Key takeaways

  • Medicare Advantage continues to grow with largely bipartisan support, and L.E.K. projects the program will reach 47% penetration by 2025 and 70% penetration between 2030 and 2040.

  • Key drivers contributing to growth include continued increases in overall Medicare healthcare costs, ongoing government support for the program, added flexibility from CMS for Medicare Advantage plan providers and expanded coverage from established and emerging payers.

  • Medicare Advantage is one of the rare products in the U.S. healthcare system that satisfies the “triple aim” of healthcare but also appeals to the self-interests of consumers, health plans and the government.

  • Payers, providers and investors should prepare for a future in which Medicare Advantage is the predominant Medicare product offering.


Over the past 25 years, Medicare Advantage (MA) has consistently penetrated the Medicare marketplace. While its penetration growth has been notably measured in the past 10 years, rising just 1.5 percentage points annually, L.E.K. Consulting doesn’t expect it to stop anytime soon. In fact, our proprietary county-level projection model shows that as seniors seek to secure better management of their care but pay less, Medicare Advantage penetration will continue to rise — to as high as 70%.

When we published our first Executive Insights in this series in 2017, the Trump administration was still in its first year and the future of the ACA was a topic of frequent debate. Today, the status and long-term structure of healthcare reform remain in flux, but Medicare Advantage enrollment is still growing ― and with largely bipartisan support. As recently as March 2019, a group of U.S. senators sent a letter to Seema Verma, administrator of the Centers for Medicare & Medicaid Services (CMS), commending the Trump administration for the actions it had taken to support Medicare Advantage and noting that the program is “anticipated to continue its steady growth, with enrollment projected to reach 38 million, accounting for ~50% of those eligible, by 2025.”

In light of the ever-changing healthcare landscape and the central position Medicare Advantage growth has taken for many national payers, we thought it would be a good time to update our forecast. To that end, we have taken into account Medicare Advantage enrollment figures that were released in February 2019 and revised our projections through 2025 and beyond.

Since 2017, Medicare Advantage has benefited from several new (or enhanced) tailwinds that we expect to drive the program toward 70% penetration, including the following:

  • Continued increases in overall Medicare healthcare costs (CMS forecasts growth of approximately 7.5% per year through 2027) and out-of-pocket costs for Medicare seniors (forecasted to grow 4.3% per year through 2023) are bolstering the need for a managed care option beyond traditional Medicare for seniors.
  • Ongoing government support for Medicare Advantage remains robust, with Secretary of Health and Human Services Alex Azar focusing on Medicare Advantage as a key component of long-term cost containment. “What I really want to do is really make sure that [for] our Medicare Advantage program, which two-thirds of new enrollees are signing up for …[,] we’re doing everything that we can to make sure it’s a strong, robust option for our seniors,” he said in January 2018. “That’s where my energies are; my focus is there.”
  • Added CMS flexibility for Medicare Advantage plan providers in 2018 and 2019 has increased their ability to design benefits that meet the unique needs and preferences of each Medicare-eligible senior.
  • Ongoing payer investments in their Medicare Advantage lines of business means established payers are making acquisitions (e.g., Anthem’s purchase of HealthSun in 2017 and America’s 1st Choice in 2018), expanding county coverage/plan benefit package offerings from 2017 to 2019 (at an estimated 12% per year). Furthermore, emerging payers are starting to offer Medicare Advantage plans (e.g., Devoted Health, Bright Health, Oscar Health) or expanding those they already offer (e.g., Clover Health).

While the majority of trends support continued increases in Medicare Advantage enrollment, Minnesota has represented one headwind of the program’s recent growth. Minnesota was the only state in which Medicare Advantage enrollment dropped during the annual election period for 2019, primarily due to the elimination of Medicare Cost plans, which are “hybrid” Medicare Advantage offerings that allow enrollees to leverage Medicare Fee-for-Service when utilizing out-of-network providers.

Medicare Cost plans are generally a popular option for seniors due to their flexibility; but after the removal of Minnesota’s offering in 66 of the state’s 87 counties, 320,000 seniors were forced to enroll in a new form of Medicare by 2019. Of this group required to move from Medicare Cost plans, approximately two-thirds immediately enrolled in MA plans for 2019, a higher enrollment rate than national MA penetration averages. Despite the one-time impact of Minnesota’s switch to more traditional Medicare Advantage plans, however, we believe Minnesota enrollment will normalize going forward as enrollees are expected to elect, and stick with, Medicare Advantage.

Driving the march

Medicare Advantage is one of the rare products in the U.S. healthcare system that not only satisfies the “triple aim” of healthcare improvement — that is, improving the experience of care and the health of populations while at the same time reducing per capita healthcare costs — but also appeals to the self-interests of three very powerful constituents that have been driving its march forward: consumers, health plans and the government.

  • Consumers like Medicare Advantage plans because they offer predictability, additional benefits, care coordination and lower estimated total annual healthcare costs than are offered by either Original Medicare or Medicare Supplement plan options (see Figure 1).
  • Health plans appreciate Medicare Advantage plans because they make more money: Medicare Advantage plans yield higher nominal revenue and operating margin with per-member per-month (PMPM) revenue of $800-$1,200 an operating margin of $30-$60 PMPM versus $180-$220 and $10-$18PMPM for Medicare Supplement, respectively.
  • Government supports Medicare Advantage because it enables the effective deployment of cost trend management tools other than the fee schedule.

Medicare Advantage versus Original Medicare

Much of the growth in Medicare Advantage penetration will come from Original Medicare, which could decrease more than 20 points, from 40% penetration to 10%-20% (see Figure 2).

Seniors with Original Medicare will presumably find their 20% coinsurance responsibility more burdensome as their healthcare costs continue to rise. According to CMS, overall healthcare costs will increase by approximately 5.6% a year through 2027, while Medicare costs are forecasted to grow at a rate of 7.5% a year.

Meanwhile, age-related conditions will likely convince seniors and soon-to-be seniors that they need the degree of care management Medicare Advantage plans provide. The number of seniors with multiple chronic conditions rose by approximately 8 percentage points from 2000 to 2010, according to the Centers for Disease Control and Prevention. Meanwhile, United Health Foundation notes that the population about to turn 65 is 7 percentage points more likely to be obese and 6 percentage points more likely to have diabetes than those who turned 65 in 1999.

According to a proprietary study we conducted at L.E.K., Medicare Advantage would be the best plan option for approximately 20% of seniors who end up defaulting to Original Medicare. Such seniors are typically worried about their health but aren’t proactive about seeking related plan information, and so aren’t making a conscious (never mind well-informed) decision to remain in Original Medicare. That means they are likely to respond positively to outreach and guidance around choosing Medicare Advantage.

Over the past 20 years, enrollment in Medicare Advantage plans has grown at a slow but steady pace (see Figure 3).

Reality versus expectations?

Our first report in this series, published in 2017, included Medicare Advantage enrollment figures of 19 million members out of 56.7 million total Medicare eligibles, resulting in overall penetration of 33.5%. Given the value proposition and strong tailwinds behind Medicare Advantage, we were bullish on membership growth reaching approximately 22.2 million members in 2018 ― and per CMS, the number of Medicare Advantage members hit 22 million last year. Looking ahead, we expect enrollment growth to continue in line with our previous forecasts of 7.7% compound annual growth rate (CAGR) to reach 47% penetration, or just over 37 million members in 2025 (see Figure 4).

Still headed for 70% penetration

After factoring in enrollment and penetration rates over the past two years, we still expect Medicare Advantage to reach up to 70% penetration sometime between 2030 and 2040.

We base our forecast on a number of factors, among them the fact that not only have several urban and rural counties already achieved a Medicare Advantage penetration rate of 55%-65%, but also their penetration rates continue to grow in 14 of the top 20 counties (see Figure 5).

Medicare Advantage products should also continue to offer a differentiated and enhanced value proposition vis-à-vis Original Medicare and Medicare Supplement (see sidebar), which should grow as healthcare becomes more expensive and Medicare Advantage plans become more targeted toward seniors’ condition-specific and holistic healthcare needs.

Medicare Advantage versus Medicare Supplement

The future of Medicare Supplement, which is used to help pay some of the costs that Original Medicare doesn’t cover, is uncertain. Like Original Medicare, Medicare Supplement plans face higher medical costs while offering a similar lack of strategic levers to manage healthcare spend.

And starting on January 1, 2020, a provision in the Medicare Access and CHIP Reauthorization Act will ban Medicare Supplement insurers from selling any Medicare Supplement policy that covers the annual Medicare Part B deductible (i.e., first-dollar coverage) to new Medicare enrollees. The change will impact the current Medicare Supplement choice favorites, Plan F and Plan C. Both changes could lead more seniors to choose a Medicare Advantage plan.

Dual eligibles

Dual eligibles, a segment where Medicare Advantage penetration has historically lagged, is also currently making up for lost time.

“Dual eligibles” is a term used to encompass Medicare beneficiaries who also receive Medicaid assistance. Medicare Advantage penetration of dual eligibles, which represents roughly 20% of Medicare eligibles, has lagged behind Medicare Advantage penetration of seniors due to a lack of coordinated state offerings and managed care. However, states are moving aggressively to manage the cost of this high-needs population. Dual Eligible Special Needs Plans (D-SNPs), which comprise the vast majority of special needs plans (SNPs), have been growing at more than 10% per year, outpacing overall Medicare Advantage enrollment growth. And large managed care organizations have indicated they expect to see continued growth in the SNP market. For example:

  • UnitedHealthcare executives at the Barclays Global Health Conference in spring 2018 said they continued to see D-SNP as a high-growth opportunity, noting that only 20% of D-SNP eligible individuals were enrolled in a D-SNP
  • WellCare executives indicated at the Morgan Stanley 16th Annual Global Healthcare Conference in September 2018 that the dual population was significantly underpenetrated and presented a large opportunity
  • Humana executives at the annual J.P. Morgan Healthcare Conference in January 2019 indicated that states and the federal government have demonstrated increased coordination for D-SNPs

Other large payers are likely to look toward SNPs, given the potential they offer for high profitability, plan design flexibility and year-round enrollment opportunity. We expect to see continued strong growth within SNPs in the coming years as they get more sophisticated when it comes to managing these complex patient populations.

Noted regulatory uncertainty

While we remain bullish on the emerging value proposition of Medicare Advantage as the highest-value product choice for a majority of seniors in the current environment, there are at least two regulatory uncertainties that could meaningfully impact the outlook for Medicare Advantage enrollment and penetration and that we monitor closely; proposals for “Medicare for All” and CMS’ recently announced Primary Cares Initiative.

Several Democratic candidates running for president in 2020 have introduced formal proposals or otherwise supported movement toward Medicare for All should Democrats regain control of the government. These proposals are still in their early days and could have dramatically different impacts on Medicare Advantage enrollment as we know it today. A “single payer” proposal such as the version proposed by Sen. Bernie Sanders could bring an end to private health insurers’ involvement in Medicare and thus Medicare Advantage entirely. On the other hand, a “Medicare Advantage for All” approach or enabling early buy-in into Medicare (and Medicare Advantage) could dramatically expand Medicare Advantage enrollment.

CMS’ new Primary Cares Initiative will also be interesting to track to determine its impact on Medicare Advantage enrollment. While it is a voluntary program, CMS projects that as many as 25% of Original Medicare beneficiaries could be incorporated into the five-year program. Similar to Medicare for All proposals, if the Primary Cares Initiative focuses entirely on enabling providers to take on risk, it might increase the degree of care management within Original Medicare and thereby diminish the incentives to join a Medicare Advantage plan. On the other hand, if CMS enables a provider group or Medicare Advantage plan to take on responsibility for the total cost of care for all Medicare beneficiaries in a specific geographic region, it could dramatically expand Medicare Advantage enrollment.

Investing in long-term penetration growth

As we noted in the first Executive Insights in this series, Medicare Advantage penetration has grown at a slow but steady pace over the past 25 years. As seniors increasingly eschew Original Medicare in favor of lower payments, enhanced care management and more cost certainty, with encouragement from both health plans and, albeit indirectly, the government, we expect that growth to continue — to 47% penetration by 2025 and, eventually, up to as high as 70%.

Payers will therefore need to take aggressive action to grow market share of their Medicare Advantage offering. That could include expanding into new counties, investing in targeted sales to age-ins, and designing new products to attract new members and keep them healthy. Meanwhile, providers that have so far elected not to participate in Medicare Advantage will need to reconsider their stance and figure out a way to win in the new operating environment. As for investors, they should be looking for vendors that are set up to support Medicare Advantage’s continued growth (and their own profitability) by offering payers superior care management, member engagement, sales and marketing, and other capabilities.

Sooner or later, Medicare Advantage will become the predominant Medicare product offering. The time to prepare for the changing of the guard is now.

Related Insights