Opportunities and challenges exist in the MA market

Medicare Advantage has struggled to achieve profitability despite increasing numbers of older Americans choosing MA plans. But even though challenges exist in the MA market, a number of opportunities also can be found in Medicare Advantage.

AM Best conducted a recent briefing on MA, looking into some of the factors shaping that market.

In 2025, more than 54% of eligible Medicare beneficiaries enrolled in MA plans, according to KFF. But 2026 could see the first decline in MA enrollment in two decades, with the Centers for Medicare and Medicaid Services expecting 34 million MA enrollees for 2026, down from 34.9 million in the previous year. 

AM Best assigned a negative outlook to MA plans for 2026. The factors leading to that negative outlook include higher usage trends, changes to Medicare Part D from the Inflation Reduction Act of 2022, reduction in MA Star Ratings and changes to MA’s risk adjustment payment methodology.

MA had been a key driver of health insurance profitability over the past five years, said Bridget Maehr, director at AM Best. But 2024 marked the first year in which the industry reported a collective underwriting loss in MA. 

The loss ratio for MA increased to a high of 89.9 for 2024, she said. That increase was due to higher utilization rates and higher drug costs.

More people than ever before are aging into plans but many of those enrollees also are higher users of medical services. The MA segment also has been impacted by changes to Medicare Part D cost share, changes to the CMS risk adjustment model and declining Star Ratings.

Nonprofit insurers and Blue Cross Blue Shield insurers continue to report the highest loss ratios for MA, Maehr said, with nonprofits reporting a 96.1 loss ratio for 2024 and BCBS insurers reporting a 94.7 loss ratio for that same year.

These numbers are driven by lower targeted margins for these companies along with increasing utilization and medical costs trends. In addition, BCBS insurers are typically concentrated by geography, which does not allow them to write business across multiple locations.

Publicly traded insurers also saw increased loss ratios in 2024, she reported. CVS saw its largest year-over-year loss ratio, driven by the loss of a four-Star rating on its largest MA plan, along with higher usage and higher drug costs. 

Health insurers that are concentrated in MA (having more than one-third of their business in MA) experienced a material decline in earnings since 2020, Maehr said. Earnings were significantly worse for smaller regional health insurers that have struggled with MA for several years.

Declining Star Ratings also have impacted MA insurers. Only plans that have a rating of four stars or higher are eligible for an additional 5% bonus payment from CMS. The percentage of plans with ratings of four stars or higher has fallen substantially from a high of 68% in 2022 to a low of 40% in 2025. The average Star Rating has declined since 2023, when it was 4.37, and will decline to 3.2 for 2026.

Drug plan utilization on the rise

Drug plans saw an increase in utilization and costs between 2024 and 2025, said Julia Friedman, principal and consulting actuary with Milliman. Medicare Part D and Medicare Advantage prescription drug plans saw a 41% increase in per member per month gross cost between calendar year 2024 and the first half of 2025. Part D had a 38% increase in utilization during that period, while MA drug plan utilization was up by 20%.

Part D utilization trends were driven by the Inflation Reduction Act, which capped out-of-pocket costs for Part D beneficiaries at $2,000 annually, Friedman said. Nearly 10% of Part D members reached the catastrophic phase of coverage by June 25, a faster rate than in prior years because of a lower out-of-pocket spending threshold, increasing utilization trends and plan benefit design changes.

MA and Part D benefits are being degraded at a level that hasn’t been seen since MA was created, she said. In addition, 2025 marked the first year in which member premiums increased in aggregate.

The dynamics of the Inflation Reduction Act and high emerging drug cost trends led to leaner Part D benefits. Friedman said MA Part D deductibles will increase $138 on average in 2026 for general enrollment plans, and 90% of MA Part D general enrollment plans have coinsurance on Tier 4 drugs. 

Medicare Advantage organizations continue to face significant revenue pressure and uncertainty, she said. Prioritization of growth and margins is driving MA product redesign efforts for 2027. Product priorities include:

» Improving financial performance through product design

» Managing competitor strategies to avoid creating adverse selection

» Considering terminating plans or adding premiums

» Positioning $0 premium plans profitably

“We see a lot of headwinds and uncertainty in Medicare Advantage, and we don’t see as many tailwinds,” Friedman said. “Before determining whether organizations should lean in, pull back or exit, we must understand whether the losses organizations might be experiencing are fixable or structural.”

The MA market saw a significant amount of plan terminations and service area reductions for 2025 and 2026, Friedman said. Nearly 3 million beneficiaries were required to select a new plan for 2026, which is 1½ times the number of beneficiaries who had to choose a new plan for 2025 and 10 times the number of those who were similarly impacted for 2024.

MA plan offerings declined for the second consecutive year, with non-special needs plan offerings showing the sharpest drop — 9% between 2025 and 2026. Meanwhile, dual-eligible special needs and chronic special needs plan offerings grew by 10% and 44%, respectively, during that time. Friedman said the decrease in N-SNP offerings and increase in SNP offerings signal a strategic shift toward serving higher-acuity populations.

“We’re in a considerably different place in Medicare Advantage in 2026 than we were even two years ago,” she said.

Looking ahead to 2027, Friedman listed some areas to examine in the MA market.

» Changes to Part D in the aftermath of the Inflation Reduction Act and a leaner benefit design will impact member spending on prescription drugs.

» As plans balance competitive offerings with sustainable margins, members will face increasing out-of-pocket liability and leaner supplemental benefits.

» Will rate hikes be high enough to temper market shifts seen in 2025 and 2026?

Despite the challenges in the MA market, Maehr said she believes insurers will adapt to the changing environment.

“It is one of the only segments with potential for real enrollment growth,” she said.

Susan Rupe is editor in chief, magazine, for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected].