Introduction

This report summarizes financial information and analysis related to administrative costs reported by the Medicare Advantage organizations (MAOs) for calendar year (CY) 2022. This is the fourth annual update of this report. The prior editions addressed CY 2019, CY 2020 and CY 2021 experience and can be obtained from the Milliman website. The methodology used to generate this year’s report is substantially consistent with the prior year's report.

Enrollment in Medicare Advantage (MA) continues to grow, with 51%¹ of Medicare-eligible beneficiaries opting for this government-sponsored program where private health plans provide benefits to Medicare beneficiaries as an alternative to traditional fee-for-service (FFS) Medicare. This is the first time that there are more Medicare-eligible enrollees in MA as compared to FFS. The primary source of this growth is beneficiaries switching from FFS to MA and from new enrollees who are aging into the program selecting MA. MAOs work with the Centers for Medicare and Medicaid Services (CMS) to provide healthcare benefits under Medicare. They handle administrative costs and profit in exchange for set capitation revenue. The federal government largely funds the cost of the program, with the revenue received by private plans based on laws, regulations, and an underlying bidding process established, regulated, and overseen by CMS.²

Traditional FFS Medicare allows members to visit any doctor anywhere in the United States that accepts Medicare. In contrast, MAOs typically offer network-based plan designs in their defined service areas with differing additional benefits, levels of member cost sharing, prescription drug coverage, and member premiums.

Most MA benefit plans offer coverage for additional benefits not covered by traditional FFS Medicare. Dental, vision, and hearing are some of the most prevalent supplemental benefits, with more than 90% of the beneficiaries enrolling in plans offering these benefits. Some of the other common supplemental benefits offered by MAOs include over-the-counter (OTC) health-related items, fitness, nonemergency transportation, meals, acupuncture, and podiatry services. Plans can also customize their benefit packages to offer certain benefits to a subset of chronically ill enrollees. Combined benefit structures and reduction in cost sharing (RICS) plans have also gained in popularity in recent years. Combined benefit structures give plans flexibility to combine multiple benefits under a single maximum plan benefit limit, a single visit limit, or varying allowances by benefit within the package. The RICS benefit is specifically a dollar allowance that beneficiaries can use to cover their cost sharing for benefits included in the RICS package.³

In addition to offering additional benefits, MAOs can offer Medicare-covered services at cost-sharing levels less than traditional FFS Medicare. Traditional FFS Medicare includes a Part A inpatient hospital deductible and daily coinsurance (for days above 60) while MAOs may require the member to pay a copay upon hospital admittance or for the first few days of the stay. Traditional FFS Medicare also includes a Part B deductible and 20% coinsurance that applies to hospital outpatient and physician services while an MAO may require fixed copays that can vary by type and place of service.

MA also includes prescription drug coverage through Medicare Advantage Part D (MAPD) plans. Most MAO benefit plans include Part D as part of the benefit plan. Part D is funded by member premiums and by the federal government through subsidies by CMS. There are certain programs within Part D where the MAO is not at risk, such as low-income cost sharing (LICS), the Coverage Gap Discount Program (CGDP), and federal reinsurance. MAOs receive prospective payments for these programs that are trued up at the end of the year. MAOs can differentiate their Part D coverage through their formulary and member cost sharing, generally below the initial coverage limit (ICL). The Inflation Reduction Act (IRA) will bring the most significant changes to the Part D program in 2025 since its inception.

MAOs are licensed health insurance entities and are required to file a statutory annual statement with their state insurance regulators. The statutory annual statement is a standard reporting structure developed and maintained by the National Association of Insurance Commissioners (NAIC), with prescribed definitions allowing comparisons among various reporting entities.

This report summarizes the CY 2022 experience for selected financial metrics of organizations reporting Medicare Advantage experience under the Title XVIII Medicare line of business on the NAIC annual statement. We compiled this information from the reported annual statements.⁴ Individual reporting entities may be excluded from this report for the following reasons:

• Did not submit a health annual statement
• Reported less than $10 million in annual Medicare (Title XVIII) revenue
• Otherwise omitted from the NAIC database of health annual statements utilized for this report

The primary purpose of this report is to provide reference and benchmarking information for certain key financial metrics used in the day-to-day analysis of MAO financial performance. This report summarizes the financial results on a composite basis for all reporting MAOs.

• Appendix 1 provides additional detail and stratifications of the financial metrics presented in this report.
• Appendix 2 provides the methodology and assumptions used in developing the metrics presented in this report.

Please download the full report PDF to view the appendices.

Summary of CY 2022 financial results

The CY 2022 financial information analyzed for this report comprises information for 426 reporting entities across 47 states, compared to 409 entities across 44 states from the prior year’s report. Information from Alaska, Montana, and Wyoming is not represented, primarily because the reporting entities in these states were excluded based on the filtering criteria described in the following paragraph. Of these 426 reporting entities, we identified 81 entities as provider-sponsored health plans (PSHPs), based on publicly available parent organization information and their status as provider entities. In this shortlist of 81 entities, we excluded large national PSHPs (like Kaiser) as these plans are not representative of the subset we are targeting for comparison purposes. We analyzed the financial performance of PSHPs separately from the traditional MAOs to identify any significant differences between the two entity types. These findings are outlined in later sections of this report. We retrieved the annual statements from an online database. In addition to the limiting criteria used to select companies in this report, certain MAOs may be omitted from this report because of their exclusions from the online database.

The MAO financials included in this report comprise information from MA-only and MAPD plans and does not include stand-alone prescription drug plans (PDPs). We compiled the financial data for the MAOs to produce outcomes of key financial metrics for various company groupings. We summarized the distribution of results to allow for user reference and benchmarking purposes. Unless otherwise stated, only companies with at least $10 million in MA revenue were used in this analysis.

The primary financial metrics we analyzed for this report include the medical loss ratio (MLR), administrative loss ratio (ALR), underwriting (UW) ratio, and risk-based capital (RBC) ratio. The selected metrics focus primarily on the income statement values of the financial statement, except for the RBC ratio, which is a capital (or solvency) measure. Appendix 2 of this report documents the methodology and formulas behind these metrics.

Figure 1 summarizes the composite CY 2022 financial results for the 426 companies meeting the criteria selected for this study. The total MA revenue base represents over $335 billion with achieved underwriting gains of 3.0% (up from 1.8% last year). CY 2021 showed reduced margins due to higher utilization from some of the pent-up demand during the the COVID-19 pandemic. The increase in underwriting gains in 2022 is aligned with the margins we have seen in the MAO industry during pre-pandemic years. The positive UW ratio of 3.0% represents a composite across identified MAOs (including PSHPs), with considerable variances by individual MAOs. In comparison, for CY 2022, the 81 PSHPs meeting the criteria selected for this study showed underwriting losses of 1.4% in aggregate.

Figure 1: Composite CY 2022 financial results

Note: Values have been rounded.

Figure 2 shows the distribution of MAOs (including PSHPs) within ranges of UW ratios specific to CY 2022, indicating that about the same number of MAOs reported gains (218 MAOs) compared to the number of MAOs reporting underwriting losses (208 MAOs). Over half of the MAOs reported an underwriting margin within a range of plus or minus 5%. In general, plans with larger membership have been more profitable compared to the smaller plans, as can be seen in Figure 9 of Appendix 1. The underwriting ratio distribution for plans with greater than $1 billion in revenue is significantly different from the nationwide average, with more than 75% of those plans reporting gains. Figure 3 shows that PSHPs had a significantly different distribution, with only 38% of all PSHPs reporting gains. About 17% of the PSHPs are reporting losses of more than 20%.

Figure 2: CY 2022 underwriting ratio distribution

Figure 3: CY 2022 underwriting ratio distribution (provider-sponsored health plans only)

Over the past five years, aggregate MA revenue (in dollars) has grown by 80%. The main drivers of the revenue growth include the year-to-year increase in CMS benchmark revenue, the increase in average star ratings from 4.07 in 2018 to 4.37 in 2022,⁵ and enrollment growth in the MA market from the increase in Medicare eligibles as well as the increase in the MA penetration rate. Enrollment included in this report increased by 47% over the same five-year period, with the largest year-over-year increase of over 14% growth this past year. Figure 4 summarizes the composite financial results for the most recent five-year period. The companies in each year’s sample are not the same; however, the criteria used to select the companies are consistent from year to year.

Figure 4: Five-year historical financial results

We note the following observations on the MA market over the most recent five years:

• The composite UW ratio for CY 2022 is now closer to the average margins observed before the pandemic within the MA markets.
• The aggregate administrative loss ratio (ALR) fluctuated between 11.0% and 12.7% from CY 2018 through CY 2022. There was a moratorium on the Health Insurance Provider Fee (HIPF) in 2019 and HIPF was permanently suspended starting CY 2021, which potentially explains to some degree the lower ALRs in those years.⁶
• Risk-based capital ratios in CY 2021 decreased for the first time since CY 2018 and decreased further in CY 2022.
• The MLR in CY 2022 decreased by 1% after significantly increasing in CY 2021 relative to CY 2020, where the pandemic had an impact.

Please note that the MLR calculated throughout this report is the MLR formula as defined in Appendix 2 and not the CMS MLR formula used for MLR rebates. This is consistent with how MLR is reported on the statutory annual statement and does not make the adjustments that CMS allows for credibility, quality improvement activities, and taxes and fees.

While Figure 4 illustrates the overall changes in the underwriting results over the last five years, it is also important to understand how the underwriting results have varied across MAOs. Figure 5 illustrates the distribution of underwriting results in the MA market for each calendar year from the MAOs included in our analysis.

Figure 5: Distribution of underwriting results by year

The composite UW ratio increased in CY 2022 after the five-year historical low of 1.8% in CY 2021. The percentage of plans with a positive margin has remained stable from 2021 to 2022, at around 50%. During 2020 and prior years before the pandemic, about 60% of the plans on average saw positive margins. The composite UW ratio reported by the MAOs in CY 2022 represents an aggregate underwriting gain of approximately $10 billion in relation to the $335 billion of revenue.

Administrative cost analysis

Medicare Advantage-focused MAOs

The previous section of this report contains analyses of key financial metrics for 426 MAOs that reported operations in the Medicare Title XVIII line of business, based on page 7 of the NAIC annual statement (Analysis of Operations by Line of Business). This section examines the administrative expenses reported by the MAOs on the Underwriting and Investment Exhibit Part 3 Analysis of Expenses page. This information is only reported at an aggregate MAO level and detailed administrative expense information is not stratified by line of business (e.g., Medicare). Therefore, the results presented in this section of the report are limited to the 260 MAOs that are defined as MA-focused in the database used for this summary. The ALRs reported by the MA-focused MAOs were relatively consistent with the remaining 166 MAOs, which were defined as non-MA-focused. The 260 MA-focused MAOs account for over 70% of the MA revenue summarized for the purposes of this report, with an average 11.0% ALR. The remainder of this section summarizes the reported administrative costs for only the MA-focused MAOs.

Summary of results

The primary expense categories used in the Analysis of Operations by Line of Business page include the claim adjustment expenses (CAE) and general administrative expenses (GAE). The CAE and GAE categories are further stratified by additional subcategories of expenses in the Underwriting and Investment Exhibit Part 3 Analysis of Expenses page, which is the basis of the administrative expense categories illustrated in this administrative cost analysis. Figure 6 summarizes the CY 2022 administrative expenses by quartile of ALR performance for the 260 companies with an MA focus. The administrative expenses are stratified by administrative cost categories summarized from the Underwriting and Investment Exhibit Part 3 Analysis of Expenses page.

Figure 6: Administrative loss ratio by quartile of ALR performance

Note: Values have been rounded.

In composite, MAOs grouped in the fourth quartile have higher administrative loss ratios across all expense types compared to MAOs grouped in the first, second, and third quartiles.⁷ Between the third and fourth quartiles, human capital (costs related to salaries, wages, and other items specific to in-house staffing resources) and operating expenses account for most of the increase in administrative costs.

Figure 7 summarizes the administrative cost per member per month (PMPM) for the most recent five-year period for all companies matching the inclusion criteria indicated in this report.

Figure 7: Administrative cost PMPM by year

Note: Values have been rounded.

Figure 7⁸ illustrates an overall increase in the reported administrative cost on a PMPM basis from CY 2018 to CY 2022. We observed a significant decrease in the administrative cost PMPM from CY 2018 to CY 2019 and from CY 2020 to CY 2021, likely due to the inclusion of the HIPF in 2018 and 2020. The average annualized increase in the median is approximately 7.0% from CY 2018 to CY 2022. The percentiles illustrated are less sensitive to outliers and changes in reported administrative expense for the largest health plans.

The PMPM increase from CY 2018 to CY 2022 is mostly attributable to general inflationary trends as well as changes in the membership covered by the MAOs in this study, such as the increase in the number of beneficiaries in special needs plans (SNPs), which have higher claim and administrative costs. The range of administrative cost PMPMs over the years is likely attributable to a combination of drivers such as more start-ups entering the market with higher fixed administrative costs in the initial years; increased prevalence of SNPs, which require more intensive member care coordination; and/or other enrollment changes that can affect the PMPMs. As expected, the lowest ALR year in this period was in CY 2019 (when there was a moratorium on the HIPF).

Conclusion

Over 50% of people aged 65 and older in the United States enroll in MA.⁹ With Baby Boomers (born between 1946 and 1964) aging into Medicare, combined with new additional benefits, benefit flexibility allowed by CMS, and lower premiums each year,¹⁰ the MA market continues to grow and play an even bigger role in the Medicare market. The Congressional Budget Office (CBO) predicts MA penetration will increase to 62% of the Medicare market over the next decade.¹¹ The analysis shows that about half of the total MAOs (including PSHPs) were profitable in 2022. MAOs offer popular coverage options for Medicare beneficiaries, and their financial results will help us understand the viability and the continued sustainability of private health insurers in the MA market.

The results in this report provide reference and benchmarking information for certain key financial metrics used in the day-to-day analysis of MAO financial performance.

Limitations and data reliance

We compiled the results contained in this report using data and information obtained from the statutory annual statements for MAOs filed with the respective state insurance regulators. We retrieved the annual statements from an online database on August 17, 2023. In addition to the limiting criteria used to select companies in this report, certain MAOs may be omitted from this report because of the timing of annual statement submissions or their exclusions from the online database.

Milliman developed certain models to estimate the values included in this correspondence. The intent of the models was to estimate the MAO financial results presented in this report. We reviewed the models, including their inputs, calculations, and outputs, for consistency, reasonableness, and appropriateness to the intended purpose and in compliance with generally accepted actuarial practice and relevant actuarial standards of practice (ASOP). The models rely on data and information as input to the models. We relied upon certain data and information for this purpose and accepted it without audit. To the extent the data and information provided is not accurate, or is not complete, the values provided in this correspondence may likewise be inaccurate or incomplete. Milliman’s data and information reliance includes the NAIC annual statement database. The models, including all input, calculations, and output, may not be appropriate for any other purpose.

This report is intended for informational purposes only. Milliman makes no representations or warranties regarding the contents of this report. Likewise, readers of this report are instructed that they are to place no reliance upon this report that would result in the creation of any duty or liability under any theory of law by Milliman or its employees to third parties.

The views expressed in this research paper are made by the authors and do not represent the opinions of Milliman, Inc. Other Milliman consultants may hold alternative views and reach different conclusions from those shown.

Qualifications

Guidelines issued by the American Academy of Actuaries require actuaries to include their professional qualifications in all actuarial communications. Shyam Kolli, Greg Sgrosso, and Tushar Makhija are members of the American Academy of Actuaries and meet the qualification standards for performing the analyses in this report.

About the authors

Phil Ellenberg is a healthcare consultant at Milliman. Mr. Ellenberg joined Milliman in 2016 and specializes in predictive analytics and business intelligence.

Shyam Kolli is a principal and consulting actuary at Milliman and is a fellow of the Society of Actuaries and a member of the American Academy of Actuaries. Mr. Kolli joined Milliman in 2010 and has nearly 20 years of healthcare-related actuarial experience.

Tushar Makhija is an associate actuary at Milliman and is an associate of the Society of Actuaries and a member of the American Academy of Actuaries. Mr. Makhija joined Milliman in 2017 and primarily works on Medicare Advantage pricing.

Greg Sgrosso is a principal and consulting actuary at Milliman and is a fellow of the Society of Actuaries and a member of the American Academy of Actuaries. Mr. Sgrosso joined Milliman in 2002 and has more than 20 years of healthcare-related actuarial experience.

Acknowledgments

The authors further acknowledge Chris Pettit, FSA, MAAA, principal and consulting actuary, and Brad Piper, FSA, MAAA, principal and consulting actuary, at Milliman, for their peer review and comments during the writing of this report.

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¹ Freed, M. et al. (August 9, 2023). Medicare Advantage in 2023: Enrollment Update and Key Trends. Kaiser Family Foundation. Retrieved November 15, 2023, from https://www.kff.org/medicare/issue-brief/medicare-advantage-in-2023-enrollment-update-and-key-trends/.

² Friedman, J.M., Swanson, B.L., Yeh, M., & Cates, J. (February 2020). State of the 2020 Medicare Advantage Industry: As Strong as Ever. Milliman Research Report. Retrieved November 15, 2023, from https://www.milliman.com/-/media/milliman/pdfs/articles/state_of_the_2020_medicare_advantage_industry.ashx.

³ Laktas, J., Yeh, M., & Friedman, J.M. (March 2023). Prevalence of supplemental benefits in the general enrollment Medicare Advantage marketplace: 2019 to 2023. Retrieved November 15, 2023, from https://www.milliman.com/en/insight/prevalence-supplemental-benefits-general-enrollment-ma-marketplace-2023.

⁴ National Association of Insurance Commissioners. Annual Statement Database, as delivered by S&P Global, Inc, all rights reserved.

⁵ Average member weighted star ratings by year for 2018 and 2022 were calculated from these sources: https://www.cms.gov/files/document/2021starratingsfactsheet-10-13-2020.pdf and https://www.cms.gov/newsroom/fact-sheets/2024-medicare-advantage-and-part-d-star-ratings.

⁶ The full text of the Consolidated Appropriations Act, 2016, is available at https://www.congress.gov/bill/114th-congress/house-bill/2029/text .

⁷ A quartile is a cut point dividing the number of data points in a data set into four parts, or quarters, of roughly equal size.

⁸ The methodology used to calculate numbers in Figure 7 was updated as compared to previous years’ reports. This new methodology now considers 2022 enrollment for each MAO and uses enrollment as weights to calculate percentiles.

⁹ Freed, M. et al., Kaiser Family Foundation, op cit.

¹⁰ CMS (September 30, 2021). CMS Releases 2022 Premiums and Cost-Sharing Information for Medicare Advantage and Prescription Drug Plans. Press release. Retrieved November 15, 2023, from https://www.cms.gov/newsroom/press-releases/cms-releases-2022-premiums-and-cost-sharing-information-medicare-advantage-and-prescription-drug.

¹¹ Freed, M. et al., Kaiser Family Foundation, op cit.