Radar on Medicare Advantage

As Medicare Advantage insurers pursue margin recovery after experiencing higher-than-expected medical cost growth, CMS on Jan. 10 provided a bit of good news with its preliminary rate notice for next year. Posting the so-called Advance Notice three weeks early, CMS estimated that MA plans on average will see a revenue increase of 4.33% in 2026, which experts say could be even higher if the incoming administration applies more recent cost data to its final estimates.

CMS’s projected revenue change for 2026 was based on an effective growth rate of 5.93% (which is largely driven by growth in fee-for-service [FFS] per capita costs) and an average risk score increase of 2.10% increase in risk scores. Take off -0.69% due to Star Ratings changes and -3.01% due to FFS normalization and risk adjustment model updates, and plans could see an estimated 4.33% increase, according to a fact sheet on the 2026 Advance Notice of Methodological Changes for MA Capitation Rates and Part C and Part D Payment Policies.

Less than two weeks before the inauguration of President-elect Donald Trump, CMS on Jan. 10 released its last set of payment updates for Medicare Advantage and Part D under President Joe Biden. In the 2026 Advance Notice of Methodological Changes for Medicare Advantage Capitation Rates and Part D Payment Policies, the Biden administration proposed to complete its three-year transition to the 2024 CMS-Hierarchical Condition Categories (CMS-HCC) risk adjustment model (aka, version 28 or v28). At the same time, it included an update to the Medicare Part D RxHCC risk adjustment model to reflect the impact of benefit changes under the Inflation Reduction Act, which Biden signed into law in 2022. 

As field marketing organizations and Medicare Advantage insurers filed multiple legal challenges to federal rulemaking, 2024 was a particularly litigious year for program stakeholders. Now, with the return of Donald Trump to the White House, the new administration must contend with critical questions about MA plan payments to agents and brokers, the calculation of Part C and Part D Star Ratings and the recoupment of overpayments to MA plans. Two leading managed care attorneys tell AIS Health, a division of MMIT, that the resolution to these questions may depend on the administration’s appetite to defend the rulemaking of the prior administration.

It also depends on the preferences of Trump’s respective leadership picks for HHS and CMS, Robert F. Kennedy, Jr., and Mehmet Oz, M.D. CMS on Jan. 10 proposed an estimated rate increase of 4.3% for MA plans, and it will be up to the new administration to finalize rates for 2026. Given that the rate increase is more favorable than the last two years — when the Biden administration began phasing in a new risk adjustment model — a vocal MA supporter like Oz could be inclined to “not rock the boat” and let what’s already been set in motion play out, suggests Lindsey Fetzer, member of the law firm Bass Berry & Sims.

Using an extrapolation methodology that will allow the federal government to recoup billions of dollars in estimated overpayments to Medicare Advantage insurers, CMS this year intends to conduct Risk Adjustment Data Validation (RADV) audits of 60 MA organizations for payments issued in 2018. Per CMS’s final rule issued in 2023, that is the first year the agency will apply the extrapolation methodology, which is the subject of an ongoing lawsuit filed by Humana Inc. At the same time, CMS expects MA organizations to return overpayments for Part C services that they identify, albeit with a slightly different interpretation of what leads to that identification.

At the center of Humana’s argument in Humana Inc. et al v. Becerra et al (No. 4:23-cv-909-O), which was filed in the U.S. District Court for the Northern District of Texas in September 2023, is CMS’s choice not to apply a fee-for-service adjuster when estimating overpayment recoveries. The FFS adjuster was intended to account for any impact from unaudited diagnosis codes in FFS Medicare data that are used to calibrate the MA risk adjustment model. Although CMS in 2012 informed plans that it would use the FFS adjuster, it ultimately deemed it unnecessary without offering “any empirical or actuarial justification for its new audit methodology,” Humana argued.

Medicare spending is significantly higher for individuals who switch from Medicare Advantage to traditional, fee-for-service Medicare — 27% higher on average — compared to those who remain in FFS Medicare. That’s according to a KFF analysis, published last month, that examined 2021 and 2022 data from the Medicare Beneficiary Summary File. The findings support previous investigations  and research suggesting that those leaving MA may have greater health care needs that aren’t being met by their plan, leading to a spike in costs when they switch to FFS Medicare, particularly during that first year. 

In 2022, Medicare spent an average of $12,012 per person on beneficiaries who disenrolled from MA the previous year, vs. $9,427 on beneficiaries who had been continuously enrolled in FFS. Skilled nursing facility services drove 34% of the overall cost difference between cohorts, followed by outpatient hospital services at 23% and inpatient hospital services at 20%. KFF pointed out that MA plans often require prior authorization for post-acute services such as skilled nursing facility stays, highlighting an October 2024 report from the U.S. Senate Permanent Subcommittee on Investigations, which found that MA plans are more likely to deny PA for post-acute care than other types of services. These denials could be driving higher-needs beneficiaries to drop MA coverage in favor of FFS. MA plans also frequently use PA to manage the use of costly Part B drugs, including chemotherapy, and inpatient hospital stays, according to KFF.