Medicare Payments to Rise Under New Policy

Medicare Advantage beneficiaries who depend on the insurance to cover key health care costs received some good news this week: the Centers for Medicare & Medicaid Services (CMS) finalized the 2027 Medicare Advantage rate. Despite a near-flat increase that was proposed in January, CMS announced a much higher final rate on April 6. The higher rate is good news for beneficiaries and the Medicare Advantage program.

If you're enrolled in a Medicare Advantage plan, here's what you should know about how the new rate could affect you and your retirement goals.

Understanding Medicare Advantage plans

Medicare Advantage plans are Medicare-approved plans that private companies run. Beneficiaries can get Medicare coverage through Original Medicare or by choosing a Medicare Advantage plan. Sometimes called Medicare Part C, Medicare Advantage plans may include prescription drug coverage, and beneficiaries may have to pay a monthly premium and copay for the health insurance.

The federal government issues a monthly payment to private insurers running Medicare Advantage plans for each enrollee. That payment helps the plans cover the cost of supplemental benefits, like vision, hearing, and dental services, and in doing so, it helps reduce cost-sharing.

Why government-to-insurer payment rates matter

The maximum amount that the government will pay to private insurers is capped each year, and it's a percentage of the amount the government spends on beneficiaries enrolled in traditional Medicare. CMS sets that rate each year, issuing advance notice of proposed changes and a finalized rate announcement by the first Monday in April.

That rate matters because it helps offset increasing medical costs and can help those insurance companies stabilize their business. Essentially, the payments help stabilize Medicare Advantage plans. In doing so, insurers are able to keep Medicare Advantage premiums low for beneficiaries. They can also reduce out-of-pocket costs, saving beneficiaries money. Those savings can attract and help retain Medicare Advantage enrollees, which further helps stabilize the program.

Since more than half of all Medicare beneficiaries are enrolled through Medicare Advantage, the stakes are high when payment rates are released.

The proposed Medicare Advantage payment rate

In January, CMS proposed a 2027 Medicare Advantage payment rate increase of less than 0.09%. If enacted, the rate would prompt $700 million in Medicare Advantage plan payments.

But that essentially flat rate drew public outcry. Industry experts expected a payment rate of about 4% to 6% higher, since Medicare's medical spending costs increased. In 2025, the Trump administration finalized a substantial Medicare Advantage payment rate increase of 5.1%, sending more than $25 billion in payments to the program. The proposed 2026 rate of less than 0.1% came as a surprise after last year's generous increase.

AHIP, formerly America's Health Insurance Plans, spoke out against the proposal, stating that it would result in benefit cuts and higher program costs for the 35 million seniors enrolled in Medicare Advantage plans.

Changes to the final Medicare Advantage payment rate

CMS announced a substantially larger finalized Medicare Advantage payment rate of 2.48% for 2026. Under the new rate, the government will make more than $13 billion in additional Medicare Advantage payments.

There's a significant gap of 2.39% between the final and the proposed rate, indicating a significant pivot by CMS. That gap also signifies a positive change for Medicare Advantage beneficiaries, who may enjoy lower premiums, reduced out-of-pocket costs, and overall savings on their health care.

How risk adjustment will also affect payment rates

The Medicare Advantage risk adjustment process will effectively increase the payment rate even more to 4.98%. The proposed changes would have altered the risk adjustment model, requiring insurers to use more recent data about enrollees' diagnoses and health care spending, and such data would have modified plan reimbursement.

Ultimately, CMS removed those changes from the finalized policy, a decision that gives plans more time to prepare for the substantial revisions which will eventually be implemented. CMS will continue to evaluate those changes, but in the meantime, the decision to leave the risk adjustment model as-is further helps stabilize the program.

Keeping pace with rising health care costs

The finalized 2027 payment rate is an improvement over the proposed 0.09% rate, but some industry groups say that it still isn't enough to address long-term financial strains on the program. The payment rate doesn't necessarily keep pace with longer-term health care inflation, meaning insurance companies still feel the financial strain and may need to find ways to trim program costs.

The rates may offer the Medicare Advantage program some short-term stability, but won't necessarily be a long-term solution for all Medicare Advantage plans. Plans still could cut benefits in 2027 to make up for the financial gap.

Bottom line

You may see changes to your Medicare Advantage plan as insurance companies respond to these rates. If your Medicare Advantage plan no longer works for you, you can change it twice during the year. During the Medicare Advantage Open Enrollment from January 1 through March 31, you can make limited changes. You'll have more options to change your coverage during the Medicare Open Enrollment period from October 15 through December 7.

The rates and insurers' responses to them are worth watching heading into the fall. Be sure to review your plan coverage for next year so you can make sure you're enrolled in a plan that best helps you avoid wasting your retirement savings.

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