Medicare Advantage (MA) plans continue to face economic challenges that are unlikely to abate any time soon. First-quarter earnings calls revealed payers’ concerns and responses to the pressures, and an expectation of reduced margins through 2025 on their MA books of business.1 Large national payers seek to “reset” products with a focus on pricing discipline and clinical and operational excellence to promote growth while returning to historical 3–4 percent margins.
In the meantime, the effects on seniors are likely to include benefits reductions, premium increases, and confusion and increased shopping triggered by negative Annual Notice of Changes in the upcoming annual enrollment period.
Headwinds placing downward pressure on payer revenues and margins include the following:
Center for Medicaid & Medicare Services (CMS) Final Notice. The Final Rule from CMS for contract year 2025 includes a payment decrease of 0.16 percent,2 which payers anticipate will disrupt benefits and prompt premium increases, adversely affecting member satisfaction and potentially leading to an increase in churn. We estimate payers could lose $50 to $80 per member per month as a result of the change, and may seek to recover half or more of those losses through product changes (exhibit).
Broker compensation. In April 2024, CMS finalized a rule that would have capped compensation to brokers for administrative services, including the performance of health risk assessments, at $100 per new enrollment. In July 2024, the cap was halted for plan year 2025 after a court found it to be “arbitrary and capricious” but there is uncertainty about whether CMS will try to reestablish the cap in future years. Ultimately, the regulation has already created additional complexity for payers as they work with partners to develop compliant payment models for distribution services. Member confusion and expected high churn in response to product resets may result in complexity in payer and broker dynamics, adversely affecting retention and mutual growth.
2024 CMS hierarchical condition category risk adjustment model, Version 28 (V28). Ongoing deployment of V28 in 2024 is intended to improve the accuracy of plan risk coding. This could reduce revenue, in particular for plans with high risk scores. The net effect will most likely adversely affect payers with large portions of their membership in fully capitated arrangements or with large dual-eligible or other special-needs populations. This will also prompt greater focus on reaching an efficient frontier on administrative and medical cost management.
CMS Star ratings. As part of the 2024 Final Rule, CMS will reward plans that provide high-quality care for socially at-risk beneficiaries by incorporating a health equity index into the Star ratings system it uses to measure plan performance. Adding a health quality index to Star ratings while simultaneously de-emphasizing operational measures on which MA plans typically perform well today (for example, appeals and teletypewriter access for members with impaired hearing) could affect plans’ overall performance.
At the same time, a number of factors are contributing to rising costs:
Higher-than-expected utilization. A sustained increase in utilization, beyond what plans anticipated, is contributing to higher costs for plans.3 Factors driving utilization include robust growth in enrollment in aggressively priced MA plans (for example, those with limited core medical benefits or rich supplemental benefits), recovery in demand for outpatient care as a result of the COVID-19 pandemic, increased demand for inpatient care, and high utilization of supplemental benefits such as dental insurance.
Regulatory changes. Regulatory changes, including those to Part D, are adding to cost and complexities. Despite these pressures, we believe MA plans still have a more favorable outlook than other healthcare profit pools, thanks to strong membership growth. Payers and other stakeholders can pursue mitigation strategies to reduce costs to improve margins.
Payers. Focusing on achieving the efficient frontier will be fundamental as a baseline strategy for payers to improve margins. To reduce medical costs, for example, payers could apply traditional cost strategies with an innovative twist such as personalized utilization management and care management programs assisted by generative AI. Simultaneously, they could build capabilities to scale optimal care delivery and value-based-care models as well as implement personalization to address the needs of their members at a microcohort level. On the revenue side, payers could continue to invest in retention and churn mitigation programs and pursue pockets of growth (for example, special-needs plans) that give them a competitive advantage in the market.
Health systems. Although health systems have experienced some market tailwinds (for example, increased utilization by seniors and the two-midnight presumption4), many face increased fiscal challenges. When caring for MA patients, most health systems fail to achieve break-even net margin.5 Moreover, the gap between MA reimbursements and underlying expenses is widening, in part because of rising denials of claims that are affecting the revenue cycle.6 An increased focus on medical management by payers navigating their own challenges could exacerbate pressures on health systems. Health systems can use this opportunity to reimagine partnerships with payers and reconsider the division of MA premiums (for example, by diversifying care delivery and commercializing services) and continue to approach payers with potential partnership models and other options to advance capitated risk models.
Risk-bearing providers (RBPs) and integrated delivery networks. Although we expect payers to bear the brunt of the effects of current pressures, RBPs will not be fully immune to them. Higher utilization costs will affect RBPs’ medical loss ratios, and V28 could reduce revenues. RBPs can work to strengthen operational and clinical performance management to bend the cost curve, better support patients in their health journeys, and meaningfully improve total care costs. Additionally, RBPs could consider improving incurred but not reported forecasting and business planning to reduce their risk exposure, and they can use technology and analytics, including generative AI, use to capture additional operational savings with high-value use cases. Meanwhile, integrated delivery networks have a distinct opportunity to better align physician incentives.
Healthcare services. Similar to RBPs, healthcare services companies are at risk of potential downstream effects as payers adjust their benefit designs, reduce administrative costs, modify their distribution strategies, and, in all likelihood, seek price reductions from healthcare services companies. Additionally, in this environment, larger payers may consider insourcing where possible. However, healthcare services companies that show demonstrable improvements in payer revenue could have meaningful potential with payers looking for new solutions to improve margins. Healthcare services companies could, for example, improve risk-coding accuracy and Stars performance or broker enablement services to propel sustainable growth. They could also help improve costs with utilization management and payment integrity solutions, for example, or they could use generative AI solutions to reduce administrative costs.
Across stakeholder groups, MA segment trends have varying implications that point to clear strategies to weather the storm. While the next few years will likely be challenging for the MA market, participants that invest in capabilities that enable sustainable growth and improve care outcomes will emerge stronger, with clear advantages for the decade ahead.
Cara Repasky is a partner in McKinsey’s Pittsburgh office, where Gabe Isaacson is an associate partner, Dan Jamieson is a partner in the Chicago office, and Sonja Pedersen-Green is an associate partner in the Minneapolis office.
The authors wish to thank Anna Buchholz, Esenam Dogoe, and Julie Wang for their contributions to this blog.
1. “Centene Corporation reports first quarter 2024 results,” Centene Corporation, April 2024; “CVS health to hold first quarter 2024 earnings conference call,” CVS Health, April 1, 2024; “Humana Inc. (NYSE:HUM) Q1 2024 earnings call transcript,” Yahoo Finance, April 25, 2024.
2. “2025 Medicare Advantage and Part D rate announcement,” CMS, April 1, 2024.
3. Paige Minemyer, “Fitch: Spike in MA utilization, rate cuts for 2025 likely credit-neutral for industry,” Fierce Healthcare, February 7, 2024.
4. Per CMS guidance, MA plans can review claims under the “two-midnight presumption,” which doctors use to classify if a stay is inpatient or outpatient based on whether it spans at least two midnights.
5. Andrew Cass, “Nearly half of health systems are considering dropping Medicare Advantage plans,” Becker’s Healthcare, March 22, 2024.
6. Michael Peterson, Sanjiv Baxi, and Sarah Calkins Holloway, “Three ways to ease the pressure on health system revenue cycles,” McKinsey, September 10, 2024.