Yes. The federal government subsidizes every Medicare Advantage plan by paying private insurers a fixed monthly amount for each person enrolled, and the subsidy is substantial: more than 35 million people are in these plans as of 2026, roughly half of all Medicare beneficiaries, and CMS projected a 5.06% increase in total payments to Medicare Advantage organizations for 2026, worth over $25 billion in additional federal spending compared with the prior year.1Centers for Medicare & Medicaid Services. 2026 Medicare Advantage and Part D Rate Announcement
How the Monthly Payment Works
The payment mechanism is called capitation. Each month, CMS sends an insurer a set amount for every one of its enrollees, no matter how much care that person uses. In exchange, the insurer is on the hook for everything covered under Medicare Part A (hospital) and Part B (outpatient and physician services). Most plans also fold in Part D drug coverage.2Office of the Law Revision Counsel. 42 USC 1395w-23 Payments to Medicare Choice Organizations
That is the inverse of Traditional Medicare. Under the original fee-for-service program, the government pays providers separately for each test, procedure, or visit. Capitation shifts the financial risk to the insurer. If enrollees need more care than expected, the plan absorbs the cost. If they need less, the plan keeps the difference.
Enrollees still pay in. Every Medicare Advantage member continues to owe the standard Part B premium, which is $202.90 per month in 2026.3Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles Some plans tack on an additional monthly premium, though in competitive markets many charge $0 extra by using rebate dollars (explained below) to buy down that cost.
How CMS Decides How Much to Pay
The size of each plan’s subsidy starts with a county-level benchmark, the maximum CMS will pay to cover an average beneficiary in that area. CMS calculates a benchmark for every county based on projected per-person spending in Traditional Medicare there, but the benchmark isn’t equal to that number. It’s set at a percentage of projected fee-for-service costs, and the percentage depends on which spending quartile the county falls into:2Office of the Law Revision Counsel. 42 USC 1395w-23 Payments to Medicare Choice Organizations
- Lowest-spending counties (Quartile 1): 115% of projected fee-for-service spending
- Second-lowest (Quartile 2): 107.5%
- Second-highest (Quartile 3): 100%
- Highest-spending (Quartile 4): 95%
In low-spending counties, CMS pays more than Traditional Medicare would cost, to pull plans into areas that might otherwise have few options. In high-spending counties, CMS pays less, on the bet that managed care can deliver the same services for a lower price.
The Bidding Process
Each year, insurers submit a bid to CMS reflecting what they estimate it will cost to cover Part A and Part B benefits for an average enrollee, including medical costs, administrative overhead, and profit margin. CMS compares that bid to the county benchmark:
- If the bid comes in below the benchmark, the plan receives its bid amount plus a share of the savings. That share is 50% to 70%, depending on the plan’s star rating.
- If the bid comes in above the benchmark, CMS pays only the benchmark, and enrollees have to cover the shortfall through a higher monthly premium.
So the plan has a direct incentive to bid lean. Bid low and the plan gets rewarded with a slice of the savings. Bid high and enrollees pay the difference, which pushes enrollment away.
Rebates and the Extras You See in Ads
When a plan bids below the benchmark, the share of the savings returned to the insurer is called the rebate. Federal law requires the rebate to flow back to enrollees rather than to shareholders. Plans must use the money for supplemental benefits beyond Traditional Medicare, reductions in copays and deductibles, or credits toward monthly premiums.4Office of the Law Revision Counsel. 42 USC 1395w-24 Premiums and Bid Amounts
That’s how Medicare Advantage plans fund the dental exams, vision coverage, hearing aids, gym memberships, and transportation to appointments that get advertised heavily and that Traditional Medicare does not cover. Some plans also apply rebate dollars toward the Part B or Part D premium.
Quality drives the rebate percentage. Plans rated 4.5 to 5 stars keep 70% of the bid-to-benchmark gap. Plans rated 3.5 to 4 stars keep 65%. Plans at 3 stars or below keep 50%. Higher-rated plans end up with substantially more money to spend on supplemental benefits.
Why Two Enrollees Trigger Different Payments
A flat per-person payment would push insurers to chase healthy enrollees and avoid sick ones. To prevent that, CMS adjusts each enrollee’s capitation payment based on how expensive that person is expected to be.
The adjustment uses the Hierarchical Condition Category model, which assigns a risk score based on age, sex, Medicaid status, and the diagnoses documented in the enrollee’s medical records from the prior year.5Centers for Medicare & Medicaid Services. Risk Adjustment Someone with diabetes and congestive heart failure generates a higher risk score, and a larger monthly payment, than a healthy 66-year-old with no chronic conditions. Two people in the same county can produce very different subsidy amounts.
CMS overhauled the model in 2024, phasing in a new version called V28 over three years: one-third V28 in 2024, two-thirds in 2025, fully V28 for 2026.6MedPAC. CMS Hierarchical Condition Category Risk Adjustment Model and Sources of Diagnoses for Risk Score Calculation The update reclassified which diagnosis codes count and how much weight they carry, which trimmed some coding patterns that had inflated payments under the older model. CMS estimates the combined effect of the risk model revision and related normalization adjustments reduced 2026 revenue by about 3% compared with what plans would have received otherwise.1Centers for Medicare & Medicaid Services. 2026 Medicare Advantage and Part D Rate Announcement
Star Ratings and Quality Bonuses
CMS rates every Medicare Advantage contract on a one-to-five-star scale each year, measuring clinical outcomes, patient experience, and operational performance across up to 40 quality measures for plans that include drug coverage.7Centers for Medicare & Medicaid Services. 2025 Medicare Advantage and Part D Star Ratings The ratings move money. Plans at four stars or higher receive a quality bonus that raises their county benchmark, meaning the government pays more per enrollee for plans that score well. Combined with the larger rebate share top-rated plans keep, higher ratings compound into significantly more revenue to pour back into benefits. Three-star plans operate with a meaningfully smaller cushion.
Guardrails on the Subsidy
The 85% Medical Loss Ratio Rule
To keep subsidies flowing to care rather than overhead, federal regulations require every Medicare Advantage plan to spend at least 85% of its revenue on clinical services and quality improvement. The remaining 15% can cover administration, marketing, and profit.8eCFR. 42 CFR Part 422 Subpart X Requirements for a Minimum Medical Loss Ratio
Falling short of 85% carries escalating consequences:
- One year below 85%: the plan owes CMS a payment equal to its total revenue multiplied by the shortfall. An MLR of 82% means a plan returns 3% of its revenue.
- Three consecutive years below 85%: CMS freezes new enrollment.
- Five consecutive years below 85%: CMS terminates the contract.
RADV Audits and Overpayment Recovery
Because the risk adjustment system pays more for sicker patients, plans have a financial incentive to document as many diagnosis codes as possible, even ones the medical record doesn’t fully support. CMS uses Risk Adjustment Data Validation audits to check that. During a RADV audit, CMS pulls a sample of enrollee records and compares the diagnoses submitted for payment against the clinical documentation.9Centers for Medicare & Medicaid Services. Medicare Advantage Risk Adjustment Data Validation Final Rule CMS-4185-F2 Fact Sheet
When auditors find unsupported diagnoses, CMS can extrapolate the error rate from the sample across the plan’s full enrollment and recoup the estimated overpayment. Extrapolation begins with payment year 2018. For audits covering 2011 through 2017, CMS collects only the specific overpayments found in the sample. CMS estimates it will recover roughly $4.7 billion from 2023 through 2032 using the updated methodology, and the agency has publicly committed to expanding its audit efforts to ensure plans “are billing the government accurately for the coverage they provide.”10Centers for Medicare & Medicaid Services. CMS Rolls Out Aggressive Strategy To Enhance and Accelerate Medicare Advantage Audits
Does the Subsidy Save the Government Money?
The program was designed on the premise that managed care would deliver Medicare benefits more cheaply than fee-for-service. In practice, MedPAC has found that total Medicare payments to Advantage plans tend to exceed what Traditional Medicare would have cost for the same enrollees.11MedPAC. Improving Medicares Payment Approaches The benchmark structure, the quality bonuses, and favorable risk-adjustment coding together push per-enrollee costs above what fee-for-service would have spent.
The arithmetic matters for the Hospital Insurance Trust Fund, which pays for Part A benefits under both Traditional Medicare and Medicare Advantage. The 2025 Trustees Report projects the trust fund will take in about $493 billion and spend about $485 billion in 2026, a surplus of roughly $7.7 billion.12Centers for Medicare & Medicaid Services. 2025 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds With over half of all Medicare beneficiaries now in Advantage plans, even small per-enrollee overpayments compound into billions in extra trust fund spending. The Trustees estimate a long-term actuarial deficit of 0.42% of taxable payroll under current assumptions, rising to 1.28% if cost-containment measures are relaxed.
That doesn’t mean enrollees are getting a bad deal. Many people value the supplemental coverage, the out-of-pocket cap, and the care coordination these plans provide. But from the government’s side, the subsidy is sizable, it is growing, and the savings it was supposed to generate have not materialized.