Through over-reimbursement and under-reimbursement, Medicare Advantage — the first real “retail” health insurance market of scale — has consistently penetrated the Medicare marketplace over the past 20 years. And it shows no sign of slowing down.
For payers, that means finding ways to drive growth of their Medicare Advantage offering. For providers not already contracting with Medicare Advantage, it’s time to bite the bullet and either figure out an effective business model or consider launching their own plan. For investors, this is a macro trend and as such, a long-term opportunity.
L.E.K. Consulting’s proprietary county-level projection model shows Medicare Advantage enrollment rising from roughly 20 million, or 35% penetration, at the end of 2017 to approximately 38 million, or 50% penetration, by the end of 2025. Nor will it stop there. Indeed, we believe that Medicare Advantage’s march forward will continue apace until its penetration rate hits 70%.
Driving the march
Medicare Advantage is one of the rare products in the U.S. healthcare system that not only satisfies the “triple aim” of healthcare improvement — that is, improving the experience of care and the health of populations while at the same time reducing per capita healthcare costs — but also appeals to the self-interests of three very powerful constituents that have been driving its march forward: consumers, health plans and the government.
- Consumers like Medicare Advantage plans because they offer predictability, additional benefits, care coordination and lower estimated total annual healthcare costs than are offered by either Original Medicare or Medicare Supplement plan options
- Health plans like Medicare Advantage plans because they make more money than other plans, such as Medicare Supplement.
- Government supports Medicare Advantage because it enables the effective deployment of cost trend management tools other than the fee schedule
Slow and steady growth
Over the past 20 years, enrollment in Medicare Advantage plans has grown at a slow but largely steady pace (see Figure 1).
We expect Medicare Advantage to continue its slow but steady growth, reaching 60% to 70% penetration sometime between 2030 and 2040.
Medicare Advantage vs. Original Medicare
Where will the penetration come from? Much of it will come from Original Medicare, which could decrease more than 20 points, from 40% to 10%-20% penetration (see Figure 2).
Note: *The number of original Medicare eligibles ― individuals who are either currently or formerly entitled to or enrolled in either Part A or Part B Original Medicare
Source: L.E.K. analysis
Seniors with Original Medicare will likely find their 20% coinsurance responsibility more burdensome as healthcare expenses continue to increase. And ongoing increases in age-related chronic conditions will likely convince seniors and soon-to-be seniors that they need the degree of care management Medicare Advantage plans provide.
Medicare Advantage vs. Medicare Supplement
Meanwhile, the future of Medicare Supplement, which is used to help pay some of the costs that Original Medicare doesn’t cover, is less certain.
Medicare Supplement plans face similar headwinds as Original Medicare, such as higher medical costs and an increased desire for care coordination while offering a similar lack of strategic levers to manage healthcare spend. Seniors confronted with increases in premiums could be forced to look elsewhere.
Furthermore, a provision in the Medicare Access and CHIP Reauthorization Act (MACRA) bans Medicare Supplement insurers from selling any Medicare Supplement policy that covers the annual Medicare Part B deductible (i.e., first-dollar coverage) to new Medicare enrollees starting January 1, 2020.
Investing in long-term penetration growth
Medicare Advantage penetration has grown at a slow but steady pace over the past 25 years. As seniors increasingly eschew Original Medicare in favor of lower payments, better care management, and more certainty in costs, with encouragement from both health plans and, albeit indirectly, the government, we expect that growth to continue — to 50% penetration by 2025 and, eventually, all the way to 70%.
With that in mind, payers will need to find ways to grow market share of their Medicare Advantage offering, and providers that have so far elected not to participate in Medicare Advantage will need to reconsider their stance and figure out a way to win with payers. Investors, meanwhile, should be on the lookout for the vendors poised to support Medicare Advantage’s continued growth.
Medicare Advantage will soon become the predominant Medicare product offering. It’s time to strike while the iron is hot. Access the full Executive Insights here.
L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and rigorous analysis to help business leaders achieve practical results with real impact. We are uncompromising in our approach to helping clients consistently make better decisions, deliver improved business performance and create greater shareholder returns. The firm advises and supports global companies that are leaders in their industries — including the largest private and public sector organizations, private equity firms and emerging entrepreneurial businesses. Founded in 1983, L.E.K. employs more than 1,200 professionals across the Americas, Asia-Pacific and Europe.