For payers, Medicare Advantage pays off in big ways. It represents the largest-growing line of business over the past 10 years, increasing at a compound annual growth rate of more than 10%. Payers capture significant revenue through premiums, quality bonus payments, and rebates. They then use the rebates to boost benefits and reduce cost sharing for members. The result: More seniors find the plans attractive, driving continued growth.
But providers often come out on the losing end of Medicare Advantage. Providers make less for the care delivered to Medicare Advantage enrollees than those covered under commercial insurance and traditional Medicare. As enrollment in Medicare Advantage grows, providers will incur lower margins. We have seen decreases of 0.5% in total margin annually due to this shift in payer mix. However, the extent to which providers feel this impact varies, a Guidehouse analysis shows.
Now, providers must take a close look at their performance under Medicare Advantage and evaluate strategies to optimize reimbursement so they, too, can reap the rewards of delivering effective care for this population.
Today, 43% of seniors are enrolled in Medicare Advantage. By 2030, that proportion is expected to rise to about 60% as more baby boomers reach Medicare eligibility age, with the Medicare Advantage market growing by almost $200 billion. As that happens, high-performing payers can profit by 5% on average for an approximately $12,000 top-line premium per Medicare Advantage enrollee per year.
Comparing National Medicare and Medicare Advantage Penetration, 2013-2030
Source: A Guidehouse Analysis of Centers for Medicare & Medicaid Services Medicare Advantage Enrollment and Penetration Files.
To further complicate the situation, providers typically realize only a portion of reimbursement for Medicare Advantage patients as compared with traditional fee-for-service Medicare. We have seen reimbursement realization levels as low as 90%. The most common reasons: payer denials and prior authorizations that lead to longer lengths of stay (LOS) and additional expense for hospital admissions, but no corresponding bump in reimbursement — just the additional expense of providing hospital-level care longer. In 2021, providers submitted more than 35 million prior authorization requests to Medicare Advantage alone.1
Meanwhile, provider revenue is decreasing, due to the continued drop in inpatient and emergency volumes.2 However, it’s not just a shift in services that is pulling down hospital margins. Hospitals are getting dinged because reimbursement rates were not established based on the cases they are now seeing. Additionally, LOS is on an upward trend because providers must wait to transfer Medicare Advantage patients to skilled nursing facilities until that care can be authorized by the plan.
If Medicare Advantage plans add 16 million members to their rolls by 2030, payers could see 5% margins on these plans, equating to more than $9.5 billion in additional profit. While that’s an aggressive estimate, it highlights the financial misalignment between payers and providers in caring for an aging community. This has prompted major providers like Vanderbilt Health, Mayo Clinic, M Health Fairview, and CentraCare to evaluate and ultimately pull out of a number Medicare Advantage plans. And while that’s a short-term strategic move that calls attention to unfavorable Medicare Advantage contracts, it won’t work in every market.
Healthcare providers must enhance their network strategy, affiliations, and partnerships to get a fair rate under Medicare Advantage and, at a minimum, realize reimbursement equivalently to what they receive in traditional fee-for-service Medicare. Additionally, with the rise in consumer choices for multi-channel care, rethinking a provider’s overall care delivery strategy is critical.
At a macro-level, payers that are successful in Medicare Advantage excel in collaboration with their provider community across three dimensions: base premiums, risk adjustment, and Star ratings.
Plans also receive rebates based on the difference between their bid and the Centers for Medicare & Medicaid Services benchmark, where the rebate percentage is based on the plan’s Star rating. Since rebates must be used to provide additional benefits and/or reduce member cost share, including premiums, health plans provide more robust benefits which typically helps attract consumers and grow market share. The Medicare Payment Advisory Commission reports that rebates have been increasing year-over-year, doubling from $1,140 per enrollee in 2018 to $2,352 per enrollee in 2023.3
It’s time for healthcare provider leaders to reset their short- and long-term strategies to improve Medicare Advantage performance. That means carefully evaluating outcomes across the following four dimensions.
Market dynamics — Evaluate market-specific demographics and compare and contrast them with state and national trends. Consider regulatory factors that could impact your organization’s decision around moving away from a traditional fee-for-service model. Determine the essentiality of the provider community to health plans in your market, which will give you a better understanding of your organization’s position in renegotiating reimbursement rates.
Performance dynamics — Evaluate the compensation your organization receives for care provided to Medicare Advantage members against the contribution it makes to the health plan’s profitability, from total cost of care to risk adjustment and quality performance. Evaluate your level of reimbursement in at-risk contracts and how well your organization performs under these contracts. Then, identify how your organization can enhance financial and clinical performance by engaging in coordinated care models (e.g., the Accountable Care Organization Realizing Equity, Access, and Community Health program). If your organization doesn’t participate in at-risk contracts, assess the internal capabilities that need to be advanced to pursue something other than a fee-for-service model.
Payer engagement and enablement dynamics — Evaluate the level of strategic, clinical, and financial alignment between your organization and its contracted payers. Assess how payers are supporting your organization’s ability to assume risk and be successful under risk-based contracts. Quantify your Medicare Advantage yield for payers, and identify the discrepancies that exist between being made whole in Medicare Advantage compared with traditional Medicare, looking at factors such as denials and prior authorizations.
Partnership dynamics — To better position your organization in the market, evaluate potential strategic alliances and partnerships with providers. Consider partnerships that are already in place that could impact your short- and long-term strategies and goals. Evaluate the pros and cons (such as payer reaction) of contracting with a select number of plans versus any willing plan.
Understanding the need for more aligned payer and provider collaboration is critical to bidirectional success under Medicare Advantage. The right Medicare Advantage strategy can help your organization chart a course between short-term responses and long-term financial resiliency and growth. It can also protect your organization’s ability to meet senior health needs under the plan of their choice and become more strategically, clinically, and financially aligned with health plans.
Co-authors: Eric Meinkow, Brian Fisher, Ernesto Flores, Monte Regier, and Brinda Gupta
1“2023 Health System Trends.” Guidehouse.com, guidehouse.com/insights/healthcare/2023/2023-health-system-trends. Accessed 26 June 2023.
2Feb 02, Nolan Sroczynski Published:, and 2023. “Over 35 Million Prior Authorization Requests Were Submitted to Medicare Advantage Plans in 2021.” KFF, 2 Feb. 2023, www.kff.org/medicare/issue-brief/over-35-million-prior-authorization-requests-were-submitted-to-medicare-advantage-plans-in-2021/.
3“Is the Biden Administration Proposing Cuts to Medicare Advantage?” KFF, 17 Feb. 2023, www.kff.org/policy-watch/is-the-biden-administration-proposing-cuts-to-medicare-advantage/.
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