Rates surge to relief of Medicare Advantage (MA) plans
On April 7, the Centers for Medicare and Medicaid Services (CMS) issued the 2026 Final Announcement for Medicare Advantage (MA) and Part D plans. This annual announcement outlines the rates and other technical rate-setting details for the coming year as well as the final Star measures and details for Star Year 2026. In addition, the notice outlines potential changes to Star and display measures moving forward.
This blog covers the non-Star issues in the Final Announcement – largely rates for 2026. On Monday, I will publish a blog in conjunction with Lilac Software on the final announcement from the standpoint of Stars changes. This will detail all the final Star measure changes, updates, and information discussed in the 2026 final MA and Part D Rule (released April 4) and the April 7 Final Announcement.
2026 MA rate proposal
When the outgoing Biden administration released the 2026 Advance Notice in January, it sent shock waves through the MA industry. After two years of rates falling in MA, plans were slated to receive just a 2.23% rate hike in 2026 (not counting risk score trends). While that was a real revenue increase it was extremely skimpy. Plan actuaries were reporting utilization and spending increases of as much as 9%.
The Advance Notice hike would have meant a third year of reduced benefits, increased cost-sharing, and geographic contraction if it held. MA advocates and plans were urging the new Trump administration to issue relief of some sort – either forestalling the further phase-in of the risk model changes or the medical education phaseout.
Well, the Trump administration didn’t have to really do anything to drive up the 2026 rate. CMS did not change any policies on rates between the Advance Notice and Final Announcement. But the rate hike surged to 5.06% because the rate setting growth factor increased dramatically between the two notices.
As noted, MA plans and actuaries warned that trends in the program were as high as 9% due to soaring utilization. Indeed, as all of the 2024 claims rolled in (especially Q4) between the first and second notice, the Effective Growth Rate in the rate formula went from just below 6% to over 9%.
MA plans have to be happy overall. With the growth rate going up so much, it would have been very hard for the administration to make policy changes to boost the rate higher. It would have been hit with attacks from providers who see either cuts or low hikes. For sure, providers will have issues anyway.
The trend is what the MA plans deserve due to the high cost trends. A 2.23% hike would have been a disaster for the industry.
Final 2026 rate details and comparison to prior years and the 2026 proposed hike
Let’s break the proposed MA rate hike down.
As you can see in the table below, the final rate hike for MA in 2026 is a 5.06% average increase, up from the proposed 2.23%.
CMS used to compute the expected risk score trend into what it views as the overall rate hike. But plans do not see it that way and the difference is really tied up in the whole overpayment and risk adjustment debate. Plans view the risk score trend from year-to-year as representing increased risk of the population. They believe these increased risk adjustment revenues will go out in claims costs and how CMS features it inflates the rate hike. CMS and some detractors of MA see the annual risk score trend as more evidence of overpayments and the risk score trends represent a real revenue increase to plans.
I stand somewhere in the middle. Perhaps some of the trends in risk scores could be part of overpayments that need reform. On the other hand, the margins that MA plans have seen of late would show that risk and costs are increasing robustly. I would also note that the projected risk score trend increase is slated to be up just over 2% for 2026, which is well below the over 4% trend on average for 2024 and 2025. This would seem to bolster the plans’ position (at least for 2026).
The Trump administration address the ongoing controversy in the Final Announcement by not including estimating coding trends in its rate table, simply noting it in a footnote. This is a major win for MA plans. As I always do, in the table below I report the rate without the coding trends and then below the bold line I show what the revenue uptake is with coding trends.
Let’s break down the component parts of rate-setting that derives the 5.06% hike.
- The effective growth rate (EGR) is derived from the growth in the per capita costs in the traditional fee-for-service (FFS) program and MA for the non-end-state-renal disease (ESRD) populations. It is a national estimate. Trends can be different in each county and region. Remember that the eventual county benchmarks are adjusted from there based on several parameters, including whether a county is at 95% up to 115% of FFS costs. For 2026, we saw a huge increase in the EGR of over 9% compared with just over 2% in 2024 and 2025. Utilization and other factors lag a bit in rate-setting. The 2024 and 2025 EGRs had some of the depressed COVID utilization years in them. Now we are seeing more robust utilization and trends in the EGR calculation. This is likely good news for the future as well. Note, though, that a medical education formula change in rate-setting actually reduced the growth of the EGR (by about 1.4% for the FFS component and 0.8% for the MA component.) Otherwise, the EGR would have grown much more.
- Rebasing relates to changes in the average geographic adjustment index (GAI), which adjusts for spending differences across regions/counties. This usually is a small impact. The rebasing could be positive or negative in a given year and actual impacts are really seen at the local county or regional level. The rebasing number simply reflects the nationwide impacts of changes in the GAI. The GAI will be set in the final announcement in April.
- Star revenue changes are a global estimate as well. Each plan will have a different result based on its actual Star performance by contract and eligibility for bonus revenue. The reduction due to Star performance is -0.69% for 2026 – the third year in a row of a decline. This is based on the 2025 Star ratings as there is a one-year lag between the rating year and payment year. Those losing Star ratings may see a much bigger year-over-year reduction in revenue. Those maintaining Star could see additional revenue due to enrollment growth. Those gaining bonus revenue for the first time or increasing their ratings would see a great jump. The negative number for Star revenue is a sign that program-wide plans lost Star power and 4 Star or above Star ratings of late.
- The coding pattern adjustment is a statutory/regulatory reduction taken to MA rates for the perceived differences in risk adjustment scores between MA and FFS. This gets to the controversy about whether MA plans over-score members. You know my thoughts on this – it is a bit of a mixed bag in my opinion. The coding intensity adjustment has been set at negative 5.91% for years now and CMS will not change it for 2026. This is despite pressures from critics who say over-reimbursement has risen well beyond that negative factor. Further, CMS likely did not change it again due to the risk model changes being implemented (see below).
- There is the normalization factor adjustment captured within the Risk Model Revision and Normalization category. The normalization factor ensures the average risk score stays at 1.0 and adjusts from the data year in the model to the payment year. This is different than the coding pattern adjustment.
- The risk model change is responsible for the biggest impact in the Risk Model Revision and Normalization category. In 2024, CMS announced it was updating the risk model and made many major changes, including:
- Condition categories are restructured from ICD-9 to ICD-10.
- The underlying FFS data years are revised.
- There are some revisions focused on reducing the sensitivity of the model to conditions with more coding variation. This has generated some controversy.
- The new model should reflect more current costs associated with various diseases, conditions, and demographic characteristics.
In a concession to plans in 2024, CMS decided to phase in the new risk model change by using one-third in 2024, two-thirds in 2025, and 100% in 2026. CMS is not backing off the final phase-in for 2026.
The risk model change certainly hurts. The three-year impact from the model change combined with normalization (they are intertwined) will be a negative 7.62% when fully phased in as of 2026. This is the biggest issue plans have – the risk model change, along with poor Star performance, has basically zeroed out the effective growth rate increase from 2024 to 2026. On the positive side, the amount reported as overpayments should decline as well.
MA plans had hoped that CMS might suspend the last year of phase-in of the risk model change. But CMS said suspending the final year of the risk model phase-in as well as one related to medical education formula changes would have added $10.4 billion to Medicare costs. The increase as outlined by CMS alone will cost about $21 billion in 2026. Further, CMS estimates the federal government will spend $9.2 trillion over the next decade on MA payments to plans, including $1.3 trillion alone on MA supplemental benefits and premium buy-down.
- The anticipated risk score trend is a national number calculated by CMS. Individual plans will see various increases or decreases. I noted above that plans and CMS view this trend very differently and why plans do not compute it into the rate hike year-to-year. Note that the projected risk score trend for 2026 is about half of what it was in 2024 and 2025 annually. This is a sign that the new model could be changing risk scoring patterns.
In the next table, I go further on the troubles MA plans have seen and how things are looking better for 2026. The industry came off of high annual rate hikes early in the 2020s. In 2024 and 2025, these hikes were basically zeroed out due to the risk model change and low effective growth rates. Compounding the problem was a major drop in Stars starting with 2023 ratings and running so far through 2025 ratings. On the cost side, utilization and other trends (such as drug costs) leapt coming out of COVID. As well, CMS has placed new costly burdens on plans, including requiring them to follow FFS prior authorization processes (I say taking the managed care out of managed care) and new unpaid costs from the Inflation Reduction Act’s (IRA) Part D cost-sharing changes. All this created a perfect financial storm for MA plans.
Things will get better now with a healthy increase for 2026 and help plans get back to financial stability and alignment. It helps smooth financial recovery efforts. But, while it is relief, it still means some challenges in 2026 due to robust costs and anticipated further increases. Utilization trends continue to impact the MA industry.
The development could, though, play a big part in mitigating further benefit reductions, cost-sharing increases, and geographic contractions. But other issues could still mean plans could continue to trim where they serve members as well as some benefits in 2026, at least for those plans that have struggled greatly.
Indeed, while MA plan executives are delighted, they are being cautious, having misjudged what occurred post-COVID.
Future caution
Another potential caution to MA plans: CMS says it has been working to calibrate the risk adjustment model using MA encounter data (diagnosis, cost, and data submitted to CMS by MA plans). CMS says it could start phasing in an encounter data-based risk adjustment model as early as 2027. The issue for plans is it would break with setting rates in part on what have been traditionally moderate to high FFS program cost trends.
Other financial factors
Other financial changes include:
- Benchmark rate percentages against FFS remain the same at 95% to 115% of FFS in the county.
- The Star bonus remains at the same 5% level and applies only to those with 4 Star ratings or greater.
- The rate rebate percentage — the difference between the plan base bid and the county benchmark which goes back to members via added benefits — remains the same based on Star performance:
- Less than 3.5 Star = 50%
- 3.5 and 4 Star = 65%
- 4.5 and 5 Star = 70%
- No changes to Star calculations for low-enrollment or new plans.
- Part D risk corridors remain the same.
- Given the low rates in Puerto Rico, poverty, and penetration in MA, CMS would continue basing the MA county rates in Puerto Rico on the relatively higher costs of individuals in FFS who have both Medicare Parts A and B and applying an adjustment regarding the propensity of individuals with zero claims.
- CMS is proposing to begin a transition in calculation of risk scores for PACE organizations. It will begin in 2026 with a blend of 10% of the risk score calculated using the 2024 CMS-HCC model and 90% of the risk score calculated using the 2017 CMS-HCC model. It outlines the full transition timeframe in the Final Announcement.
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— Marc S. Ryan
