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2025 Medicare, Medicaid trends to watch in spending, strategy

The new year brings many old challenges, such as high spending trends, but payers in Medicare and Medicaid will weather these difficulties through insightfulness and agility.

Public payers have significant steering power in the payer space. In 2025, they will continue to lead the healthcare community by combatting traditional problems and leveraging new tools.

Medicare and Medicaid wield influence in the healthcare industry due in part to their size. Combined, the two powerhouses cover more than 140 million Americans and together contribute 39% to national health expenditures. Given these factors, Medicare and Medicaid's spending trajectories, technology adoption and competitive environments can shape the industry's economic impact and overall strategic choices.

Across the industry, healthcare spending is expected to grow in 2025. Experts projected an 8% year-on-year medical cost trend in the group health insurance market. Inflation, new prescription drug costs and behavioral health utilization are considered key culprits in this escalation. Medicare and Medicaid will not escape these and other trends sweeping across the industry and will face complications of their own.

Andy Davis, FSA, MAAA, principal for Deloitte Consulting LLP's Health Care practice, shared what public payers and their partners can expect in 2025.

AI trends will impact all lines of business

In 2025, at least one trend will be relevant across all lines of business: the increased adoption of artificial intelligence.

Unsurprisingly, generative AI (GenAI) use will be a key factor in payers' success in the new year. Much has already been accomplished with GenAI in the health insurance space the last couple of years, but in 2025 one of the most impactful use cases for payers will be in the area of payment integrity, according to Davis.

"If you haven't started to invest in and look into that space to help you really be more administratively efficient, that's such an opportunity," Davis encouraged.

This is true across all lines of business between both public and private payers. But it is especially true in situations, like Medicare faced in 2024, where profitability is in question and financial constraints are a serious concern. In such a quandary, GenAI and other emerging technologies can offer payers the boost they need to improve efficiency, facilitate accurate payments and augment business decisions.

These tools should not be used to enforce underpayment for services, Davis emphasized. The Medicare Advantage space experienced a CMS crackdown in 2024 after reports found that Medicare Advantage plans' AI tools might have erroneously denied claims. However, when used correctly, these tools help payers save money by ensuring correct payments so that health plans avoid the financial penalties states can invoke due to inaccurate payments.

Additionally, payers can leverage AI to improve patient outcomes, customer service and document patient interactions.

Three factors will drive Medicare spending

Medicare contributes significantly to the country's overall healthcare spending and is not expected to hold back in 2025. Medicare spending grew 8.1% in 2023 to exceed $1 trillion. It accounted for 21% of national health expenditures. While the data for 2024 spending is not yet public, this 2023 statistic reveals the baseline. The Congressional Budget Office projected that 2024 and 2025 would see continued growth and expected Medicare spending to surpass $2 trillion by 2034.

Davis highlighted three key factors behind Medicare spending and prices in 2025: utilization, specialty drug trends and the two-midnight rule.

Utilization

Historically, experts anticipate some influx in utilization around the new year due to seasonal factors. The winter of 2023 going into 2024 saw higher numbers of flu, COVID-19 and respiratory syncytial virus cases, for example, which had an impact on healthcare spending in Medicare.

However, heading into 2025, Medicare is experiencing a rise in utilization that goes beyond seasonal fluctuations. While it may be tempting to assign this trend entirely to COVID-19 and a rise in the intensity of services, Davis pointed instead to a rise in the frequency or volume of services.

"The impact of that is a little bit different," Davis explained. "That delay of care didn't create a worsening or more chronic condition because case mix didn't get worse, but we are seeing maybe the impacts of delay of care creating more reasons for acute visits."

It is unclear how long this trend will continue now that the coronavirus pandemic -- which sparked many delays in care -- is largely under control. What is certain, however, is that higher rates of utilization continue to impact Medicare spending, and the trend shows no signs of subsiding.

Specialty drug pricing trends

Specialty drug pricing trends also contribute to Medicare costs in 2025, making them a key focus for payers. From 2010 to 2019, the average annual price growth for specialty drug costs was 13.2%. This presented a major problem for patients who rely on specialty drugs, saddling them with higher out-of-pocket healthcare spending. While some policies have been put in place to control specialty drug costs -- such as the Inflation Reduction Act (IRA) -- payers will not rely on policy alone to control specialty drug costs. This sector of the industry will pursue its own strategies for making lower-cost drug products more accessible to members.

For example, many plans push generic drug use to keep prescription spending under control. They might integrate generics into step therapy efforts, asking patients to try a generic drug before moving on to a brand name medication. Medicare plans also arrange their formularies to be more cost-effective, placing generics on the most inexpensive tier to encourage uptake. When generics are not the most effective treatment, establishing preferred pharmacy networks, collaborating with pharmacy benefit managers and negotiating drug prices can also help reduce costs for beneficiaries.

The specialty drug trend for 2025 presents a twofold challenge because not only does this factor affect spending in 2025, but the prices for specialty drugs in 2025 help determine the prices in 2026. For a certain set of drugs, CMS can negotiate its prices directly with the manufacturers. In 2026, 15 drugs, including some specialty drugs, could be less costly due to CMS's negotiations. The agency expects that this move will reduce specialty drug spending, but this does not directly translate to lower specialty drug costs overall in the next year.

Two-midnight rule

The two-midnight rule, which CMS implemented in 2013 and expanded in 2024, is the third factor that could significantly impact costs in 2025 and, by proxy, shape payers' plans. The rule initially clarified when inpatient hospital stays are covered under Medicare Part A and when a patient's stay qualifies as inpatient versus outpatient. Part A covers a hospital stay as "inpatient" if the admitting provider predicts the patient will need to stay at the hospital beyond two midnights for recovery, with specified exceptions. The 2024 expansion clarified that these rules apply to Medicare Advantage plans as well, which were originally excluded from the policy.

The rule led to higher inpatient utilization and lower outpatient visits in 2024 with the inclusion of Medicare Advantage plans, a report from Strata found. Inpatient admissions rose nearly 19% over 2022 rates in February 2024 alone.

"YOY growth in inpatient revenue surpassed outpatient revenue in March for the first time in more than two years," the report explained, reflecting on the rule's impact.

Implementation has been difficult and Medicare Advantage plans in particular seem to buck this policy. However, the shifts in utilization are clear. And such shifts often translate to adjustments in spending, as the relationship between spending and utilization is well-defined.

Across all three of these price influencers, payers will start the year working off of projections and historical patterns but will soon find they need to pivot as the actual 2025 data and trends clarify. For those overseeing Medicare plans -- and for payers in general -- the big question of 2025 will be: How do I assess more quickly where my organization varies from forecasted trends? Knowing the reasons behind each assumption will be a crucial part of this process.

"Sometimes when you're forecasting out all of these events, you're doing so based on some history and some level of expectation," Davis shared, noting that the finance part of the payer organization would appreciate quicker ways to analyze assumptions that are made based on market intuition.

Successful payers will be able to identify why assumptions diverted from the projections and, as a result, will pivot quickly in response to unexpected changes.

Competition will ramp up in Medicaid

The results of the 2025 Medicaid bidding process involved some surprises. Incumbent organizations lost their contracts. Some payers took the states to court to appeal these decisions, most notably Anthem in Kentucky and Aetna in Kansas both of which lost their appeals. To Davis, these upsets reveal how Medicaid has become a highly competitive environment.

"Medicaid has actually been a relatively stable line of business for underwriting gain, year over year over year, especially as you think about Medicaid expansion and the opportunity it presented," Davis said.

Medicaid is considered a significant source of revenue for many major payers. When the Affordable Care Act allowed states to increase the eligibility threshold for Medicaid, the Medicaid population naturally grew and became an even more accessible and lucrative line of business. Now, payers are jockeying for Medicaid-managed care contracts and have to do more to stand out from the crowd.

"Medicaid expansion brought [in] a whole new set of stakeholders to see that Medicaid could be a profitable line of business and [to] invest time and energy in there," Davis said.

In this post-expansion world, cost -- while still an important factor in the bidding process -- is no longer the primary consideration. The specific added benefits that might attract attention will vary from state to state, since every state's population health needs are unique. But the ability to meet social determinants of health demands and reach underserved groups is almost always an asset.

Setting up the portfolio for 2026

Payers are always looking ahead. As they consider how to use 2025 to better position themselves for 2026, Davis affirmed paying close attention to the Dual-Eligible Special Needs Plan (D-SNP) market. D-SNPs do not fall directly under the public payer umbrella, but they do affect individuals who are eligible for both of the major public payer programs.

"If I'm a payer and I'm evaluating the portfolio I have, how do I start to make some of those changes now to be able to offer some of these more integrated, coordinated D-SNP products?" Davis prompted. "You can start to invest in that now."

From 2020 to 2024, the number of D-SNPs grew from 547 to 854, according to Milliman. Enrollment followed suit, with a growth rate of 8% to 16% in the last five years. UnitedHealthcare has maintained dominance in this market and the majority of the market is divided between seven major payers. Due to the complex overlap of coverage between Medicare and Medicaid eligibility, coordinating benefits can be challenging. But there is great need for it among the D-SNP population, which tends to be low-income and may face health equity and complex care challenges. As a result, the space is ripe for change and innovation.

As payers kick off the new year, there are multiple challenges ahead in the public payer space. But evidence-based strategies can help them make progress on lowering costs and differentiating their products.

Kelsey Waddill is a managing editor of Healthcare Payers and multimedia manager at Xtelligent Healthcare. She has covered health insurance news since 2019.

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