Medicaid expansion how is it impacting the marketplace by Sutherland Global Services

Medicaid Expansion - How is it Impacting the Marketplace July 2013

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Agenda

Medicaid Expansion - Overview

Medicaid Expansion – Opportunities & Challenges

Medicaid Expansion – Health Plans & Their Strategy

Medicaid Expansion – Market Pulse

www.sutherlandglobal.com October 16, 2013

Agenda

Medicaid Expansion - Overview

Medicaid Expansion – Opportunities & Challenges

Medicaid Expansion – Health Plans & Their Strategy

Medicaid Expansion – Market Pulse

www.sutherlandglobal.com October 16, 2013

Medicaid Expansion – Overview

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Effective January 1, 2014, Medicaid will be expanded to include individuals between the ages of 19 up to 65 (parents, and adults without dependent children) with incomes up to 138% Federal Poverty Line (FPL) based on modified adjusted gross income – $26,347 for a family of three and $15,417 for an individual

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The Medicaid expansion would add an estimated 13 million people to the program in 2014 (rising to 17 million by 2016)

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The Medicaid expansion is 100% federally funded for the first three years (2014-2016) and at least 90% federally funded thereafter

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If all states implement the ACA Medicaid expansion, the federal government will fund the vast majority of increased Medicaid costs ― The Medicaid expansion and other provisions of the ACA would lead state Medicaid spending to increase by $76 billion over 2013-2022 (an increase of less than 3%)

Opportunities for Savings in Medicaid Number of Beneficiaries, 2012 56 million Total Spending, 2012 $459 billion (40% is spent on low income Medicare Beneficiaries)

Percent of Federal Budget, 2012 8%

― While federal Medicaid spending would increase by $952 billion (a 26% increase) •

After the June 2012 Supreme Court ruling on the Medicaid Expansion the federal government’s enforcement authority is limited: if a state does not implement the expansion, the Secretary of Health and Human Services cannot withhold funds for the state’s remaining Medicaid program

Percent of State Budgets, 2012 24%

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Overall state costs of implementing the Medicaid expansion modest compared to non-Medicaid expansion spending, and many states would likely observe small net budget

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The states that does not choose to expand Medicaid, residents of that particular state, with incomes from 133% to 400% of the poverty level, can attain federally funded private insurance through insurance exchanges

Source: KFF, Urban Institute, News articles, SGS research

www.sutherlandglobal.com October 16, 2013

State-wise support for Medicaid Expansion

Map representing state-wise decision on Medicaid Expansion

WA ME

MN ID

WI MI

MD WV

MA RI

NJ DE DC

NC AZ

TN AR

SC MS

TX LA FL

Opposes HI

Supports Weighing Options

Source: News articles, SGS research

www.sutherlandglobal.com October 16, 2013

Timeline for Medicaid Expansion Health Care Reform Medicaid Expansion Eligibility Quality Assurance 9/2012 IT Systems Development 10/2011 Health Exchange Integration Manage Newly Eligible Enrollment 9/2011 6/2012 WAC Changes Policy Development 1/2013 Stakeholdering 8/2011 Marketing/Education 2/2012 1/2013

2011

Oct

Jan 2012

April

July

Oct

Jan 2013

April

July

HCR Implementation 1/2014 Conversion 1/2013

Oct

Jan 2014

2014

Policy Development

8/2011 – 6/30/2012

Health Exchange Integration

9/2011 – 12/31/2013

IT Systems Development

10/2011 – 9/30/2013

Stakeholdering

2/2012 – 12/31/2013

Manage Newly Eligible Enrollment

6/2012 – 12/31/2013

Eligibility Quality Assurance

9/2012 – 12/31/2013

Marketing/Education

1/2013 – 12/31/2013

WAC Changes

1/2013 – 12/31/2013

Conversion

10/2013 – ongoing

Health Care Reform Implementation

1/1/2014

Source: News articles, SGS research

www.sutherlandglobal.com October 16, 2013

Agenda

Medicaid Expansion - Overview

Medicaid Expansion – Opportunities & Challenges

Medicaid Expansion – Health Plans & Their Strategy

Medicaid Expansion – Market Pulse

www.sutherlandglobal.com October 16, 2013

Medicaid Expansion – Opportunities & Challenges Opportunities

Challenges

• Medicaid expansion would stabilize a state’s insurance market, increase the certainty around the cost of covering people in the state, and decrease the risk of adverse selection for private insurers

• Health insurers are required to spend at least 80% of the premiums they collect on medical care, thereby capping their profits

• The Medicaid expansion offer $40 billion to $45 billion in annual new revenue for managed-care companies • Insurers already covering Medicaid enrollees will be well positioned to increase the number of people they cover in the states that fully implement the ACA expansion and thus increase their revenues ― 25 million people will buy health insurance on the law's regulated "exchange" marketplaces in the states, according to the Congressional Budget Office • Insurers will be able to capitalize on the movement of enrollees back and forth between Medicaid and private coverage by offering both types of coverage in the same state • The Medicaid expansion would allow insurers to better manage care effectively and efficiently – Medicaid will be more likely to be able to maintain consistent access to their health care providers and treatments, even if their coverage source changes • Providers and insurers participating in the Medicaid program would not be taxed by the states

• Private insurers that do not currently contract with states to provide Medicaid managed care and do not plan to expand into that business would be adversely affected by the churning, higher prices, and greater uncertainty that would result from a coverage gap in a state • States control on spending for Medicaid will come from slashing reimbursements to physicians and other providers (Medicaid pays about 60% of what private insurers pay) ― This would lead to even more waiting time and inconsistent source of outpatient care for patients with Medicaid coverage as few physicians would agree with lower payments • Another big challenge health plans face is recruiting doctors since Medicaid pays them less than Medicare or commercial insurance carriers ― To entice more doctors to participate, the federal health law this year temporarily increased pay for those providing primary care services to the same level as Medicare rates— an average 70% pay raise

― The pay raise lasts only through 2014 which has limited its effectiveness

Source: News articles, SGS research

www.sutherlandglobal.com October 16, 2013

Agenda

Medicaid Expansion - Overview

Medicaid Expansion – Opportunities & Challenges

Medicaid Expansion – Health Plans & Their Strategy

Medicaid Expansion – Market Pulse

www.sutherlandglobal.com October 16, 2013

The Medicaid expansion has lead to new opportunities for private … •

UnitedHealth will selectively respond and participate in exchanges for the Medicaid expansion ― The company’s level of participation in state-based exchanges will be driven by how they assess each local market’s current and future prospects, including how the exchange and its rules are set up state-by-state and, UnitedHealth’s market position relative to others in the market ― UnitedHealth’s participation would likely evolve as change over time as the exchange matures • UnitedHealth has plans to participate in about 12 state exchanges • United Healthcare, with nearly 4 million members, is opening health benefit stores around the country to assist Medicaid enrollees and offer free public health education

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• • • •

WellPoint acquired CareMore Health Group which offers Medicare Advantage plans and Special Needs Plans designed for the chronically ill in select California, Nevada and Arizona markets ― CareMore focuses on improving the health of its 54,000 Medicare members – WellPoint is looking to expand CareMore's model both within existing CareMore markets and to WellPoint markets across the country Acquired Medicaid specialist Amerigroup, for $4.9 billion in cash ― The Amerigroup acquisition has added 2.6 million Medicaid members in 13 states to WellPoint’s Medicaid and doubled its business to 12%, with 4.5 million people in about 19 states. The deal also added 35,000 Medicare Advantage members WellPoint was motivated to gain access to dual eligible patients with the Amerigroup acquisition; it expects a $16 billion revenue boost from patients covered by both Medicare and Medicaid The company wishes to enter exchanges in the 14 states in which it operates Blue Cross Blue Shield licenses , however there is uncertainty over the timing of the overall rollout of the exchanges WellPoint has also pulled out of state Medicaid programs in Connecticut, Nevada and Ohio after deciding the payment rates were inadequate to cover medical costs According to Angela Braly, WellPoint’s CEO, expects that Medicaid spending under managed-care programs to increase by nearly $100 billion by the end of 2014

“Opportunities in the Medicaid are going to grow no matter what” Angela Braly , WellPoint CEO

“The company is still waiting to hear how the states will handle pricing and ratings of applicants, how many competitors will be allowed on the exchanges in some states that plan to limit numbers and how many plans they can offer in others that are more permissive.” Wayne DeVeydt, WellPoint CFO

Source: Reuters, KHN, The Center of Public Integrity, News articles, SGS research

www.sutherlandglobal.com October 16, 2013

… health insures to redefine their market, which has lead to a … •

Aetna Group acquired Coventry Health Care, Inc., a diversified managed health care company for $7.3 billion, in 2013, for Government Plans making them the third largest managed health care company in the U.S. ― The acquisition builds on Aetna’s existing resources and capabilities, and increases the company’s mix of business in higher-growth Government programs – 30% of Aetna’s revenue will come from federal-backed plans for elderly Medicare enrollees and low-income Medicaid patients, increasing from 23%

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The Coventry deal boosts Aetna's Medicaid membership by 932,000 members, it also increases its total commercial and government business by 3.8 million medical members, including the addition of 253,000 Medicare Advantage members and 1.49 million Medicare Part D members

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Aetna’s Medicaid business has grown from 1.1 million members to more than 2 million members, and its Medicaid footprint has expanded from 12 to 16 states

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The company has submitted applications to offer plans in 14 states

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In 2012, Humana acquired Florida-based Metropolitan Health Networks Inc., for $850 million a medical services organization (MSO) that provides coordinated care for Medicare Advantage and Medicaid beneficiaries primarily in Florida

― Metropolitan Health owned Symphony Health Partners, entered a partnership with Humana to manage health care services for about 9,900 Medicare Advantage members in Cincinnati, Indianapolis and Northern Kentucky •

Humana has also made a non-controlling investment in a second Florida-based MSO, MCCI Holdings, which provides managed care services for Medicare Advantage and Medicaid beneficiaries in Florida and Texas

•

The company successfully bid for Medicaid business in Ohio, Illinois and Kentucky, their alliance with CareSource in 2012 was key to the Ohio success

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Humana plans to acquire Medicare-related businesses to grow inorganically and drive further up in coordinated care management and delivery “The growing privatization of the government-backed Medicaid and Medicare programs offers a huge opportunity for them, which generated $6.93 billion of its $9.09 billion in total premium revenue from Medicare during the first nine months of 2012” Michael B. McCallister, Former CEO of Humana

Source: Aetna, News articles, SGS research

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… number of mergers and acquisitions (both organic and inorganic), … •

Molina serves more than 4 million people who receive care through Medicaid, Medicare and other government-funded programs in 15 states • The company also hopes to pick up more business as federal agencies and California expand managed-care programs for people who qualify for both Medicaid and Medicare, the so-called “Dual-eligible's” • Molina is targeting the parents of children who receive services through the government's Children's Health Insurance Program ― In July 2013, Molina expanded its services to cover Medicaid enrollees in Ohio, and added Children with Special Health Care Needs (CSHCN) • Molina has applied to sell plans in all nine states where it provides Medicaid services: California, Washington, Utah, New Mexico, Texas, Ohio, Michigan, Wisconsin and Florida – some of these states, such as California, Ohio and Florida, have competition, while Utah and New Mexico - states with fewer insurers now - are expected to draw just a handful of competitors "We are really targeting patients up to about 200 and 250 percent of the federal poverty level” Dr J. Mario Molina CEO Molina Healthcare

•

• • • • • •

In November 2012, it gained access for the first time to the California market, the largest Medicare Advantage (MA) market in the U.S., through the acquisition of Easy Choice Health Plan ― As of December 2012, Easy Choice served 39,000 MA members, more than double the 15,000 members it served in December 2011 In January 2013, WellCare completed the Medicare Advantage acquisition of Desert Canyon Community Care adding 4,000 members and their 14th Medicare state, Arizona ― This has also given them future growth opportunities in the state for MA market Again in January 2013, acquired UnitedHealthcare’s South Carolina Medicaid business, which serves TANF and Supplemental Security Income members in 39 of the state’s 46 counties ― This would also help them leverage their presence in neighboring Georgia In April 2013, WellCare acquired Missouri Care, Inc. As of January 2013, Missouri Care served more than 100,000 Medicaid program members in 54 counties across the state ― The acquisition also complements their Medicare plans in Missouri and will accelerate its MA expansion goals WellCare got approval to expand its Staywell Medicaid managed care services . The expansion adds 25 new counties to the company’s service area and positions WellCare as the only Medicaid managed care provider offering plans in all 67 Florida counties The company obtained new contracts, service area expansions, or contract extensions for our Medicaid programs in Florida, Georgia, Hawaii, Kentucky, and New York WellCare has organically grew their MA membership by 29%, including membership growth in our Dual-Special Needs Plans (D-SNP) of more than 50%

Source: News articles, SGS research

www.sutherlandglobal.com October 16, 2013

… and other expansion plans, in order to gain market share in U.S. … •

The Blue Cross and Blue Shield System comprises of 38 independent and locally operated Blue Cross and Blue Shield companies and the Blue Cross and Blue Shield Association (BCBSA), and it is the oldest and largest family of health benefits company in the U.S.

•

In August 2011, Blue health insurers, Independence Blue Cross (IBC) and Blue Cross Blue Shield of Michigan (BCBSM), announced to be partnering to expand services to Medicaid beneficiaries nationally through the AmeriHealth Mercy Family of Companies, a Medicaid managed care organization headquartered in Philadelphia ― AmeriHealth Mercy was one of the country's largest Medicaid companies, serving almost 800,000 members in Medicaid managed care plans in three states ― AmeriHealth Mercy also offered other services such as pharmacy benefits management and behavioral health care to an additional 3.2 million Medicaid, Medicare, and SCHIP beneficiaries in 11 states

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The Michigan Blue-Independence Blue alliance was built to create a vehicle that other Blues can use to expand into the Medicaid market

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Blue Cross and Blue Shield of New Mexico (BCBSNM) was selected to serve the state of New Mexico as a selected Managed Care Organization for Centennial Care, the state of New Mexico's Managed Medicaid program “We are looking forward to being part of Centennial Care and think we will have great opportunities for expansion and picking up members from those who will no longer be in the program, so it is a big deal for us,” - Kurt Shipley CEO Blue Cross

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In 2012, Cigna acquired HealthSpring, Inc. for $3.8 billion, expanding Cigna's presence in the Seniors and Medicare segments ― The acquisition adds 22,000 Medicaid members, 340,000 Medicare Advantage members and 800,000 Medicare Part D members to Cigna's existing 70 million customer relationships

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Cigna offers Medicare Advantage plans in 13 states and the District of Columbia, Medicare Part D plans in all 50 states and the District of Columbia, and Medicaid plans in targeted markets, including the business associated with the 2012 acquisition of HealthSpring

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The company will participate in 5 exchanges which has been already identified “Cigna sees federal reform and specifically the exchanges as more of an opportunity than a threat, because the company doesn't have a huge book of individual or small business customers that may opt for coverage through the exchange.” - David Cordani CEO Cigna

Source: News articles, SGS research

www.sutherlandglobal.com October 16, 2013

… Medicaid market •

Centene wants to be on both sides of the line, selling – a product that offers people a comfortable transition, as there would be a considerable churn from members moving between the ACA’s expanded Medicaid program and commercial policies sold on the exchanges as their incomes fluctuate ― The company plans to serve Dual-eligible members in the Greater Chicago Region as part of Illinois’ Medicare-Medicaid Alignment Initiative, it is also present in Ohio with Dual-eligible’s ― Centene was awarded a contract to serve Medicaid beneficiaries in New Hampshire and was also awarded statewide Medicaid contract in Kansas ― The company also commenced operations of Medicaid contract in Washington and Missouri

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In 2012, Centene expanded its operations in Texas with the expansion of the Hildago Medicaid Rural Service Areas (MRSA), and implemented pharmacy carve-in benefits in both Texas and Louisiana

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The company is a Medicaid health plan with 2.5 million members in 18 states, recently started paying enrollees a few dollars each time they seek preventive services, such as $10 for an annual flu shot or $20 for an annual breast cancer screening

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The company feels it has a strong competitive position to capitalize on the Medicaid expansion, with the acquisition of Celtic in 2008, giving them insurance licenses in 49 states. Also, their participation in Exchanges in Massachusetts, Indiana and Texas give them unique, practical experience with Exchange-based solutions

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Going forward, Centene looks to, expanding its geographic reach, and growing organically in their existing markets through Medicaid expansion and contracts for Medicaid/Medicare Dual-eligible’s and Exchange based solutions

“The company has shown strong interest in Arkansas – “We are very capable of doing an Arkansas-type model, that’s something that would be a sweet spot for us” Michael Neidorff , CEO Centene Corp

“We believe we can achieve increased profitability in 2014 upon the commencement of the ACA, the exchange market represents the largest growth opportunity for Centene over the next several years, estimated at $52 billion in our existing markets.” Michael Neidorff , CEO Centene Corp

Source: KHN, Centene, News articles, SGS research

www.sutherlandglobal.com October 16, 2013

Agenda

Medicaid Expansion - Overview

Medicaid Expansion – Opportunities & Challenges

Medicaid Expansion – Health Plans & Their Strategy

Medicaid Expansion – Market Pulse

www.sutherlandglobal.com October 16, 2013

Expert Comments (1/2)

“Health insurance companies, hospitals and other players are merging into bigger entities in hopes of restraining their own costs and grabbing larger shares of the markets as they are reshaped by health care reform.”

“Executives at the four largest U.S. health insurers say they are likely to sell insurance plans on less than a third of the exchanges, reluctant to venture out beyond the states where they already offer coverage”

– Robert Laszewski, President of Health Policy and Strategy Associates in Alexandria

– Reuters, Analysis: Big insurers wary of entering new Obamacare markets

“Lack of clarity about the kind of prices they can charge and the number of plans they can sell on each exchange, the expectation that the program is only expected to reach about 7 million people nationwide in its first year and uncertainty over whether all of the exchanges will be ready in time.”

“Heavily populated states where many insurers already sell plans now, such as California and New York, will have competing products for the exchanges when health reform takes full effect on January 1. But states whose existing insurance markets have little or no competition, like Alabama and Alaska, may not see much of a difference”

– Reuters, Analysis: Big insurers wary of entering new Obamacare markets

"Many people will receive up-front financial assistance to make insurance more affordable, plus many will be new or first time customers for insurance companies,“ – Erin Shields Britt, a spokeswoman for the Department of Health and Human Services Source: KHN, News articles, SGS research

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Expert Comments (2/2)

"We do think the uptake may be slower than maybe people thought six months ago or a year ago in terms of what is going on in the first year with the exchanges,”

“Illinois businesses could pay $70 million to $106 million in penalties if the state doesn't expand Medicaid”

- Shawn Guerin CFO Aetna

– A recent study by Jackson Hewitt Tax Service

Smaller insurers like Magnolia, part of Centene Corp, and Molina Healthcare Inc that specialize in serving the poor through state Medicaid programs, play a major role in the push to expand U.S. health coverage – "They are going to be important players in the exchanges that are going to attract a significant low income and modest income population,“

Until now, most Medicaid managed care enrollees have been children, pregnant women and young parents. But many of the newly eligible will be older and some are likely to come with health needs that haven’t been addressed due to lack of coverage. “You certainly run the risks that medical costs can be higher than expected”

- Linda Blumberg, a health economist at the Urban Institute

– Jason Gurda, MD Healthcare Leerink Swann in New York

"To come in as a new carrier, do marketing to build your brand name, and build a provider network from scratch is very, very hard.“ – Caroline Pearson, Avalere Health VP for Health Reform Source: KHN, News articles, SGS research

www.sutherlandglobal.com October 16, 2013

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