Medicare Advantage Plans Could See Rates Dip Slightly In 2025

Health insurers in Medicare Advantage will see their payment rates drop slightly in 2025 if a new proposed regulation is finalized.

The CMS on Wednesday released preliminary reimbursement rates for privately run Medicare plans that increases overall reimbursement by about 3.7%, but includes a 3.9% adjustment for risk coding.

All together, that amounts to a 0.2% payment decrease — though, the government estimated MA plans should still receive $16 billion more in payments than this year.

The rate change is modestly disappointing for insurers, but there’s a good chance the reimbursement rate could improve in the final notice, analysts said.

Rate cut but reason for optimism

In MA, the government pays private insurers a flat per-member per-month fee to cover the care of Medicare seniors. The program has ballooned in popularity, and now covers more than half of all Medicare beneficiaries.

As more seniors have elected for MA over traditional Medicare, health insurers have flocked to the program, expanding their market presence and benefits as they jockey for members.

However, MA insurers are struggling with a number of headwinds in the program, including seniors utilizing more care than anticipated. The trend, which started last year, is expected to continue in 2024 and winnow how much in premiums plans can keep as profit.

As such, the 2025 rate cut is unlikely to receive a warm welcome from insurers. MA lobby the Better Medicare Alliance and insurer association AHIP both released statements on Wednesday saying they were still digesting the rule, but stressing the importance of stability in MA.

If the 2025 rates are finalized as proposed, it will represent the second straight year of payment decreases for MA plans as regulators try to get a handle on ballooning costs in the program.

However, analysts noted that regulators will probably improve the rates before the rule is finalized.

The CMS assumed a lighter effective growth rate for 2025 than expected, which likely didn’t include the effects of utilization rising through the end of last year, according to J.P. Morgan analyst Lisa Gill. The effective growth rate represents how much costs are increasing in traditional Medicare, and is a major factor in calculating the overall MA reimbursement rate.

“We believe there is a strong possibility that the effective growth rate and overall payments should improve when the Final Notice is published,” Gill wrote in a Wednesday note on the rate release.

Final rates have come in above the preliminary rate in 9 out of the last 10 years, Gill said.

Rates will probably end up closer to the 1% rate increase that investors expected due to pressure on regulators, according to a note from Leerink Partners analyst Whit Mayo.

Last week, a bipartisan group of more than 60 senators sent a letter to the CMS expressing support for MA. And the Biden administration likely doesn’t want to upset the powerful health insurance industry too much during an election year.

Regulatory turbulence

The rate notice continues to phase in an updated risk adjustment model unveiled last year that’s meant to curb upcoding, a practice where insurers inflate their members’ sicknesses to get higher payments from the government.

In 2025, the CMS expects to calculate risk scores based on 67% of the new model and 33% of the old model.

Regulators have been criticized for not doing enough to rein in upcoding, as overpayments to MA plans total in the tens of billions per year.

But the continued phase-in should make MA less susceptible to gaming, said Medicare director Meena Seshamani in a statement Wednesday.

The CMS under the Biden administration has been a thorn in the side of MA payers. Historically, MA can be twice as profitable for insurers than other types of plans. However, the program’s earnings potential is shrinking in part due to regulatory changes, according to credit ratings agency Moody’s.

Along with the unfavorable rate and risk-adjustment changes issued last year, regulators have also implemented a stricter methodology for calculating quality ratings that’s caused payers to lose out on lucrative bonuses. The government also greenlit a plan last year to audit Medicare Advantage payments that’s expected to claw back roughly $4.7 billion 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.

Health insurers say these moves — along with elevated medical utilization among seniors — are stifling their growth in MA.

Major MA providers UnitedHealth and Humana, which together cover nearly half of all beneficiaries in MA, both recently lowered their MA growth expectations for 2024.

Payers are taking steps to combat the changes to protect margins. Along with lowering expenses (a number of insurers laid off employees last year), some insurers have said they plan to reduce benefits or raise premiums in 2024. Some plan to exit underperforming markets — or leave MA altogether.

Others are turning to litigation. Elevance is suing the HHS over changes to how regulators calculate quality ratings in MA, while Humana is suing the government to stop the overpayment audits.

For their part, regulators have stressed that the 2025 rate changes are necessary to ensure accurate payments, and noted that premiums and benefits for seniors in the program have remained stable.

The rate announcement didn’t seem to affect stocks of major MA providers. Shares in UnitedHealth, Humana, CVS Health and Elevance remained generally flat following the news.