Falling Medicare Advantage star ratings are pressuring payers’ future earnings, as some of the biggest U.S. health insurers are poised to lose out on valuable Medicare revenue from bonuses tied to the stars in 2024.
Volatility in MA stars for the 2023 plan year is raising questions around the earnings outlooks issued by payers before seeing star ratings fall. That’s especially true for payers with the biggest decreases like CVS Health’s Aetna and Centene, analysts say.
“Both companies saw significant declines in their exposure to 4 Star or higher plans and thus face material headwinds relative to their 2024 EPS targets,” Credit Suisse analyst A.J. Rice wrote in a note on the declines.
Credit Suisse calculates that Centene, which has an earnings per share target of between $7.50 and $7.75 for 2024, could see a nearly 10% headwind. CVS, which has outlined a double-digit earnings per share growth target, could see an 8% headwind to that growth.
Similarly, Morgan Stanley analysts estimate Centene could see an 11.5% headwind and CVS could see a 4.4% headwind.
Humana, UnitedHealth and Elevance (previously known as Anthem) are unlikely to see earnings meaningfully change based on the star ratings shift, analysts said.
The five-star ratings program was established by the Affordable Care Act to try to encourage plans to compete for enrollees based on quality. Star ratings are used to determine two parts of a plan’s MA outlook: whether a plan receives a bonus, and a plan’s ability to bid against a higher benchmark rate.
Plans that receive four stars or above receive a 5% quality bonus adjustment for the following year and have their benchmark increased. Bidding against a higher benchmark rate and higher rebate percentages give plans a competitive advantage with respect to benefit offerings and plan value.
Over the past year, MA plans saw a huge bump in their star ratings due to COVID-19 disaster relief provisions that sunset this year, so a decline in star ratings was expected.
But the magnitude of CVS and Centene’s fall was surprising, and should improve the competitive position of rivals with better star ratings like Humana coming into the 2023 open enrollment period, Morgan Stanley said in its analysis.
All major MA payers saw a hit to their star ratings, but the magnitude of the effect differs
The new scores erase expected earnings gains from glowing 2022 star ratings across the board. But the hit is harder insurers than on others.
The loss of earnings from 2023’s falling stars is expected to eat away at 2022’s gains and be a net negative over the two years for CVS, Centene and Cigna, according to Morgan Stanley.
Star ratings in MA quality bonus programs are also important to plans because they represent a significant amount of money. MA plans will receive an estimated $10 billion in bonus payments in 2022, according to an analysis by the Kaiser Family Foundation.
CVS received $1.2 billion and Centene received $233 million in 2022 bonus payments. UnitedHealthcare — the biggest MA payer in the U.S. — received $2.8 billion in bonuses, according to KFF.
CVS’ Aetna National PPO — one of the largest plans in the U.S., with more than 1.9 million members and making up almost 60% of Aetna’s overall MA membership — dropped from 4.5 to 3.5 stars, bringing down the payer’s overall average, CVS said in a filing with the Securities and Exchange Commission.
CVS said the decline shouldn’t affect its 2022 earnings, and that it will pivot to blunt any financial impact it might have in 2023.
The payer said it planned to mitigate the loss of star bonus payments in 2024 through ongoing contract diversification efforts, and is evaluating a “variety of operational initiatives and capital deployment alternatives” to help offset the headwind.
CVS spokesperson Ethan Slavin told Healthcare Dive that the member satisfaction surveys used by the government to calculate star ratings was based on “less than 1,000 member survey responses out of nearly 2 million members.”
”We don’t believe they accurately reflect the total experience” of our members,” Slavin said.
Centene did not respond to multiple requests for comment.