Changes in prior authorization, the Star program, and risk adjustment will force MA plans to pivot to aggressive data analysis and intervention to reduce costs and improve quality.
Investor news is crazy with various news about major health plans and the struggles they are seeing. The biggest light has been focused on the sad financial news of Medicare Advantage (MA).
There are 340 million people in the country, and there are now almost 70 million seniors and disabled on Medicare. While some major health players, such as The Cigna Group, have divested Medicare plan assets, most others see MA as critical to insurer success overall. After all, MA has huge premiums (let’s say about 2.5 to 3 times other lines of business) and should have margins that are among the best (perhaps 4 to 6% in good years like commercial, compared with 2% at best in Medicaid and the Exchanges).
But the financials of insurance are changing. Health plans are seeing huge increases in utilization, driven by a post COVID surge and expensive weight-loss, specialty, and medical drugs. And more and more, regulators and lawmakers are clamping down on traditional ways insurers have limited medical expense. Prior authorization (PA) and claims denials are being targeted by both state and federal lawmakers for reform.
Plans are also seeing revenue pressures. Governments and employers are much stingier of late on premiums paid. In some lines of business, more and more is being tied to quality outcomes. And governments are watching closely for abuse on risk adjustment systems that are meant to distribute revenue fairly amongst health plans based on relative risk.
Let’s deep dive and consider the cascading issues impacting MA plans in these financial areas.
Prior authorization and claims denials – The Centers for Medicare and Medicaid Services (CMS) and a bipartisan group of lawmakers in Congress have pushed and will push for major reforms here. For 2024, CMS forced MA plans to follow the traditional fee-for-service (FFS) program rules for coverage. This effectively has reined in PA demonstrably in the program. Newer CMS rules also rein in the ability to retroactively enforce PA and limit claims denials. A PA bill could finally pass in Congress and the new CMS administrator, Dr. Mehmet Oz, promises additional PA streamlining and enforcing uniformity across plans.
Of course, all this is politically popular but bad for MA. After all, MA is managed care and the traditional FFS program is rotten in terms of fraud, waste, and abuse (FWA) and over-utilization. Perhaps some changes are merited, but by and large these proposals take the managed care out of managed care.
Star challenges – MA plans are clearly struggling with the Star quality program, on which they rely to increase benefits beyond the traditional program. This is critical to their growth strategy and to maintain healthy margins. At stake are literally billions of dollars per year in bonus or rate rebate payouts.
As of Star Year 2025 statistics, Star power and ratings have dropped three years in a row in the program. The average MA Star rating is now below 4.0 for the first time since 2015. The percentage of MA-Part D (MA-PD) contracts hitting 4 Star and above as well as the percentage of enrollment in the high performing contracts are extremely low and have now dropped well below pre-COVID levels. The percentage of contracts that rate 4 Star and above barely broke 40%, down from over 44% in 2024. Enrollment in 4 Star and above contracts has now slipped to just over 62%, from over 76% in 2024.
The Star challenges are a result of a few factors:
- Plans lost diligence during the COVID years on Star performance.
- CMS has implemented some complex changes that make it tougher to achieve high ratings, including a Tukey outlier, more complex measures, weighting changes, and the phaseout of manual chart reviews.
Risk adjustment reforms – Rate hikes have come down tremendously in MA over the past few years. That is not due to cost trends in the traditional program, but from implementation of a new risk model, v28. The new model was created and implemented by CMS to rein in overcoding by health plans and target recognition of risk among individuals better. v28 will take more than 7% out of rates when the phase-in is complete for rate year 2026. This has caused tremendous revenue drops just as utilization has begun to spike. In 2026, there is a reasonably hefty rate hike of 5.06%, but utilization and spending will still go up in the program 9% or more.
Beyond v28, CMS and lawmakers are looking at further reforms due to reports that MA is overpaid by $80 billion or more annually. I do not agree with extreme calculations of overpayment. I have a link below to a good Health Affairs Forefront blog. It is a bit sympathetic to those who pedal massive overpayment theories. But it does do a good job of arguing the need for better data to understand exactly how much is overpayment or not. The blog notes that data and assessments must take into account a variety of dynamic and interacting variables, including demographics , health status, selection, risk, coding practices, and quality bonuses, among others.
Suffice it to say, though, that there is a great deal of abuse and that is tied to practices at a handful of plans. That disproportionately benefits those plans in terms of revenue, but it gives all of MA a bad name.
Dr. Oz has promised lawmakers to rein in overpayments. Some lawmakers on both sides of the aisle want reforms as part of the budget reconciliation bill. Oz announced that CMS will get to 100% auditing of plans on risk adjustment data validation (RADV) quickly. Others want to eliminate risk scores that are tied exclusively to health risk assessments or manual chart reviews. Still other proposals include a blanket increase in the coding intensity factor (which reduces MA rates) or a sliding scale coding intensity adjustment tied to the perceived level of upcoding by each plan.
Marketing and enrollment practices — MA plan enrollment and marketing practices are being challenged. CMS sought to implement major reforms to stop what it viewed as compensation to brokers and agents that was extra-legal and not in the best interest of enrollees. The rule CMS proposed under the Biden administration was struck down in federal court. Under the Trump administration, the Department of Justice is suing several large plans and brokers accusing them of fraud in marketing practices and compensation of brokers.
What is the impact of all of this?
The trends and anticipated further reforms create challenges for plans in the long term both on the revenue and spending front.
On revenue, tougher Star standards will rein in what used to be generous rebate and Star bonus dollars. Risk adjustment reforms will dramatically hamper revenue growth as well.
On the spending side, aging, longer life expectancy, high overall prices, and drug prices and inflation will mean extremely high costs trends each year. The inability to leverage traditional managed care gatekeeping, such as PA and claims scrutiny, will erode cost-saving opportunities.
Together, these changes create a challenging future for MA even as the program remains a very attractive option for seniors and the disabled as compared with the traditional program.
What plans will need to do
If plans survived and thrived in MA before by ratcheting costs down with PA and claims denials and taking advantage of a free-wheeling risk adjustment environment, they now will need to pivot to new ways of boosting revenue and reducing costs.
What will MA plans — really all plans — need to do?
- Invest in technology and personnel to truly assess quality outcomes and performance. Broad investments here to be constantly ahead of the Stars changes and complexity are key. Stellar performance will mean analysis of and outreach to every member on dozens of measures.
- Invest in technology and personnel to thoroughly assess member risk and global cost trends and intervene to lower costs. Far too little is done in this area and when it is done often the data analyzed is so stale that the opportunity to intervene and tackle trends has evaporated.
- Invest in technology and personnel to enhance member satisfaction. While cost trends are always eating away at margin, low member satisfaction hurts both revenue and margin through ongoing churn of membership. Average annual churn has increased dramatically the past decade or so. Prior to 2017, average annual churn was about 10%. In 2021 and 2022, the average churn hit 17%. The churn rate may have increased even more in the last couple of years due to overall MA growth as well as plan and geographic contractions. What is the revenue impact? Say an MA plan has a fairly good annual average churn of 10%, a 100,000 life MA plan loses somewhere between $120M and $150M in annual revenue. A plan with a 15% churn loses $180M to $225M in annual revenue. Also, churn tends to increase the more dual eligibles that are enrolled in a plan.
Each of the above will require engagement with members, providers, and various plan departments to lower risk, reduce costs, increase quality, and boost member satisfaction.
While large plans could make the needed investments, small- and medium-sized plans could struggle. But a mature data analytics platform deriving real-time assessment of factors as well as leveraging artificial intelligence (AI), machine learning, and agentic AI engagement could be how all plans rise to the occasion and pivot their enterprises for financial success in MA.
Certainly, many plans need to be cautious about leveraging AI from a member abrasion and security standpoint. But carefully crafted use cases for analysis and interventions — guided by clinicians — could get members, providers, and plans more comfortable with leveraging such technology. It very well may be the biggest innovation to reduce administrative costs and extend the reach of health plans to members and providers alike.
Article noted above: https://www.healthaffairs.org/content/forefront/policymakers-need-data-budgetary-impact-medicare-advantage-growth
#healthplans #ai #margins #medicareadvantage #data #stars #quality #riskadjustment #overpayments #priorauthorization
— Marc S. Ryan
