The Medicare Advantage Squeeze
Dall E 3 derived representation of changes in Medicare Advantage policy. Interesting.
I've covered the MA market before where I examined the 5-Star rating program on how it scores quality and health outcomes, and whether MA plans really deliver on them (links above in the Blogs section). Now that the Center for Medicare and Mediciad (CMS) released the final rate announcement for for 2025, we can finally see how the program will evolve in the next cycle.
On April 8, 2024, Paul Keckley in his The Keckley Report sounded the alarm bell about changes CMS will bring in 2025. According to Paul, it will be "significantly different for plans, enrollees and providers". I do suggest subscribing to his newsletters if you are interested in following the intermix of economic and policy forces in the US healthcare market.
Out of all the many changes CMS is planning for 2025, below are some significant ones that Paul points out, followed by my comments.
CMS announced a 3.7% increase in payments for Medicare Advantage plans in 2025, but a cut to base payments of 0.16%. The cut to base payments directly impacts health providers who are reliant on fee for service (i.e. standard) Medicare.
CMS released a final rule with directives about how Medicare Advantage plans should operate starting next year. CMS implemented a stricter methodology for calculating quality ratings that’s lowered payer bonuses. The government also approved a plan to audit MA payments that’s expected to claw back billions of dollars from payers. Regulators have also moved to crack down on improper care denials, deceptive marketing and brokerage practices that steer beneficiaries to certain plans in MA.
CMS changed how the 5-Star rating system will impact bonuses. The estimated effect of changes in the Quality Bonus Payments for the 2025 payment year is -.15%. The only substantive change in the 5-Star questions is bumping the weighting of "Plan All-cause Readmissions" from a weighting of 1 to a weighting of 3 for 2025. As a reminder, all ratings for 2025 are based on data reported from the 2023 measurement year so it is too late to do anything about them.
What this means for US healthcare ecosystem
Physicians
The cut to Medicare base payments impairs providers' ability to negotiate rates with MA plans, because this benchmark is used as a starting point. This continues the mismatch of leverage that insurers have over physicians. As a fiscal intermediary, insurers can continue to place roadblocks such as pre-auth requirements and claims denials to absorb more of the increased MA payments and keep them as profit, as long as they meet the medical loss ratio (MLR) maximum allowed by law. This is not how we all envisioned value based care to play out, where the incentives for low cost and quality care is pushed down to the patient and provider level.
Health Plans
If payers want to improve their 5-Star ratings for 2026, this year (2024) is the time to make changes. For star year 2026 CMS will decrease the weight of patient experience, complaints, and access measures from 4.0 to 2.0 in the Star Ratings. This decrease in weighting has the effect of increasing the impact of claim-based measures.
Hospitals
Any restriction in the flow of dollars towards healthcare providers is devastating to their ability to function. Just look at the impact the recent (and apparently ongoing) hack to Change Healthcare has had. It may be true that government spending on healthcare is projected to increase in the future, however those dollars will be spread out among an ever expanding population of seniors seeking care.
The impact of lower FFS Medicare revenue will hurt hospitals, who are already seeing a larger mix of government revenue versus commercial payers. For example, HCA reported a 5.4 percentage point decrease in commercial insurance payments between 2016 and 2022 (see the chart below). The middle section of the chart, in shades of green, are Medicare and Medicaid revenue, which is growing larger while the commercial payer, in blue, is shrinking. For 2022, the mix 43.6% of revenue from federal and state programs compared to 48.3% from commercial payers.
Share of HCA’s revenue by payer type. The green bars in the middle represent government sources, while the blue bar at the bottom is commercial insurance payers (HMO, PPO etc).
The real kicker is, according to a Kaiser Family Fund analysis, even the most efficient hospitals struggle to earn a profit from Medicare payments (see the chart below). In fact, Becker's this week covered this growing impact with an article called "Health systems face more than one math problem".
In conclusion, the changes to Medicare Advantage (MA) by CMS in 2025 will have a significant impact on health plans, hospitals, and physicians. These changes include a cut to base payments, stricter methodology for calculating quality ratings, and changes to the 5-Star rating system. As the healthcare industry navigates these changes, technology, including AI, can play a crucial role in addressing these challenges.
Unfortunately for patients, there are few substantive changes here that make me believe their experience will be improved in the next couple of years.
