Medicare Advantage (MA) continues to grow, but there are signs that its profitability is on the decline, according to a new report from Moody's Investors Service.
The analysis found that margins declined from 4.9% in 2019 to 3.4% in 2022. Margins also fell in the commercial risk-based sector, but by a smaller amount, and they grew in Medicaid during that window, according to the report.
These data are based on reports from 10 payers rated by Moody's, which encompass two-thirds of all MA enrollees.
Dean Ungar, vice president at Moody's and one of the report's authors, told Fierce Healthcare that MA has continued to balloon given the sheer volume of people reaching Medicare eligibility, but translating higher membership to profitability has proven a challenge, especially given the difficulty of breaking into the market in the first place.
"You've got this great opportunity where you have this great cohort of people, where you can earn a lot of money on the theoretical use, but you need to be able to make it profitable," he said. "And I think that's what we've seen is not really the case. Almost all the profits are in the big companies."
UnitedHealthcare, Humana and Aetna are the largest players in the MA space, and, while the market has attracted interest from disrupters, competing with those large players at scale has been a major hurdle, according to the report.
"Although not immune to the weakening performance, the three market leaders have been able to grow earnings and generally maintain their margins," the analysts wrote. "We attribute this to the importance of scale to cover things such as customer acquisition costs, achieve appropriate pricing and maintain a stable benefits package."
In addition, smaller players or newer entrants may not be as nimble in adapting to value-based care models, according to the report. The analysts estimate that the biggest three companies "accounted for virtually all the earnings reported above in 2022."
Ungar said that beyond value-based care and their larger size, the major insurers have greater know-how around crafting provider networks and are far more familiar with common utilization management models than the upstarts.
These new entrants are coming to the table with good ideas—focusing on greater digital engagement, for example—but are struggling with the fundamentals, he said.
"It needs to be accompanied by the same level of knowledge about how to run the business. The nuts and bolts have to be there," Ungar said. "So if you get in and you're not really good on the other parts, you're gonna get hurt."
Even for the biggest players, though, there are pressures set to squeeze the MA space in the near term, according to the report. Both UnitedHealth and Humana were hit with a spike in utilization in the latter half of the year that is set to be a likely headwind through 2024.
CVS Health, the parent company of Aetna, has not yet reported its fourth-quarter results and will do so next week, so it remains to be seen how an increase in utilization has impacted them.
The Moody's analysts attribute the spike in part to a combination of pent-up demand due to COVID-19, and then a "log jam" in scheduling thanks to provider staffing issues. However, while several key factors are involved, there isn't a consensus on the ultimate cause, according to the report.
Beyond concerns around utilization, the program also faces funding issues as the Medicare Trust Fund remains at risk of running out, and changes to risk adjustment audits will likely lead to lower payments.
Those risk adjustment changes will be phased in over the next three years, and UnitedHealthcare, for example, made adjustments to benefits and pricing to account for that decline in payouts. That can, instead, lead to lower-than-expected membership growth as products are less attractive, Ungar said.
"You might have put yourself at somewhat of a disadvantage upfront," he said.