With Donald Trump signing into law his Tax and Spending plan, the healthcare industry is coming to grips with a nearly $1 Trillion expected cut in Medicaid spending over the next ten years. These cuts will impact bottom-line performance of virtually all hospitals who treat Medicaid beneficiaries and health insurance payers who contract with state regulators to insure these beneficiaries. The question is what will payers do next? Will they hide their heads in the sand, focus on cost cutting, or will they consider new ways to generate untapped revenue?

The predictions vary in size for how many Americans will lose coverage (11 – 16 million) for one reason or another with the changes the new law deploys, but ultimately it means between 15% and 20% of the total Medicaid market may disappear.

Payers have built a revenue model on a principle of continually adding to the participant roles; this is true of both for-profit and not-for-profit payers. This model seeks to add to the population of plan participants, and it is so ingrained in the industry that it has become the mantra for the primary way to grow revenues. But the coming changes to Medicaid mean that potentially 4% of the US population will no longer be Medicaid-eligible (15% of Medicaid recipients). For example, firms like Molina, which last year earned 88.3% of all its member premiums from Medicaid, may enroll ~750k fewer members and could sustain approximately a $4.5 billion cut to annual premiums. Similarly, prominent not-for-profit Medicaid plans, some with annual revenues exceeding $10 billion, could see significant reductions in premium revenue.

In situations like this, many firms will pivot to a cost-cutting mentality. The issue with this approach is that cost-cutting can negatively impact quality, service, brand perception and eventually may erode competitive advantage.

An alternative to this well-worn methodology is to find new channels of revenue or untapped areas of potential revenue. One such path, the use of premium float investments to create additional non-operating revenue, has been a staple of the property and casualty insurance industry for decades. One reason this has remained a largely under-utilized revenue stream for health insurance payers is the very short float periods associated with health insurance premiums. These short float durations severely limit the ability to leverage a health payer’s balance sheet, but recent innovations in the financial markets have created new solutions for these historic challenges.

Health Insurance Backed Securities (HIBS) give payers the ability to extend float durations synthetically, thereby creating the opportunity to realize far greater returns on float investments without adding to net debt or risk. HDE Innovations is currently leading the way in this field and is actively onboarding clients.