Healthy Industry
In Medicaid, Private HMOs
Take a Big, and Profitable, Role

With the growth has come criticism from some doctors and patients who accuse Medicaid HMOs of scrimping on care. Even as they restrict medical tests and use of prescription drugs, the companies spend the money they get from states on items that don't have an obvious connection to patients. Centene has funded a multimillion-dollar arts center in St. Louis and paid to put its name on stadiums in Montana and Missouri. The HMOs are also big donors to political campaigns.

Executives say their profits are justly earned and don't come at patients' expense. Traditional Medicaid is a fee-for-service program: The government pays each medical bill the patient racks up, with little or no effort to manage the costs. Medicaid HMOs, like other HMOs, seek to save money by eliminating unnecessary care and paying for preventive treatments. Centene Chief Executive Michael Neidorff says the company sometimes gives free child-safety car seats to pregnant women who attend all of their prenatal exams. "We save millions" by preventing premature births, he says.

Mr. Neidorff earned $1.85 million in salary and bonus last year and as of the end of last year held restricted stock valued at $26 million. The company also recorded $135,547 last year in compensation for Mr. Neidorff representing the value of personal trips he took on the corporate jet, a Bombardier Challenger that features an espresso machine on board, according to the lease agreement.

Centene spokesman Robert Schenk declined to say how much the company pays to lease the jet. He said the jet is needed because many of Centene's operations are hard to reach by commercial carriers, and the company's board requires Mr. Neidorff to use corporate transportation even on personal travel to ensure that he is secure and accessible.

Centene's business is managing the care of patients such as Melissa Bishop, 39 years old, of Phillipsburg, N.J. When she needed radiation for cancer near her pancreas this summer, she called Centene, her Medicaid HMO. She says she tried three facilities suggested by the company, but none of them were part of Centene's plan. "I was going round and round and round," says Ms. Bishop. "I was getting so aggravated."

After she got an appointment at a fourth place, an administrator there told her it didn't accept her plan either. The administrator, Barbara Tofani of Hunterdon Regional Cancer Center in Flemington, N.J., says she called a dozen other centers in the region and struck out every time. Finally, Ms. Tofani called Centene and negotiated an ad-hoc deal to cover Ms. Bishop's treatment, although Ms. Tofani says the center will be lucky to break even.

Andrew Greenberg, Ms. Bishop's radiation oncologist, says that if it hadn't been for the special effort, "Melissa would have gotten lost in the system." Centene didn't provide comment on Ms. Bishop's case.

Each state runs its own Medicaid program but the majority of funding generally comes from the federal government. When states sign up HMOs to manage care, they often calculate what they would spend on Medicaid patients directly and pay the HMOs a per-patient premium below that amount. Florida, for instance, sets its HMO premium rates about 8% below what it would cost the state. WellCare, a big operator in Florida, says it saves the state $75 million a year. HMOs have an incentive to keep their costs under the premium because they keep the difference as profit.

After several years of spiraling growth in Medicaid costs, there's some evidence that the tide is turning, although it's unclear how much HMOs have contributed. Total Medicaid spending grew in fiscal 2006 by just 2.8%, according to a report last month by the Kaiser Commission on Medicaid and the Uninsured. That was the lowest rate of growth since 1996. The commission said that for the first time in years many states aren't feeling pressure to cut people off Medicaid rolls.

Are Medicaid HMOs slashing necessary care to achieve cost savings and raise profits? Yes, says Jerry Flanagan, health-care policy director of a California group that wants to stop state governments from moving Medicaid beneficiaries into private managed care. "What's good for shareholders is bad for patients," he says. "What's really happening is we're giving less money for far, far fewer services."

Private companies "deliver a good-quality product at a reasonable price," counters Ruben Jose King-Shaw Jr., a former top federal Medicaid and Medicare official who joined WellCare's board in 2003. He notes that states often require private HMOs to achieve high rates of vaccination and other quality standards that weren't met when bureaucrats did all the work. Mr. King-Shaw, whose final annual salary in government was $142,500, has sold WellCare shares for $1.8 million. He owns shares and options valued at an additional $1.5 million. "You only do well in health care if you deliver value," he says.

States began experimenting with using managed care for Medicaid patients in the early 1980s, and the idea took off in the 1990s. Now many states are moving aggressively to put more Medicaid patients in HMOs. Last month, Ohio chose the winning bidders to provide Medicaid HMO services to 120,000 of the state's aged, blind and disabled population -- a group that traditionally hasn't been placed in HMOs.

When states run their own Medicaid programs, they spend on average 4% to 6% on administrative costs, according to Martha Roherty, director of the National Association of State Medicaid Directors. The rest -- 94% to 96% -- goes to paying for medical care. At Medicaid HMOs, only 80% to 85% of premium dollars generally go for medical costs. The rest covers other costs -- including executive compensation, entertainment and political contributions -- or becomes profit for shareholders.

States monitor the profit margins of Medicaid HMOs, which are generally reported as 5% or less. State officials say that with such a thin margin there's little room for further savings, although a review in New Jersey questioned whether one HMO was overcharging its subsidiary in the state for services. That could make the subsidiary's profits look lower.

While they spend fewer dollars on medical care, companies say they are more efficient and improve the health of patients. Elizabeth Douglas of Chicago says her 11-year-old son has kept up on his immunizations thanks to a WellCare program that gives her a free ride to the doctor's office.

Some patients and doctors have a different view. Kuldeep Singh, an internist in Valdosta, Ga., says that when Georgia began to move more than a million Medicaid recipients into HMOs this year, he suddenly faced hurdles not imposed by regular Medicaid. Recently, he says, one of his assistants had to wait on hold to get approval from WellCare for a hospital chest X-ray on a patient suspected of having pneumonia. "It was ridiculous," says Dr. Singh. A spokesman for WellCare says it sometimes requires such approval because hospital-based X-rays cost two to three times as much as those done in a doctor's office or imaging center.

Many doctors refuse to take patients in Medicaid HMOs because reimbursements are so low. (The same problem occurs in traditional Medicaid.) Noha Polack, a pediatrician in Union City, N.J., has an arrangement under which Centene pays her a fixed monthly sum per child to handle basic medical needs. Until a few months ago, that sum was $11.50 per month, equal to $138 a year -- about half of what other Medicaid insurers pay, says Dr. Polack. A child who had a few colds or scrapes during a year would quickly put her in the red.

Dr. Polack threatened to drop all her Centene patients and recently got a raise -- the amount of which is confidential, she says -- but she still stopped accepting new Centene patients.

The HMO is stingy about drugs that others approve with little question, says Dr. Polack, naming the antibiotic Ceftin as an example. "Many times we have to make treatment decisions not depending on what would be best for the patient but what the patient can afford," she says. While she could ask for an exception to use Ceftin, "they are so notorious for not getting back to you" and there's little time when a child has an infection, she says.

Vickie Vickers, a 39-year-old Trenton, N.J., single mother on disability and Medicaid, learned about the difficulty of finding a doctor this year. She hurt her hand on Mother's Day while stooping to pick up playing cards that fell on the floor. She went to the hospital for a temporary cast but spent weeks with Centene trying to find an orthopedic doctor.

She finally found one an hour away. She says the orthopedist told her she needed an MRI or CT scan, but Centene wouldn't approve it. It took until late June for an orthopedist to fit her with a splint with metal bars.

Ms. Vickers rents a house in a run-down part of Trenton with a rusty fence outside and a leaky roof that has caused big water stains in the attic, bedroom, bathroom and kitchen. She wishes the old Medicaid were back because in the 1990s "you didn't have to call 50 doctors" to get an appointment.

Centene didn't provide comment on the complaints by Dr. Polack and Ms. Vickers.

Research on the quality of care in Medicaid HMOs is thin. A study of infant health last year by researchers at the University of Illinois-Chicago and the Urban Institute found that Medicaid managed care was correlated with a slight increase in inadequate prenatal care in some women but in general showed little difference from traditional Medicaid.

While some doctors and patients complain of Centene's stinginess, the company has been generous in regions where it has offices. Centene last year was the biggest donor for a $9.5 million renovation of an arts building in St. Louis, now called the Centene Center for Arts and Education, according to a spokeswoman for the center. The company paid $200,000 last year for the naming rights of a minor-league baseball stadium in Montana, where Centene employs 100 claims processors but doesn't have Medicaid clients. Centene also pledged $400,000 this year to the school district in Clayton, Mo., where the company has its headquarters, to rename the district's stadium.

Cynthia Schultz, director of the Great Falls International Airport in Montana, says Mr. Neidorff, the Centene CEO, once walked through the airport and heard that it couldn't afford artwork. Centene then commissioned and donated a $7,000 welded-metal sculpture of an eagle with a 16-foot wingspan that now hangs prominently in the airport, she says. The company confirmed the donation. "It's a great gift from someone who doesn't even live here," says Ms. Schultz.

Mr. Schenk, the Centene spokesman, said the donations show Centene is a "responsible and publicly focused corporation" and they help make the communities better places to live.

A few big U.S. insurers that serve large employers, including UnitedHealth Group and WellPoint Inc., also compete in the Medicaid HMO market. Many others don't. Medicaid HMOs assemble doctor networks in places with many people on Medicaid -- such as big cities and poor rural areas -- and deal with a single kind of customer, state governments. Those skills "are importantly different than what most commercial insurers have," says John W. Rowe, the former chief executive at Aetna Inc. and now a professor at Columbia University.

Medicaid HMOs have donated to candidates in state political races who support their existence. In 2005, five WellCare subsidiaries together donated $125,000 to Illinois Gov. Rod Blagojevich, a Democrat who won re-election this month. WellCare has 92,000 members in Illinois.

This year, 20 WellCare subsidiaries each donated the legal maximum of $500 to the campaign of Republican Tom Lee, who was narrowly defeated in his bid to become chief financial officer of Florida, WellCare's biggest market. WellCare donated $34,000 to the Republican Governors Association this year and contributed $100,000 to President Bush's second inaugural festivities in 2005.

"I call a governor, I usually get a call back within 24 to 48 hours," says Centene's Mr. Neidorff.

States keep track of the finances of Medicaid HMOs to ensure that the HMOs are spending a sufficient part of their revenue on medical costs. However, the numbers are subject to interpretation. A review of Centene's New Jersey subsidiary in 2004, by a unit of Marsh & McLennan Cos., said hundreds of thousands of dollars that Centene counted as medical costs should have been considered administrative costs.

The report also questioned cases where Centene's New Jersey subsidiary pays a national Centene subsidiary for specialized services such as mental-health or a nurse hotline. It said the New Jersey subsidiary was paying an above-market rate for some of these services. That would tend to increase the state subsidiary's medical costs and reduce its profit, without affecting the bottom line of Centene as a whole. Mr. Schenk of Centene declined to discuss the report in detail but said Centene has used the findings "to strengthen its operational efficiencies."

In Illinois, the state and the Justice Department asserted in a lawsuit that Amerigroup spent only $131 million on medical care from 2000 to 2004 despite taking in $243 million from the state. The lawsuit accused Amerigroup of fraudulently trying to exclude pregnant and sick patients to reduce its medical costs. A jury in Illinois state court agreed last month, finding Amerigroup liable to the government for $144 million. Internal Amerigroup emails filed in court show managers contemplated disciplinary action for employees who signed up women in the third trimester.

Amerigroup said it will appeal. The company says it discouraged transfers by pregnant women so their care wouldn't be disrupted. A spokesman said the figures in the suit are "extremely misleading," in part because they don't account for preventive health programs.

Write to Barbara Martinez at Barbara.Martinez@wsj.com¹