The Persistent Challenges and Future of Medicare Advantage: A Deep Dive into Devoted Health's Journey

Devoted Health: Five Years of Medicare Advantage with No Profit

Devoted Health, a leading health insurance and provider startup, has been in the business of selling Medicare Advantage plans for five years without realizing profitability. Despite persistent losses, the company maintains a high valuation, although its future remains uncertain. Like many health insurance startups, Devoted Health has promised better care, but this promise has come at a significant cost. The company's lack of profitability underscores the challenging nature of the health insurance industry, particularly in the realm of Medicare Advantage.

Declining Profitability in Medicare Advantage

A recent analysis by Moody's Investor Service reveals that Medicare Advantage profitability is declining, with increased utilization putting significant cost pressure on insurers, thus affecting earnings. Despite an increase in Medicare Advantage (MA) membership and premiums, aggregate earnings and earnings per member have declined by 28%. This decline, coupled with funding pressure and depletion of the Medicare Part A Trust fund, raises concerns about the future of Medicare Advantage. Nevertheless, the program remains popular among seniors due to its lower out-of-pocket costs and premiums, additional benefits like dental, vision, and hearing coverage, and high star ratings for the quality of health and drug services.

Medicare Advantage Base Payment Rate and Policy Changes

The Centers for Medicare and Medicaid Services (CMS) recently proposed a new reduction in the Medicare Advantage base payment rate for 2025. This proposal is part of a series of policies executed by President Joe Biden to constrain Medicare Advantage spending and raise the bar for quality bonuses. The health insurance industry has protested many of these policies, with industry leaders disclosing that spending on Medicare members is exceeding projections, thereby impacting their finances negatively. These policy changes present another layer of challenge for health insurers like Devoted Health.

Two-midnights Rule: Impact on Medicare Advantage

From this year, private Medicare plans must cover their members' hospitalizations at the higher inpatient rate if their doctors predict they will need to stay beyond two midnights. This 'two-midnight rule'—a standard that traditional Medicare has followed for a decade—was implemented after it was discovered that Medicare Advantage plans were frequently denying coverage for necessary services. This rule, although initially overlooked, could have a significant impact on companies' finances. For patients with Medicare Advantage plans, it could mean better access and smaller out-of-pocket costs after a hospitalization.

Proposed Increase in Medicare Advantage Payments

Despite the numerous challenges, there is some positive news for Medicare Advantage insurers. The CMS has proposed a 3.7% increase in Medicare Advantage payments for 2025, which totals over $16 billion. This proposed rule aims to strengthen protections for the millions of people who rely on Medicare Advantage and Medicare Part D prescription drug coverage. Although this comes at a time when Medicare Advantage insurers are reporting lower profitability and higher utilization of medical services, the increase in payments could provide some relief.

In conclusion, while health insurance startups like Devoted Health continue to face challenges in the Medicare Advantage landscape, these challenges are not insurmountable. With the right strategies, policy adjustments, and institutional support, it is possible to achieve profitability while still delivering high-quality healthcare services to the older adult population.