Understanding A Recent Analysis of Gross Margins in Medicare Advantage
Earlier this month, the Kaiser Family Foundation released an issue brief titled, Financial Performance of Medicare Advantage, Individual, and Group Health Insurance Markets. In it, the authors examine and compare average annual gross margins in the Medicare Advantage, individual, and group markets, suggesting that insurers are profitable in each market and implying that the profits in Medicare Advantage are too high and that the method used to calculate payments to Medicare Advantage plans may be inappropriate.
This blog outlines a number of critical clarifications on the findings and explains why this analysis does not offer a basis for the authors’ conclusion regarding high profits in Medicare Advantage nor does it have reason to suggest a change in payment methodology in Medicare Advantage. The conclusions are misleading and incorrect.
- Gross margins are not an indicator of profit: Gross margins are the difference between premiums collected and paid medical claims. In Medicare Advantage, “premiums” include both member premiums as well as the capitated payment from CMS. Gross margins do not account for administrative expenses, including profit. Administrative costs include claims processing, contracting and oversight, actuarial analyses, quality assurance, marketing, risk stratification, and other administrative costs. Appropriate use of allowable administrative costs, as well as allowable profits, are carefully regulated in Medicare Advantage. Higher gross margins do not necessarily translate into profit. Both the report, and the messaging around the report by the authors, inaccurately imply that gross margins equate to profits. Fact is, MedPAC reports that Medicare Advantage margins are, on average, 2-3 percent.
- In Medicare Advantage, in addition to administrative costs, gross margins also include “rebate” dollars, which are used to directly benefit enrollees. The gross margin in Medicare Advantage includes a rebate, which is the difference between the plan bid and the county-level benchmark set by CMS, which determines what plans are paid in each county. By law, these rebate funds must be used to directly benefit enrollees. They are used to lower premiums for Medicare Advantage and Part D coverage, lower cost-sharing for enrollees to see providers, and provide supplemental benefits, like dental, vision and hearing coverage, access to social service hotlines, fitness programs, transportation, meals, and more. A recent analysis by AARP found that the majority of Medicare Advantage beneficiaries had access to dental, vision or hearing benefits, and many had access to all three.
- Comparing Medicare Advantage gross margins to other types of markets is not a clear comparison. The report includes several charts that compare the average gross margins of Medicare Advantage, individual and group markets. These are not apples-to-apples comparisons, because Medicare beneficiaries (both FFS Medicare and Medicare Advantage) have much higher average costs compared to the individual and group markets. The Medicare population is an older, sicker population with greater health care needs, and it is appropriate for Medicare Advantage to spend more on these individuals. In addition, the laws and regulations for each of these three markets are different, with different essential benefits, different risk adjustment methodology and different payments, as well as different regulation of profits.
- Comparing percent margins tells you more than comparing hard dollar amounts. The report mostly compares gross margins in hard dollars, which is not particularly informative for the reasons above. It is more appropriate to look at medical claims as a percentage of premiums - or the Simple Loss Ratio. Simple Loss Ratios are similar across the three markets. In fact, Medicare Advantage simple loss ratios are higher than both the individual and gross margins, showing that Medicare Advantage plans pay out a higher percentage of their premiums in medical claims than the other markets. Other research has similarly found that Medicare Advantage pays out a higher proportion of its payments on medical claims.
- Medicare Advantage profit margins are highly regulated and approved by CMS. CMS exercises oversight over Medicare Advantage organizations and their profits. For example, one requirement is that “Medicare Advantage gain/loss margins as a percent of revenue, must be within 1.5 percent of the MAO’s non-Medicare business margin requirement.” Another requirement is that Medicare Advantage plans must abide by the Total Beneficiary Cost Policy, which limits how much plan benefits, including cost-sharing, may change from one year to the next. This means that plans may not increase enrollee cost-sharing or decrease benefits above a certain threshold year-over-year and is another example of how beneficiaries in Medicare Advantage are protected from high out-of-pocket expenses.
While gross margins can be an indicator of an insurer’s overall financial health, they do not necessarily translate to level of profitability. Medicare Advantage continues to be a highly regulated program with strict oversight of how resources are used to benefit enrollees. Comparing gross margins in Medicare Advantage to other plan markets cannot lead to a conclusion that Medicare Advantage payments are inappropriate or that reform is needed. Researchers should be careful not to suggest conclusions that cannot be drawn from the findings and thereby mislead policymakers and the public in the process.
Not only are profits controlled and monitored, and beneficiaries out-of-pocket cost limited with annual cap, but Medicare Advantage has shown to offer more benefits, care coordination and are able to target care and services to those with chronic conditions – and at roughly the same cost to government as Traditional Medicare. Medicare Advantage continues to be highly preferred among Medicare beneficiaries, owed to the better quality it provides and the consumer cost protections it offers. Policymakers should be wary of false conclusions that undermine the care and benefits offered in Medicare Advantage, as well as valuable lessons for the future of Medicare.