The Medicare Advantage Reset and Managed Care Valuations

Introduction

Medicare Advantage (MA), the private alternative to traditional Medicare, covered about 35.2 million people in 2026, 55% of eligible beneficiaries, according to KFF's 2026 enrollment update. For a decade it was managed care's growth engine: insurers added members every year, built physician groups to manage their costs, and investors paid premium multiples for both. In 2025 that model broke, as medical costs rose faster than the government's payment rates. The repair that followed (fewer members, leaner benefits, a smaller value-based care footprint) reshaped how payers, providers and their buyers are valued.

This article covers the shock, the 2026 repair, the 2027 rate decision and what the reset means for healthcare services deals. For how MA fits within Medicare, see Medicare Parts A through D.

The turning point came on May 13, 2025, when UnitedHealth suspended its 2025 guidance and replaced CEO Andrew Witty with former chief executive Stephen Hemsley. The company said care activity was still accelerating across more benefit types and that medical costs for many new MA members were higher than expected; its shares closed about 18% lower that day. Its full-year 2025 medical care ratio reached 89.1%, with the adjusted figure up about 340 basis points from 2024.

Medical Care Ratio (MCR)

The share of premium revenue a health insurer spends on members' medical care, also called the medical loss ratio or benefit expense ratio. If an insurer collects $100 in premiums and pays $89 in claims, its MCR is 89%, leaving 11 points to cover administration and profit. Because administrative costs are largely fixed, small MCR moves swing earnings sharply, which makes it the most watched number in managed care.

Three forces hit at once:

Insurers responded by pricing for higher costs and accepting smaller books. UnitedHealth priced its 2026 MA plans for roughly 10% medical cost growth, exited markets and PPO products, and guided to an MA contraction of more than 1.1 million members. By June 30, 2026 its MA membership had fallen to about 7.6 million from 8.4 million at year-end, while its second-quarter MCR improved to 86.7% from 89.4% a year earlier and it raised its full-year earnings outlook.

KFF's figures show the market still grew, by about 1.1 million enrollees or 3%, but growth came mostly from special needs plans for dual-eligible and chronically ill members, which accounted for 85% of the net increase. Humana gained the share UnitedHealth and Elevance gave up, a reminder that one insurer's discipline is another's adverse selection risk.

Payment rates are the other half of the equation. In early 2026, CMS's advance notice proposed a 0.09% increase for 2027, effectively flat funding after two years of cost pressure. The final rate announcement on April 6, 2026 raised it to 2.48%, more than $13 billion in additional payments, mainly because more recent traditional Medicare cost data lifted the growth rate and CMS dropped a proposed risk model recalibration. Insurer shares rallied on the news. The notice still tightened program integrity: from 2027, diagnoses found only through unlinked chart reviews no longer count toward risk scores, which hits plans and providers that relied on retrospective coding.

Star Ratings: The Second Rate Lever

Rates are not the only federal input. Plans rated four stars or more earn a quality bonus that lifts their benchmark (by 5% in most counties) and keep a larger share of savings as rebates for richer benefits, so Star Ratings decide much of a plan's competitiveness. Humana shows the swing: after a contract downgrade, only about 20% of its MA members sat in four-star plans for 2026, which cost it billions of dollars of bonus revenue. When CMS published the 2027 ratings on October 8, 2026, Humana said about 95% of its members would be in four-star plans, and its shares jumped. In a payer model, ratings belong next to cost trend as a driver of revenue per member, with a one-year lag between the score and the payment.

Brokers expect insurers to bank the rate relief rather than spend it on members: 2027 plans are widely expected to trim extras such as dental coverage and Part B premium givebacks, which keeps margins first and growth second.

The reset hit hardest at value-based care (VBC) providers, the physician groups and enablement platforms that take capitated MA payments and bear the cost risk. Optum Health, UnitedHealth's care delivery arm, served about 700,000 fewer VBC patients in the second quarter of 2026 than a year earlier, pulling revenue down 5% to $23.5 billion, as it exited markets where it lacked enough density. agilon health cut its platform to 549,000 members by mid-2026, down 10% year on year, in exchange for a return to positive medical margin.

Value-Based Care (Capitation)

A payment model in which a provider group receives a fixed amount per member per month and is responsible for the total cost of that member's care, keeping the savings if costs come in below the payment and absorbing the loss if they run above it. In Medicare Advantage, insurers pass a share of their premium to these groups, so the groups inherit the plan's exposure to utilization, risk adjustment and rate changes. See healthcare reimbursement and payment models.

For dealmakers, the lesson is about reimbursement durability. PwC's 2026 midyear health services outlook describes buyers favoring assets with reimbursement visibility and margin durability, and private equity, still the main source of services deal flow, has leaned toward platforms whose revenue does not depend on one government payment formula. A capitated primary care group is valued on its medical margin, not its revenue, and the 2025 shock showed how quickly that margin can turn negative. The same discipline applies to any services asset with heavy MA exposure, alongside the Medicaid and exchange pressures covered in the One Big Beautiful Bill article.

The managed care reset is not over. Insurers enter 2027 with better rates, smaller books and leaner benefits, while value-based care platforms are still rebuilding margins. For bankers, the result is a market that rewards underwriting discipline in payers and payer-mix resilience in providers, and treats MA growth on its own as a risk to be priced rather than a premium to be paid.