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, Part D coverage, and member premiums.
MA has grown in popularity since its inception in 1997 as Medicare+Choice, expanding significantly in the last 10 years, from 26% of Medicare-eligible members in 2012 to 42% in 2021.1 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 below traditional FFS Medicare. Traditional FFS Medicare includes a Part A inpatient hospital deductible and daily coinsurance (for more than 60 days) 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 MAOs may require fixed copays that may vary by type and place of service. MA also includes prescription drug coverage through Part D (MAPD). Most MAO benefit plans include Part D as part of the benefit plan. Part D is funded by member premiums and also 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 formularies 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 second annual iteration of the Medicare report, reflecting financial information for calendar-year (CY) 2020 and analysis related to administrative costs reported by the MAOs. The first iteration addressed CY 2019 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 2020 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 2020 financial results
The CY 2020 financial information analyzed for this report comprises information for 374 reporting entities across 43 states compared to 333 entities across 42 states in 2019. Information from Alaska, Delaware, Montana, North Dakota, South Dakota, Vermont, and Wyoming was 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 services observed starting in March 2020. This can be observed in the improved underwriting ratios for MAOs in 2020 compared to 2019. 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. 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 2020 financial results for the 374 companies meeting the criteria selected for this study. The total MA revenue base represents approximately $247 billion with achieved underwriting gains of 4.7%. The positive UW ratio of 4.7% represents a composite across identified MAOs, with considerable variances by individual MAOs.
Figure 1: Composite CY 2020 financial results
Notes: Values have been rounded.
Figure 2 shows the distribution of MAOs within ranges of UW ratios specific to CY 2020, indicating slightly more than 66% (247 MAOs) of the MAOs reported gains, with the remaining MAOs reporting underwriting losses. Forty-four percent of the MAOs reported an underwriting margin within a range of plus or minus 5%. Despite an increase in UW ratio from 3.3% overall in 2019 to 4.7% overall in 2020, the distribution looks quite similar between the two years.
Figure 2: CY 2020 underwriting ratio distribution
Over the past five years, the growth in aggregate MA revenue reflects a 62% increase. 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. Enrollment included in the report increased by 37% over the same five-year period, with the largest year-over-year increase of over 9% growth in the years 2018 and 2020. 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
Several observations on the MA market can be made over the most recent five years:
- Since CY 2016, the composite UW ratio has been greater than 3.0% in four of the last five years.
- The aggregate ALR fluctuated between 11.1% and 12.6% from CY 2016 through CY 2020. As expected, the two lowest ALR years in this period were in CY 2017 (when there was a moratorium on the Health Insurance Providers Fee [HIPF]) and in CY 2019 when the HIPF was suspended until CY 2020. The HIPF has ultimately been suspended going forward.4
- Risk-based capital ratios increased from 539% in CY 2016 to 654% in CY 2020.
- The MLR was stable and between 84.5% and 85.7% from CY 2016 to CY 2019 but dropped to a new low of 82.7% in CY 2020 due to the decrease in utilization of services as a result of the COVID-19 pandemic.
Please note the MLR calculated throughout this report is the MLR formula as defined in Appendix 2 and not the CMS MLR formula used for MLR rebates. It is consistent with how it’s reported on statutory annual statements and does not make the adjustments that CMS allows for credibility, quality, 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 increased over the five-year historical period from 3.3% in CY 2016 to 4.7% in CY 2020. The percentage of MAOs reporting gains increased, while the percentage of MAOs reporting losses decreased over time. The composite UW ratio reported by the MAOs in CY 2020 represents an aggregate underwriting gain of approximately $11.5 billion in relation to the $247 billion of revenue.
Administrative cost analysis
MEDICARE ADVANTAGE-FOCUSED MAOS
The previous section of this report contains analyses of key financial metrics for 374 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 195 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 179 MAOs, which were defined as non-MA-focused. The 195 MA-focused MAOs account for approximately 69% of the MA revenue summarized for purposes of this report, with an average 12.7% 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 2020 administrative expenses by quartile of ALR performance for the 195 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, although other expense types also increase steadily from quartile to quartile.
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 2016 to CY 2020. There was a significant increase in the administrative cost PMPM from CY 2017 to CY 2018 and from CY 2019 to CY 2020. The average annualized increase in the median is approximately 6.4% from CY 2016 to CY 2020. The percentiles illustrated are less sensitive to outliers and changes in reported administrative expense for the largest health plans.
The PMPM increase from CY 2016 to CY 2020 is likely 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 (when there was a moratorium on the HIPF) and in CY 2019 when the HIPF was suspended until CY 2020.
More than 40% of people age 65 and older in the United States enroll in MA. With Baby Boomers aging into Medicare, combined with new additional benefits, benefit flexibility allowed by CMS, and lower premiums each year, 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 51% of the Medicare market over the next decade.6 The results in this analysis show the majority of MAOs were profitable in 2020. MAOs are an integral part of the delivery system for Medicare-eligible enrollees, 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. It is likely that the COVID-19 public health emergency will significantly impact the financial results in CY 2021 and possibly beyond.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 August 11, 2021. 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 has 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 have 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 have relied upon certain data and information for this purpose and accepted it without audit. To the extent that the data and information provided is not accurate, or is not complete, the values provided in this report 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.
Please download the full report PDF to view the appendices.
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.
1 Kaiser Family Foundation. Medicare Advantage in 2021: Enrollment Update and Key Trends, Figure 1. Kaiser Family Foundation. Retrieved February 9, 2022, from https://www.kff.org/medicare/issue-brief/medicare-advantage-in-2021-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 February 9, 2022, 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 See the Consolidated Appropriations Act, 2016, 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.