Medicare Advantage turmoil could allow new arrangements

Amid a roiling 2025 Medicare Advantage (MA) market, health systems may have new opportunities to change payment dynamics with them.

“Health system do have a lot of leverage, they do hold a lot of cards and if they are willing to step up, this is good time to strike up those partnerships with payers, as payers are also hurting and looking for a more sustainable path forward,” said Joyjit Saha Choudhury, a managing director for Kaufman Hall.

It’s a counterintuitive opportunity because it comes amid increasing public conflicts between health systems and MA plans.

MA plans increased their denials of prior authorization requests from 5.7% in 2019 to 7.4% in 2022, according to research by the Kaiser Family Foundation. Meanwhile, 28 health systems have moved by October to drop Medicare Advantage plans in 2024, according to tracking by Becker’s Hospital CFO Report.

“Insurers are being challenged to make a profit in the MA segment. Public insurers have targeted an average margin of 3%-5%, though most will struggle to achieve this,” said an August report by S&P Global.

The medical loss ratio for all five largest MA insurers worsened in the second quarter of 2024 compared to the second quarter of 2023, according to an October report by Mark Farrah Associates.

The financial struggles of MA plans can create new opportunities, said Choudhury.

“If they are struggling on their margin, which most payers these days are, they are coming to a realization that they need an enhanced level of performance and cooperation from the health systems to be successful,” Choudhury said.

In contrast, hospital may be in a stronger financial position from which to negotiate new arrangements in 2025. Hospital median margins tracked by Moody’s Ratings were expected to improve in 2025 from about 6% in 2024, according to an October report.

Where the opportunity exists

Although many factors driving current collaborations are market specific, Choudhury identified some common factors where they have occurred:

• Market has large senior population with a high share of MA enrollment
• The provider’s payer mix is weighted toward MA
• MA plans have poor margins

“In a small number of markets, payers and providers are realizing that they need to conduct a real collaboration and real partnership with a higher level of transparency and incentive sharing than they have ever done before and that’s the only path for both to be mutually sustainable,” Choudhury said.

Similarly, a September McKinsey healthcare blog details the financial struggles of MA plans identified new partnerships with health systems as a way forward for plans.

“Health systems can use this opportunity to reimagine partnerships with payers and reconsider the division of MA premiums (for example, by diversifying care delivery and commercializing services) and continue to approach payers with potential partnership models and other options to advance capitated risk models,” wrote the McKinsey analysts.

New partners

Health systems executives have said there is little interest among dominant MA plans to engage in such arrangements. However, the pullback of some publicly traded for-profit insurers in some markets, will create room for the not-for-profit regional plans to expand, Choudhury said.

That trend may make partnerships more likely.

“We are also seeing more strategically regional not-for-profit health systems start to think of partnering differently with some of those not-for-profit regional plans,” Choudhury said.  “There’s a growing sentiment of ‘Who are the payers to partner with for the future?’”

But interest among dominant plans also may increase, as Medicare changes in star ratings resulted in a large share of their plans having reduced ratings — and the additional revenue that accompany them — for 2025. Health system collaboration is a key way analysts said they could work with health systems to improve those ratings.

New pressures

The opportunity to change the financial relationship between MA plans and health systems is driven by Medicare regulatory, strategy changes by MA plans and worsening financial situation of large insurers. That tumult has led plans to cancel plans offered to nearly 2 million enrollees for 2025, far more than the average 100,000 people losing plans in recent years.

MA plan pressures include:

• Medicare reducing rates
• Medicare applying “two-midnight rule” in 2024 driving inpatient volume increases
• Medicare rules streamlining the prior authorization process, effective in 2026

Those are matched by growing pressures on hospitals, which include:

• MA enrollees comprising a growing majority of Medicare enrollees
• Expanded MA program integrity measure use, resulting in increased delays in payment
• Increasing wage pressures not offset by Medicare base rates

A big change

Such “radical collaboration,” as Choudhury describes it, would mark a stark departure from the type of risk arrangements that MA plans already have adopted.

 MA plans have moved much more deeply into risk-based arrangements with providers than traditional Medicare, according to the latest report by the Health Care Payment Learning and Action Network. It found MA plans had tied 35% of payments to downside risk, while only 24% of traditional Medicare payments were similarly structured.

However, MA plans’ risk arrangements are traditionally focused on shifting volumes to clinics and other primary care settings, said Brian Tanquilut, an analyst for Jefferies.

“There are not a lot of hospitals involved in that,” Tanquilut said in an interview. “It’s more of these startups and PE-backed companies in that space taking on risk from managed care.”

But some health systems are leaning into the opportunity. For instance, Warner Thomas, CEO Sutter Health, detailed to Modern Healthcare several relationships the system has with Medicare Advantage plans, which include initiatives to strengthen complex case management, segment primary care, build better infrastructure and improve data analytics.

Getting to radical collaboration with MA plans by health systems may require moving beyond traditional arrangements, such as becoming part of narrow networks used by MA HMO plans. Boris Vabson, a research faculty member at Harvard Medical School, said at least 95% of the value-based MA arrangements his research has examined were with HMO plans.

“What that indicates for me is that for a lot of value-based payment arrangements to work between say a payer and provider, it’s not enough to have financial risk. Providers also need to have the tools to really be able to manage the patient and manage the risk effectively,” Vabson said at a Brookings Institution event.