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, according to officials at the Centers for Medicare and Medicaid Services.
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.