The federal government will give Medicare Advantage plan issuers a bigger raise than it had expected in 2026 because Medicare enrollees' health care costs surged in the fourth quarter of 2024.
The Medicare Advantage program expects average payments per enrollee to increase 5.06% in 2026, officials at the Centers for Medicare and Medicaid Services said Monday.
The average increase for 2025 was 3.7%. The projected 2026 average increase of just 2.23% was included in the "advance notice," or rate announcement preview, that CMS released in January.
Subsidy calculations for the Medicare Advantage program are based partly on 2024 claim costs, and the average payment is increasing because the fourth-quarter cost surge increased Medicare's "effective growth rate" — a measure of change in the underlying cost of care — to 9.04%, from the estimate of 5.93% used in the advance notice.
What it means: Higher federal subsidy rates could make the private Medicare plan market much more stable in 2026 than it has been this year.
That could help older clients keep their coverage stable.
But, if the underlying cost of care continues to surge, that could lead to big coverage and cost changes down the road.
The backdrop: The Medicare Advantage program gives private insurers a way to offer plans that fill in the many gaps in traditional Medicare coverage, and the Medicare Part D prescription drug plan program gives insurers a way to offer prescription drug benefits to Medicare enrollees.
About 34 million of the 68 million Medicare enrollees have Medicare Advantage coverage, 32 million get prescription coverage through their Medicare Advantage plans and 23 million have standalone Part D drug plans, according to the CMS Medicare enrollment dashboard.
Health insurers and issuers of stop-loss insurance — insurance arrangements that protect self-insured employer health plans against catastrophic losses — began reporting a big surge in claims in the fourth quarter of 2024.
They suggested that the increase might be due to a combination of rising health care prices, a reduction in preventive care during the worst years of the COVID-19 pandemic, and outbreaks of influenza and other viral illnesses.
Medicare supplement insurance: Some clients use an older type of product, Medicare supplement insurance, or Medigap insurance, to fill in traditional Medicare coverage holes.
The new CMS rate announcement will have no direct effect on Medigap issuers. State insurance regulators oversee Medigap policies and rates.
But any lingering, widespread increases in Medicare enrollees' claims could also push up Medigap premiums.
Obesity: CMS originally proposed requiring Medicare drug plans to cover semaglutide and other drugs that can help people fight obesity.
CMS backed away from the anti-obesity medication proposal in the 2026 rate announcement and a set of final regulations for 2026.
Some people and organizations that commented on the proposal predicted that it would increase plan costs, officials said in a discussion of the comments it received on the advance notice.
The players: CMS developed the advance notice for 2026 while President Joe Biden was in office. Donald Trump is now president.
The Senate confirmed Mehmet Oz as Trump's CMS administrator last week, and CMS did not quote Oz in the rate announcement news release.
Oz mentioned Medicare briefly Monday in an interview on "Hannity," a Fox News show.
"The president has said he will love and cherish Medicare," Oz told the host, Sean Hannity.
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