Increased Medicare Advantage utilization likely credit neutral, finds Fitch

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Rising Medicare Advantage utilization among older U.S. adults, as well as rate cuts for 2025, are likely to be credit-neutral to the healthcare industry, according to analysts at Fitch Ratings.

Some of the disruption in MA reflects renewed efforts by the Centers for Medicare and Medicaid Services to rein in the rate of growth in expenditures for the Medicare program, while attempting to maintain stable coverage for U.S. seniors, analysts said. The recent tightening within the program follows a moderate relaxation of funding constraints during the pandemic to deal with COVID-19.

Health insurers have been critical of weaker payment rates, as well as changes in the Star Rating program and risk adjustment model, which they say are increasing complexity in benefit offerings and pricing decisions. And an increase in utilization beginning in 2023, driven in large part by the return of elective procedures that were deferred during the pandemic, has placed upward pressure on medical loss ratios for the MA business. New rules around prior authorizations may further increase costs.

Fitch-rated insurers generally have sufficient ratings headroom to withstand higher MA utilization rates, with broader medical loss ratios remaining within ratings expectations for most insurers, according to Fitch. 

Analysts expect stability to return to MA over the next 12 to 18 months as the higher utilization and hangover effects from the pandemic normalize, and carriers adjust to administrative changes in the program.

WHAT'S THE IMPACT?

While these developments appear to be placing downward pressure on MA margins for insurers, the popularity of such programs may promote a boost in volume for some providers.

For-profit health systems in particular benefitted last year from above-average same-facility volume growth, including an upturn in inpatient volumes, which have experienced headwinds in recent years from the migration of lower-complexity surgical procedures to outpatient settings, including ambulatory surgery centers.

The increase in MA patient volumes has played a key role in the overall volume upturn, which helped stabilize provider margins and operating performance after a challenging 2022. During that year, labor availability, which was constrained by the pandemic, posed headwinds to both volumes and compensation costs – the latter including high temporary labor costs that receded over the course of 2023.

Yet despite the positive effects on volumes, Fitch noted there appears to be a growing trend, particularly among some nonprofit providers, to exit network contracts with some MA insurers. Reasons often cited by the systems include administrative challenges, slow payments and denial of prior authorizations for care.

MA business is more exposed to federal government intervention and oversight relative to commercial business, analysts said. It typically generates moderately lower EBITDA-based margins for health insurers relative to commercial membership, although absolute earnings per member are generally higher.

THE LARGER TREND

In 2023, 30.8 million people were enrolled in MA, or 51% of the eligible Medicare population, and accounted for $454 billion (or 54%) of total federal Medicare spending, according to the Kaiser Foundation. UnitedHealthcare and Humana comprise nearly half (47%) of all Medicare Advantage enrollees nationwide.

Medicare Advantage payments are expected to increase on average by 3.7%, or more than $16 billion, from 2024 to 2025. The 2025 Advance Notice for the Medicare Advantage and Medicare Part D Prescription Drug Programs, released earlier this month, complements a proposed rule, also for 2025, that CMS released in November 2023. This rule would, if finalized, strengthen protections for the millions of people who rely on MA and Medicare Part D prescription drug coverage.

The advance notice proposes annual updates to MA payment growth rates and changes to the MA and Part D payment methodologies to improve payment accuracy.

A recent Moody's analysis found that MA profitability is on the decline. 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 recently 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.

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 a 65-year-old beneficiary are $3,138 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.
 

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