Medicare Advantage (private insurance for Medicare beneficiaries) presents major risks for insurers. First, the Centers for Medicare & Medicaid Services annually compiles performance data and assigns every plan from one to five stars. These star ratings have two effects: Higherrated plans get higher payments and more customers. Because star ratings depend on the customer and clinical service offered by providers, who are usually independent contractors, profitability depends on factors that insurers control imperfectly. Second, profitability in Medicare Advantage depends on Medicare spending levels, and no one can really forecast how payment innovations will change Medicare spending. For example, Medicare’s bundled payment for joint replacement reduced costs by 20 percent in some markets (Navathe et al. 2017). Changes that large could matter. Third, no one knows what will happen to Medicare Advantage enrollment if Medicare’s benefits or payment systems change. Most insurers have profited from Medicare Advantage, benefiting from the enrollment of younger retirees, more efficient use of care, and more favorable contracts with providers. But some insurers, such as Catholic Health Initiatives, have posted large losses (Barkholz 2017).

Risk is intrinsic to the health insurance business. Insurers take on risk by selling coverage for consumers’ variable medical expenditures. When you average risk over the spending patterns of tens of thousands of consumers, however, the risk becomes less uncertain—in most cases. But in Medicare Advantage the insured populations are often small, and costs may be driven by a handful of beneficiaries. But the main perils do not come from the operational issues mentioned previously. The real risks spring from strategic decisions that could go wrong if an insurer misjudges the market.

Discussion Questions

• What has happened to Medicare Advantage enrollment during the past year?

• Have any insurers pulled out of Medicare Advantage during the past year?

• Have any Medicare Advantage plans lost money during the past year?

• Is Medicare Advantage riskier than other forms of private health insurance?

• What other healthcare firms also face risks due to changes in government policy?

• What are the advantages of having private insurers manage Medicare? Disadvantages?