McDermott+ is pleased to bring you Regs & Eggs, a weekly Regulatory Affairs blog by Jeffrey Davis. Click here to subscribe to future blog posts.
April 10, 2025 – This past week, the Trump administration put its first major stamp on the Medicare Advantage (MA) program. The Centers for Medicare & Medicaid Services (CMS) released two final regulatory documents related to MA:
To help me discuss these regs and their implications, I’m bringing in my colleague Lynn Nonnemaker.
As described in a previous Regs & Eggs blog post, we anticipated that the final rule would be relatively short, as it was unclear whether CMS would finalize many of the proposals introduced by the outgoing Biden administration. And it turns out we were mostly right, and what has garnered the most attention is what isn’t in the rule. CMS did not finalize a proposal to expand coverage of anti-obesity medications in Medicare Part D and Medicaid. CMS also stated its decision not to finalize provisions that would have expanded requirements to analyze the impact of utilization management policies on health equity and apply guardrails around plans’ use of artificial intelligence (AI). CMS signaled possible future rulemaking around AI.
Since many provisions from the proposed rule went unaddressed in the final rule, it is possible that CMS may issue a second (and even third) final rule later in the year that would finalize additional proposals. The agency legally has three years from the proposed rule’s publication date (December 10, 2024) to take action on proposals before they expire. So, stay tuned!
In terms of what’s actually in the rule, CMS finalized the following policies:
Before describing the final notice, let’s set the scene. CMS released the 2026 advance notice under the previous administration, announcing a +2.23% basic update to plans and an estimated average +4.33% increase in revenue after factoring in expected trends in risk scores. This proposed basic update was much higher than the 2025 update of -0.16%. In our preview of the rate notice, one of the major questions we considered was whether the basic update would be larger than what was proposed.
The answer to our question about the basic update was pretty definitive: in the final rate notice, CMS finalized a basic update of +5.06%, significantly higher than the +2.23% proposed in the advance notice. CMS estimates that this basic update will result in a $25 billion increase in MA payments to plans in CY 2026. Although CMS did not explicitly project the expected average change in revenue for MA plans, it is approximately +7.16%, compared to the +4.33% initially estimated in the advance notice. This projected revenue change takes into account an underlying coding trend to increase risk scores, which CMS estimates to be 2.10% on average. The argument for not counting the average increase in MA risk scores across all MA plans towards expected MA plan payments is that risk scores vary among MA plans depending on the specific populations that MA plans serve. Therefore, the risk score trend does not represent an actual guaranteed payment increase for MA plans. All in all, the actual increase in payments to MA plans could wind up being higher than CMS’s $25 billion estimate after factoring in the effects of coding practices.
The main reason for the higher overall update was the growth rate. The growth rate is CMS’s estimate of how much the cost of providing care to enrollees will change in 2026. It forms the basis for benchmark payments to plans and is primarily based on utilization trends among Medicare beneficiaries in the “traditional” or fee-for-service (FFS) program. MA plans benefit when the growth rate is high. The final growth rate increased more than three percentage points compared to the advance notice, from 5.93% to 9.04%. One reason for the jump may have been the advance notice’s early release, which forced CMS to rely on older cost data in its initial projections. In the final notice, CMS used data through the end of 2024, which led to higher FFS cost estimates for 2026.
Interestingly, the growth rate would have been even higher had CMS not moved forward with several technical adjustments. CMS proposed these adjustments to refine cost estimates and to reflect expected changes in future costs due to litigation related to the 340B program. CMS held firm on making the adjustments, which made the final growth rate modestly lower than it would otherwise have been.
Stakeholders should keep in mind that the growth rate announced in the final rate notice is a national average. Benchmark payments are set at the county level, so a plan’s payments will rise or fall based on where it offers coverage and enrolls members. Payments are also affected by a plan’s star rating and its enrollees’ health status. Plans will rely on detailed county-level data released in conjunction with the final rate notice to determine exactly how their payments will change for 2026.
Since 2024, CMS has been phasing in a new risk model for MA payments. The new model was intended to address concerns about coding intensity that led to higher risk-adjusted payments. Many plan stakeholders hoped the new administration would proceed more cautiously in adopting the new model. However, CMS held firm and will calculate risk scores based entirely on the new model in 2026. The agency estimates the move will save the Medicare trust funds about $13 billion in 2026.
Many plans also hoped the final rate notice would take a different approach to calculating the “normalization” adjustment that typically reduces MA risk scores. The normalization factor is an adjustment CMS makes to risk scores and payments to account for changes in the FFS population’s underlying risk. It is one of the few levers CMS has, besides the growth rate, to dial MA payments up or down in a given year. CMS finalized its proposed method for calculating the normalization factor, meaning that MA risk scores (and risk-adjusted payments) will be adjusted down in 2026.
CMS also held firm on its proposed method for calculating normalization factors for Part D risk scores. In a change first introduced in 2025, CMS will calculate separate normalization factors for plans that combine MA and Part D benefits (MA-PDs) and plans that offer Part D benefits only. This will lead to substantial cuts to Part D risk scores for MA-PD enrollees, and will likely mean that MA plans must devote a greater share of rebate dollars to buying down Part D premiums if they want to offer a $0 premium plan for 2026. Importantly, CMS does not reflect the impact of Part D normalization in its impact estimate, suggesting the expected net change in revenue is not quite as positive as CMS suggests.
High scores in the Stars Rating System trigger bonus payments for MA plans and are an important marketing tool. The most important changes to stars come through the rulemaking process, but the final notice did finalize the list of star measures for 2026, including the measures used in calculating the reward factor and the Categorical Adjustment Index. The final notice also specified the areas affected by extreme and uncontrollable circumstances policy for the 2026 ratings. These areas include states and counties affected in 2025 by hurricanes and the California wildfires. CMS also announced that it is no longer considering adding the “social need screening and intervention” measure to stars. That measure was part of the Universal Foundation efforts intended to focus attention on care and outcomes measures that are broadly applicable across healthcare segments. Finally, CMS announced a name change for the Health Equity Index reward, set to take effect for the 2027 star ratings. It will now be known as the Excellent Outcomes for All (EO4all) reward.
Now that the final rule and rate announcement have been published, plans will focus on developing their 2026 offerings and bids. The deadline for submission to CMS is June 2, 2025. The policies and rates CMS finalized suggest that 2026 will offer stability for plans and enrollees. That doesn’t mean CMS won’t propose future changes to the program – we’ll be watching closely, so keep your eye on this space for more updates on the MA program.
Until next week, this is Jeffrey (and Lynn) saying, enjoy reading regs with your eggs.
For more information, please contact Jeffrey Davis. To subscribe to Regs & Eggs, please CLICK HERE.
