To the shock of the big insurance companies that run most Medicare Advantage managed care plans, the government has proposed boosting payments to plans by just 0.09% in 2027. That would be a fraction of the annual increase plans received in the past and far below what they, and their investors, expected. Share prices plummeted and plan executives darkly warned of future benefit cuts.

What would it really mean for enrollees? Insurers can respond to lower-than-expected federal payments in several ways. They can raise premiums, scale back certain optional benefits such as vision and dental care, pay their network providers less, or withdraw from less profitable markets.

They also could accept lower profits. But that seems an unlikely option even though MA generates gross margins that are nearly double what insurers get from the individual insurance market.

What will it mean for competition? Today, three insurers, United Health Group, Humana, and CVS Health insure 54% of MA enrollees. If the big three withdraw from some markets, will that leave seniors without managed care options or will smaller, not-for-profit firms be willing to accept narrower margins step into the breach?

High Costs, Limited Benefit

I suspect once the insurers are finished lobbying, Medicare will boost its proposed 0.09% increase once it locks in 2027 rates in April. Last year, the government eventually doubled its initial proposal. Still, this is only the latest move by the Trump Administration to try to control MA costs.

And no wonder. MedPac, the independent organization that advises Congress on health care, estimates Medicare will pay MA plans $76 billion, or about 20%, more in 2026 than what it would pay under original Medicare.

That shouldn’t be a surprise. Medicare has consistently paid the plans more over the past decade. And for the last four years, the additional costs have run in the neighborhood of $80 billion annually. Overall, Medicare paid the plans $538 billion in 2025.

This has turned the concept of MA on its head. The initial promise was that by coordinating care, private insurance would improve patient health and save the government money.

And there was good reason to believe that by managing and coordinating care, plans could out-perform original Medicare’s deeply fragmented delivery system.

It has not happened. Not only has MA been more costly than traditional Medicare, there is little evidence that the plans provide overall better health outcomes. According to a 2022 KFF review of 62 studies, MA scores higher for some conditions, but the same or worse for others.

Consumers Have Flocked To The Plans

Nonetheless, the plans have been extremely popular with consumers. A decade ago, about one-third of Medicare beneficiaries were enrolled in MA. By last year, 55%, or 35 million older adults and people with disabilities had signed up for managed care.

And no wonder. MA provides a wide range of additional benefits at little or no extra premium cost compared to original Medicare. Plans may add vision and dental coverage, gym memberships, drug benefits, and non-medical services for people with chronic conditions for free, or close to it.

Plus, enrolling in a single MA plan is vastly easier than signing up for original Medicare, which requires enrolling in Part A hospital insurance, Part B physician coverage, Part D drug insurance, and—if you want extra coverage-- picking one of dozens of Medicare Supplement (Medigap) policies.

But those benefits come at a price. MA enrollees must use in-network doctors, hospitals, nursing homes, and the like or pay much more out-of-pocket. Tests and procedures ordered by the doctors often are delayed while they await prior authorization from the insurers and occasionally are denied.

Tight networks and utilization reviews can avoid unnecessary or even inappropriate care, but they also are a tool to save insurers money and increase returns to their shareholders.

Why Is MA So Expensive?

Why does Medicare pay MA plans more than for traditional fee-for-service care, which ought to be less efficient?

Start by remembering how MA plans are compensated. Medicare pays them a fixed monthly fee of roughly $1,000 for each member they enroll. That fee is adjusted for several factors, but a big one is the overall health of their members. The sicker they are, the more Medicare pays the plan.

In addition, the plans receive bonus payments for meeting certain financial and quality targets set by the government. Those extra dollars, averaging more than $2,000 per member annually, fund all those extra benefits and reduced premiums consumers love.

There are three big reasons why Medicare overpays.

First, Medicare payments to MA plans don’t accurately reflect that their members are healthier, and thus use less medical care, than those in traditional Medicare.

The second is that plans have become wizards at making their members appear sicker than they really are, thus raising the amount Medicare pays. They often do so only by looking at medical records and without a physical exam or tests.

Medicare has taken steps to curb the practice but so far has had only modest success.

Finally, while those quality bonuses were intended to go to the best plans, it turns out that nearly 70% of MA enrollees are in plans that get them.

What Will Change?

The challenge for plans, and their members, is that a federal payment squeeze, whether through smaller direct payment increases or a crackdown on coding practices, will inevitably make the plans less attractive for consumers. Fewer benefits mixed with higher premiums and narrower provider networks is not a successful strategy for growing a business.

It isn’t easy for current enrollees to switch from MA to traditional Medicare because they be unable to buy a Medigap policy if they have pre-existing conditions. But younger, healthier seniors may gravitate back to original Medicare when they first enroll. And even a modest return to the old days of traditional Medicare could have profound changes for the government and enrollees.