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Friday, Dec 8, 2023

Medi-Cal Mayhem: Health Net, Other Firms Seek to Overturn Molina Healthcare Medi-Cal Contracts

Woodland Hills-based health plan Health Net of California Inc. and several other health plans in the state are waging a battle to overturn this summer’s preliminary award of huge Medi-Cal contracts to Long Beach-based Molina Healthcare and a handful of other health care payers.

Molina was the biggest winner in the state’s proposed overhaul of Medi-Cal contracts to provide health care to the one-third of Californians who meet low-income thresholds. If the awards are finalized, Molina will snag the crown jewel of Los Angeles County, taking away more than 1 million enrollees from Health Net. The new contract awards – collectively worth billions of dollars – are slated to go into effect on Jan. 1, 2024.

Health Net, a subsidiary of St. Louis, Missouri-based health insurance giant Centene Corp., – along with Oakland-based Blue Shield of California and San Diego-based Community Health Partnership Plan – have filed appeals of the contract awards, and have also filed lawsuits against the California Department of Health Care Services demanding the release of the agency’s scoring documents used to determine the contract winners. 

These health plans claim that switching millions of Medi-Cal patients to new plans in January 2024 will be hugely disruptive and could cause some current Medi-Cal enrollees to slip through the cracks.

“Through our local health plan, Health Net of California, we have been providing quality, comprehensive and equitable healthcare to members throughout California for 25 years,” Centene’s Aug. 25 statement read. “We strongly believe our exit in these counties will be a significant disruption in services to our members and providers… We are evaluating all options to appeal the decision and protect our members and their access to quality healthcare.”

Health Net has been serving Los Angeles County Medi-Cal enrollees since the late 1990s, when the county was switched to a two-plan system. Health Net has about 1 million enrollees, while Westlake-based nonprofit L.A. Care has the remaining 2.1 million.

Medi-Cal overhaul

Health Net building in Woodland Hills. (Photo by David Sprague)

At stake in this battle between medical insurance giants is billions of dollars in 28 new Medi-Cal contracts that the state Department of Health Care Services awarded on a preliminary basis in late August. It was all part of the first major overhaul of Medi-Cal service contracts undertaken by the agency as part of a strategy to improve the delivery of health care to the state’s low-income residents. A major aim was to reduce the overall number of health plans with Medi-Cal contracts.

Three commercial managed care plans – Molina, Anthem-Blue Cross Partnership Plan and Health Net of California – received the lion’s share of the contracts, covering Medi-Cal enrollees in 21 counties. 

But with this round of Medi-Cal contracts, Health Net was excluded entirely from the Los Angeles market, as well as Sacramento and Kern counties. The commercial managed-care plan was left with eight counties, mostly in the Central Valley and other rural parts of the state.

Blue Shield, which had only a portion of San Diego’s Medi-Cal population, was excluded entirely from this round of 28 contracts.

Blue Shield has launched a public pressure campaign aimed at overturning the contract awards, with the aim of having the contracts rebid. The company set up a website, “Stand Up for California,” and released an “open letter to all Californians” from Blue Shield of California Chief Executive Paul Markovich.

In the Oct. 2 letter, Markovich said the California Department of Health Care Services “intends to choose for-profit health plans with poor track records in improving access to quality care and constructively engaging local communities… This has implications for people’s lives and the kind of care they deserve.”

Markovich in the letter went on to call the intended award decision “a breach of trust with the very communities whose health and lives depend on Medi-Cal.”

On Oct. 6, Blue Shield announced it had filed a lawsuit against the Department of Health Care Services. The lawsuit alleges that the agency had up to then failed to comply with a public records request for documents related to the contract award decision.

“On behalf of the Medi-Cal beneficiaries we serve today whose health care is directly impacted by this decision, and of every Californian, we are turning to the court to insist on a full, fair, and robust Medi-Cal procurement appeals process,” Kristen Cerf, Blue Shield of California Promise Health Plan’s chief executive, said in the lawsuit announcement.

The following week, Health Net and Community Health Group Partnership Plan filed their own lawsuits.

Molina response

Molina has not commented publicly on the appeals and lawsuits. 

But in remarks to analysts in Molina’s third-quarter earnings conference call on Oct. 27, Molina’s chief executive, Joseph Zubretsky, addressed its rivals’ criticisms. He said that the company is prepared to spend $60 million to staff up and otherwise prepare to handle the 1.4 million-plus new customers it is set to assume responsibility for as of Jan. 1, 2024; that spending will be taken as a charge against earnings throughout 2023.

“We are very confident in our ability to operationally prepare for this expansion,” Zubretsky said in the earnings conference call. “We have a deep knowledge of the [Medi-Cal] program, and we have an existing long-term presence in Los Angeles. We have already commenced the 15-month build-out for this significant expansion.”

Zubretsky said the scope of its California Medi-Cal contract wins and some other contracts the company won during the quarter will transform the company over the next several years, bringing in up to $6 billion in additional revenue. Last year, Molina reported $27.8 billion in revenue.

“The new business wins will have a profound impact on our company over the next few years,” he told analysts. “In 2023, we will be busy scaling our proven operating infrastructure to service this new revenue, incurring front-end implementation costs. In 2024, we expect to achieve full run-rate contract revenue with earnings beginning to emerge from this significant new revenue.”

Analyst split verdict

Will Health Net and the other health plans that lost out in the Medi-Cal contract bidding succeed in regaining their business?

A couple of equity analysts who follow Molina expressed varying degrees of caution about the outcome.

Scott Fidel, managing director of equity research in health care services with Little Rock, Arkansas-based Stephens Inc., said he was following Molina’s lead on the matter.

“In our report, we did discuss that MOH (Molina) felt highly confident that it will prevail,” Fidel said. “In our earnings model, we are assuming that MOH will assume the new Medi-Cal business in 2024, although there is always the possibility that the appeals could delay the implementation date for the new contracts beyond 2024,” he added.

But another equity analyst, Stephen Baxter of Wells Fargo Securities Inc. in New York, was not so sure. In his Oct. 31 report on Molina, he put forward multiple scenarios for future earnings for the company, factoring in whether Molina gets the Medi-Cal contracts or not. He gave those scenarios equal weight.

Baxter went through the same process with Centene, folding the results into his Molina report.

“We are introducing a scenario-based price target that we think helps frame a range of outcomes across California Medicaid and an uncertain outlook for Medicaid margins over the next couple of years,” Baxter wrote in his report.

Hannah Madans Welk
Hannah Madans Welk
Hannah Madans Welk is a managing editor at the Los Angeles Business Journal and the San Fernando Valley Business Journal. She previously covered real estate for the Los Angeles Business Journal. She has done work with publications including The Orange County Register, The Real Deal and doityourself.com.

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