State Medicaid officials have seen the future and can sum it up in two words: managed care.

The Florida legislature's vote this past week to move 1.5 million Medicaid recipients into managed care programs is the latest and most dramatic indication of where these programs are headed. Like every other state, Florida is desperate to get control of spiraling Medicaid costs, a problem that will only accelerate as healthcare reform goes into effect and the federal/state program begins adding 16 million more members.

Already, just over half of the 57 million Medicaid recipients in this country are in MCOs. HealthLeaders-InterStudy research indicates that 11 states are in the process of expanding their Medicaid managed care programs to cover larger territories and new categories of enrollees. Illinois, for example, hopes to enroll at least 50 percent of its Medicaid members into MCOs, estimating it will save $774 million over five years. Florida has among the largest and fastest-growing Medicaid populations, and it already has about 60 percent of its Medicaid recipients in managed care.

Currently, 39 states and the District of Columbia have contracted with a private MCO to manage at least a portion of the Medicaid program. In general, MCOs have been most widely used in highly populated states and regions, and are rarest in the states with low populations, where it's hard to design and maintain a managed care provider network.

Pharma should take note of the Medicaid expansion for two important reasons this will create larger Medicaid MCOs with more negotiating power, and it will offer a preview of the state health insurance exchanges scheduled to begin in 2014. The federal health reform law calls for these newly eligible adult Medicaid members to have a Medicaid benefit package that is also available as a benchmark plan within the state's Insurance Exchange, so that those who transition into or out of Medicaid eligibility will have less disruption in their healthcare coverage.

There are more than 150 Medicaid MCOs operating in the 50 states and the District of Columbia, ranging from MCO giants UnitedHealthCare and WellPoint to pure-play Medicaid plans such as Amerigroup, Centene and Molina, to independent Blue Cross plans and small provider-owned plans. As of mid-April 2011, the stock price of the three major Medicaid-focused public companies (Centene, Amerigroup and Molina) has outpaced the rest of the managed care sector. Each one has seen its stock rise by more than 44 percent since the first of the year, whereas the average for publicly traded plans was an increase of 26 percent. The larger players will look to acquire small plans as they consolidate their hold on the growing Medicaid managed care market.

But Medicaid is not for the faint of heart. Although states are required to pay actuarially sound rates to MCOs, fluctuations in state revenues, political or policy shifts and the unpredictability of costs such as flu outbreaks make the Medicaid segment more risky than the commercial market in many ways. MCOs have had to become expert at learning when to walk away, and when to run, from unprofitable state contracts.

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