Why More Organizations are Terminating Medicare Advantage Contracts

The great termination? More organizations are terminating payer contracts amid heated negotiations, and Medicare Advantage is in the hot seat.

The payer/provider battle is raging, and signaling what may be an emerging trend: More organizations are fighting back against payers by terminating their contracts completely, and Medicare Advantage (MA) has seemingly been the focus.

Thanks to record inflation and operational challenges, hospital and health systems find themselves with their backs against the wall in negotiations, leading CFOs to initiate contract terminations.

But what exactly has led to the turmoil? CFOs say the reasons are vast.

“Bad behavior.”

More organizations are now considering contract terminations due to dissatisfaction with reimbursement rates and overall bad payer behavior.

Healthcare providers have been arguing for years that insurance payers often set reimbursement rates at levels that are lower than the actual cost of providing care. Couple this with skyrocketing inflation costs and labor expenses, and providers can be left with no other choice.

When reimbursement rates are significantly lower than the cost of care and the administrative burdens are so high, healthcare providers may experience unsustainable financial losses. These underpayments along with egregious denials are pushing providers to the limit.

In such cases, CFOs may weigh the option of contract termination as a last resort to protect the financial stability of the organization.

“There is rarely one final straw, but rather, a cumulation of events that negatively impact the fiscal viability of the relationship,” Britt Berrett, managing director and teaching professor at Brigham Young University and former CEO with HCA, Texas Health Resources, and SHARP Healthcare, explained.

“Long before rates become contentious, hospitals are dealing with bad behavior and payer shenanigans,” Berrett said.

For example, he says, payers are rejecting claims based on utilization review criteria. Many healthcare leaders consider these rejections to have little to do with utilization but rather an attempt to refuse payment.

Luckily for providers, organizations are becoming more capable of cost accounting and utilizing analytics to determine the actual cost by patient and payer.

Why Medicare Advantage?

Why has MA been in the hot seat of terminations? While not the only culprit of the turmoil, organizations have been fighting back against MA’s low reimbursement rates for years, and as Berrett said, maybe CFOs are finding no fiscal viability in the relationship with the payer.

One case in point is Scripps Health. Two medical groups within the system canceled their MA contracts for 2024 because of low reimbursement rates, denials, and administrative costs to manage high utilization and out of network care.

These challenges have led to annual losses that exceeded $75 million for the system.

“We’re unfortunately on the vanguard of what I think is going to be a very ugly few years between hospitals and commercial insurance companies,” Chris Van Gorder, president and CEO of Scripps, told USA Today.

And Scripps has the resources to better manage these burdens, meaning these burdens are even more exacerbated for smaller systems.

An example of this is Samaritan Health Services. It recently terminated its commercial and MA contracts with UnitedHealthcare.

The five-hospital, nonprofit health system cited slow processing of requests and claims that have made it difficult to provide appropriate care to UnitedHealth's members, according to a news release from Samaritan.

“This, along with other factors, is not in alignment with our mission of building healthier communities together,” the health system said.

Another example is St. Charles Health System, a four-hospital network and healthcare company in Central Oregon, which terminated its MA contracts in 2023.

Steve Gordon, president and CEO of St. Charles, said great thought went into the decision to reevaluate MA participation, and it was done only after years of concerns piled up not just at St. Charles, but at health systems throughout the country.

“The reality of Medicare Advantage in central Oregon is that it just hasn’t lived up to the promise,” he said in a press release. “A program intended to promote seamless and higher quality care has instead become a fragmented patchwork of administrative delays, denials, and frustrations. The sicker you are, the more hurdles you and your care teams face. Our insurance partners need to do better, especially when nurses, physicians and other caregivers are reporting high levels of burnout and job dissatisfaction.”

It's also worth noting that Memorial Hermann Health System, the largest hospital system in the Houston region, terminated its agreement with Humana's MA networks at the beginning of the new year. Memorial Hermann has not yet publicly cited why, other than saying the contract negotiations hit an impasse.

OK, but what’s the outcome of termination?

But what is it like on the other side of an MA termination? It hasn’t been so bad for some.

Hamilton Health Care System, a not-for-profit, fully integrated system of care serving the northwest Georgia region, has been out of network with MA for years.

“We are not currently in network with any Medicare Advantage plans. We would end up netting less than traditional Medicare because of denials and administrative hassles,” said Julie Soekoro, EVP and CFO at Hamilton Health Care System.

In addition to a lessened administrative burden, being out of network hasn’t affected Hamilton’s bottom line or patient experience.

“Since we are out of network, the MA plan should be paying us as if the patient were a regular Medicare patient, so it has not affected the patients adversely,” Soekoro said.

All the time and money spent on takebacks, pre-authorizations, and denials add up. Coupled with the aforementioned low reimbursement rates, CFOs can find it doesn’t make business sense to continue with the payer.

MA isn’t the only difficult payer, though; the challenge is universal.

For example, Hamilton Health Care has spent a lot of time going back and forth on a contract with a national payer that wanted to bring them in network, only for Hamilton to walk away from the negotiation table.

“After spending a great deal of time and effort modeling the contract, we learned the payer will require all diagnostic imaging business to go to a freestanding competitor, while building in very attractive looking rates for imaging,” Soekoro said. “This is misleading in that they never intended to allow their subscribers to come to us for imaging.”

“This was discovered incidentally by our contracting director, rather than fully disclosed by the payer,” she added. “Also, certain provider-favorable terms that we built into the language have mysteriously fallen out of the most recent version of the language.”

As stated, Hamilton walked away from that particular negotiation.

Another example comes from Berrett and his time at Texas Health Resources.

While Berrett didn’t specify the type of plan (MA or otherwise), the organization terminated a payer contract because its patients had significantly higher CMI, resulting in losses for their patients.

“The impact [of terminating the contract] was very positive for the hospital. We lost volume but improved margins,” he said. “The payer was able to promote a significantly lower premium for companies because their rates to the providers were so low. When we terminated the agreement, they could no longer sell lower premiums and their market share dwindled. They eventually retreated from the market.”

What does the future hold?

It’s worth noting that the trend of MA terminations is not a common occurrence with the nation's health systems—yet. In fact, several health systems expanded their own 2024 MA subsidiaries.

But that hasn’t stopped the critiques of the program from growing louder.

The Health and Human Services Department’s inspector general reported last year that some MA plans have denied coverage for care that should have been provided under Medicare's rules. On top of this, CMS and the Biden Administration have both proposed rules to address certain aspects of the plan’s requirements.

Even so, the payer/provider relationship is sure to remain heated in the coming year—even beyond MA.

“At the same time that community hospitals are struggling to stay out of the red, the national payers are reporting profits in the billions in their quarterly earnings reports,” Soekoro said.

“It feels to me like the payers became accustomed to taking in premiums during the volume downturns of the COVID years when patients shied away from seeking follow through on regular—and sometimes even urgent—healthcare needs,” she said. “Now the payers seem to be looking for ways to sustain those increased quarterly earnings.”

As for the providers, CFOs could have more leverage in negotiation talks than they think, but it requires willingness and preparation to pull levers that may be uncomfortable yet necessary for financial survival.

Dropping a payer is “absolutely an important strategy,” Berrett says. “Providers are becoming more capable in measuring the impact of the slow or rejected payments, and providers are looking at the actual cost of care by patient. Payers need to be aware that.”

There are two important considerations for providers, Berrett says.

“Are we able to collect our negotiated rates, and are the patients covered by this payer more expensive to treat?”