Growth of Medicare Advantage: What Providers Need to Know

Medicare Advantage (MA) has consistently grown each year for close to 20 years and now represents over half of all eligible Medicare beneficiaries — almost 37 million of the 67 million eligible.

Due to its increasing influence, capitation payment mechanism, use of risk adjustments, attractiveness to beneficiaries, availability of supplemental benefits, and impacts on providers, understanding MA warrants attention.

Demographics, enrollment growth

As the Baby Boomer generation ages into Medicare eligibility, MA plans offer an attractive alternative to traditional fee-for-service (FFS) Medicare. MA lets beneficiaries choose plans fitting their circumstances and financial situation.

In 2023, there were 5,635 plan options from 184 organizations. During the 2024 enrollment period, the average beneficiary had a choice between 43 plans offered by an average of eight organizations, with over $2,000 in additional benefits available depending on plan choice. These benefits are a result of MA’s underlying financing mechanism. The additional benefits are specific to MA and an important reason MA may be more attractive to younger beneficiaries.

According to MedPAC’s 2024 Report to Congress, beneficiaries enrolled in MA plans who can receive in-network care generally pay less than an enrollee in FFS Medicare who purchases Medigap coverage.

Growth in MA enrollment has been centered in local preferred provider organization (PPO) plan options, which typically offer less restrictive networks. Between 2022 and 2023, enrollment in PPOs accounted for more than 66% of the increase in overall MA enrollment. While health maintenance organizations (HMOs) still enrolled the most beneficiaries in 2023, enrollment in PPOs grew 15%, while HMO options saw a 6% increase in enrollment. PPO plans are more popular in rural areas, while HMOs tend to make up a higher proportion of urban enrollments.

Continued growth is variable by state and county based on where plans are offered. Providers should consider demographic shifts and current MA pentation rates to understand their local markets now and in the future.

For example, MA plans are increasingly popular in rural areas and enrollment grew there by 12% in 2023 compared to 8% in urban areas.

Basics of Medicare Advantage capitation

Unlike traditional FFS, which reimburses based on a fee schedule, Medicare pays MA plans a capitated rate for enrolled beneficiaries. Capitation means an MA plan receives a specific amount per member per month (PMPM) regardless of whether costs for beneficiaries are higher or lower. From the federal government’s perspective, this approach provides stable outlays while also shifting financial risk to the MA plans.

Several factors are involved in calculating PMPM rates. At a high-level setting the PMPM includes determining a county benchmark compared to a plan’s bid. This sets the base rate, which is then multiplied by beneficiary risk score, as seen below:

During the rate setting process, MA plans submit bids representing the amount of money the plan believes it will expend to cover Parts A and B benefits for a beneficiary of average health. Plan bids are then compared to county benchmarks. If a plan’s bid exceeds the calculated benchmark, its base rate is set to the benchmark and plan enrollees are required to pay a premium to make up the estimated difference. If a plan’s bid is below its benchmark, its rate is the bid amount plus a share of the difference between the bid and the benchmark.

These additional payments, called rebates, must be used to provide what are called “supplemental benefits” to beneficiaries such as lower cost sharing, lower premiums, and additional benefits like dental or vision coverage. These benefits are part of why MA plans are attractive to beneficiaries. Plans may also use a portion of the rebate amount to cover administrative costs and profit.

Risk adjustment

Once a plan’s base rate is determined, it’s multiplied by the beneficiaries’ risk scores to determine the rate MA plans will receive for providing services to each individual. The risk score indicates the difference between the expected Medicare spend for any single MA-enrolled beneficiary and the national average FFS beneficiary.

MA has used risk adjustment methodologies for decades to account for per capita cost differences. Various risk adjustment models reflect different patient populations and typically use methodologies with HCC scores based on age, sex, disability status, disease severity, specific diseases, and dual eligibility status. Higher risk scores result in higher capitation payments to reflect the predicted cost of providing care.

The Department of Health and Human Services (HHS) also uses risk adjustments in other programs and models, like value-based payment models and the PACE program. States may also use risk adjustment with their Medicaid managed care plans.

How do the funds flow in an MA plan?

Now that we see how capitation works in MA, let’s look at how PMPM dollars flow in an Institutional Special Needs Plans (SNP) or I-SNPs. SNPs are subset of MA. I-SNPs have garnered interest in the post-acute space as a means to move up the value chain to be closer to the premium dollar.

In our example below, we show an I-SNP with 1,000 covered lives and a PMPM rate of $2,492.50 per life. Our example uses both a current performance and target performance to show how managing costs — through successful execution of a quality model of care — within an I-SNP results in positive cash flow/margin. For both current and target, the total annual premiums for all lives is $29,910,000.

Managing avoidable inpatient utilization and other medical expenses in the target performance results in a savings of $5,094,000 a year compared to current performance loss of $1,897,000. The target performance results in the plan generating an economic impact of $266 PMPM or $3,196,000 in total.

This is where medical loss ratio (MLR) and administrative loss ratio (ALR) come into play. The MLR is a measure used to indicate the percentage of premium revenues required to be spent on clinical services and quality improvement activities, as opposed to administrative costs.

For MA plans, the required MLR is set at 85%. This means at least 85% of the premium revenues collected by the plan must be spent on healthcare services and quality improvement initiatives. The remaining 15% is the ALR and can be used for administrative costs, marketing, and other non-care-related expenses. If the MLR is greater than 85% of the premium, the plan is essentially operating at a loss. If the MLR is less than 85%, providers can participate in the savings generated through quality bonuses and gainsharing.

While there are far more complexities to making the clinical and financials work in I-SNPs, this provides a glimpse of how cash flows.

Increasing enrollment brings increasing scrutiny

As MA continues to represent a growing proportion of Medicare-eligible beneficiaries, there has been increased scrutiny from the federal government and health care providers. With the latter, numerous media reports document contract disputes between hospitals and health systems and MA plans due to administrative burden (e.g., prior authorizations) and low reimbursements, particularly with inflation and high labor costs. These contract disputes will likely continue.

MA watchdogs and HHS are also watching plan-reported diagnosis codes used to determine beneficiary risk scores. Bottom line is more diagnosis codes likely lead to higher HCC risk scores and higher capitation rates. The HHS Office of Inspector General (OIG) did a series of plan-specific audits that reported some codes MA plans submitted were not supported by a beneficiary’s medical record.

Prior authorization denials are also of concern. In 2022, the OIG issued a report examining prior authorization denials from 15 selected MA organizations during June 1 – 7, 2019. Of the 12,273 denials issued, 13% met Medicare coverage rules. Per OIG, if the amount of denial requests in the time frame examined are extrapolated across 52 weeks of a plan year, the plans examined would have denied 84,812 requests for services meeting Medicare coverage rules. A corollary concern for prior authorization is MA plan use of algorithms, leading to multiple ongoing lawsuits.

CMS is using policy levers to make other changes — an updated risk adjustment model in 2024, changes to MA Star Rating program, beneficiary transparency requirements, and caps on broker compensation.

How we can help

Half of all Medicare beneficiaries are in MA plans. Other programs — value-based models, Medicaid managed care, and PACE — also use risk adjustments and capitation. Health care providers across the continuum should understand the current and future use of these programs in their respective locations.

It’s not always easy to navigate all the moving parts. CLA can help you through next steps:

• Analyze demographic trends in your locations
• Review MA penetration rates in your geographies
• Consider a market assessment
• Understand your quality and cost data
• Update your strategic plan to reflect MA’s potential growth
• Assess your current and future involvement with MA, SNPs, value-based, or risk-bearing models
• Review and update financial models
• Focus on quality, safety, and outcomes

From market analysis, financial modeling, strategic planning, operational assessments, outsourcing and talent solutions, and more, our deep industry specialization allows us to help you wherever your path is headed.

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