As management advisory firm Oliver Wyman noted in its recent study on Medicare Advantage’s (MA) woes, “history has a way of repeating itself.” And so it is with MA’s plight today. Oliver Wyman says MA plans can learn a great deal from what plans went through during the Medicare+Choice days almost thirty years ago. Oliver Wyman admonishes plans to avoid the Medicare+Choice mistakes lest MA plans suffer the same fate of many Medicare+Choice plans back then.
What is Medicare+Choice and what happened?
Medicare+Choice is the same program we have today but under its earlier name. While there was managed care in Medicare for a few decades, Medicare+Choice was formally established as Part C of the program via the Balanced Budget Act of 1997 (BBA). Plans were rolled out effective January 1, 1999. Medicare+Choice was renamed Medicare Advantage as part of the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) in 2003.
As Oliver Wyman reminds us, what hampered the new Medicare+Choice program was the fact that the BBA established strict budgetary caps across federal spending. Medicare+Choice payments to plans were capped in most counties at 2% despite inflation ranging from 5% to 10%. Plans did not deal well with the capped reimbursement and therefore many were forced to exit or scale back their coverage areas. Oliver Wyman says that, between 1998 and 2002, the number of Medicare+Choice contracts fell to 157 from 346. The contract exits included big companies like Aetna, Cigna, and many Blue Cross Blue Shield plans nationwide. The number of enrollees in the program shrank from 6.3 million to 4.7 during that time.
But as Oliver Wyman notes in the analysis, a number of high-profile plans did adapt to the financial tightness in the program, including Oxford, PacificCare, and Humana. (Both Oxford and PacificCare are now owned by United Healthcare.) Oliver Wyman says that these plans and others adopted “rigorous financial discipline.”
What can be learned?
As Oliver Wyman notes in its analysis – and as I often point out here – most MA plans abandoned the financial discipline they need in the program. Let’s call it the “COVID effect.” This was very much tied to strong rate increases earlier this decade, flexible Star standards during COVID, and in some cases the adoption of very loose risk adjustment scoring. With revenue flowing freely, most plans significantly augmented benefits to attract enrollees. But now there is a “COVID hangover.” Things turned south for the MA plans beginning in 2023. Many regular Star standards were reintroduced. In 2024, rate hikes began to evaporate with the introduction of a new risk adjustment model, which is being phased in from 2024 to 2026. All of this turned the financials upside down for most MA plans. Big national players such as Humana, CVS Aetna, and Centene all reported negative financial results.
As Oliver Wyman notes, with the free flow of revenue, there has been an “arms race” among MA insurers to expand supplemental benefits given relaxation of benefit coverage rules by the Centers for Medicare and Medicaid Services (CMS). Plans expanded benefits with abandon, took strong rate hikes for granted, took their eyes off of the Star program, and more. Complicating all this was the return of inflation and utilization post-COVID as well as major scrutiny from CMS and Capitol Hill regarding the program and perceived overpayments.
Oliver Wyman speculates that the tighter fiscal climate will not be transitory but perhaps last for as long as a decade. I think that is right. While the biggest problems seen thus far were falling Star revenue and the phase-in of the risk adjustment model change, there is every reason to suspect that further changes will be made by the government that will negatively impact MA – other negative rate changes, tightening Star requirements, and further scrutiny of risk adjustment revenue to name a few. And it is a good bet that any administration, regardless of the party, will need to deal with Medicare solvency issues over time. That means reductions across all Medicare providers, including MA plans.
The cure
Oliver Wyman says that MA plans must take a page out of the Medicare+Choice plans’ playbook post BBA 1997. They must adopt strong financial discipline to stay in the program and succeed financially. They must focus on margin over enrollment growth.
The result would be fewer enhanced benefits in MA over time, but MA plans that still make money and bring a huge value to enrollees. Indeed, with aging, MA enrollment will continue to grow moving forward because the value difference between MA and traditional Medicare will remain huge.
Oliver Wyman does expect to see a split in the industry moving forward as happened with Medicare+Choice. Some will not make the journey to financial discipline and exit the market. But others will succeed. And we are seeing a glimpse of that today. Humana has made major changes to its 2025 benefits and is exiting coverage areas. Centene and CVS Aetna are doing the same. Even the plans bullish on 2025, such as United Healthcare, are making benefit changes. It would appear that the current fiscal battles that left executives with egg on their face have taught a lesson – benefit-driven enrollment is not everything, especially if each new member loses money.
Oliver Wyman suggests the following as a transformation playbook:
- Product planning must be replaced with business planning.
- Data insights must drive decision-making to ensure the right insurance risk for a plan while minimizing member and provider abrasion.
- Start 2026 benefit planning early.
- Have evolved governance and strong accountability.
I disagree with a lot of what CMS has done of late on MA. I think it will directly hurt millions of Americans, many of whom are on fixed incomes. But at the same time, there is an inevitability to what is occurring with MA. As I stated in a recent blog and podcast, a number of progressive MA plan leaders are arguing that it is time for MA to reform itself. Their proposals go beyond just basic realignment to hit margin. The progressive leaders argue MA plans have a duty to be efficient, accountable and find ways to give more back to both those they serve and Medicare.
And it should be an effort led primarily by plans. The alternative is misguided policies from CMS and Capitol Hill that make MA plans villains rather than constructive partners bringing true reform to the healthcare system.
Sources and additional reading:
https://www.beckerspayer.com/payer/the-lesson-medicare-advantage-plans-can-learn-from-the-90s.html
https://www.healthcarelabyrinth.com/a-more-accountable-medicare-advantage/
https://www.healthcarelabyrinth.com/39-toward-a-more-accountable-medicare-advantage-program/
#medicareadvantage #healthcarereform #medicare
— Marc S. Ryan
