Cain Brothers Newsletters: Industry Insights
“Industry Insights” is a bi-weekly email newsletter published by Cain Brothers, a division of KeyBanc Capital Markets. The newsletter features innovative and original perspectives about healthcare services, healthcare IT, and life sciences from our team of experienced investment bankers. Read the latest newsletter content below, and subscribe to start receiving the newsletter in your inbox.
Now It’s Medicaid’s Turn
April 3, 2025 – Banker Commentary by Mike Elizondo
Turbulence in managed care markets continues. Over the last 18 months, highlighted in previous articles and podcasts, that turbulence has been from government insurance programs, particularly Medicare Advantage. 2024 regulatory actions targeted excess margin in the Medicare Advantage program. While many of our predictions of how operators would react continue to come to fruition, these actions continue to cause volatility for Medicare Advantage operators and investors alike.
While Medicare was the focus of 2024, 2025 appears to have Medicaid in its sights. Medicaid is a more complicated problem, as the program is co-funded between the federal and individual state governments. Yet, federal spending on Medicaid has supported meaningful growth in services provided by state Medicaid programs. For reference, federal Medicaid spending has grown from $116.8 billion in 2010 to $567.9 billion in 2022. Over that same period, the federal government’s share of total Medicaid spending has increased from 58% to 71%.1 Supporting Medicaid expansion, pandemic support and enhanced matching programs (among other methods) have been net positive to state budgets to aid and support this broad population.
The GOP’s desire to cut overall federal spending is well covered, and no doubt healthcare spending will be impacted. While details are still a mystery, including cuts, if any, to Medicare and Social Security, changes to federal Medicaid funding seem inevitable. While the House Energy & Commerce Committee considers how to slash $880 billion in healthcare spending, broad tactics have been floated:
- Per capita spending caps
- Elimination and/or changes to matching rates (enhanced, base, population/program-specific, etc.)
- Elimination of state provider tax funding mechanisms
- Work requirements
- Eligibility changes (population and poverty levels)
The drive is loud and clear: there will be attempts to change how the federal government supports Medicaid. But how will the states respond? In some respects, it’s very simple: should federal support of Medicaid programs change, there are two options: 1) raise revenue to replace federal funds and/or 2) cut spending. Neither are popular, and many governors would rather not make the first move. This is complicated and while press coverage is (overly) simplified, details matter. Investors are focused on the details. Public investors have battered the government-focused managed care companies and private equity investors’ scrutiny on businesses with Medicaid reimbursements has heightened.
Readers of this publication and listeners to our podcasts have heard our prediction of how long challenges in Medicare Advantage will last (hint: at least through the 2026 bid and plan year). But Medicare Advantage programs all over the country have one advantage over Medicaid programs: uniformity in its funding source. I believe the complexity of Medicaid’s funding will create attractive and unattractive state, and perhaps regional, markets. Those states that step up funding to replace federal cuts will continue to attract private investment in Medicaid benefits and services; those that don’t (or can’t) will not. Both operators and investors will find the markets that have opportunities and continue to invest. All this is to say, stay tuned until October when the recently passed continuing resolution expires; it’s going to be a bumpy ride.
1 https://www.statista.com/statistics/245350/total-medicaid-federal-and-state-expenditure-in-the-us-since-1966/
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