The government is trying to rein in Medicare Advantage costs. Will it work?
For two decades, Medicare Advantage (MA) has grown from a niche option into the dominant way Americans receive Medicare benefits. More than half of beneficiaries now enroll in private MA plans, drawn by zero-dollar premiums, caps on out-of-pocket spending, and extras like dental or vision coverage. But popularity has come with a price: federal payments to MA have persistently exceeded what the same people would have cost in traditional fee‑for‑service (FFS) Medicare, once you account for risk. Independent analysts such as the Medicare Payment Advisory Commission (MedPAC) estimate that MA overpayments amount to several percent above FFS—adding up to tens of billions of dollars a year.
Washington is responding with a multi‑pronged effort to curb these costs without destabilizing a program millions like. Whether it works depends on technical details, industry behavior, and politics.
Why MA costs more than it should
– Risk adjustment and coding intensity: Plans are paid more for sicker members. Over time, MA organizations have become adept at documenting diagnoses (through health risk assessments, chart reviews, and contracted providers) that raise risk scores faster than the underlying illness burden appears to grow in FFS. This “coding intensity” inflates payments.
– Benchmarks, bids, and bonuses: Plans bid against county benchmarks tied to FFS spending. When bids come in below benchmarks, plans keep much of the difference as “rebates” to fund supplemental benefits. Quality bonuses through the Star Ratings program further inflate benchmarks. The structure pushes federal spending above FFS levels in many counties.
– Selection and utilization management: Some plans may still enroll slightly healthier people or manage care in ways that reduce costly services. Those savings don’t fully flow back to taxpayers because of how benchmarks and rebates are set.
What the government is doing
1) Tightening risk adjustment and data integrity
– New risk adjustment model and phase-in: CMS is phasing in an updated model (commonly called V28) through 2026 that pares back or remaps diagnosis codes that were especially vulnerable to aggressive coding and shifts more weight to diagnoses backed by encounter data. The goal is to pay more accurately for actual disease burden, not documentation prowess.
– Maintaining the coding intensity adjustment: By law, CMS applies a minimum across-the-board downward adjustment to MA risk scores to offset coding differences with FFS. The floor remains in place and could be increased in future years if coding outpaces expectations.
– Risk Adjustment Data Validation (RADV) audits: A final rule allows CMS to extrapolate audit findings to recover MA overpayments starting with plan year 2018, without applying an “FFS adjuster.” The expected recoupments are meaningful but small relative to total MA spending.
2) Moderating payment updates and quality bonuses
– Rate notices with modest growth: Annual MA benchmark updates have been restrained relative to underlying medical trend. Combined with the risk model changes and a higher normalization factor for risk scores, plans face low‑to‑mid single‑digit revenue headwinds in the near term.
– Star Ratings recalibration: Methodological changes and the unwinding of pandemic-era flexibilities have reduced the share of plans earning 4+ stars, thereby lowering bonus payments and the size of rebates available for extra benefits.
3) Cracking down on questionable coding and marketing practices
– Limits on chart-review-only diagnoses and health risk assessments: CMS has tightened rules so that diagnoses used for payment generally must be supported by face‑to‑face or similarly robust clinical encounters, discouraging “drive‑by” coding.
– Broker and marketing reforms: CMS has restricted high-pressure marketing tactics, standardized and capped certain agent and broker compensations, and required clearer disclosures about plan benefits and limitations to reduce steering and selection effects.
4) Prior authorization and beneficiary protections
– Faster, more transparent prior authorization: A 2024 final rule requires MA plans to provide specific reasons for denials, meet shorter decision timelines, and report PA metrics. While aimed at access, transparency also curbs denials that may inappropriately lower reported utilization and costs.
5) Oversight of supplemental benefits
– Evidence and reporting: Plans must document that supplemental benefits address health needs and are used by members, and they must report utilization and, effectively, value for money. This makes it harder to subsidize marketing-friendly but low‑value extras with taxpayer-funded rebates.
How plans are likely to respond
– Trim extras and tweak benefits: With lower rebates from reduced star bonuses and tighter payment, plans will pare back certain supplemental benefits, raise some cost sharing, or narrow networks to protect margins—especially in counties where benchmarks sit close to actual costs.
– Keep coding but shift tactics: Even with the new risk model, plans will invest in clinical documentation and care management that legitimately capture diagnoses under the updated rules. The “coding arms race” won’t disappear; it will evolve.
– Consolidate and reprice: Large insurers with scale advantages are best positioned to adapt. Smaller or less efficient plans may exit certain counties or consolidate, but widespread withdrawals are unlikely given MA’s profitability and growth.
– Intensify value-based contracting: More capitated or shared‑risk arrangements with physician groups can help control utilization and stabilize plan finances under tighter rates.
Will it work?
Short term (1–2 years): Expect modest fiscal savings relative to the pre‑reform trajectory. Lower star bonuses, the phased-in risk model, and restrained benchmark growth will collectively shave a few percentage points from plan revenue versus what it would have been. Federal spending on MA should grow more slowly, and the gap with FFS could narrow somewhat. However, much of the immediate effect will be offset by plan countermeasures (benefit trims, network changes) rather than dramatic reductions in overall program outlays.
Medium term (3–5 years): The full effect of the risk model changes, RADV recoveries, and supplemental benefit oversight will accumulate. If CMS continues to police coding and keeps star bonus inflation in check, the payment gap with FFS could shrink further. But structural features—county benchmarks tied to FFS, generous rebate retention, and ongoing coding incentives—will still produce some overpayment absent deeper reform.
Long term: Truly bending the MA cost curve to parity with FFS, or below, likely requires bigger structural steps that are politically harder:
– Competitive bidding to set benchmarks from actual bids rather than administratively set FFS-based rates.
– Stronger, automatic coding‑intensity adjustments or tighter rules on which diagnoses count for payment (for example, limiting certain settings or capping year‑over‑year risk score growth).
– Narrowing or retargeting quality bonuses and rebates to ensure taxpayer value, not just richer extra benefits.
– Improved encounter data quality and independent auditing to make risk adjustment less gameable.
– Aligning incentives between MA and traditional Medicare, including site‑neutral payment policies and consistent benefit designs.
Constraints and politics
MA is popular with beneficiaries and influential in Congress. Insurers derive significant profits from MA, and providers increasingly rely on MA contracts. Aggressive cuts can trigger plan exits, reduced benefits, or provider backlash—outcomes elected officials try to avoid. As a result, CMS has pursued incremental, technical fixes that spread pain thinly and predictably. That approach is more sustainable politically, but it also limits how much savings can be achieved quickly.
What to watch
– Average risk score growth per member and the coding intensity adjustment level.
– Share of enrollees in 4‑star and 5‑star plans, and the size of plan rebates.
– RADV audit recoveries and any litigation that changes their scope.
– Encounter data completeness and CMS’s reliance on it for payment.
– Benefit richness: size of dental/vision allowances, over‑the‑counter benefits, and zero‑premium plan prevalence.
– Network breadth and prior authorization rates, along with beneficiary complaints and disenrollment patterns.
– Plan participation by county, especially among smaller insurers.
Bottom line
The government’s current strategy—tightening risk adjustment, tamping down star bonuses, enforcing audits, policing marketing, and scrutinizing supplemental benefits—should slow the growth of Medicare Advantage spending at the margins and reduce the most egregious overpayments. It is unlikely, on its own, to eliminate the persistent payment gap with fee‑for‑service Medicare. Without more structural reforms to benchmarks, rebates, and coding incentives, MA will probably remain a bit more expensive for taxpayers than it needs to be, even as it remains popular with beneficiaries. The policy question is whether the added costs are justified by the program’s protections and extras—and how much political appetite exists to push further.
