Understand the value you bring to the table and have a long-term strategy, says one CFO.
After historic levels of private equity (PE) deal-making in 2021 and 2022, activity dipped in the first half of this year as firms dealt with debt service costs and other economic challenges—but that doesn’t necessarily mean your organization is safe from the PE disruption.
PE deals are expected to rise though in the second half of the year and into 2024 as the debt market recovers and inflationary pressures settle.
This just goes to show that PE’s presence in healthcare isn't diminishing anytime soon, even if the level of activity doesn't return to the record-breaking highs during the peak of the COVID-19 pandemic.
CFOs have decidedly realized that if you can’t fight PE, you might as well partner if necessary, so reading the market and recognizing the ebbs and flows of PE is critical for providers who are considering partnerships with firms.
What is the state of PE now?
As it stands, hospitals aren't the only ones under financial stress—investors are also dealing with economic pressures that are causing them to move cautiously.
The result has been a slowdown in PE deal-making in the first half of 2023 following two straight years of historic investing. Thanks in part to the trillions in monetary stimulus the economy received to offset the effects of the pandemic, 2020 saw a record $151 billion in total deal value, according to research from Bain & Company. That breakneck pace didn't sustain in 2022 as market forces in the second half of the year caused a dip to $90 billion, but it was still more than $10 billion greater than the next-closest year.
Recent research by PitchBook, revealed that PE deals in healthcare declined "unexpectedly" in the second quarter of 2023. An estimated 164 deals took place in 2023, the lowest figure since the second quarter of 2020 and a decrease of 23.7% from the first quarter of 2023. While it marks the sixth straight quarter of deal count declines, the second quarter was still 12.3% higher than the average quarterly deal count in 2018 and 2019.
Much of the deceleration is due to heavily leveraged platforms feeling squeezed by growing debt service costs and upcoming maturity walls from the federal funds rate being set at 5.5%, Pitchbook notes.
It’s not all downhill though.
It's expected that PE activity will steadily climb again in the second half of the year and into 2024. Pitchbook believes a "gradual reversal" is coming with buyers more willing to accept prices lower than those from the past two years. As the economy stabilizes, inflationary pressures settle, and the debt market recovers, PE deal-making should pick up as firms have their dry powder at the ready.
What does this PE activity mean for CFOs?
It’s not out of the question for CFOs to consider partnering with PE firms, especially when there are minimal financial alternatives.
PE isn't all bad, Janet Carbary, CFO at IRG Physical & Hand Therapy, told HealthLeaders.
"They can help a company grow. They can bring in some expertise on the ground that the company doesn't have, especially in the finance and marketing area. And they certainly give the company access to capital," Carbury says.
But keep in mind they aren't in it for the long term, "private equity is rarely in it for longer than five years," she says.
Still, some providers may see a PE deal as an opportunity to shed management and administrative responsibilities to focus all their efforts on delivering high-value care. PE firms can provide financial relief or allow a practice owner to exit on their own terms.
"There are so many owner-operators who don't have a really good exit strategy for when they retire and no longer want to be an owner-operator," Carbary said. "It does potentially give the owner-operator a way to transition their company into a little bit longer term exit strategy for the company and the employees."
So how can providers capitalize if they are looking to partner? Carbary offers two pieces of advice: know your worth and know what you want to accomplish, both in the short- and long-term.
"You have to understand your value as a provider," Carbary said. "Too often owner-operators out there don't have a good idea of what their company is worth. It's really important that you feel like you're in control and that you know you're valuable coming in and that private equity is interested in you because they feel like they can continue to add value."
Do you want to remain independent? In that case PE is probably not the way to go, Carbary warns. "Or do you want to sell a minority share that's going to bring in capital to allow you to grow to a point where you can essentially buy them out again? You as a provider have to have a very clear understanding of what your relationship is going to be with private equity."
Private practices can also take steps to make themselves more attractive to PE firms, such as auditing workflow processes and implementing new technology.
Regardless of whether providers ever make the leap into PE, being ready to jump at the right opportunity will be an advantage during this new normal of PE in healthcare.
Most major health insurers are so far experiencing positive results in the face of unknowns.
The largest payers continued to see profits in the second quarter, despite concerns of increased utilization.
Familiar names were at the top of the charts, with UnitedHealth Group paving the way at $5.5 billion in profit, followed by CVS Health at $1.9 billion.
Not unlike their counterparts on the provider side, health insurers this year have had to maneuver through their own set of issues, although as their second quarter earnings reports showed, it hasn't hurt the bottom line much.
Here are three takeaways from the second quarter:
Utilization is up, but not alarmingly so
Insurers were already bracing for utilization to go up from deferred services as a result of the COVID-19 pandemic.
Those fears, the second quarter indicated, were not unfounded, but they weren't fully borne out either.
Some of the medical loss ratios experienced by payers were 83.2% for UnitedHealth, 86.2% for CVS, 86.3% for Humana, and 81.2% for Cigna. While the figures were on the higher end compared to recent quarters, they were mostly manageable.
Where utilization has especially increased is in outpatient settings as patients begin to seek out care they delayed during the pandemic.
"Bottom line, I don't really think the benefits are driving this," UnitedHealth Group CEO Andrew Witty told investors. "When you look at the concentration of what we're seeing in terms of the outpatients, the orthopedics, in particular, those sorts of areas, it looks very much more like a kind of deferment of care."
CVS also reported utilization increase in outpatient settings, particularly on the Medicare Advantage (MA) side.
Fallen star ratings
Speaking of MA, payers projected realistic outlooks for their star ratings, which have taken a hitacross the board in 2023.
Cetene CEO Sarah London told investors that the insurer anticipates losing its only four-star MA contract—plans with at least four out of five star qualify for bonus payments that can be used to offer supplemental benefits.
"While this is disappointing, we do expect to see meaningful movement in our three- and 3.5-star plans in October, and roughly two-thirds of our members are in plans showing year-over-year improvement," London said.
Humana, meanwhile, expressed confidence in their position and reported significant improvement in star ratings for CenterWell Home Health, with the percent of its branches with 4.5 stars or above increasing from 18% in January to 50% in the second quarter.
Bonus payments have been a boon for MA insurers, with KFF estimating qualifying plans will collect at least $12.8 billion in bonus payments this year—an increase of 30% from 2022.
MA payers are working to account for CMS' adjusted methodology for star ratings to continue bringing in the payments.
Medicaid not redetermining expectations
The ongoing Medicaid redetermination process is creating a potential drain in membership, but insurers have so far conveyed cautious optimism that it won't be too detrimental.
Elevance Health president and CEO Gail Boudreaux said she was encouraged that Medicaid members losing coverage are transitioning into Affordable Care Act exchange plans. The insurer reported a loss of 135,000 Medicaid members in the quarter, but managed a net income increase of 13.2% year-over-year.
"It's still early in the process, and our expectations for coverage transitions remain unchanged," Boudreaux said on an earnings call.
For Centene, Marketplace membership grew to 3,295,200, up from 2,033,300 over the same period in 2022, while the Medicaid business increased to 16,059,600, compared to 15,446,000 year-over-year.
London said the performances of both sectors are "running slightly ahead of expectation."
From expenses to admissions, there are a few key indicators that CFOs need to know that both positively and negatively affected recent earnings reports.
The financial outlook for hospitals across the nation is moving in a positive direction, albeit with challenges still standing in the way.
After the largest for-profit health systems released their second quarter earnings report earlier in the summer and as nonprofits continue to release theirs, patterns have emerged indicating America's hospitals are beginning to see some financial relief.
It's evident that now is still not the time for CFOs to let their financial guards down, but the squeeze may be lessening for some.
Here are three significant trends we saw in the second quarter:
Labor costs down, total expenses still up
Arguably the biggest priority for healthcare CFOs right now is reducing costs without sacrificing potential growth. Part of that task is finding a way to bring down labor costs, which have been a thorn in executives' sides amidst a workforce shortage.
The second quarter, however, saw some health systems produce encouraging results. HCA Healthcare slashed labor costs by 20% compared to last year's second quarter, while also increasing nurse hiring by 9%, CEO Sam Hazen told investors.
Community Health Systems (CHS) cut its labor costs by 15% to $74 million, a drastic change from its peak of $190 million in the first quarter of 2022, CEO Tim Hingtgen said on an earnings call.
Other hospitals, however, saw their labor costs go in the opposite direction and even with improvement in that area, HCA or CHS couldn't bring down their total expenses for the quarter, which increased 7.6% and 1.9%, respectively.
Bringing down total expenses remains an obstacle for healthcare leaders, but having a process-oriented mindset can help, Ochsner Health CFO Jim Molloy recently toldHealthLeaders.
"It is important to develop a culture in which leaders seek continuous improvement, while also measuring the appropriate things and benchmarking yourself in key areas against best-in-class organizations," Molloy said. "While it is important to always keep a mindset toward reducing expenses, the true key to success for any organization is disciplined growth."
Admit one (or more)
Another positive development for hospitals has been the rise in admissions as demand has rebounded after the COVID-19 pandemic kept patients away.
Universal Health Services (UHS) experienced an increase of 7.7% in adjusted admissions, following an uptick of 10.5% in the first quarter.
At Tenet Healthcare, same-hospital admissions increased 3% year-over-year, with non-Covid admissions up 5%, contributing to a strong overall second quarter.
Meanwhile, Mayo Clinic saw a 6.5% rise in outpatient visits, an area many hospitals are both experiencing growth and targeting to maintain financial stability.
Stacy Taylor, CFO at Nemaha County Hospital, recently shared with HealthLeaders why focusing on outpatient services has been vital to the critical access hospital.
"We try to stay in the market by bringing in as many outpatient doctors that we can from the bigger cities so that they can see patients here. This way, patients are not driving an hour to get to the city, and we can see them here at the hospital in a rural setting," Taylor said.
Operating margin inching forward
Even as most hospitals underperformed, the median year-to-date operating margin index for June increased to 1.4%, according to Kaufman Hall's National Hospital Flash Report.
Comparatively, the operating margin index was at 0.7% in May, and the bump in June was partly a result of fiscal year-end accounting adjustments, Kaufman Hall noted.
The increase was helped by a dip in aforementioned labor costs, as the report found the proportion of full-time equivalents per adjusted occupied beds fell 8% from May.
Further indicating a shift away from inpatient settings, the report also revealed an increase in outpatient revenue.
Members want more from their health insurer, but different generations require different approaches.
If you're a health plan and want to not only retain your members, but attract new ones, the status quo may not be enough.
A one-size-fits-all approach may not be either, with older beneficiaries preferring one type of experience, and younger members wanting another. That's why health plans have to deliver highly personalized care—something they're seemingly not doing enough of.
Recent surveys, studies, and analysis have shown member satisfaction to be relatively low right now. The newest piece of evidence comes from a survey of more than 2,800 beneficiaries by digital healthcare company HealthEdge, which found that only 45% of respondents are fully satisfied with their health plan, while 55% want more from their insurance.
The survey also reveals differences among generations. Respondents aged 18 to 24 were four times more likely than other age groups to prefer digital communication with their health plan, such as texting and mobile app messaging. Respondents aged 65 and up, on the other hand, preferred traditional forms of communicating, such as phone calls and emails.
However, commercial health plans are struggling to meet patients' engagement needs. A separate study by J.D. Power, based on response from 32,656 commercial health plan members, uncovered that overall member satisfaction dropped by 13 points this year (on a 1,000-point scale), mostly due to a 33-point decline in customer service and a 16-point decrease in information and communication.
Another report by Accenture, released near the end of 2022, revealed the top reasons why beneficiaries leave their insurers. Nearly half of almost 11,000 respondents (49%) cited ease of navigation as the number one factor for switching, which includes: inconsistent or inaccurate information, unanswered questions, poor experiences using digital tools, poor customer service, and discomfort with how payers used their personal data.
Switching up coverage and benefits, or increasing provider choice, is likely a bigger ask for health plans than improving the engagement experience. Focusing on digital tool offerings, customer service, and convenience can be low-hanging fruit for payers to appeal to beneficiaries, particularly of the younger generation who are more prone to switching plans.
Gabriella Gold, director of Network Strategy and Innovation at CareFirst BlueCross BlueShield, recently shared at the HealthLeaders' Payer NOW Summit some unique solutions to improving the member experience in behavioral health that her health plan is seeing results from.
"An example of a technology we've rolled out to all our commercial members is an asynchronous chat function that mimics a coffee conversation with a close friend or family member," Gold said.
"We've also partnered with an organization to bring all of our solo practitioners together and incentivize technology use for charting and appointment scheduling. We're now seeing streamlined appointment bookings in under four days whereas previously, members were calling five to 10 providers and not getting a call back for 30 days. We've seen great strides there."
For health plans, building and maintaining loyalty with beneficiaries isn't just about trust and consistency, but also about demonstrating a willingness to evolve to meet members' needs and expectations.
While digital engagement may not always be the priority for members, it's the area where insurers can potentially make strides fairly quickly to improve satisfaction.
Back-end revenue cycle management is a top priority as organizations seek operational and cost efficiency.
Even in a tight economic environment that is forcing healthcare organizations to scale back costs, many hospital and health system leaders are still eyeing investments in automation to improve workflows and save money in the long run.
Revenue cycle managment (RCM) solutions especially can significantly reduce administrative burden, allowing staff to spend time and energy on what matters most: improving and delivering care.
The risk of spending more for the reward of operational efficiency appears worth the squeeze for more than one-third of health system executives in a recent survey who said they are planning to automate two or more RCM or finance functions in 2024. The survey, conducted by the Healthcare Financial Management Association and strategy and market research company Eliciting Insights, fielded responses from 321 health system executives in May.
Back-end RCM was selected as the highest automation priority, with 40% of executives saying they planned to invest, followed by patient access (37%) and mid-revenue cycle (32%). Within RCM, the biggest areas of focus highlighted by respondents were prior authorization (39%), denials/appeals management (37%), and patient self-service/digital front door (37%).
Covenant Health senior vice president and CFO Stephen Forney recently shared with HealthLeaders how the multi-state, Massachusetts-based health system is fighting "financial toxicity" through integrating AI.
"At Covenant, we've seen how AI can play a crucial role in addressing financial challenges by streamlining workflows and improving revenue cycle management," Forney said. "We leverage an automated philanthropic aid platform, Atlas Health, that helps keep us up to date on the latest aid programs, alerts us when they're open for enrollment, and helps match our patients to the program they're best suited for, streamlining the process significantly for all stakeholders.
"Integrating AI into our systems promotes efficient resource utilization and better financial outcomes."
Health systems appear to also be interested pursuing standalone RCM solutions, whether those are vendors that offer an all-encompassing range of tools, or single functionality vendors that can improve specific areas. According to the survey, 95% of executives planning to purchase RCM or finance technology and services are willing to consider "bolt-on" vendors outside of their EHR systems.
Joann Ferguson, vice president of revenue cycle at Henry Ford Health, toldHealthLeaders that her advice to other health systems considering AI is to do their due diligence, find the right fit, and be willing to pursue the best solutions.
"Going for the quick fix or using last year’s technology because it's cheaper will only make change more painful in the future," Ferguson said. "That means finding a partner who understands rev cycle operations and AI, and what your team needs to be successful.
"AI products that will grow and can keep pace with the breakneck speed of tech innovation in healthcare are a must, not a 'nice to have.'"
The publicly operated health plan has seen an increase in requests for resolving claims and requests for potential advances coming out of the pandemic.
Months into taking over the reins as CFO of L.A. Care Health Plan, Afzal Shah understands the financial challenges facing not only his organization, but also his counterparts at hospitals.
"They want their claims paid faster," Shah says.
During a time in healthcare when payers and providers have little choice but to work together to ensure mutual success, it's critical both sides recognize what the other needs.
Shah knows that better than most, having previously served as deputy CFO at L.A. Care, senior vice president at Alignment Healthcare, and vice president for Actuarial Services at Health Net and Centene.
In an exclusive interview with HealthLeaders, Shah shared how he's collaborating with hospital CFOs, addressing claims disputes, scaling back expenses while eying growth, and more.
This transcript has been lightly edited for clarity and brevity.
HealthLeaders: What has the experience been like in the first few months as a CFO in the current financial climate?
Shah: After the pandemic, there have been quite a lot of changes, impacts to our providers and our partners, including our IPAs [Independent Physician Associations] and especially the hospital community and the nursing facility community. We've definitely seen an increase in requests for paying claims faster, requests for potential advances, and loans. We officially don't give out loans, but we can give an advance related to directed payment that usually the state gives us to pass on to hospitals and we have offered millions and millions of dollars in those advances to hospitals to provide financial relief to them.
And then separately for L.A. Care, we are certainly looking at our team, our resources, our admin, our vendor spend, contracting spend. Our goal and my goal for the company is I want to see a sustainable company for many, many years to come, long after I'm gone. So we are reviewing all of our departments and our spend internally to see how we can manage to live within the revenue. We are heavily, heavily dependent on the revenue we get from the state of California, so how we can live within the revenue that the state gives us for both our admin costs, as well as our healthcare costs spent.
HL: Healthcare organizations everywhere are trying to cut costs, but how do you grow while keeping expenses low?
Shah: We are doing both, looking at our healthcare dollars and where we want to spend the right amount of dollars for the right price, in terms of purchasing services. We are looking at our network. Where do we need to add providers in the market? We are also looking at, in the individual market, people who may fall off of Medi-Cal due to redetermination. We have a home for them in Covered California and we continue to be the lowest price plan for that. We are also reviewing all of our admin spend and looking at each and every department. There are areas where we are looking to add staff where it's needed and then at the same time there are areas where we are looking to make changes.
Afzal Shah, CFO, L.A. Care Health Plan.
HL: What are the areas of focus for investment right now?
Shah: Security is a big one for us. Our IT team is very focused on security. That's very, very important to us. We have made some investments in the health services team. We heard from many of our hospital partners, they wanted more focus, they wanted more regular meetings, updates. And as we know, there are multiple changes on the state side in terms of the Medi-Cal program with CalAIM, Enhanced Care Management, community support. So we are also making investments to ensure that we can comply with all of the requirements of the state and the new benefits and programs that are impacting the Medi-Cal population, which of course is the majority of our population.
HL: How do you view the current payer-provider relationship and what can you do to improve it? Putting yourself in the shoes of a hospital CFO, how do you see it from their side?
Shah: I talk to hospital CFOs on a weekly basis. The leadership team is very committed to making sure we are listening to the issues that hospitals are facing and we are responding. We've had some very positive meetings with the CFOs. We are figuring out ways to address the issues. I think a lot of what we certainly hear is they want their claims paid faster than even before the pandemic, at times. That's what I hear a lot. If there are claims disputes, how do we address them in a timely manner. I've been working all summer with many of the CFOs to address some of those issues and there's still a long way to go, but we have been working with them collaboratively and listening to them.
There's definitely, in terms of medical inflation and changes in the healthcare industry, we've heard of certain hospital closures. So I do want to recognize that the economic environment is a fairly challenging one for hospitals and we are doing everything we can to help, such as with advances that we've made to hospitals for the ones that need it, for example.
HL: How can you tailor payment and care models to gain a win-win with providers, whether it's with fee-for-service, fee-for-value, or capitation?
Shah: We currently have a very diverse model of care, in the sense that we have three plan partners: Anthem Blue Cross, Promise, and Kaiser. We delegate membership to those plan partners, which we believe is a good thing because certainly that way our members have a choice of not just L.A. Care, but also the plan partners. But we also delegate risk to hospitals and IPAs, and because of that, sometimes there are timing issues. If a provider sees an L.A. Care member, oftentimes they may send us the claim, but the claim may not belong to us. It may belong to a delegated party. It may belong to a plan partner that we have delegated risk to, for example. While this very complicated payment methodology structure we believe is providing good service to our members, it can create some delays and we are working collaboratively with our hospitals, as well as our plan partners and delegated payers to really see how we can address the root causes of those delays.
There are also delays sometimes with Medicare, Medi-Cal claims where there's coordination of benefits—a provider has sent us a claim but we don't have the amount that Medicare would pay. So we also are working on addressing how we can, on a more timely basis, address those types of claims where there's a different party that's the primary payer versus the secondary payer.
The federal agency has made the changes after receiving feedback from stakeholders and participants.
CMS announced changes to the ACO REACH Model for 2024, which will advance health equity and afford participating providers more predictability.
ACO REACH is a value-based model that replaced the Global and Professional Direct Contracting Model and encourages providers to form an Accountable Care Organizations (ACOs) to shift away from fee-for-service in Medicare while taking on more financial risk. There are currently 132 participants in the model, which began on January 1, 2023, and runs through performance year (PY) 2026.
The updates to the model further incentive providers to participate. Included in the changes is a reduction on the beneficiary alignment minimum for new entrant ACOs from 5,000 to 4,000, as well as for High Needs Population ACOs from 1,200 to 1,000 for PY2025 and from 1,4000 to 1,250 for PY2026.
CMS is also providing a 10% buffer on alignment minimums for all ACOs starting in PY2024, which will allow ACOs to temporarily drop their beneficiary count while continuing to participate in the model.
Eligibility criteria for alignment to a High Needs Population ACO is being refined so beneficiaries with at least 90 Medicare-covered days of home health services utilization or at least 45 Medicare-covered days in a skilled nursing facility within the last year are included.
Additionally, CMS is revising the risk adjustment methodology in Medicare Advantage. PY2024 risk scores will be blended using 67% of the scores with the 2020 standards and 33% of the scores under the new 2024 model.
When it comes to the Health Equity Benchmark Adjustment (HEBA), CMS is adding two new variables—low-income subsidy status and state-based area deprivation index—to calculate the composite measure for identifying underserved beneficiaries.
HEBA will also see expanded access with CMS adjusting the ACO benchmarks in the modified policy to $30 per person, per month for beneficiaries with the highest equity scores.
The changes to the model make it more predictable for participants, maintain consistency across CMS programs and models, protect against inappropriate risk score growth, and advance health equity efforts.
Clif Gaus, president and CEO of the National Association of ACOs (NAACOS), said the updates address many of the concerns that have been raised by NAACOS members.
"We believe these changes will satisfy many concerns and stabilize future participation," Gaus said in a statement. "Additionally, we encourage CMS to explore adding features of REACH into a permanent track within the Medicare Shared Savings Program. Using MSSP as a chassis for innovation while infusing lessons learned from Innovation Center models into a permanent program is another path for stabilizing and growing participation in ACOs."
Over 48,000 clinicians polled say payers are manipulating the surprise billing law.
Health insurers are acting in bad faith in a multitude of ways when it comes to the No Surprises Act, a survey by Americans for Fair Health Care (AFHC) reveals.
The coalition of clinical and advocacy organizations polled 48,005 physicians in 45 states to investigate concerns over insurer abuse in the surprise billing law. The survey results suggest that providers are often on the wrong end of power dynamics, which includes payers withholding payments, limiting patients access to in-network care, and ignoring mechanisms of the independent dispute resolution (IDR) process.
The No Surprises Act is meant to protect patients from unexpected bills when they receive services from out-of-network providers at in-network facilities. When there is a dispute between providers and payers over price, the two sides can enter an IDR arbitration.
However, according to the surveyed clinicians, 52% of payments determined by independent dispute resolution entities were not made at all, while 49% were not made in the required 30-day timeframe, and 33% were made in an incorrect amount.
Since going into effect on January 1, 2022, the No Surprises Act has run into a litany of problems. Providers have challenged the law several times in court, with the latest resulting in a federal court suspending the IDR process once again by striking down an increase in administrative fees for arbitration and restrictions on batching related claims.
The IDR process has also been inundated with a massive influx of disputes. A recent status update by CMS revealed a total of 334,828 billing disputes had been filed, nearly 14 times more than initially expected.
Litigation challenges and surveys such as the one conducted by AFHC have illustrated how providers feel about the balance of power within the law. Without the necessary cooperation from insurers, the No Surprises Act will continue to impose financial challenges that will fall on the shoulders of providers.
New analysis reveals UnitedHealthcare and Humana are expected to earn nearly half of total bonus payments.
Federal spending on Medicare Advantage (MA) bonus payments will reach at least $12.8 billion this year, with UnitedHealthcare the biggest winner among payers, according to research by KFF.
Bonus payments in the program have increased every year since 2015 and the 2023 figure represents an increase of nearly 30% ($2.8 billion) from 2022. As Medicare Advantage enrollment continues to grow, understanding how the quality rating system and bonus payments affect Medicare spending and beneficiary premiums will be critical, KFF analysts wrote.
Eighty-five percent of MA enrollees are in plans that are receiving bonus payments this year, compared to just 55% in 2015. The share of enrollees in plans that receive bonus payments this year is the highest since the current iteration of the program was implemented.
The average bonus payment per enrollee highest for employer- or union-sponsored MA plans ($460) and lowest for special needs plan ($374). Comparatively, the average bonus per enrollee is $417 for individual plans and $374 for special needs plans.
UnitedHealthcare will is expected to receive the biggest bonus payment at $3.9 billion, followed by Humana at $2.3 billion. The two payers, which account for 47% of all MA enrollment, will make up 49% of total bonus payments this year as payments largely correlate to distribution of enrollment.
Behind them are BCBS affiliates at $1.7 billion, CVS Health at $1.3 billion, Kaiser Permanent at $966.8 million, Centene at $321.6 million, and Cigna at $247.3 million.
The average bonus per enrollee ranges from $251 for those in Centene plans, to $523 for those in Kaiser Permanent plans.
As the share of MA enrollment in plans with at least a four-star quality rating increases, spending on bonus payments follows.
"This spending comes at a time when the Medicare program is facing growing fiscal pressures, which are exacerbated by growth in quality bonus program spending," analysts wrote. "Growth in the quality bonus program is projected to lead to faster growth in Medicare Advantage benchmarks (and corresponding spending) compared to traditional Medicare spending in upcoming years."
MA insurers experienced a rude awakening with star ratings in 2023 as the average rating across all plans declined to from 4.37 in 2022 to 4.15, while the number of a five-star contracts fell to 57, down from 74 in 2022.
Insurers like Centene are feeling the pain, with CEO Sarah London telling investors on a recent earnings call that the payer anticipates losing its only four-star MA contract.
The quality bonus program as a whole has received criticism for overpaying MA plans. A recent report by the Urban Institute found Issues with measures of beneficiary experience and administrative effectiveness, as well as the star rating system suffering from score inflation.
New findings reflect the differences in negotiating dynamics and financial incentives in the two markets.
Hospital prices for commercial health plans are, on average, two to three times higher than Medicare Advantage (MA) plans prices in the same location for the same service when negotiated by the same insurer, according to a new study published in Health Affairs.
With the cost of health insurance in the commercial insurance market increasing over the past decade, the research highlights how the commercial and MA markets face different financial incentives and regulations.
Using 2022 price information given by hospitals in compliance with the price transparency rule, the researchers examined the ratio of commercial-to-MA prices negotiated by the same insurer, in the same hospital, and for the same services.
The results showed that median commercial prices ranged between 1.8 and 2.7 times more expensive than MA prices across all services. In dollar terms, commercial prices were between $660 and $707 more expensive than MA prices, on average.
Within the same hospital, the median commercial-to-MA price ratio varied, from 1.8 for surgery and medicine services, to 2.2 for laboratory tests and emergency departments visits, and 2.4 for imaging services.
The price ratio is higher at larger, teaching, and system-affiliated hospitals, and is higher for larger national payers with a major presence in both the MA and commercial markets.
"High commercial prices are ultimately passed on to employees and their dependents in the form of lower wages, higher premiums, and higher out-of-pocket expenditures," the authors wrote. "The large price gap between commercial and MA prices within an insurer reveals the pricing consequences of differing incentives across markets."
Why would insurers knowingly negotiate commercial prices so much higher than MA? The study highlights that out-of-network prices for MA plans are set at 100% of Medicare fee-for-service rates, which means that hospitals receive Medicare fee-for-service prices from MA insurers if they don't join their network. This allows insurers more negotiating power for their MA plans.
Another explanation the authors posit is that insurers bear more risk for their MA plans than for their commercial plans.
"All else being equal, insurers may accept higher prices for their commercial plans if it allows them to remain competitive in the MA market, where gross margins are nearly twice as high per enrollee," researchers wrote.
The study's findings have implications for policymakers and stakeholders interested in containing commercial hospital prices, the authors said.
"Because insurers respond to differing incentives by negotiating substantially different prices across markets, policy and practice efforts that alter incentives for insurers may have the potential to lower commercial pricing."