Discover more from Vital Signs
The Changing World of Medicare Advantage
I write pieces on sub-sectors and trends within health tech and S-1 breakdowns. Sign up below to get the latest in your inbox.
In the past month, a series of health insurers have announced Medicare Advantage (MA) enrollment that fell short of projections. On January 6, Humana announced its enrollment numbers were only ~50% of previous projections, causing the stock to drop by 20%. In short succession, Alignment and Cigna also announced they had enrolled fewer members than expected. While the Medicare Advantage market remains attractive financially and at the center of digital health innovation, these recent enrollment misses suggest the MA market may be changing. These changes present interesting opportunities for startups selling into MA payers.
First, a bit of background: Medicare Advantage allows seniors 65 and older to opt into insurance plans that are funded by the government but run privately. Since its introduction in 1997, the market has steadily grown to become a $412B market. Medicare Advantage enrollment has nearly doubled in the last decade; over 26 million Americans (42% of Medicare beneficiaries) are now enrolled in MA plans. The space generates high investor excitement because patients tend to stick with insurers for long periods of time and bring in ~$12,000 per year in revenue. Humana, specifically, has seen its stock increase 2.3x over the last five years as it built a strong number two position in MA. In the meantime, numerous startups such as Alignment, Bright Health, Devoted Health and Clover have raised substantial funding to tackle the market.
These recent enrollment misses weren’t caused by new startups which are still early in their trajectory and collectively only currently account for ~1% of total MA members. As Axios pointed out, the six major insurers (United, Humana, CVS/Aetna, Anthem, Kaiser and Centene) still dominate, accounting for 75% of the market.
The MA market also continues to expand at a 9% growth rate. So what happened to cause these misses?
Humana CEO Bruce Broussard had some choice words about what’s been happening in the market at the Goldman Sachs Annual Global Healthcare Conference this year. He pinpointed the problem as Humana losing a bunch of existing members and gave two reasons:
Competitors were putting lots of money into call centers that increased patient churn. He said Humana did not invest in these call centers because they were commoditized.
Competitors were chasing growth with unsustainably low pricing. He said Humana would seek to differentiate on product instead. Alignment and Cigna echoed similar concerns around underpricing.
For more context on Broussard’s comments and what’s happening with the MA market I talked with Byron Edwards, co-founder of Spark Advisors, an MA brokerage startup that supports independent field agents and provides care navigation for their Medicare beneficiaries:
Before diving into what’s changed, can you explain how Medicare Advantage carriers get beneficiaries to enroll?
The Medicare Advantage market is fiercely competitive and primarily gets “sold” via three channels. I’m using air quotes for “sold” because–and we’ll get into it later–most MA plans are priced at $0 per month, so don’t require any payment upfront.
The first channel is direct; carriers advertise to consumers and get them to sign up online or through their so-called captive agents.
The second channel, and traditionally the largest, is via independent field agents who represent many plans and primarily operate as small businesses in their local communities. They build their book of business over time and rely heavily on referrals from their existing clients.
The third channel, and the one that saw the most growth during COVID, is call centers. Call centers, such as the public companies GoHealth and eHealth, typically hire their brokers and run national direct-to-consumer campaigns. They might also serve as the outsourced direct channel arm for carriers.
And a very small-but growing percent-of members purchase their own plan online.
How has sales distribution changed over the past 5 years?
As mentioned, the call center channel grew quite a bit during COVID. A big reason for that was that independent field agents were unable to run their Medicare 101 type seminars in libraries and community centers or meet beneficiaries face-to-face. Call centers have invested heavily in performance marketing and traditional advertising channels (TV, radio, direct mail, etc.). While all of the major carriers work with them, they experience much higher churn than field agents. In short, insurers might hit enrollment targets through call centers during the Annual Enrollment Period (AEP) in the fall, but struggle to retain beneficiaries once plans start.
What is the customer experience like during MA enrollment?
In general, there’s a lot of noise for beneficiaries. They don’t know who or what to trust, and they’re looking for someone who can just explain what their options are without selling. When potential enrollees call a carrier directly, they’re going to speak to a salesperson who can only sell a single carrier.
And when they speak to a call center broker, they get someone on the line paid seasonally who has short-term bonus incentives to sell them a plan. I’m biased because we work with independent agents, but they’re the most long-term aligned for two reasons. First, most of their commissions are tied to annual client renewals and that commission is the same regardless of the plan, as mandated by the Centers for Medicare & Medicaid Services (CMS). Second, they build their business with referrals, playing the long-game. That’s not to say there aren’t any bad actors among independent agents looking to make a quick buck.
What are the call centers good at?
The call centers are good at purchasing leads, qualifying prospects, and handing them to an agent to do a telephonic enrollment. The agents are primarily compensated based on the upfront enrollment, not on retention. The call centers generate volume, but see high churn a few months later when a beneficiary realizes that their drug costs are higher than they had expected, or that their doctor is no longer in-network. Since there’s little loyalty to the call center–the beneficiary won’t even know which call center they used-the beneficiary just calls another number and changes the plan.
To be clear, not all call centers are the same. Each one has its own marketing strategy from driving traffic to (no-joke) Medicare.com to running Joe Namath ads or forming partnerships with referral sources. There are two big staffing issues they have to deal with: they have to staff up new agents during the Annual Enrollment Period, many of whom are let go right after, and they tend to lose the best agents; they go independent because they make ten times more per sale.
With respect to call centers, Humana believes this is a commoditized channel which is why it’s purposefully not investing. How should we understand MA plans' relative reliance on this channel and what does that mean for insurers who don’t invest in call centers?
For a carrier, it’s a great channel if you want to build volume quickly. As a carrier, you give a call center a large co-marketing commitment to scale up performance marketing or outdoor advertising spend and direct consumers to a phone number. That’s easier than coordinating across tens of thousands of independent agents.
The flipside is that you likely overpay and run into retention issues down the road. I expect the call centers will be pushed more and more to deliver on their retention metrics in order to justify the marketing commitments they’re receiving from the national players.
What does this shift to call centers mean for smaller startup carriers?
It’s especially hard to compete as a startup or regional carrier unless you have a marketing niche or significant product differentiation. Call centers will flock towards the national players since they have much larger marketing budgets that can generate volume. United Healthcare added more than four times more beneficiaries than all of the startups combined. The startups will focus on a few counties and build up direct advertising, independent agent relationships, and referral partners.
Humana talked about these call centers driving high churn, but they also mentioned competitors pricing aggressively. To what extent are you seeing that in the market?
We haven’t spoken at all about the product! If your product isn’t competitive, both independent agents and call centers are going to replace it with a better one.
In the last five years, there’s been a dramatic expansion of supplementary benefits in MA plans. That’s because monthly premiums have already gone down to $0, so MA plans are trying to differentiate on something other than price.
Some of the levers that MA plans pull are changing the maximum out of pocket spend (which averages $7.5k for in-network), reimbursing part of the Part B premium (effectively paying beneficiaries to use their plan), and increasing dental, vision, and hearing benefits. You’ll also see plans introducing things like an “over-the-counter” card that lets beneficiaries spend a certain amount at pharmacies every month. These extra benefits hurt plan economics but can increase enrollees.
If something bad happens, beneficiaries are still on the hook up to their max out-of-pocket spend, but the product is now often priced below $0 per month. Notice that I haven’t mentioned quality of care–while consumers do care a lot about the network that’s available to them, they are almost never aware of their plan’s Star Rating and don’t know what it means.
New carriers (either altogether, or within a market) may enter a market with a really great plan that loses money but drives volume initially. A few years later, carriers can change the plan and hope the beneficiary stays on it, even if it’s no longer the most competitive. You’ve asked a lot about retention rates, but in general, MA beneficiaries don’t switch that much. Status quo bias is strong here.
What can carriers like Humana do to improve retention if it’s becoming an issue?
It’s expensive to acquire beneficiaries, so plans are doing whatever they can to retain them. One part is ensuring that their plans stay competitive. The other part is ensuring the beneficiary is making the most of the benefits they already have. That means making sure they’re seeing a Primary Care Physician (PCP) they like within the first 90 days of joining the plan, signing up for a mail order pharmacy, logging into the carrier’s web portal, and using any supplementary benefits. It’s critical to personalize the outreach through multiple channels, coordinate with providers, brokerages, and pharmacy partners, as well as use data to anticipate which clients might churn. But that’s hard to get right, and this is where we step in to help our agents and payers.
How do you expect to see this market evolve going forward?
In the short term, consumers will continue to receive richer benefits. In the longer term, there’s a glaring question whether any of this actually creates better health outcomes, versus using benefits exclusively as sales tools. At a societal level, you’d like to see carriers win on the basis of quality and cost, and not on their marketing tactics.
I expect carriers will continue to work across all three distribution channels, but will try to shift from the call center brokerages to their direct agents. Independent field agents will continue to play an important role, while digital-only enrollment will grow too. Startups will carve out niches, but the big carriers will continue getting bigger.
(End of interview).
So what does this all mean for startups building in the MA space?
Payers should be particularly receptive right now to startups building ancillary benefits that consumers love and ideally lower costs. Medicare Advantage remains an attractive market but it’s becoming increasingly difficult for plans to stand out beyond lowering pricing to potentially unsustainable levels. Social Determinants of Health companies that provide services like transport to appointments, in-home visits etc. like Papa, Duos and Soda Health are particularly interesting for plans as they both can be a benefit that attracts members and a way to reduce healthcare spend. The higher touch care models of Special Needs Plans (SNPs) that can lower cost for complex patients should also prove similarly attractive.
As distribution channels become more competitive and larger carriers dominate nationwide channels, newer plans will need unique approaches to stand out. Some particularly interesting approaches in this space include Clever Care Health Plan, an MA plan focused on integrating Eastern and Western medicine, and Troy Medicare which partners with independent local pharmacists to leverage the trust they’ve built in communities.
Now is a unique moment for startups to pitch retention to payers. While retention in MA may have been previously assumed, payers are increasingly focusing on retaining members versus lower-priced competitors. Many patients barely know their insurer or use their benefits. Companies that can effectively engage patients after enrollment and provide positive experiences accessing healthcare and resolving issues should find a more attentive audience. This includes broader MA navigation services that Spark is building, higher touch specialty care models like Thyme Care and Strive Health and companies like Uno Health and Unite Us that help members access helpful government and non-profit benefits.