MA margins are bottoming and recovering, but the industry is moving toward low-margin, utility-like characteristics

Overview

This report is a set of meeting notes from Bernstein's summer Healthcare Teach In series on Medicare Advantage, systematically reviewing MA's history, product value, rate and medical cost mechanisms, the recent margin crisis, the industry's recovery path, and future policy and technology disruptions. The report's core view is that MA still has structural growth and cost advantages, but after going through a typical insurance-cycle downturn, the industry will recover margins through competition exits and pricing discipline, while gradually moving toward a scaled, low-margin, utility-like structure.

Core views

The report attributes weak MA performance in 2023-2025 to the combination of three factors: first, long-term high growth and high margins attracted excessive competition, leading to bloated supplemental benefits; second, low rates in 2024-2025, v28 risk adjustment, and coding regulation compressed revenue; third, the rebound in hospital employment and utilization after the pandemic caused a medical cost shock. Looking ahead, the 5.06% rate increase in 2026, competition exits, benefit pullbacks, pricing discipline, and utilization normalization will drive margin recovery. Over the long term, MA growth should remain resilient, but rates are expected to trail medical cost trends by about 100-150bp, and industry margins may stabilize in a lower 2%-3% range.

Analysis framework

The report uses an insurance cycle framework for the industry, placing member growth, competitive intensity, supplemental benefits, CMS rates, risk adjustment, Star ratings, medical cost trends, and policy cycles into a single analytical framework, while also using company-level member attrition, MLR improvement, reserve levels, and target-price ratings to assess the margin recovery path for MCOs.

Methodology notes

• Industry cycleInsurance cycle analysis

  Growth and high margins attract competition, and competition drives benefit expansion while compressing margins.

  The report views MA's recent crisis as a traditional insurance cycle: rapid growth and roughly 5% margins during 2005-2015 attracted new entrants, after which plan counts, supplemental benefits, and market competition increased, and margins were significantly compressed under rate pressure.

• Policy and ratesComparison of CMS rate notices and medical cost trends

  MA revenue growth depends on CMS rates, risk adjustment, and Star ratings, while the cost side is affected by medical utilization and wage inflation.

  The report compares long-term MA rate growth of about 2.5% with medical cost trends of about 4%-5%, noting that rates usually run below cost trends, and highlights the importance of the 2026 rate of 5.06% and the 2027 rate of 2.48% for margin recovery.

• Risk adjustmentv28 risk adjustment and regulation of excessive coding

  Risk adjustment provides additional payment for high-risk populations, but regulatory tightening on excessive coding creates revenue headwinds.

  CMS introduced v28 in 2023 and is phasing it in over three years, reducing risk adjustment by about 6%; in 2027, reform through unlinked chart reviews further reduces excessive risk coding by about 1.5%.

• Market structureUtility-like evolution

  Over the long term, the government MCO market may concentrate among a small number of scaled participants and operate with lower but stable margins.

  The report expects MA and Medicaid over the long term to resemble utility markets, dominated by about 4-5 or 4-6 scaled participants, with Medicaid margins around 1.5% and MA margins around 2%-3%.

• Disruptive factorsScenario analysis for GLP-1, AI, and VBC

  New drugs, technologies, and payment models could simultaneously change costs, longevity, efficiency, and market size.

  GLP-1 will raise drug costs but could extend life expectancy and expand Medicare TAM by 5%-10%; AI can improve hospital operations and patient care efficiency; VBC becomes more valuable when margins are under pressure.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• UNH

  One of the largest MA participants; rated Outperform in the report with a target price of $492.

  Strengths

  Leading scale; the report says it has cut MA membership and showed significant normalization-driven margin improvement in 1Q26, with reserve levels also at a multi-year strong position.

  Weaknesses

  Highly exposed to MA rates, risk adjustment, and utilization volatility.

  Comparison

  Along with HUM, it has long ranked among the top two in the MA market, with stronger scale and cost management advantages than smaller participants.

  Risks

  CMS rates running below medical cost trends, further tightening of risk coding, and adverse selection or member losses caused by benefit cuts.

• HUM

  A major MA participant; rated Outperform in the report with a target price of $425.

  Strengths

  Long the No. 2 MA player, with specialization and scale advantages, and it has already reduced MA membership in 2025 to improve margins.

  Weaknesses

  The business is more sensitive to the MA cycle and benefit design.

  Comparison

  Alongside UNH and CVS, it is a core MA participant and has meaningful leverage to industry margin recovery.

  Risks

  Membership contraction, adverse selection, drug costs, and unfavorable policy rates could slow the pace of recovery.

• CVS

  A major MA participant; rated Outperform in the report with a target price of $106.

  Strengths

  Long the No. 3 MA player; the report says 1Q26 MLR improved by about 200-300bp, showing signs of margin recovery.

  Weaknesses

  Needs to balance benefit reductions, pharmacy cost exposure, and member growth.

  Comparison

  Compared with UNH/HUM, CVS also has scale, but its recovery path is influenced by product mix and execution.

  Risks

  Part D and pharmacy costs, customer satisfaction after benefit cuts, and CMS policy changes.

• ELV

  A government MCO and health insurance covered name; rated Outperform in the report with a target price of $424.

  Strengths

  The report notes that ELV announced MA membership cuts for 2026, signaling industry pricing discipline and competition exits.

  Weaknesses

  Company-specific detail is limited in this excerpt, and MA recovery is affected by region and product mix.

  Comparison

  Like UNH, HUM, and CVS, it benefits from improving MA industry rates and competition.

  Risks

  Rates below expectations, a rebound in utilization, and policy constraints on risk adjustment and benefit design.

• CNC

  A government MCO covered name; rated Outperform in the report with a target price of $68.

  Strengths

  Benefits from long-term demand and coverage expansion discussion in the government healthcare market.

  Weaknesses

  The report does not provide sufficient company-level operating detail, presenting it more as part of the coverage basket.

  Comparison

  Compared with HUM, which has higher MA purity, CNC's investment case may depend more on its government program mix and policy environment.

  Risks

  Medicaid/MA rates, member mix, policy changes, and cost trends.

• CI

  A covered name rated Outperform in the report with a target price of $371; the report also mentions CI and other competitors exiting certain MA competition.

  Strengths

  Competition exits help overall industry margin recovery and improve market discipline.

  Weaknesses

  If it exits MA growth opportunities, its direct participation in long-term MA growth may decline.

  Comparison

  Compared with UNH/HUM/CVS, the report provides less company-level description of CI's MA operations.

  Risks

  Business mix changes, policy risk, and medical cost trends.

• AGL

  A covered name rated Market-Perform in the report with a target price of $86, with higher relevance to the VBC theme.

  Strengths

  The report emphasizes that VBC's value proposition increases under long-term margin pressure.

  Weaknesses

  The report does not provide sufficient company-level operating data, and the rating is Market-Perform.

  Comparison

  Compared with large MCOs, AGL is more of a VBC theme exposure than an MA scale platform.

  Risks

  VBC execution, healthcare rates, cost control, and partner changes.

• HCA

  A hospital operator rated Market-Perform in the report with a target price of $413.

  Strengths

  Hospitals benefited from recovering capacity and patient volumes during the post-pandemic utilization rebound.

  Weaknesses

  The report believes that medical volumes returning to pre-pandemic normal levels create a volume headwind for hospitals.

  Comparison

  Unlike MCOs, utilization normalization helps MCO cost control but may weaken hospital volume growth.

  Risks

  Slowing inpatient volumes, labor costs, payer pricing pressure, and changes in healthcare policy.

Key data

• Population covered by MedicareAbout 20% of the US populationThe report compares this with Medicaid/safety net at about 30% and employer insurance at about 50%; Medicare spending accounts for a higher share than membership because seniors have higher medical spending.
• Number of Medicare enrolleesAbout 70 millionAbout 90% are age 65 and older, and about 10% are disabled populations.
• MA vs. FFS shareMA 51%; FFS 49%The report believes that nearly all incremental Medicare growth over the past few decades has come from MA.
• Expected MA membership growthAbout 4%-5%Growth remains resilient but has clearly slowed versus earlier periods.
• MA top-player concentrationTop three about 55%UNH and HUM have long ranked No. 1 and No. 2, while CVS is steadily No. 3; the report expects long-term consolidation into 4-6 scaled companies.
• Consumer supplemental benefits2024 average $194/month, about 15% incremental valueSupplemental benefits include lower cost sharing, Part D coverage, and additional benefits such as vision, dental, and hearing.
• Sales channelsE-broker about 40%; traditional brokers about 30%The remaining sales mainly come from MCO internal brokers and call centers.
• Customer segmentationIndividual about 60%; Group MA about 20%; dual Medicare/Medicaid about 20%Different customer groups have different sensitivities to cash cards, physician networks, and benefit design.
• Medical cost trendAbout 4%-5%Part A was about 2.5%-3% before the pandemic, but rose after the pandemic due to wage inflation and higher utilization; Part B is usually higher than Part A.
• Long-term MA ratesAbout 2.5%The report says long-term rates usually run about 2 percentage points below medical cost trends, tending to be lower under Democratic administrations and higher under Republican administrations, with a 3-4 year lag.
• 2026/2027 rates2026 +5.06%; 2027 +2.48%The 2027 rate already includes reform for unlinked chart reviews, further reducing excessive risk coding by about 1.5%.
• Impact of v28 risk adjustmentAbout -6% over three years; an additional -1.5% in 2027The report believes the roughly 10% overpayment in 2023 could fall to 2.5% or lower in remaining risk by 2027.
• Industry margin declineDown about 360bp since 2022About 190bp of the decline occurred in 2023, mainly due to mispriced plans caused by rising post-pandemic utilization.
• Margin recovery forecastAbout +100bp in 2026; about +50bp per year in 2027-2030The recovery is driven by competition exits, rate improvement, pricing discipline, benefit reductions, and utilization normalization.
• Long-term government MCO marginsMedicaid about 1.5%; MA about 2%-3%The report describes the long-term market structure as utility-like.
• Potential GLP-1 impactPotential 5%-10% expansion of Medicare TAMGLP-1 will raise drug costs, but could extend life expectancy and expand the Medicare member base.
• Ratings and target pricesAGL $86; CNC $68; CI $371; CVS $106; ELV $424; HCA $413; HUM $425; UNH $492AGL and HCA are rated Market-Perform, while the other listed names are rated Outperform.

Impact & implications

For MCOs, MA margin recovery from 2026 onward, competition exits, and stronger pricing discipline are positive factors, especially for companies with leading scale that can proactively shrink unprofitable members and manage medical costs. For hospitals, normalization of medical utilization from elevated post-pandemic levels could create a volume headwind. For policy and long-term valuation, MA's structural growth remains intact, but if the industry moves toward a utility-like model, investors will need to lower their assumptions for long-term margins and excess returns.

Risks

• Medical cost trends continue to exceed MA rates, and long-term rates lagging by 100-150bp could keep compressing margins.
• CMS may continue tightening risk adjustment, excessive coding, or rate calculations, increasing uncertainty on the revenue side.
• Benefit cuts, higher premiums, or increased pharmacy out-of-pocket costs could trigger member dissatisfaction, adverse selection, or disenrollment.
• GLP-1 will raise drug costs in the short term; if these cannot be passed through via rates or product design, MCO margins will be affected.
• Around 2028, affordability, coverage expansion, and rising uninsured rates in healthcare may alter policy direction.
• If competition exits are insufficient or participants resume pursuing growth, industry pricing discipline and margin recovery may be weaker than expected.
• If hospital employment and medical utilization rise again, MLR pressure could re-emerge.

What to watch

• 2027 and subsequent CMS advance/final rate notices, especially changes in risk adjustment, Star ratings, and coding regulation.
• MCOs' Q2 medical utilization, MLR, and reserve releases, to verify whether the 2026 margin recovery is real.
• Execution effectiveness of membership reductions, exits from loss-making markets, and benefit cuts at UNH, HUM, CVS, ELV, and others.
• The impact of changes in supplemental benefits, Part D, deductibles, and cash cards on member choice and adverse selection.
• The dual impact of GLP-1 usage, drug costs, and longevity assumptions on Medicare TAM and the cost side.
• Whether AI and VBC can actually reduce hospital operating costs, improve patient care, and offset rate pressure.
• Policy discussions before the 2028 election regarding healthcare affordability, coverage expansion, and Medicare for All.