Medicare Advantage growth could be challenging for hospitals

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The Medicare Advantage program recently achieved the milestone of covering more than half of all Medicare beneficiaries, but according to a 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.

Analysts said they expect providers to see future rate pressure from regulatory changes, and from MA plans implementing strategies to preserve their margins from higher utilization.

WHAT'S THE IMPACT?

Medicare Advantage coverage has risen steadily through the years. In 2010 it covered 26% of the total Medicare population; in 2020 it covered 43%; and last year it grew to 52%.

This growth poses challenges to providers' credit quality, given growing risks to reimbursement from MA plans relative to traditional Medicare, as well as the payment risk and higher complexity around prior authorization requirements, the report found.

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), which limits the hospital's ability to verify the insurance treatment of provided services on a prospective basis.

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.

Additionally, 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.

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.

These headwinds have even gotten the attention of some large providers. In one example, Scripps, a large nonprofit health system in San Diego, terminated its contract with Medicare Advantage plans effective January 1.

THE LARGER TREND

Weaker MA rates from a new risk model being implemented in 2024-2026, as well as MA Star Rating changes, are making for a very challenging operating environment for payers, the report found.

Insurers are being challenged to make a profit in the MA segment. Public insurers have targeted an average margin of 3%-5%, though most will struggle to achieve this, authors projected.

Looking ahead, insurers recently submitted their 2025 bids and have highlighted the need to reprice their MA products, adjust product benefits, cut supplemental benefits, and exit less-profitable products and geographic markets to remain competitive in the market. 

Because of that, S&P expects insurers to prioritize margin over membership, and expects large insurers will use their scale and market clout to limit provider rate increases over what will likely be a challenging contract negotiation season.
 

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