Last week CMS published their 2027 Advanced Notice and immediately crashed healthcare stocks. This was primarily in reaction to two things:

• Their proposed downward recalibration of the Risk Adjustment Factors and

• Their headline of flat payments for next year (vs. last years’ large upward adjustment)

Both of these fit the current government narrative of driving down costs and industry pundits have read it as a shot across the bow.

We’ve spent the last week analyzing the notice and our results disagree with the prevailing external commentary. Our conclusions are two-fold:

1. The actual impact of this does not match this narrative. In fact it is the opposite.
   There is a subtle methodology difference in how CMS presented the fact sheet this year versus last year, which materially overstates the implied change in rates.

2. This is not a fundamental shift in CMS’s posture toward risk adjustment and is, in fact, consistent with their past indications. There are straightforward but meaningful steps MA organizations can take to ensure they are prepared for what is really to come.

Recognizing that this is the Advanced Notice and elements often change in the Final Rate Announcement, we analyzed what was written from three perspectives:

• Financial impact as written,

• Interpretation in the context of prior years, and

• Strategic implications 

Financial Impact

Our analysis covered three main drivers to revenue using CMS’ own estimates:

• The effective growth rate (benchmark increase) is 4.97. This is lower than last year (5.93%).

• Risk score model rebasing and normalization is estimated at -3.32% This is slightly lower than last year (-3.01%).

• Elimination of unlinked charts is estimated at -1.53%.

Taken together, CMS estimates these components produce a headline expected overall payment change of a 0.09% increase, which appears materially lower than last year’s 4.33% increase estimate.

However, there is one notable gap between the methodologies for 2026 and 2027:

CMS’s fact sheet in 2026 included an MA risk score trend (assumed increase in coding gross of model differences and normalization) of 2.1%.  In 2027, they don’t include this number in their table, but do footnote an assumption of 2.45%.  Including this assumption would raise the implied expected overall revenue change to an increase of approximately 2.5%.

We also removed the impact of unlinked charts, as organizations using technology such as ours for accurate linking do not do unlinked submissions, yielding an overall increase of approximately 4%- in line with last year. This will vary organization by organization based on their diagnostic mix of patients, but the headline holds: 

CMS’s published impact is not reflective of the actual impact organizations will see and more in line with last year. 

Interpreting the Proposals

The policy direction reflected in these proposals is consistent with long-running CMS efforts to moderate RAF growth.

1. The efforts to curb risk score generating activities are not new - on the contrary, they’ve been around almost since the inception of Medicare Advantage.

   1. GAO analysis of gap between MA and FFS risk scores led to the adjustment for coding differences

   2. Risk score models have periodically removed or reweighted HCCs to better align MA coding patterns with FFS experience. The v28 model, released in 2024 payment year, is the most recent example.

   3. RADV audits, and various efforts to bolster it, to claw back unearned revenue

   4. Most recently, significant expansion in scope for RADV audits announced in the Spring and subsequently delayed amid litigation and industry challenge

2. Year-over-year comparisons to the expected average change can be misleading, as summarized above.

3. The proposal does not eliminate retrospective submissions- it eliminates unlinked submissions.

However, in light of the aggressive cuts to Medicaid and ACA subsidies, the federal government has shown a willingness to make deep cuts, even when those cuts are disruptive to members and stock prices.  While we think it’s likely that the final announcement will be somewhat more favorable than the Advance Notice (if prior years are indicative), we also believe strongly that anticipating revenue headwinds for the next several years would be prudent.

What does this mean for MA orgs?

1. Claim-linked documentation is now table stakes for sustainable RAF performance. Make sure your organization has the capability to do this.

2. Documentation requirements for risk adjustment will continue to rise. Your Organization
   should look to improve the audit durability and evidentiary strength of captured diagnoses along the way. Strategies could include:

   1. Concurrent review of aligned provider charts to strengthen documentation

   2. Rolling retrospective review of other provider charts followed by appropriate re-documentation through aligned or subsidiary provider visits you can direct.

3. Your Organization should aggressively identify opportunities to improve both MLR performance and operating efficiency, especially leveraging emerging technologies. If you have the team to do this, drive them to value. If you don’t, find partners who can help. 

Most importantly, do not leave any of this to chance. When industry revenue growth slows, performance gaps widen. The winners take share. The rest fall behind.

This analysis is based on current CMS Advance Notice materials and is intended to provide directional insight, not financial forecasts or actuarial opinions.