How to Make a Fortune on Obamacare

At the start of 2016, nine companies offered health insurance in Georgia through the federal Patient Protection and Affordable Care Act, aka ACA, aka Obamacare. Eighty-five percent of residents signing up could choose from among four to eight carriers, depending on where they lived. One by one, though, companies stopped selling insurance through ACA exchanges—they were spooked by uncertainty about the market’s future, or were paying more for care than they were collecting in premiums and other payments, or both.

As 2017 dawned, only five companies remained, and almost half of Georgia’s ACA population was choosing from one or two insurers. Then, in August, Anthem Inc. Blue Cross Blue Shield announced it would pull out of ACA marketplaces in 74 of Georgia’s 159 counties, leaving all but 14 counties with a single carrier for 2018. “We were beside ourselves,” says Melissa Camp, who directs a program to help people sign up for ACA benefits at the nonprofit InsureGA.

In came Centene Corp., a relatively obscure but swiftly growing insurer based in suburban St. Louis. Centene, which had sold Medicaid coverage in Georgia for longer than a decade, had moved cautiously into the ACA market. But as Anthem prepared to flee, Centene told state regulators it would expand into 20 more counties, including 17 in rural southwest Georgia that are home to some of the poorest, unhealthiest people in the U.S.

Centene also said it would offer ACA policies next year across Nevada, filling in rural counties that were destined to lack any such insurers. It proposed to sell plans in Indiana, Missouri, and Ohio counties that otherwise would have gone without. It also will sell plans next year in new areas in Florida, Kansas, Texas, and Washington state and, after exits by other carriers, is poised to be the sole Obamacare provider throughout Mississippi.

Centene is the rare insurance company that really has made a fortune from Obamacare, to borrow President Donald Trump’s phrase. The ACA is only one factor in the company’s growth, but since Centene took its first wary steps into these marketplaces in 2014, its stock price has tripled, annual revenue has climbed from $10.9 billion to more than $40 billion, and net income has swelled more than threefold, despite thin margins. Chief Executive Officer Michael Neidorff last year was awarded $22 million in compensation, more than his peers at UnitedHealth Group, Aetna, and Humana. One of his biggest headaches these days is finding office space for all the people Centene has to hire to handle new business.

In his office at Centene headquarters, Neidorff says the company is doing what it’s done since he became CEO in 1996: courting the tens of millions of Americans who have trouble affording health insurance. Compared with most employer-provided plans, through which a majority of working Americans are covered, his company’s are stingy. To view it through a Wall Street lens, the value proposition is that Centene’s plans are better than nothing.

Melissa Camp juggles a client’s phone and her own while trying to obtain information to apply for health insurance at Phoebe Sumter.PHOTOGRAPHER: SUSANA RAAB FOR BLOOMBERG BUSINESSWEEK

A decade ago, Centene was one of several Medicaid managed-care companies taking heat for limiting customers’ access to hospitals, doctors, and drugs. Now the company’s tactics are more than welcome in such places as Georgia. “We’re just so grateful that they’re coming in here,” InsureGA’s Camp says of Centene. “We hope they make a lot of money and stay.”

President Trump last month halted $7 billion in annual ACA subsidies that reimbursed insurers that offer lower-income customers discounted copayments and deductibles. A federal judge upheld Trump’s order; a court challenge continues. Neidorff, though, likes to say that Centene, descendant of a health plan started in the basement of a Milwaukee hospital in 1984, has weathered the twists and turns of six administrations. At his desk, surrounded by photographs of him with several past presidents (and one with Dolly Parton), he says Trump’s effort to undo President Obama’s signature legislation is nothing Centene can’t handle. “We will figure out how to work with it,” he says. “We are not victims, we are managers.”

Neidorff.PHOTOGRAPHER: SUSANA RAAB FOR BLOOMBERG BUSINESSWEEK

Neidorff is a physician’s son who gave up on becoming a doctor after a tough organic chemistry course in college. He ran a UnitedHealth subsidiary in St. Louis for a decade and later joined Coordinated Care as CEO in June 1996. The company managed Medicaid coverage in two Wisconsin counties and part of one in Indiana. Neidorff renamed the company Centene for a French centime he found in his pocket after a trip to Europe. In 1997, he moved Centene to Clayton, Mo.

Medicaid, a federal-state program, supplies health care to almost 70 million Americans, including the poor, pregnant, disabled, and blind. In the 1990s, states increasingly sought to offload the costly, complex task of managing Medicaid care. Neidorff liked the business because state contracts offered the chance to gain large groups of customers—some healthier than others—in one swoop. “I never wanted to be accused of skimming” the healthiest customers, he says. “We wanted them all.”

Some doctors declined to treat customers of Centene and its managed-care peers because reimbursements for their services were low. States signed the companies up anyway. By 2009, the year before Obama signed the ACA into law, Centene was handling Medicaid contracts in nine states. The company bolstered its Washington lobbying as the ACA bill took shape—it tallied more than $1 million in total lobbying expenses in 2009 and 2010 after spending less than half that in the prior three years combined, according to OpenSecrets.org.

Individuals who buy their own policies represent less than 10 percent of the market, even accounting for the 12 million people now covered by plans purchased on ACA exchanges. The big money has always been in providing packages to employers. Prior to Obamacare, the individual market could be profitable, too; the key was to attract reasonably healthy customers who paid their premiums and didn’t run up six-figure hospital bills. Insurers could charge more or refuse coverage altogether to people who were already injured or sick. Tens of millions of unhealthy or lower-income people were effectively locked out of the health insurance market.

Obamacare remade the individual market by immediately outlawing the refusal of coverage to people with pre-existing physical or mental conditions. The companies would have to deal with a lot of sicker, more expensive customers without billing them more than healthier ones. (This applies as well to people who buy individual plans outside the exchanges, as about 5 million people do.) Still, most big insurers jumped into the ACA exchanges with gusto. Some priced their plans too low and got burned. Centene moved slowly, entering limited areas in only nine states, getting the lay of the land and gathering information on the new clientele.

It became clear to Centene that success or failure in these markets hinged on keeping costs low, which it considered an area of expertise. “In the Medicaid space, you don’t get to raise prices on people who are expensive,” says Nathan Landsbaum, who runs Centene’s Missouri health plan. “You have to use medical management to decrease the cost.”

Centene leans on data it has compiled from customers’ past ACA claims, including doctor and hospital visits, prescription drug use, and laboratory tests. Because many of Centene’s clients rotate into and out of Medicaid as their economic situations fluctuate, the company often has past information on them, and when Centene picks up Medicaid clients, it can get state data on them as well. The company also aggregates anonymous, publicly available data from a variety of sources ranging from county health rankings developed by the Robert Wood Johnson Foundation to Centers for Disease Control information on tobacco and alcohol use. Taken together, the data tell the company what to expect even from brand-new clients who fit certain age, income, and other demographic profiles. “We’ve been in so many states caring for so many populations that we can approximate what will happen from past data,” says Ken Yamaguchi, Centene’s chief medical officer.

The trick is to identify those who appear most likely to suffer such costly conditions as diabetes and cardiovascular disease and intervene before small problems become big ones. Research shows that 5 percent of an insurer’s population can account for as much as 50 percent of its costs. One Centene software tool, TruCare, sifts customer data to generate patient to-do lists that are updated every 24 hours and shared with Centene’s 3,000 case managers. The system, for example, might alert a case manager that a client’s potassium levels have spiked, signaling the potential for a life-threatening kidney problem. The caseworker then can contact the client to help her schedule a doctor visit or make sure she’s taking prescribed meds.

Diane McCray of Americus is a medical clerk at Middle Flint Behavioral Healthcare. She helped her two sons enroll in plans.PHOTOGRAPHER: SUSANA RAAB FOR BLOOMBERG BUSINESSWEEK

The use of predictive analytics in health care remains an imperfect science: Electronic medical records systems are often incomplete and unable to talk to one another, and physicians don’t always like to be told what to do by algorithms, according to an essay published in June by Harvard Business Review. But health providers are coming around, says Eric Just, senior vice president for product development at Health Catalyst, a firm that helps providers use data. Most major insurers employ analytics, but at Centene, Just says, “they were talking about it before it was cool.”

Many of Centene’s newer ACA customers have never had a regular doctor—they go to the emergency room or go without. That’s notoriously expensive. Centene tries to goad clients into healthier habits with cash rewards for doing such things as getting a flu vaccine, completing a wellness survey, or attending prenatal doctor appointments. The rewards, which differ from state to state, can be used for health-related expenses such as transportation to doctors’ appointments. The thinking behind this is on display even in the company’s employee cafeteria, where a cheeseburger sells for $5 but a veggie burger is $1.50.

Centene told investors in June that under one of its Medicaid plans, it’s reduced emergency room visits over the past five years by 5 percent. Wall Street would love to see more of that. Investors sent the company’s shares lower in October after Centene’s third-quarter medical spending climbed a single penny, to 88¢ for each dollar of revenue from premiums.

Ninety percent of Centene’s ACA marketplace customers earn little enough to qualify for federal tax credits that reduce their monthly premiums. Many also qualify for reduced copays and deductibles, which Centene must continue to provide even after the recent cutoff of reimbursements. Subsidized clients are vital to Centene’s success. While only 8 percent of the company’s 12.3 million customers have marketplace coverage, that slice accounts for 15 percent of earnings, according to Ana Gupte, an analyst at Leerink Partners.

Tawanna Peterson is a client smack in the company’s sweet spot. She’s 60, not experiencing severe health problems, and good about seeing her primary care physician and taking her prescriptions for blood pressure, high cholesterol, and arthritis. She lives in Columbus, Ga., with her husband, who’s on Medicare.

Peterson qualifies for the tax credit because her household earns less than 400 percent of the federal poverty level. She bought a policy sold under Centene’s Ambetter brand last year after losing her job at a call center. She pays $62.28 a month after the tax credit. “I don’t know what I’d do without it,” she says.

Some Centene customers complain about not being able to visit the doctors and hospitals they prefer. Centene’s networks are narrow, or limited—they offer fewer doctors and hospitals than other networks in a given area. Plans with narrow networks can be 16 percent cheaper than otherwise similar plans with broad networks, according to research published in September in the journal Health Affairs. The most likely reasons are that providers in narrower networks agree to lower reimbursements and perform only the most necessary services.

“I want to go to more of an upscale environment”

Over the past two years, traditional insurers have engaged fewer narrow networks while Medicaid specialists such as Centene have used more of them, says Daniel Polsky, executive director of the Leonard Davis Institute of Health Economics at the University of Pennsylvania. It’s unclear whether these networks offer poorer care. A study published in July in the Journal of Clinical Oncology concluded that some narrow networks in 2014 allowed less consumer access to oncologists at high-quality cancer centers. But research published in May 2015 in Health Affairs suggested these networks don’t necessarily offer care of lesser quality and sometimes may provide better care.

Centene has received mostly middling grades for the quality of its Medicaid care and service in many states, according to the nonprofit National Committee for Quality Assurance. No such comprehensive ratings for the ACA market have been published yet, but California and Washington state rankings give the company below-average grades. Neidorff counters that 80 percent of Centene’s ACA customers last year renewed for 2017. Of course, some would have had no alternative short of going without coverage. As for the company’s provider networks, he says, “You may not get the exact doctor you want, but you’ll have access to good doctors.”

Neidorff also argues that Centene’s predominantly poor clients actually appreciate not being able to go to certain hospitals for cultural reasons. For example, he says, a pregnant teen covered by Centene might prefer a neighborhood clinic to, say, Manhattan’s Lenox Hill Hospital (where Beyoncé delivered her baby in a private suite). “This young girl doesn’t want to sit in some upscale obstetrician’s office having people look down on her,” Neidorff says. Former Centene customer Meaghan Latifi Amini in Austin begs to differ. Some of the doctors she could see were at lower-end community-care clinics, and “I want to go to more of an upscale environment,” she says. Amini and her husband left Centene for employer-based coverage on Nov. 1.

Aaron Wellons, 30, a cook from Americus. His monthly premium will be $92.PHOTOGRAPHER: SUSANA RAAB FOR BLOOMBERG BUSINESSWEEK

Centene tends to build its ACA networks around Medicaid providers it’s worked with in the past. Company executives won’t discuss specifics of what Centene pays its doctors and hospitals, but Missouri executive Landsbaum says there’s a “wide gap” between what providers usually seek—standard commercial rates, or what most private employers pay—and where Centene starts negotiations, which is closer to Medicaid levels. Commercial plans probably pay twice as much as Medicaid on average, according to data from the Congressional Budget Office and the Kaiser Family Foundation. Some providers refuse to work with Centene. The company has greater leverage in places where it’s the sole marketplace provider, as in the clutch of southwestern Georgia counties it’s entering on Jan. 1.

Median household income in seven of the counties where Centene is expanding is below or just above the poverty level for a household of four, and health is generally poor. “We see the train wrecks,” says Sarah Lang, CEO of Valley Healthcare System Inc., a federally funded care provider with three clinical facilities in and around Columbus. “They have multiple illnesses and because of the cost will wait until the last possible minute to seek care.”

Centene is familiar with the territory, having managed Georgia Medicaid clients under its Peach State Health Plan brand. Last year the company started talking with southwestern Georgia’s dominant hospital network, Phoebe Putney Health System, about serving Centene’s policyholders next year. Phoebe Chief Financial Officer Brian Church says he was glad to hear from Centene because it’s been a “good partner” in Medicaid and “we saw it as the perfect complement to Blue Cross.” Then Blue Cross said it was ending ACA coverage in counties where Phoebe does business, leaving Centene the lone insurer. Church won’t discuss specifics of what Centene will pay, but says, “I could be in a better position a year from now with Centene or I could be in a worse position.” The Phoebe system wasn’t required to join Centene’s network. But if it hadn’t, it would still have to eat the cost of treating uninsured people, which was $65 million in the fiscal year ended July 31, 2016. Centene is “doing what business does, which is look at the rulebook and say, ‘How can we make a profit?’ ” says Jim Beck, a former Georgia deputy insurance commissioner now running for commissioner.

Two boom cranes hover over a construction site across the street from Centene headquarters, at work on a 27-story tower that will house 2,000 Centene employees. When the company closes its $3.75 billion acquisition next year of Fidelis Care—New York state’s largest Medicaid provider—on top of its $6 billion purchase of Health Net Inc. last year, Centene says it will be the largest Medicaid provider in the four most populous states. It’s gradually expanding into the lucrative market for private health insurance for seniors known as Medicare Advantage Plans.

But political threats loom over its Obamacare business. Without the subsidies Trump recently stopped, premiums across the country will rise. As of Jan. 1, Centene’s premiums are scheduled to climb 46 percent on average in Florida, 36 percent in Indiana, and more than 50 percent in Georgia. As these go up, though, so will applicable tax credits, so that 80 percent of HealthCare.gov enrollees will be able to buy a plan for $75 or less per month. Assuming Obamacare survives in its current form, those tax credits will cost the government $194 billion more over the next decade than if Trump had done nothing, according to the CBO and the Joint Committee on Taxation.

The greater threat to Centene is Congress and Trump finally repealing Obamacare altogether. An end to the ACA market for individuals or the ACA expansion of Medicaid could cost the company millions of customers. Neidorff dismisses the political back-and-forth as “headline noise.” The company is considering where it will expand in 2019. “Most people never thought we’d be where we are today,” he says. “We’re a Fortune 66 company this year. We’ll be a Fortune 50 in ’19. It’ll take a while to become a Fortune 25. That’ll probably be somebody else’s opportunity, not mine.” —With Anders Melin

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