Health insurers usually breathe a sigh of relief after the federal government posts final Medicare Advantage payment rates. Normally, after a public comment period (and aggressive industry lobbying), regulators finalize a friendlier notice than what they originally put out.
That was not the case on Monday, when the Biden administration finalized MA rates for 2025 essentially unchanged from a proposal that had industry up in arms earlier this year.
It’s a modest base rate cut, though regulators stressed that insurers will still get billions of dollars more in 2025 than they will this year after coding for members’ medical conditions.
Still, shares in major MA players including UnitedHealth, Humana, Elevance, CVS and Centene fell Monday after the rates, which Leerink Partners senior research analyst Whit Mayo deemed “well below expectations,” were finalized.
Insurer lobbies slammed the rule, with groups like the Better Medicare Alliance and AHIP arguing it doesn’t account for rising care utilization among Medicare seniors and will force payers to reduce benefits and raise premiums.
“Left unaddressed, CMS’ Final Rate Notice risks the stability of the affordable and dependable care more than 32 million Medicare Advantage beneficiaries rely on,” BMA CEO Mary Beth Donahue said in a statement.
However, researchers say the rates will barely touch insurers’ profits, while making an important step toward curbing rampant overpayments in the privately managed alternative to traditional Medicare.
Rate debate hinges on Medicare spending
Payers have seen their stocks fall this year amid growing challenges in MA, a program that used to be a reliable and steadily expanding source of income that’s grown to cover more than half of all Medicare seniors.
The cost of covering care has been ratcheting up, payers say, as seniors seek out more outpatient care, like hip and knee surgeries, and because of a difficult respiratory season this winter.
Health insurers’ core gripe with Monday’s final rule — which amounts to a 0.16% reduction in the benchmark rate — is that regulators based it on a measure of Medicare spending payers say is lower than spending in reality.
A number of the 42,000 public comments the CMS received on the proposed rule from payer groups like AHIP and the Blue Cross Blue Shield Association urged regulators to increase that metric, called the effective growth rate.
That’s something analysts said was likely to happen in the final rule, which relies on more complete data than the proposal. Since the effective growth rate affects base payment for MA members, hiking it would bump government reimbursement, too.
However, the CMS actually cut the effective growth rate, from 2.44% in the advance notice to 2.33% in the final rule.
In comparison, a study funded by a MA lobbying group in February argued for a growth rate of 4% to 6%.
The growth rate cut was a “surprise,” J.P Morgan analyst Lisa Gill wrote in a note on the rates.
The final metric is based on more recent information, including payments in traditional Medicare through the fourth quarter of 2023. Those payments didn’t reflect higher utilization, the CMS said, despite MA payers’ warnings about rising costs.
“Actual program payments [in the fourth quarter] did not show higher utilization than what was expected based on prior year seasonal trends,” regulators wrote in a fact sheet on the final rule.
“This observation is in contrast with most MCO's reported experience,” Leerink’s Mayo said.
Regulators addressed that discrepancy in the final rule, noting more Medicare beneficiaries are getting outpatient care, but it’s not that much higher than predicted. In addition, more people dually eligible for Medicare and Medicaid have been enrolling in MA, which could be increasing that program’s spending growth compared to traditional Medicare, the CMS said.
Rates not a cut
Monday’s final rates make 2025 the second straight year of rate decreases in MA. The base pay decrease is also a result of the continued phase-in of changes to how regulators calculate risk adjustments, meant to make payments more accurate.
However, the CMS stressed the rates are not a cut. Payments from the government to MA plans are still expected to increase 3.7% on average in 2025 compared to this year, representing an increase of more than $16 billion in reimbursement after plans risk score their enrollees, regulators said.
Industry arguments that the rates represent major cuts are “not true,” Brown University and Georgia State researchers wrote in a recent Health Affairs analysis.
“The extremely high margins made by MA plans will barely be touched,” the researchers wrote.
Insurers have warned they could cut benefits, exit markets or raise premiums — or a combination of all three — if lower MA rates cut into profits. However, the CMS said such actions shouldn’t be a result of the rates.
Under the finalized policies, “CMS anticipates adequate payment to MA and Part D plans to ensure stable premiums and benefits and plan options,” the fact sheet reads.
Still, the rule’s actual earnings impact on payers will depend on cost trends in 2025, according to TD Cowen senior equity resesarch analyst Gary Taylor. To maintain or improve margins, plans will have to make sure the rate increase coupled with their medical coding, member management and benefit design work together to match or exceed cost trends, Taylor wrote in a note Monday.
Analysts said one insurer particularly jeopardized by the rule is Humana, the second largest provider of MA plans in the U.S.
Earlier this year, Humana estimated the preliminary notice would cause its benchmark MA funding to drop 1.6% if finalized.
Monday’s final notice “at best likely maintains this expected headwind,” and makes Humana’s 2025 earnings targets “significantly more challenging, said Leerink’s Mayo.
Health policy researchers say curbing rates is necessary in the face of soaring payments to MA plans.
To put the rates in context, the 3.7% revenue increase is larger than last year’s predicted increase of 1%, but smaller than increases in previous years, which exceeded 7% annually, the Brown University and Georgia State researchers wrote in Health Affairs.
Unlike previous administrations, the Biden administration has been cracking down on MA — especially curbing inflated payments, which a congressional advisory group says could total $88 billion this year.
Along with the unfavorable rate and risk-adjustment changes last year, regulators have also 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.
Insurers are not taking the changes lying down. Along with aggressive lobbying and marketing campaigns, some are turning to the courts: Elevance is currently suing the HHS over changes to how regulators calculate quality ratings in MA, while Humana is suing the government to stop the overpayment audits.
Still, the 2024 presidential election “now matters even more,” said TD Cowen’s Taylor, as “the current administration seems likely to relentlessly compress MA funding.”
