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Late-year moves position insurers to gain Medicare Advantage market share

The largest health insurers used M&A or diversified contracts this year to boost their enrollment in the industry's most lucrative business line, Medicare Advantage, to set themselves up for a more profitable 2018.

All year, insurers have been maneuvering to gain more share of the Medicare Advantage market, which has become larger and more valuable as Americans continue to grow older on average.

Insurance under the federally provided Medicare program, operated by the Centers for Medicare and Medicaid Services, or CMS, is offered to most U.S. citizens when they turn 65. Depending on the plan and benefits makeup, a consumer could receive low-cost or even free care.

Medicare is broken into four parts: A, B, C and D. Part A covers inpatient hospital stays, care in a skilled nursing facility, hospice care and some home health care. Part B covers certain doctors' services, outpatient care, medical supplies and preventive services. Part D adds prescription drug coverage to Part and A and B plans and is offered by insurance companies approved by CMS.

Part C is Medicare Advantage, which is a bundling of Parts A, B and D into one plan offered by private health insurers. The government heavily subsidizes coverage for Medicare Advantage plans, making the mix of reimbursements from CMS and the built-in customer base extremely attractive to insurers.

UnitedHealth Group Inc., the largest U.S. insurer, announced in late November that it expects its Medicare Advantage membership to grow by 450,000 to 500,000 lives in fiscal year 2018. At an investor presentation, executives said the company reached 12 million covered lives in Medicare through record retention and membership growth of about 1 million in individual Medicare Advantage, more than 850,000 in group Medicare Advantage and 1.3 million in Medicare Supplemental over the past five years.

In 2016, the company raked in $32.40 billion in individual Medicare earned premiums, according to statutory filings.

In October, the company rolled out its plan to expand Medicare Advantage offerings into about 100 new counties, reaching 1.5 million more Medicare-eligible consumers. In July, it announced an early renewal with seniors advocacy group AARP to offer Medicare products with AARP branding. The group has about 38 million members nationwide.

Credit Suisse equity analyst A.J. Rice said in an interview that UnitedHealth has benefited from excellent star ratings, a plan rating system devised by CMS to measure the quality of Medicare Advantage plans. Insurers receive a bonus payment for offering plans with four- or five-star ratings, the two highest ratings.

"If your star ratings are going up, you're getting more and more of those 5% bonus payments," Rice said.

Despite its size, UnitedHealth is facing pressure from the other major managed care companies in the U.S. Humana Inc. recorded $32.25 billion in individual Medicare earned premiums in 2016, according to statutory filings, and has become a "formidable competitor" to UnitedHealth, Rice said.

"The thing that has allowed United[Health] and to some degree Aetna to grow faster than Humana in the last few years has been [that] Humana was late in tweaking its benefits," Rice said.

Rice said Humana has been trying to recover from an adverse audit conducted by CMS in 2015 triggered by a penalty imposed on the company that led to lower star ratings for the 2018 bonus year.

Still, Humana had about 2.8 million members enrolled in Medicare Advantage plans as of Sept. 30, according to its third-quarter earnings report.

The company also paid $800 million for a 40% share of Kindred at Home, the home health provider unit of Kindred Healthcare Inc. The deal, Humana executives have said, overlaps around 65% with the company's individual Medicare Advantage membership, allowing the companies to build a collaborative advanced payment model.

Rice said that by 2019, Humana should be "back on track" as the company has made some effective adjustments to its plan offerings.

In June, CMS lifted its marketing and enrollment sanctions on Cigna Corp.'s subsidiaries for failing to provide its enrollees with Medicare benefits in accordance with the regulator's requirements.

The removal of sanctions, Rice said, will allow Cigna to join Humana in improving star ratings in 2019.

"They'll be tough competitors once again in 2019. The strategy will be, who can coordinate care management better?" Rice said.