Medicare Advantage Plans Face Rising Health Benefit Costs in 2025

In 2025, Medicare Advantage plans faced a median 9.6% increase in health benefit costs, whereas administrative expenses remained stable, resulting in squeezed profit margins.

This development underscores a significant challenge for Medicare Advantage plans, which have grown to cover more than half of eligible Medicare beneficiaries in the United States. These insights emerge from the 2026 Medicare benchmark report by Sherlock Company, a firm experienced in analyzing administrative costs within health plans.

The Rising Cost of Health Benefits

According to the Sherlock Company’s analysis, health benefit costs for Medicare Advantage plans have risen, with the median health benefit ratio climbing by 1.9 to 2.6 percentage points among continuous plan participants. This uptick is attributed to increased medical expenses that have outpaced reimbursement rates set by the Centers for Medicare & Medicaid Services (CMS). Despite significant increases in healthcare expenditures, administrative costs per member declined slightly by 0.3%, maintaining at $56.76 monthly.

Impact on Medicare Advantage Growth

Medicare Advantage's journey from a specialized option to a mainstream choice is evident, with a Kaiser Family Foundation report noting that 56% of large employers with retiree health coverage offered these plans in 2024. While these plans are favored for their cost-effectiveness, insurers are now challenged to sustain attractive benefit packages for retirees amidst rising costs.

Administrative Cost Dynamics

The administrative expense landscape within Medicare Advantage plans has notably shifted. Although the total costs remained largely unchanged, plans have become adept at cost containment through efficiency improvements in staffing, reducing full-time staff per member by an average of 5.1%. This restraint is crucial as premium growth approaches double digits, enabling a lower administrative cost ratio.

Challenges Ahead for Supplemental Benefits

Employer group programs offering zero or low-premium plans face increasing difficulties in maintaining supplemental benefits—an attractive feature of Medicare Advantage. The pressures have led to a decrease in available Medicare Advantage prescription drug plans, dropping from 36 to 32 between 2024 and 2026. As employers anticipate double-digit increases in overall healthcare costs, the capacity to sustain benefit levels is strained, particularly in offering dental, vision, and other add-ons.

Looking Ahead

The current landscape indicates that financial sustainability is paramount for Medicare Advantage plans to maintain competitive benefit packages. The ongoing negotiations with CMS regarding payment rates will be crucial in determining future directions. For insurance professionals and industry leaders, understanding these dynamics is essential to manage risk, compliance, and develop strategic responses to evolving cost structures.