Best’s Commentary: Narrowing Margins in Medicare Advantage Segment Could Hinder Health Insurer Profitability Levels

The impact of higher than expected utilization levels for Medicare Advantage (MA) products could lead to a deterioration in profitability and adversely impact health insurers’ overall financial results, according to a new AM Best commentary.

The Best’s Commentary, “Narrowing Margins in Medicare Advantage,” states that higher utilization levels reported by several companies in fourth-quarter 2023 may not have been anticipated fully in filings pertaining to 2024 rates. In addition, an initial notice from The Centers for Medicare and Medicaid Services for 2025 rate levels is significantly below prior years.

MA was the one of primary drivers of profitability in 2022, accounting for over a third of the U.S. health industry’s underwriting gains and has been a premium growth engine during the past five years, albeit with fluctuating earnings and margins, according to the commentary. Various factors, such as increased utilization of outpatient and supplemental benefits, contributed to the heightened MA usage in 2023—trends that do not seem to be abating in 2024.

“These unfavorable trends pressured financial results throughout 2023, raising concerns about whether insurers have effectively integrated these escalating trends into their 2024 pricing models,” said Jon Housel, financial analyst, AM Best.

The commentary also raises the issue of whether the elevated utilization trends in 2023 were adequately captured into pricing for 2024. The final notice set by CMS for 2024 was considerably lower than in previous years, and some of the utilization was not noted until after rates were filed in June of 2023. Insurers have acknowledged that some of the elevated medical trends were incorporated into 2024 pricing—but not all.

“Consequently, some insurers revised their full-year 2024 outlooks to reflect the uncertainty about MA trends,” said John McGlynn, senior financial analyst, AM Best. “At the same time, however, insurers have stated that they believe they are able to manage the narrower margins in the segment.”

According to the commentary, the sheer number of Americans aging into Medicare eligibility will ensure growth in MA, even if market penetration declines or the growth slows. Even if margins narrow, AM Best expects MA membership to continue to grow faster than other programs in the near term, although there is the potential for MA results to be pressured through at least 2025 due to the CMS’ advance notice on rate changes. Preliminary rate increases by CMS for 2025 are thought to be insufficient according to multiple insurers, owing to the general medical cost trend.

To access the full copy of this Best’s Commentary, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=341113.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

Copyright © 2024 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240311121863/en/