Member Retention has an Exponential Effect on Revenue

The typical MA health plan, on average, loses eight percent of its members annually through voluntary disenrollment, and another four percent involuntarily.  Let’s assume that same health plan has a membership of 50,000 lives, and from a revenue perspective, typically realizes $1000 per member per month in premiums and Medicare payments to the health plan.  That means that just a single percentage point improvement in member retention — going from an eight percent (4000 member loss) to a seven percent voluntary disenrollment rate (3500 member loss) — would result in a $6 million increase in plan revenue.  Do the math.  That’s a 500 member difference, times $1000 PMPM… here are the results as the disenrollment rate improves by one, and even two percentage points. 

*These figures are based on a health plan with 50,000 members, and $1000PMPM in payments to the plan

At the same time, today’s sales & marketing budgets are getting smaller and smaller.  If we move beyond a cursory assessment and look at the acquisition costs to replace that one percent (500 members) through sales, we can then see the additional impact that member retention can have on an organization’s performance.  Depending on your market, the acquisition costs to find a new member can be somewhere around $1,200, on average.  This cost includes advertising & marketing costs, sales & marketing operations costs, salaries & benefits of those employees, and can even include software costs and services through other vendors.  So assuming a $1,200 cost of acquisition, that one percent improvement in member retention (500 members) just saved your sales and marketing department $600,000 in what it would have cost to replace them.  Furthermore, we can assume that $600,000 will still net the health plan another 500 members…and we just showed what that one percentage point was worth.

So let’s look at this in perspective. Even if our hypothetical organization is able to immediately replace every single one of the 500 members – representing the difference between an eight percent and a seven percent voluntary disenrollment rate – through new sales, recouping that $6 million in would-be lost revenue, that organization still had to go out and spend $600,000 of their own sales and marketing dollars to make it happen.  Thus, if you’re looking at this problem objectively, to get the most “bang for your buck”, it makes sense to take a hard look at your member retention strategy before moving on to sales and marketing.  Remember, retention’s impact is two-fold; not only will it impact the bottom line on the payment side, but it will put sales & marketing dollars to more efficient use — where they should be — adding members, not replacing them.  Retention doesn’t always have to be a cause & effect of benefit design.  There are other dynamics in play that beneficiaries take into consideration when choosing a plan. Knowing what those factors are – and ultimately what value your beneficiaries attach to them – can help keep the initial impact of aspects such as benefit structure or premium increases from sending existing members out in search of a new plan.