Trends 2025: Medicare Advantage prospects strong despite challenges

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The past couple of years have seen the sharp ascendancy of Medicare Advantage to now include more than half of all beneficiaries with Medicare coverage.

The alternative to the traditional fee-for-service Medicare has proven popular with consumers due to lower out-of-pocket costs and its additional benefits, such as prescription drug, vision and dental coverage. 

But for the first time, the program, also known as Part C, is suffering setbacks as well as growth.

Medicare Advantage profitability is on the decline, as shown in recent quarterly reports from the large insurers. The headwinds, executives said during recent earnings calls, have been due to greater than expected utilization of benefits and lower than expected reimbursement from the government.

Adding to MA's margin challenges are providers who are making the decision to cut their ties with MA plans rather than deal with delays in prior authorization and claims payments.

Michael Abrams, managing partner at Numeroff and Associates, sees a few factors that are contributing to MA's challenges.

"Utilization went up in 2024 unexpectedly, possibly reflecting pent-up demand carried over from the pandemic, or from people delaying their care," said Abrams. "In either case, utilization exceeded estimates. Another factor is that reimbursement is less than projected, which set the stage for an earnings gap even if utilization had not spiked."

A Moody's analysis from February showed that in 2023, MA results suffered because of unexpectedly high utilization, especially for outpatient orthopedic procedures. There was no consensus on the reason for this, and there was not the same dynamic in Medicaid or commercial insurance. That may be due to several factors, Moody's said, including seniors finally getting procedures they had put off because of the pandemic.

REIMBURSEMENT

On the reimbursement front, insurers have decried the 3.7% rate increase for 2025 that Medicare Advantage plans will receive from the Centers for Medicare and Medicaid Services. The federal government is projected to pay between $500 and $600 billion in Medicare Advantage payments to private health plans, according to the 2025 Advance Notice for the Medicare Advantage and Medicare Part D Prescription Drug Programs released in April.

The payment rate was considered inadequate by insurers, who were also troubled over other key factors, including a 0.16% reduction in the Medicare Advantage benchmark rate for 2025, which represents a 0.2% decrease.

The 3.7% rate increase, said Abrams, "was not sufficient to sustain all the various benefits on the plan, and that is what has made its growth so dramatic.

MARKET EXITS

"Insurers may make some adjustments in terms of which markets or submarkets they want to continue to operate in," said Abrams. "It's possible they may make some changes in the geography in which they're working, so the higher-cost plans are the plans they might be considering getting out of."

And some insurers are indeed exiting MA markets. In August, Stephens, an independent financial services firm and privately owned investment bank, confirmed that Centene will exit the Medicare Advantage market in at least six states next year. 

During Centene's July 26 Q2 earnings call, an investor asked about the company's statement to "optimize its footprint" in Medicare and whether this included exiting markets. 

CEO Sarah London responded, "Yes. So relative to Medicare, I think the team has done a really good job in terms of thoughtfully defining the 25 bids consistent with the long-term strategy, even in a challenging rate year. But also, as I mentioned, we've been thinking about how to streamline that book and further align it with our Medicaid footprint, because that's where the puck is going. And so as a result of that, you will see us exit a handful of states with that longer term strategy in mind."

While some payers, especially the smaller ones, look to scale back on Medicare Advantage, the bigger players are likely to wait out the current turbulence and come out stronger on the other side, said Abrams.

"A company like Humana is just going to wait this out," said Abrams. "They know the government is not going to yank a product that has attracted 54% of eligible enrollees. Their expectation is that the government will need to come back with increases in reimbursement that will sustain the program. They're in the game to stay."

But while payers are eyeing long-term sustainability, hospitals and providers have been challenged by MA's growth. According to an August report from S&P Global Ratings, this could have an adverse impact on hospital margins. That in turn could be a negative credit factor for certain healthcare service companies – the most stressed segment within S&P's rated for-profit healthcare universe. The firm said hospitals are the most negatively affected healthcare services subsector.

S&P believes hospitals are the most vulnerable subsector because Medicare is typically at least a third of their revenue, and because a large percentage of their admissions are unplanned (such as via the emergency room). This limits the hospital's ability to verify the insurance treatment of provided services on a prospective basis, which means delays in reimbursement..

There may also be future risks to providers if the Centers for Medicare and Medicaid Services addresses the MA program's higher-than-expected spending. According to a March 2024 MedPAC report to Congress, "Medicare payments to MA plans in 2024 (including rebates that finance extra benefits) are projected to total $83 billion more than if MA enrollees were enrolled in traditional Medicare." MedPAC also noted that payments to MA plans average about 122% of the expected spending if MA enrollees were in traditional fee-for-service Medicare.

MedPAC also estimates Medicare beneficiaries will pay $13 billion more in Medicare Part B premiums. Given this was not the original intention, authors speculate that any future changes to the program to lower spending would ultimately hurt providers.

PRIOR AUTHORIZATION

As MA plans are paid a capitation rate, they're incentivized to tightly control utilization of healthcare services, the report said. One key strategy for this is to require prior authorization from the insurer. The preauthorization and denial rates are high, and cause providers to absorb additional costs to refile a claim and add uncertainty about how much they will be paid, or if they will be paid at all. 

Smaller providers don't have the resources to fight claim denials and, in some cases – especially in rural areas – providers have terminated contracts with MA plans in response, and in some instances were forced to close their locations.

Case in point is Louisville, Kentucky-based Baptist Health, which has been out-of-network with UnitedHealthcare and Centene's Wellcare Medicare Advantage plans since the beginning of the year, citing denied and delayed prior authorization requests and payments from the insurers.

It was the same reason cited by Baptist Health when it went out-of-network with Humana's Medicare Advantage and commercial health plans last fall.

Prior authorization denials are especially challenging, with Premier data from March showing that nearly 15% of all claims submitted to private payers for reimbursement are initially denied, including many that were pre-approved to move forward through the prior authorization process. An average of 3.2% of all claims denied included those that were pre-approved via the prior authorization process.

Hospital and health system respondents that fought the denials did so at an average cost of $43.84 per claim, the survey showed. Considering that health insurers process about three billion medical claims each year, this means that providers spend about $19.7 billion a year in these reviews.

According to Premier, of that spend, $10.6 billion was "wasted arguing over claims that should have been paid at the time of submission." That figure doesn't include the costs associated with added clinical labor, which the American Medical Association estimates adds $13.29 to the adjudication cost per claim for a general inpatient stay, and $51.20 to the cost of inpatient surgery.

This burden is impacting hospitals' financial viability. Over the past year, the average days of cash on hand for hospitals and health systems declined by 44 days over the previous year, on average – a 17% drop year over year. Lacking cash on hand, health systems are unable to re-invest in patient care and may also suffer from downgrades in bond ratings, making cash more expensive and harder to obtain.

By contrast, days of cash on hand increased for insurers like UnitedHealth Group (up 25.5% on average from 2019) and Cigna (up 24.4%).

Premier singled out Medicare Advantage, where over a quarter of claims are subject to prior authorization, and nearly 20% of discharges to post-acute care settings are initially denied. Premier urged the Centers for Medicare and Medicaid Services to stringently monitor reporting of expenditures on direct patient care, particularly in the MA program. 

Premier also encouraged CMS to begin collecting data on payment delays and denials between MA plans and contracted providers to determine whether the practice violates CMS' expectations around network adequacy.

Consumers are largely unaware of the challenges to providers, but more than few have some experience with prior authorizations, said Abrams.

"Those healthy enough not to get involved in prior authorization probably have no idea what's going on," he said. "Those touched by prior authorization may come away with a different point of view."

Yet despite the struggles and growing pains, Abrams expects that the long-term viability of Medicare Advantage will endure, especially for providers – although premiums for consumers may go up. 

MEDICARE ADVANTAGE STAR RATINGS

The picture isn't entirely rosy for insurers: In addition to higher-than-expected utilization, just seven plans received 5 stars in CMS' annual Medicare Advantage Star Ratings, compared to 28 in 2023. That has prompted a handful of insurers to sue the federal government, including UnitedHealthcare, which filed a lawsuit in October seeking an injunction to reverse the rating downgrade. UHC claims it was based on an "arbitrary and capricious" assessment linked to a single phone call between a UnitedHealthcare customer service representative and a CMS "secret shopper."

UnitedHealthcare won its lawsuit over star ratings, while Centene reportedly netted $200 million in its Medicare Advantage Star Ratings win.

Insurer participation is not going away anytime soon.

"As Medicare Advantage grows, it's drawing market share from traditional Medicare," said Abrams. "I can definitely see that as enrollment for traditional Medicare shrinks, that will drive premiums up, because there's a fixed component to that that needs to be spread out over the number of enrollees. That contributes to a larger premium, and you have this self-perpetuating move from Medicare to Medicare Advantage. 

"Which is another reason that if you're in this product," he said, "the longer-term perspective appears to be positive."
 

Jeff Lagasse is editor of Healthcare Finance News.
Email: jlagasse@himss.org
Healthcare Finance News is a HIMSS Media publication.