With recent news that the Health Plan of San Mateo may shut down its Medi-Cal business, a new report from the California HealthCare Foundation (CHCF) addresses the question: how long will health plans participating in Medi-Cal managed care remain fiscally viable following recent Medi-Cal rate cuts? Prepared for CHCF by Mercer Government Human Services Consulting (Mercer), the report assesses the current financial condition of Medi-Cal health plans and projects the financial viability of these health plans for the next four years.

The Impact of California's Fiscal Crisis on Medi-Cal Health Plans found that overall, the financial performance of the 22 health plans participating in Medi-Cal improved between 1998 and 2002. They remained profitable as a group, which allowed them to build equity, and most health plans also appear to be financially sound on an individual basis. As good as this sounds, unfortunately, the picture could change dramatically in the near future.

The study identified several factors that will play a role in the future profitability and financial viability of the Medi-Cal health plans. These include capitation rates, administrative efficiencies, subcontract arrangements, and federal and state regulatory changes (most notably, HIPAA). To project financial viability, the report examined best-, intermediate-, and worst-case scenarios with variations in revenue and expenditures.

Based on the results of the financial projections, it appears that most Medi-Cal participating health plans will be able to endure a minor decrease in capitation rates through 2003. However, if revenue growth continues to lag behind medical expense trends, the Medi-Cal participating health plans whose primary membership is Medi-Cal members will begin to fall out of compliance with California’s Tangible Net Equity (TNE) requirement in 2004. Subsequently, a significant number of these plans may become insolvent between 2004 and 2005.

According to Chris Perrone, CHCF senior program officer, “Understanding the current financial position and future viability of the health plans participating in Medi-Cal is critical, because more than half of Medi-Cal’s membership is enrolled with and receiving health care services through 22 contracted health plans. If health plans exit Medi-Cal, quality will suffer and state spending will increase.”

The study analyzed findings separately for two groupings of plans — Commercial Primary health plans (plans with less than 70 percent of their total membership comprised of Medi-Cal members) and Medi-Cal Primary health plans (plans with at least 70 percent of their total membership comprised of Medi-Cal members). Seven financial ratios measured the results of operations including operating margin, administrative cost ratio, medical loss ratio, equity ratio, excess TNE, current ratio, and net equity per member.

• The state should consider requiring detailed supplemental financial reporting of Medi-Cal-specific operations. Such reporting would provide California important information for managing the multi-billion dollar program and aid in future capitation rate-setting by identifying pure Medi-Cal expenditures while segregating other costs.

• Although Medi-Cal members only account for 12 percent of the Commercial Primary health plans’ membership on average, these plans serve approximately 47 percent of all Medi-Cal managed care members. Policymakers should consider whether Commercial Primary health plans would choose to continue to participate in Medi-Cal managed care if they are faced with losses from operations and are forced to utilize their reserves.

  Report co-author Branch McNeal, notes, “Recent cuts in reimbursement rates could prompt health plans incurring financial losses to withdraw from the Medi-Cal program in the near future. Some plans may be able to weather the storm for a few years, but they, too, are vulnerable. This has important implications for the future of the program and for beneficiaries’ access to health care services.”