Consolidation in Medicare Advantage and Prospects for Regional/Local Plans
In the past 12 months three health insurers have each acquired a Medicare Advantage HMO: HealthSpring (Bravo), WellPoint (CareMore), and Humana (Arcadian). Large plans are finding that acquisitions make more sense than investments in organic growth in certain markets, and that enrollment will be driven by millions of plan-friendly Baby Boomers and employers seeking to transfer risk for retirees to Medicare. Investors that sat on the sidelines the last couple years during the financial crisis now need to invest, many large players are sitting on piles of cash, and there are many opportunities in the fragmented MA market. So consolidation will intensify — what does that mean to regional or local MA plans?
First, there’s plenty of room in MA’s pantheon for regional and local plans. It doesn’t take much enrollment to make the Top 25 in Medicare Advantage given revenues for MA members typically run 4-6x what commercial members pay — take Independence Blue Cross in Philadelphia. They have about 85,000 members and they’re among that hallowed group. 10,000-12,000 members is generally thought to be the “magic number” in MA, where a plan achieves actuarial stability with an enrolled pool big enough to weather the inevitable million-dollar babies at end-stage.
If you’re above that number today, you can likely endure and thrive through the next several years of ACA transition and consolidation by following some specific best practices, especially around risk adjustment and Star Ratings management. If you’re not there yet, this is going to be a very challenging couple of years ahead.
The best ways for local/regional plans to offset the rate cuts in ACA is on the revenue side. Risk adjustment and Star Ratings management best practices are the keys to survival for local and regional plans, and the methodologies of each actually favor these organizations. The new state of the art in risk adjustment is the advanced prospective evaluation — a health risk assessment on steroids, conducted in the beneficiary’s home by a trained physician (see the many posts by my colleagues Dr. Jack McCallum and RaeAnn Grossman on this subject). It’s a complex process, arranging the scheduling, executing the visits, reporting the data to CMS — but one managed more easily by local/regional plans with assets on the ground than large nationals.
Star Ratings quality bonuses from CMS actually favor local/regional plans as they’re calculated at the contract (“H-number”) level. Large national insurers typically have sprawling MA service areas: United in California, for example, has an MA contract for the entire state, requiring United to coordinate with literally dozens of physician groups to improve their Star Ratings. By contrast, tiny GEMCare Health Plan in Bakersfield, with a 5-county service area and only a handful of provider groups, is far better positioned to secure its Star bonus than United.
On the downside, minimum Medical Loss Ratio (MLR) regulations can be harder for local/regional plans to contend with. Beginning this year the ACA requires health plans to spend 80% to 85% of premium revenue on reimbursements for clinical services and activities that improve health care quality. Further, costs associated with conversion to ICD-10 coding, EMRs and e-prescribing are harder for smaller firms to absorb. But harder doesn’t mean impossible, especially with effective planning and local leadership.
In the end, I think we’re probably looking at one-third fewer contracts in MA by 2016 — 671 today, down to about 400 by then, driven by acquisitions and a hard-nosed CMS pushing weak performers out of the program. That leaves plenty of room for local/regional plans — if they can execute as well or better than the big dogs, especially on the revenue side of the ledger.
I’ll be speaking on this and related topics at AHIP’s Medicare conference here in DC on September 13, and again September 26-27 at the Opal Events 3rd Annual Medicare Advantage Strategic Business Symposium. For more information, click here. Hope to see you there.