Near-Flat Medicare Advantage Updates and the Emerging Tradeoffs for Beneficiaries
CMS’s proposed 2027 rate changes shift pressure onto plan networks, utilization management, and beneficiary affordability rather than headline premiums.
Key Findings
CMS’s proposed CY 2027 Medicare Advantage rate update tightens payment growth, with downstream implications for plan design, beneficiary choices, and access to care.
· CMS has proposed a near-flat Medicare Advantage payment update for 2027, alongside risk-adjustment changes intended to improve payment accuracy, marking a notable shift from recent years of benchmark growth.
· The proposal directly affects Medicare Advantage rather than Traditional Medicare, but any resulting changes in plan generosity or access are likely to increase demand for Traditional Medicare among beneficiaries able to absorb higher out-of-pocket costs.
· Many older beneficiaries face substantial financial barriers to Traditional Medicare, which typically requires multiple premiums and supplemental coverage and involves approximately $7,000 per year in additional costs beyond payroll taxes for a typical retiree.
· Under constrained payment growth, Medicare Advantage insurers are more likely to adjust less visible features of coverage—including provider network breadth and the use of utilization-management tools such as prior authorization and claims denials—rather than advertised premiums.
Introduction
On January 26–27, 2026, the Centers for Medicare & Medicaid Services (CMS) released the Calendar Year (CY) 2027 Medicare Advantage and Part D Advance Notice proposing payment updates and methodological changes affecting the Medicare Advantage (MA) program. CMS Advance Notice & Fact Sheet
Major press coverage noted that the proposal suggests almost no growth in Medicare Advantage payments, surprising insurers and investors expecting higher increases (e.g., 4–6 percent). Managed Healthcare Executive summary
If finalized as proposed, CMS estimates a net average year-over-year payment increase of only 0.09 percent for Medicare Advantage plans in 2027, amounting to approximately $700 million more in MA payments than in 2026. CMS 2027 Proposed Policies
Key elements of the proposal include payment-policy adjustments and risk-adjustment reforms, such as excluding diagnoses from chart reviews not tied to a face-to-face encounter from risk score calculations beginning in 2027. CMS payment accuracy details
This is a proposal (not a final rule); CMS is accepting comments through late February 2026 and expects to publish final payment rates by early April 2026.
This proposal applies to Medicare Advantage, rather than Traditional (fee-for-service) Medicare. The payments and incentives in the two systems are fundamentally different.
Under Traditional Medicare, CMS pays providers directly on a fee-for-service basis and insurers generally do not bear claims risk for Part A and Part B.
In contrast, Medicare Advantage plans receive a capitated, risk-adjusted payment per enrollee and assume responsibility for managing total spending within that fixed payment.
These structural differences drive distinct benefit and access tradeoffs:
Medicare Advantage plans often feature lower premiums (including $0 plans), supplemental benefits, and Part B premium givebacks, which can make coverage more appealing to lower-income beneficiaries.
However, MA plans typically rely on more limited provider networks and broader use of utilization management tools that can restrict access to certain providers and services.
Traditional Medicare offers broader access to providers but typically comes with higher premiums, greater cost sharing, and a need for supplemental coverage (e.g., Medigap plus separate Part D).
Enrollee Income and Demographics: Evidence on Differences
Research shows meaningful differences in the population enrolled in Medicare Advantage compared to Traditional Medicare:
MA enrollees are more likely to have lower incomes and greater health needs than those in Traditional Medicare. Specifically, they are more likely to have incomes below $20,000 and have higher rates of poor or fair health status.
Traditional Medicare beneficiaries, especially those in Medigap plans, tend to have higher incomes and are more likely to access supplemental coverage.
Dual-eligible individuals (Medicare and Medicaid) are also more prevalent in MA than in Traditional Medicare.
Implication: Because MA enrollee income skews lower, changes that reduce supplemental benefits or introduce access restrictions could have disproportionate effects on lower-income beneficiaries.
Medicare Advantage Enrollment Share
Medicare Advantage has grown steadily for more than a decade and now covers a majority of Medicare beneficiaries. In 2005, shortly after the creation of the modern Medicare Advantage program, fewer than one in five beneficiaries were enrolled in private plans. Enrollment rose to roughly one quarter of beneficiaries by the early 2010s, exceeded 40 percent by 2020, and reached about 54 percent of eligible Medicare beneficiaries in 2025, according to Kaiser Family Foundation estimates. Enrollment growth remains substantial but has slowed modestly in recent years as the program has matured as noted in KFF Medicare Advantage enrollment data.
The long-run expansion of Medicare Advantage reflects both policy design choices and changing beneficiary affordability constraints, rather than a single dominant driver. On the policy side, benchmarks and rebate mechanisms have allowed Medicare Advantage plans to translate Medicare payments into lower premiums, out-of-pocket maximums, supplemental benefits, and Part B premium givebacks that are not available in Traditional Medicare. These features have made Medicare Advantage plans increasingly competitive at the point of enrollment, particularly for beneficiaries sensitive to premiums and predictable cost exposure.
At the same time, enrollment growth appears consistent with broader economic trends affecting retirees. Traditional Medicare often requires beneficiaries to finance multiple layers of coverage separately, including Part B premiums, standalone Part D plans, Medigap premiums, and uncapped cost sharing in the absence of supplemental coverage.
Disparities in income and wealth among older households have widened over recent decades, increasing the share of beneficiaries for whom the combined costs of Part B premiums, Medigap, and out-of-pocket exposure in Traditional Medicare are difficult to sustain.
https://www.gao.gov/products/gao-19-587
For a typical retiree, Traditional Medicare involves approximately $7,000 per year in premiums and cost sharing beyond payroll taxes, excluding income-related surcharges. This amount reflects the standard Part B premium, premiums for a stand-alone Part D prescription drug plan, the cost of private Medigap coverage to limit uncapped cost sharing, typical prescription drug out-of-pocket spending, and expenditures on services largely excluded from Medicare such as dental, vision, and hearing. (Appendix C under the paywall lists some studies on why some people choose Medicare Advantage.)
In this context, Medicare Advantage’s lower upfront premiums and bundled benefit structure can function less as a preference for managed care per se and more as a response to affordability constraints.
This dynamic helps explain why Medicare Advantage enrollment has expanded even as concerns about network breadth, utilization management, and access tradeoffs have become more salient.
Cost Comparisons: MA vs Traditional Medicare
Differences in Medicare spending between Medicare Advantage and Traditional Medicare reflect a combination of coding intensity, selection dynamics, and benefit design rather than straightforward differences in beneficiary health. Some analyses find higher Medicare program spending per Medicare Advantage enrollee than would have occurred for the same beneficiaries in Traditional Medicare, driven in part by higher risk scores associated with more intensive coding and by additional benefits financed through plan rebates.
At the same time, selection remains dynamic: beneficiaries who develop complex or high-cost conditions, including cancer and other conditions requiring specialized care, are more likely to disenroll from Medicare Advantage and return to Traditional Medicare. As a result, estimates of relative spending vary widely depending on how risk adjustment, coding intensity, and health status differences are treated, and higher observed spending in Traditional Medicare partly reflects where high-cost care is delivered rather than inherent differences in beneficiary risk.
Medicare Advantage entails tradeoffs, including narrower provider networks and greater reliance on utilization management tools that may affect access once care is needed. Nonetheless, many beneficiaries choose Medicare Advantage because it offers lower premiums, an annual out-of-pocket maximum, and supplemental benefits such as dental, vision, and hearing that are not covered by Traditional Medicare.
Implications of Near-Flat 2027 Updates for Medicare Advantage Enrollees
Near-flat Medicare Advantage payment growth combined with tighter risk adjustment is likely to place modest but meaningful pressure on plan margins. While the proposal does not imply immediate or abrupt changes to coverage, plans are likely to respond through adjustments that are less visible at enrollment but consequential for access and care delivery over time.
In practice, this pressure is more likely to be absorbed through changes in supplemental benefits, provider networks, and utilization-management practices than through headline premium increases. Because many Medicare Advantage plans compete on advertised premiums, particularly zero-premium offerings, plan responses are likely to affect benefits and access in ways that become salient only after enrollment.
The sections that follow examine two of the most important channels through which near-flat payment updates are likely to affect beneficiaries: provider network design and the use of prior authorization and related utilization-management tools.
Implications of Near-Flat Rates for Provider Networks
One predictable response to sustained near-flat Medicare Advantage payment updates is increased reliance on restrictive provider networks as a cost-control strategy. Narrower networks allow insurers to concentrate enrollment among hospitals and physician groups willing to accept lower payment rates, tighter utilization-management requirements, or greater administrative burden.
Prior research shows that beneficiaries frequently have limited visibility into network breadth at enrollment, particularly for specialty and hospital services, even though network composition can meaningfully affect where and how care is delivered.
Medicare Advantage networks are already substantially narrower than Traditional Medicare networks, with especially limited participation by higher-cost hospitals, academic medical centers, and some specialty providers. For beneficiaries who value access to those providers, network design can function as a binding constraint rather than a marginal inconvenience (MedPAC 2024; Jacobson et al., 2022).
If payment updates remain as constrained as those proposed for 2027, plans negotiating future contracts are likely to take a firmer stance with providers. This increases the likelihood of contract disputes, narrower networks, or provider exits in certain markets, particularly where provider systems have significant bargaining power or have resisted Medicare Advantage utilization management practices.
Recent years have seen multiple high-profile examples of hospital systems terminating or declining to renew Medicare Advantage contracts, often citing reimbursement levels, administrative burden, or denial practices. While network adequacy rules continue to apply, oversight relies heavily on plan-reported data, and federal reviews have identified persistent limitations in CMS’s ability to assess real-world access.
Over time, sustained pressure on networks could sharpen geographic and socioeconomic differences in access, particularly if beneficiaries with fewer resources have less ability to switch plans or coverage types in response to network changes.
Additional academic evidence, regulatory findings, and real-world contract disputes related to Medicare Advantage network design and provider exits are summarized in Appendix A1 and A2 under the paywall.
Prior Authorization and Denials
Medicare Advantage plans make substantially greater use of prior authorization and other utilization-management tools than Traditional Medicare. These mechanisms are a core feature of the Medicare Advantage model, allowing plans to manage utilization within a fixed, capitated payment. However, they also represent an area of longstanding concern for beneficiaries, providers, and regulators.
Federal oversight agencies have repeatedly found that some Medicare Advantage organizations deny prior authorization requests or payment claims that would have met Medicare coverage rules if provided under Traditional Medicare. Audits by the HHS Office of Inspector General have documented inappropriate denials and identified deficiencies in appeal and notice processes, with a meaningful share of denials later overturned on appeal. These findings raise concerns about whether utilization-management practices can delay or impede access to medically necessary care, particularly for post-acute services and high-need patients.
The more restrictive payment rules proposed by CMS will likely result in greater use of prior authorization and claim denial procedures to reduce costs. Appendix B1 and B2 under the paywall lists studies on current use of prior authorization procedures under Medicare Advantage.
Conclusion
Traditional Medicare beneficiaries are not the direct target of the current OMB proposal on Medicare Advantage Premiums.
The near-term implications for Traditional Medicare are indirect. If MA becomes less generous or more restrictive, some beneficiaries may choose to remain in or return to Traditional Medicare. Any shift in plan participation or provider contracting could affect market dynamics over time.
The estimated impact of the CY 2027 Medicare Advantage payment proposal on long-term Medicare Trust Fund solvency is modest. The scale of the proposed update and risk-adjustment changes is small relative to the program’s projected financing gap, and by itself is unlikely to materially alter long-run depletion timelines for the Hospital Insurance trust fund. If viewed purely through a solvency lens, the proposal may appear incremental.
The proposal is however significant. It reflects a continued shift by CMS toward payment accuracy, constraint of coding-driven spending growth, and a willingness to tolerate greater friction with Medicare Advantage insurers. The limits on reimbursements will alter insurer behavior, would limit care given to Medicare Advantage and would likely increase demand for traditional Medicare, although traditional Medicare is likely unaffordable for many elderly.
Financial markets appeared to assign greater significance to the announcement than its direct fiscal impact would suggest. Major publicly traded Medicare Advantage insurers experienced sharp share price declines on the day of the release, reflecting investor sensitivity to changes in benchmark growth assumptions and risk-adjustment policy. While that reaction may ultimately prove overdrawn relative to the proposal’s standalone effects, it underscores how tightly Medicare Advantage business models are levered to marginal payment changes and regulatory signals.
Importantly, this announcement arrives amid a broader set of pressures on the health insurance industry, including medical cost trend uncertainty, heightened scrutiny of utilization management practices, ongoing provider-payer contracting disputes, and political attention to Medicare Advantage oversight. Future analysis will place this rate proposal alongside those other stressors, examining how their combined effects may shape insurer strategy, plan offerings, provider networks, and beneficiary experiences over time.
Authors Note: I would like to refer you to my recent SSRN paper https://papers.ssrn.com/sol3/papers.cfm?abstract_id=6098606
Allocating Health Risk in the ACA: Premiums, Reinsurance, and the Limits of Income-Linked Subsidies
22 Pages Posted: 23 Jan 2026
David P. Bernstein
Independent
Date Written: January 19, 2026
Abstract
Recent debates over the expiration of the enhanced Affordable Care Act premium tax credits treat affordability as a distributive tradeoff-between higher household premiums and higher federal subsidy costs-rather than as a problem of market design and risk allocation that determines the underlying level and distribution of premiums. The current ACA marketplace treats premiums as the primary way to control costs to people receiving state exchange health insurance. The alternative approach considered here considers whether additional subsidies in the form of expanded Medicaid and CHIP use and a direct reinsurance subsidy for larger health insurance claims could allow for reductions in the premium tax credit and overall improvements in insurance outcomes. The reduced reliance on income-linked premium subsidies weakens the implicit marginal tax rates embedded in the current system, improves work incentives, and supports a more fiscally sustainable and stable Marketplace while leading to better insurance outcomes.
Keywords: Health insurance, premium tax credit, Medicaid, CHIP, reinsurance
Suggested Citation:
Bernstein, David P.,
Allocating Health Risk in the ACA: Premiums, Reinsurance, and the Limits of Income-Linked Subsidies
(January 19, 2026). Available at SSRN: https://ssrn.com/abstract=6098606 or http://dx.doi.org/10.2139/ssrn.6098606
Appendices (Structured and Parallel)
• Appendix A1: Networks—Theory, Evidence, Oversight
• Appendix A2: Networks—Real-World Disputes and Exits
• Appendix B1: Prior Authorization—Theory, Evidence, Oversight
• Appendix B2: Prior Authorization—Individual Cases and News Reporting
• Appendix C1: MA vs Traditional Medicare Spending Comparisons
• Appendix C2: Enrollment, Demographics, Health Status Differences
• Appendix C3: Why Beneficiaries Choose Medicare Advantage
Appendix A. Medicare Advantage provider networks and payer–provider disputes
