Why Medicare Advantage is Here to Stay

February 24, 2012
|In Strategy
|By GHG Advisors

If you want to understand why Medicare Advantage is now part of the firmament of the US healthcare economy, and will now weather almost anything Congress and the Administration can throw at it, you need only comprehend what Medicare contributes to the big players’ bottom lines.

Since the exodus from the program that followed the Balanced Budget Act of 1997, and its resurgence with the Medicare Modernization Act of 2003, Medicare Advantage has become a monkey on the backs of the major payers that they just can’t afford to quit, no matter how austere things get in the Capital.

Medicare has driven much of the industry’s earnings growth over the past few years, as commercial risk membership has fallen and margins were pressured by rising cost trends last year.  So even though Medicare may not contribute a lot on an overall basis, it has been a major contributor to earnings.

Carl McDonald, our good friend and uber-analyst at CitiGroup, shows in his EBITDA analysis of the “big 12” payers that Medicare Advantage contributed almost 23% of earnings on a weighted average basis, United at 28%, and 3 — Universal American, HealthSpring and Humana — deriving over 60% of their earnings from Medicare.

There are several reasons why MA is here to stay — the reliance on capitation to bring stability to Medicare and Medicaid expenditures in our new Age of Austerity; the relentless march of American demographics and the Baby Boomers being more plan-friendly than the World War II generation; the consistent value proposition the “one-stop shop” MA offers relative to traditional FFS Medicare or the Medigap/Prescription Drug Plan combination; the migration of many delivery systems to MA, fleeing declining rates and rising expectations in FFS, to name a few.

But the real reason is that Wall Street is like Nikita Khrushchev at the Battle of Stalingrad, pointing a gun at his own comrades in the face of the Nazi onslaught: “Not one step backwards.” Any of the big 12 exiting from the program would be inconceivable today. And that ensures robust participation in the program for the foreseeable future.