After I posted my last blog Thursday ( https://www.healthcarelabyrinth.com/with-medical-expense-rising-what-are-health-plans-to-do/ ) and people digested what was happening with insurers’ stocks last week, a number of readers contacted me asking me to opine further on what was happening in MA. Many asked: “Is the Medicare boom over and is Medicare Advantage (MA) somehow collapsing under the weight of growing medical expense and government regulations?” They told me that they read many articles that implied MA was done — kaput! Indeed, my blogs have struck an alarmist cord at times about what is happening in MA, while other times I continue to extol the value and continued success of MA. So what’s up?
It is a fair question and impression after the MA news over the past few weeks. Indeed, I give you a mixed review on MA on this site for good reasons.
Refresh on issues
Let’s refresh a bit on that news so everyone has the context.
- Medical expense is rising and that seems to be most true in MA given a very sick cohort of aged and disabled enrollees. United Healthcare and Humana have already seen unexpected increases in MA medical costs and they will not be the last to report this phenomenon.
- The Centers for Medicare and Medicaid Services (CMS) and Capitol Hill lawmakers (on a bipartisan basis) are scrutinizing MA given its growth to over 50% of all Medicare beneficiaries. CMS has issued an atrocious new prior authorization rule that will drive up costs dramatically and is soliciting input on expanding regulation of MA plans. The new Risk Adjustment Data Validation (RADV) rule is unfair and will cost plans a great deal if it really does go into effect. A new interoperability bill (some of it good for healthcare) will further impact MA plans with shorter approval timeframes for prior authorizations. Capitol Hill is currying favor with providers by talking about passing all sorts of anti-MA bills – this despite the clear popularity of the program. MedPAC, the congressional policy arm, is also attacking MA for overpayments, risk adjustment, and the Star program.
- Rate hikes were very generous a few years ago, but for 2024 the hike was not. Many think the same will hold true for 2025. What’s more, CMS is phasing in changes to its risk adjustment formula that will impact revenue into the future even more.
- All of the above have come together to increase risk in MA and led to many plans pulling back on where they offer MA as well as the generous nature of benefit packages.
What did Humana’s Bruce Broussard say and what did he mean?
Humana’s CEO Bruce Broussard was the most dire in his view on the future of MA. He is one of the most brilliant guys in healthcare so I listen to what he says. He understands MA better than anyone out there. Some might say that Broussard, who is retiring this year after building an incredible company over more than a decade, accidentally went too far in his statements on MA. Others might say that, in an intended bold swan-song admonition, he was telling Capitol Hill and CMS that their blatant politicking and shortsightedness on MA policy will backfire on the thirty million plus who rely on MA. As well, he fundamentally was resetting investors’ expectations for the MA industry. I tend to believe Broussard knew exactly what he was doing.
Because of the utilization trends and regulatory changes, at Humana’s recent investor conference call Broussard predicted that the entire industry will have to make similar pricing adjustments to what Humana did for 2024 and may have to continue to do in the future. He stated: “I think the whole industry will possibly reprice,” he said. “I don’t know how the industry will take this kind of increase in utilization along with regulatory changes that will persist in 2025 and 2026.”
Broussard has all this right. We saw the upsurge in medical expenses at Humana first for a few reasons. It is primarily a MA company. While United may have more MA lives, it also has some of its revenue cushioned by other insurance lives and its huge Optum services’ subsidiary (but it, too, reported troublesome medical expense in MA).
It also appears that Humana may have done the right thing and readied for the new prior authorization limitations. While other insurers are attempting to “be cute with” the rule, Humana understood that the rule barring most outside evidence-based criteria (plans are largely limited to using the traditional fee-for-service (FFS) program National Coverage Determination (NCD) and Local Coverage Determination (LCD) criteria) was pretty straightforward and Humana paved the way for is compliance. Based on Humana’s reference to the uptick in Q4 costs of inpatient due to the “two midnight rule” and the major cost difference between short inpatient and outpatient observation stays, it would appear that it may have implemented the CMS rule early (before 1/1/2024).
So what does Broussard mean by “repricing?”
It is a complicated issue, but here is my effort to explain it. The truth is that MA plans take many liberties in their calculations each year of medical expense and benefit costs when they “price them” for annual bid and benefit design filings . MA actuarial filings are an art not a science. All this is done to ensure that a given MA plan remains competitive in given markets even as they may be disadvantaged in many ways – risk adjustment revenue, Star scores and bonus dollars, provider agreements, and more. This is easy in good revenue times, but is much more difficult in tighter times.
Earlier this decade, we saw sizeable rate increases and generous Star scores, which meant a surge in quality bonus money. Plans expanded benefits and footprints considerably. When Star scores began being calculated without COVID flexibilities in 2023, we saw some plans begin to ratchet down benefits (“reprice them”) and even footprints. With the 2024 rate contraction and continuing Star troubles for some, we saw more retrenchment. Humana says it did so to some degree for 2024 benefits. Much earlier, Centene announced it was repricing and pulling back in some areas for 2024 due to its low Star scores and financial challenges in the program. Other plans have done so, too.
Broussard is saying that we should expect more of the same – and perhaps a greater degree of it — in the entire industry. The Star program will continue to limit many plans’ revenue. The risk adjustment changes and the RADV rule will mean lower revenue and greater risk. Rate hikes likely will be lower than in the past. Medical expense will continue to challenge MA plans. And the big wild card is the prior authorization rule. I have argued that will have a profound impact on medical expense.
So, plans will be forced to pullback in terms of benefit generosity, network access, as well as geographic footprints in the future. Long-term revenue prospects will not justify the cost of the additional benefits currently offered – premiums will rise, cost-sharing reductions will be adjusted upward, and supplemental benefits will be pared back. Given the new prior authorization rule, it is likely that MA plans will no longer be able to offer a significant additional benefit that reduces or eliminates the inpatient days cap in the FFS program and reduces cost-sharing for hospital stays. That is a shame — it offers so much protection to low-income and fixed income seniors and the disabled. Some regions or counties that have seen MA introductions and expansions could also be impacted from both a coverage and benefit perspective.
Warning signs in the market
In the end, Humana still thinks its focus on MA is the right move as do many other health plans. That shows faith in the program overall. At the same time, there are many warning signs in the market. I have already mentioned declining stock values across the industry due to the medical expense reports from both United and Humana. But here are some other data points:
Moody’s reports that MA profitability may be declining. I often say that MA can earn a plan a 4% to 6% margin depending on how well run it is. But Moody’s Investor Services reports that MA profitability at ten payers covering two-thirds of enrollees dropped from 4.9% in 2019 to 3.4% in 2022. That is a material decrease.
Molina has acquired Bright Health’s roughly 109,000 lives due to the insurtech’s troubles. After due diligence, Molina recently dropped the payment from up to $600 million to up to $500 million, with $100 million placed in escrow as well. That is a significant reduction in value. While some of it may have come from the insurtech’s operating issues, at least some could be attributed to the program changes and future risk.
As well, Cigna CEO David Cordani appears he will shed all of Cigna’s MA lives and sell them to Health Care Service Corporation. Cigna has struggled in the MA world with low Star scores, enrollment, and financials. Cordani thinks a better bet is a focus on commercial insurance and its growing Evernorth services business.
Do repricing and the market warning signs mean MA is in trouble and will go away?
Hardly, because there is one clear fact about MA – it is much better than traditional fee-for-service (FFS). Critics can talk all they want about negatives of MA, but the alternative is to enroll in the dilapidated FFS system, which has benefit gaps and huge costs for consumers. MA has lowered the cost of delivering those traditional services, added additional benefits and protections, and thrived with a great value proposition. That is why we have seen a 40% growth, or about 9.5 million people, in MA since January 2020 (read my MA enrollment blog here: https://www.healthcarelabyrinth.com/great-news-for-insurers-and-medicare-beneficiaries-january-2023-to-january-2024-medicare-advantage-growth-rebounds/ ).
But in the end, based on what is happening, MA could look very different. MA health plan margins are softening and that might continue in the future. The boom may be over. I would argue it was a bit artificial with rising Star scores during COVID and huge rate hikes. In truth, investors and analysts buried their heads in the sand over the past few years. They got caught up in the stock-growth euphoria when negative signs were clear.
But with investor demand for strong margins, multiples, and outyear prospects, publicly traded plans will have to pull back on benefits and some geographic areas served to deal with lower revenue, risks, and investor demands. But there is no reason to think that plans cannot make the adjustment and otherwise thrive, although getting back to investor expectations could take a great deal of time.
People still will be attracted to MA because, even if added value is less, it will continue to be so much better than FFS. The sad fact, though, is that Capitol Hill and CMS are driving costs up in the program for bad political rather than good policy reasons. Progressive Democrats are doing so to see if they can achieve their Medicare for All dreams. Other Democrats and Republicans, including CMS and MedPAC, are currying favor with providers and are simply not aware of the long-term damage being done.
Conclusion
I am the first to admit that there are reforms needed in MA and we need more accountability. On some of these issues, I have said that change is needed. Each individual change noted, save for the prior authorization rule, may have some merit and may not be cataclysmic in and of itself. But MA already is among the most heavily regulated and accountable spaces in healthcare. In their totality, the changes being made by CMS/lawmakers and the trends in the rate, Star, risk adjustment, prior authorization, and other areas are onerous and will do two things:
- Rob the lower- and lower-middle class of critical benefits and protections. The pain will be real for those on fixed incomes.
- Rob the Medicare healthcare world of innovation by the private sector. MA health plans will no longer have as much latitude to innovate as financials tighten and risk increases.
That ultimately was Broussard’s message as he looks to retirement at the end of the year.
Another inevitable argument will emerge: as benefits contract and premiums rise, lawmakers and even CMS will blame greedy insurers, not telling the public that they themselves set the stage for the negative changes in MA. Democrats will argue that for-profit companies do not belong in healthcare. But, has anyone truly studied the only alternative? Has anyone really examined the state of FFS? It is a maze of confusion, high costs, fraud, waste, abuse, and poor quality. The complex and overlapping reform pilots add to the confusion and have produced inconsequential savings and dubious quality improvements.
In the end, government-run healthcare in America does not work. Private sector innovation is important in healthcare. I hope lawmakers and CMS wake up before too much damage is done.
#medicareadvantage #priorauthorization #medicalexpense #humana #broussard #cms #medicare #rates #payments #stars #radv #riskadjustment #cigna #cordani #molina #brighthealth #united
— Marc S. Ryan
