The health insurance industry is beginning to climb the quality scale when it comes to government measures established under the Affordable Care Act for privately operated Medicare plans.
The Medicare Star Ratings System, which is now five years old, was designed to ensure seniors are choosing a quality private health plan. The rankings measure everything from call center performance to how well an insurer handles a health plan member's appeal.
But the impact of the star ratings, complete with its five-notch scale, goes beyond just a consumer-friendly way to offer benefits. It also affects how plans are paid, and the star ratings can help boost revenues.
Health plans are reaping bonus payments when they score high and are picking up more customers with the ability to tout certain scores in a government-backed version of Yelp. And that's good for stock prices and investors in companies with big Medicare businesses, such as Aetna, Humana (NYSE:HUM), UnitedHealth Group (NYSE:UNH) and Anthem.
Medicare's Yelp boosts insurers
"Medicare beneficiaries are taking notice of quality ratings and using them to make election decisions," said Tom Kornfield, vice president of Washington-based health research and consulting firm Avalere Health, which this month issued a report on the impact of Medicare's star ratings.
Avalere said there are now 72%, or 12.1 million, of the nation's 17 million Medicare beneficiaries in Medicare Advantage plans with a rating of four or more stars on a five-star scale. This figure represents a near-quadrupling from 2009 figures.
Plans achieving 4 or more stars receive bonus payments and rebates. These in turn are utilized to provide even greater benefits, like vision and dental. In addition to the benefit of these financial incentives, achieving a high ranking is an advantage when it comes to marketing to prospective beneficiaries.
Medicare stars may help revenue shine
UnitedHealth Group stands out as a beneficiary of the star ratings system. In 2015, the insurer grew its Medicare and retirement revenues to $49.7 billion in 2015, an 8% year-over-year increase.
Given UnitedHealth's continued improvement, the insurer seems to be in the best position among its competing insurers to benefit from the higher star ratings. UnitedHealth is also not distracted by consolidation issues. Other plans are being attacked by groups like the American Medical Association and the American Hospital Association for taking too much control of the Medicare Advantage market via acquisition rather than organic growth.
And UnitedHealth executives believe this segment will help grow the business in the future.
"We remain focused on driving exceptional performance for health plan operations, raising clinical quality measures, and improving member satisfaction," said Matthew Burns, UnitedHealth spokesman for the company's Medicare and retirement business. "We expect that approximately 63% of our Medicare Advantage members will be in plans rated four stars or higher at the beginning of payment year 2017. This represents a steady improvement compared with approximately 56% of members in plans rated four stars or higher for payment year 2016, and 39% for payment year 2015."
But it's not just UnitedHealth. The broader insurance industry is benefiting from the move to star ratings in the Medicare Advantage program.
Aetna and Humana, for example, have said that their eventual merger will result in better quality with broader provider networks in certain markets and more choice, contrary to critics of their merger.
Humana said it has 2.5 million Medicare Advantage members in plans rated 4 start or higher and claims that this the most of any Medicare Advantage carrier.
Humana also said it received a 4.5-star rating for six Medicare Advantage contracts offered in nine states, which was an improvement from five such contracts last year.
More broadly, the higher scores for plans should translate to more seniors moving into an Advantage plan over traditional fee-for-service Medicare.
"It is reasonable to think that this contributes to increased participation," Avalere Vice President Caroline Pearson said.
The Obama administration said Medicare Advantage has "reached record high enrollment each year since 2010, a trend continuing into 2016 with a cumulative increase of 50% to an all-time high of more than 17.1 million beneficiaries," said Raymond Thom, a spokesman for the Centers for Medicare and Medicaid Services.
Despite this record growth, the bulk of the nation's seniors remain in fee-for-service Medicare with just 32% of Medicare beneficiaries enrolled in a Medicare Advantage Plan.
Clearly, Medicare Advantage plans are a growth opportunity for health insurers -- and an upside for their stocks.
Bruce Japsen has no position in any stocks mentioned. The Motley Fool recommends Anthem and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.