By Elizabeth O'Brien

Higher-than-expected federal payments to Medicare Advantage plans should offer some relief for big health insurers, but they don't solve the stubborn medical costs behind the jump.

On Monday, the Centers for Medicare and Medicaid Services said it would increase payments to Medicare Advantage insurers by a projected 5.06%, or more than $25 billion, from 2025 to 2026. This represents an increase of 2.83 percentage points over the advance notice released in January at the end of the Biden administration.

CMS attributed the additional amount to higher costs in traditional, fee-for-service Medicare run by the federal government. In particular, inpatient hospital costs came in higher than expected when fully tallied for the final payment rate, says Sean Creighton, managing director at consultancy Avalere Health.

In Medicare Advantage, the federal government pays insurers a fixed annual amount per member to manage that member's healthcare costs. Shares of Humana, which has the bulk of its business in Medicare Advantage, surged around 12% on Tuesday morning as investors cheered the higher federal payments.

Last year was challenging for Advantage insurers, who saw costs rise on higher-than-expected healthcare use among members. "This gives plans some breathing room," Creighton says.

But the boosted federal payments don't remedy the continued increase in medical services prices. Healthcare costs have rocketed in the wake of the pandemic, due to the higher use of medical services, wage inflation, and other factors. Some hospital systems are coping with internal inflation rates of around 12%, says Ron Mastrogiovanni, CEO of HealthView Services, a firm that provides retirement healthcare cost data and tools to financial advisors.

And that trickles down to all patients. If Medicare payments don't adequately cover medical providers' costs, providers may push costs onto other customers -- like employers paying for their workers' healthcare, who in turn might have to increase employee premiums, Mastrogiovanni says.

Retirees, too, will ultimately pay the price for higher healthcare costs, in the form of rising out-of-pocket and premium costs.

For now, though, the bump is welcome news for Medicare Advantage enrollees, at least for the coming year. Higher payments encourage insurers to stay in the market, says Gretchen Jacobson, vice president of the Medicare program at the Commonwealth fund.

But it's too early to say whether the boost in Advantage plan payments will translate into more generous benefits for next year, experts say. Most Advantage plans provide supplemental benefits that traditional Medicare doesn't offer, such as dental, vision, gym, and grocery benefits.

Many Advantage insurers curtailed their ancillary benefits for 2025 as they faced higher costs. If the increased federal payments for 2026 match the costs that insurers experience, plans may not have much leeway to increase benefits, Creighton says.

Write to Elizabeth O'Brien at elizabeth.obrien@barrons.com

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April 08, 2025 16:46 ET (20:46 GMT)

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