Health care update (MA)

Recent/upcoming developments… CMS has issued the “Part I” proposed rule governing Medicare Advantage (MA) plans for contract year 2026, which includes policy and technical changes to the program.  The “Part II” proposed rule, which focuses on reimbursement levels, will likely be released in sometime in January or February 2025.

Our outlook… The Part I proposed rule includes a series of changes which are marginal in nature (i.e., further limiting use of prior authorization, additional marketing oversight, tightening medical loss ratio calculations) but nonetheless further highlight Democrats’ interest in constraining the practices (and profitability) of MA plans.  However, CMS likely will not be able to finalize the Part I rule before President-elect Trump takes office.  We expect the Trump administration will be looking to soften at least some components of the proposed rule (i.e., marketing, MLR) given Republican’s general support for supporting and expanding MA.  That said, some proposals (i.e., prior authorization) may be sustained given the party’s interest in reducing improper service denials.  With respect to the coming Part II rule (rates), history suggests both the proposed and final rate rules will be released by the new administration.  That said, if Biden were to issue the CY26 proposed rate rule, we do not believe disruptive changes would be pursued (i.e., increase in coding intensity adjustment) given that the Trump administration would surely roll-back such proposals.  But regardless of which administration issues the proposed rule, the continued implementation of updates to the MA risk adjustment model and changes to the star ratings may create some pressure on CY26 rates (i.e., rate update being below the projected per capita cost growth rate).  It is possible the Trump administration could intervene to soften these dynamics, though the timing of the new administration taking office and the deadline for finalizing the rule (April) creates risk that intervention may not occur for CY26.

* With respect to prior authorization, the proposal would limit when/how MA plans can apply utilization management, require MA plans to publicly post their internal coverage policies, strengthen notice requirements regarding MA coverage decisions, restrict MA plans from reopening approved inpatient hospital authorizations, and clarify that contemporaneous coverage decisions during care are subject to appeal.  Concerning marketing, CMS is proposing to broaden the definition of “marketing” to require more advertisements be submitted for review before use and expand the list of topics that agents and brokers must discuss with individuals during enrollment (i.e., eligibility for the Low-Income Subsidy and Medicare Savings Programs, the impact of MA enrollment on Medigap guaranteed issue rights, and resources for additional information).  And with respect to the MLR, CMS is proposing to exclude administrative costs from quality-improving activities and tighten the criteria for including provider incentives in the numerator, which would mean plans will have fewer allowable expenses to count toward the MLR threshold.  The proposed rule includes other more modest proposals such as capping beneficiary coinsurance for behavioral health services and increasing transparency in provider directories.

* Looking to the forthcoming Part II proposed rule, the effective growth rate (essentially, the baseline market basket update for MA plans) has averaged ~3.5% over the past decade.  Even if this average holds for CY26, however, there are other components of the broader MA rate formula which may result in a lower net update (as was the case in CY24 and CY25).  For example, in CY26 CMS will finish phasing-in changes to its risk adjustment model which began in CY24 (the process for adjusting payments based on beneficiary health status is being updated to reflect new data and service classifications).  The first two years of the phase-in resulted in cuts of -2.16% and -2.25% (respectively), and a similar cut is possible for CY26 as CMS shifts to using even more of the new data in the risk adjustment model.  Additionally, the CY25 star ratings – which are used in the CY26 rate calculations – continue to exhibit signs of a downward trend due to prior changes around their calculation (changes which will drop the average star rating from 4.07 in CY24 to 3.92 in CY25, with ~14% of plans become newly ineligible for star rating bonus payments in CY26).  When considering risk adjustment and star rating dynamics, the net payment update for CY26 is likely to be more modest as compared to the growth rate (i.e., 0-1.5% update).  Of course, these are rough estimates based on trends and the figures could vary materially once proposed.

Watch for these developments… With respect to the Part I proposed rule, watch for indications that Republicans – who have traditionally supported prior authorization reforms – are expressing concern around Biden’s proposals in this area, as this would increase the probability of Trump’s CMS opting to not move forward with those changes (or significantly scaling them back).  And with respect to the Part II rule, watch for how quickly Oz and other key officials are installed at CMS and whether there are calls from Republican lawmakers/aligned stakeholders for the agency to make MA policy changes a “day one” priority, as this would increase the probability of pro-industry changes (i.e., pause on further implementation of v28) being pursued very quickly (i.e., slated for implementation at the soonest possible date, which is CY26).