Reaction to the proposed 2027 Medicare Advantage (MA) payment update was swift and severe. Insurer shares fell sharply — some by as much as 20% in a single day — as investors adjusted earnings expectations in what appears to be a flat-rate environment.
Now that the initial shock has worn off, it is important to understand what the 2027 Advance Notice for Medicare Advantage and Part D truly means for plan operations next year and beyond. The administration is signaling a shift from growth accommodation toward tighter payment controls.
The Centers for Medicare and Medicaid Services (CMS) proposed a 0.09% rate increase for 2027, which is a sharp decline from the 5.06% finalized increase for 2026. Even after incorporating expected MA risk score growth of roughly 2.45%, total payment growth would be approximately 2.5%, still well below prevailing medical cost and utilization trends.
For most plans, that gap suggests negative operating leverage in 2027. Revenue growth will not keep pace with expense growth. The result is a structurally tighter Medicare Advantage environment that favors scale, integration, and operational excellence over membership growth alone.
Risk adjustment reform is the core story
The most consequential elements of the proposed rule are changes to risk adjustment policy. CMS continues modify the hierarchical condition category (HCC) version 28 model using more recent diagnosis and spending data, a shift that could reduce aggregate payments by more than 3%. The agency also proposed excluding diagnoses derived from unlinked chart reviews and tightening standards for audio-only telehealth diagnoses, further reducing revenue potential.
These changes align with CMS’s stated objectives of improving payment accuracy and strengthening program integrity. At the same time, they represent deliberate policy reform rather than technical recalibration, making them unlikely to change in the final rule.
Historical precedent suggests some limited relief
Over the past decade, the average uplift in MA rates has approached one percentage point, although outcomes have varied significantly year by year.
But those historical trends may offer limited comfort now. A larger share of the proposed impact stems from explicit policy aimed at coding integrity and documentation standards rather than forecasting assumptions. While modest improvements in the final rate are still possible, a significant upswing is unlikely. Plans need to model conservatively and prepare for margin pressure rather than cyclical volatility.
Margin pressure extends beyond rates
The rate update is not done in isolation. CMS also wants to refine the Star Ratings program, shifting emphasis toward outcomes and member experience measures while reducing reliance on process metrics. While that appears to align with quality improvement goals, the adjustments would reduce predictability in bonus payments and increase earnings variability.
Oversight of supplemental benefits and Special Supplemental Benefits for the Chronically Ill (SSBCI) would also intensify under the proposed rule. There will be higher expectations for improved documentation, for instance. Compliance costs will increase as administrative requirements expand and that could outstrip revenue growth.
Taken together, these forces reinforce that the 2027 environment is not a one-year blip, rather it’s a long-term tightening of MA economics.
The impact on MA plans will be uneven
The proposed changes will not affect all plans equally. Large, diversified sponsors with scale, advanced analytics, and integrated care management capabilities are better positioned to absorb pressure. Urban and higher benchmark markets are likely to fare better than rural and lower cost regions.
Smaller regional plans, provider-sponsored entrants, and newer MA participants face more difficult trade-offs. Without established risk infrastructure or diversified geographic footprints, they may face hard decisions regarding benefit design, premium strategy, or selective market exits if the proposals are largely finalized. Geographic variation in benchmarks will further differentiate performance across markets.
Three keys for MA plans to foster long-term success
In light of the 2027 Advance Notice's emphasis on tighter economics and program integrity, we recommend Medicare Advantage plans pivot toward proactive, execution-focused strategies. Even if the final rates are higher, we see this as an opportunity to build resilient operations that prioritize value over volume. Below, we outline three critical actions MA plans should take now to continue navigating margin compression and reposition for long-term success:
1. Strengthen risk adjustment infrastructure with advanced analytics and compliance-first processes: Invest in robust data analytics platforms to enhance coding accuracy and documentation rigor, ensuring all diagnoses are substantiated and aligned with CMS's evolving HCC model. For instance, integrate artificial intelligence-driven tools to flag potential gaps in linked chart reviews and audio-only telehealth encounters. From our viewpoint, plans that proactively audit their risk adjustment practices — aiming for a 10% to 15% improvement in documentation completeness — can mitigate revenue shortfalls by up to 2% to 3%. Start by conducting a baseline assessment of your current processes within the next quarter, partnering with experts to simulate the impact of V28 recalibration on your portfolio.
2. Optimize Star Ratings through member-centric outcomes and predictive modeling: Shift resources toward improving member experience and clinical outcomes metrics, such as CAHPS surveys and HEDIS measures, while de-emphasizing outdated process indicators. Implement predictive analytics to forecast Star Ratings volatility and target interventions, like personalized care management programs for high-risk populations. In our experience advising MA sponsors, plans that achieve consistent 4-plus Star Ratings can unlock bonus payments that offset up to 1% to 2% of payment headwinds. Plans should take a cross-functional approach to redesign of quality roadmaps, incorporate real-time feedback loops, and pilot new initiatives in select markets before 2027.
3. Refine benefit design and cost management for economic precision: Conduct a thorough review of supplemental benefits and SSBCI offerings to ensure they deliver measurable value while meeting heightened documentation standards — avoiding over-reliance on growth-driven expansions that inflate administrative costs. Leverage integrated care models to control medical loss ratios, targeting a 1% to 2% reduction in utilization through provider partnerships and value-based contracting. Oliver Wyman's analysis shows that scaled plans with diversified footprints can achieve 3% to 5% efficiency gains by focusing on high-benchmark urban markets. As an immediate step, plans should model multiple scenarios for 2027 bids, incorporate conservative revenue assumptions, and explore selective market and network adjustments or product and pricing strategies to maintain competitiveness without eroding margins.
By acting on these priorities, MA plans can transform the 2027 challenges into a catalyst for operational excellence.