In recent years, Medicare Advantage (MA) plans have emerged as a pivotal player in the healthcare sector, capturing more than half of eligible Medicare beneficiaries. These plans, offered by private insurers and subsidized by Medicare, operate under a performance-based bonus system known as “star ratings.” This system, designed over a decade ago to encourage competition based on quality, has seen significant financial growth, especially during the COVID-19 pandemic. However, with the expiration of pandemic-era policies, the landscape of these bonuses is shifting, leading to an expected $1 billion decrease in payments for 2024.
Let’s break down the intricacies of the MA star ratings system, its financial implications, and what lies ahead for these plans in a post-pandemic world.
The Star Ratings System
The star ratings system was introduced as part of the Affordable Care Act to drive competition among MA plans. The idea was simple: higher-rated plans receive larger bonuses, and these bonuses enable them to offer better benefits to enrollees. Ratings range from 1 to 5 stars, with 5 stars being the highest, reflecting a plan’s performance in areas like patient care, member satisfaction, and the management of chronic conditions.
Insurers that score four stars or above are eligible for a 5% bonus, which gets factored into the benchmark rates — the rates plans can bid against to receive additional rebates. These higher rebates, in turn, give the plans more flexibility in enhancing benefits or lowering costs for members, giving them a competitive edge in the crowded Medicare Advantage market. This system, though effective in theory, has faced criticism, especially concerning its financial burden on Medicare.
COVID-19’s Impact on Star Ratings and Bonuses
During the COVID-19 pandemic, the federal government introduced temporary policies that bolstered star ratings for many plans, resulting in a surge in bonus payments. As insurers dealt with the challenges of the pandemic, the government granted certain leeways, allowing for elevated ratings in 2022, which in turn led to record-breaking bonuses in 2023 — reaching a staggering $12.8 billion.
However, these pandemic-era policies expired in 2022, and the ratings for 2023 reflect that rollback. As a result, bonus payments for 2024 are projected to drop by $1 billion, down to $11.8 billion. While this still marks a higher total than in most years before the pandemic, it represents a significant shift for insurers that have grown accustomed to steady bonus increases.
The Rise and Role of Key Players in MA Bonuses
Although the overall bonus pool is shrinking, the distribution of bonuses remains concentrated among a few dominant insurers. According to KFF (Kaiser Family Foundation), UnitedHealthcare and Humana, the two largest MA payers, will receive half of the total bonus payments this year, with UnitedHealthcare expected to rake in $3.4 billion and Humana set to collect $2.5 billion.
Meanwhile, Kaiser Permanente, known for its high-quality care, will receive the highest per-member bonus at $516. On the other end of the spectrum, Centene, with a lower percentage of enrollees in bonus-qualifying plans, will receive only $32 per member.
This concentration of bonuses among the largest insurers highlights the competitive nature of the star ratings system. It raises questions about its role in maintaining a level playing field across the healthcare landscape.
Controversy Surrounding MA Bonus Payments
The growth in Medicare Advantage bonus payments has sparked criticism from healthcare experts and Medicare watchdogs, who argue that the star ratings system does not accurately reflect the quality of care provided by plans. More concerning is the increasing financial burden these bonuses place on Medicare.
Between 2015 and 2023, spending on MA bonuses surged by over 400%, far outpacing the growth in MA enrollment. Critics argue that this rapid increase in spending, coupled with allegations of “upcoding” (where insurers exaggerate patients’ health needs to receive higher payments), has contributed significantly to Medicare’s spending deficit. According to the Medicare Payment Advisory Commission (MedPAC), privatized MA plans have raised Medicare costs by $612 billion since 2007, with $82 billion of that increase occurring in 2022 alone.
Legal Challenges and Future Risks for Star Ratings
The star ratings system, while providing an important mechanism for quality control, has also faced legal challenges. In 2024, the Centers for Medicare & Medicaid Services (CMS) was forced to recalculate star ratings after a federal court ruled in favor of insurers who claimed that the agency had miscalculated the original ratings. This recalibration resulted in higher ratings for more than 60 plans, a welcome relief for the industry.
However, the future remains uncertain. For the 2025 plan year, CMS has increased cut points — the thresholds that determine a plan’s star rating. Raising these cut points means that many plans could see their ratings drop, putting them at risk of missing out on bonus payments. According to health policy analyst Whit Mayo, the rise in cut points highlights both the competitiveness of the industry and the inherent risks associated with relying on star ratings to determine financial outcomes.
What to Wait?
As the MA program continues to grow, with 33.4 million enrollees in 2023 and further growth expected, the future of star ratings and bonus payments will remain a hot topic. The key challenges moving forward include:
- Regulatory Changes: Stricter oversight from CMS and increasing cut points could impact star ratings and reduce bonus payments.
- Cost Concerns: With Medicare facing increasing financial pressure, the sustainability of large bonus payments may be questioned.
- Quality vs. Cost: The ongoing debate surrounding whether star ratings effectively measure quality could lead to further revisions of the system.
For insurers, navigating this evolving landscape will require not just a focus on quality care but also careful attention to regulatory changes and financial strategy. For Medicare, finding the balance between incentivizing quality care and maintaining financial sustainability will be crucial in ensuring the program’s long-term viability.
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