The Medicare ecosystem is facing a series of simultaneous challenges, disruptions, and opportunities that add up to one certainty: this market will look meaningfully different in the years ahead. Medicare Advantage (MA) is projected to be the line of business that drives the most profit for payers in 2026, even while headwinds are emerging in the Medicare program. The Centers for Medicare & Medicaid Services (CMS) is projecting the Medicare trust fund will run out of money in 2031, although investors continue to pour billions into acquisitions of payers, care delivery partners, and related healthcare services and technology providers across the Medicare value chain. Additionally, market penetration of Medicare Advantage (MA) remains hugely variable nationwide, with only about 12 percent of beneficiaries in MA plans in some states but about 60 percent in others. Meaningful disruptions—in demographics, regulations, and member preferences—compound the uncertainty, making it difficult for payers and other Medicare participants to chart a path forward. By making transformational moves in the near term, payers can improve their ability to compete in the years to come.
The strategic decisions private Medicare payers make now will determine their ability to have competitive capabilities and position themselves to succeed as the market changes. Some large payers and investors have already begun placing strategic bets to capture future growth (for example, buying up primary-care centers whose patients are enrolled in MA plans), despite the climate of uncertainty. By closely monitoring the ongoing shifts in Medicare, continually adjusting their priorities, and building new capabilities, payers can position themselves to succeed.
Disruptive trends are shaking up the Medicare landscape
Payers are considering strategies to better address the aging population, a succession of pending regulatory changes, and shifts in member preferences for benefits and engagement.
Demographic shifts
The demographic profile of Medicare beneficiaries and eligible individuals is skewing older. From 2020 to 2030, seniors aged 75 to 79, 80 to 84, and 85 and older are projected to grow as a proportion of all seniors. This is a shift from the 2015–20 period, when growth was more heavily in the cohort aged 65 to 74.
For many of these aging and higher-need members, today’s popular plans (for example, those with zero or negative premiums, rich supplemental benefits, or leaner core medical coverage) may no longer be the best fit. To retain members, payers may need to counsel them to switch to products that better match their evolving health needs, although some members are likely to resist, at least initially.
Medicare beneficiaries aged 85 and older average more than twice the monthly medical costs of those aged 65 to 69 and are more than three times as likely to have at least one hierarchical condition category. This creates a substantial increase in clinical burden that will require payers to develop new capabilities in care management, social determinants of health (SDoH), and health equity—in line with CMS’s priorities. In the meantime, payers will continue to advance their capabilities as risk-bearing entities operating under capitated models. Specifically, where diagnosed conditions are most acute, payers could pursue specialist-centric risk arrangements. As needs intensify and mobility declines, payers could also develop intensive, home-based care models.
Along with the aging Medicare population, MA membership growth is slowing. We estimate that annual growth in MA membership will slow from more than 8 percent in 2022 to about 3 percent in 2031. As growth slows in historically strong and currently penetrated (primarily urban) markets, payers will seek to build the networks and capabilities to grow in historically less penetrated markets, such as those with large rural populations (Exhibit 1).
Regulatory environment
The most sweeping set of regulatory changes to the Medicare Advantage program since the Medicare Modernization Act of 2003 will go into effect in the next three years, affecting rates, risk adjustment, Star ratings, and Part D. To adjust, these changes necessitate a nimble response from payers.
MA rates. The 1.12 percent effective MA rate decrease—the change in the amount paid per enrollee per year to payers by CMS—marks the first decline since 2015 (Exhibit 2). This translates to a loss to payers of an average of $150 per member per year.
Risk adjustment. CMS announced changes to MA risk adjustment following careful analysis, including observed higher-than-expected risk scores compared with fee-for-service (FFS). CMS has refreshed the risk adjustment model to bring it more in line with FFS, driving MA rates down by 2.16 percent, on average. Risk adjustment remains a high-priority topic for payers as they respond to CMS’s Risk Adjustment Data Validation (RADV) Final Rule, which is expected to enable CMS to recoup $4.7 billion over the next ten years.
Star ratings. For calendar year 2024, CMS reduced payment rates by 1.24 percent in response to a decline in average MA Star ratings, which resulted largely from expiring COVID-19 provisions and scheduled measure adjustments.
Star ratings reached a record high in rating year 2022, with 90 percent of members in plans rated with four or more Stars; that number has fallen to 72 percent in 2023. Payers will likely face further headwinds from Stars technical changes—for example, removal of contract performance outliers using the Tukey method and revisions to disaster provisions—and the introduction of the health equity index (HEI). Starting with 2027 Star ratings, the new HEI will reward contracts for high measure-level scores with low-income subsidy, dual eligible, and disabled enrollees.
According to a simulation of the removal of the current reward factor and addition of the proposed new HEI reward, 1.7 percent (seven) of MA prescription-drug contracts gained a half star on the overall rating, while 13.4 percent (54) of contracts lost a half star on the overall rating. Historically, payers have been able to respond to technical adjustments, the addition or expiration of certain metrics, and other changes to the Stars program, but the magnitude of these changes will be their biggest test yet.
Part D. As a result of CMS changes to Part D plans, payers will be prohibited from collecting back-end payments from pharmacies via direct and indirect remuneration (DIR) fees and will be required to assume greater responsibility for catastrophic drug coverage. Payers will lose more than $11 billion in plan revenue from lost DIR fees, equivalent to 74 percent of revenue from member premiums in 2021 (Exhibit 3). Additionally, reinsurance payments are currently the largest and fastest-growing source of payer revenues. In 2025, however, government coverage for reinsurance will drop by three-quarters, from 80 percent of catastrophic costs to 20 percent, leading to dramatic decreases in reinsurance payments to payers.
Shifting member preferences
Members’ preferences for engagement with MA plans are fundamentally changing—in line with the seamless, omnichannel, and customer-centric experiences they now routinely enjoy with B2C companies such as retailers and technology providers. Most prominently, this change manifests in their rising preferences for digital engagement. This appears first in the extent to which beneficiaries increasingly rely on e-brokers when shopping for MA plans. Of the more than seven million beneficiaries who enrolled in a new MA plan in 2022, more than one-third (about two million) used an e-broker, highlighting a meaningful shift to digital channels compared with even five years ago.
Beyond shopping, our recent survey data indicates that more than two-thirds of members reported using technology in the onboarding journey to understand benefit coverage, manage prescription drugs, and navigate physician networks. More broadly, delivering a distinctive omnichannel experience will be critical in retention of members and performing well on Stars ratings. The quality of members’ experiences will be a core component of competitive differentiation in the future.
How payers can respond to the changing Medicare landscape
Payers can address changes in Medicare with near-term, targeted interventions and simultaneously carry out transformative initiatives. In the near term, they could consider the following:
- Pursuing sizable growth opportunities in underpenetrated populations (such as high- and low-income rural areas) with renewed focus and creativity to build products and networks—potentially augmented by virtual care—that will appeal to members traditionally less inclined to enroll in MA and historically presented with fewer plan options.
- Actively engaging in the evolving marketing and sales ecosystem—by diversifying their portfolio of partners to include more field brokers and e-brokers—to enable payers to reach more eligible individuals in their preferred (increasingly digital) channels. By supplementing their captive internal-distribution channels, which rely heavily on standard mailers and other traditional methods, they could also broaden their reach into, for example, communities with a higher proportion of minority residents or residents of relatively low socioeconomic status.
- Prioritizing investment in the Stars program to meet evolving beneficiary needs and address Stars performance and, therefore, revenue headwinds. Investment in Stars could be targeted to address SDoH needs, close clinical care gaps, and improve clinical outcomes for an increasingly aging population with more acute care needs, allowing payers to deliver a best-in-class member experience.
- Expanding digital engagement (such as through applications, text, and chatbots) to meet changing member preferences, and develop wraparound support services to increase member uptake and proficiency.
Additionally, a series of transformative initiatives could best position payers to navigate the future Medicare ecosystem.
Serve members with efficiency. For payers facing substantial margin pressure, administrative costs, which commonly exceed $100 per member per month (PMPM), are increasingly unsustainable. Plans can consider entirely new ways of managing administrative costs and running their budgets without sacrificing service quality. Although attaining economies of scale can create cost efficiencies, the distributed nature of MA membership creates challenges. Many single-state payers can boast a strong market presence yet have only tens of thousands of members. For most payers, reducing administrative costs will require investment in nonscale performance levers.
Typically, increasing cost efficiencies would require a meaningful investment in automation, data-backed decision making, and continuous reallocation of resources. Specific actions to consider include the following:
- embarking on true zero-based budgeting, targeting an administrative cost of less than $80 to $100 PMPM so that it could better withstand any changes in top-line revenue
- expanding reliance on shared technology platforms and services to manage costs while also investing strategically in products and capabilities
- investing now in innovative technologies that will soon become standard, including, for example, chatbots to assist members with support and requests (such as generative AI) and self-serve portals with tools to help members find the best plan for them
Deliver seamless shopping, enrollment, and onboarding experiences. Demographic changes will result in fewer seniors enrolling in MA, expanding opportunities to reach new and existing members. Payers could create and deliver an integrated experience from shopping to enrolling and onboarding to attract and retain members. In a 2022 survey of MA members, nearly half indicated they had shopped around to assess product options in the year prior, highlighting the imperative for easily navigable websites and distinctive benefits positioning.
To achieve their growth targets, payers will also likely expand their reliance on brokers and other third-party partners. Success will hinge on having clearly defined member journeys and integrated internal and external channels (for example, call centers and onboarding). Multidirectional, real-time data sharing paired with efforts by payers to educate and enable brokers would allow the integrated distribution unit to optimally attract and retain members in a lower-growth environment.
Know each member and personalize engagement. Knowing members as individuals is becoming crucial to meeting their shopping preferences, implementing best-fit engagement channels, managing disease states, ensuring access to quality care, and supporting evolving care needs.
Although payers have vast repositories of data, their databases (for example, for customer-relationship-management and care-management tracking) have traditionally been siloed. Payers have also typically defaulted to standard reporting and struggled to perform ad hoc analytical queries to understand the full scope of member engagement. And they have relied extensively on third-party Stars vendors who engage in sporadic calling campaigns to engage members in their healthcare journeys.
Instead, payers could consider differentiating themselves in their engagement with members by meeting the standards set by leading retail and e-commerce players. This might entail establishing a singular view of each member over the span of their Medicare journey and using unique member identifiers to track data points and touchpoints across channels such as brokers, care managers, and physicians. With a holistic view of each member at their fingertips, customer service representatives could provide better support.
Payers could develop AI-enabled predictive capabilities to provide personalized engagement plans and smart interventions. Ultimately, this improved transparency could unleash a ripple effect of better care, improved health outcomes, and an elevated experience for each member.
Convene and enable a redefined care-delivery landscape. The payer’s role in the care domain has expanded over time from utilization management to care management and, increasingly, care delivery. Some payers are carving out a leadership role as a convener of a care delivery ecosystem (encompassing the set of care models, physicians, capabilities, and services that surround a patient) while leaving care provisioning to clinicians. They are investing in enablement partnerships and acquisitions while working hand in hand with physicians to improve outcomes for Medicare members in meaningful risk-sharing arrangements.
Payers could accelerate this trend by assessing the clinical needs of their membership and mapping them to the care delivery landscape in their geography. For example, payers that have members with substantial clinical needs (for example, large populations with chronic kidney disease or special-needs plans for chronic conditions) might invest in or partner with specialists or advanced in-home care delivery partners. Payers with a large rural population could consider supplementing their care delivery footprint to address care gaps (for example, through virtual-care models).
Many payers would benefit from simultaneously pursuing multiple strategies, particularly as acuity in the Medicare population accelerates. Important considerations include aligning their incentives with those of physicians and patients and protecting physician independence in clinical decision making.
Payers could also use member data and conduct advanced analytics to match members with effective care models and enable physicians to deliver the highest quality of care.
A mature care delivery ecosystem would meet every member where they are through a combination of value-based care models (with physicians who can deliver against them), next-generation models (for example, rural-focused care), in-home primary and specialty care, and advanced care models.
Reimagine the product portfolio in line with MA membership needs. Payers often grapple with variable economics across the product portfolio. Newer members are typically enrolled in the most generous products with, for example, expansive dental and vision benefits, flex cards that cover not only over-the-counter medications but also food and wellness, and Part B givebacks (in which payers cover a set monthly amount toward a member’s premium).
These newer products are also the most economically challenging for payers. But although they would struggle to sustainably offer, for example, a $100 Part B giveback benefit, legacy members paying higher premiums (at least for now) effectively subsidize these offerings, resulting in an overall profitable membership mix. This trend, encouraged by many distribution partners, is unsustainable for payers, as evidenced by a number of previously high-growth MA plans that are now retrenching, rolling back benefits, and potentially causing meaningful disruptions in healthcare for tens of thousands of members.
The trend also doesn’t bode well for members as they age and their needs evolve. While members are relatively young and healthy, preferred provider organization (PPO) plans with $0 premiums and rich supplemental benefits but lighter core medical benefits can be a fit. These members, unconcerned with a higher maximum out-of-pocket cost, see supplemental benefits flowing directly to their personal bottom line—an especially appealing proposition at a time of high inflation and broader economic uncertainty. However, as the MA membership skews older, likely correlating with increasing medical needs, plans with richer medical benefits and lower maximum out-of-pocket costs may make more sense.
Payers can start now to evolve their product offerings and messaging to serve these members, including by rationalizing the supplemental benefit portfolio and reinvesting in core medical benefits that matter most to members’ health. In parallel, they can devise ways to counsel members to ensure they are continually enrolled in the right plan for their needs, perhaps over decades.
Given members’ increasing proclivity to shop, a proactive stance by payers will be rewarded. Payers could consider strategically engaging brokers, for example, to enable intrapayer plan movements. Although some payers and distributors have already begun to do this on an ad hoc basis (by, for example, proactively moving members to plans within their portfolios that have better Star ratings), taking a more strategic approach could help retain members within the payer’s ecosystem.
The MA market has been on an upward trajectory for years, with a continual stream of investor dollars chasing double-digit growth rates annually, enabling a thriving ecosystem of payers, care delivery partners, and services and technology companies. The variety of disruptions emerging, however, means that the winning strategies of the past five years are unlikely to be sufficient to meet members’ evolving needs and preferences. Success in the future will be determined by bold moves made now.
Author: Gabe Isaacson
Source: © 2023 Mckinsey & Company
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