How Medicare Advantage Plans Can Thrive Despite CMS’s Proposed Minimal Rate Increase

This is an AArete Healthcare Payer insight

CMS recently released the CY2027 Medicare Advantage Rate Announcement, approving a 2.48% increase.  After risk adjustment implications, this translates to an estimated effective impact of 5%. This offers some relief for Medicare Advantage plans, that were rethinking their long-term strategy after CMS initially proposed a rate increase of just 0.09%.  CMS is still considering risk adjustment changes for the future, and plans already facing cost constraints need to look beyond enrollment growth for profitability and sustainability. Plans need to reduce administrative expenses, strategically design benefits to attract balanced member mixes, and address high-cost areas of business operations. 

The New Reality: Strategic Growth Over Volume 

Achieving scale remains a central strategic priority for Medicare Advantage plans. Although growth historically correlated with improved financial position, now how much growth and what kind of growth are more pressing considerations. Some plans are pulling out of markets, while others are poised to move in. Regardless of market positioning, all plans need to gain efficiencies and reduce administrative costs. 

Organizations focused on strategic growth typically have some combination of the following characteristics:  

The plans poised for growth are eyeing payers exiting the market as an opportunity to provide their high-quality plans and benefits, more cost-efficiently, to a much larger pool of members. They’re also doing the internal work to design and price products that attract their desired members. These organizations are laser-focused on maintaining quality while driving efficiency through increased automation and AI. By lowering costs through automation, they’re able to offer competitive, high-quality products. 

Larger national plans with multiple lines of business are also pursuing growth with a different strategy, with an eye toward dual eligibility offerings. These plans typically have an established Medicaid footprint and a core base of Medicare Advantage (MA) members, or vice-versa. Like their MA-focused counterparts, they’re implementing smart automation and AI to reduce administrative costs and create capacity for expansion. 

Managing Costs in Challenging Markets 

In certain counties, particularly smaller or higher-cost markets, MA benchmarks combined with utilization trends, risk model changes, and Star rating volatility can materially compress margins. Although risk adjustment compensates for acuity, plans must rigorously analyze internal medical and administrative cost drivers to sustain profitability. 

Health plans are navigating the same macro pressures, but leadership priorities diverge based on how each plan competes and operates. Strategic priorities vary by plan type:  

• Plans operating at national scale are focused on managing complexity across multiple lines of business. The priority is spreading fixed costs, standardizing operations, and investing in automation without losing visibility into performance at the local level.
• Plans built on strong provider relationships are balancing long-standing partnerships with increasing affordability pressure. Leadership is often navigating how to sustain collaboration while responding to cost and performance expectations.
• Provider-aligned plans are working to translate care model advantages into sustainable financial performance. The opportunity is clear, but margin pressure requires more deliberate operational discipline and cost management.
• Regionally focused plans often have greater agility in responding to local market dynamics. At the same time, they must make trade-offs around scale, investment capacity, and operational efficiency. 

Organizations often have untapped opportunities to improve operational efficiency. By conducting granular trend analytics that link operating expense, medical cost, and contribution margin at the county and product level, plans can make informed decisions about where to focus. With this visibility, targeted initiatives including workflow automation, coding optimization, and predictive cost management can address specific margin pressure points rather than applying broad-brush cost-cutting initiatives.  

The Stars and CAHPS Blind Spot 

One of the most consequential risks facing MA plans today is a late-cycle Stars or CAHPS rating drop. Several payers with high membership bases and historically strong 4+ Star ratings discover too late that they are trending toward a half-Star or even full-Star reduction in the next cycle.  

By the time they see the signals, it’s too late to act, and recovering from a rating drop is often at least a two-year cycle. The combined top-line revenue impact of a rating drop plus existing cost pressures creates a double impact that’s hard to recover from quickly. 

Plans staying ahead of this share two behaviors: They treat Stars and CAHPS as an enterprise-wide undertaking, and they build reporting and visibility around early signals. They align goals and incentives across functions, not just as a siloed quality department initiative. Clinical operations, member experience, network management, and IT all have a role to play. Reporting focuses on early indicators and operational metrics that signal whether performance is trending in the right direction, rather than relying on post-facto reporting that arrives too late to drive corrective action. 

Taking Action Now 

As history has shown, the advance notice is rarely the final decision. But it’s clear that plans need to be intentional about introducing efficiencies, maintaining or improving Star ratings, and designing benefit plans to attract a balanced mix of members.

Executives of MA plans are grappling with interconnected operational challenges, all of which are potential levers to optimize. These include reducing supplemental benefit spend, improving RAF capture integrity, mitigating high-cost specialist leakage, ensuring accurate provider contract and policy configuration, targeting Stars intervention, automating utilization management, and creating G&A efficiencies while enhancing member access, quality of care, and experience.  

AArete helps plans navigate these challenges through:

• Refining vendor ecosystems to maximize the value of those relationships and to identify where consolidation or negotiation can drive savings
  
• Bridging gaps in data and processes that create administrative drag and undermine decision-making confidence
  
• Performing trend analytics to identify and correct costly problem areas, leveraging proprietary market intelligence at the county and product level
  
• Honing cost-of-care levers, including network design, utilization management, payment accuracy, and analytics
  
• Strengthening baseline data to enable deployment of AI capability and applications and drive tangible ROI
  
• Supporting Stars and CAHPS programs with enterprise-wide frameworks, early-warning reporting infrastructure, and intervention targeting that keeps plans ahead of rating cycle risk 

Throughout the year, AArete will be offering helpful playbooks and advice related to these levers. Follow us on LinkedIn and subscribe to the Payer Pulse newsletter to get access to the latest publications as they’re released. 

Meet The Authors

Elizabeth Levy

Managing Director

Maulik Bhagat

EVP & Senior Managing Director