How to Succeed in the Booming Business of Medicare Advantage
There is great uncertainty surrounding attempts to repeal, reform, or replace the Affordable Care Act (ACA). But as we’ve noted, market participants can’t afford to sit still. Regardless of what happens, there is one very significant sector of healthcare that is positioned to succeed in this environment of uncertainty: Medicare Advantage (MA). As baby boomers age into qualification for Medicare, members are more likely to opt for plans that have benefits beyond what Medicare has traditionally offered. As a result, MA will present a significant source of growth for insurers. But to access a substantial share of this profit, plans need to urgently invest in key differentiating capabilities.
Some background: The federal government provides healthcare insurance for seniors through Medicare, which is administered by the Centers for Medicare and Medicaid Services (CMS). Although Medicare reimburses providers, it doesn’t cover all costs. This is where Medicare Advantage comes into play. Members have the option of purchasing MA plans from private insurers to cover out-of-pocket costs. The majority of Medicare recipients do not choose MA plans, either because they aren’t aware of them or because their preferred doctors may not always be part of the plans, but the numbers are growing. Based on CMS data, more than 32 percent of Medicare members in 2016 — some 19 million out of the 58 million total — enrolled in MA plans. But this is just the beginning. Analysis from Strategy&, PwC’s strategy consulting business, projects that over the next eight years, enrollment in MA will rise at a compounded annual rate of between 7 and 12 percent. Accordingly, we expect annual revenues for MA plans to rise from US$215 billion in fiscal year 2017 to more than $500 billion by 2025.
The underlying growth of MA is good news for healthcare payors. But not all participants will benefit equally. Given the structural and market forces at work, the total number of profitable MA plans is actually likely to decrease even as the number of participants surges. In this winner-take-all market, between $10 billion and $15 billion per year in total industry profits will shift toward a smaller number of higher-performing plans.
As they sign up more members, plans operating in the MA market in the coming years will have to grapple with a host of external and internal challenges to their profits. These include cost pressures, lower reimbursement rates, increasingly stringent compliance requirements, and the double-edged sword of performance-driven reimbursements. CMS conducts an annual assessment of MA plans based on performance in a range of areas, including patient experience, access to care, and clinical care outcomes. The results of this assessment are published as star ratings, with the best-performing plans receiving a five-star rating. CMS offers substantial financial incentives in the form of bonus payments to plans with a higher star rating. Additionally, a small proportion (i.e., up to 5 percent) of the reimbursement payments are tied to these quality ratings.
As time goes on, CMS will be basing a larger proportion of its payments on the ability of payors to deliver specific results and improvements in health metrics. At the same time, customers will likely flock to those plans with the highest quality ratings. This will create a virtuous circle. We project that within three years, 73 percent of the total MA membership will be serviced by plans with four or more stars, up from 34 percent today. Aside from attracting more members, plans with quality ratings of four or more stars will continue to receive a significant portion of the quality incentives paid by CMS, and have the resources to offer more attractive plans and reinforce their brands. The resulting increase in profit — an additional $800 million to $1.2 billion annually — means they’ll have larger cash flows to deploy for further investment in differentiated capabilities and market-position enhancement.
To achieve the desired performance levels and have a winning position in the MA market, insurance plans need to urgently invest in four key success factors.
Provider payment innovation/MACRA
Enhanced care models/care coordination
Proactive and member-centric risk management
Member-centric risk management that aligns with the way CMS regards regulatory compliance offers several clear advantages. It can predict “hot spots,” or future areas of concern, such as changes in coverage that may result in barriers to care, before they become full-blown citations; it also can help management prioritize allocation of resources to areas that will have the greatest impact. More fundamentally, plans can identify and address root causes that typically span organizational boundaries.
Member engagement and experience
Each of these four differentiating areas is important for success in the MA market. But to truly succeed, payors will need to build a coherent strategy that holistically ties these four areas with a corresponding “way to play.” For example, a clinic-based care coordinator, such as Illinois-based Riverside Healthcare, can emphasize in-person care experiences and maintain a low-cost model by automating or outsourcing operations including compliance, all while leveraging MACRA principles for its narrow network design. A regional plan with large membership, such as Florida-based managed care company Wellcare, should seek to enhance the member experience by expanding its digital footprint while developing proactive risk management and operational excellence capabilities that ensure compliant and low-cost operations.
Regardless of the path they choose, plans must begin investing in capabilities now. In the winner-take-all healthcare market of the future, passivity is not an option.