Medicare Advantage profitability on the decline, Moody's finds

Photo: FG Trade/Getty Images

While Medicare Advantage remains attractive to the healthcare industry due to strong growth, high revenue and earnings per member, profitability is on the decline, according to a new analysis by Moody's Investor Service.

The signs began around 2022, when MA earnings were 2% lower than in 2019 despite substantial membership and premium growth. UnitedHealth Group, Humana and Aetna, which together comprise more than half the MA market by membership, have fared better, generally maintaining margins. Newer entrants, with smaller market shares, have struggled.

MA performance has remained under pressure in 2023 because of a significant spike in utilization for most of the companies, which Moody's expects will result in lower full-year MA earnings for insurers. Adding to that is lower reimbursement rates for the first time in years that are likely to remain weaker in 2025 and 2026, which is credit negative.

Moody's analysts contend that MA may have "lost its luster," citing as evidence Cigna's efforts to sell its MA business, even after a failed merger with Humana. Cigna this week announced it had entered into a definitive agreement to sell its Medicare Advantage, Supplemental Benefits, Medicare Part D and CareAllies businesses to Health Care Service Corporation (HCSC) for about $3.7 billion.

WHAT'S THE IMPACT?

The analysis was not able to disclose much information on individual companies since the survey was derived from information provided to Moody's confidentially. But an aggregate analysis of the 10 companies Moody's rated show some good news and bad news for Medicare Advantage.

The good news: Annual earnings per member in 2022 (and premiums per member) for MA of $526 was double or more than the level for Medicaid ($254) and 45% higher than commercial risk ($364). And MA membership increased 41% between 2022 and 2019, while premiums increased 40%.

The bad news: Aggregate earnings over that period actually declined 2% among rated insurers, to $10.6 billion from $10.8 billion. The MA earnings margin declined to 3.4% from 4.9%, and earnings per member declined 28%.

Those with smaller MA market positions have struggled to achieve profitability. Analysts attribute this to the importance of scale to cover things such as customer acquisition costs, achieve appropriate pricing and maintain a stable benefits package. Another important factor is the prevalence of value-based care, which helps better control costs and, according to Moody's, produces better outcomes. 

Unfortunately, MA is likely to remain under pressure. 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, including seniors finally getting procedures they had put off because of the pandemic. 

Most companies have factored in a continuation of this elevated utilization, and so it should be covered in pricing for 2024. Moody's called the ability to reprice a "key positive" for the industry and a source of stability.

There are other pressures facing MA, such as funding pressure. In the 2023 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds (the Medicare trust funds), the trustees now project that the Medicare Part A Trust fund will be depleted in 2031. (Part A covers inpatient hospital services, hospice care, skilled nursing facilities and home health services following stays.) The 2023 forecast is actually an improvement. In 2021 the trustees had forecast that Part A would be depleted by 2026, so the outlook has improved, but the long-term risk remains.

Part A is funded by payroll taxes and the trustees forecast that expenditures will outgrow the funding source. When the trust fund is depleted, absent new legislation, Medicare expenditures for Part A would have to be reduced to match payroll tax income.

Medicare Part B, which covers doctor visits, outpatient hospital, home health and other services, is funded from the general fund of the Treasury and therefore can be reset each year and is not at risk of depletion over the next 10 years, analysts said.

THE LARGER TREND

Despite the challenges, MA remains popular with seniors, boasting lower out-of-pocket costs and premiums than traditional Medicare. Analysts cited a 2023 Milliman report showing annual estimated healthcare costs per 65-year-old beneficiary are $3,138 versus compared to $5,000 for traditional Medicare fee-for-service, and over $5,700 if a traditional Medicare beneficiary also buys a Medigap plan. Besides the lower cost, MA also offers additional benefits such as dental, vision and hearing, which are not covered by traditional Medicare.

MA membership has grown nationally at an annual rate of 8% to approximately 32 million, while traditional Medicare has declined at an average annual rate of 1%. Over that time, the percentage of people choosing MA has grown to 49% from 28%.

Last fall, the Centers for Medicare and Medicaid Services released the Medicare Advantage, Part C and Medicare Part D Star Ratings that rank MA plans by the quality of health and drug services received by consumers. Thirty-one contracts for both Medicare Advantage and the Part D drug plan earned 5 stars, compared to 57 in 2023. Four contracts received the low overall ranking of 2 stars, the same number as in 2023.

The star ratings for Medicare Advantage and Medicare Part D prescription drug plans are released annually and reflect the experiences of people enrolled in Medicare Advantage and Part D prescription drug plans. Plans are rated on a one-to-five scale, with one star representing poor performance and five stars representing the highest level of performance.

Federal spending on bonus payments to insurance companies that offer Medicare Advantage plans will reach at least $12.8 billion in 2023, according to a KFF analysis. That's a nearly 30% increase from 2022, and more than quadruple the spending in 2015.

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