CMS Sets Medicare Advantage Rates Annually. Here’s How.

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On January 27, 2026, CMS delivered its answer for 2027: a 0.09 percent payment increase. Not 9 percent. Zero point zero nine.

CMS faces a puzzle every January: how much to pay private plans to cover more than 30 million seniors—accounting for disease patterns, geographic differences, quality performance, and the question of what counts as fair compensation.

The annual rate announcement is the result of competing pressures from Congress, insurance companies, beneficiary advocates, and actuaries trying to forecast what healthcare will cost millions of people they’ve never met.

The Calendar That Runs Medicare Advantage

CMS operates on a strict timeline defined by federal law. The agency releases its “Advance Notice”—proposed rates and payment policies for the following contract year.

CMS must issue final rates by the first Monday in April. Plans need finalized rates to develop competitive bids by the first Monday in June. Beneficiaries need those plans designed and priced before October open enrollment.

These dates are locked into law. If CMS misses them, the entire enrollment process breaks down.

Benchmarks: Where the Money Starts

Before any rate gets set, CMS establishes benchmarks—the maximum amount the government will pay for a Medicare Advantage plan in any given county. CMS looks at traditional Medicare spending per beneficiary in each county, then uses that as a baseline for what it will pay private plans.

But between that baseline and the actual benchmark, several adjustments inflate payments significantly.

The biggest is the “applicable percentage”—a location-based payment adjustment designed to keep plans operating in less-profitable areas. Counties are divided into four quartiles based on traditional Medicare costs. This structure mathematically guarantees that half of all U.S. counties have Medicare Advantage benchmarks above traditional Medicare spending before any other factors are considered.

Without higher payments in low-cost rural areas, insurers would concentrate in high-cost urban markets and abandon entire regions. Congress built this subsidy in to prevent market withdrawal. Critics argue it creates structural overpayment—plans in lower-cost areas consistently achieve higher profits because they start with inflated benchmarks relative to actual medical costs.

Then comes the quality bonus program. Plans rated four or five stars receive benchmark increases of 5 to 10 percent, depending on their county classification. In 2025, this distributed an estimated $12.7 billion to Medicare Advantage plans.

Risk Adjustment: The Engine of Overpayment

Benchmarks set the framework. Risk adjustment drives the variation.

CMS recognizes that beneficiaries aren’t uniform—some have chronic illnesses costing far more to treat. The tool CMS uses is the CMS-Hierarchical Condition Category model, a computer system that assigns higher payments for sicker patients. It looks at patient diagnoses and assigns a “risk score” that increases or decreases the base benchmark payment amount.

Someone with no chronic conditions might have a risk score of 0.8—payment is 80 percent of the benchmark. Someone with multiple serious illnesses might score 1.5 or higher—payment is 150 percent or more of the benchmark.

In practice, it’s become the primary driver of Medicare Advantage overpayment.

The core problem: Medicare Advantage plans have financial incentives to document more diagnoses than traditional Medicare providers do, and the system doesn’t adequately correct for this tendency.

When someone in traditional Medicare sees their doctor, the provider documents the encounter and submits claims with whatever diagnosis codes they recorded. When someone in Medicare Advantage sees their doctor, the plan receives the same documentation. Then the plan engages in supplementary activities traditional Medicare doesn’t incentivize.

They conduct “chart reviews,” when plan staff look through medical records to find diagnoses. They conduct “in-home health risk assessments,” visits to seniors’ homes to check their health conditions. Sometimes these efforts identify diagnoses the beneficiary’s own doctors haven’t formally diagnosed. Plans claim this improves care coordination. It also increases risk scores, triggering higher Medicare payments.

Other researchers estimate overall coding intensity inflates Medicare Advantage payments by 14 to 20 percent—plans receive $14 to $20 in extra payments for every $100 of benchmark payment due to nothing other than more aggressive coding practices.

It’s possible some aggressive documentation reflects real diagnoses that traditional Medicare providers failed to capture, improving care coordination. It’s equally clear some of it reflects practices designed primarily to inflate risk scores and capture higher government payments, with limited clinical benefit to the patient. The line between legitimate care improvement and fraudulent upcoding is often unclear.

In January 2026, Kaiser Permanente agreed to pay $556 million to settle allegations that the insurer had engaged in systematic searching through medical records to find diagnoses that increase payments. Federal investigators said the plan used data analytics to identify diagnoses that could be added to patient records, sometimes months after the patient visit, to inflate risk scores and generate approximately $1 billion in unsupported payments.

If even prestigious plans with five-star ratings engage in such practices according to federal investigators, the coding intensity problem may be systemic rather than limited to a few bad actors.

CMS Tightens the Screws

To address coding intensity concerns, CMS has been tightening its risk adjustment model. Beginning in 2024, the agency phased in Version 28 of the CMS-HCC risk adjustment model—a significant recalibration designed to reduce the tendency to record more diagnoses between Medicare Advantage and traditional Medicare.

For 2027, CMS proposes additional tightening, including completely excluding diagnoses from “unlinked chart reviews”—diagnoses found in medical records but not connected to specific doctor visits—from risk score calculations. CMS’s updated model also uses more recent data and excludes diagnoses from audio-only encounters.

The insurance industry views them as unjustified rate cuts that will squeeze already-thin profit margins.

The 2027 Rates: How Little Growth Adds Up

CMS proposed an effective growth rate of 4.97 percent, reflecting estimated growth in traditional Medicare per capita costs. But CMS built in offsets and adjustments reducing the actual payment increase to 0.09 percent on average—a reduction from the initial growth rate of 4.88 percentage points.

In practice, Medicare Advantage plans will see payments increase nominally by approximately $700 million in aggregate. CMS also reports an “effective” change of 2.54 percent after adjusting for expected underlying coding trends and population changes.

Medical costs are rising significantly faster than the 0.09 percent headline increase. If medical costs rise at 10 percent annually but CMS increases payments by 0.09 percent, the gap of 9.91 percentage points will eventually cause insurers to operate at a loss on Medicare Advantage unless they reduce costs through benefit restrictions, network contractions, or membership reductions.

Quality Bonuses: $12.7 Billion in Questionable Spending

Every year, CMS rates approximately 2,800 Medicare Advantage and Part D prescription drug plans using a five-star scale. The ratings are based on nearly 50 different measures, and results are released publicly so beneficiaries can evaluate plan quality during open enrollment.

But the Star Ratings system directly affects plan payments. Plans with four or five stars receive benchmark increases of 5 to 10 percent, translating to substantial additional revenue.

In 2025, an estimated $12.7 billion flowed to Medicare Advantage plans through quality bonus payments. This represents roughly 4 percent of total Medicare Advantage spending. For high-performing plans in double-bonus counties, a five-star plan could see its benchmark increase by 10 percent, representing tens of millions of dollars annually for a large plan.

Many quality measures show little variation across plans—most Medicare Advantage plans perform well on clinical metrics like diabetic control or medication adherence because these measures have been around for years and the industry has optimized performance on them. When nearly all plans achieve 4 or 5 stars on most measures, the quality bonus program may simply be transferring billions to any plan that meets a minimum threshold rather than truly incentivizing superior performance.

There’s also evidence that plans can influence their Star Ratings through careful documentation practices, sometimes distinct from actual quality improvements. If plans systematically document conditions more aggressively for their beneficiaries, beneficiaries may appear healthier relative to their peers, potentially improving plan ratings on outcomes measures.

The Medicare Payment Advisory Commission has noted that Star Ratings are calculated at the contract level rather than individual plan level. That means a large insurer operating multiple plans in the same county sees all its plans lumped together for rating purposes, potentially obscuring meaningful quality differences.

For 2027, CMS proposed modifications to the Star Ratings system, including elimination of 12 measures focusing on administrative processes rather than clinical outcomes, and removal of a health equity reward program designed to encourage plans to focus on underserved populations. The agency also proposed not implementing a new “Excellent Health Outcomes for All” reward designed to recognize plans achieving high performance for enrollees with social risk factors.

When Margins Matter: The Insurer Financial Crisis

In the first quarter of 2025, the four largest health insurance companies reported medical loss ratios—the percentage of insurance money spent on patient care rather than administrative costs and profits—ranging from 84.8 to 89.7 percent.

A medical loss ratio of 87 percent means for every dollar an insurer collects in premiums, 87 cents goes to paying medical claims and only 13 cents remains to cover administrative costs, pay taxes, and generate profit.

But what makes Medicare Advantage different is that medical costs are accelerating faster than payment rates. UnitedHealth’s medical loss ratio of 92.4 percent in the fourth quarter of 2025 was deeply concerning. The company spent $92.40 for every $100 of premiums collected, leaving only $7.60 to cover administrative costs and profit. That’s unsustainable for extended periods, and it explains why the company announced it would intentionally reduce Medicare Advantage membership by approximately 900,000 beneficiaries in 2026.

In 2024, Humana experienced a severe financial crisis when actual medical costs far exceeded the company’s projections at the time plans were priced. The company responded by exiting hundreds of markets, cutting benefits, and raising premiums in 2025. It reduced its Medicare Advantage enrollment by nearly 300,000 beneficiaries.

CVS Health faced similar pressures, with its Aetna insurance division experiencing elevated medical loss ratios and leading the company to make significant management changes.

Medicare Advantage has been in a financial crisis for two years, driven by a mismatch between government payment growth and healthcare cost inflation. The crisis was temporarily masked in 2025 by the Trump administration’s decision to increase Medicare Advantage payment rates by approximately 5.06 percent rather than the 3.70 percent the Biden administration’s CMS had initially proposed. But the 0.09 percent increase proposed for 2027 signals that temporary relief is ending and the fundamental problem—medical costs growing faster than government payments—remains unsolved.

The Market’s Response: Consolidation, Exits, Fewer Choices

When Medicare Advantage insurers face sustained financial pressure, beneficiaries ultimately feel the effects through reduced plan options, eliminated supplemental benefits, and geographic service area contractions.

The total number of Medicare Advantage plans available for individual enrollment declined from 3,719 in 2025 to 3,373 in 2026—a decrease of 346 plans or 9 percent. About 13 percent of Medicare Advantage beneficiaries enrolled in individual plans—roughly 2.6 million people—found their plan being terminated for 2026.

UnitedHealth announced it would stop offering Medicare Advantage plans in 109 U.S. counties, affecting approximately 180,000 beneficiaries. Humana cut its service area dramatically, exiting markets that collectively served hundreds of thousands of beneficiaries and pulling back from several states entirely. Aetna stopped offering prescription drug plans in 100 fewer counties.

More than half of eligible beneficiaries (54 percent) remain enrolled in Medicare Advantage as of 2025, up from 26 percent in 2010. In 2026, the average beneficiary still has access to 39 Medicare Advantage plans to choose from, down from 42 in 2025 (a 7 percent decrease).

But these aggregate statistics mask concerning granular patterns. In some rural areas and smaller metropolitan regions, plan options have contracted meaningfully. A few dozen counties across the country now have no Medicare Advantage plans available at all, forcing beneficiaries in those areas back to traditional Medicare. In markets where large health systems have terminated relationships with specific Medicare Advantage plans, beneficiaries may suddenly find their preferred doctors are no longer in network.

The Overpayment Question: How Much and Why?

A persistent theme in Medicare Advantage debates is whether the program represents good value for the government and beneficiaries or wasteful overpayment that should be curtailed. The answer determines the appropriate level of CMS payment growth.

The Medicare Payment Advisory Commission has conducted the most thorough analysis of Medicare Advantage payment levels compared to traditional Medicare costs. MedPAC’s March 2025 report estimated that in 2024, CMS paid Medicare Advantage plans 18 percent more than it would have cost to cover the same beneficiaries in traditional Medicare.

MedPAC attributed this 18 percent overpayment to two primary drivers: “coding intensity” and “favorable selection.” Coding intensity alone accounts for approximately 9 percent of the 18 percent overpayment. The remaining 9 percent reflects favorable selection—healthier people choosing private plans more often due to plan design features, network limitations, and other factors that make plans more attractive to low-cost seniors.

The 2024 shift to V28 and subsequent tightening of coding standards for 2027 are designed to reduce coding intensity adjustments by somewhere between 1 to 3 percentage points, which would lower the overpayment estimate from 18 percent toward the 14 to 16 percent range. That still leaves a substantial gap between what Medicare Advantage plans are paid and what traditional Medicare costs would be for the same beneficiaries.

The Committee for a Responsible Federal Budget has projected that upcoding alone could cost Medicare more than $470 billion through 2035, on top of $730 billion in costs from favorable selection, for a total of $1.2 trillion in Medicare Advantage overpayments over a decade.

Experts disagree about the right way to measure what traditional Medicare would have cost for the same beneficiary population. They also disagree about how much aggressive diagnosis coding in Medicare Advantage represents real clinical differences that should be compensated versus artificial inflation for profit maximization. The Kaiser Permanente settlement provides evidence supporting the more skeptical view.

Beneficiary Impact: The Hidden Costs of Rate Pressure

When insurers face margin pressure from inadequate payment growth, they typically respond by reducing their costs: reducing supplemental benefits, tightening prior authorization for services, narrowing provider networks, exiting geographic markets, and increasing beneficiary out-of-pocket costs through higher premiums, deductibles, or coinsurance.

Data from the 2026 plan year show these pressures starting to emerge in beneficiary experiences. While most Medicare Advantage plans continue to offer vision, hearing, and dental benefits, the breadth and generosity of these benefits have begun to contract in some markets. Fewer plans are offering benefits like home-delivered meals and non-emergency transportation.

Premiums for Medicare Advantage plans, which had declined from an average of $16.40 per month in 2025 to $14.00 in 2026, could increase sharply in 2027 if the 0.09 percent payment increase fails to cover medical cost inflation.

The prior authorization issue presents perhaps the most direct impact on beneficiary care. Medicare Advantage plans deny or require prior authorization for a higher percentage of services than traditional Medicare, and congressional hearings revealed disturbing anecdotes about medically necessary care being delayed or denied by plans.

Representative Kim Schrier, a physician from Washington State, described an enrollee who suffered a stroke and required hospitalization, but whose UnitedHealth plan initially refused payment, deeming the hospital stay “medically unnecessary” despite the treating physician’s determination that the patient was unsafe to discharge home. The appeal took more than a year, and the claim was eventually paid.

These anecdotes illustrate tensions that can arise when rate pressure forces insurers to scrutinize claims more aggressively. As margins compress, the financial incentive to deny or delay authorization for marginally necessary services increases. For vulnerable beneficiaries—those with multiple chronic conditions, limited income, or language barriers—these obstacles are particularly consequential.

What Happens Next

CMS’s 0.09 percent rate increase for 2027 is not final—the agency must accept public comments through February 25, 2026 and will issue final rates on or before April 6, 2026. The insurance industry and its allies are mobilizing for that comment period, with the Better Medicare Alliance and individual insurers likely to submit detailed analyses arguing the proposed rates are inadequate.

The Trump administration’s CMS, led by Administrator Mehmet Oz, has signaled its commitment to controlling Medicare Advantage overpayment through stricter coding standards. CMS Administrator Dr. Mehmet Oz stated that the proposed policies were “about making sure Medicare Advantage works better for the people it serves,” and that by “strengthening payment accuracy and modernizing risk adjustment, CMS is helping ensure beneficiaries continue to have affordable plan choices and reliable benefits, while protecting taxpayers from unnecessary spending that is not oriented towards addressing real health needs.”

This stance differs from what some Medicare Advantage advocates hoped when Trump returned to office. The 0.09 percent increase suggests the administration views controlling Medicare spending as consistent with its fiscal conservative positioning.

Congress is also actively scrutinizing Medicare Advantage, with members of both parties expressing concerns during recent hearings. Legislation has been proposed to reform prior authorization practices, restrict upcoding, address consolidation concerns, and improve transparency about plan denials. Some proposals would reduce Medicare Advantage payment benchmarks, while others would modify the quality bonus program.

If CMS holds firm on the 0.09 percent rate increase, expect continued plan exits from marginal markets, further reductions in supplemental benefits, and potentially stricter review of which services get approved by remaining plans. If Congress passes legislation tightening coding standards or reducing benchmarks further, the financial pressure on insurers will intensify. Conversely, if insurers successfully lobby for higher rate increases or if Congress passes legislation protecting supplemental benefits or restricting rate cuts, Medicare Advantage plans may stabilize.

Medicare Advantage has become the dominant form of Medicare coverage. Enrollment has grown from 26 percent of eligible beneficiaries in 2010 to 54 percent in 2025. The program touches tens of millions of seniors and accounts for hundreds of billions in federal spending. Whether it evolves into a successful example of private sector efficiency delivering better outcomes at lower cost, or whether it becomes a cautionary tale of insufficient regulation leading to overpayment and consumer harm, will depend significantly on how rate-setting policy, coding standards, and competitive dynamics develop over the next several years.

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