Medicare Advantage payment update eases concern but raises longer-term questions

A higher-than-expected Medicare Advantage payment increase for 2027 is offering short-term relief for insurers, but experts shared with Managed Healthcare Executive that it does little to ease longer-term cost pressures or resolve ongoing concerns about risk adjustment and market competition.

CMS announced April 6 that Medicare Advantage (MA) plans will see an average payment increase of 2.48% in 2027, totaling more than $13 billion in additional payments. The final rate reflects a number of factors, including growth in underlying healthcare costs, Star Ratings quality bonuses and updates to risk adjustment.

The increase marks a significant shift from CMS’ January Advance Notice, which proposed an average increase of just 0.09%, or about $700 million. That earlier proposal fell below expectations and triggered sharp declines in insurer stock prices, which flags how closely the industry tracks even small changes in federal payment policy.

MA now covers more than half of all Medicare beneficiaries, making annual payment updates a major piece in shaping plan strategy, benefit design and financial performance.

CMS stated that the final policies aim to enhance payment accuracy and promote long-term sustainability. A key part of the update is continued focus on risk adjustment, including maintaining the 2024 MA risk adjustment model for 2027 and moving forward with excluding diagnoses from unlinked chart reviews.

Under this policy, diagnoses must be tied to a specific patient encounter to count toward risk scores, a move CMS has said is intended to better reflect patient health status and reduce unnecessary cost growth tied to coding practices.

Experts expressed that the higher rate is a welcome change from the earlier proposal, but it doesn’t fully address broader financial challenges facing plans.

Michael Lutz, a managing director at Avalere Health, said the increase provides some relief but falls short of offsetting rising costs.

“While the increased payment rate compared to the flat rate presented in the Advance Notice is a welcome update, it is important to realize that the rate increase does not fully offset the impacts of healthcare services inflationary pressures,” Lutz said. “Therefore, this increase is not a panacea that will take away the cost pressures plans and members face.”

Lutz added that the update could help plans in the near term, but it’s unlikely to shift longer-term strategies.

“I do think it helps plans finalize their benefit designs as it takes some of the focus away of having to trim benefits to meet cost and premium expectations, but I don't expect it changes the larger, long-term business strategy discussions around where to enter or leave markets, product types offered, or network reimbursement negotiations,” he said.

Leaders representing nonprofit and regional plans pointed to ongoing concerns about how payments are distributed across the market.

Ceci Connolly, president and CEO of the Alliance of Community Health Plans, said CMS has taken some positive steps on risk adjustment, but deeper issues remain.

“We're pleased by CMS’ early moves on risk adjustment and chart review flexibility,” Connolly said. “This will improve how patient acuity is captured, particularly as beneficiaries switch plans amid recent market exits. It’s a good first step. However, the system’s core inequities remain, continuing to favor larger carriers and distort competition.”

She added that differences in risk adjustment payments continue to raise concerns about fairness in the MA market. She gave the example that in 2023, an ACHP analysis found that taxpayers paid the largest MA carrier $6 billion more in risk adjustment than all ACHP plans combined.

“That undermines competition and benefits investors, not patients,” Connolly said. “We’re excited to continue working with CMS and others interested in a high-performing, stable, simpler Medicare Advantage program.”

Connolly also noted that while the final rate provides some stability, it may not be enough for all plans.

“The modest rate increase provides some short-term stability, but it falls short of rising cost pressures, especially for plans serving rural and underserved communities,” she said.

However, insurers stressed the importance of maintaining affordability for beneficiaries as costs continue to rise.

In a statement, AHIP said MA remains a key source of coverage for millions of Americans.

“More than 35 million seniors and Americans living with disabilities choose Medicare Advantage because it provides them with better care at lower costs than fee-for-service,” Chris Bond, an AHIP spokesperson, said in the released statement. “As health plans incorporate the policies released in recent days, they will continue to focus on keeping coverage and care as affordable as possible during this time of sharply rising medical costs.”

While this updated rate may ease some immediate concerns raised earlier this year, experts note that ongoing cost pressures and future changes to risk adjustment policy will continue to shape the MA market in the years ahead.