Dive Brief:
- Medicare Advantage rate changes proposed by regulators last week are upsetting Humana’s funding expectations for 2025.
- If finalized as proposed, the MA changes will lower Humana’s benchmark funding by around 160 basis points compared to a flat rate environment, the health insurer disclosed in a filing with the Securities and Exchange Commission on Monday.
- The discrepancy is because the CMS didn’t factor in persistently elevated medical costs into how it calculates rates, Humana said. However, regulators could do so in the final rule. Despite the uncertainty, the insurer reaffirmed its earnings outlook for 2025.
Dive Insight:
In MA, the government pays private payers a flat per-member, per-month fee to manage the care of Medicare seniors. MA has proved highly popular with seniors and can be quite lucrative for insurers — margins in the program can be twice as high as those in other types of plans, according to KFF.
Regulators are taking steps to curb inflated payments in MA, which a congressional advisory group says could total $88 billion this year.
The CMS on Wednesday released preliminary MA payment rules for 2025 that include the second year in a row of payment decreases for plans. Regulators are proposing a 0.2% decrease in average benchmark payment rates next year. Though, insurers’ vigorous coding practices should still result in MA plans getting paid $16 billion more next year than they received this year, the CMS said.
Still, insurers are expected to lobby heavily for a higher payment rate in the final notice, which will come out by April 1.
Humana performed its own analysis based on the precepts in the proposed rule and determined the changes will lower its benchmark funding by roughly 160 basis points. Previously, the payer had expected rates to stay flat.
The issue hinges on “the proposed effective growth rate restatements, which the company did not anticipate in light of the higher medical cost trends experienced across the industry,” and how the CMS is adjusting for potential risk scores next year, Humana said in its filing with the SEC.
The effective growth rate represents how much costs are increasing in traditional Medicare, and is a major factor in calculating the overall MA reimbursement rate. The 2025 rate notice assumed a much lighter effective growth rate than industry watchers had expected, because the CMS didn’t include data through the end of 2023 in calculating the rule.
The final rate should include more recent data. Since MA payers reported costs continued to be elevated through the end of last year, that should help them score a higher final rate. Analysts expect final rates to represent a between 0.5% to 1% payment increase.
“We believe there is a strong possibility that the effective growth rate and overall payments should improve when the Final Notice is published,” J.P. Morgan analyst Lisa Gill wrote in a note last week.
MA is historically a golden goose for insurers, but less-than-favorable regulatory changes and rising costs as seniors seek out more medical care is shrinking the program’s profitability. Major managed care plans in the program like UnitedHealth and Humana have seen their 2024 outlooks pressured by winnowing growth prospects in MA.
As a result, insurers are expected to pursue profitability above growth this year. Along with raising premiums and cutting benefits, payers have said they may exit select markets to boost margins.
Meanwhile, Cigna is eschewing MA altogether. Last week, the Connecticut-based insurer agreed to sell its Medicare businesses to Chicago-based Health Care Service Corporation for $3.7 billion.
However, Cigna still wants to capitalize on MA by providing services to other managed care companies.
