Hospitals in rural and underserved areas could lose out on billions of dollars in federal funding if the government shutdown drags on.
Why it matters:
Many hospitals already run on tight margins and are bracing for fallout from Medicaid cuts and other changes in the One Big Beautiful Bill Act.
The big picture:
The immediate concern is health policies that expired when government funding lapsed at midnight Tuesday. Health providers and their lobbyists expect Congress will make providers whole in an eventual funding deal and reimburse claims made during the shutdown.
But that’s not a given. And uncertainty about how long the shutdown will go on is leaving some of the most financially vulnerable hospitals in limbo.
“There’s just that underlying fear of, oh my gosh, what if they can’t come together on any agreement to open the government again, and we all get looped into it,” said Kelly Lavin Delmore, health policy adviser and chair of government relations at Hooper Lundy Bookman.
State of play:
Safety-net hospitals face an $8 billion cut to Medicaid add-on payments in the absence of a government funding package.
The cuts to so-called disproportionate share hospital payments originate from the Affordable Care Act.
Congress has postponed the pay reductions more than a dozen times, but the most recent delay expired on Tuesday and Congress hasn’t signaled if or when it will step in.
The add-on payments are made quarterly, so hospitals may not feel immediate effects, even if Congress doesn’t further delay the cuts, according to the American Hospital Association. But state Medicaid agencies could let the cuts take place if they think lawmakers’ standoff will continue indeterminately, per AHA.
The uncertainty “really impacts that predictability and reliability as it relates to funding,” said Leonard Marquez, senior director of government relations and legislative advocacy at the Association of American Medical Colleges.
If the cuts do take effect, it would significantly hamper hospitals’ ability to care for their communities, Beth Feldpush, senior vice president of advocacy and policy at America’s Essential Hospitals, told Axios in a statement.
Additionally, two long-running programs that give pay bumps to rural hospitals expired on Wednesday.
One program adjusts Medicare payment upward for rural hospitals that discharge relatively few patients.
The other gives increased reimbursement rates to rural hospitals that have at least 60% of patients on Medicare.
They were designed to keep care available in communities that might otherwise not be able to support a hospital.
Both programs have expired in the past, only to be brought back to life with claims paid retroactively.
Zoom out:
Hospital industry groups have also been urging Congress to extend enhanced Affordable Care Act tax credits, which have become a flashpoint in the shutdown fight. Democrat lawmakers have so far refused to pass GOP-led funding proposals that don’t include a full extension of the subsidies.
What they’re saying:
AHA is urging Congress to find a bipartisan solution and reopen the government, a spokesperson told Axios.
“Patient care doesn’t go away with the loss of coverage and the loss of funding,” said Lisa Smith, vice president of advocacy and public policy for the Catholic Health Association.
“I just don’t know how long that’s going to be sustainable for our facilities that are really already operating on the margins.”
Hospital financial and operational performance could be threatened by a trend showing a growth in the cost of expenses outpacing that of revenue, according to a Kaufman Hall National Hospital Flash Report.
“While performance has generally been strong this year, profitability has decreased slightly over the past few months. Bad debt and charity care also continue to rise. In addition, operating margins for health systems are about one percent lower than hospital margins. This points to potential challenges for hospitals and health systems to weather future uncertainty,” said Erik Swanson, managing director and group leader, Data and Analytics, at Kaufman Hall.
WHY THIS MATTERS
What the report shows is that hospital performance has softened in recent months.
While patient volumes and revenues are trending upward, bad debt and charity care are also elevated.
Expense growth is outpacing revenue growth, with non-labor expenses putting pressure on hospitals. Supplies are up 26% compared to 2022, and drugs costs are up 31% compared to 2022.
Margins have improved over prior years, though there has been some softening in recent months. Given an uncertain future outlook, many hospitals are taking steps to build long-term resiliency, the report said.
Operating margins in August 2024 were 4.6% but fell to 5% in December 2024. Starting in January, margins jumped to 6.9% and remained in the 6.2% range until this past June, when they fell to 5.5% and in July, 5.3%.
Profitability is down from 48% in July 2024 to 27% this year.
THE LARGER TREND
Data for the report came from more than 1,300 hospitals sampled on a monthly basis from Strata Decision Technology.
The sample of hospitals for the report represents all types of hospitals in the United States, from large academic to small critical access hospitals, geographically and by bed size.
Kaufman Hall, a Vizient company, provides advisory services and management consulting.
The financial challenges are linked to a lawsuit charging the PBM with filing more than 3.3 million false claims from 2010 to 2018.
CVS Health subsidiary Omnicare has filed for Chapter 11 bankruptcy due to issues related to its recent litigation in the U.S. District Court for the Southern District of New York, the company said this week.
A federal judge in July determined that Omnicare had illegally charged the U.S. government for prescription drugs and ordered it to pay more than $948 million in damages and penalties. Omnicare filed more than 3.3 million false claims between 2010 and 2018, in violation of the False Claims Act, according to court documents.
The original lawsuit had been filed by a former Omnicare pharmacist, who had accused the pharmacy benefit manager (PBM) of improperly billing Medicare, Medicaid and the Tricare military program for more than $135 million in drugs that weren’t covered.
The Chapter 11 agreement is for $110 million in debtor-in-possession (DIP) financing. Once the court gives the go-ahead, the company expects the financing to provide enough liquidity for it to meet its ongoing business obligations during the process.
Omnicare said it will use the Chapter 11 process to address other financial challenges facing the long-term care pharmacy industry and will potentially mull restructuring options. That could include anything from standalone restructuring to outright sale.
The company said it will seek authorization from the court to continue its operations during the Chapter 11 proceedings. To that end, it said it would meet its commitment to stakeholders, including continuing to pay for employee wages and benefits.
Omnicare said it also expects to pay vendors and suppliers in full, under normal terms, for goods and services.
The Trump 2.0 administration is 8-months into its MAGA agenda. Summer has passed. Schools are open. Congress is in session. Campaign 2026 is underway. The economy is slowing and public sentiment is dropping.
For U.S. healthcare, it’s more bad news than good. The challenges are unprecedented. Most organizations—hospitals, medical groups, drug and device makers, infomediaries and solution providers, insurers, et al—are defaulting to lower risk bets since the long-term for the health system is unclear.
The good news is that the health system in the U.S. is big, fragmented, complex, expensive (5% CAGR spending increases thru 2034) and slow to change. It is highly regulated at local, state and federal levels, labor intense (20 million) and capital-dependent (government funding, private investment)—a trifecta nightmare for operators and goldmine for private investors who time the system for shareholders effectively. And it operates opaquely: business practices are hidden from everyday users and bona-fide measures of its effectiveness not widely applied or accepted.
The bad news is its long-term sustainability in its current form is suspect and its short-term success is dependent on adapting to key tenets in Trump Healthcare 2.0:
Trump Healthcare 2.0 is about reducing federal healthcare spending so federal deficits appear to be going down to voters in the mid-term election (November 3, 2026). Healthcare, which represents 27% of federal spending is an attractive target since a significant majority of all voters (especially MAGA Republicans) are dissatisfied with its performance and think is wasteful and inefficient. It views healthcare as a market where less government, more private innovation achieves more.
The effect of One Big Beautiful Bill Act cuts to Medicaid and marketplace subsidies and imposition of Make America Healthy Again dogma in CMS, CDC, FDA and FCC are popular in the MAGA base while problematic to states, hospitals, physicians and insurers whose business practices and clinical accountability will be more closely scrutinized.
The federal courts—SCOTUS, 13 circuit and 94 district courts– will support Trump Healthcare 2.0 policy changes in their decisions favoring state authority over federal rules, enabling White House executive orders and administrative actions against challenges and departmental directives that encourage competition, price transparency and cost reduction.
The FTC and DOJ will pro-actively pursue actions that reverse/disable collusion, horizontal and vertical consolidation in each sector deemed to raise prices and lower choices for consumers.
In the administration’s posturing for the mid-term election November 3, 2026, it’s assumed the economy and prices will be THE major issues to voters: healthcare affordability, housing costs and food prices will get heightened attention as a result. Thus, every healthcare organization board and leadership team should revisit short and long-term strategies, since traditional lag indicators re: utilization, regulations, structure, roles, responsibilities and funding are decreasingly predictive of the future.
Though every organization is different, there are 6 takeaways that merit particular attention as C suites and Boards re-evaluate strategies and timing:
Monitor the entire economy. The healthcare is 18% of the GDP; 82% of commerce falls outside its domain. Appropriations for healthcare compete with education, defense and public safety and health; household spending for healthcare competes with housing, food and transportation costs. The healthcare dollar is not insulated from competing priorities. If, as expected, the economy slows due to slowdowns in the job market and in housing, and if cuts to marketplace subsidies are enacted, healthcare spending will quickly and significantly drop though utilization will increase.
Follow clinical innovations carefully. Understand bench to bedside obstacles. The FDA will authorize 50-60 novel drugs and biologics and over 100 AI-enabled devices this year. Some will fundamentally alter care management processes; all will change costs and pricing. Those with short-term cost-reduction potential require consideration first. Given increased margin pressures, capital and operating budgets will reflect a more cautious and risk averse posture.
Manage fixed costs (more) aggressively and creatively. Direct costs reduction is not enough. Facilities and administrative functions are fair game and for outsourcing, partnerships and risk sharing with suppliers, vendors, advisors and even competitors.
Don’t underestimate price transparency. Prices matter. Consumers and regulator demand for price transparency from drugmakers, hospitals and insurers are inescapable. Justification and verification will be critical to trust and utilization.
Navigate AI strategically. The pace and effectiveness of Ai-enabled solutions will define winners and losers in each segment. And private capital—investors, partners—will bring those solutions to market.
Don’t discount public opinion. Consumer sentiment about the economy is low and dissatisfaction with the health system is high and increasing. Understanding root causes and initiating process improvement are starting points.
As I head back to DC today, the FY26 federal budget is in suspense as the GOP-controlled Senate and House debate a final version to avoid a shutdown next week. Physicians, public health and state officials will digest last week’s ACIP vaccine advisory recommendations and issue their own directives and insurers will file their plan revisions for 2026. That’s what lawmakers and trade groups will be watching.
But at the kitchen tables in at least 40% of America’s households, unpaid healthcare bills from hospitals, labs, doctor offices and set-aside cash for over-the-counter remedies and prescription drug co-pays are on the agenda. Student loan payments, escalating costs for groceries, housing, rent and child care and an unstable employment market are squeezing families. Budgeting for healthcare is more problematic for them than anything else because price are not accessible and charges are not known until after services are performed.
Trump Healthcare 2.0 is not transformational: it is transactional. It aims to simplify the system and facilitate changes certain to disrupt the status quo. Its locus of control, is Main Street USA. not Pennsylvania Ave, in DC.
Lawmakers weigh extending enhanced subsidies that keep plans affordable while grappling with calls to curb hidden costs and insurer abuses.
There’s some real political drama brewing in Washington, and the outcome will determine whether millions of Americans will be able to keep their health insurance. I’m not talking about Medicaid or Medicare but the 24 million Americans who are not eligible for either of those programs or even for coverage through an employer.
As the federal government barrels toward its Sept. 30 shutdown deadline, Democrats say they won’t vote to keep the government open unless Republicans agree to extend the subsidies that make coverage available through the Affordable Care Act (ACA) marketplace more affordable for individuals and families who get their health insurance there. At the heart of the debate are the so-called “enhanced” subsidies that were put in place during the Covid pandemic. Those subsidies are set to expire at the end of this year. If they do, more than 90% of people who buy coverage in the ACA marketplace will have to pay a whole lot more for it next year.
Republicans, who control Congress, are split. Hardliners want the subsidies to disappear, but a growing faction of GOP lawmakers see the political peril staring them in the face: Millions of their constituents will receive marketplace renewal notices with eye-popping premium hikes as open enrollment begins Nov. 1, and they likely will blame Republicans for those hikes.
Virginia Republican Rep. Jen Kiggans has even taken the lead on a one-year extension bill, warning that “people will get a notice that their health care premiums are going to go up by thousands of dollars” if Congress doesn’t act. A July GOP poll found that letting the subsidies lapse could tank Republicans’ midterm prospects.
“The Republicans have to come to meet with us in a true bipartisan negotiation to satisfy the American people’s needs on health care or they won’t get our votes, plain and simple”.
Why extending the subsidies matters — but why it shouldn’t be a blank check
When I was an insurance executive, I used to champion high deductible health plans and steep out-of-pocket costs, arguing Americans needed to have “more skin in the game.” The industry sold Congress on that logic during the ACA debates – and it worked. Lawmakers not only set the law’s out-of-pocket (OOP) maximum high from the start, they also – at the insurance industry’s insistence – let it rise to new heights every year.
The result? That cap ballooned 67% between 2014 and 2025. And in 2026, the max will reach $10,600 for an individual and $21,200 for a family. That means most ACA plans leave people exposed to thousands of dollars in medical bills even after they’ve paid their premiums. And the people who get burned the most are those with chronic illnesses or sudden serious diagnoses – or even an accident.
If the subsidies vanish, the nonpartisan Congressional Budget Office projects about 4 million people will drop out of ACA plans in the first year. People will get sicker. Some will die sooner.
But let’s not kid ourselves: Simply shoveling more taxpayer money into insurers’ coffers is not a solution. These same companies are already awash in tax dollars through their private Medicare Advantage plans, Medicaid contracts, and even the VA.
The concessions for subsidy extension
Here’s the tradeoff Congress should demand: Insurers can get the subsidies (which go straight to them), but only if they agree to put some of their own skin in the game. And they have plenty of it. Just the seven largest for-profit health insurers reported more than $71 billion in profits last year.
Specifically, lawmakers should:
Cap out-of-pocket costs on ACA plans. Apply the same protections Congress just gave to Medicare beneficiaries: a $2,000 cap on prescription drugs AND a $5,000 overall cap on annual out-of-pocket costs. That would be a seismic shift, bringing ACA plans closer to what Americans think they’re buying when they pay for “coverage.”
Crack down on prior authorization abuse. Prior authorization delays and denials are rampant in ACA plans, just as they are in Medicare Advantage. If taxpayers are footing the bill, patients should get timely care — not insurer red tape.
Fix ghost networks. Insurers routinely list doctors who aren’t actually accepting new patients or aren’t even in-network. Regulators should require accurate, verified networks so people can actually see the providers they’re paying to have access to.
My former Big Insurance colleagues will howl and launch a massive propaganda campaign when these ideas gain traction, claiming they’ll have to jack up premiums even more than they usually do if they have to be even slightly more patient-friendly. I know because I used to plan and execute the industry’s fear-mongering campaigns. Don’t fall for it this time or ever again. Those seven giant insurers took in more than 1.5 trillion dollars and shared more than $71 billion of their windfall with their already rich shareholders last year alone. Yes, the industry’s lobbying will be intense. But if members of Congress do the right thing, they won’t just preserve coverage for millions, they will finally start forcing insurers to compete on value, not just premium retention.
What comes next
If Democrats are going to play hardball by threatening a government shutdown if Republicans don’t extend these ACA subsidies, they should make it count. Americans need relief not just on premiums, but on the crushing costs hidden behind their insurance cards.
Republicans’ sweeping Medicaid overhaul has left a lot of the heavy lifting to governors and state health officials as the program launches the biggest package of changes in its 60-year history.
Why it matters:
States working with hospitals, clinics and other providers will have to do more with less as they face about $1 trillion in program cuts and the likelihood of 10 million or more newly uninsured people from new work rules and other changes.
While the GOP views Medicaid as a waste-riddled program that’s due for a shakeup, the cuts will force painful tradeoffs at the local level as health systems also struggle with inflation, higher labor costs and rising medical costs.
“Congress left the dirty work to be done by the governors and state legislators, and that work will start very soon,” said Joan Alker, executive director of Georgetown University’s Center for Children and Families.
State of play:
Medicaid typically accounts for about 30% of a state’s budget each year. Spending goes up during tough economic times, and states are required to cover a set of mandatory benefits.
The fallout from the cuts will vary by state based on their reliance on certain funding mechanisms, like taxes on health care providers, and whether they’ve expanded Medicaid coverage under the Affordable Care Act.
The new work requirements only apply to people in the expansion group.
The biggest changes from the law will arrive in 2027. But states have already started planning for how they’ll implement work requirements, decide who’s eligible more frequently and cope with new restrictions on how they draw down federal funds.
They’ll also be competing for $50 billion in rural health funding that Congress added to the law — a sum that’s been widely criticized as inadequate.
“We are working day and night ever since this bill was passed,” New York’s Medicaid director, Amir Bassiri, said while speaking at a conference in Manhattan in July.
“Chances are we will not be able to mitigate all of the impacts of these changes, but we’re going to do everything in our power to do that.”
The other side:
The new dynamic will force states to think more critically about how taxpayer dollars are being spent in Medicaid, said Brian Blase, president of Paragon Health Institute and a White House official during the first Trump administration.
“I want there to be a real budget constraint so [states] have to grapple with the actual cost of these programs,” he said.
Zoom in:
Many states were already preparing austerity moves before President Trump signed the law. States faced with Medicaid budget crunches often cut or limit benefits they aren’t required to offer, like dental care or home- and community-based services.
Other strategies to adjust to the new era of Medicaid funding could include reducing Medicaid payment rates for providers or finding new sources of revenue like additional taxes.
A big focus is how well states will track whether recipients are either meeting a requirement to complete 80 hours of work, school or community service a month or are exempt from the rules.
Illinois, Missouri, Montana, North Dakota, New Mexico, Utah and Wisconsin have the highest risk of improperly kicking many eligible people off of Medicaid due to procedural issues, per a recent Georgetown Center for Children and Families report.
The report ranked state performance on eight key metrics, including how long Medicaid centers take to answer calls, how long the states take to process new applications and whether they renew eligibility automatically.
Between the lines:
Congress authorized $200 million in federal funds to help states modernize their infrastructure for determining whether people are eligible for Medicaid.
HHS communications director Andrew Nixon said $100 million of the funds will be allocated equally among states, while the other half will be divvied up based on the share of enrollees in the state that will be subject to work requirements.
“All funding decisions will be guided by efficiency and legal compliance,” he said in an email.
States are still waiting for guidance and regulations from Medicaid administrators on some of the policy changes, and what kinds of technology they can use to ease the burden of reporting work hours and verifying who’s eligible.
Even timelines for getting systems running are up in the air. The budget law gives the Centers for Medicare and Medicaid Services discretion to let states have up to two more years to get work requirements up and running.
What we’re watching:
What role health systems and Medicaid advocates have in states’ decision-making processes — and whether they can persuade state lawmakers to make up for some of the federal cuts with state funds.
“We’ve always said the cuts to Medicaid are … going to impact so many other parts of state budgets, and so that’s where the fight really is,” said Nicole Jorwic, chief program officer of Caring Across Generations, a nonprofit that advocated against Congress’ health care changes.
If Trump and RFK Jr. want to crack down on deceptive health care ads, they should start with the avalanche of misleading Medicare Advantage commercials blanketing seniors every fall.
The Trump administration announced last week it plans to crack down on prescription drug advertising. In reporting on the news, the New York Times quoted former Food and Drug Administrator David Kessler as saying that what the administration is proposing “would in essence remove direct-to-consumer advertising from television.”
In a press release, Health and Human Services Secretary Robert F. Kennedy Jr. said the intent is to “shut down that pipeline of deception and require drug companies to disclose all critical safety facts in their advertising.”
You’ll get no argument from me that companies of any kind, especially those that make money in health care, should not be allowed to deceive the public by withholding critical facts.
What I do argue – and hope this administration and Democrats in Congress will agree on – is that this crackdown should also include so-called Medicare Advantage ads.
As we get close to “open enrollment” season, the period of time every fall when seniors and people with qualifying disabilities can choose between Traditional Medicare and one of many private health insurance plans, we already are beginning to see deceptive ads by Big Insurance to once again lure Medicare beneficiaries into their often deadly money machine.
You’ve seen the ads: happy, smiling seniors playing tennis or pickleball and gabbing about “free” groceries and dental benefits they presumably get because of the generosity of their MA plans. Nowhere – ever – have you seen or heard anything in any of those ads about the potentially lethal side effect of signing up for those plans. But the terrifying truth is that an untold number of MA enrollees have gone to early graves because their insurers delayed or outright denied a test, treatment or medication their doctors said they needed. Or because they couldn’t even find a high-quality doctor, hospital or skilled nursing facility close to their home – or even far away for that matter. Many centers of excellence – hospitals and clinics that are renowned for things like cancer and cardiac care – are not in many MA plans’ “networks.”
Seniors need to be told how limited MA networks can be – and that Traditional Medicare, by contrast, doesn’t even have networks. Traditional Medicare doesn’t restrict you to certain providers. That’s because almost all doctors, labs, clinics and hospitals participate in Traditional Medicare.
And seniors need to be told explicitly in ads what prior-authorization is and how it can affect them. And they need to be told about how much money they’ll have to pay out of their own pockets if they knowingly or unknowingly get care from an out-of-network provider. They also need to be told that their MA plans can and do drop doctors and hospitals from their networks during the course of a given year and that more and more physician practices and hospitals – including world-class facilities like Johns Hopkins and M.D. Anderson and the Cleveland Clinic – have dropped out of many MA networks. And they need to be told that their MA plan could very well dump them next year by “exiting” the community they live in, as Humana, Aetna, UnitedHealth and other plans did this year and plan to do next year.
Why, Mr. Trump and Mr. Kennedy, are MA insurers not held to the same standards as pharmaceutical companies? And how fast can you put standards in place to assure us that MA ads don’t omit “critical facts?” You know as well as anyone that between October 15 and December 7 (the open enrollment period) you won’t be able to turn on your TV or scroll through your social media feeds without seeing multiple MA ads that blatantly lie by omission.
Researchers at the nonpartisan KFF found TV ads hawking MA plans ran 650,000 times during the 2022 open enrollment period. You can expect that number will be surpassed this year because Medicare Advantage has become such a cash cow for Big Insurance. As just one example, UnitedHealthcare, a division of the biggest health care conglomerate in the world, got more than 75% of its revenue last year from Medicare and other taxpayer-supported programs. Now you know why those deceptive ads are so ubiquitous, and why private insurers lie with impunity.
Speaking of UnitedHealthcare, it co-brands its MA plans with AARP, which gives that corporation a kind of good seal of approval. AARP has received billions of dollars from UnitedHealthcare over the years as part of the relationship. To its credit, AARP called attention to that KFF study on its website just before the 2023 open enrollment season started. That’s notable, but AARP needs to do much more. So I am hereby calling on AARP to join us in demanding that both the Trump administration and Congress take immediate action to make sure MA ads cannot leave out essential information. Truthful MA ads are just as important as drug company ads. Maybe even more so when you consider all the potential harms MA plans inflict on seniors and people with disabilities every single year.
Privately administered Medicare Advantage (MA) has long been the subject of policy debate. To some, the once-nascent source of Medicare coverage is an important mechanism for injecting competition and innovation into the government-sponsored insurance program. To others, it represents an expensive and unnecessary alternative to directly administered traditional Medicare (TM).
After years of rapid growth, MA accounted for most program enrollments (33.6 million) and federal spending ($494 billion) in 2024.1 This has intensified some existing debates but also spurned increasing bipartisan agreements and interest in reforms. Politicians and policy experts who have historically supported MA, including some Republicans, have articulated greater openness to reforming the now-entrenched program.2 In effect, the debate has shifted from whether the MA program should be reformed to how it should be reformed and, critically, what the government should do with any savings. This Viewpoint discusses notable areas of consensus (and lack thereof) and the prospect of reforms from the Trump administration.
Areas of Growing Consensus
Several observations about MA are generally agreed upon.First, MA plans can use utilization management tools, like prior authorization, to constrain costs in ways that TM generally cannot. This reduces MA plans’ costs of covering Part A (hospital) and B (physician) benefits compared with a scenario where they imposed few constraints on utilization, like in TM. Policymakers also increasingly recognize the administrative burdens imposed on clinicians and restraints on patient access due to these tools, which have generated growing interest in reforms.
Second, and perhaps paradoxically, the federal government would spend less if all MA enrollees instead chose TM. This reflects several factors. MA plans are paid benchmark rates that are set above the fee-for-service spending in many counties. Plan payments can increase further due to the quality-bonus program. MA plans also have higher coding intensity, meaning the same beneficiary has more diagnoses recorded if they are enrolled in MA rather than TM. This increases risk scores and payments from the government (whether this reflects more accurate coding vs fraudulent behavior remains a source of debate). In addition, MA plans experience advantageous selection, meaning they attract enrollees who are relatively cheaper to cover conditional on their observable characteristics.3All told, the Medicare Payment Advisory Commission estimates that the federal government spends 20% more (or an estimated $84 billion in 2025) than if all enrollees chose TM.1 While the exact magnitude of difference is subject to debate, the basic conclusion is not.
Third, MA plans offer more generous benefits to enrollees, including lower out-of-pocket costs and coverage of additional benefits such as vision and dental services. This occurs because plans keep a portion of the difference between their bid and the benchmark rate. These rebates average $2255 annually per enrollee, which represents 17% of all spending on MA.1
Where Disagreements Remain
While there is growing acknowledgment of the fiscal costs of the MA program, there is disagreement or uncertainty about several questions that inform an appropriate policy response. First, there is debate about how valuable some supplemental benefits are to enrollees. While it is relatively straightforward to value reductions in premiums or cost sharing in MA plans, there is limited information about how often enrollees use many of the supplemental benefits. Some research suggests that use of certain extra benefits may not be much higher in MA plans.4
Partly because of this, it is uncertain how much payment reductions to MA plans will reduce benefits and, in turn, how much that reduces enrollee welfare. Some research suggests the last dollar spent on MA plans results in much less than a dollar’s worth of additional benefits, particularly in markets with limited competition between plans.5This suggests that reducing payments would initially lower plan profits but result in minimal welfare loss for enrollees. Even if true, it is not obvious when this tradeoff becomes more pronounced. Other research indicates the aggregate value of reduced cost sharing represents a large share of excess payments, suggesting reducing spending may quickly trigger benefit reductions.6 These effects may further depend on how policymakers chose to alter payments.
Finally,there remains significant disagreement about how to use any savings generated by program reforms. Democratic lawmakers often argue that savings should be used to increase TM benefits (eg, by adding dental benefits or imposing an out-of-pocket cap). Republicans are much more likely to pair spending reduction with policies that boost MA (eg, allowing MA plans to keep more of the savings if they bid below benchmarks). This predominantly reflects different preferences over the optimal structure of Medicare rather than empirical uncertainty.
Reform Possibilities From the Trump Administration
Many observers expect that the current administration will be relatively generous toward MA, as is typical of a Republican administration. This is particularly true given that the Centers for Medicare & Medicaid Services (CMS) administrator, Mehmet Oz, MD, has historically expressed support for MA plans. While major spending reductions may remain unlikely, early actions suggest the administration supports targeted reforms and is likely to test changes to the program’s design.
In his Senate confirmation, Oz was explicitly critical of strategic upcoding by insurers. Early policy decisions have been consistent with this view. The 2026 final payment notice for MA continues implementation of several policies that reduce MA payments. Notably, the Trump administration finalized implementation of an updated risk adjustment model that is designed to partly address coding intensity. For example, it eliminates approximately 2000 diagnosis codes that were judged to be most prone to upcoding. In conjunction with related changes, this is expected to decrease plan payment by 3.01%.7 CMS also announced the expansion of audits aimed at verifying the accuracy of diagnoses recorded by MA plans.8 This suggests the administration is willing to address strategic behavior by insurers, which they characterize as addressing waste, fraud, and abuse.8
However, the final payment notice also included higher payment increases for MA plans than was initially proposed by the Biden administration (5.06% vs 2.23%). After accounting for coding trends, realized payments are expected to increase by 7.16%. While consistent with an effort to boost MA enrollment, CMS noted that this change predominantly reflected the effects of higher-than-expected growth in per capita costs in TM, which mechanically increased payment updates. While CMS has some flexibility in payment updates, observers should use caution when using these upward revisions to infer the administration’s level of support for MA.
If the current administration is open to more novel and consequential reforms, they are likely to emerge from the Centers for Medicare & Medicaid Innovation (CMMI). While CMMI demonstration projects have historically focused on TM, the office can test changes to key features of MA that would significantly alter spending and incentives. Notably, Abe Sutton, JD, the director of the CMMI, recently highlighted the possibility of testing changes to risk scores, benchmarks, and quality measures, suggesting they are interested in taking advantage of this authority.9
With its place in the Medicare program now firmly established, MA has begun to attract more consistent interest in reform, even among Republican policymakers. This may reflect political considerations, as an unwillingness to act may provide an opportunity (and a source of budgetary savings) for future lawmakers to pursue alternative policy goals. Early signals from the Trump administration suggest they support program reforms, especially those targeting strategic behavior by insurers. Given the slim margins in Congress, it will be interesting to see if and how the administration uses CMMI’s authority to pursue substantive program changes.
Matthew Fiedler testified at a hearing held by the Subcommittees on Health and Oversight of the House Committee on Ways and Means to discuss the present and future of Medicare Advantage (MA).
His testimony made five main points on MA payment reform:
Covering a beneficiary under MA costs an estimated 20% more than covering the same person under traditional Medicare, generating $84 billion in additional payments in 2025.
Paying an MA plan an additional dollar delivers much less than a dollar of value to enrollees.
Reforming MA payment could free up resources to meet other needs, allow policymakers to enhance Medicare’s benefits, or both.
A sensible goal for MA payment reform would be to align payments to MA plans with the cost of covering comparable enrollees under traditional Medicare.
The opportunities presented by MA payment reform show that it is possible to sharply reduce federal health care spending without increasing uninsurance.
HENRY KOTULA 