As the Obama administration rolls out the first new regulations for managed care plans in more than a decade, health plans in the Medicaid business can expect new regulations designed to enhance their quality with consumers and, potentially, bring a boost to their bottom lines should they increase performance.

While health insurance companies are often leery of new rules and government edicts, a star system for health plans contracting with Medicaid programs for low-income Americans could be a good thing for health plans and their stock prices. Companies with large Medicaid businesses include Aetna (NYSE:AET), Humana (NYSE:HUM), and UnitedHealth Group (NYSE:UNH), as well as more pure-play Medicaid health plan providers like Molina Healthcare (NYSE:MOH) and Centene (NYSE:CNC), which are growing due to Medicaid expansion under the Affordable Care Act. 

First came Medicare success with seniors
When the Centers for Medicare & Medicaid Services began rolling out its star rating system five years ago, Medicare health plans that scored four or five stars on a five-star scale gained certain marketing advantages and bonus payments. It was widely popular among health plans, and most health insurance companies did well under the system, according to several studies.

Take Aetna, for example, which increased the number of health plans it had under the Aetna and Coventry brands with four or more stars to 19 this year from 12 in 2013. Aetna reports that 79% of Aetna and Coventry Medicare Advantage plan members began this year in plans rated with four overall stars or higher.

From 2013 to 2014, most publicly traded health plans, including Aetna, Cigna (NYSE:CI), Humana, and UnitedHealth Group, improved their rankings, according to a Barclays analysis, which said that the average "star rating increased to 3.86 stars, up 0.16 stars year over year" for health plans contracting with the Medicare program.

To score well, health plans in Medicare are rated on a variety of metrics designed to improve quality, evaluating such areas as how quickly they process claims or how well they score on various "outcomes" measures.

Medicaid for poor Americans looks to join the ratings game
Meanwhile, the proposed rules for Medicaid managed care organizations, which haven't been updated since 2002, will give states more flexibility to implement Medicaid but also set minimum standards and bring "greater standardization of metrics across states and plans," according an analysis by Washington consulting and research firm Avalere Health.

The stakes are high for the Medicaid managed care industry, which is projected to manage benefits for nearly 75% of poor Americans with Medicaid benefits by the end of this year, Avalere said.

"Over the past four years, enrollment in Medicaid managed care has increased by 48 percent, with 46 million beneficiaries now receiving coverage through these plans," Avalere Health Vice President Caroline Pearson wrote in a report this month.

Because there is a forthcoming public-comment period on the regulations, it's unclear when health plans would have to abide by any new rules or when quality ratings might emerge.

But if the rules lead to health plans that score higher in terms of quality, as they did under the Medicare star-ratings systems, that should be a good thing for health plans and owners of their stocks.

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