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.
Between $10 billion and $15 billion per year in total industry profits will shift toward a smaller number of higher-performing plans.
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. In the healthcare market generally, there is a shift from the traditional fee-for-service (FFS) model toward payment for value or quality of services rendered, rather than quantity. The value-based payment model ties provider payments to the outcome of services provided as part of an effort to focus more on patient well-being and decrease medical costs. For example, insurers are implementing value-based payment strategies through episodic bundled payments for conditions such as hip and knee surgery and maternity care. Overall, tying payments to values and outcomes should help healthcare plans reduce medical expenses through the elimination of unnecessary and duplicate services. The 2015 Medicare Access and CHIP Reauthorization Act (MACRA) is accelerating this shift by rewarding or penalizing Medicare providers (i.e., doctors and hospitals) through the addition of a bonus to, or subtraction of a fine from, their FFS payments based on the quality of care. As a result, Medicare plans will be able to negotiate rates with providers based on their performance. In order to thrive in the MACRA world, plans will need to provide scale and management capabilities to support providers through this transition, and to revamp their provider network and engagement strategies. MA plans can help physicians segue into MACRA-based payment models by equipping them with solutions and funding that enable them to perform MACRA-related analysis and reporting.
Enhanced care models/care coordination. Coordinating care for members is another critical differentiator for MA plans. Due to their age and health conditions, typical MA enrollees on average seek a lot more medical services across multiple avenues — physicians, labs, pharmacies, and long-term care — than younger patients. As reimbursement shifts to a value-based model, payors will need to find cost efficiencies by managing care through a “whole-person care” model. For example, by coordinating the care of a 70-year-old heart bypass surgery patient more effectively with the surgeon, hospital, and nursing home, payors can help smooth postoperative care and reduce readmissions. To forge a seamless care-delivery experience for the newly tech-savvy and empowered enrollees, MA plans can employ innovative and customizable models for integrated care coordination (e.g., cash bonus for enrollment in wellness programs) and through technology such as customized apps to track member health/wellness (e.g., tracking diets for diabetics).
Proactive and member-centric risk management. As compliance and regulatory requirements continue to become more stringent, plans need to deploy a three-step member-centric strategy to manage risk. First, they have to use data analysis to evaluate all member interactions across the company to identify the greatest risk areas for regulatory noncompliance. This can be done through by analyzing complaints and holding reviews of audits and internal processes. For example, timely member notification — such as the need to confirm receipt of enrollment applications within seven business days — is often an area of high risk for payors to ensure compliance with CMS requirements. Reviewing a single member’s experience with claims (as opposed to reviewing every process in the internal claims department) can be effective in identifying areas of concern. Next, payors must systematically address the most probable and highest-impact areas through both short- and long-term solutions that directly manage each high-risk member interaction. Finally, as plans implement solutions, they need to adopt a culture of continuous improvement that both extends and updates these solutions regularly.
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. With the rapid increase in the number of baby boomers qualifying for Medicare, it is critical for MA plans to invest in differentiated member engagement capabilities. As noted, the number of customers for these plans is becoming more significant. But given the decades of experience these customers now have with online shopping, banking, and other services, their expectations for technology and user experience are increasing. Payors must review member needs across the spectrum of care as well as the services they provide and define new user experiences for each step. Doing so will allow plans to ensure member satisfaction, enable better retention, and reduce the number of member complaints, which are a significant driver of plan performance ratings.
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.
- Akshay Jindal is an advisor to executives in the healthcare industry for Strategy&, PwC’s strategy consulting business. Based in Austin, he is a principal with PwC US.
- Ashwin Badrinarayan advises companies in the healthcare industry for Strategy&. Based in Chicago, he is a director with PwC US.
- Sanchit Madan advises companies in the healthcare industry for Strategy&. Based in Chicago, he is a director with PwC US.