Best’s Special Report: Higher Utilization, Regulatory Challenges Pressure Medicare Advantage Segment, Prompting Some Carriers to Exit Market

Higher utilization of Medicare Advantage (MA) and a lower level of increase to reimbursement rates has led to rising loss ratios and narrowing profitability among health insurers offering MA plans, according to a new AM Best report.

According to the Best’s Special Report, “Higher Utilization, Regulatory Challenges, Pressure Medicare Advantage Segment,” competition and underwriting performance vary by state, but underwriting losses are becoming more prevalent. In 2023, there were aggregated underwriting losses in 21 states, compared with six in 2019 and 14 in 2021. Factors such as increased inpatient admissions and utilization of outpatient care and supplemental benefits have contributed to the heightened MA usage. While the impacts to individual companies vary and depends partly on how much they integrated the increased utilization into their 2024 pricing models, overall, the unfavorable trends have pressured financial results for the last couple years, continuing into 2024. The percentage of MA carriers reporting an underwriting loss in 2023 was 71%, the highest since 2015. The report notes that due to the changing market conditions of Medicare Advantage, some MA carriers including both national and regional companies, have stated that they were dropping plans or exiting certain markets entirely for 2025.

“To counter the elevated utilization and pricing pressures, some insurers have reduced benefits, although this is regulated by CMS, while others are implementing rate increases,” said Jason Hopper, associate director, Industry Research and Analytics, AM Best. “Insurers with higher enrollment can have a cost advantage as fixed costs are spread over the larger enrollment base.”

A contributing factor to the recent announcements of market exits by some participants include the Inflation Reduction Act of 2022 (IRA), which takes effect in 2025 and includes several provisions aimed at lowering prescription drug expenses for Medicare Part D beneficiaries, shifting a larger share of costs to insurers and drug manufacturers. A separate stabilization demonstration program was enacted earlier this year to support implementation of the redesigned Part D benefit by subsidizing the anticipated premium and cost increases; however, this is available to Medicare Part D-only insurers and does not apply to MA plans that include Part D. Another factor pressuring MA plans are the recent changes in the risk adjustment score calculation that are being phased in over three years starting with 2024; the new calculation drives down the score leading to lower reimbursement rates per member.

“MA insurers may look to reduce additional benefits to mitigate the impact of increased costs of Part D benefits and decreased risk adjustment revenues rather than reflect the impact through higher premiums,” said Bridget Maehr, director, AM Best. “Moreover, with the changes in the risk adjustment calculation will be felt even more in 2025 and 2026.”

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=348422.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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