Medicare Advantage Plans Increase Profits by Dodging MLR Limitations

Parent companies that offer Medicare Advantage plans may generate substantial profits through operating related businesses that are not subject to medical loss ratio limitations, according to a report from the USC-Brookings Schaeffer Initiative for Health Policy.

According to the Medicare Payment Advisory Commission (MedPAC), Medicare Advantage enrollment grew by ten percent between July 2020 and July 2021. The program accounted for 46 percent of all Medicare beneficiaries in 2021, with total payments amounting to $350 billion.

To examine the sources of earnings and profits for Medicare Advantage plans, researchers collected data from 10-K reports, IRS Form 990s, Mark Farah Associates’ Health Coverage Portal, the National Association of Insurance Commissioners (NAIC), and CMS.

The report reflects data from parent companies rather than individual plans.

The Affordable Care Act aimed to limit overpayment to Medicare Advantage plans by reducing benchmarks to align more closely to traditional Medicare and establishing a medical loss ratio (MLR) requirement of 0.85.

The MLR regulation requires plans to spend at least 85 percent of their revenue on medical claims to ensure they are not directing it all to their own profit.

However, MLR limitations may not restrict profits if plans disguise profits as costs. MLR rules do not apply to the profits that parent companies generate from related businesses, allowing the profits to appear as costs in MLR reports for the Medicare Advantage plan.

In 2021, 67 percent of Medicare Advantage enrollment was attributed to UnitedHealthcare, Humana, Kaiser, CVS/Aetna, and Elevance Health—formerly known as Anthem.

These major payers operate related businesses that offer services to their Medicare Advantage plans, such as pharmacy benefit managers (PBMs), home healthcare providers, hospitals, and physician practices.

In 2019, the five companies had an average gross profit of $2.3 billion and a gross margin of 3.6 percent. While this operating margin does not stand out among the average operating margin for all industries of 11 percent, the report noted that margins only provide a partial snapshot of profitability.

Return on assets (ROA) may offer a more complete view of profits, the report noted.

Researchers used Kaiser Medicare Advantage plans as an example of how related businesses increase plan profits.

Kaiser Permanente is the parent company of health plans, physician practices, and hospitals. In 2019, Kaiser reported $15.47 billion in Medicare revenue and total revenues of $62.24 billion. Total expenditures from the Kaiser Foundation Health Plan were around $61 billion.

Four out of five of Kaiser Foundation Health Plan’s independent contractors are owned by the plan’s parent company. These four companies accounted for $43.34 billion or 71 percent of total health plan expenditures, the report found. This indicates that substantial portions of Kaiser Permanente’s revenues appear as costs in MLR reporting.

Kaiser hospitals accounted for $20.3 billion in spending by Kaiser’s health plan and had a gross profit of $3.37 billion in 2019.

“Thus, there are substantial transactions between the MA plans and hospitals owned by the parent company and therefore opportunities for net revenues to the parent company to be treated as costs to the health plans that satisfied MLR requirements,” the researchers wrote.

According to the report, related businesses from Medicare Advantage plan providers can account for 20 percent to 71 percent of spending.

“The implication is that for the health plans serving most MA beneficiaries, related businesses offer an opportunity for pricing practices within the parent firm umbrella that can shield profits from the terms of MLR regulations,” the report stated.

While it is unknown how often parent companies engage in these practices, the potential to do so puts smaller plans without related businesses at a competitive disadvantage.

Incomplete data and limited guidance from CMS on MLR reporting make it difficult to quantify how often these practices occur. However, the report noted that oversight could increase as payment regulations call for better monitoring of health plans.