Hospital ending health plan amid industry's struggles

Memorial Hermann Health System's decision to close its Medicare Advantage plan at year's end comes as many healthcare providers and insurers struggle with financial and regulatory challenges, experts said.

Houston's largest health system announced last month that it will stop offering its private insurance alternative to Medicare beginning in 2027. The Memorial Hermann plan has more than 14,000 members as of this month, according to data from the Centers for Medicare and Medicaid Services.

Memorial Hermann pointed to a variety of reasons for its decision, including intensifying competition in the market and uncertainty around changing federal regulations.

"By narrowing our focus on our System's core strengths, including care delivery, access and clinical excellence, we can advance our mission while positioning the System for sustainable growth," Memorial Hermann said in a statement on its website.

Memorial Hermann previously announced plans to wind down its commercial insurance plans -- types of plans administered by private companies and typically obtained through an employer -- by the end of the year.

Experts said Memorial Hermann's decision to close its plan comes as many health insurers scale back coverage because of various financial and regulatory challenges. Hospitals and insurers have struggled with rising healthcare costs and a higher-than-expected demand for services. The federal government has also implemented several policy changes that have tightened payments to Medicare Advantage plans.

"It can just create an environment where it's very difficult to continue to operate a very complex line of business like a health plan when you're navigating all these other things going on," said Molly Smith, group vice president for public policy at the American Hospital Association.

Hospital plans

Health systems have operated health insurance plans for decades. In Houston, Texas Children's Health Plan offers Medicaid STAR and CHIP coverage for children in low-income households and pregnant women.

Medicare Advantage plans have become particularly popular for hospitals in recent years because they have clear rules and regulations and pricing is structured and predictable. New potential members are always aging into Medicare eligibility, which is available to adults 65 and older and people with certain disabilities and medical conditions, Smith said.

The arrangement can also benefit hospitals and patients, said Grace Mackleby, a research scientist of health policy and economics at the University of Southern California.

"It gives them a little bit more control over patient treatment paths," she said. "There's a little bit more leeway for a hospital to decide, 'This is the appropriate thing a patient needs,' without having to go through quite as much prior authorization."

Mackleby and Geronimo Bejarano Cardenas, a postdoctoral fellow in health policy and management at the Harvard T.H. Chan School of Public Health, have studied the effects of hospital-owned Medicare Advantage plans. The latter has been an author on multiple studies that have found evidence those plans could lead to better health outcomes for patients.

The researchers have cited some concerns with hospital-owned Medicare Advantage plans, such as the possibility a hospital may encourage its doctors to over-diagnose patients to inflate payments from the federal government. Medicare Advantage plans have historically been more vulnerable to the practice, known as coding intensity, but the federal government has recently made changes to prevent it, Bejarano Cardenas said.

Industry challenges

Hospital-owned Medicare Advantage plans have surged in popularity over the past decade. Nearly one in six people in the U.S. with a Medicare alternative is enrolled in a hospital-owned plan, Mackleby and Bejarano Cardenas found.

In recent years, though, hospitals and large commercial insurers have begun closing their plans or scaling back their Medicare Advantage offerings. UnitedHealthcare, Humana and Aetna are shutting down or scaling back plans nationwide, affecting millions of people, according to NPR.

The shift is partly due to high healthcare costs that have hit the healthcare and insurance industries in recent years. Many seniors are also catching up on medical care they delayed during the COVID-19 pandemic, which has led to a higher-than-expected demand for services, Mackleby said.

"It drove up costs in a way the plans didn't predict," she said.

The federal government has also overhauled the way it calculates payments to Medicare Advantage plans.

Through a process called risk adjustment, CMS pays more for patients with health conditions that typically require more healthcare, such as heart failure. The government recently reformed the process to curb overpayments, and experts said those changes could tighten payments to insurers.

Operating an insurance plan is complex, so the many challenges in the healthcare industry may be prompting hospitals to reevaluate their Medicare Advantage plans, Cardenas said.

"Obviously, hospitals are dealing with a lot right now," he said. "... And so, if they do need to cut somewhere, it's not going to be in closing the hospital. It's going to be in closing the insurance arm."

What to do

The Memorial Hermann Medicare Advantage plan ends Dec. 31. Members can continue using their benefits through the end of the year, according to the health system.

Members are being asked to choose a new Medicare plan before Feb. 28, 2027. They can compare options on Medicare.gov, by calling 1-800-MEDICARE, through the State Health Insurance Assistance Program (SHIP) or through a licensed Medicare sales representative.

Anyone who chooses a new plan by the end of the year will generally have it take effect Jan. 1. Anyone who chooses a new plan in January or February 2027 will generally have it take effect at the start of the following month, according to Memorial Hermann.

Members who do not choose a new plan by Dec. 31 will generally be transitioned to original Medicare beginning Jan. 1, according to Memorial Hermann.

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