What Is Behind Rampant Medicare Advantage Contract Terminations?

With a history of overpayments, care denials, and limited provider networks, the relationship between Medicare Advantage and the rest of the healthcare industry has always been tumultuous. Over the past year, the private payer program has faced a new issue that is unlikely to resolve quickly.

2023 saw a string of hospitals and health systems terminating their contracts with Medicare Advantage plans. For example, Cape Fear Valley Health announced in August 2023 that it transitioned to an out-of-network status with UnitedHealthcare Medicare Advantage plans. Similarly, North Carolina-based WakeMed shared that its facilities were no longer considered part of the Humana Medicare Advantage network as of October.

Many health systems involved in these terminations cited frequent care denials from their former Medicare Advantage partners. While there are likely a multitude of other grievances behind the canceled contracts, the main factors driving the terminations can be boiled down to the financial and administrative challenges confronting both payers and health systems.

On the provider side, hospitals and health systems have dealt with poor financial performances since the COVID-19 pandemic hit. Although operating margins are stabilizing, the issues linger, including labor shortages.

“General Medicare Advantage margins were at their high in 2020, and although they still remain profitable for payers, providers have had to go through a variety of renegotiations around reimbursement,” Ash Shehata, national sector leader for healthcare at KPMG, told HealthPayerIntelligence.

“Providers generally do better with Medicare reimbursement. With Medicare Advantage, some of that extra margin goes to the payer to help them manage value-based agreements. There’s a lot more risk for health systems, especially with things like labor shortages and being able to move patients from inpatient to outpatient, that’s where you start to see the compression of margins.”

Contract negotiations are not the primary driving force behind these terminations, though, according to Karen Schulte, president of SCAN Health Plan’s Medicare Division.

Medicare Advantage plans cannot control funding and regulations set by CMS, but plan payments from CMS depend on a few controllable factors. Plans are paid based on beneficiaries’ health, meaning plans must accurately document health statuses so sicker members can get the care they need. Care coordination is another critical part of plan payments; if beneficiaries are not receiving proper evidence-based care, services may be denied.

“To make Medicare Advantage work, you have to invest in the programs and tools that will ensure that what is in your control is done well,” Schulte said. “Health systems have not typically invested or changed their infrastructure to support the controllable elements of Medicare Advantage. They’re usually organized around fee-for-service medicine: you render care, you bill for that care, you get paid for that care. Without the right program and tools, there is no contract rate that will solve the gap or the disparity between care and cost.”

For Medicare Advantage to operate successfully, regulators, health plans, and health systems must all bear responsibility, Schulte indicated.

Preventing further contract terminations and strengthening the relationship between payers and health systems will not be light work. According to Shehata, the keys to a working payer-provider partnership are high-performing networks offering seniors targeted care and health incentive alignment across all stakeholders. Additionally, the Medicare Advantage bidding process needs more transparency.

Regardless of why a health system terminates its contract with its Medicare Advantage plan, beneficiaries will experience consequences. In the summer of 2023, Scripps Clinic and Scripps Coastal Medical Groups told SCAN Health Plan they would be dropping Medicare Advantage plans, impacting 20,000 SCAN members in San Diego County, Schulte shared.

Supporting beneficiaries through this change with a hands-on approach is essential, Schulte emphasized.

“We hosted a series of tele-talks, explained what was happening, and went through the process with our members. Through those tele-talks, we saw firsthand the emotional toll this type of disruption was having on our members,” Schulte explained. “They’ve built these long-trusted relationships with their doctors who have been caring for them for possibly decades.”

Through constant contact with members as they struggled to make tough decisions about their care, SCAN retained 50 percent of its members. Often, after disruptions of this size, health plans only retain up to 25 percent of their membership, Schulte noted.

“It consumed a significant amount of our resources and time that we had to take away from other things, especially since it was unplanned,” she said. “But do not cut back, do not shortcut, because at the end of that line, and where the major impact is, is one of your members.”

Contract terminations between Medicare Advantage plans and health systems will likely continue if they cannot work together to provide the necessary investments and negotiate a strategy that works for both entities.

Continuous friction between plans and providers could lead to seniors leaving Medicare Advantage altogether.

“When seniors hit a certain point in their coverage cycle—such as when they’re using a lot of inpatient bed days—financially, it might make sense for them to go back to Medicare because Medicare gives them a lot more options across multiple specialties even though the unit costs might be a little higher,” Shehata explained.

Alternatively, beneficiaries may choose to enroll in a different Medicare Advantage plan that still has their provider in-network. Enough beneficiary exits could spur additional discussions between payers and providers about the payment structure and lead to renegotiations, Shehata noted.

However, labor shortages will likely hinder possible solutions for the next few years.

“The labor issue is a sustainable problem. It’s a supply shift problem, meaning we have a greater demand and less supply of professionals for a variety of reasons post-pandemic,” Shehata said. “That is not going to go away, and automation is going to take time to set in.”

Shehata anticipates that medical costs will increase, negotiations will become more complex, and health systems will do what they can to recover financially.

At the same time, the labor shortage is making contract terminations even harder on Medicare Advantage beneficiaries.

“When you have these large health systems who have thousands of primary care and specialty physicians and you’re taking them out of an already limited clinician pool, it’s a call to action that if there’s anything we can do as an industry to make sure we stop this trend from happening, we need to. Because it is severely impacting the ability to give these vulnerable seniors the care they need,” Schulte concluded.