Medicare Advantage provider, benefit cuts may follow rate reduction

Medicare Advantage insurers are likely to respond to a modest rate cut next year by adjusting premiums, benefits, provider reimbursements and making other moves to emphasize profitability, financial analysts said.

Although the Centers for Medicare and Medicaid Services has downplayed the effects of its proposed 0.16% reduction in the Medicare Advantage benchmark rate for 2025, the rule issued last Wednesday is the latest in a string of policies that has Medicare insurers and their investors wary about the program.

Related: Medicare Advantage plans face new pay cut under CMS proposal

In addition to the cumulative effect of CMS actions under President Joe Biden—such as modifications to the Star Ratings quality program that made top scores and bonus payments harder to obtain—the new draft regulation appeared as Medicare Advantage carriers are reporting unpredicted rises in medical expenses.

UnitedHealth Group subsidiary UnitedHealthcare, Humana and CVS Health subsidiary Aetna each recently has warned investors that spending on Medicare Advantage members outpaced projections in November and December in a trend that’s expected to continue.

“They’re always going to say the sky is falling, but there are some things they can do to ease the pain a bit,” said Duane Wright, a senior research analyst at Bloomberg Intelligence. “These players have a lot of levers to pull to mitigate the impact. They can adjust their benefits offerings, they can adjust the rates, they can adjust their reimbursement rates with providers.”

The proposed benchmark rate accounts for medical costs through Sept. 30 and the final rule will incorporate updated utilization trends, CMS officials told insurance industry representatives during a conference call last Wednesday.

TD Cowen noted that CMS has offered higher payments in final rules than initially proposed for five consecutive years. Based on that trend, the investment bank predicts the Medicare Advantage benchmark rate will be 0.8% more next year, not 0.16% less. TD Cowen nevertheless expects rising costs and decelerating population growth will depress profitability from the high double digits to the low single digits over time, its analysts wrote in a research note published Friday.

CMS plans to issue the Medicare Advantage final rule by April 1. Whatever the agency dictates is unlikely to be enough to cover the rising costs insurers are seeing, said Brad Ellis, a senior director at the credit agency Fitch Ratings. “We’re just in for a couple of rough years with MA and there will be a predictable tightening from one year to the next,” he said.

Aetna may especially be exposed after recording higher-than-average enrollment growth during the sign-up period that ended last month, Ellis said.

“Everyone's pointing at Aetna as being aggressive with pricing,” Ellis said. “It’s a difficult year, and seeing their growth relative to everyone else—way beyond United and Humana—it at least begs the question, ‘How did they see that much growth?' Are they adding a lot of benefits or are they just not raising premium rates enough?” Aetna declined to comment.

Industry response

Health insurance trade groups such as AHIP publicly have said little about the draft regulation, offering statements last week that merely said they are reviewing it. CMS will accept comments on the proposed rule through March 1.

Notably, Humana, the second-largest Medicare Advantage carrier by enrolllment, is not updating its earnings guidance for the year despite the proposed benchmark rate being “worse than its expectation of a flat-rate environment,” the company wrote in a filing to the Securities and Exchange Commission on Monday.

The industry’s lobbying arms are likely to press CMS and Congress for a rate increase.

But the Biden administration has consistently enacted Medicare Advantage policies that rankle insurers, and lawmakers are mired in protracted efforts to advance government spending bills and other, less controversial and less costly healthcare priorities. Even physicians continue to await relief from fee-for-service Medicare cuts.

Still, Senate Majority Leader Chuck Schumer (D-N.Y.) and a bipartisan group of 60 other senators wrote CMS ahead of the rule to recommend a balanced approach to Medicare Advantage.

Biden’s Medicare agenda

The Medicare Advantage 2025 rate proposal aligns with the Biden administration’s broader focus on value-based care and its efforts to constrain costs by trimming payments to insurers and reimbursements to providers such as physicians, Ellis said.

Medicare spending rose 5.9% to $944.3 billion in 2022, which amounted to 21% of national health expenditures that year, according to the most recent report from the CMS Office of the Actuary. Under current projections, the Medicare trust fund is slated to be in shortfall by 2031.

“CMS continues to tighten the screws in terms of payment rates and overall expenses associated with Medicare,” Ellis said. “I am not surprised by the decrease in the physician side and for Medicare Advantage. It's unfortunate right now, given the elevated utilization we're seeing, but I think it’s a view into the future for Medicare.”

Over the past several years, CMS has raised the bar for high star ratings, ramped up audits and restrained marketing practices. The latest draft regulation continues implementing some of these policies, and the benchmark cut itself arose mainly from the revised risk-adjustment system CMS introduced a year ago.

The new proposed rule includes essentially no new policies ahead of the upcoming presidential election, Wright said. “It's one less problem for them going into November, so I'm not surprised,” he said. “For CMS to do anything more, it might rock the boat a bit too much.”

Effects on providers

When health insurance companies need money, they often turn to provider reimbursements and other cost centers.

“There will be an attempt to get in front of this. They’ll try and look at cost control through care management or other tools,” Wright said. That could include payment cuts and changes to value-based care arrangements to “squeeze out more dollars from an efficiency standpoint,” he said.

That’s got providers concerned, Dr. Jerry Penso, president and CEO of the American Medical Group Association, said in a news release Thursday. “On paper, it may appear that Medicare Advantage plans can afford a little belt-tightening. But the providers they contract with are already facing cuts of more than 3% on the fee-for-service side,” he said.

“In addition, there are potential impacts to patient care, such as decreased access, a reduction in available services and decreased programs that address social drivers of health,” Penso said. “CMS is underestimating the ramifications of further payment reductions for providers and their patients.”

For-profit health systems have identified the rise in prior authorization requirements and claims denials under Medicare Advantage as major challenges to their credit ratings, said David Peknay, director of healthcare at the credit agency S&P Global Ratings.

“CMS’ future expectation is ideally that the Medicare Advantage products provide care more cost-efficiently than traditional Medicare,” Peknay said. “That's a long-term goal here, and it comes with a lot of pain.”