How the $21 Billion Payment Increase Will Affect Medicare Advantage
Key Takeaways
- In January 2025, the Centers for Medicare & Medicaid Services (CMS) announced an over $21 billion increase in payments to Medicare Advantage plans for 2026.
- The increase includes changes to both the base payments that plans receive and to risk scores.
- CMS also announced the 2026 cap on out-of-pocket spending for covered prescription drugs under Medicare Part D.
In January 2025, the Centers for Medicare & Medicaid Services (CMS), the federal agency that administers Medicare, announced an over $21 billion increase in payments to Medicare Advantage plans for 2026. This marks a significant boost compared to previous years.
Medicare Advantage, also called Part C, is an alternative to Original Medicare. These plans are offered by private insurance carriers and cover everything Original Medicare does. Unlike Original Medicare, most plans include Medicare Part D prescription drug coverage, and they may offer extras like vision, dental, hearing, and fitness benefits.
With over half of Medicare enrollees now choosing Medicare Advantage plans, this payment increase could affect healthcare options and costs for many U.S. adults who are over 65 or living with certain disabilities.
We’ll break down the highlights from the announcement and discuss what to expect next.
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What’s New for 2026?
Each year, CMS makes a proposal for new Medicare Advantage payment rates, which determine how much the federal government reimburses private insurance carriers for covering people on Medicare. The goal is to make it financially viable for Medicare Advantage plans to continue providing high-quality coverage for an increasing number of beneficiaries — about 32.8 million as of 2024.
Here’s a quick overview of the changes CMS announced for 2026:
- Medicare Advantage Payment Bump: A $21 billion, or 4.3%, increase in payments to Medicare Advantage plans.
- Medicare Part D Update: An adjustment to the cap on out-of-pocket costs for covered drugs based on inflation.
A $21 Billion Payment Increase
CMS proposed a $21 billion payment boost that’s designed to address rising healthcare costs for the many Americans enrolled in Medicare Advantage plans.
The bump comes in two parts: a 2.2% increase in the base payment rate and a 2.1% adjustment for risk scores:
- The base payment rate is the minimum amount the federal government pays a private insurance carrier to provide coverage for an individual.
- Risk scores account for the additional costs of caring for people with more complex health conditions.
By proposing higher payments to Medicare Advantage plans in 2026, CMS hopes to make it possible for plans to meet the needs of all enrollees, including those who need specialized care.
The Risk Adjustment Model and Medicare Advantage
Of the 4.3% overall proposed increase to Medicare Advantage funding in 2026, 2.1% comes from updates in the risk adjustment model. But what is this model and how is it used to determine funding?
What Is Risk Adjustment?
Risk adjustment is a method to predict likely healthcare expenses for the upcoming year, accounting for the differences in every person’s needs. CMS analyzes factors like diagnosis data, medical history, and care costs to assign risk scores based on the health profile of an individual. A higher score indicates higher expected cost.
By compiling data from recent years, CMS aims to manage costs effectively so enrollees can continue to receive coverage and access additional benefits from Medicare Advantage plans.
In 2024, CMS introduced an updated formula, the 2024 CMS-HCC Risk Adjustment Model, to improve accuracy. This new model uses data from 2022-2023 to better estimate healthcare costs. CMS has been phasing in this model since 2024, and it will be applied fully in 2026.
Why Does the Risk Score Matter?
Risk scores are a tool Medicare uses to estimate how much it will cost to care for people enrolled in Medicare Advantage.
Using the updated model, the government predicts a 2.1% hike in payments due to risk scores, which is added to the 2.2% increase in base scores, totalling $21 billion more in payments.
For Medicare Advantage beneficiaries, this may mean that plans are better able to meet their needs. Over the next 10 years, the government is expected to spend $9.2 trillion on Medicare Advantage plans, and $1.3 trillion of that amount goes toward additional benefits like vision, dental, and hearing coverage, as well as making premiums affordable.
An accurate Risk Adjustment Model enables those plans to provide care for people with a variety of health challenges.
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Updates to Medicare Part D
Medicare Part D is prescription drug coverage that’s administered by private insurance carriers. People on Original Medicare have the option to enroll in a Medicare Part D plan, while most Medicare Advantage plans include this coverage. More than 80% of Medicare beneficiaries were enrolled in Part D coverage as of late 2024.
CMS announced updates to the Medicare Part D program for 2026 as part of broader changes under the Inflation Reduction Act (IRA). The IRA, signed into law by President Joe Biden in 2022, included provisions to lower prescription costs and improve access to medications for people on Medicare. CMS has been implementing changes to Medicare Part D to comply with the IRA.
One of those changes was a cap on annual out-of-pocket costs for drugs covered by Part D, which can be adjusted each year based on inflation. The out-of-pocket maximum is intended to provide financial relief for those who rely on expensive medications. CMS has now announced that, in 2026, the cap will be $2,100, a $100 increase from 2025’s cap of $2,000.
Looking Forward
The proposed 2.2% payment increase in 2026 marks a shift in funding after a 0.2% decrease the previous year. This increase is expected to help maintain the availability of supplemental benefits, like dental, vision, and hearing care. We could also see stability or a decrease in premiums for enrollees.
With President Trump resuming office and Dr. Mehmet Oz stepping in as CMS administrator, their policies will likely shape the future of Medicare. The direction of Medicare Advantage could change under new leadership, although it’s still unclear how their approaches will impact funding or beneficiary costs.
The January 2025 CMS proposal is not final. Adjustments may be made before the final decision is announced. The Centers for Medicare and Medicaid Services (CMS) is expected to release the final rate announcement on April 7, 2025.