The Smartest Insurers in the Room: How Medicare Advantage Insurers Continue to Evade
By: Grace Totman
August 31, 2021 — In 1997, President Clinton and Republicans championed a new form of Medicare: managed Medicare offered by private insurance companies, an interesting artifact of how far to the left Democrats have moved on health policy. Now known as Medicare Advantage (MA), the program offers beneficiaries enhanced benefits and a cap on out-of-pocket spending in exchange for potentially more limited access to services. Today, MA is roughly 42% of Medicare and expected to exceed traditional Medicare enrollment by 2030. The issue: is it actually saving any money?
Policymakers have remained three steps behind MA insurers since the program began. Repeated attempts to curb costs have worked short-term, only to be thwarted by regulation-evading strategies. Further, years of refinement have made MA a beloved program for seniors, raising the political risk of touching the program for lawmakers. Historic attempts to curb costs in MA, at first predicted to be catastrophic for insurers, have proven futile. Given the political risks, it seems like any reforms to MA going forward would need to be offset by boosts to the Medicare program such as adding benefits to Medicare or lowering the eligibility age, both of which Capstone has written about extensively.
As a preface, the original intent of the program was to reduce costs in Medicare while driving up the quality of care. The latter is generally accepted: MA plans consistently score higher in quality improvement categories and consumer satisfaction reports. The cost savings, however, are up for debate.
Shortly after the creation of MA, the federal government increased payments to the private insurers, shelling out nearly $44 billion in extra payments to MA plans in just six years, with the goal of having competition drive down costs. The substantial overpayments went largely unaddressed, with Medicare spending 13% more on average on MA enrollees than they would have under traditional Medicare by the end of 2009.
In an attempt to curb these overpayments, the Affordable Care Act (ACA) overhauled the payment structure for MA. It included a mandate that insurers spend at least 85% of their premium revenue on patient care, known as the medical loss ratio (MLR), capping administrative expenses and profits at just 15% and rebating the excess back to beneficiaries. The MLR transformed the business model of MA insurers, who sought new ways to retain profits. After trimming the obvious low-hanging fruit- advertising expenses and broker commissions- insurers had to get more creative. Increase premiums or cost-sharing and that 15% ceiling gets taller. MA plans have successfully disguised this tactic, with premiums declining every year since 2015. Less obvious cost-sharing measures, such as out-of-pocket limits, or prior authorization, however, have continued to grow.
Beyond behind-the-scenes cost-sharing changes, MA plans have utilized one of the most prevalent healthcare trends to avoid the profit cap; vertical integration. The insurers obscure profits in subsidiary health care facilities, reporting them as costs. M&A in the MA space rises each year; UnitedHealthcare and Humana now account for 45% of total MA enrollment, up from 42% in 2018. UnitedHealthcare is now one of the top employers of providers in the US and Humana-Kindred type acquisitions are on the rise.
One clarification: MA costs have come down. Medicare now spends approximately the same amount on MA beneficiaries as it does on traditional Medicare enrollees, however the addition of quality bonus payments make true reimbursement slightly higher. At the same time, MA plans are spending 20-40% less on actual patient care than traditional Medicare. This is the real concern for policymakers, who don’t want to see taxpayer dollars going straight into the pockets of private insurers.
The obvious solution: increase regulation. Democrats are eyeing MA reform as a potential payfor in the forthcoming reconciliation bill. The issue: policies proposed to fix MA overpayment back in 2009 remain on the table today and the political risk of harming MA is only increasing as more beneficiaries opt for MA. Even in the case of successful reform, the federal government will still remain two steps behind. Perhaps the solution, or at least the eventual outcome, is to accept that maybe a program that has figured out how to maximize profits while keeping beneficiaries healthy is the best-case scenario, even if those profits are coming largely from the federal government (taxpayers).