How Medicare Advantage brokers can rise above market turmoil
As the MA market shifts, brokers face beneficiary churn, payers’ vertical integration, and compensation uncertainty. To survive, they’ll need to expand services and professionalize capabilities.
By Cara Repasky, with Gabe Isaacson
Brokers are vital to the Medicare Advantage (MA) ecosystem, representing 70 percent of MA distribution. Today, though, brokers need to rethink their strategy as they sort through some of the biggest shifts in the MA market in the past two decades. At a time when payers are pulling back on benefits to navigate profitability challenges, brokers find themselves at the forefront of dealing with evolving beneficiary preferences, payers’ strategic shifts, and potential regulatory scrutiny.
These shifts are consolidating the brokerage industry. For example, changes in MA benefits heading into 2025 are leaving many seniors uncertain about their best options, leading to increased switching. This member churn means that, as brokers scramble during the annual enrollment period, customer acquisition costs are soaring. This pressure is pushing some brokers out of the market while sending others looking for acquirers. As acquirers expand, they can demand larger volume-based administrative payments, further cementing their advantage.
Is it game over for smaller brokers? Not quite. But to remain competitive, brokers must pursue new strategies to succeed. This article examines dominant trends among beneficiaries, payers, and regulatory environments and outlines a response that can help brokers.
Beneficiaries’ shopping propensity suggests the need for more longitudinal engagement
In recent years, churn among MA members has reached unprecedented rates (up about 70 percent since 2017).1 With members increasingly shopping and switching, brokers need to strategize to remain the agent of record for the beneficiaries they support and prove their value to payers. Brokers now need to keep in mind that even beneficiaries who are satisfied with their current plans are exhibiting a shopper’s mentality and seeking the latest benefit changes. This is largely due to supplemental benefits becoming increasingly generous, with an array of financial, health, and wellness offerings. All of this adds complexity heading into 2025, where some plans have increased product richness while many others have retrenched or exited entirely.
As baby boomers age, it is unclear if this trend of increasing churn will persist. Historically, older MA members have churned less frequently (7 to 8 percent for those 75 years and over versus 11 to 15 percent for those 65 to 74 years).2 However, the newest generation of seniors has “aged in” amid this period of substantial supplemental benefit growth.
Given rising churn and the possibility of sustained switching behaviors, brokers should focus on longitudinal member engagement. They should expand client interactions and ensure year-round member engagement to ensure client satisfaction and improve renewal success. More broadly, they will need to be attuned to their clients’ needs to personalize guidance based on evolving health needs. But for that, they would need to rigorously track engagement, which could also help them prove their value to payers and, in turn, make higher compensation viable. This approach enhances the member experience and positions brokers as trusted advisers committed to their clients’ long-term health and well-being.
But not all brokers are created equally when it comes to beneficiary churn. While e-brokers drive high volumes, they are known for enrolling a larger proportion of members into special needs plans (SNPs) and dual-eligible special needs plans (D-SNPs), resulting in higher churn rates. The other type of broker—field marketing organizations (FMOs), or field brokers—generally deliver a smaller proportion of D-SNPs but stronger retention. E-brokers and FMOs are both caught in the disconnect between the need for retention and payers’ imperatives to grow the D-SNP cohort, which provides superior margin performance for payers.
But this market has evolved in recent years. E-brokers now enroll more members than either FMOs or payers—more than 40 percent of beneficiaries that enroll annually—according to McKinsey analysis that shows this increase from pre-COVID-19 to 2023. However, FMOs are larger operations than e-brokers and remain crucial partners to MA payers. In recent years, though, the FMO space has experienced a number of rollups. As a result, the brokerage landscape overall is now led by a small subset of large institutions, mirroring the consolidation and growth of the largest payers.
Payers’ compressed margins create opportunities to be sophisticated B2B partners
Grappling with unprecedented headwinds, many payers—including national payers, which have been profitable in MA in recent years—are asserting a posture of margin over membership growth; some are even intimating at changes that might trigger membership losses in the coming year. In particular, payers are looking beyond pure payer revenues and continuing to pursue vertical integration, which has two key implications for brokers.
First, payers’ economics vary considerably by micromarket; they’re now pursuing growth in some areas but not in others. This will push many brokers beyond their traditional sales focus to instead become sophisticated B2B partners with a better understanding of payers’ incentives, while also prioritizing support for beneficiaries.
Second, payers may seek broker acquisitions to both manage administrative costs and gain additional payer-agnostic assets. Brokers will need to contemplate if remaining independent leaves them better equipped to grow and serve beneficiaries compared with close integration with a payer.
Brokerages are at an evolutionary stage. Many originated from modest beginnings, yet their commercial evolution has outpaced their organizational maturity. Now, as brokerage leaders increasingly interface with seasoned payer executives, they face expectations to elevate their performance standards.
Potential for rules that set compensation guardrails may necessitate new approaches
Less oriented around membership growth, many payers leaned into a proposed rule from the US Centers for Medicare & Medicaid Services (CMS) that would have reformed historical models of broker compensation.3 That rule is now stayed,4 but considering payers continue to face margin pressures that could strain sustainability, broker compensation has become a strategic question: Will payers adjust or reduce historical broker commission levels as a means of reducing administrative costs? Recently, many payers have taken steps toward this, indicating that they will not pay commissions for new products that may be unprofitable. Payers choose to keep these products to retain legacy membership and mitigate disruption, but they eschew paying further commissions that drive growth in select unprofitable products.
Stepping back: in the 2025 Medicare Final Rule, CMS proposed a redefinition of brokers’ compensation. This rule, stayed by a Texas district court in July 2024, highlights the scrutiny on broker channels and aligns with recent governmental actions to crack down on bad actors. Historically, broker compensation entailed CMS-regulated enrollment and renewal commissions to the agent plus a bundled fee to the brokerage for all services provided during enrollment. These administrative fees, also known as overrides, are paid on a per-enrollment basis and are based on the fair market value (FMV) of those services. The proposal aimed to restrict overrides by eliminating fees for enrollment-related services, though leaving opportunity for other, non-enrollment-related services to be compensated at an FMV.
If pursued again and successfully implemented, these changes may require brokerages to separate enrollment-related services from others such as compliance, marketing, and commissions management. Furthermore, longitudinal engagement—a critical part of brokers’ adjustment to beneficiary churn—would also fall outside of enrollment.
Amid uncertainty about potential regulation, brokers can explore other approaches. This could include vending out marketing and sales or enrollment technology to payers, monetizing actionable information learned during the sales process (like drug, doctor, benefit preferences), and lump-sum payments for lead generation. Brokerages also have an opportunity to equip their agents with a full product portfolio inclusive of life insurance, final expense, Affordable Care Act plans, and more.
Brokers must now prepare for the long haul given the ongoing confluence of beneficiary, payer, and regulatory shifts. These trends force a need for brokers to upgrade their capabilities, expand their best practices, and commit to higher standards to meet evolving demands and expectations. The bar is rising: traditional lead generation and renewal efforts are being supplanted by payers’ proprietary lead sources, generative AI, automated screening, and technology-enabled distribution. The success of many brokerages has been on the back of a start-up mentality and enduring entrepreneurship. This mentality must persist, but capabilities also must expand.
ABOUT THE AUTHOR(S)
Cara Repasky is a partner in McKinsey’s Pittsburgh office, where Gabe Isaacson is an associate partner.
This article was edited by Querida Anderson, a senior editor in the New York office.
Star power: How Medicare Advantage payers can shine in the new quality-focused landscape
An increased emphasis on clinical and health equity measures, while staying strong on member experience, is critical to secure 4+ stars and to bolster the overall Medicare Advantage strategy.
As Medicare Advantage (MA) payers continue to be buffeted by regulatory and market changes that could dampen margins, payer leaders should not lose sight of the importance of investing now to stabilize their businesses for the long run. A critical area of focus for leaders should be the Medicare Advantage Star Ratings program. While 4+ star performance is becoming table stakes, plans that emphasize achieving better Star-program performance tend to have an advantage.
The Centers for Medicare & Medicaid Services (CMS) introduced Star Ratings in 2007 to improve the quality of care for members, with the expectation that the ratings would evolve over time. To date, CMS continues to refine the program to encourage plans toward targeted new priorities. But MA payers often get caught up in the complexity and number of changes that have been made to the Star Ratings program through the years. Some have debated the program’s value,1 deeming the rating system challenging to implement well given the frequency of the changes, and questioning the effectiveness of the Star measures to improve clinical outcomes.
MA payers should, however, stay on top of improving their plans to align with the latest Star Rating measures (see sidebar, “Upcoming changes to Star Ratings”) to be able to obtain a 4+ rating. If they don’t, they may find it hard to maintain a margin-positive business, and also stand to lose payments and rebates tied to the Quality Bonus Program.
Our analysis shows that the Star program has increased the prevalence of cancer screenings, improved medication adherence, and helped close the gap for other preventative measures like flu shots and diabetic eye exams. Over the past decade, roughly 90 percent of the program’s raw scores have improved (Exhibit 1); for those that did not improve, this was likely because of heightened competition and increased formulary complexity. Payers’ focus on improving these scores has triggered better performance on metrics CMS deems to correlate with quality of care.2
The Star program also influences how members select plans. In the 2023 McKinsey Medicare Shopping Survey, 50 percent of respondents noted that a plan’s ratings were among the top features they considered, with 24 percent saying it was the most important aspect. In our 2020 survey, only 5 percent of respondents said it was the most important factor. As a result, 76 percent of MA members now enroll in 4+ Star plans, up ten percentage points since 2015.3 Yet despite this steady increase, 2022 represented a high-water mark. With the removal of the COVID-19 era’s temporary provisions that made it easier to perform well on the program, payers may need to rethink their approach to Star Ratings.
Now more than ever, payer leaders should consider how to integrate Star Ratings tactics into their broader MA strategy. MA margins will likely continue to be pressured by regulatory and market-level headwinds affecting both expected CMS reimbursements and members’ healthcare costs. All of this crystalizes the importance for payers to make Star improvements even more central to their MA strategy. The Star program is interlinked with other MA priorities, such as promoting higher-quality, lower-cost care and decreasing administrative spend, since higher utilization is likely based on demographic changes. Ultimately, plans with stronger ratings can reinvest their higher CMS rebates into additional plan benefits in a self-reinforcing cycle.
So what can Star program leaders do to prepare for upcoming challenges? They could start by creating a blueprint that includes building better relationships with providers, enhancing member engagement to address care gaps, and identifying members with social risk factors (SRFs), all while maintaining a focus on providing a high-quality member experience.
Winning in clinical measures
The Star Rating pendulum is swinging away from measures linked to operations and member experience surveys and toward a combination of measures relating to healthcare effectiveness and Health Outcomes Surveys (HOS), as well as pharmacy measures.4 Clinical activities will thus most likely replace member experience as the main arena for plans vying for a 4+ rating. This suggests that leaders should focus on building better provider partnerships and improving member engagement in their own care.
Provider engagement plans
Strong provider collaborations can improve a plan’s performance on the Star program’s clinical measures while also enhancing members’ experience with providers. Payers can start by offering incentives to prioritized providers through service-level agreements and bonus payments to improve their performance on clinical measures and member experience. Partnering with providers who perform better overall—particularly when it comes to performance on healthcare effectiveness data and information set (HEDIS) details, pharmacy measures, and the consumer assessment of healthcare providers and systems (CAHPS) family of surveys—can be linked to a 0.5 to 1.5 percent reduction in medical loss ratio (most likely resulting from behavioral changes tied to provider incentive programs), according to a McKinsey analysis of plans with a high percentage of members in value-based contracts.
Additionally, payers can focus more on furthering value-based care through more meaningful risk-based arrangements with providers—that is, ensuring risk arrangements exceed 50 percent upside and 50 percent downside with no downside caps or shifting to full capitation. Payers should consider both increasing the number of providers in such contracts and advancing these relationships along the spectrum of risk—from pure fee-for-service to full-capitation contracts.
Payers can also strengthen provider relationships by developing digital provider-enablement tools that offer near-real-time member data. These capabilities will become increasingly critical as clinical Star measures become more time-bound (for example, requiring member-level follow-ups within 30 days after an event).
Member engagement plans
Members themselves play a key role in managing their health. Digital self-service tools are increasingly available to help members understand their care gaps and plan benefits. However, it’s insufficient to expect members to fully understand and address their healthcare on their own. Member outreach is imperative, and personalizing targeted messages can help ensure necessary actions are taken. Subsequently, tracking how such outreach initiatives affect results is important for reallocating resources away from low-ROI methods.
Finally, as payers conduct outreach, the focus should be on recommending that members consider higher-quality yet lower-cost care. Given the broader margin pressures expected in MA, leaders should think about member experience in the context of medical-cost optimization. More coordinated and accessible care goes hand in hand with better member experiences and can lower total costs.
Maximizing Health Equity Index performance
The year marks the first time in which CMS will collect data to benchmark performance for the Health Equity Index (HEI). This means that to maximize performance in rating year 2027 (RY2027), payers need to prioritize identifying—and engaging—members with HEI-defined SRFs now.
Two of the important demographics to home in on will be members of dual-eligible special needs plans (D-SNPs) and those eligible for the low-income subsidy (LIS). The D-SNP population, in particular, will be key: our analysis shows that plans with higher D-SNP membership have seen their HEDIS performance decrease over the past two years (Exhibit 2).
Improving HEDIS scores is important, as their performance will have a greater effect on overall Star Ratings given that the newly introduced HEI is expected to comprise select HEDIS and pharmacy measures.
While identifying D-SNP and disabled members from member profiles should be relatively easy, identifying LIS-eligible members could require more effort. CMS estimates up to three million seniors could benefit from this program but are not currently enrolled.5 To find likely LIS-eligible members, payers can consider claims, socioeconomic data, geospatial data, as well as information from screenings and surveys related to social needs and wellness, among other data types. Beyond current MA members, payers can also zero in on their own commercial or individual plan members who will age into Medicare in the near term.
Connecting with this segment early on can give payers a head start on improving performance for future members.
Once members who meet the SRF criteria are identified, they should be quickly engaged. Since most members are not aware of the LIS program, clear education on its benefits, including individualized assistance, might be needed. Payers should also have a strategy to connect members with SRFs with required clinical and social services, as well as enroll them into tailored care management programs.
Identifying and engaging members with SRFs could be inconsequential, however, for payers that do not in parallel invest in creating innovative product benefit designs for this population. They should expand offerings to include programs targeted at behavioral and social determinants of health, as well as improve benefits that focus on chronic conditions, for example, through value-based insurance design and supplemental benefits for the chronically ill. Payers should also build structures to deliver such a suite of wraparound services—for example, partnerships with community groups, religious institutions, housing organizations, and food security and nutrition assistance programs.
Addressing geographic challenges, such as those that rural and tribal communities face, should be another area of focus and can include the use of expanded networks, transportation support, and mobile-healthcare services. Payers should also collaborate with Medicaid managed-care organizations, supplemental benefit teams and providers, and population health and health equity teams, as well as offer analytics to coordinate care with these partners.
Maintaining high-quality member experience
Although member experience measures will decline in weighting in RY2026, these measures still make up a considerable portion of the aggregate Star score. High performance in these competitive measures will continue to be critical to achieving a 4+ Star Rating for the foreseeable future. With a narrow margin for error, payers would be well served to not lose their focus on member experience, particularly those metrics on which plans have historically performed very well, such as foreign-language interpreter, teletypewriter availability, and timely reviews of appeals.
Improving efficiency with automation and digital technology
Investing in automation and other digital technologies such as generative AI is key to improving member experience. For example, automated prior authorization, customer self-service AI chatbots, targeted member messaging, and automated outreach could help plans’ Star performance.
Such tools can also have the added benefit of helping reduce costs, especially administrative expenses. Our analysis indicates that in 2025, MA payers could face administrative and medical cost increases of $50 per member per month (PMPM), driven by increased healthcare utilization and administrative spend, and $30 PMPM revenue impact due to rate declines (Exhibit 3). Administrative efficiencies gained from improved digital tools will help offset these increases and the investments needed to fully integrate Star Rating improvements into the overall MA strategy.
MA payers may find themselves in the middle of a balancing act: they need to ramp up focus on clinical measures and HEI-related member outreach without ceding ground on member experience measures to achieve a 4+ star rating. This year has already laid bare the extent to which increased costs related to higher utilization can dampen growth. MA payers that adapt quickly and thoroughly to the Star program’s latest changes can position themselves as leaders in spurring a shift to high-quality care that lowers costs in the long run. Given the increasing headwinds pressuring Medicare Advantage margins, strong Star performance will be critical for payers to ensure the sustainability of their plans and overall MA strategy.
ABOUT THE AUTHOR(S)
Cara Repasky is a partner in McKinsey’s Pittsburgh office; Anna Buchholtz is a solution manager in the Washington, DC, office; Ava Clarke is a capabilities and insights specialist in the Greater Boston office; and Sonja Pedersen-Green is an associate partner in the Minneapolis office, where Will Lyle is a consultant.
This article was edited by Querida Anderson, a senior editor in the New York office.
Payer considerations in 2024 as Medicare Advantage changes
This year US health insurers have to navigate strong crosscurrents from demographic shifts, regulatory changes, and member preferences. How they react now can have an impact for years to come.
By Gabe Isaacson, Dan Jamieson, Sonja Pedersen-Green, and Cara Repasky
The undeniable story of early 2024 for US health insurers has been the sustained economic pressures that Medicare Advantage (MA) payers are experiencing. This was borne out in 2023 year-end financial results, with several MA payers pointing to inpatient and outpatient care utilization being higher than expected, consequently increasing the medical-loss ratio.
Looking ahead, the financial pressure on payers could worsen. In its 2025 advance notice for new payment rates, the US Centers for Medicare & Medicaid Services (CMS) notes that there will be an aggregate revenue growth (3.7 percent)6 when the increase (3.86 percent) driven by the risk score trend is included. Payers’ estimates of this number, however, vary widely.
Taken together, these headwinds only exacerbate the imperative for MA payers to contain costs. Savings will need to come from both medical costs and value-based care, as well as administrative expenses and product design changes. Yet none of this lessens the need to invest sufficiently to achieve growth expectations and Star-rating aspirations.
Higher utilization in 2023 was likely spurred by delayed care caused by the COVID-19 pandemic and other acute triggers in excess of historical trends. As the extent and longevity of these acute triggers are uncertain, payers can continue to monitor the research. But in the longer term, they can also continue to focus on how the aging of the Medicare population is likely to continue driving utilization, indicating that this could be a new normal. Similarly, some other seemingly gradual changes could nonetheless be disruptive this year.
Besides planning for demographic shifts, payers will need to navigate changes to Star ratings and rethink product designs and distribution channels. All of these factors are expected to complicate growth and revenue. As we consider the decisions that payers will need to contemplate, five key trends are coming into clear focus for the year ahead: the need for a product reset, an aging population, Star-rating pressures, opportunities in special needs plans (SNPs), and broker channel constraints.
Product reset
The cost-containment imperative for MA payers means that a focus on ROI in product design is already emerging as an undercurrent in 2024 and is expected to be a priority in the 2025 bid cycle. Regulatory changes are putting pressure on top-line revenue and may seemingly warrant retrenchment, but instead we suggest that payers make calculated trade-offs and reevaluate their portfolios. In recent years, with more cash on hand, the focus has been on increasing product richness—for example, through new and more generous benefits, increasingly in cash and cash-equivalent forms—to drive growth.
However, as CMS starts to ask more questions on benefit utilization to assess efficiencies,7 we expect to see a more triangulated focus on designing benefits for not just growth but also retention (for example, ease of use and vendor stability) and member outcomes (for example, proactive engagement in seeking care and flex card allowance focused on medical coverage rather than broader retail access). Even with possible new reporting requirements and nascent recommendations regarding standardization, supplemental benefits are expected to go from being nice to have to an offering that provides meaningful strategic upside. With the number of plan options increasing every year, the market may have reached a saturation point, leading to benefit designs that evolve from a buffet to a curated menu.
Payers were clearly grappling with these choices in the 2024 pricing cycle. Some pulled back in select markets and aligned investment to risk-bearing providers, whereas others employed a broader stance to deliver richness across markets in pursuit of a nationwide approach to membership.8 In 2024 and beyond, payers may see more value in having a concise narrative for distribution partners and beneficiaries rather than the “all things to all people” approach of recent years.
A critical question for this year is whether the market has reached a tipping point in benefit generosity focused on growth and will shift to an environment in which payers are more intentional about ROI through member retention and improved health.
Aging population
Nearly half of the MA-eligible population will be aged 75 or older by 2030, up from roughly 40 percent at the present time.9 This increase, along with labor-shortage concerns, has triggered rising qualms about a potential crisis in eldercare. Healthcare worker vacancies reached 710,000 in May 2023, and the educational pipeline indicates that the gap is likely to expand in the next decade. This makes 2024 a pivotal year to put in place solutions to rebuild the depleted workforce of doctors, nurses, certified nursing assistants, home health aides, nursing home workers, and other integral supporters of eldercare.
Besides the foundational solutions needed to address workforce challenges, we expect to see a shift toward next-generation care models to better help the higher-need aging population access the right care at the right time at the right cost. These models often use technology and data to personalize care through, for example, wearables, remote monitoring, telehealth, and sophisticated data platforms. This responsibility falls heavily on payers—not only those that already own many of these services, but also those that shoulder the responsibility of engaging members to navigate this complex web.
Of crucial concern are whether the emerging crisis will prompt those payers that aren’t already vertically integrated to begin down this path, whether it will encourage those that are vertically integrated to continue with M&A and investments in healthcare delivery, and if the next decade of investment will vary from the primary care–centric investments to date.
Star-rating pressures
Another year brings another set of changes to Star ratings for payers to adapt to. For one, implementation of Tukey method guardrails for rating year 2024 will raise the bar on the Star program. The new provision nixes performance outliers from calculations, which in turn contributes to more challenging cut points. Also in the current rating cycle, plans will face the deweighting of member experience measures, which will place relatively more emphasis on clinical and pharmacy metrics.10 Payers will need to focus on member and provider engagement through both omnichannel outreach and an on-the-ground presence, an area that has traditionally seen lower investment. And it could well be that clinical and pharmacy metrics, even when properly collected, won’t affect Star ratings as positively as member experience measures have.
Looking ahead, another important change to the Star program is that a health equity index will replace the reward factor, which benefited plans with high and consistent performance across various measures. The index, though, will do more for plans with high performance on a subset of measures for their low-income-subsidy, dual-eligible, and disabled populations. For payers with fewer of these members or less experience in serving these populations, building out these capabilities will be a multiyear effort. We expect to see payers invest in these populations through both traditional care and addressing social determinants of health.
A vital matter is whether payers can adjust to the new guidelines and reverse the downward trend in Star ratings over the past couple of years.
Opportunities in SNPs
The market for SNPs, driven by both demographic and regulatory trends, will continue to be an area of increased focus. As top-line MA population growth begins to slow, payers are continuing to seek out pockets of growth, and chronic-condition SNPs may be an emerging opportunity. They grew faster in last year’s enrollment period than dual-eligible SNPs (D-SNPs) did for the top three payers.
D-SNPs, however, remain the largest of the SNPs. Recent years have seen substantial growth in their population, with payer entry and investment to match. This isn’t lost on state governments. While not a nationwide phenomenon, more states continue to move into highly integrated and fully integrated models for the D-SNPs. New models are expected in 2026 for Illinois, Michigan, and Rhode Island, and many more states are likely to be close behind. Recent surveys point to 17 additional states that are considering pursuing new D-SNP contracting strategies.11
McKinsey analysis indicates that while MA should remain a high-growth profit pool overall, the dual-eligible cohort is expected to see EBITDA increase by more than 10 percent by 2027.12 This means that payers are now grappling with the increasing imperative to invest further in Medicaid capabilities and partnerships, including through connecting with community partners and social organizations, to remain viable in this market.
A central issue is whether payers will make the needed proactive moves to prepare—whether the state they work within forces it or not—to build the capabilities necessary to remain viable for the D-SNP population.
Broker channel constraints
Payers and brokers have been abuzz since CMS’s November 2023 announcement “proposing to redefine ‘compensation’ to set a clear, fixed amount that agents and brokers can be paid regardless of the plan the beneficiary enrolls in.”13 With customer acquisition costs widely pushing north of $2,000 across the country, these compensation caps could—if implemented as proposed—have a meaningful impact on the financial solvency of the largest field-marketing organizations and brokerages.14
Although the compensation cap won’t affect those naturally aging into Medicare from commercial plans, it will affect other groups, as brokers have developed superior marketing and sales capabilities for them. To date, payers have used broker channels for their efficiency and high-volume capabilities, but the expected pressure on the broker business raises questions of sustainability and competitiveness.
A fundamental query is whether the new compensation caps will be a forcing mechanism for payers to bring more distribution into internal systems by enhancing and scaling their own marketing and sales capabilities.
Although 2024 has just begun, we already see some MA payers adjusting their outlook for the rest of the year. The sustained increase in utilization is only adding upward pressure on cost structures, while the CMS 2025 advance notice is putting downward pressure on revenue. We expect that the trends discussed in this article will deepen disruptions for MA payers. The next few months and the next round of financial results will be telling about which payers have anticipated these changes successfully, setting them up for success for years to come.
ABOUT THE AUTHOR(S)
Gabe Isaacson is an associate partner in McKinsey’s Pittsburgh office, where Cara Repasky is a 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 Emily Pender for her contributions to this article.
This article was edited by Querida Anderson, a senior editor in the New York office.
Sweeping changes to Medicare Advantage: How payers could respond
The Medicare Advantage program will look meaningfully different in the years ahead. Payers will need to consider transformational moves in the near term to improve their ability to compete in the long term.
The Medicare ecosystem is facing a series of simultaneous challenges, disruptions, and opportunities that add up to one certainty: this market will look meaningfully different in the years ahead. Medicare Advantage (MA) is projected to be the line of business that drives the most profit for payers in 2026,15 even while headwinds are emerging in the Medicare program. The Centers for Medicare & Medicaid Services (CMS) is projecting the Medicare trust fund will run out of money in 2031,16 although investors continue to pour billions into acquisitions of payers, care delivery partners, and related healthcare services and technology providers across the Medicare value chain. Additionally, market penetration of Medicare Advantage (MA) remains hugely variable nationwide, with only about 12 percent of beneficiaries in MA plans in some states but about 60 percent in others.17 Meaningful disruptions—in demographics, regulations, and member preferences—compound the uncertainty, making it difficult for payers and other Medicare participants to chart a path forward. By making transformational moves in the near term, payers can improve their ability to compete in the years to come.
The strategic decisions private Medicare payers make now will determine their ability to have competitive capabilities and position themselves to succeed as the market changes. Some large payers and investors have already begun placing strategic bets to capture future growth (for example, buying up primary-care centers whose patients are enrolled in MA plans), despite the climate of uncertainty. By closely monitoring the ongoing shifts in Medicare, continually adjusting their priorities, and building new capabilities, payers can position themselves to succeed.
Disruptive trends are shaking up the Medicare landscape
Payers are considering strategies to better address the aging population, a succession of pending regulatory changes, and shifts in member preferences for benefits and engagement.
Demographic shifts
The demographic profile of Medicare beneficiaries and eligible individuals is skewing older. From 2020 to 2030, seniors aged 75 to 79, 80 to 84, and 85 and older are projected to grow as a proportion of all seniors. This is a shift from the 2015–20 period, when growth was more heavily in the cohort aged 65 to 74.18
For many of these aging and higher-need members, today’s popular plans (for example, those with zero or negative premiums, rich supplemental benefits, or leaner core medical coverage) may no longer be the best fit. To retain members, payers may need to counsel them to switch to products that better match their evolving health needs, although some members are likely to resist, at least initially.
Medicare beneficiaries aged 85 and older average more than twice the monthly medical costs of those aged 65 to 69 and are more than three times as likely to have at least one hierarchical condition category.19 This creates a substantial increase in clinical burden that will require payers to develop new capabilities in care management, social determinants of health (SDoH), and health equity—in line with CMS’s priorities. In the meantime, payers will continue to advance their capabilities as risk-bearing entities operating under capitated models. Specifically, where diagnosed conditions are most acute, payers could pursue specialist-centric risk arrangements. As needs intensify and mobility declines, payers could also develop intensive, home-based care models.
Along with the aging Medicare population, MA membership growth is slowing. We estimate that annual growth in MA membership will slow from more than 8 percent in 2022 to about 3 percent in 2031. As growth slows in historically strong and currently penetrated (primarily urban) markets, payers will seek to build the networks and capabilities to grow in historically less penetrated markets, such as those with large rural populations (Exhibit 1).
Regulatory environment
The most sweeping set of regulatory changes to the Medicare Advantage program since the Medicare Modernization Act of 2003 will go into effect in the next three years, affecting rates, risk adjustment, Star ratings, and Part D. To adjust, these changes necessitate a nimble response from payers.
MA rates. The 1.12 percent effective MA rate decrease—the change in the amount paid per enrollee per year to payers by CMS—marks the first decline since 2015 (Exhibit 2).20 This translates to a loss to payers of an average of $150 per member per year.21
Risk adjustment. CMS announced changes to MA risk adjustment following careful analysis, including observed higher-than-expected risk scores compared with fee-for-service (FFS).22 CMS has refreshed the risk adjustment model to bring it more in line with FFS, driving MA rates down by 2.16 percent, on average.23 Risk adjustment remains a high-priority topic for payers as they respond to CMS’s Risk Adjustment Data Validation (RADV) Final Rule, which is expected to enable CMS to recoup $4.7 billion over the next ten years.24
Star ratings. For calendar year 2024, CMS reduced payment rates by 1.24 percent in response to a decline in average MA Star ratings, which resulted largely from expiring COVID-19 provisions and scheduled measure adjustments.25 Star ratings reached a record high in rating year 2022, with 90 percent of members in plans rated with four or more Stars; that number has fallen to 72 percent in 2023.26 Payers will likely face further headwinds from Stars technical changes—for example, removal of contract performance outliers using the Tukey method and revisions to disaster provisions—and the introduction of the health equity index (HEI). Starting with 2027 Star ratings, the new HEI will reward contracts for high measure-level scores with low-income subsidy, dual eligible, and disabled enrollees.27
According to a simulation of the removal of the current reward factor and addition of the proposed new HEI reward, 1.7 percent (seven) of MA prescription-drug contracts gained a half star on the overall rating, while 13.4 percent (54) of contracts lost a half star on the overall rating.28 Historically, payers have been able to respond to technical adjustments, the addition or expiration of certain metrics, and other changes to the Stars program, but the magnitude of these changes will be their biggest test yet.
Part D. As a result of CMS changes to Part D plans, payers will be prohibited from collecting back-end payments from pharmacies via direct and indirect remuneration (DIR) fees and will be required to assume greater responsibility for catastrophic drug coverage. Payers will lose more than $11 billion in plan revenue from lost DIR fees, equivalent to 74 percent of revenue from member premiums in 2021 (Exhibit 3).29 Additionally, reinsurance payments are currently the largest and fastest-growing source of payer revenues. In 2025, however, government coverage for reinsurance will drop by three-quarters, from 80 percent of catastrophic costs to 20 percent, leading to dramatic decreases in reinsurance payments to payers.30
Shifting member preferences
Members’ preferences for engagement with MA plans are fundamentally changing—in line with the seamless, omnichannel, and customer-centric experiences they now routinely enjoy with B2C companies such as retailers and technology providers. Most prominently, this change manifests in their rising preferences for digital engagement.31 This appears first in the extent to which beneficiaries increasingly rely on e-brokers when shopping for MA plans. Of the more than seven million beneficiaries who enrolled in a new MA plan in 2022, more than one-third (about two million) used an e-broker, highlighting a meaningful shift to digital channels compared with even five years ago.32
Beyond shopping, our recent survey data indicates that more than two-thirds of members reported using technology in the onboarding journey to understand benefit coverage, manage prescription drugs, and navigate physician networks.33 More broadly, delivering a distinctive omnichannel experience will be critical in retention of members and performing well on Stars ratings. The quality of members’ experiences will be a core component of competitive differentiation in the future.
How payers can respond to the changing Medicare landscape
Payers can address changes in Medicare with near-term, targeted interventions and simultaneously carry out transformative initiatives. In the near term, they could consider the following:
- Pursuing sizable growth opportunities in underpenetrated populations (such as high- and low-income rural areas) with renewed focus and creativity to build products and networks—potentially augmented by virtual care—that will appeal to members traditionally less inclined to enroll in MA and historically presented with fewer plan options.
- Actively engaging in the evolving marketing and sales ecosystem—by diversifying their portfolio of partners to include more field brokers and e-brokers—to enable payers to reach more eligible individuals in their preferred (increasingly digital) channels. By supplementing their captive internal-distribution channels, which rely heavily on standard mailers and other traditional methods, they could also broaden their reach into, for example, communities with a higher proportion of minority residents or residents of relatively low socioeconomic status.
- Prioritizing investment in the Stars program to meet evolving beneficiary needs and address Stars performance and, therefore, revenue headwinds. Investment in Stars could be targeted to address SDoH needs, close clinical care gaps, and improve clinical outcomes for an increasingly aging population with more acute care needs, allowing payers to deliver a best-in-class member experience.
- Expanding digital engagement (such as through applications, text, and chatbots) to meet changing member preferences, and develop wraparound support services to increase member uptake and proficiency.
Additionally, a series of transformative initiatives could best position payers to navigate the future Medicare ecosystem.
Serve members with efficiency. For payers facing substantial margin pressure, administrative costs, which commonly exceed $100 per member per month (PMPM),34 are increasingly unsustainable. Plans can consider entirely new ways of managing administrative costs and running their budgets without sacrificing service quality. Although attaining economies of scale can create cost efficiencies, the distributed nature of MA membership creates challenges. Many single-state payers can boast a strong market presence yet have only tens of thousands of members. For most payers, reducing administrative costs will require investment in nonscale performance levers.
Typically, increasing cost efficiencies would require a meaningful investment in automation, data-backed decision making, and continuous reallocation of resources. Specific actions to consider include the following:
- embarking on true zero-based budgeting,35 targeting an administrative cost of less than $80 to $100 PMPM so that it could better withstand any changes in top-line revenue
- expanding reliance on shared technology platforms and services to manage costs while also investing strategically in products and capabilities
- investing now in innovative technologies that will soon become standard, including, for example, chatbots to assist members with support and requests (such as generative AI) and self-serve portals with tools to help members find the best plan for them
Deliver seamless shopping, enrollment, and onboarding experiences. Demographic changes will result in fewer seniors enrolling in MA, expanding opportunities to reach new and existing members. Payers could create and deliver an integrated experience from shopping to enrolling and onboarding to attract and retain members. In a 2022 survey of MA members, nearly half indicated they had shopped around to assess product options in the year prior,36 highlighting the imperative for easily navigable websites and distinctive benefits positioning.
To achieve their growth targets, payers will also likely expand their reliance on brokers and other third-party partners. Success will hinge on having clearly defined member journeys and integrated internal and external channels (for example, call centers and onboarding). Multidirectional, real-time data sharing paired with efforts by payers to educate and enable brokers would allow the integrated distribution unit to optimally attract and retain members in a lower-growth environment.
Know each member and personalize engagement. Knowing members as individuals is becoming crucial to meeting their shopping preferences, implementing best-fit engagement channels, managing disease states, ensuring access to quality care, and supporting evolving care needs.
Although payers have vast repositories of data, their databases (for example, for customer-relationship-management and care-management tracking) have traditionally been siloed. Payers have also typically defaulted to standard reporting and struggled to perform ad hoc analytical queries to understand the full scope of member engagement. And they have relied extensively on third-party Stars vendors who engage in sporadic calling campaigns to engage members in their healthcare journeys.
Instead, payers could consider differentiating themselves in their engagement with members by meeting the standards set by leading retail and e-commerce players. This might entail establishing a singular view of each member over the span of their Medicare journey and using unique member identifiers to track data points and touchpoints across channels such as brokers, care managers, and physicians. With a holistic view of each member at their fingertips, customer service representatives could provide better support. Payers could develop AI-enabled predictive capabilities to provide personalized engagement plans and smart interventions. Ultimately, this improved transparency could unleash a ripple effect of better care, improved health outcomes, and an elevated experience for each member.
Convene and enable a redefined care-delivery landscape. The payer’s role in the care domain has expanded over time from utilization management to care management and, increasingly, care delivery. Some payers are carving out a leadership role as a convener of a care delivery ecosystem (encompassing the set of care models, physicians, capabilities, and services that surround a patient) while leaving care provisioning to clinicians. They are investing in enablement partnerships and acquisitions while working hand in hand with physicians to improve outcomes for Medicare members in meaningful risk-sharing arrangements.
Payers could accelerate this trend by assessing the clinical needs of their membership and mapping them to the care delivery landscape in their geography. For example, payers that have members with substantial clinical needs (for example, large populations with chronic kidney disease or special-needs plans for chronic conditions) might invest in or partner with specialists or advanced in-home care delivery partners. Payers with a large rural population could consider supplementing their care delivery footprint to address care gaps (for example, through virtual-care models).
Many payers would benefit from simultaneously pursuing multiple strategies, particularly as acuity in the Medicare population accelerates. Important considerations include aligning their incentives with those of physicians and patients and protecting physician independence in clinical decision making.
Payers could also use member data and conduct advanced analytics to match members with effective care models and enable physicians to deliver the highest quality of care.
A mature care delivery ecosystem would meet every member where they are through a combination of value-based care models (with physicians who can deliver against them), next-generation models (for example, rural-focused care), in-home primary and specialty care, and advanced care models.
Reimagine the product portfolio in line with MA membership needs. Payers often grapple with variable economics across the product portfolio. Newer members are typically enrolled in the most generous products with, for example, expansive dental and vision benefits, flex cards that cover not only over-the-counter medications but also food and wellness, and Part B givebacks (in which payers cover a set monthly amount toward a member’s premium).
These newer products are also the most economically challenging for payers. But although they would struggle to sustainably offer, for example, a $100 Part B giveback benefit, legacy members paying higher premiums (at least for now) effectively subsidize these offerings, resulting in an overall profitable membership mix. This trend, encouraged by many distribution partners, is unsustainable for payers, as evidenced by a number of previously high-growth MA plans that are now retrenching, rolling back benefits, and potentially causing meaningful disruptions in healthcare for tens of thousands of members.
The trend also doesn’t bode well for members as they age and their needs evolve. While members are relatively young and healthy, preferred provider organization (PPO) plans with $0 premiums and rich supplemental benefits but lighter core medical benefits can be a fit. These members, unconcerned with a higher maximum out-of-pocket cost, see supplemental benefits flowing directly to their personal bottom line—an especially appealing proposition at a time of high inflation and broader economic uncertainty. However, as the MA membership skews older, likely correlating with increasing medical needs, plans with richer medical benefits and lower maximum out-of-pocket costs may make more sense.
Payers can start now to evolve their product offerings and messaging to serve these members, including by rationalizing the supplemental benefit portfolio and reinvesting in core medical benefits that matter most to members’ health. In parallel, they can devise ways to counsel members to ensure they are continually enrolled in the right plan for their needs, perhaps over decades.
Given members’ increasing proclivity to shop, a proactive stance by payers will be rewarded. Payers could consider strategically engaging brokers, for example, to enable intrapayer plan movements. Although some payers and distributors have already begun to do this on an ad hoc basis (by, for example, proactively moving members to plans within their portfolios that have better Star ratings), taking a more strategic approach could help retain members within the payer’s ecosystem.
The MA market has been on an upward trajectory for years, with a continual stream of investor dollars chasing double-digit growth rates annually, enabling a thriving ecosystem of payers, care delivery partners, and services and technology companies. The variety of disruptions emerging, however, means that the winning strategies of the past five years are unlikely to be sufficient to meet members’ evolving needs and preferences. Success in the future will be determined by bold moves made now.
ABOUT THE AUTHOR(S)
Gabe Isaacson is an associate partner in McKinsey’s Pittsburgh office, where Cara Repasky is a partner; Dan Jamieson is a partner in the Chicago office, where Emily Pender is a consultant; and Sonja Pedersen-Green is an associate partner in the Minneapolis office.
