Insurer stocks were rocked recently by news that both United Healthcare and Humana saw unexpected medical expense increases. After filings with the Securities and Exchange Commission (SEC) and quarterly investors relations calls, these two companies’ stocks as well as those of other insurers tumbled. Elevance Health also reported its Q4 2023 and full year 2023 results. It beat the trend. It reported medical expense in line with expectations, but did note some increases in areas. We are sure to see other plans report unexpected increases, with the biggest impacts likely seen at plans with major enrollment in Medicare Advantage (MA). And many plans are gearing up for additional layoffs and other administrative cuts due to the medical expense concerns.
Why are plans seeing increases in medical costs? First, utilization is slowly returning to normal in the healthcare industry post the COVID pandemic. Second, inflation is taking root again and it is forecasted to be moderately aggressive. Third, plans are also seeing some new COVID-related costs. Fourth, high drug prices, especially in specialty and medical drug areas (especially cancer) continue to take a bite out of insurer pocketbooks.
What’s worse is that insurers are seeing some major changes in areas of cost-containment. The federal government and states are passing laws and regulations that significantly rein in the ability for insurers to use traditional prior authorization processes. Some states are passing laws that mandate that prior authorizations be lifted if a provider reaches a percentage approval threshold over time. The Centers for Medicare and Medicaid Services (CMS) just implemented a rule that disallows MA health plans from using outside evidence-based criteria (except in limited instances). MA plans will now only be allowed to use the traditional fee-for-service (FFS) programs coverage criteria. In addition, the MA rule also impacts the use of observation stays versus actual inpatient admission. Just today, CMS issued a Data Request for Information (RFI), soliciting input on how MA can be more transparent. Its press release mentions prior authorization as one area on which it wants feedback. Provider groups and advocates will use the opportunity to suggest even greater limitations on plans in the area of PA.
The MA prior authorization rule change could lead to a major increase in more expensive admissions, something the hospitals want. As well, backlash from providers in all lines of business have led to a reassessment by plans about what should be prior authorized or not. In the commercial world this has led to major players significantly reducing the medical codes that have prior authorization.
See some earlier blogs I did on these topics for more information:
There are also new interoperability rules coming into effect in the future. Under a recent rule from CMS that has been finalized, MA, Medicaid managed care, and certain Exchange plans will need to significantly shorten prior authorization time frames. For medical services, it would be no more than 7 days for a standard request and 72 hours for an urgent request. The retail pharmacy world already has fairly strict timeframes for action in most lines of business, from 24 hours to 72 hours depending on urgency. The new medical services rule creates major compliance risk for plans and will add considerably to administrative costs. On the positive side, a new medical services electronic prior authorization mandate will come in 2027, which will parallel existing efforts on the retail pharmacy side. Similar state rules are being passed in this area, too. Over time, this will clearly save; but, it does mean a major investment for both plans and providers upfront.
In some cases, the reduction of medical codes subject to PA by insurers made sense. The administrative costs of the prior authorization exceeded the costs of the service. It was time plans re-evaluated their prior authorization list. In most cases, though, prior authorization makes sense but lawmakers and regulators are now interceding to restrict or ban them. There is no doubt in my mind that this will lead to a huge surge in medical expense over time. We are seeing some evidence of that already with Humana. PA does and should have a reasonable role in managing healthcare. Compare the cost of delivering traditional benefits through MA and Medicaid managed care vs. traditional FFS systems and “why” becomes clear. For example, in MA, plans deliver traditional Medicare benefits much more cheaply, which then frees up dollars to be spent on augmented or supplemental benefits not offered in FFS.
So what will happen in the future? With the major victories on PA throughout the nation, the provider lobbies will continue to press state and federal lawmakers and regulators on the issue of prior authorization and claim denials. After all, they want an open and unconstrained system. Hospitals and private equity firms love this and today they own most doctors. They drive costs in the system. With anti-PA sentiment resonating in state houses and Congress, they will continue to eat away at PA. This will force health plans to slowly but surely dismantle a great deal of PA and utilization management.
Health plans will necessarily have to pivot to other strategies:
- Major investments in wellness, prevention, and care management: We already see some of this. America is a huge outlier in terms of prevention, maintenance of disease states, and the number of admissions to hospitals for preventable conditions. Huge savings could be derived from keeping disease states and conditions in check and it is worthy of investment. With tenure in health plans now becoming longer due to recent coverage requirements and reforms, this becomes a smart bet. It becomes a necessary alternative with PA being reined in. As well, it must be remembered that social determinant barriers or SDOHs may be a greater predictor of outcomes than even underlying disease states. So SDOHs are critical to track as well.
- Member and provider engagement: Plans must invest in ways to drive active ownership of health outcomes among members. Emerging digital health is a good way. Plans, too, must develop the right financial arrangements with providers, accompanied by analytic insights, to ensure they oversee wellness, prevention, disease maintenance, and risk. Capitation as well as global and partial fund arrangements are emerging across America between insurers and providers. It takes us out of the perverse fee-for-every-service transaction system that has dominated for decades and leads to ever-increasing costs.
- Transforming health plan data/infrastructure and investment in analytics to tackle costs: Due to raising medical expenses and risks, plans must build the capacity and ability to quickly ingest data, analyze it, and get critical updates to departments inside the health plan, members, and providers. It must invest in price transparency (so member and providers understand relative costs and quality), analyzing the best sites of care for treatment (in terms of efficiency, cost, and quality), and network and provider performance (also in terms of cost, efficiency and quality). This will also lead to setting up new approaches to network optimization and product offerings.
- Revenue and quality: The concentration on data transformation goes beyond costs, but to revenue and quality. It offers the chance for health plans to have truly accountable reporting of risks (and concomitant requests for revenue/rates/payments due to disease states and SDOHs) and quality achievement.
A case can be made that savings in these areas will be many folds greater than with PA. In the end, plans should fight to save some forms of prior authorization and utilization management. It is a necessary part of managed care. At the same time, though, the attacks on prior authorization give MA plans the opportunity to pivot to the areas above that hold great promise in reducing costs, improving quality, driving revenue, and transforming our healthcare system. The necessity for clean and timely data and analytics will also become that much more important in health plan operations.
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— Marc S. Ryan