Four Strategies Medicare Advantage Plans Can Implement to Mitigate Financial Pressures

The sustained financial pressures that Medicare Advantage (MA) health plans are facing – due to increased utilization, rate cuts, Star Ratings, and changes to risk adjustment – will persist throughout the foreseeable future. That means health plans must take a consistent, thoughtful approach to sustaining their business by managing costs without compromising member access to quality healthcare.

Striking that balance will be imperative as MA enrollment continues to rise. This year marks “Peak 65,” a noteworthy demographic milestone where the number of Americans turning 65 years old – about 11,200 per day – hits the high-water mark. Those individuals will be required to decide which Medicare plan they want. These days, more people are opting for MA over traditional Medicare because many plans offer lower out-of-pocket cost limits, attractive supplemental benefits (dental and vision coverage, gym membership), and for some plans, $0 monthly premiums.

MA has become the preferred healthcare option for seniors. In January, KFF reported that “for the first time in Medicare’s history,” a majority of Medicare-eligible people (53% or 30.8 million individuals) enrolled in an MA plan. That percentage is expected to steadily increase, from its current level to 62% in 2033, according to forecasts by the Congressional Budget Office. Those individuals will increasingly require more frequent and costlier healthcare services.

During shareholder conference calls to review fourth quarter 2023 financial results, CEOs at some of the largest health insurance companies cited the pressure that higher medical utilization expenditures was putting on MA plans’ operating margins. That cost pressure has continued into 2024 and will likely persist for the rest of the year – and beyond – due to a variety of factors, including:

• Rate cuts: The Centers for Medicare and Medicaid Services (CMS) has finalized a 0.16% reduction in the Medicare Advantage benchmark rate from 2024 to 2025, creating a substantial revenue impact for MA health plans.
• Utilization increases: Health plans experienced higher than expected utilization in Q4 of 2023 and that trend has continued into 2024. The result of this is an increase in costs for health plans.
• Star Ratings: Changes to the scoring methodology have caused Star Ratings to decline overall, which has resulted in a loss of revenue for many health plans.
• Risk adjustment: Changes to the risk adjustment methodology as a result of moving to version 28 will have a significant negative impact for MA plans. In 2024, MA risk scores are projected to decrease by -3.12%, which will translate into an $11 billion net saving to the Medicare Trust Fund. This change furthers the need for accurate coding practices and data analysis. 
• Federal regulations: Recent policy changes have affected authorization and utilization management requirements, resulting in higher administrative costs.

To mitigate the effect of revenue and cost impacts, plan leaders should focus on the following four strategies:

1. Analyze and address all components that contribute to the cost of care

Now is the time to conduct a comprehensive deep dive into the medical cost levers across all functional areas of the health plan, including network, payment integrity, medical management and pharmacy. Health plans should use data analytics to identify opportunities to develop unit cost, utilization and configuration initiatives and drive execution of those initiatives to achieve savings to their bottom line. 

The analysis will provide plans with greater insight into which expenses are controllable and which are not. Overall, there are many levers that a health plan can utilize to address medical costs. 

2. Evaluate product design and its downstream impacts

It is imperative that plan leaders understand how product design impacts the members they are attracting and the downstream impacts of increased costs. First, plans need to evaluate the competitive market landscape, including comparisons of their product and network, benefits, disenrollments, growth, and member composition. Plans should then assess the ROI of their programs and potential changes, and develop a market/geographical-level strategy. Lastly, plans will need to implement the changes, develop strategic partnerships and engage new members, while continuing to monitor performance. 

Plans should also closely examine the revenue and costs associated with each partner (vendors and in-network and out-of-network healthcare providers), as well as the network design, to determine if the partnerships are achieving the necessary financial and quality-of-care targets. Some questions that need answers include: Are the right providers in network? Could certain healthcare services be contracted at lower rates without affecting the quality of member care? Can certain programs, such as gym memberships or allowances for over-the-counter drugs, be cut back to lower expenses or expanded to improve member health?

3. Assess the impact of risk adjustment and ensure revenue maximization

Changes to the risk adjustment program are being made so that it better reflects differences in the underlying risk among participating insurers. The modifications include the incorporation of prescription drug data, the incorporation of preventive services, and better accounting for partial-year enrollees. In 2025, CMS will introduce multiple changes to how risk adjustment factor (RAF) and quality-of-care scores are calculated, and these will force health plan leaders to significantly revise their plans or risk lower reimbursements from government-sponsored programs.

Health plans are addressing changes to risk adjustment through a comprehensive review of the encounter and revenue lifecycle processes to enhance risk adjustment-related activities across the organization. The goal is to maximize risk capture and plan revenue. Plans should look at every area related to this goal, including encounter submissions, provider engagement incentives/initiatives, clinical coding audit, vendor optimization, supplemental data and actionable reporting. 

4. Develop initiatives to improve Star Ratings scores

Health plans, which are still reeling from the fallout of previous CMS revisions that led to lower Star Ratings, could soon see additional downward pressure on plan ratings. For the Star Year 2026 (plan year 2027), for example, CMS has recommended raising the hold harmless threshold to 5.0 Stars. It also proposed eliminating guardrails that are used to set cut points for non-Consumer Assessment of Healthcare Providers and Systems (CAHPS) measures.

While waiting for CMS to finalize the new rules, plans should implement strategies to bolster plan performance and member care, helping to protect or advance Star Ratings. For example, plans can analyze quality score categories to gain insights into which efforts will move the needle and should therefore be prioritized. They can then develop initiatives to help address those areas, balancing level of impact and ease of implementation.

One final thought: Plan leaders should take advantage of today’s cutting-edge digital tools to collect, analyze and forecast cost reductions. The improved sophistication of these applications can help plan leaders deliver sustainable cost containment or reductions – rather than layoffs or one-time budget cuts – while not impacting service to members.

Photo: claudenakagawa, Getty Images

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