Medicaid Cost Trend Assessment

for Illinois Policymakers

December 5, 2017
A. Introduction and Executive Summary
The set of analyses conveyed in this report all suggest that Illinois per capita Medicaid health
costs are likely to increase during 2018 by several percentage points relative to 2017 cost levels.
Our understanding is that the health plans are currently expected to provide coverage during
2018 at essentially the same monthly capitation rates paid during 2017. In the near term, we
estimate that such a payment approach will impose large-scale financial losses on Illinois
Medicaid health plans who have partnered with the State in good faith but collectively already
experienced significant losses during 2016 and 2017. In the longer term, many plans
experiencing this level of losses over a multi-year timeframe are not going to be able to continue
their participation in the Illinois Medicaid program. Plan exits and enrollment freezes, such as
those currently occurring in Iowa -- which has faced a similar pattern of continued large-scale
Medicaid MCO losses -- can destabilize the Medicaid program and introduce significant care
disruptions for the beneficiary population.
For numerous reasons primarily to serve as a fair business partner and preserve the stability of
care for the States Medicaid population actuarially sound capitation payment rate increases
need to occur. An absence of premium increases when the plans have already been continuously
losing money invites an unraveling of Illinois coordinated care program.

B. Projected 2018 Financial Results of Flat Trend Capitation Rate-Setting

Assumption in Capitation Rate Setting
Illinois Medicaid health plans have collectively been operating at a financial loss during the past
two years. Our analysis of 2016 financial statements across seven Illinois managed care
organizations (MCOs) showed a collective operating loss of 4.9% of capitation revenues, as
shown in Exhibit 1.
Exhibit 1. 2016 Financial Performance of Illinois Health Plans Medicaid Lines of Business

Claims
Medical Adjustment Administrative Underwriting
Health Plan Costs Expense Expense Gain/Loss
Aetna 97.2% 2.2% 5.3% -4.4%
Family Health Network 92.2% 2.3% 5.0% 0.4%
Harmony Health Plan 88.7% 1.2% 13.0% -2.9%
HCSC 85.8% 9.9% 10.0% -3.9%
Health Alliance Connect 96.8% 3.6% 4.7% -4.7%
IlliniCare 101.1% 1.3% 6.8% -10.3%
Meridian Health Plan 97.1% 0.4% 9.0% -4.0%
Total 95.1% 3.0% 7.4% -4.9%

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An assessment of quarterly financial statements available for nine Illinois MCOs through
September 2017 suggests that the Illinois MCOs Medicaid financial performance has remained
unfavorable during the current year although the plans have moved much closer to collective
breakeven versus 2016. Our tabulations, shown in Exhibit 2, indicate that the plans are on a path
to a collective loss of over 170 million, or 1.5% of Medicaid revenues across the entirety of
CY2017.
The specter of receiving no capitation rate increases for 2018 endangers the MCOs viability to
operate Medicaid in two ways. First, extremely large-scale losses will occur under a scenario of
normal medical cost escalation. The States health plans have always been at dollar-for-dollar
financial risk, have extensive experience, and likely have few, if any, new levers to pull to
contain medical cost growth. The bottom rows of Exhibit 2 indicate that if per capita medical
costs increase by 4% in 2018 relative to 2017 (a conservative estimate in light of the information
to be presented later in this assessment), the States Medicaid MCOs will collectively experience
a CY2018 loss of approximately $600 million, or 5.3% of revenues. Losses of this magnitude
violate actuarial soundness principles and are not sustainable.
Second, significant losses in 2018 would compound the losses the MCOs have already
experienced during each of the previous two years. Such a scenario forces the incumbent health
plans to seriously question whether the State of Illinois can serve as a credible business partner.

Exhibit 2. 2017 Financial Performance of Illinois Medicaid MCOs and 2018 Projections
Under a No Rate Increase Scenario
2017 Medicaid Line of Business Financal Performance (dollar figures in millions)
Annualized based on Reported Actuals through September

Estimated
Medical Medical Administrative Estimated
Health Plan Revenues Costs Loss Ratio Expense Gain/Loss
Aetna Better Health $1,673 $1,589 95.0%
Family Health Network $477 $438 91.8%
Harmony Health Plan $365 $351 96.0%
HCSC $898 $831 92.6%
HealthCare Service Corp. $1,890 $1,906 100.8%
IlliniCare $1,275 $1,235 96.9%
Meridian Health Plan $1,255 $1,165 92.8%
Molina Healthcare $690 $695 100.7%
UnitedHealthcare Plan $2,910 $2,551 87.7%
Total $11,433 $10,760 94.1% 7.4% -1.5%
Estimated Increase, 2018 0.0% 4.0% 0.0%
Estimated Outcome, 2018 $11,433 $11,190 97.9% 7.4% -5.3%
Dollar Gain/Loss, 2018 -$603

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C. Overall Per Capita Cost Trends
The remainder of this document provides a brief assessment of various dynamics of Medicaid
cost trends. We have tabulated information ranging from cost trends at a broad level and drilling
down to a specific assessment of trends in Illinois Medicaid prescription drug costs.
We derived per capita costs using National Health Expenditures data compiled by HHS and
dividing these costs by the total USA population. Historical costs (i.e., known costs) were
available through 2015, with projections made by HHS from 2016 forward. HHS puts
considerable effort into their compilation and projections.1
Across the ten-year timeframe 2005 through 2015, per capita health costs increased every year.
The average annual increase across this period was 3.9%; the smallest annual increase was 2.2%
and the largest was 5.5%. The specific figures for each year are shown in Exhibit 3.
CMS projects that national health costs will increase by 5.8% from 2017 to 2018, an increase of
5.4% on a per capita basis.
The two key takeaways from these analyses are:
a) health costs are consistently increasing, and
b) a relatively sharp increase is projected to occur in 2018.

Exhibit 3. Total USA Health Care Expenditures, 2005 2018 (actual through 2015)
Health Percent
Federal Fiscal Population as of Expenditures Expenditures Change Vs.
Year July 1 Each Year (billions) Per Person Prior Year
2005 295,520,000 $2,024,226 $6,850
2006 298,380,000 $2,156,516 $7,227 5.5%
2007 301,230,000 $2,295,650 $7,621 5.4%
2008 304,090,000 $2,399,061 $7,889 3.5%
2009 306,770,000 $2,494,669 $8,132 3.1%
2010 309,350,000 $2,596,405 $8,393 3.2%
2011 311,660,000 $2,687,902 $8,624 2.8%
2012 314,000,000 $2,795,403 $8,903 3.2%
2013 316,200,000 $2,877,574 $9,100 2.2%
2014 318,560,000 $3,029,255 $9,509 4.5%
2015 320,900,000 $3,205,556 $9,989 5.0%
2016 323,130,000 $3,358,235 $10,393 4.0%
2017 325,340,000 $3,539,264 $10,879 4.7%
2018 326,767,000 $3,745,726 $11,463 5.4%

1
The document describing their methodology and data sources is more than 40 pages long.
https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-
Reports/NationalHealthExpendData/Downloads/DSM-15.pdf

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D. National Medicaid Cost Trends
We also assessed the national progression of Medicaid expenditures. The CMS Office of the
Actuary has also projected that 2018 will be a year of relatively significant increases in Medicaid
per capita costs.2 CMS projects that Medicaid per capita costs will increase by an annual
average of 2.7% per year from 2014-2018, with an increase of 4.4% occurring in 2018 versus
2017. The specific annual figures are shown in Exhibit 4.

Exhibit 4. USA Medicaid Expenditure Projections, 2015 2018

Average Percent
Federal Fiscal Enrollment Expenditures Expenditures Change Vs.
Year (millions) (billions) Per Person Prior Year
2015 70.0 $552.3 $7,890 3.8%
2016 72.2 $575.9 $7,976 1.1%
2017 73.5 $595.5 $8,102 1.6%
2018 74.8 $632.9 $8,461 4.4%

E. National Medicaid Pharmacy Cost Trends

We work extensively with Medicaid prescription drug data, using the CMS State Drug
Utilization Data Files which contain Medicaid prescription volume and corresponding pharmacy
payments for each state and for each calendar quarter. Exhibit 5 conveys general trends in
Medicaid prescription drug costs. During the 2011-2016 timeframe, average annual pharmacy
expenditures per Medicaid beneficiary increased by an average of 5.0% per year, with larger
annual increases occurring in the most recent years.

2
Sources: 2016 Actuarial Report on the Financial Outlook of Medicaid, Office of the Actuary, CMS. Full report is
available at: https://www.medicaid.gov/medicaid/financing-and-reimbursement/downloads/medicaid-actuarial-
report-2016.pdf Enrollment figures were obtained from the Kaiser Family Foundations website : www.kff.org

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Exhibit 5. Illinois Medicaid Costs Per Prescription, MCO-Paid Medications
Average
Annual %
Change,
2011 2015 2016 2011 - 2016
Medicaid Spending, Pre-Rebate $36,115,337,191 $52,446,585,734 $59,020,857,714 10.3%
Percent Change from Prior Year 23.0% 12.5%
Average Medicaid Enrollment 56,300,000 70,000,000 72,200,000 5.1%
Medicaid Rx Expenditures Per
Enrollee $641 $749 $817 5.0%
Percent Change from Prior Year 14.4% 9.1%

F. Illinois Medicaid Pharmacy Cost Trends

Recent Medicaid prescription drug cost trends in Illinois are shown in Exhibit 6 for medications
paid by the states Medicaid Managed Care Organizations (MCOs). Across the first three
quarters of FFY2017, average costs per prescription were $63.78, 8.6% above the FFY2016
figure.

Exhibit 6. Illinois Medicaid Costs Per Prescription, MCO-Paid Medications

Pre-Rebate Cost
Timeframe Per Prescription
FFY2016 $58.74
Q4 2016 $61.56
Q1 2017 $62.90
Q2 2017 $68.16

Note that large rebates occur in the Medicaid pharmacy arena, leading to net prescription drug
costs that are currently roughly half of the initial amounts paid to pharmacies. Because the vast
majority of these rebates are statutory and accrue to the State and CMS (rather than to the
MCOs), our pharmacy cost analyses have focused on pre-rebate expenditures for purposes of
providing information relevant to capitation rate-setting efforts.

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The degree to which specialized drugs are being introduced with very high price tags is a key
upward driver in Medicaid prescription drug trends. The figures in Exhibit 7 demonstrate that
the percentage of Illinois pharmacy expenditures attributable to high-cost medications (those
above $1,000 per prescription) rose from less than 30% during 2013 to more than 40% in 2017.
This trend mirrors those nationally the percentage of nationwide Medicaid expenditures for
prescriptions with a cost of more than $1,000 (pre-rebate) was less than 2% in 2005 and reached
40.5% during 2016. While Illinois percentage during 2016 (38.2%) was below the national
average, these specialty drug dynamics are pushing up pharmacy costs for all payers.

Exhibit 7. Progression of High-Cost Medications in Illinois Medicaid

These figures are for all Medicaid-paid prescriptions in Illinois both those paid by MCOs and in the
FFS setting. These tabulations were produced using pre-rebate payments to pharmacies.

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G. Summary Observations
The information above clearly indicates that health costs in general and prescription drug costs
in particular are generally rising. An assumption that health care costs in an upcoming year
will be flat relative to a recent year deviates from typical trends. CMS actuaries have
projected that there 2018 will be a year of relatively high per capita cost increases, both in the
nation overall and within Medicaid.
We are not privy to the specific data on which Illinois capitation rates are being derived.
However, from a broad lens there exists significant grounds for concern that the absence of a rate
increase is driven by state budget challenges rather than sound actuarial projections. This is a
critical juncture in Illinois Medicaid managed care program and it is important for the State to
ensure that a financially sustainable partnership exists with its Medicaid MCO contractors. All
of our analyses suggest that a capitation rate increase of several percentage points is warranted
for CY2018.