Medicare Advantage's growth a bad omen for hospitals, S&P Global warns

The upward trajectory of Medicare Advantage (MA) enrollment is likely to become an issue for hospitals and other healthcare providers forced to contend with plans’ prior authorization requirements and other reimbursement headwinds, S&P Global warned in a recent report.

As of 2023, more than half of the Medicare population is enrolled in a MA plan, and payments to these plans now exceed traditional Medicare. That tally is likely to keep rising, S&P wrote, due to insurers’ viewing the market as a long-term growth opportunity, MA plan marketing as “zero-premium products” with additional benefits winning over consumers and general bipartisan political support for the program.

However, policy changes to reduce the program’s “higher-than-expected spending,” as highlighted by MedPAC earlier this year, could lead insurers to take a hard stance in rate negotiations in order to maintain their target average margins of 3% to 5%. That means providers—who already see slightly lower margins on MA-covered patients compared to traditional Medicare patients—could be in for future pay cuts.

“If already elevated utilization rates remain high for an extended period we would expect payors to further squeeze payments to providers,” S&P wrote in the report while referencing payers’ second-quarter 2024 earnings trends. “Overall, we expect these challenges coupled with further expansion of MA as a percentage of total Medicare beneficiaries will continue to pressure margins on the Medicare portion of the provider payor mix.”

Though the headwinds from MA affect providers broadly, S&P wrote that it “believes hospitals are the most vulnerable subsector because Medicare is typically at least a third of their revenue, and because a large percentage of their admissions are unplanned (they come through the emergency room), which limits the hospital's ability to verify the insurance treatment of provided services on a prospective basis.”

Even beyond rates, MA adds more administrative and liquidity hurdles for providers. S&P pointed to MA plans’ “key strategy” of prior authorization requirements, which force providers to absorb associated refiling costs and sometimes keep patients locked in a longer hospital stay. That burden is exacerbated by insurers’ generally “high” denial rates, S&P wrote, which have led to instances where smaller providers without the resources to fight claim denials terminate their MA plan contracts and become more vulnerable to closure.

“These headwinds have even gotten the attention of very large providers,” according to the report. “In a well-publicized example, Scripps, a large not-for-profit health system in San Diego, terminated its contract with Medicare Advantage plans effective Jan. 1, 2024.”

The report also notes that many MA plans have longer pay cycles than traditional Medicare. Combined with claims denials and payment uncertainty, the delayed reimbursement “can hurt cash flow and liquidity,” according to the report.

Though S&P paints a road map of continued MA enrollment growth and “a challenging contract negotiation season,” the report wrapped by highlighting a couple recent Centers for Medicare & Medicaid Services (CMS) policy updates expected to give hospitals a hand:

  • The so-called “two-midnight rule,” which requires patients be admitted as inpatients rather than remain outpatients if care extends beyond two midnights. The rule went into effect earlier this year could drive higher reimbursement, though “it remains to be seen whether MA plans will recoup the higher expenses associated with greater inpatient admissions through lower reimbursement rates to hospitals in future rate negotiations."
  • A CMS rule finalized in January requires health plans to send prior authorization decisions within three days for urgent requests and seven days for standard requests, among other requirements, starting in 2026. “This should theoretically provide more certainty for providers around payment terms and reimbursement, though hospitals may benefit less given the emergent nature of most admissions,” S&P wrote.