The Centers for Medicare & Medicaid Services is proposing payment policies it estimates would increase average Medicare Advantage plan revenues by 3.70% in 2025, or more than $16 billion compared with 2024, while continuing a multi-year overhaul of risk adjustment and preparing for major changes to Medicare Part D. The agency’s 2025 Advance Notice, released January 31, sets the opening terms for one of the federal government’s largest annual health-plan payment decisions.

The headline increase masks significant moving parts. CMS estimates a 2.44% effective growth rate in underlying Medicare fee-for-service costs and a 3.86% increase from expected Medicare Advantage risk-score trends. Those gains are partially offset by a 2.45% reduction associated with updates to the risk model and normalization factors. The result is a projected 3.70% average revenue increase, although individual plans can experience very different effects depending on geography, member health status, quality bonuses and coding patterns.

A second year of the new risk-adjustment model

CMS is continuing the three-year phase-in of the 2024 Medicare Advantage risk-adjustment model, known as CMS-HCC V28. The agency began transitioning to the revised model in 2024 after concluding that the prior system included diagnosis categories whose coding patterns did not always correspond cleanly to incremental medical costs. For 2025, risk scores will blend the old and new models in the next step of the transition.

The agency’s January 31 release argues that the proposal will maintain stable choices for beneficiaries while paying plans accurately for expected costs. The full methodological detail is contained in the Advance Notice, which is open for public comment through March 1. CMS plans to issue the final rate announcement by April 1.

The risk model matters because Medicare pays private Medicare Advantage plans a capitated amount for each enrollee, adjusted for clinical characteristics. More diagnosed conditions can produce higher risk scores and therefore higher payments. That creates a powerful incentive for complete documentation, but it has also made coding intensity a central point of dispute between regulators, insurers and analysts concerned about differences between Medicare Advantage and traditional Medicare.

Part D is being rebuilt around a $2,000 out-of-pocket cap

The 2025 notice also prepares Medicare’s prescription-drug program for some of the Inflation Reduction Act’s most important benefit changes. Beginning in 2025, Part D beneficiaries will have annual out-of-pocket drug spending capped at $2,000, and the existing coverage-gap phase will be eliminated. Liability for drug costs will be redistributed among plans, manufacturers and Medicare.

CMS’s Advance Notice materials describe changes to the Part D risk-adjustment model intended to account for the redesigned benefit. The shift is substantial because plans will assume more responsibility for high drug costs after beneficiaries reach the new cap, while manufacturers will provide discounts under a redesigned program. Insurers therefore must price premiums and bids against a benefit structure that differs materially from 2024.

The $2,000 limit is designed to address one of Medicare Part D’s longstanding weaknesses: beneficiaries using very expensive medicines could face thousands of dollars in annual cost sharing even after reaching catastrophic coverage. The new structure will provide much greater predictability for patients, while moving more financial risk to plans and manufacturers.

Plans welcome growth but dispute the regulatory math

Medicare Advantage enrollment now exceeds 30 million people, making even small percentage changes in federal payment assumptions financially significant. Industry advocates immediately scrutinized whether the 3.70% average revenue estimate adequately reflects the costs of the new risk model and medical utilization.

The Better Medicare Alliance said in a January 31 response that the proposal should be evaluated in light of the continued risk-model transition and rising care costs. The group represents Medicare Advantage plans and allied organizations and has argued that payment reductions can lead insurers to adjust supplemental benefits, premiums or service areas.

America’s Physician Groups likewise responded to the notice, emphasizing the implications for organizations operating under capitated and value-based contracts. Its statement highlighted the need for payment stability as physician groups manage increasingly complex Medicare populations.

Outside analysis also emphasized the difference between the projected top-line increase and the components beneath it. TechTarget’s review noted that the 3.7% estimate combines positive growth and risk-score trends with negative effects from model changes, meaning the practical result will depend heavily on each insurer’s enrollee mix and coding profile.

The final rates will shape benefits for 2025

The Advance Notice is not the final payment rule. Insurers, clinicians, beneficiary groups and other stakeholders have a month to comment, after which CMS can revise assumptions before the April announcement. Plans will then use the final rates to construct 2025 bids, premiums, networks and supplemental benefits.

For beneficiaries, the stakes extend beyond insurer revenue. Medicare Advantage plans compete partly through benefits not covered by traditional Medicare, including dental, vision, hearing, transportation and over-the-counter allowances. If plans believe federal payments are insufficient relative to expected costs, they can reduce those extras, raise premiums or change cost sharing. If payments are more favorable, competition can push plans to preserve or expand benefits.

The 2025 cycle is unusually consequential because it combines ordinary annual rate setting with structural changes in both Medicare Advantage and Part D. CMS is attempting to tighten risk adjustment, preserve plan participation and implement a prescription-drug benefit that sharply reduces catastrophic out-of-pocket exposure. Whether those goals can be achieved simultaneously without destabilizing premiums or supplemental benefits will become clearer after the final rates are issued this spring.