A modest cut to the base Medicare Advantage payment rate next year may compel health insurance companies to carry out threats to scale back benefits, hike premiums and reduce provider payments.
Last week, the Centers for Medicare and Medicaid Services finalized a 0.16% cut to the benchmark Medicare Advantage rate, which excludes risk adjustment payments, in 2025. It was the second consecutive year the agency reduced payments and the first time since 2018 that it didn't offer a higher rate in the final rule than it proposed.
Related: CMS finalizes Medicare Advantage rate cut
Investors reacted unkindly to the news, driving down share prices for large insurers, said Dean Ungar, vice president and senior credit officer at Moody’s Ratings. Health insurance stocks are down 15% on average since the start of the year. “The Street was expecting that the final rate notice would be better than the preliminary rate notice,” Ungar said.
The lower base rate partially reflects the continued three-year phase-in of a new risk-adjustment model, and Medicare Advantage insurers should expect a similarly low rate in 2026 for the same reason, Ungar said.
Health insurance companies contend the benchmark rate is not actuarially sound because it does not account for the higher medical costs they experienced at the end of 2023. Hospitals and technology companies likewise reported that Medicare Advantage utilization rose in the final months of the year.
Centene and CVS Health, which owns Aetna, threatened to reduce benefits if the base rate did not increase. Elevance Health said it would offer fewer Medicare Advantage plans if the payment reduction took effect. Humana, the second-largest Medicare Advantage insurer by membership, told investors last month it would miss the high end of its earnings target for 2025 under the rule.
“As we look forward to 2025, Humana will focus on offering plans that provide stability in the benefits that our members value most,” a Humana spokesperson wrote in an email.
Market leader UnitedHealthcare has not commented on how it may manage the rate reduction. The company responded to a request for comment by referring Modern Healthcare to the trade group AHIP and the Better Medicare Alliance, an industry coalition. CVS Health also deferred to AHIP.
The Better Medicare Alliance and AHIP declined to make executives available for interviews. Other insurers did not respond to requests for comment.
These companies have threatened to burden Medicare beneficiaries with higher costs, cut back on provider pay or raise premiums in previous years, as well. But past experience suggests insurers may not follow through.
Medicare Advantage carriers issued similar ultimatums ahead of the 2024 rate cut and the risk-adjustment revamp. But, as TD Cowen reported in October, they increased their investments in this market instead, as evidenced by a higher share of enrollees eligible for zero-premium plans. To date, insurers have primarily sought to shore up their finances by laying off workers.
But rising costs and unfavorable regulations are likely to lead insurers to make drastic changes in 2025, said Mark Fish, a senior managing director at FTI Consulting. Medicare Advantage bids for 2025 contracts are due June 3.
“They're scrambling right now,” Fish said. “Administrative efficiencies, degrading profit margins, those types of things — all those will be on the table.”
Insurers may stiffen prior authorization requirements, shrink provider networks or slash reimbursements to preserve their Medicare Advantage margins, Ungar said. More contract disputes between insurers and health systems are likely, he said. More hospitals may stop accepting Medicare Advantage plans in response, he said.
Health insurance companies may look beyond Medicare Advantage to make up for lost revenue by raising premiums for employer and exchange plans, Ungar said.
“CVS-Aetna, Elevance and United have a lot of commercial business,” Ungar said. “It's a longstanding issue that some commercial insurance is subsidizing these lower Medicare insurance rates. You have to make up something somewhere.”
CMS limits how much insurers may modify Medicare Advantage policies each year, which constrains their ability to reduce benefits. Health insurers considering cuts may also be concerned about the headline risk of pushing costs onto enrollees, said Duane Wright, a senior research analyst at Bloomberg Intelligence.
“It’s not like these aren’t companies making billions and billions of dollars every year,” Wright said. “They have to worry about the optics of significant changes against the backdrop of concerns that they're overpaid, or that they just make a lot of money in general. 'Why are they passing this down to vulnerable seniors?'"
The largest health insurance companies accumulated $1.1 trillion in combined revenue last year, a five-year high, Fitch Ratings reported Monday. Their debt-to-adjusted operating income ratio declined slightly as operating and investment income grew, according to Fitch Ratings.
