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“It’s not us; it’s you.”
As Medicare Advantage (MA) enrollment grows, hospitals are breaking up with MA insurance plans. Becker’s Healthcare reported that, so far in 2024, at least 17 systems ended a contract with an MA insurer.
But even as hospitals back away, patients have embraced MA. KFF reported that 32.8 million people are currently on an MA plan—that’s 54% of the eligible Medicare population, and the figure could jump to nearly two-thirds by 2034 according to the Congressional Budget Office. In 2014, only 31% of the Medicare population had Medicare Advantage.
Yet analysts warned in an August 15 report from S&P Global Ratings that this growth may hurt hospitals’ credit quality by shrinking their cash flow and operating margins.
“It’s not to say that, in and of itself, [credit] ratings are changing because of this issue. They’re not,” David Peknay, healthcare director for S&P Global Ratings, told Healthcare Brew. “It adds another issue that providers have to contend with.”
Margin malaise. Providers see slightly lower margins with MA plans versus fee-for-service Medicare. While the current difference is small—a 2016 study put it at 5.6%—it’s a sign of big problems, the report read.
One contributor is, since MA plans are paid a fixed rate per person, insurers make more money by limiting how often people use healthcare services. According to S&P Global, prior authorization requirements and higher denial rates are a “key strategy” to do this.
A 2022 Department of Health and Human Services study found that MA organizations are less likely to reimburse providers or provide prior authorization for care covered under traditional Medicare. Costs of refiling a claim, providing unreimbursed care, and payment delays then hurt hospitals’ cash flow, particularly rural hospitals, which may not be equipped to navigate all the administrative hurdles that Medicare Advantage throws their way.
Future headwinds. S&P Global further projected that while reimbursement rates are similar right now between traditional Medicare fee-for-service and MA, that’s “unlikely” to stay true.
“We expect large insurers will use their scale and market clout to limit provider rate increases over what will prove to be a challenging contract negotiation season,” analysts wrote in the report.
Up next. Recent regulatory changes may help hospitals, though.
The “two-midnight” rule, which requires people be admitted as inpatients if their medical care is expected to exceed two midnights, expanded to MA plans earlier this year. S&P Global analysts said this could increase provider reimbursement by growing the number of people billed as inpatients, which have higher reimbursement rates than outpatients.
CMS also finalized a rule in January to streamline prior authorization by setting time limits for prior authorization decisions and requiring payers to provide a reason for denials.
But Pecknay said there’s no data yet on how these changes impact hospitals: “I still think we have to see how this evolves, whether it is ultimately a benefit.”