California’s Resolve Questioned After It Grants Medi-Cal Contract Concessions

In a backroom agreement announced in the final days of 2022, Gov. Gavin Newsom’s administration, facing lawsuits, granted concessions that allowed major insurers to claw back business they would have lost had health officials stuck with the state’s initial contract awards for managed-care plans. Oakland-based Blue Shield of California and St. Louis-based Centene Corp. — which owns Health Net, the largest commercial health plan in Medi-Cal, the state’s version of Medicaid — were among those that had aggressively challenged the initial results.

“They had this long process, and then they just sort of struck deals,” said Maya Altman, who retired a year ago after nearly 17 years as CEO of the Health Plan of San Mateo, which did not participate in the bidding. “It’s kind of weird. Not transparent — very much behind closed doors.”

It was a remarkable change of course that came four months after the state had announced its initial contract awards. The Department of Health Care Services, which oversees Medi-Cal, had spent years preparing for the bidding competition and touted it as an important means of addressing substandard care. Eight commercial Medi-Cal plans, covering around 30% of the program’s 13 million managed-care enrollees, were required to submit bids for contracts worth about $70 billion over five years.

Noncommercial, locally governed Medi-Cal plans that cover the other 70% of managed-care enrollees did not have to submit bids, but they will be required to sign the same new contract as the commercial plans, scheduled to take effect next year.

State officials said their new decision avoids uncertainty after the losing health plans — Health Net, Blue Shield of California, Community Health Group, and Aetna — threatened drawn-out legal action. It also dramatically reduces the number of Medi-Cal enrollees who will have to switch plans — from an estimated 2.3 million to about 1.2 million. And state officials said it strengthens their ability to enhance Medi-Cal through the new contracts, which will contain requirements for higher-quality care, greater transparency, and more equitable access.

Other states have faced legal disruption after they put their Medicaid contracts up for bid. In Louisiana, for example, Centene and Aetna in 2019 protested the results of a rebidding process, which led that state to nullify its awards and start over. The new results were announced nearly two years later, with Centene and Aetna among the winners.

“When you create disputes, and lawsuits, they always put some uncertainty into things,” Dr. Mark Ghaly, secretary of the California Health and Human Services Agency, told KHN. “We feel that we ended up in a place where we achieved certainty. We have a set of [health] plans who are committed to this.”

Consumer advocates had worried that lingering uncertainty would hinder the rollout of a far-reaching nearly $12 billion, five-year Medi-Cal initiative to provide nonmedical social services that address socioeconomic factors such as homelessness and food insecurity, widely viewed as key health indicators.

Still, the state’s decision to throw out the bidding results has many patient advocates and some health plan executives questioning the value of future contract competitions and even whether health officials will effectively enforce the higher standards in the new contract.

“It would be extremely disappointing if poor-performing plans were able to litigate their way into participating in Medi-Cal,” said Abbi Coursolle, a senior attorney in the Los Angeles office of the National Health Law Program.

Tony Cava, a spokesperson for the Department of Health Care Services, said the bids submitted were still “incredibly valuable,” because they showed how the health plans intend to improve care. He said commitments made in the bids will be incorporated into the new contracts. Cava also said the department, which had not previously held a statewide bidding competition, now intends to hold one every five years.

Patient advocates and industry insiders gave the state credit for fining health plans that fell short of quality and access standards in a report issued late last year. But they also noted that several of the health plans that will continue to operate in Medi-Cal — including Molina Healthcare and Health Net — were among the lowest performers.

When the state announced its initial awards in August, Blue Shield was shut out, despite its large health care footprint statewide and its long-standing efforts to curry favor with the state’s political class. The state also said initially that it would take Los Angeles County, a huge Medi-Cal contract, away from Health Net.

Between 2018 and 2022, Blue Shield spent at least $31 million on lobbying, political donations, and other contributions, including $20 million to a state homelessness fund Newsom set up, according to a KHN analysis of filings with the secretary of state and the California Fair Political Practices Commission. Health Net parent Centene spent at least $5 million over that period, mostly on lobbying and political donations.

Under the new arrangement, Blue Shield will keep its San Diego County Medi-Cal business after initially losing it in the contract competition, though it will not get a contract in any of the other 12 counties where it bid. Its roughly 129,000 San Diego enrollees will not have to switch plans, but over 100,000 other Medi-Cal members in San Diego will still have to switch, as Health Net and Aetna exit.

In Los Angeles County, Health Net will retain its primary Medi-Cal contract, but will have to split its 1.1 million members 50-50 with Molina under a subcontract. Molina already subcontracts with Health Net in the county, but currently has only 80,000 enrollees under that arrangement.

Some observers questioned how the split can be maintained. Cava said half of new Medi-Cal enrollees in L.A. County don’t choose a plan and are assigned to one instead, according to the most recent data. These assignments will be used to help balance enrollment between Health Net and Molina, he said.

The state and the five participating health plans issued an unusual joint statement, and the plans put a positive spin on it. Centene said the state’s revised decision “is in the best interest of millions of members.” A Blue Shield executive said it was “honored to continue serving Medi-Cal beneficiaries in San Diego County.”

In an investor call this month, Molina’s CEO, Joseph Zubretsky, noted that his company’s Medi-Cal membership will double with the new agreement, though it would have tripled under the state’s initial decision. He summarized the situation for Molina as “taking three steps forward, taking one step back, and ending up being two steps ahead.”

Consumer advocates, patients, and medical professionals expressed relief that the new agreement allows Community Health Group, the largest Medi-Cal health plan in San Diego County, to keep operating there. Had the initial results held, it would have lost its contract, and its 335,000 members would have had to choose new plans.

Christine Xayalinh, a member of Community Health Group in Escondido, said the plan afforded her treatment for Type 2 diabetes and referred her to University of California-San Diego for a successful gastric bypass.

“I know some people do have concerns about their health insurance,” Xayalinh, 29, said, “but for me, it’s been a lifesaver.”

With the contract awards decided, the state’s hope of improving Medi-Cal will hinge on its ability to enforce the new contracts.

“The focus now needs to be on making sure that works,” said Kiran Savage-Sangwan, executive director of the California Pan-Ethnic Health Network. “This is a very vulnerable population of Californians who are not getting what they need.”

This story was produced by KHN, which publishes California Healthline, an editorially independent service of the California Health Care Foundation.

KHN (Kaiser Health News) is a national newsroom that produces in-depth journalism about health issues. Together with Policy Analysis and Polling, KHN is one of the three major operating programs at KFF (Kaiser Family Foundation). KFF is an endowed nonprofit organization providing information on health issues to the nation.

This story can be republished for free (details).