The headwinds facing group Medicare Advantage growth

New York City’s struggle to switch more than a quarter-million retired government workers and their dependents from traditional Medicare to private health insurance could set an alarming precedent for employers and insurers banking on the fast-growing group Medicare Advantage program.

Cost-conscious employers offering retiree benefits are increasingly adopting such plans as alternatives to existing commercial health plans or traditional Medicare coverage. Membership through group plans represents nearly 20% of the 29.5 million individuals enrolled in Medicare Advantage, and the number of patients enrolled through this kind of coverage more than doubled over the last decade, according to the latest federal data.

But public and private employers seeking to join the trend may face pushback from retirees who fear their benefits will be limited. Some former workers have sued their previous employers to block the switch. Federal investigations into Medicare Advantage carriers and the potential for changes to the program this year from the Centers for Medicare and Medicaid Services could also present hurdles.

“There’s a lot of money riding on it and, frankly, taxpayers are the ones paying these future obligations,” said Mike Thompson, president and CEO of the National Alliance of Healthcare Purchaser Coalitions, a nonprofit group of private- and public-sector employers and unions focused on healthcare purchasing. “Employers are trying to be good stewards of the taxpayer dollar, but that’s where the conflict comes into play.”

Companies have offered workers group Medicare Advantage plans since the Balanced Budget Act of 1997 opened the door to privatized Medicare. A single group Medicare Advantage plan can act as a cheaper alternative to contributing a monthly amount to workers’ retirement plans or contracting with consultancies to design individualized exchanges.

Federal changes to how private and public employers must account for retirement spending have accelerated adoption of the program over the past few decades: More than 5.2 million individuals were enrolled in group Medicare Advantage plans as of December.

Employers typically pay insurance companies a set sum to offer a customized group Medicare Advantage plan for their workers. The government pays insurers a flat fee to cover all healthcare costs workers are expected to incur, aside from patients’ copays, deductibles or coinsurance. If the Medicare Advantage carrier effectively manages patient care, it can pocket any savings achieved.

The arrangements often result in a profit for carriers. Insurers’ gross margins for individual and group Medicare Advantage plans are typically two to three times greater than those for other insurance products, according to Brad Ellis, senior director at ratings and research agency Fitch Ratings.

Money is also a factor for employers choosing group Medicare Advantage plans. A December study from the Kaiser Family Foundation found that in 2022, half of large employers—meaning those employing 200 or more workers—offering retiree benefits worked with an insurer to design a group Medicare Advantage plan, nearly double the portion from 2017. The federal government’s subsidy helps offset employers’ costs for private group Medicare coverage, while employers usually must pay the full price for any supplemental policies for their former workers. Additionally, employer plans are eligible to receive quality bonus payments through the Medicare star ratings program.

Insurers usually ink gainshare agreements requiring them to return to their business customers a portion of any federal dollars not used on patient care, said Tim Snyder, senior vice president of group Medicare at Humana. Eleven percent of Humana’s Medicare Advantage membership, or 564,600 patients, are enrolled in group plans.

“It’s basically a tool to say, ‘Hey, if we’re wrong, and we’re paying significantly less in claims than what we thought, then we’re going to share those savings with you,’ ” Snyder said. “They’re all fairly different agreements. But it’s a tool to make sure that the pricing is fair.”

Companies can negotiate a better plan for beneficiaries than the individual products offered because they are buying in bulk, said Emma Hoo, director of value-based purchasing at the Purchaser Business Group on Health, a coalition of 40 large public and private employers that includes Walmart, Boeing and Microsoft.

“From a value purchasing perspective, there’s good information available about the quality performance of Medicare Advantage plans,” Hoo said. “They also provide navigational support to individuals, where [with] Medicare fee-for-service, it’s much like the PPO environment, where [beneficiaries are] navigating on [their] own.”

Most employers opting for group Medicare Advantage plans are public-sector organizations seeking a solution to the nation’s unfunded pensions crisis, with some unions making the coverage decisions. But private companies are also offering post-retirement Medicare Advantage benefits to attract and retain talent.

“There are still organizations, whether in the private sector or the public sector, that are trying to manage this and do the best they can for their shareholders, but also for the retirees,” said Thompson, of the National Alliance of Healthcare Purchaser Coalitions.

“One of the values associated with Medicare Advantage is you can extend that money further than you could have under traditional Medicare. And it offers an integrated approach that was very common in the old days, but today it’s become less common,” Thompson said, referring to care-navigation services.

Group Medicare Advantage plans represent an opportunity for employers looking to cut costs and insurance companies looking to boost revenue. But federal investigations into Medicare Advantage plans and pushback from retirees feeling forcibly switched to the program could stymie its growth.

As with individual Medicare Advantage products, CMS spends more tax dollars on retirees enrolled in group Medicare Advantage plans than on those signed up for the traditional, fee-for-service program. The Justice Department wants to know why. Over the past decade, it has sued four of the five largest Medicare Advantage carriers—including those providing group plans—over allegations they exaggerated patients’ anticipated healthcare expenses to generate additional money. The fifth carrier is under agency investigation.

The suits, two of which have been settled so far, spotlight the need for transparency regarding funding for group Medicare Advantage plans, said Meredith Freed, a senior policy analyst with Kaiser Family Foundation’s Program on Medicare Policy.

“It would be helpful to understand where [employer and insurer] savings are coming from, and to what extent they are being passed off onto the Medicare program or not,” Freed said. “That’s something we don’t have a lot of insight into.”

CMS has not collected information on the premiums, cost sharing, supplemental benefits and provider networks available through group Medicare Advantage products since 2017 and did not respond to questions about why it stopped. It allows employers some plan design flexibility—such as midyear benefit change allowances and varied premium requirements—but it also does not collect information about how the tweaks affect beneficiaries or costs to the Medicare Trust Fund.

Group Medicare Advantage plans are subject to the same general oversight and auditing standards as other Medicare Advantage plans, a CMS spokesperson said in an email. The agency waives certain requirements for employers’ Medicare Advantage plans if it believes they will hinder the design, offering or enrollment in the plan, the spokesperson said. CMS did not respond to questions about how benefit flexibilities affect taxpayer dollars and patients’ experience.

Insurers say the flexibilities allow employers to ensure their group Medicare Advantage plans look as similar as possible to their commercial offerings. Employers tend to structure plans that are more generous than individual Medicare Advantage products, Humana’s Snyder said.

“What employers really want is very little disruption. They don’t want provider disruption, and they don’t want benefit disruption,” he said.

But enrollees can struggle to access independent information about their plans. The murkiness can lead to resistance, as has been the case in New York City.

Mayor Eric Adams promised the 2022 switch from Medicare supplemental insurance to a single Medicare Advantage plan offered by Elevance Health, formerly Anthem, would offer retired city employees better benefits and the same provider network. Adams said it would save the city up to $600 million per year because the federal government would help cover the cost of the insurance. The savings were also contingent on the administration’s ability to levy a $192 monthly penalty on any retiree opting out of the city’s group Medicare Advantage plan, according to Adams.

New York City did not unveil formal documents about the exact benefits retirees would receive, however. As a result, Elevance Health withdrew from the program in July. At the time, the insurer said the lack of notice would have hurt patients’ ability to compare their insurance options. Adams and Elevance did not respond to interview requests.

The strategy also faces an ongoing legal challenge. The NYC Organization of Public Service Retirees, a grassroots group of around 25,000 individuals led by former fire department paramedic Marianne Pizzitola, sued the city in September 2021 in state Supreme Court to stop the switch.

Judge Lyle Frank ruled in March that the city and union could shift retired municipal workers to Medicare Advantage, so long as the city allowed patients to opt out of the plan and maintain their existing traditional Medicare coverage for free. Adams’ administration unsuccessfully appealed the ruling. The mayor and unions have also tried to persuade the New York City Council to amend a local law and allow retirees to be charged for traditional Medicare coverage.

Adams’ administration turned to an independent arbitrator, who in December recommended the city end its payment for supplemental Medicare coverage and work with CVS Health subsidiary Aetna to negotiate a new Medicare Advantage plan by Jan. 9. An Aetna spokesperson said the company looks forward to working with the city and agreeing to a contract by the deadline.

Pizzitola said her group rejects the validity of the arbitrator’s decision, arguing his power does not extend to this dispute.

“He has no authority over this, and he has no authority over us,” she said. “We are still telling the city council to ignore this propaganda fluff.”

Retiree challenges could represent some of the strongest headwinds to the growing group Medicare Advantage program, said Hoo, from the Purchaser Business Group on Health. The NYC Organization of Public Service Retirees is advising groups in Delaware, Illinois, Maine, New Hampshire, Ohio and Washington on how to keep their employers from forcibly switching them to Medicare Advantage plans.

Such potential for employee unrest means employers must effectively communicate about their health insurance coverage, said Jack Hoadley, a research professor emeritus at Georgetown University’s Center on Health Insurance Reforms. In his free time, Hoadley helps patients navigate Medicare enrollment by volunteering as a state health insurance assistance program counselor in Virginia.

“If patients ask me about a general [individual] Medicare Advantage plan, I can go into Plan Finder and get all the details. We all have access to that information,” Hoadley said. “But if I’m working with a retiree group waiver plan, then I’m limited to whatever that employer provides the retiree.”

Employers switching retirees to Medicare Advantage plans should offer a grace period during which patients can continue seeing their existing doctors—if the doctors will eventually be dropped from the plan—and communicate about how the plan is expected to change over time, Hoadley said. Many employers initially offer generous out-of-network coverage to try and sell the plan to patients, but don’t sustain the benefit over time, he said.

Employers should also explain to retirees how they can opt out of their group Medicare Advantage plan and enroll in traditional Medicare or other forms of coverage, he said. They should clarify if an individual will be subject to different enrollment deadlines, or penalized for choosing an independent plan.

“Companies that communicate the changes well tend to have less pushback. But if the communication doesn’t work so well, or if the changes are more dramatic—let’s suppose a limited-network HMO was the only option—it’s quite likely you’re gonna get some pushback,” Hoadley said.

Any reimbursement and policy changes to the Medicare Advantage program could slow adoption too, Hoo said. CMS is weighing several moves that could increase costs for Medicare Advantage plans, possibly decreasing insurance companies’ momentum and savings for employers. The agency in December proposed cracking down on and automating Medicare Advantage carriers’ use of prior authorization and refining their quality ratings system. The agency also said it will finalize a long-awaited rule by February about how federal payments to private Medicare carriers should be audited.

Despite these obstacles, Hoo said she views the future of group Medicare Advantage as bright, as employers increasingly look to save on retirees’ healthcare costs.

“It’s still very strong,” she said.