Health Law Seen Boosting Xerox, HP

When Tennessee Medicaid Director Darin Gordon walks around his department in an office park north of downtown Nashville, he sees dozens of workers from technology giant Hewlett-Packard.

HP’s employees help to operate the massive computer systems that run Tennessee Medicaid. When Gordon wants a report on how much the government health insurance program is spending, or the quality of the care for 1.3 million enrollees, he relies on HP-generated data — “the backbone of everything we do,” he says.

Health Law Seen Boosting Xerox, HP

Tennessee Medicaid Director Darin Gordon next to cabinets of servers that process massive amounts of data for the state’s Medicaid program. (Photo by Josh F Anderson for USA TODAY)

Growth in the program for the poor has created boom times for data management companies like HP and Xerox. Even before passage of the federal health care law, states were farming out the operations of the safety net program.

Now, with Medicaid poised for broad expansion under the law and with online insurance markets being built in most states, those companies are well-positioned to profit.

“There is near-term growth and wind at your back if you can deliver,” said Paul Keckley, executive director of the Deloitte Center for Health Solutions, a consulting firm.

HP runs Medicaid data systems for 21 states, processing millions of claims from hospitals and doctors as well as enrolling providers, verifying patients’ eligibility and authorizing some services.

Rival Xerox runs the data systems for a dozen states and the District of Columbia and has contracts with 24 more to handle duties such as determining Medicaid eligibility or managing the program’s pharmacy costs.

Medicaid contracts are “big and foundational” for Xerox as it evolves into a service company looking for higher profit margins than it gets from selling copiers, Xerox Chairman and CEO Ursula Burns told Wall Street analysts during an earnings call earlier this year.

Those contracts are now a $900 million-a-year business for the company, said Mary Scanlon, senior vice president for government healthcare solutions. That’s still a small part of a company with nearly $23 billion in 2011 revenue.

HP, which had $127 billion in revenue last year, does not break out revenue from its Medicaid business.

A number of smaller companies, including CNSI in Gaithersburg, Md., and Molina Healthcare in Long Beach, Calif., have several state Medicaid contracts each –most of which are worth more than $100 million each over several years.

Expanding Portfolio

Most states hire companies to crunch the data because they lack the technology or expertise, said Peter Bendor-Samuel, CEO of the consulting firm Everest Group. “As Medicaid expands, it means a strengthened business climate for these Medicaid vendors.”

Already the nation’s largest health insurance program with about 60 million enrollees, Medicaid is expected to add as many as 17 million more if every state extended eligibility under the health law, according to the Congressional Budget Office. The Supreme Court decision last June made participation effectively optional, and state officials are expected to decide the issue next year.

The technology companies are often invisible to Medicaid recipients, but they play a vital role – “the brains behind a properly functioning program,” said Alan Levine, former Medicaid director in Florida and Louisiana.

Xerox and HP alone process nearly $200 billion in Medicaid medical claims to doctors, hospitals and other providers. Their systems help determine eligibility and detect fraud and abuse.

Their call centers also handle questions from recipients about their benefits or finding a doctor — often working in conjunction with private health insurers, such as UnitedHealthcare and Aetna which manage Medicaid for many states.

Xerox sees the health law as providing another avenue of potential growth. It is trying to leverage its Medicaid experience to win contracts to develop the infrastructure of the new online insurance marketplaces, called exchanges, required to be set up by next October.

“It’s a natural fit for us,” Xerox Group President Will Saunders said of the exchanges.

The company has won a $72 million exchange contract in Nevada, and one for $68 million to run an insurance exchange for small businesses in Florida, which predates the federal law.

“Exchanges are a small piece of our business now, but we have made the investment and think it will grow,” Scanlon said.

HP officials said they do not plan to pursue the exchange market.

Federal Reimbursement Key

Xerox and HP entered the Medicaid business around the same time. Xerox bought Affiliated Computer Services (ACS) for $6.4 billion in 2010, and HP bought Electronic Data Systems (EDS) for $13.9 billion in 2008. The Medicaid contracts had represented a small, but growing part of ACS and EDS business for more than two decades.

Xerox bought ACS as it was expanding from selling products like printers into the more profitable technology services field, consultant Bendor-Samuel said. HP bought EDS to increase its technology services business and help it compete with rival IBM.

One reason for their burgeoning Medicaid business is that many states have been updating data systems originally built in the 1980s.

The federal government reimburses states that modernize or replace their systems for as much as 90 percent of the costs. It covers as much as 75 percent of the costs of operating the new system if it meets federal requirements.

That has resulted in hefty contracts — often the single largest contracts that states award.

In 2010, Xerox outbid HP to win a 10-year, $1.6 billion contract to develop and operate California’s Medicaid billing system. David Maxwell-Jolly, director of California’s Department of Health Care Services, says Xerox will make billing easier for providers and pay claims quicker and more accurately.

Other states that have recently signed contracts include:

  • Florida, which signed a three-year, $172 million deal with HP last year.
  • Louisiana, which signed a three-year, $185 million deal with CNSI in February.
  • Maryland, which earlier this year awarded Computer Sciences Corp. of Falls Church, Va., a contract worth as much as $297 million over 11 years.

Sue Arthur, vice president of health and life sciences at HP, said when states outsource Medicaid jobs to her company, most of those jobs remain in state capitals.

“The Medicaid expansion gives us an opportunity to bring a broader set of technology to states, no matter what they do,” she said.