Abby Burns (00:17):
From Advisory Board, we are bringing you a Radio Advisory, your weekly download on how to untangle healthcare's most pressing challenges. I'm Abby Burns. Today, we're talking Medicare Advantage, specifically what the latest MA payment rate update looks like, what it means for payers and providers, and what impact it might have on the future stability of the MA program.

(00:38):
We've talked about Medicare Advantage a bunch on Radio Advisory, and that's in no small part because this is a super consequential segment of the healthcare industry, for payers and providers, certainly, but also for patients, 35 million of whom have opted into MA and who rather enjoy having supplemental benefits that traditional Medicare doesn't offer.

(00:57):
But their ability to access those benefits relies on this program being stable and sustainable for the whole ecosystem. As we talked about on Radio Advisory back in February, it's been a volatile few years for MA, and the MA program itself is coming under more and more scrutiny from the government. Today, I want to understand how that scrutiny is showing up in one of the main levers the government has to influence the way this program operates, the annual payment rate adjustment.

(01:23):
CMS made the 2027 MA and Part D final announcement in early April. Today, I want to understand not just the high level, but the mechanics of what is and isn't in this rate announcement and what it means for payers and providers alike. Now, to do that, I need to call on someone with both the technical expertise to break down the specifics of what goes into this rate and the strategic acumen to explain the "so what?"

(01:48):
That's why I'm calling Alex Balmes, VP of actuarial services for Optum. Alex has been doing actuarial consulting for payers and providers in the government payment space for 23 years, including eight years in R&D for actuarial models. Without further ado, here's my conversation with Alex. Alex, thank you so much for coming on Radio Advisory.

Alex Balmes (02:13):
Thank you.

Abby Burns (02:14):
We are talking about Medicare Advantage. In January of this year, CMS put out its 2027 Medicare Advantage and Part D Advance Notice, as it does every year. This time, it caused a little bit of an uproar. The stocks of major health insurance companies who operate Medicare Advantage plans dropped as much as 10 to 20% in a single day.

(02:37):
For their part, plans were very clear from the time this advance notice came out that this essentially is not a viable or a sustainable proposal. So fast-forward a couple months in early April, CMS released the final rate announcement. Alex, to start our conversation, can you overview where CMS landed with the MA final rate notice for calendar year 2027?

Alex Balmes (03:01):
So CMS announced in the rate announcement what they ultimately intend to do for contract year 2027. Major components of the rate announcement include the overall effective growth rate and risk adjustment model changes and normalization changes and Star Rating changes. So they got all these different mechanical components, and the aggregate result that they announced in the rate announcement was about a 2.5% increase in overall MA reimbursement. That's compared to about a flat to negative, slightly negative change in the advance notice that they had proposed.

(03:35):
The major change was not really on the effective growth rate. The key change that was made in the MA rate announcement was that the risk adjustment model changes weren't as bad as what they had proposed in the advance notice, and that was the big concern that I think the stock market and payers were concerned about, was a major change in the risk adjustment model for 2027.

Abby Burns (04:00):
So to your point, we're calling it a rate notice, but we're not really just getting, "Hey, here's the updated payment rate for the next year." There's actually a lot that goes into that.

Alex Balmes (04:11):
Yup. All the calculation components, the details, the weeds of how they set those rates at the county level for MA plans, and all the considerations that the actuaries have to take into account in their bid submissions all have to be compiled and considered in setting the overall payments that we bid for the MA plan to receive.

Abby Burns (04:34):
And we should say you are an actuary by training.

Alex Balmes (04:37):
I am.

Abby Burns (04:38):
How does this rate notice stack up from an actuary perspective to rate notices of past?

Alex Balmes (04:45):
Well, the past four or five years since COVID hit have been a whirlwind of large increases and large decreases and flat rates for these overall changes from CMS to MA payers, and that whirlwind was expected when COVID happened. A lot of people in the actuarial community had seen that coming, and we said, "Oh, this is going to be a mess." Right?

(05:09):
It's really been the fluctuation within the past four or five years and the changes in the risk adjustment model that has really constrained reimbursement to MA payers, and that has compounded financial struggles for the MA industry, and what we're seeing in the stock markets and for CEOs of MA payers and directors of the programs is real, genuine financial concern and strain.

Abby Burns (05:34):
Okay. Super helpful. Now, I want to talk about the risk adjustment conversation, because, to your point, this was what caused a lot of consternation, what was a big driver behind the activity that we saw in the stock market, and it ultimately didn't end up becoming part of the final notice. By the way, if we look at those same insurance companies the day the final notice came out, stocks did rebound, not in the 10 to 20% range, typically more in the 5 to 10% range. But talk to me about the risk adjustment that ended up in this final notice.

Alex Balmes (06:04):
So let's be clear. In the rate announcement, there's actually multiple risk adjustment models that get proposed and/or adopted. The Part D risk adjustment model, also known as the RxHCC model, was adopted as it was proposed in the advance notice.

Abby Burns (06:17):
Okay.

Alex Balmes (06:18):
The MA or HCC model was not adopted as it was proposed in the advance notice. The MAHCC model was updated a couple years back to what people finally call the V28 model, and it causes a lot of consternation in the market when you talk about the history of risk adjustment on many, many fronts for stakeholders, whether it be policy advocates, CEOs of companies on the payer and the provider side.

(06:43):
These risk adjustment models are deeply important in the MA space, because they are a function of how plans get paid and, in many cases, how providers get paid. Changes to that underlying model really need to be thought out and planned ahead for the industry. Whether you're a payer or provider, a change in that risk adjustment model has an implication.

Abby Burns (07:09):
Yup. And the consensus was the proposed rule didn't have that well-thought-out logic behind it to be able to go into effect for the coming plan year.

Alex Balmes (07:17):
Yes. And there was also, when the industry saw the proposed model, they actually teased out some real fundamental technical problems with the model. When you get into the weeds of how they built the technical risk adjustment model, the coefficients to the model, they actually had a fundamental problem that led to certain condition categories being over-reimbursed relative to the cost that we expected and the rest of the conditions being under-reimbursed, and the industry pointed that out.

(07:48):
Really good, smart people across the industry spent a lot of time between the advance notice and, in response to it, advocating for the fact that there was a technical problem in the risk adjustment model that they had proposed. Now, there's good things that they were doing with that risk adjustment model in the sense of rebasing the underlying claims data and all that type of stuff, but that technical problem ended up, I think, driving the decision to say, "We're not going to adopt it for this year."

(08:14):
Rolling to 2028, plans should be concerned about this is coming. We are going to rebase this model at some point in time, but CMS has some technical considerations that they need to build into their development of the risk adjustment model going forward that they did not consider in what they proposed for 2027.

Abby Burns (08:31):
Yup. Alex, are there any other technical components of the MA and Part D final notice that we need to be aware of?

Alex Balmes (08:39):
One other thing that did get adopted in the risk adjustment model change that's been a buzz amongst stakeholders is linked and unlinked chart review. Linked and unlinked chart review specifically refers to how diagnosis data gets submitted from an MA payer to CMS for inclusion in the risk adjustment model or the calculation of the risk adjustment factors that are paid at the member level, and CMS proposed that unlinked charts would no longer be included in the development of risk scores for payment to the MA payers.

(09:12):
Now, the impact of that could have been all over the place. So some MA payers might have significant volumes of unlinked charts, and their risk scores are really levered in a big manner to unlinked charts, and some are not well-levered to unlinked charts, and it's not really a big issue for them. So every payer had to think this through on their own.

Abby Burns (09:32):
And Alex, where you're taking us is where I want to go next, which is, what does this final notice mean for health systems and for plan leaders, and what should they do next in order to position themselves for success in 2027, but also as they're thinking long term into 2030 and beyond? I actually want to start us on the health system side of the equation. What do health system leaders in particular need to be thinking about in light of this final rate notice?

Alex Balmes (10:00):
So health system leaders, A, should always be paying attention to the rate announcement, even if they're not in percent of premium, VBCs, or risk arrangements for a lot of different functions. And I think you got two different classes that we often talk about when it comes to health system leadership and how they think about the rate announcement. One is if you're in a VBC that has shared risk in any way, whether it's upside shared risk or downside or both ways, if you have SLAs tied to policy changes, for example, with diagnosis capture and/or SLAs tied to quality measures.

(10:36):
The rate announcement is really important to how the direction of those existing contracts are going to be renegotiated with MA payers, and you may have direct financial exposure in those provider contracts with your payer partners. The key here for the health system operators and owners is to be forecasting out and advocating as part of this policy process, but also immediately renegotiating and knowing your financial position on the provider side during the renegotiation that the MA payers are going to put you through, and they will put you through this.

(11:13):
They're definitely going to look at this and say, "If my revenue is only going up by 2.5%, well, I certainly can't afford to pay my providers an extra 3% that they're asking for." So that balance of capability for your MA payer partners to actually pay large rate increases is really hindered by this growth rate being low.

Abby Burns (11:33):
Why is it important that health system leaders understand the technical components that go into that final 2.48% growth?

Alex Balmes (11:42):
Well, you have to understand the market pressures in that discussion. What's happening at the market level for both payers and providers in these government-run programs and Medicare in particular is there is a contraction and a compression in the overall money available to spend. Whether you're a payer or provider, that's true. The government is saying, "We need to spend less."

(12:01):
And they hold most of the cards for how that reimbursement mechanism is structured, for how much the government is willing to pay to the industry, the industry inclusive of payers and providers. And we've been in a cycle in the past where reimbursement levels were growing really well and there was money to be made. And now, we're in a situation where we have a responsibility, providers and payers, to figure out where do we carve out costs.

Abby Burns (12:30):
Yeah.

Alex Balmes (12:31):
So the discussion now shifts and pivots to saying, "We are only getting this much money to play with. We're willing to share this much with you, and that's consistent with what we've always been willing to do, but that amount, that total bucket is less. So are you going to partner in this discussion on the fiduciary responsibilities, or is this going to become contentious because you believe that you deserve 105% of what we're actually making as income from the government to operate these programs?" It's a tough conversation, and it puts some companies out of business.

Abby Burns (14:16):
Alex, we talked about what the industry as a whole needs to know about that's in this final rate notice, but I wonder if there are any components that we haven't talked about yet that you think providers in particular need to be especially aware of.

Alex Balmes (14:28):
The other component is, it's the first time in a couple of years where the out-of-pocket maximums post-IRA are starting to increase at a substantial level, and that will start to balance out member behavior a little bit, but is it enough? That's the great debate amongst actuaries. Probably not enough. So we're going to have a lot of pharmacy growth, cost growth that's still continuing through 2027.

Abby Burns (14:52):
And I think the out-of-pocket maximum increased from $2,100 to $2,400, when you're saying it increased not a substantial amount when you look at overall sort of plan budget.

Alex Balmes (15:04):
Percentage-wise, it's a lot. It's a big number. But dollar-wise, it's still significantly lower than it was pre-IRA.

Abby Burns (15:12):
Yeah. And also, for patients, it might feel like a lot.

Alex Balmes (15:14):
Absolutely.

Abby Burns (15:15):
For plans, it might not. So let's move over to talk about plans. We talked about what providers need to be aware of and need to be thinking about relative to this MA and Part D final rate announcement. What do health plan leaders need to be tracking?

Alex Balmes (15:31):
Health plan leaders need to be thinking about their portfolio. They need to be thinking about the diversification of their insurance portfolio amongst various lines of business. In the current environment, if I can't make money off of MA or as much money as I need to maintain my overall insurance entity, let's just say, then do I have a long-term diversification strategy that allows me to absorb losses in one line of business while also sustaining the overall health of the business with other lines of business?

Abby Burns (16:03):
Which it's notable to say, for example, when we look at other lines of business and what's going on there. We all know that the enhanced premium tax credits just expired at the end of 2025. So the ACA line of business is maybe not doing much to bolster the overall portfolio mix.

Alex Balmes (16:19):
Yup. And backdrop of the past year in legislative environment with other larger pieces of legislation that have come into play. Shifts in Medicaid, ACA, and Medicare reimbursements causes members and health insurance entities to remix everything. So we've got this ecosystem of health insurance in the U.S. So the very first thing is, if MA rate announcement is low, if we're sitting at a 0 or a 2.5% increase, is that enough to sustain overall cost trend? True, false? Each organization has a different answer to that.

Abby Burns (16:51):
Yeah.

Alex Balmes (16:52):
The belief in we're going to be able to carve out 5% and trend here and increase revenue trends over here, and we're going to be at equilibrium. We're still dealing with the ongoing effects of COVID and how all these mechanisms work. More control is given to the government over time in the MA space for how they can move different levers, whether it be risk adjustment or Stars or growth rates.

(17:19):
The growth rate is pretty much a calculated number, but risk adjustment and Stars programs constantly are changing and allows the government to kind of claw back components of MA revenue, and they proposed that this year, and they didn't adopt it ultimately. But if they get it right on the technicals, they would have adopted this model, and we would have been sitting with a model that causes overall reduction in reimbursement in 2027.

Abby Burns (17:45):
Which affects every part of the ecosystem.

Alex Balmes (17:47):
Correct. Industry-wide, seeing organizations contract, MA organizations pulling back, shifting around their plan strategies. For many years, we were in a very heavy growth trajectory. We see that with MA enrollment numbers going up significantly. Most recently, trends were focused on C-SNPs and the whole SNP market in terms of where we can acquire membership. Solvency requirements are real, and every payer leader has to face the solvency discussion at some point in time with the state.

(18:16):
Those are real discussions that have been happening. The MA growth rate, just bringing it back to the rate announcement, if it's not adequate to keep up with the cost trends that we have, and we're not able to increase our rate and our benefits to align with that over time or fast enough, that's a problem, and MA is heavily restricted on how you can adjust benefits from year to year.

Abby Burns (18:37):
To that point, when the proposed notice was filed in January, one of the main messages coming from health plans was, "Hey, we're going to have to massively restrict member benefits. Maybe it's capped for this year, but as we look at the next five years, members are going to feel this." And famously, the stakeholder that is happiest with Medicare Advantage as a program is patients. Usually, approval ratings are in the high 90s, mid- to high 90s.

Alex Balmes (19:03):
I hope so, because they're getting a really good benefit, and I hope that they recognize that. And I think another obstacle for payers is helping the beneficiaries to understand how good of a benefit this is, how hard they're trying to really present a good value product. In the MA industry, you're making money by keeping that member in your book of business over time.

(19:25):
So that is another challenge that payers really have been struggling with, is, "How do I explain this value proposition of staying with our organization over time, working with our providers efficiently, engaging in our care management platforms and programs, and the strategy that we have to serve you best over a longer period of time?"

(19:46):
The government doesn't necessarily have a set of financial mechanisms in the rate announcement that fully supports that long-term strategy. They've been proposed over time by advocacy groups around the industry and by payers, but they haven't really proposed in a rate announcement to say, "Let's expand risk adjustment to be a two-year look-back period. Let's encourage things that are long-lasting to keep those members enrolled in your organization over time." They are instead encouraging a competitive environment that can lead to some unintended outcomes for the member.

Abby Burns (20:21):
It's interesting, because it's almost like replicating some of the challenges with commercial insurance. One of the reasons that value-based care is hard in commercial insurance is member churn tends to be higher. Right? That's not the only reason, but if I'm thinking about this covered life for a two-year standpoint or a three-year standpoint, maybe I, as a plan, act really differently than if it was a 10-year standpoint. I want to ask a similar question on the plan side to what we talked about on the provider side, which is around drug spend. Obviously, this is a major area driving trend for plans. How does that show up for them in this advance notice?

Alex Balmes (20:54):
So right now, every Part D sponsor and payer leadership on the pharmacy side is thinking through formulary changes, renegotiating contracts with PBMs, thinking through their 2027 strategies given where the market is going, and there's a lot of compliance around the Part D space in particular. There's more and more formulary restrictions that will occur as the government negotiates more prices.

(21:18):
So we hit on topics like manufacturer discount pricing and maximum fair price negotiations that the government is going through and inflation protection in the drug pricing space that all impact negotiations between PBMs and manufacturers of drugs, and impacts the access to those drugs in the market by having additional formulary requirements and drug coverage requirements for what the Part D sponsors have to deal with.

(21:46):
So this is just the ecosystem that we're sitting in, and plans have to bid for this for 2027. So Part D is still a competitive bidding process where everybody is submitting a bid in June, and then by August, we find out how close we were or weren't, and the actuaries have to predict and plan around how that's going to play out. And that's really difficult to do, as you might have.

Abby Burns (22:09):
I was going to say, that's why you get paid the big bucks.

Alex Balmes (22:10):
And so, every payer leader is probably aware of this and dealing with this fun of the bidding process and how they want to guess, for lack of a better way to say it, around what direction they think the market is going. Now, that's on Part D. There's also physician-administered drugs, and there's also IRA in the backdrop that I mentioned earlier. That's not enough to really change that behavior, that decision-making process. So back to the providers having influence, payers have to forecast all this.

Abby Burns (22:38):
Yup.

Alex Balmes (22:39):
The payers are having to figure out, "How do I manage this?" The PBMs are having to figure out, "How do I help my payer partners to navigate through this new landscape?" And rebates have been stymied in the pharmacy pricing market because of negotiations that the government has injected themselves into for how the funding is spread, shared between manufacturers and the payers. We have a complete shift over the last three years in how pharmacy pricing actually will work going forward. Good, bad, I'm not trying to opine on that.

(23:14):
What I am trying to say is that change is still being digested by payer leaders, and that change is real, but it's real for everybody. You're not alone in that, and the whole industry is digesting that right now. It's very, very important, those partnerships that you have with your PBMs, those partnerships that you have across the industry with your providers, to find relevant solutions and to advocate how that's going to look on the go-forward. There's going to be some pain throughout this change.

Abby Burns (23:45):
Alex, let's follow that train of thought. Where I want to end our conversation today is actually going ahead and looking at the years to come beyond calendar year 2027. If we think about where we've been, and you laid this out so helpfully at the beginning of our conversation, Medicare Advantage has been pretty turbulent, pretty unpredictable if we look at, let's call it, the last five years. To what extent will this rate announcement impact the longer-term stability of the MA program?

Alex Balmes (24:14):
Near term, there's pain. We're still, I think, going to see some organizations withdraw, pull back. We are seeing some light at the end of the tunnel. Many organizations are starting to figure out that they can't be on a restrictive strategy for too long. They've still got to grow their enrollment. They've still got to cover their admin to exist.

(24:36):
We see other organizations just trying to sell the business. Consolidation is a reality here in the near term because of some of that too. There's value in what has been built in the past, and the industry is going to figure that out. Long term though, CMS is addressing a couple of core systemic issues that I do think will be helpful to payers and providers to get back onto a stable market environment.

Abby Burns (25:01):
Helpful to both payers and providers.

Alex Balmes (25:03):
Yes. I think it will be helpful to payers and providers, because stability means predictability, and predictability means that we can actually figure out a cohesive set of parameters for our relationship between payer, provider, and beneficiary over time. That's really, really important, and the government plays a critical role through these rate announcements to create stability. And I do think that the current tone is focused in on that as a value proposition for members, and they're very focused on the member. We should be too. All of us should be.

(25:35):
But it's important that the government stays focused on the member without compromising the stability of reimbursement for providers and the MA payers in the industry. So too much disruption or inappropriate disruption, like the proposed risk adjustment model, throws wrenches into things, and it was really good to see that they didn't adopt it, that they actually listened.

Abby Burns (25:58):
Yes. Proposing the innovation can be productive. It's also productive to acknowledge where there are technical weaknesses that will impact the viability of the greater ecosystem. Let's take the time to get it right.

Alex Balmes (26:10):
Absolutely.

Abby Burns (26:12):
Alex, before we wrap, any final forward-looking thoughts about MA that you want to leave us with?

Alex Balmes (26:18):
Well, it's all good, fun discussion. I think that there's a reflection on all of these policy changes and an expectation on the MA industry and Part D industry that they're thinking two years, five years ahead, that they're designing their organizations and their strategy for the long run, knowing that they want to be in this business, that they're committed to supporting these members.

(26:38):
The government policy is going to take time to calibrate, and the policy itself is a year-by-year adjusting process that takes time to catch up to the reality of medical cost trends and pharmacy cost trends, and how we continue to pivot to try and extract cost savings and revenue growth to sustain our businesses. Having a long-term strategy that is constantly rolling forward with the changes in the regulatory environment is a top key thing to continue to monitor through this process.

Abby Burns (27:07):
Well, Alex, thank you so much for coming on Radio Advisory.

Alex Balmes (27:11):
Thank you.

Abby Burns (27:15):
At the highest level, to pull us fully out of the weeds, what I heard from Alex is that this rate announcement won't be massively disruptive for plans or providers really. It also doesn't serve to stabilize the MA program longer term. And in fact, we should expect more fundamental changes to risk adjustment methodology in future years that will likely have significant impact. And remember, as always, we're here to help. Next week on Radio Advisory.

(28:00):
New episodes drop every Tuesday. If you like Radio Advisory, please share it with your networks, subscribe wherever you get your podcasts, and leave a rating and a review. Radio Advisory is a production of Advisory Board. This episode was produced by Rae Woods, Chloe Bakst, and me, Abby Burns. The episode was edited by Katy Anderson, with technical support provided by Chris Phelps and Joe Shrum. Additional support was provided by Leanne Elston and Erin Collins. Special thanks to Sally Kim. We'll see you next week.