Has Medicare Advantage's Business Model Broken?
The gravy train might be leaving the station.
Monday evening: the Trump administration releases its 2027 Medicare Advantage rate increase proposal.
Tuesday morning: $80 billion in market value evaporates. Humana’s stock fell by 20%. UnitedHealth down 19%. CVS down 13%.
Wall Street wasn't reacting to the proposed 0.09% rate increase. Wall Street was reacting to a business model potentially breaking in real time.
For context, Medicare Advantage is the private insurance alternative to traditional Medicare, where the government pays private insurers a fixed amount per member to provide Medicare benefits. More than half of Medicare beneficiaries—roughly 35 million people—choose these private plans, often attracted by extra benefits like dental, vision, and gym memberships that traditional Medicare doesn't cover.
Here's how the money worked: the Centers for Medicare and Medicaid Services (CMS) pays plans more for sicker members using "risk adjustment". Think about it like this— insurers get paid more for managing sicker patients because sick patients cost more to treat. The more diagnosed conditions a member has, the higher the payment. So payers built sophisticated programs to thoroughly document every health condition via home health visits, comprehensive assessments, and chart reviews. CMS designed the system to reward complete health documentation, and payers became very good at it.
Monday’s proposal changes everything, so that diagnoses will now only count if they’re linked to actual medical treatment. For example, let’s say a nurse visits your home, reviews your chart notes, and documents that you have diabetes. Under the old rules, that documentation alone meant more money for the insurer. Under the new rules, it only counts if the insurer then actually coordinated treatment for that diabetes—such as scheduling doctor visits, prescribing medications, and tracking outcomes.
The market just repriced the entire industry.
Why Wall Street Has Panicked
It’s easy to get lost when trying to understand why Wall Street has been roiled over this proposed rate increase. But in short, it is because two things hit simultaneously:
The revenue assumption broke: Wall Street analysts expected 4-6% rate increases for 2027 based on historical patterns and rising medical costs (CMS projects medical costs will grow 4.97% in 2027). Under the current proposal, every financial model built on consistent rate growth just became obsolete.
The incentive structure reversed: This is the more important piece of the puzzle that gets overlooked. As mentioned above, CMS designed their risk adjustment policies to pay more for sicker, more complex members, and rewarded comprehensive and thorough health documentation. So payers spent years developing systems for complete diagnosis capture through chart reviews, home health visits and even sophisticated analytics. Now CMS is proposing to exclude diagnoses from health assessments unless they're linked to a specific medical encounter with treatment. By upending how payers typically coordinated care to align with CMS’ incentives, this is poised to reduce industry revenue by $7 billion in 2027 (meaning that Medicare saves $7 billion).
The market reaction makes even more sense when you realize how much of Medicare Advantage economics were built on assumptions that were just eviscerated. Humana gets roughly half its revenue from Medicare Advantage. UnitedHealth is the largest Medicare insurer by membership. CVS was counting on Aetna’s Medicare business for its turnaround story. All three just watched their 2027 revenue models collapse.
Insurance companies are already running on thin margins. For example, companies like Humana are currently spending ~92 cents of every premium dollar on medical care, leaving 8 cents for everything else including profit. When your revenue assumptions drop by several percentage points while costs keep rising, the math gets brutal fast.
No Good Short-Term Options
Insurance payers have until April 6th to plan for 2027, as that is when the CMS will finalize its Medicare Advantage rate increase. Every short-term option hurts.
Benefit cuts: The most likely response. Meal delivery programs already dropped from 65% of plans to 57%. Over-the-counter allowances fell from 73% to 66%. Now expect cuts to the high-visibility benefits that seniors actually notice—dental, vision, and even gym memberships.
Market exits: If a county isn't profitable, why stay? Rural markets with higher costs and lower margins are particularly vulnerable. This isn't just a business decision—it's a direct threat to healthcare access in underserved areas where seniors may be left with few or no plan options.
Tighter utilization management: Expect insurers to deny more claims and require stricter approval before care can begin. When you can't grow revenue, you control what you pay out. Providers will feel this squeeze as much as seniors do.
For some companies, like Humana, the timing could not be worse. Just two months ago, Humana was sure about continued Medicare Advantage growth in 2026 and maintaining generous benefits in its plans while competitors cut. On their November earnings call, executives said they felt "good about what we are seeing so far" in open enrollment, with new sales at the high end of expectations. They were betting they could grow membership while doubling pre-tax margins. Now they have to choose: stick with existing benefits and watch margins collapse, or cut mid-course and kill the growth they were banking on.
The Long Game: Integrated Players Win
The short-term pain is unavoidable. But the long-term strategic implications are what really matter, and I believe that they fundamentally reshape the competitive landscape of Medicare Advantage.
The ultimate winners will likely be integrated healthcare systems such as Kaiser Permanente that own both insurance and care delivery. Why does this matter? Because when you own the hospitals, clinics, and doctors providing the care, you can actually demonstrate the treatment interventions that CMS now requires—not just document that someone is sick, but show that you're actively managing their health. These systems have deep value-based care relationships with providers and invested in care management infrastructure rather than primarily documentation infrastructure.
Those that are more exposed are payers that were heavily reliant on Medicare Advantage enrollment. Humana, for example, falls squarely in this bucket—roughly half their revenue comes from Medicare Advantage, and they lack the integrated delivery scale of a Kaiser. They're a pure-play Medical Advantage insurer trying to build clinical integration (for example, with their CenterWell division), but it is not yet enough to offset the pressure on the core Medicare business. Even UnitedHealth, despite owning Optum and having the largest provider network through Optum Health, faces questions about how much of their historical advantage came from superior coding capabilities versus actual care delivery. If the competitive advantage shifts fully to demonstrated clinical interventions, their massive administrative scale matters less than whether Optum can actually show better health outcomes.
The plans most at risk are smaller, regional Medicare Advantage insurers that built their entire business model around efficient administration and coding optimization without investing in provider relationships or care delivery. They have neither the scale to compete on administrative efficiency alone nor the clinical integration to compete on outcomes.
CMS is also signaling bigger changes ahead. They're exploring risk adjustment models based on what care patients actually receive (such as utilization patterns, lab results, and prescriptions) rather than just diagnosis codes. It's essentially a further shift toward value-based care: providers get reimbursed for outcomes and interventions, not documentation. That would complete the transformation and fundamentally redraw the competitive landscape.
The M&A implications are becoming clear: Plans need to acquire care delivery capabilities, not just enrollment scale. Humana’s CFO said in November that they see “significant opportunities to acquire attractive small to mid-sized provider businesses”—which looks remarkably prescient now. Provider groups with strong value-based care track records just became much more strategically valuable. Care management technology that drives documented interventions becomes a critical capability. Pure administrative capabilities and coding infrastructure are becoming legacy assets that don’t generate the returns they used to.
Some plans anticipated this shift and invested in clinical integration years ago. Others optimized for the incentive structure as it existed, which was entirely rational at the time. But only one of those strategies positions well for where Medicare Advantage is heading.
The final rates come out in April, and there will certainly be lobbying and potential adjustments before then. But the strategic direction is increasingly clear: CMS is moving toward encounter-based risk adjustment, and the competitive advantages that matter in Medicare Advantage are fundamentally shifting. The question facing every payer isn't whether they optimized correctly for the past—it's whether they built capabilities that still matter for the future.