Privately run Medicare Advantage plans will get a considerable boost in payments from the federal government. The Trump administration announced this week that it would pay the insurers 5.1% more in 2026 than in 2025. This represents a $25 billion increase.
The decision made by the Centers for Medicare and Medicaid Services differed from the 2.2% increase that the Biden administration had proposed in January. The difference reflects updated data on spending patterns within the Medicare program. CMS cites rising medical costs.
Medicare serves roughly 68 million elderly and disabled Americans. It also covers people with certain disabilities or illnesses, such as end-stage renal disease. At age 65, most Americans are automatically enrolled in Medicare coverage for hospital and physician visits costs, known as Part A and Part B, respectively. Beneficiaries who opt for traditional fee-for-service Medicare can also sign up for prescription drug coverage (Part D) through stand-alone plans that manage the pharmacy benefit. Alternatively, they can enroll in Medicare Advantage.
Medicare Advantage plans are private health insurers who are reimbursed on a per member per month basis by the federal government. Plans typically combine coverage for hospital and outpatient care as well as medications, while eliminating the 20% coinsurance requirement and capping beneficiaries’ annual out-of-pocket costs. In addition, many of the plans don’t charge an additional monthly premium. Plans can also use rebates they get from the government to offer extra benefits for beneficiaries that traditional Medicare doesn’t provide, such as dental and vision coverage. This further incentivizes Medicare beneficiaries to sign up. Aggressive marketing has also played a role in promoting the insurance product.
Altogether, 54% of people enrolled in Medicare are now Medicare Advantage members. Enrollment has almost quadrupled, from eight to 33 million between 2007 and 2024. KFF expects at least 60% of beneficiaries to sign up with a Medicare Advantage plan by the end of the decade.
Medicaid, the federal and state health insurance program for low-resourced individuals and families, now already has about 74% of beneficiaries enrolled in private managed care plans. Like Medicare Advantage, Medicaid managed care plans began to appear in the 1990s.
At the time such payers were established as part of the Balanced Budget Act of 1997, it was called Medicare + Choice. The Medicare Modernization Act of 2003 redesigned and renamed it Medicare Advantage. Major changes then included enhanced payments to plans.
Augmented compensation since the early 2000s has resulted in a divergent pattern of government spending on beneficiaries in traditional Medicare versus Medicare Advantage. The Medicare Payment Advisory Commission stated in 2024 that the government pays Medicare Advantage plans an estimated 23% more for similar beneficiaries than it spends in traditional Medicare.
Over the years, there’s been bipartisan support for Medicare Advantage, but perhaps a somewhat stronger preference among Republicans as it aligns with their goal to increase the role of the private sector in administering public programs over government-run entities.
The current head of CMS, Mehmet Oz, once said he favored a system of Medicare Advantage for All, which meant not only fully privatizing the program, but also establishing universal healthcare coverage through Medicare Advantage for “every American who is not on Medicaid.”
There is a flipside to some of the attractive features of Medicare Advantage to beneficiaries as plans have been granted substantially more flexibility to limit their medical costs by restricting provider networks and requiring prior authorization across healthcare services and medical technologies.
To curb growth in spending on prescription drugs, they also have cost containment tools at their disposal that traditional Medicare carriers don’t. During the first Trump administration, Medicare Advantage plans were given the authority to put in restrictions for physician-administered drugs in the form of step edits. This meant that patients had to fail first on a plan-preferred treatment option before stepping up to the more expensive alternative. And unlike traditional Medicare, most Medicare Advantage plans require doctors and hospitals to get approval in advance in many cases before treating their patients.
Since the Clinton administration, the presumption by federal policymakers has been that the supposed efficiencies and cost savings achieved by managed care in the private sector would transfer to the Medicare program. This hasn’t borne out in practice. Medicare Advantage has cost substantially more than the traditional Medicare program, Moreover, overpayment has increased in recent years. A Medicare Payment Advisory Commission report states that Medicare Advantage plans may be getting as much as $100 billion annually in overpayments.
During his Senate confirmation hearing, Oz pledged to rein in alleged fraud perpetrated by Medicare Advantage plans, specifically “upcoding.” The federal government adjusts payments to plans based on how sick a beneficiary is. Insurers have been accused of adding diagnosis codes to a patient’s record to make them look sicker so plans can obtain larger payments from Medicare. When CMS announced an increase in payments to Medicare Advantage payers, the agency also said it will continue to phase in updates to its risk adjustment model that began in 2024. These changes aim to prevent upcoding.