Medicare Advantage Market Exits: What Are They Thinking?

“Should I stay or should I go? If I go, there will be trouble. And if I stay, it will be double.”

- The Clash, Combat Rock - 1981

Pulling the rip cord

There has been periodic coverage this fall of multiple Medicare Advantage carriers exiting markets or terminating plans. Kaiser Family Foundation reported a slight decrease nationally in the number of Medicare Advantage plan choices available to consumers this annual renewal cycle. But that small decrease is cold comfort for consumers in counties where a carrier exited completely or reduced the number of plans available.

One example is Humana, which has elected to terminate a number of plans and exit 13 countiesin 2025. An important nuance is Humana intends to “crosswalk” the majority of the impacted 560,000 consumers to another Humana plan. “Crosswalking” is allowed by CMS and takes the form of an offer to consumers currently enrolled on a terminated plan to be automatic transferred to another, similar Humana plan. These consumers can opt to shop for another plan with Humana or a competitor, and some will. But typically, most consumers will agree to the automatic transfer by Humana, retaining them as customers.

This type of Medicare Advantage crosswalk strategy is beneficial to consumers in some cases. But it is almost always beneficial to the insurance company. It allows the insurance company to off-load poorly performing plans and shift enrollment to a plan with a better margin – and potentially better medical management and Star rating.

What’s are they thinking?

There are many factors that influence a decision by C-suite leaders to term a plan or exit a county. These range from care delivery unit costs to plan level enrollment to competitor tactics. At the end of the day, the Medicare Advantage business model is based on risk delegated to the carrier and capitated revenue paid by CMS. That balance changes annually based on shifting demographics, physician practice patterns, competitor tactics and CMS benchmark rates.

Every year Medicare Advantage carriers prepare a “bid” for the coming plan year documenting their forecast financial performance of their product portfolio. This bid is submitted to CMS and includes detailed demographic assumptions, risk score forecasts, and detailed financial modeling. If the forecast financial performance of a plan has a negative margin, the carrier may elect to term the plan or reduce the counties it is sold in. Terming a Medicare Advantage plan may result in bad press, but keeping a poor performing plan is likely to result in angry shareholders.

Here are a few of the factors influencing the Medicare Advantage stay/go decision making process every year:

Disadvantageous network and drug unit costs

Market share equals negotiating strength. If a carrier does not have material enrollment in a county, the local provider community may not be interested in negotiating favorable reimbursement rates with them. Value based contracts require additional administrative work and provider groups may decide the admin burden is not worth the effort for the small patient population available from a carrier.

The ever increasing acquisition of physician practices by large, corporate insurance carriers can make some geographies disadvantageous for competing Medicare Advantage carriers. The purchased physician practice is not likely to be allowed to offer competing carriers reasonable reimbursement agreements, making staying in that market undesirable.

In addition to purchasing physician practices, a few large pharmaceutical-based corporations have purchased Medicare Advantage carriers. The CVS purchase of Aetna is an example. These vertically integrated corporations drive drug utilization on their Medicare Advantage Part D coverage to drug products they produce or control. Since prescription drug costs represent 18% of medical costs, these vertically integrated, pharmaceutical-based corporations have a material cost advantage and may be able to use it to price competitors out of a market.

Star ratings across portfolio

CMS Star ratings directly affect the capitation payment amount a carrier receives, often to the tune of tens of millions of dollars. Medicare Advantage carriers must have one or more contracts with CMS, allowing them to participate in the market. Carriers offer multiple plans under a single contract, and new contracts are only issued by CMS to offer a different type of plan (HMO, PPO, SNP.) Star ratings are assigned at the contract level based on the aggregate performance of all plans offered under that contract. A single poor performing plan drags down all plans under that contract and could result in a lower Star rating for all those plans – resulting in loss of many millions of dollars. By exiting a county with a poor performing healthcare delivery system or provider community, a carrier may be protecting their Star rating.

Staying competitive vs meaningful difference

Every year carriers add new supplemental benefits in an effort to become more competitive. These enhancements typically are added to newer plans to drive enrollment, while older, incumbent plans (typically with older consumers) are untouched with no enhancements. Additionally, the trend in recent years is for new plans to offer low or zero dollar premiums. Older plans often have higher premiums, in some cases more than $100 per month. CMS requires carriers to demonstrate meaningful difference between the plans they offer. This actuarial calculation becomes more and more challenging as new low cost plans with rich supplemental benefits are offered paired with old, incumbent plans with high cost premiums. Carriers have to offer the new plans to be competitive, so at some point they may elect to term the old plans to get past the meaningful difference requirements.

Why this matters

Healthcare start-ups, health tech companies and new market entrants need to integrate Medicare Advantage revenue and financial incentives within their value propositions to gain traction with insurance carriers. Understanding the external factors driving plan level performance, both positively and negatively, is part and parcel of the Medicare Advantage business. Companies able to demonstrate a capability to improve lagging performance will garner carrier interest and potentially new business opportunities.

Medicare Advantage carriers decide every year if they are going to stay or are going to go. Both offer risks and opportunities. Services and technologies that inform these tough decisions will always be valued.

This article was written by a human being; no chatbots or AI were used. No permissions are granted for any use of this content to train AI algorithms.

Copyright 2itive 2024

2itive is a Portland based consultancy founded by Erik Goodfriend, offering a unique combination of market intelligence, knowledge of healthcare payment systems and creative business strategy insights. Feel free to contact us at info@2itive.com