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The growth of Medicare Advantage and its impact on providers


Higher administrative costs hurt providers, but technology can help

Payers are increasingly drawn to the benefits of Medicare Advantage (MA), while providers face challenges adapting to its impact. MA offers clear advantages to payers, particularly in terms of profitability. According to an analysis by the Kaiser Family Foundation (KFF), MA insurers reported gross margins averaging $1,730 per enrollee in 2021. This figure is at least double the margins reported by insurers in the individual/non-group market ($745), the fully insured group/employer market ($689), and the Medicaid managed care market ($768).

Medicare Advantage: ©NajmiArif -

Medicare Advantage: ©NajmiArif -

The greater profitability of MA for health insurers has resulted in increased spending by the federal government on health care costs. A separate KFF analysis revealed that federal spending for Medicare Advantage enrollees was $321 higher per person in 2019 compared to if enrollees had been covered by traditional Medicare. This additional federal spending per Medicare Advantage enrollee contributed to an estimated $7 billion in extra expenditures.

On the other hand, MA has led to higher administrative costs for providers. As the number of MA plans and enrollees has soared, providers must contend with a growing number of policies and regulations. Compliance with these rules has become more complex and variable, resulting in increased claims denials and prior authorization requests for providers. Research has indicated that the administrative burden associated with MA is 1.4 to 1.5 times more onerous compared to traditional Medicare when it comes to filing claims and adhering to regulations and policies.

Moreover, the surge in MA's popularity is occurring amidst widespread staffing shortages across the nation. According to an annual survey conducted by the American College of Healthcare Executives, workforce challenges ranked as the top concern for hospital CEOs in 2022 for the first time in 16 years, when financial challenges were ranked as the top concern.

Taking a closer look at MA, it was launched by Congress nearly two decades ago as a private-sector alternative to Medicare with the promise that innovative private companies would find ways to lower health care costs while maintaining high-quality care. However, a comprehensive report by The New York Times exposed several shortcomings of MA. The report revealed how major health insurers exploited the program to inflate their profits by billions of dollars. Federal audits found that eight of the top 10 MA insurers submitted inflated bills, and four of the five largest players faced federal lawsuits alleging fraudulent over-diagnosis of customers.

Despite the revelations, the popularity of MA continues to rise. In 2022, nearly half (48%) of eligible Medicare beneficiaries were enrolled in MA plans. Overall, MA enrollment as a share of the eligible Medicare population more than doubled from 19% in 2007 to 48% in 2022, according to KFF.

MA spending accounts for a substantial portion of total federal Medicare spending, amounting to $427 billion or 55%, according to KFF. In fact, the government now spends nearly as much on the nation's 29 million MA beneficiaries as it does on the Army and Navy combined, as reported by The New York Times.

Despite the challenges faced by providers, insurers are increasingly entering the MA market. For instance, Humana recently announced its plans to phase out its commercial business with employer health plans and shift its focus primarily to MA. This trend is not surprising considering that MA is considered the only growth market within the health insurance landscape, according to Bloomberg.

Recognizing the additional administrative burden imposed on providers by the growth of MA plans, the U.S. Centers for Medicare and Medicaid Services (CMS) has proposed potential relief in the form of electronic prior authorizations. The proposed rule would require MA and other government-related plans to implement electronic prior authorization systems by 2026. It also mandates that payers provide a specific reason for denying a prior authorization request and issue a decision within 72 hours for urgent requests.

CMS noted that prior authorization has been identified as a major source of provider burnout and can pose a health risk to patients if inefficiencies in the process cause delays in care. Additionally, providers are forced to allocate resources to navigate the varying prior authorization requirements across payers and the submission and approval processes, which could otherwise be directed towards clinical care.

However, the actual impact of this proposal on providers' day-to-day operations and the broader issue of administrative waste remains uncertain. Given the shortage of health care labor supply, providers would be better served by adopting artificial intelligence-based automation and advanced analytics to reduce administrative costs associated with obtaining clean claims, securing quick prior authorization approvals, and facilitating faster payments. By leveraging AI and automation, health care organizations can enhance the efficiency of their revenue cycle without the need to hire and train additional staff.

In conclusion, as MA plans continue to grow in number and complexity, providers must recognize the need to leverage AI and automation to streamline their revenue cycle operations. By adopting these technologies, health care organizations can overcome administrative challenges, optimize their revenue, and navigate the evolving landscape of Medicare Advantage more effectively. Proactive providers who embrace the transformative power of AI will position themselves at the forefront of the industry, ensuring financial stability and success in the years to come.

Kimberly Hartsfield is a seasoned healthcare executive with almost 30 years of experience in the payer, provider, and consulting arenas. She has utilized her experience in the healthcare industry as a frequent presenter, with nearly 60 national speaking engagements on a variety of topics including data and analytics, compliance, value-based payment models, and provider cost and quality transparency. Kimberly currently serves as EVP, Growth Enablement at VisiQuate, helping healthcare organizations achieve peak business health by taking command of their data to maximize revenue cycle operations.

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© National Institute for Occupational Safety and Health