Health care update (MA)

Recent/upcoming developments… CMS has released the CY26 Advance Notice for the Medicare Advantage (MA) Program (also known as the Part II proposed rule, which addresses payment issues).  Under the proposal, CMS asserts that aggregate plan payments will increase next year by a projected 4.33% or $21b over FY25.  However, when excluding the risk score trend (a contested input into the MA rate update) the aggregate rate update is 2.23%.

* According to CMS, the aggregate rate of 4.33% reflects a 5.93% effective growth rate, a -0.69% reduction due to star ratings changes, a -3.01% reduction due to the third and final year of the three-year phase-in of the risk model revisions, and a 2.10% increase due to the risk score trend (i.e., CMS’ projection of the degree to which plans will increase beneficiary risk scores to secure higher reimbursements).  As discussed below, there is long-running and intense debate as to the validity of CMS’s risk score trend calculation and whether it should be considered part of the CMS’ statements as to the magnitude of the rate update.

Our outlook… As expected, the proposal omits disruptive but politically controversial changes sought by progressives (i.e., increasing the coding intensity adjustment).  That said, insurers are displeased with the proposed rate update, as they are once again asserting that the inclusion of the risk score trend artificially/improperly inflates the rate update and that the “true” update of 2.23% fails to keep pace with the cost of care.  The task of finalizing the rate rule will now fall to the incoming administration, and we are already seeing efforts by industry to pressure Trump to increase the rate update (i.e., pause/revise the risk model revisions, adjust star ratings).  Republican support for MA remains strong (despite some modest softening in recent years), and while we believe intervention by the new administration is possible, but that the more likely outcome is that the rule is finalized roughly as-is (i.e., +4.33% including the risk score trend, +2.23% excluding it, +/- less than 1% to account for ordinary formulaic fluctuations).

* On the risk model revisions, as previously discussed, the Biden administration switched the MA risk model to the so-called v28 system starting in 2024 (but to soften the impact, CMS opted to phase those changes in over three years).  That switch updated diagnosis coding to ICD-10, refined condition categories, and reduced risk scores for some chronic conditions, aiming to curb overpayments to insurers, improve payment accuracy, and limit incentives for upcoding (all of which had the effect of lowering payments).  Republicans have been eager to characterize the risk model changes as a “cut” to MA and third-party groups aligned with Republicans (i.e., the Heritage Foundation), as well as industry, have called for these changes to be undone.

* With respect to the MA star ratings, the Biden administration over the past four years has adjusted the rating calculations in ways that have generally lowered ratings for many plans.  Key changes include removing the COVID-era “guardrails” that had temporarily prevented sharp declines in ratings, reintroducing pre-pandemic performance cut points, and toughening methodology for certain quality measures, making it harder for plans to achieve high scores.  Additionally, higher weighting for patient experience measures has magnified lower enrollee satisfaction scores, while refinements to medication adherence and chronic condition management measures have also made it challenging for plans to maintain high ratings.

* Both inputs can be adjusted unilaterally, so there is no question of authority regarding intervention by CMS.  That said, there are several factors that depress the probability of action to increase rates for CY26 (i.e., specific policy changes, as opposed to natural formulaic fluctuations).  First, the MA rates need to be finalized by early April and Trump’s CMS leadership may not be in place or organized in time to put its finger on the scales.  Second, Republican opposition to the v28 cuts in particular has come in the form of political messaging rather than in the form of substantive critiques (suggesting the party may lack a clear vision on how to alter the current construct).  Third, while the risk model implemented by Biden has the practical effect of constraining risk scores, scores continue to grow by an average of 3% YOY (slightly lower for CY26), meaning many plans continue to see revenue growth despite the v28 changes – and with Republicans placing heightened emphasis on deficit reduction, some may view the currently proposed update (even excluding the risk score trend) as threading the needle between supporting plans and limiting the growth in federal spending.  And, fourth, Republicans are generally moving in a more populist direction on health care policy and in other areas, including being highly critical of industry.  While they’ve focused that criticism more on drug pricing related issues, this dynamic may make Republicans reluctant to provide a clear win to the health insurance industry.

Watch for these developments… Over the coming weeks, we are watching for an intensification of industry pushback to the proposal and the emergence of calls from key Republicans lawmakers (i.e., Senate Finance Chair Crapo (R-ID), House Ways & Means Chair Smith (R-MO), House Energy & Commerce Chair Guthrie (R-KY)) for action by CMS to increase the rates, the latter of which would increase the pressure on the Trump administration to act.  We are also watching for indications that Trump’s nominee to lead CMS (Dr. Oz) not only supports intervention but is on schedule to be confirmed by the Senate ~the next month, as his disengagement on this issue and/or the failure of the Senate to install him by ~March could jeopardize the ability of the agency to put its own spin on the rule ahead of the finalization deadline.