Ep 1. Medicare (dis)Advantage. Does it suck? It depends.

Drs. Anthony Paravati and Amar Rewari delve into the complexities of Medicare Advantage, exploring its appeal to seniors, the financial mechanisms behind its low premiums, and the challenges faced by providers. They discuss the demographics of Medicare Advantage enrollees, the revenue structures that sustain these plans, and the implications for healthcare providers. The conversation also highlights the pros and cons of Medicare Advantage for beneficiaries and speculates on the future sustainability of the program amidst tightening margins and regulatory pressures.takeaways

• Medicare Advantage offers lower premiums, appealing to budget-conscious seniors.

• The program is administered by commercial insurance companies, not the government directly.

• Narrow networks in Medicare Advantage can limit provider choices for seniors.

• Seniors with lower incomes are more likely to choose Medicare Advantage.

• Insurance companies benefit from risk adjustment payments for sicker patients.

• Quality bonuses incentivize Medicare Advantage plans to improve care.

• Hospitals face challenges with payment delays and denials from Medicare Advantage plans.

• The popularity of Medicare Advantage is increasing among seniors.

• Tighter margins for Medicare Advantage plans may lead to reduced benefits.

• Future changes in Medicare Advantage will depend on regulatory adjustments and market dynamics.

Introduction to Value Health Voices

Let's talk about why is it the Medicare Advantage premiums can be so low and what's happening behind the scene financially? Let's get into it. This is episode one of our new podcast project called Value Health Voices. Since it's new, we have to introduce ourselves. I'm Dr. Anthony Paravati. I'm a radiation oncologist by training and I'm a physician executive who oversees a cancer center and all its divisions.

And I'm Amar Rewari. I'm also an oncologist by training and my prior background I worked in investment banking and also as a physician executive now and interested in health policy and economics.

In fact, yes, both of us have this interest. We've volunteered a lot over the years in these areas. My side's been primarily focused on interacting with the commercial insurance companies who both, of course, operate commercial insurance plans and operate Medicare Advantage plans.

Right. And on my side it's been more dealing with co-development, valuation and new payment models, whether it be bundled healthcare or others.

Yeah, it's a good combination of experiences you and I have had to be able to tackle a lot of these very vexing and complicated issues around healthcare policy and finance and with the goal of making them accessible and easily understandable.

Yeah. And I think one of the other goals of this podcast is to help new physicians out of training understand some concepts of healthcare finance as well as people still in training and those just looking to learn more.

That's right, yeah. So it's an ambitious plan. I think we can do it. And so we decided that no better topic to start then would be to have a chat about Medicare and Medicare Advantage. Both of those are options that seniors have for their coverage in the United States. Traditional Medicare is, of course, the traditional option. And then more recently, Medicare Advantage has come on the scene and become very popular, especially in certain geographies around the country, as a cheaper way, at least on a recurring monthly cost basis—a cheaper way for the senior to access care.

Right. And before we get into it even further, I just wanted to make the quick legal disclaimer again that all our opinions are entirely our own and do not represent anyone we work for or any professional society or other third party.

Yes, what he said. Thank you for doing that. Appreciate it.

Defining Medicare Advantage

So, Anthony, I know you already recorded a little fundamentals of Medicare, but maybe for the listeners you can just give a quick 30 seconds. What is Medicare Advantage?

Sure. Medicare Advantage is essentially a subscription that seniors can sign up for with commercial insurance companies. Everyone thinks is Medicare as a government program, and it is fundamentally. Medicare Advantage is an alternative where the senior can say to UnitedHealthcare, to Cigna, to Humana, "I'd like you to administer my health benefits." And so that's what it is.

Why Seniors Choose Medicare Advantage

So why would somebody choose Medicare Advantage over traditional Medicare, as you rightly mentioned? So we decided to record a kind of a primer episode, or fundamentals as we've called it, where we explain the different sections of Medicare. If you look at the sections that a senior has to sign up for to have full coverage with traditional Medicare, that implies a fairly significant amount of recurring monthly expenses of premiums that are not low. That can be a lot for the average senior to take on.

For seniors who want to reduce their monthly expenses for their medical care, they've turned to Medicare Advantage where premiums can be $0, but the national average premium is $18. Currently, it's $0.

That's huge. So really, a lot of people with lower incomes or who are really on a tight budget and have to really think about those finances seriously, it's a good option for them. Medicare Advantage, it really is.

There's a lot of research been done to break down the demographics of who signs up for traditional Medicare, who opts for a Medicare Advantage plan. The Kaiser Family Foundation has done a nice job with this. Generally, less well-off seniors, seniors who live in urban centers, seniors who typically—more popular with African Americans, with Hispanics—Hispanic seniors, they generally opt for Medicare Advantage according to the data put out by Kaiser Family Foundation.

Cost Control Mechanisms

So, Anthony, one of the disadvantages to Medicare Advantage would be that there's less options for individuals to pick different providers in their network.

Right. And that's one of the ways Medicare Advantage can help keep costs low. If you're going to operate an insurance plan for seniors who are going to need, let's face it, they're going to need medical care sooner or later. So if you're going to operate a plan where on an out-of-pocket basis, premium basis, it's $18 or $0 or whatever it is, there's got to be a way that you get there.

One of the ways that the cost is offset to the insurer to be able to offer a plan like that is they do narrow networks. They don't just let the senior who they've signed up go to any hospital or any physician anywhere. They have narrow networks because they've pre-negotiated lower costs with that hospital system, with that physician. That's just one thing.

Number two, they use utilization management. So they have guidelines, they have a policy, the things they're going to cover. And these things may be substantially more restrictive than what are in Medicare's coverage description. Medicare has coverage rules that are national and the Medicare Advantage plan has to abide by those. But there's also local so-called local coverage determinations. And the Medicare Advantage plans, because their jurisdiction is national, they can sort of ignore those things and they can make up their own list.

So those are the two main mechanisms that they control cost: they negotiate directly for narrow networks and they use so-called utilization management, which I talk about in the Primer episode. Basically, it's industry jargon for: the things that we say are medically necessary are medically necessary as the insurer. Everything else is denied.

Yeah, so this is where we come to all the stuff that a lot of doctors deal with regarding prior authorizations with all these plans on that utilization management side. Like you're saying, they keep costs down by controlling expenses through negotiating with the networks and utilization management. But also on the revenue side. Because they're getting money in fixed payments from the government and they get more money for sicker patients, they get bonuses for managing it more efficiently and showing quality. And then they also get increased money if they bid low. Then the regional—they get to pocket that difference as a rebate and use that to kind of defray some of the premium costs. So on the revenue side and expense side, they're really managing that effectively.

Revenue Mechanics: Benchmarks and Bids

Yeah, that's a great kind of overview of it. And probably I would imagine those who are tuning in, they'd like us to maybe break it down a little. So let's go through the categories. On the revenue side, actually I think it's even better to start with the so-called benchmarking and bids that you were just mentioning.

In a given part of the country, because it does vary by region, there's a benchmark rate that Medicare sets for the coverage of the seniors. What the commercial insurance company does is it bids to Medicare what they believe the insurance company believes they can spend to cover that senior. As you just said, if the benchmark and the bid come out—if the bid is less than the benchmark, then a difference that the federal government pays to the commercial insurance company. That difference between the benchmark and the bid that wins—the commercial insurance company pockets that and they can use that to fund other benefits. So that's the start of it, there's a benchmark rate.

Right. And this is where the whole dental, vision, all those other benefits can get funded through that.

Exactly. Through that difference. And why Medicare Advantage has been so much in the news lately is that the federal government has recalculated what it thinks the benchmark should be and decreased that. And so the response has been a number of things. Certain Medicare Advantage providers have said, "Well, we're going to not offer Medicare Advantage in certain parts of the country anymore or we're going to cut down on these extra benefits that we offer."

And this is a big problem for Humana in particular because they are a company that really doubled down. So they basically divested from traditional commercial insurance, put all their eggs in the basket of Medicare Advantage. They have a lot of market share in parts of the country where the benchmarks are being cut. The benchmarks aren't very favorable. So they're basically then going to divest altogether, not only from the commercial, which they already did, but from Medicare Advantage in certain geographies because the benchmark doesn't allow for them to win on that delta—a lower bid versus the benchmark—and then fund the other benefits.

So that's one thing. With that, is that why we see more of a trend in medicine for more of these utilization management in the last few years? Could that explain some of it? Because they're not getting the same delta on that in the bidding war?

I think it has to be because there's a real attachment on the part of the insurance companies that operate Medicare Advantage plans to certain margin objectives that they really want to hit. And essentially they make the business there because the margins on the Medicare Advantage plans are substantially higher than they are in the commercial plans. Which on its face seems bizarre. Because you think of a younger person, maybe 35 years old, they're employed, they have commercial insurance, fully insured plan through their company. That should be a money maker for the commercial insurance company. But it turns out it's kind of not, and the Medicare Advantage business was much more attractive. And now we're in this period of readjustment where what the federal government is willing to pay per beneficiary per month is coming down.

Risk Adjustment and Quality Bonuses

And it might be because on the commercial side, also, a lot of them are doing aggressive utilization management. But they're not getting all these other revenue streams. You're talking about the benchmarking. But the other thing is with the HCC, and getting paid more for sicker patients. Maybe we could tell our listeners a little bit about that.

Yeah, I think that's another part of the three drivers of the flow of funds from the government to the commercial. So we talked about the benchmarking and bids. That's number one. Number two is risk adjustment. Medicare pays a given dollar amount per enrollee per month that's covered by the Medicare Advantage plan. So let's say we're talking about United. United has a beneficiary, and that beneficiary is doing pretty well, doesn't have a lot of conditions. Then the federal government would pay dollar amount X, let's say $1,000 per month to United to provide the Medicare Advantage coverage for that senior.

While then another senior, again, another Medicare Advantage enrollee with United, is substantially sicker and has a higher hierarchical condition categorization with the HCC.

Yep, exactly. Hierarchical condition category.

And so the HCC being higher in that individual reflects the fact that they are sicker, more expensive. And so then Medicare, again, federal government will pay, let's say, $1,400 a month or $1,200 a month to United for that senior. And so risk adjustment is a huge deal. And the Medicare Advantage operators, the commercial insurance companies, basically have teams of staff that are dedicated to, in one way or another, being in contact with the senior and doing whatever they can to justify a refresh of the HCC so that the senior can be sicker on paper.

Right. Which is different than in the commercial side, because they're getting more money for potentially sicker patients. And if they manage the costs well, that's this fixed payment coming into them. So then they can have higher margins out of it. Can you talk about the quality bonuses, also, as the third tier?

Sure, yeah. So the final tier of funds flowing from the federal government to the commercial insurance company is exactly the quality bonuses. And so these are what would have been called star ratings. These are built into the payment structure, and they are an incentive. Essentially, the federal government creates categories of performance and the Medicare Advantage plans that perform well in these various categories—let's say there are five quality metrics and if you perform in the top level, then you're a five-star rating for your Medicare Advantage plan and then you get quality bonuses from the government.

So they've got the risk, they've got the bid-benchmark spread, and then the quality bonuses all make up the revenue side. There's a lot of opportunity for gaming the system if you like.

Right, yeah. Because you're starting with this building block and then you're adding three additional layers of revenue. The costs really is just on the negotiated cheaper rates oftentimes with providers, and then they're not offering all the exact same services. So it results in these higher margins.

Provider Challenges and Network Denials

Exactly. So one of the things we should talk about, and I'm curious your experience practicing where you are in the country, but in regions of the country where Medicare Advantage is particularly popular. Where I practice Medicare Advantage is 60%. It's well over 50% of the senior's choice is for Medicare Advantage.

I don't know what it is in your region, but it's definitely becoming the more popular product out here as well.

Yeah. It creates one of the things that exists in the background with Medicare Advantage and in the push and pull between hospital systems and Medicare Advantage are things like denial of services and timing of payments. Because it's not for no reason that various hospitals in this country have decided that they're going to go a different way and that they're going to cut their exposure to Medicare Advantage by not contracting with certain Medicare Advantage providers. They've come out and said, "Listen, we sign up for Medicare Advantage, we contract with Medicare Advantage insurers. It's a slow pay and no pay game. We are left holding the bag." Have you guys had that pressure, those conversations?

Yes, yes. All the hospitals around here are seeing much higher first claim denials. We're really working hard on our revenue cycle and revenue management, and these conversations are happening. But also it's competitive pressures in the area. We don't want to lose those patients; we want to make sure we service the communities we practice in and are good stewards to that. So it's not so easy as just being able to drop some of these insurance products. You just kind of have to work around it. That's very difficult in these hospital systems right now, which have very tight budgets and operating margins.

Yeah. And I'll be very honest with you. In my conversations both internally and externally with consultants and with people I know at other systems, this is the question that keeps coming up. I was asked point blank by a senior executive at another hospital system, "Should we cut United? Should we stop contracting with United?"

Yeah.

He brought up a number of reasons why he was asking me that. And so I obviously said questions back to him about, "Well, what's the percentage in the market and what's your percentage Medicare Advantage versus traditional and what do your commercial contracts look like? What's your percentage of Medicare and Medicaid as a percentage of business relative to commercial?" Those kinds of questions tell you the answer to that because everyone's asking the question and some hospital systems in the country have already answered it.

Right, right, right. And these are in the news. So you and I aren't breaking news here, but in Scripps—Scripps in San Diego, I did my residency there. I have no idea what the payer mix is in the San Diego area right now. There's certainly a lot of great payers there. I guess they felt like they're in a position where the market that they could say, "All right, all Medicare Advantage, we are done," and they did it.

And I think for some of the listeners also—to realize why was this even attractive for CMS to begin with? A lot of it comes down to just having predictability with fixed payments and being able to manage the financial risk more effectively.

Right. As opposed to being on the hook for all the costs for beneficiaries. Now you can just give out these fixed payments—$1,000, $1,200 plus the other tiers of revenue.

Yeah. If you think about—and I talk about this in the Fundamentals episode—if you think about the structure of traditional Medicare, very unusual events have to happen for the federal government to become not at risk to pay for the care for the senior. They have to have more than 60 days in a row hospitalized or more than 90 days over their entire essentially life of being 65 or older. But until then, more or less, once the deductible is exceeded, the federal government is on the hook for it. And while for Part B, while there's a monthly premium that the senior has to pay of $174 currently... there's the $174 premium and then there's a 20% coinsurance that the senior has to pay. But that's only 20%. It could be 20% of infinity in theory. The federal government's got to pay 80%.

So the federal government became very attracted to the idea of offloading risk from them to the commercial insurance plan. But it was a bit of a miscalculation the way it was put in place because with all the revenue opportunities that the private insurance companies who operate Medicare Advantage plans have, the per beneficiary spend that Medicare was paying was higher than they wanted it to be—much higher than originally planned. Hence the ratcheting down the benchmark rate that they're now paying. But they never predicted that. I think they always thought Medicare Advantage would end up being a smaller portion, as opposed to now exploding.

Choosing the Right Plan for Beneficiaries

But I did want to segue a little bit into the pros and cons of Medicare Advantage for beneficiaries because we've talked about it a lot throughout this episode, just to summarize a little bit. In my mind, for certain individuals who can afford to pay for Medigap insurance, for example, and really want to have a selection—to be able to pick their own doctor—I don't think Medicare Advantage necessarily makes the most sense. Because if you can pay for that supplemental insurance to cover your deductibles, cover your coinsurance, then you're going to be disadvantaged doing Medicare Advantage. But I think for people who are really income sensitive then and they don't mind not being able to pick their doctors—and dealing with delays is secondary to the income—maybe for them Medicare Advantage makes more sense. What are your thoughts?

Yeah, I think you laid it out nicely. We see it in the choices that seniors are making. Those who don't really have so much of a budget constraint, they like the freedom to go to the doctor they want to go to, to know that they have access to whatever the doctor recommends. So long as it's not entirely, let's say, not covered by Medicare at all, they're going to be able to receive that care. For the senior who is budget conscious and who does not require complex medical care of advanced services that are expensive, that are emerging therapies, that senior is in good shape and best served by selecting a Medicare Advantage plan.

And also perhaps a senior who does need a fair amount of prescription medications. One thing we didn't get into at all is the Medicare Advantage coverage of prescription drugs is usually by a tiered system like a tier one through four or let's call it A, B, C, D. If that senior needs a lot of prescription drugs, but they're basically drugs that are in tier one and two, it is a great thing for them to have Medicare Advantage because it's all covered and there's not much in terms of out-of-pocket expense. If instead you can imagine a man who maybe 70 years old, he has prostate cancer, he's got either high risk or metastatic prostate cancer, he needs abiraterone, he needs Lupron. These are tier 4 drugs. So with his Medicare Advantage plan he could still be paying thousands monthly for those drugs.

Right? That's a good point.

Yeah, so it really depends on the senior's situation what the right selection is for them.

Yeah, we can't forget about the drugs. That is very true. So going forward, what do we think's going to happen here? Because this is not sustainable. The margins are now slowly getting tighter for these Medicare Advantage plans. There's pressure on providers to either, like you said, renegotiate these contracts or potentially drop them. CMS is under pressure. So where do we go from here?

Future Outlook and Legislation

It's a pressure cooker waiting to explode. That's a great analogy for it. I think we are for now going to see nibbling around the edges. We're going to see the benchmark rate that CMS readjusted downward. The cut was like less than 1%. I think it was 0.16; I have to go back and watch the fact check after. But we see nibbling around the edges, gesturing, the typical negotiation-type maneuvers. I don't think we're going to see any large-scale changes for now.

What I think we will see, coming at this from the perspective of a physician now, we're going to see some improvements in the so-called utilization management and prior authorization part of denials because the federal government has finalized the rule to place new restrictions on Medicare Advantage. Thank God, because as you know, the amount of time we spend in these peer-to-peers and our poor patients who are having these delays to care...

That's great news about legislation.

Yes. Now it's great that the rule is coming. There is a bill that was introduced as well that I believe has not been passed.

It has not. No, that's correct, it's not been passed.

It'll likely be reintroduced next year in the new Congress. I think there's bipartisan support for that. So that may come along, but the issue will remain that neither this rule nor the language in the bill—at least that I've seen or the last version I've seen—really does anything to impact post-care denials or time to payment. So that will remain an issue that will cause a lot of heartburn for the hospital systems and physician groups even after these rules come into full force.

So I liked your term. So it's just going to be nibbling away at the edges.

Exactly. I think status quo.

Financial Margins: MA vs. Commercial

Status quo, yeah. But should we talk about some, just to give an idea for the... Because one of our missions here is to talk about healthcare finance. If you want to talk about healthcare finance, we got to talk about real dollars and cents.

Oh, yeah, yeah. Let's put some numbers around.

So why don't you start, why don't you explain... If you recall typical, let's say, margins of commercial insurance. So now forgetting Medicare for a second, we're talking about typical fully insured plan, 40 year old, I don't know, accountant who works for a major accounting firm.

Yeah. From when I was doing the research for this episode, I think the most recent numbers were around 2 to 3% margins. Right?

Yeah. And that's almost half the margins that these Medicare Advantage plans are seeing.

Right. So in the heyday of Medicare Advantage, before any of these recent adjustments—during COVID for example, when there was quite little care being consumed, if we can put it in those terms, not as much care being provided, let's say elective care—you're talking about margins up to 10%. More typically in the neighborhood of 4 to 6%. So what does that mean?

If the federal government is paying on a monthly basis a per-member per-month payment from the federal government's treasury to the commercial insurance provider—the Medicare Advantage plan—of $1,000 to $1,200, let's say, just as an example, because those are pretty typical per-member per-month payments. Then you're talking about, if you got a 6% margin, you're talking about $60, $72 bucks. And on the commercial side, again, just that theoretical 40-year-old accountant, you're talking about $12 bucks, maybe $18 bucks. So the difference between $18, a 3% margin, versus $72 bucks a month at a 6% margin on a $1,200 payment—I mean, that's huge. You can see why Humana in particular basically fell for it. They put all the business into one line of business because they were chasing that 5, 6%, even higher margin.

Well, you can see the frustration with the providers in the hospitals, knowing that these margins are there and they're having to have so much difficulty cutting clinical staff and programs when they know these insurers are getting these margins off of them.

Yeah, it's true. It's been interesting to see these margins on the insurance side balloon up a little bit before COVID but especially during COVID. Now we have the situation of the pendulum kind of swinging away from them because of elective care—sort of the classic pent-up demand situation. So a lot of elective care was provided and consumed in 2023, 2024. And then Medicare readjusting the benchmark rate down has really eroded into the margins that the commercial insurance companies make in Medicare Advantage, and hence all this sort of histrionics: "We're going to cut the dental, we're going to cut this market." All this stuff. So that's the situation we're in right now. That's the current sort of 360 view of the interaction between hospital systems and Medicare. The question is, if it becomes less attractive to be a beneficiary who signs up for Medicare Advantage, will people flow back into traditional Medicare? I think that remains to be seen.

Yeah. If the premiums slowly start rising again, maybe the pendulum will shift back. We'll see. But for now, I think we call it an episode. What do you think? We covered it all?

Yep, sounds good.

All right, well, hopefully you join us again for episode two where we'll talk about something. We haven't said it yet.