Has Medicare Advantage lost its luster?

Though Medicare Advantage enrollment keeps climbing, the program may not have the profitability it once did for insurers. 

In a January analysis shared with Becker's, Moody's analysts wrote that the program "seems to be losing some of its luster," facing a significant increase in medical costs and lower reimbursement rates from CMS. 

Earnings in Medicare Advantage shrunk by 2.1% among the insurers Moody's rated from 2019 to 2022, despite premiums and members growing by 40% in the same time period. 

Humana, the nation's second-largest Medicare Advantage insurer by membership, posted a $541 million loss in the fourth quarter of 2023, a result of what executives called an unprecedented increase in medical utilization. 

Other insurers are not immune to skyrocketing prices — UnitedHealth Group CEO Andrew Witty said costs were on the rise in the sector, in part due to the new RSV vaccine for older adults, on a Jan. 12 call with investors. CVS Health, the third-largest MA insurer, is bracing for costs to keep climbing in 2024, CFO Thomas Cowhey told investors in January. CVS Health has not yet reported its fourth quarter results, but Mr. Cowhey said the company's medical-loss ratio in the third quarter may come in higher than expected. 

Insurers and analysts have posited several explanations for the rising costs. UnitedHealth pointed to the popularity of RSV vaccines — which led to more primary care visits and increased medical service costs in other areas — and inpatient COVID-19 admissions. Humana noted more short-stay inpatient admissions and fewer observation stays. 

Several insurers have said outpatient procedures are driving up costs in the MA business. Moody's analysts wrote this could be because of pent-up demand during the pandemic, and a logjam in scheduling procedures because of nursing and staff shortages. Some analysts suggested pickleball injuries could be one contributing factor behind the need for more orthopedic procedures.

Giants loom larger in Medicare Advantage  

UnitedHealth and Humana controlled nearly half of the Medicare Advantage market in 2023, according to KFF. Aetna had another 11%, and all Blue Cross Blue Shield plans combined had 14%. 

Though warnings of rising costs and squeezed margins from the largest insurers have made headlines and sent stock prices down, the largest organizations are best poised to weather the storm. From 2019 to 2022, the market leaders were able to grow earnings and maintain margins, according to Moody's, while smaller payers struggled to achieve profitability. 

Following a called-off merger with Humana, Cigna, which has a relatively small Medicare Advantage membership of 599,000, is looking to sell its business in the segment. On Jan. 3, The Wall Street Journal reported Cigna was in exclusive talks to sell the business to Health Care Service Corp., which operates Blue Cross Blue Shield affiliates in Illinois, Texas and three other states. 

As the Medicare Advantage gold rush slows down, payers like Elevance Health and Cigna, whose MA businesses are a much smaller part of their portfolio, are becoming more attractive to some investors, Wall Street Journal columnist David Wainer wrote Jan. 25. 

Paying for more with less

As costs are rising, CMS is also phasing in changes to the risk adjustment program between 2024 and 2026. Insurers maintain the changes, which removed some diagnostic codes used to pay plans on a per-member basis, are a cut in funding. The agency has said the notice amounts to a slight increase in payments. 

2024 marks the first rate cut to the program in several years, according to Moody's, and with the changes being phased in through 2026, insurers won't see a bump for several years, at least. 

On a Jan. 25 call with investors, Humana's CEO Bruce Broussard said he expected "disciplined pricing" across the industry in response to the rate changes and higher pricing. 

Facing higher costs and lower reimbursement, insurers might cut back on benefits offered in MA plans, Mr. Wainer wrote in The Wall Street Journal, which could slow their membership growth. 

UnitedHealth's Mr. Witty spun the risk adjustment changes as an opportunity for innovation for the company. At an investor day presentation in November, he called the rate notice an "incredibly positive and healthy event for UnitedHealth Group." 

"Not because it gave us more money. It didn't," Mr. Witty said. "But because it gave us the stimulus to rechallenge ourselves on how we do things even more effectively going forward." 

MA isn't going anywhere

Despite the pressures in the industry, Medicare Advantage is "clearly winning in the marketplace," according to Moody's. 

Medicare Advantage now accounts for more than half of the Medicare program's enrollment. Over the past 10 years, MA membership has grown at a rate of 8% per year, while traditional enrollment has shrunk by 1%. MA is expected to account for 62% of Medicare enrollment in 2033, according to Congressional Budget Office estimates. 

Though enrollment will eventually plateau, according to Moody's estimates, there is still room for the program to gain additional market share in the next few years. 

Insurers are maintaining a positive outlook on the future of the program as well. 

"Although the near term impacts of the higher utilization are disappointing, our confidence in the long-term attractiveness of this sector and our position with it has not changed one bit," Mr. Broussard told Humana's investors.

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