Introduction
Medicare Advantage (MA) is a government-sponsored program that offers an alternative to traditional fee-for-service (FFS) Medicare, where private health plans, otherwise known as Medicare Advantage organizations (MAOs), provide benefits to Medicare beneficiaries. MAOs offer several different network-based plan designs in their defined service areas with differing additional benefits, levels of member cost sharing, prescription drug coverage, and member premiums.
The popularity of MA has grown since its introduction in 1997 as Medicare+Choice, expanding significantly in the last 10 years, from 27% of Medicare-eligible beneficiaries in 2012 to 48% in 2022.1 MAOs contract with the Centers for Medicare and Medicaid Services (CMS) to deliver and manage the healthcare benefits under the Medicare program as well as their administrative costs and profit in exchange for predetermined capitation revenue. The federal government largely funds the cost of the program, with the revenue received by private plans based on laws, regulations, and an underlying bidding process established, regulated, and overseen by CMS.2 Members may also pay a monthly premium depending on the plan design and the capitation revenue.
Most benefit plans offer coverage for additional benefits not covered by traditional FFS Medicare. Services like eyeglasses or contacts, hearing aids, dental, transportation, over-the-counter (OTC) drugs, and gym memberships are a few of the more common additional benefits provided by MAOs. Plans can also customize their benefit packages to offer certain benefits to a subset of chronically ill enrollees.
In addition to offering additional benefits, MAOs can offer Medicare-covered services at cost sharing less than traditional FFS Medicare. Traditional FFS Medicare includes a Part A inpatient hospital deductible and daily coinsurance (for days above 60) while MAOs may require the member to pay a copay upon hospital admittance or for the first few days of the stay. Traditional FFS Medicare also includes a Part B deductible and 20% coinsurance that applies to hospital outpatient and physician services while an MAO may require fixed copays that may vary by type and place of service. MA also includes prescription drug coverage through Medicare Advantage Part D (MAPD) plans. Most MAO benefit plans include Part D as part of the benefit plan. Part D is funded by member premiums and by the federal government through subsidies by CMS. There are certain programs within Part D where the MAO is not at risk, such as low-income cost sharing (LICS), the Coverage Gap Discount Program (CGDP), and federal reinsurance. MAOs receive prospective payments for these programs that are trued up at the end of the year.
Standard Part D coverage includes a deductible, 25% coinsurance up to the initial coverage limit (ICL), 25% above the ICL with prescription drug manufacturers paying 70% of the brand name drug costs, and catastrophic coverage. MAOs can differentiate their Part D coverage through their formulary and member cost sharing, generally below the ICL.
MAOs are licensed health insurance entities and are required to file a statutory annual statement with the state insurance regulator. The statutory annual statement is a standard reporting structure developed and maintained by the National Association of Insurance Commissioners (NAIC), with prescribed definitions allowing comparisons among various reporting entities.
This is the third annual update of the Medicare report, reflecting financial information for calendar year (CY) 2021 and analysis related to administrative costs reported by the MAOs. The previous iterations addressed CY 2019 and CY 2020 experience and can be obtained from the Milliman website. The methodology used to generate this year’s report is substantially consistent with the prior year's report.
This report summarizes the CY 2021 experience for selected financial metrics of organizations reporting Medicare Advantage experience under the Title XVIII Medicare line of business on the NAIC annual statement. We compiled this information from the reported annual statements.3 Individual reporting entities may be excluded from this report for the following reasons:
- Did not submit a health annual statement
- Reported less than $10 million in annual Medicare (Title XVIII) revenue
- Otherwise omitted from the NAIC database of health annual statements utilized for this report
The primary purpose of this report is to provide reference and benchmarking information for certain key financial metrics used in the day-to-day analysis of MAO financial performance. This report summarizes the financial results on a composite basis for all reporting MAOs.
- Appendix 1 provides additional detail and stratifications of the financial metrics presented in this report.
- Appendix 2 provides the methodology and assumptions utilized in developing the metrics presented in this report.
Please download the full report PDF to view the appendices.
Summary of CY 2021 financial results
The CY 2021 financial information analyzed for this report comprises information for 409 reporting entities across 44 states compared to 374 entities across 43 states in 2020. Information from Alaska, Delaware, Montana, North Dakota, South Dakota, and Wyoming is not represented, primarily because the reporting entities in these states were excluded based on the filtering criteria used for this report (described in the following paragraph). The COVID-19 pandemic had an impact on the financial results of MAOs in 2020 due to the decreased utilization of healthcare. However, pent-up demand for healthcare services from 2020 led to increased utilization in 2021, which resulted in a decrease in underwriting ratios for MAOs in 2021 compared to 2020. We retrieved the annual statements from an online database. In addition to the limiting criteria used to select companies in this report, certain MAOs may be omitted from this report because of their exclusions from the online database.
The MAO financials included in this report comprise information from MA only and MAPD plans and does not include stand-alone Prescription Drug Plans (PDPs). We compiled the financial data for the MAOs to produce outcomes of key financial metrics for various company groupings. We summarized the distribution of results to allow for user reference and benchmarking purposes. Unless otherwise stated, only companies with at least $10 million in MA revenue were used in this analysis.
The primary financial metrics we analyzed for this report include the medical loss ratio (MLR), administrative loss ratio (ALR), underwriting (UW) ratio, and risk-based capital (RBC) ratio. The selected metrics focus primarily on the income statement values of the financial statement, except for the RBC ratio, which is a capital (or solvency) measure. Appendix 2 of this report documents the methodology and formulas behind these metrics.
Figure 1 summarizes the composite CY 2021 financial results for the 409 companies meeting the criteria selected for this study. The total MA revenue base represents approximately $278 billion with achieved underwriting gains of 1.8%. The positive UW ratio of 1.8% represents a composite across identified MAOs, with considerable variances by individual MAOs.
Figure 1: Composite CY 2021 financial results
Note: Values have been rounded.
Figure 2 shows the distribution of MAOs within ranges of UW ratios specific to CY 2021, indicating about the same number of MAOs reported gains (205 MAOs) compared to the number of MAOs reporting underwriting losses (204 MAOs). Half of the MAOs reported an underwriting margin within a range of plus or minus 5%. Predictably, due to a decrease in UW ratio from 4.7% overall in 2020 to 1.8% overall in 2021, the distribution shifted to more MAOs losing money in 2021 than in prior years. In general, plans with larger membership have been more profitable compared to the smaller plans as can be seen later in this report in Figure 8 of Appendix 1. The underwriting ratio distribution for plans with greater than $1 billion in revenue is significantly different from the nationwide average, with more than 70% of the plans reporting gains.
Figure 2: CY 2021 underwriting ratio distribution
Over the past five years, aggregate MA revenue has grown by 69%. The main drivers of the revenue growth include the year-to-year increase in CMS benchmark revenue coupled with the enrollment growth in the MA market from the increase in Medicare eligibles as well as the increase in MA penetration rate. Enrollment included in the report increased by 40% over the same five-year period, with the largest year-over-year increase of over 10% growth this past year. Figure 3 summarizes the composite financial results for the most recent five-year period. The companies in each year are not the same; however, the criteria used to select the companies are consistent from year to year.
Figure 3: Five-year historical financial results
We note the following observations on the MA market over the most recent five years:
- The composite UW ratio for CY 2021 is the lowest over the past five years.
- The aggregate ALR fluctuated between 11.0% and 12.6% from CY 2017 through CY 2021. The two lowest ALR years in this period had been in CY 2017 and CY 2019 (when there was a moratorium on the Health Insurance Providers Fee [HIPF]). As the HIPF has permanently been suspended after CY 2020, CY 2021 has the lowest ALR over the last five years.4
- Risk-based capital ratios in CY 2021 decreased for the first time since CY 2017.
- The MLR hit a new high in CY 2021, after dropping to a new low of 82.7% in CY 2020 due to the COVID-19 pandemic.
Please note that the MLR calculated throughout this report is the MLR formula as defined in Appendix 2 below and not the CMS MLR formula used for MLR rebates. This is consistent with how MLR is reported on the statutory annual statement and does not make the adjustments that CMS allows for credibility, quality improvement activities, and taxes and fees.
While Figure 3 illustrates the overall changes in the underwriting results over the last five years, it is also important to understand how the underwriting results have varied across MAOs. Figure 4 illustrates the distribution of underwriting results in the MA market for each calendar year from the MAOs included in our analysis.
Figure 4: Distribution of underwriting results by year
The composite UW ratio decreased over the five-year historical period from 3.1% in CY 2017 to 1.8% in CY 2021. The percentage of MAOs reporting gains decreased for the first time in the past three years in CY 2021. The composite UW ratio reported by the MAOs in CY 2021 represents an aggregate underwriting gain of approximately $5.1 billion in relation to the $278 billion of revenue.
Administrative cost analysis
Medicare Advantage-focused MAOs
The previous section of this report contains analyses of key financial metrics for 409 MAOs that reported operations in the Medicare Title XVIII line of business, based on page 7 of the NAIC annual statement (Analysis of Operations by Line of Business). This section examines the administrative expenses reported by the MAOs on the Underwriting and Investment Exhibit Part 3 Analysis of Expenses page. This information is only reported at an aggregate MAO level and detailed administrative expense information is not stratified by line of business (e.g., Medicare). Therefore, the results presented in this section of the report are limited to the 227 MAOs that are defined as MA-focused in the database used for this summary. The ALRs reported by the MA-focused MAOs were relatively consistent with the remaining 182 MAOs, which were defined as non-MA-focused. The 227 MA-focused MAOs account for over 70% of the MA revenue summarized for purposes of this report, with an average 11.0% ALR. The remainder of this section summarizes the reported administrative costs for only the MA-focused MAOs.
Summary of results
The primary expense categories used in the Analysis of Operations by Line of Business page include the claim adjustment expenses (CAE) and general administrative expenses (GAE). The CAE and GAE categories are further stratified by additional subcategories of expenses in the Underwriting and Investment Exhibit Part 3 Analysis of Expenses page, which is the basis of the administrative expense categories illustrated in this administrative cost analysis. Figure 5 summarizes the CY 2021 administrative expenses by quartile of ALR performance for the 227 companies with an MA focus. The administrative expenses are stratified by administrative cost categories summarized from the Underwriting and Investment Exhibit Part 3 Analysis of Expenses page.
Figure 5: Administrative loss ratio by quartile of ALR performance
Note: Values have been rounded.
In composite, MAOs grouped in the fourth quartile have higher administrative loss ratios across all expense types compared to MAOs grouped in the first, second, and third quartiles.5 Between the third and fourth quartiles, human capital (costs related to salaries, wages, and other items specific to in-house staffing resources) and operating expenses account for most of the increase in administrative costs. Taxes, fees, and other costs decreased significantly from CY 2020 to CY 2021 due to the removal of the HIPF.
Figure 6 summarizes the administrative cost per member per month (PMPM) for the most recent five-year period for all companies matching the inclusion criteria indicated in this report.
Figure 6: Administrative cost PMPM by year
Note: Values have been rounded.
Figure 6 illustrates an overall increase in the reported administrative cost on a PMPM basis from CY 2017 to CY 2021. We observed a significant increase in the administrative cost PMPM from CY 2017 to CY 2018 and from CY 2019 to CY 2020, likely due to the inclusion of the HIPF in 2018 and 2020. The average annualized increase in the median is approximately 6.0% from CY 2017 to CY 2021. The percentiles illustrated are less sensitive to outliers and changes in reported administrative expense for the largest health plans.
The PMPM increase from CY 2017 to CY 2021 is mostly attributable to general inflationary trends as well as changes in the membership covered by the MAOs in this study, such as the increase in the number of beneficiaries in special needs plans (SNPs), which have higher claim and administrative costs. The range of administrative cost PMPMs over the years is likely attributable to a combination of drivers such as more start-ups entering the market with higher fixed administrative costs in the initial years; increased prevalence of SNPs, which require more intensive member care coordination; and/or other enrollment changes that can affect the PMPMs. As expected, the two lowest ALR years in this period were in CY 2017 and CY 2019 (when there was a moratorium on the HIPF).
Conclusion
Almost 50% of people aged 65 and older in the United States enroll in MA.6 With Baby Boomers aging into Medicare, combined with new additional benefits, benefit flexibility allowed by CMS, and lower premiums each year,7 the MA market will continue to grow and play an even bigger role in the Medicare market. The Congressional Budget Office (CBO) predicts MA penetration will increase to 61% of the Medicare market over the next decade.8 The results in this analysis show a slim majority of MAOs were profitable in 2021. MAOs offer popular coverage options for Medicare beneficiaries, and their financial results will help us understand the viability and the continued sustainability of private health insurers in the MA market.
The results in this report provide reference and benchmarking information for certain key financial metrics used in the day-to-day analysis of MAO financial performance.
Limitations and data reliance
We compiled the results contained in this report using data and information obtained from the statutory annual statements for MAOs filed with the respective state insurance regulators. We retrieved the annual statements from an online database on July 11, 2022. In addition to the limiting criteria used to select companies in this report, certain MAOs may be omitted from this report because of the timing of annual statement submissions or their exclusions from the online database.
Milliman developed certain models to estimate the values included in this correspondence. The intent of the models was to estimate the MAO financial results presented in this report. We reviewed the models, including their inputs, calculations, and outputs, for consistency, reasonableness, and appropriateness to the intended purpose and in compliance with generally accepted actuarial practice and relevant actuarial standards of practice (ASOP). The models rely on data and information as input to the models. We relied upon certain data and information for this purpose and accepted it without audit. To the extent the data and information provided is not accurate, or is not complete, the values provided in this correspondence may likewise be inaccurate or incomplete. Milliman’s data and information reliance includes the NAIC annual statement database. The models, including all input, calculations, and output, may not be appropriate for any other purpose
This report is intended for informational purposes only. Milliman makes no representations or warranties regarding the contents of this report. Likewise, readers of this report are instructed that they are to place no reliance upon this report that would result in the creation of any duty or liability under any theory of law by Milliman or its employees to third parties.
The views expressed in this research paper are made by the authors and do not represent the opinions of Milliman, Inc. Other Milliman consultants may hold alternative views and reach different conclusions from those shown.
Qualifications
Guidelines issued by the American Academy of Actuaries require actuaries to include their professional qualifications in all actuarial communications. Shyam Kolli and Greg Sgrosso are members of the American Academy of Actuaries and meet the qualification standards for performing the analyses in this report.
About the authors
Phil Ellenberg is a healthcare consultant at Milliman. Mr. Ellenberg joined Milliman in 2016 and specializes in predictive analytics and business intelligence.
Shyam Kolli is a principal and consulting actuary at Milliman and is a fellow of the Society of Actuaries and a member of the American Academy of Actuaries. Mr. Kolli joined Milliman in 2010 and currently has nearly 20 years of healthcare-related actuarial experience.
Tushar Makhija is an actuarial analyst at Milliman. Mr. Makhija joined Milliman in 2017 and primarily works on Medicare bid pricing.
Greg Sgrosso is a principal and consulting actuary at Milliman and is a fellow of the Society of Actuaries and a member of the American Academy of Actuaries. Mr. Sgrosso joined Milliman in 2002 and currently has more than 20 years of healthcare-related actuarial experience.
Acknowledgments
The authors further acknowledge Chris Pettit, FSA, MAAA, principal and consulting actuary, and Brad Piper, FSA, MAAA, principal and consulting actuary at Milliman, for their peer review and comments during the writing of this report.
1 Freed, M. et al. (August 25, 2022). Medicare Advantage in 2022: Enrollment Update and Key Trends. Kaiser Family Foundation. Retrieved November 27, 2022, from https://www.kff.org/medicare/issue-brief/medicare-advantage-in-2022-enrollment-update-and-key-trends/#Figure1.
2 Friedman, J.M., Swanson, B.L., Yeh, M., & Cates, J. (February 2020). State of the 2020 Medicare Advantage Industry: As Strong as Ever. Milliman Research Report. Retrieved November 27, 2020, from https://www.milliman.com/en/insight/state-of-the-2020--medicare-advantage-industry-as-strong-as-ever.
3 National Association of Insurance Commissioners. Annual Statement Database, as delivered by S&P Global, Inc, all rights reserved.
4 The full text of the Consolidated Appropriations Act, 2016, is available at https://www.congress.gov/bill/114th-congress/house-bill/2029/text.
5 A quartile is a cut point dividing the number of data points in a data set into four parts, or quarters, of roughly equal size.
6 Freed, M. et al., Kaiser Family Foundation, op cit.
7 CMS (September 30, 2021). CMS Releases 2022 Premiums and Cost-Sharing Information for Medicare Advantage and Prescription Drug Plans. Press release. Retrieved November 28, 2022, from https://www.cms.gov/newsroom/press-releases/cms-releases-2022-premiums-and-cost-sharing-information-medicare-advantage-and-prescription-drug.