Blue Cross or Aetna insurers hold Medicare contracts with each county in which they operate, providing at least one benefit package and often more. These contracts establish plan revenues and profits through risk-adjustment mechanisms.
These plans combine your Part A, B and, if applicable, D Medicare coverage into one plan and comply with Medicare rules by requiring referrals before seeing specialists.
1. They Offer Coverage
Medicare Advantage plans are private insurance companies that provide Medicare beneficiaries with more choices of benefits packages at lower or no premiums than traditional Medicare, as well as access to health care providers beyond what’s available through hospitals and doctors groups locally. Medicare Advantage plans receive enough government payments to cover their administrative expenses, while also making a profit through providing fitness, travel or dental/hearing aid coverage at an attractive price point for consumers.
Insurers offering Medicare Advantage plans must first secure a contract from the Centers for Medicare and Medicaid Services (CMS), permitting them to operate within specific counties or groups. Insurance companies then submit bids each year that estimate their estimated costs associated with providing all aspects of Part A and B services to typical beneficiaries – this bid becomes the market benchmark that Medicare Advantage plans are reimbursed using. Any differences between their bid costs and actual market costs result in rebates back to them from CMS.
UnitedHealthcare, Aetna, Anthem, Cigna and Humana earned $213.1 billion through Medicare Advantage plans alone in 2016, making up more than half of their total revenue.
Hospitals and doctors negotiate contracts with Medicare Advantage plans so that patients can benefit from lower, in-network rates at their facilities and doctors offices. Negotiations, which used to take place largely behind closed doors, is now increasingly public as hospitals seek adequate payments while physicians struggle to contain rising medical expenses.
Some hospitals and doctors’ negotiating tactics used to secure higher Medicare Advantage rates may not always be fair to consumers. For instance, some health systems are terminating contracts with private insurers to force them into increasing reimbursement rates; such terminations often come accompanied with threats of collection action, and may also serve as a strategy against Medicare’s increasing cost-shifting policies.
2. They Earn Commissions
Medicare insurance markets can be highly profitable for insurers. According to a 2021 KFF study on health insurer financial performance, UnitedHealthcare, Aetna, Anthem, Cigna and Humana made approximately 2.5 times as much profit per Medicare enrollee versus private-sector customers.
Part of Medicare’s success can be seen through its rapidly expanding market for Medicare Advantage plans (Medicare Part C). These policies often offer additional services like transportation and meals in addition to medical coverage, with most plans including an independent Medicare Prescription Drug Plan with $0 premiums.
Brokers and agents earn a portion of premiums paid by beneficiaries who purchase Medicare Advantage and PDP policies they sell, in addition to commissions paid for the initial year (and renewal) of Medicare Supplement policies they sell. Some carriers even pay bonus commissions when agents meet specific sales benchmarks.
Compensation for Medicare agents can depend on both the product they sell and carrier with which they contract, such as Medigap insurers offering tiered commission rates based on how many claims are paid out; or simply charging a flat fee per sale.
As many brokers and agents pay their expenses out of commissions earned, such as office space rental costs, telephone bills and marketing costs–they must work tirelessly to earn the money that goes toward covering expenses such as office rent. At busiest periods like Medicare’s Annual Enrollment Period (AEP), agents could work up to twelve hours every day! Luckily, their earnings go directly towards covering these expenses with additional earnings considered bonus income.
3. They Collect Fees
Insurance companies collect premiums from enrollees but do not need to make payments until one or more insureds file claims such as hospital visits or property damage due to tornadoes. This unpaid cash creates enormous potential profits for health insurers; some is set aside so as to cover claims expected in the near term; the rest can be invested elsewhere.
Nearly all Americans possess some form of health coverage, either through employer-sponsored group plans or individual policies, government programs like Medicare and Medicaid coverage or military plans. Obamacare requires most Americans to have coverage, creating an enormous market for insurers to make profits off this coverage.
Health insurance providers make significant profits from collecting premiums and then negotiating discounts with doctors for services covered under their plans. Most often, doctors agree to reduce their usual, reasonable and customary (URC) fee per service provided – representing a percentage of what will be reimbursed from health insurers for coverage under each service plan.
Medicare Advantage (MA) plans are reimbursed under this system based on their annual premium bids compared with a predetermined “market benchmark.” Any difference between plan revenues and costs represents profits; MA plans must have at least an 85% medical loss ratio to prevent excessive profit-taking.
Medicare Advantage prices tend to offset mechanical price changes in Medicare program, and renegotiations of insurer-physician contracts can further lessen such fluctuations. But there are limits as to how much MA can influence overall national prices.
Recent work conducted by economists at Harvard’s Center for Health Policy Research revealed that a 2-percent cap on Medicare Advantage payments led private plans in nonfloor counties to cut service offerings and raise beneficiary copays, ultimately prompting beneficiaries to abandon them, leading them to drop contracts from 346 in 2003 to only 151 contracts available today – providing seniors fewer choices.
4. They Pay Claims
When you visit a doctor or hospital, their billing provider sends their bill directly to your insurance company for payment. A claims processor then verifies its completeness and accuracy before paying a portion or all of it based on your plan’s coverage; any remaining balance is then invoiced back to you directly.
Insurance companies make their money from Medicare Advantage plans they manage, under a risk-sharing arrangement between the government and private insurers. Under this system, Medicare pays the private insurance firms a monthly capitation payment in return for managing health benefits to beneficiaries; typically this involves managing costs as well as controlling premium growth and costs growth over time.
Medicare’s payments to insurance companies are determined based on an annual bid submitted by each insurer and evaluated against market benchmarks established under statutory authority. The difference between bid and incurred cost is plan profits; profit margins for all insurance companies often differ due to selling different products across multiple markets or due to investments that do not directly correspond with revenues.
Insurance companies make money not only from paying claims but from premiums, co-pays and administrative fees as well. Medicare Advantage marketplace investments account for almost 60% of total revenue of top five insurers providing Medicare Advantage policies.
Blue Cross or Aetna enter the Medicare Advantage marketplace by negotiating contracts with the Centers for Medicare and Medicaid Services (CMS). Each contract holder typically offers multiple benefit packages, known as plans; some might be HMOs or PPOs while still others provide drug coverage. Beneficiaries select their ideal plan using flexible rules allowing them to switch in/out monthly.
