Jeremy Nighohossian — Health Policy
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How MA Plans Get Paid

Benchmarks, bids, and rebates — the payment mechanism every later entry in this guide refers back to.

Reference
65%Average share of the bid-benchmark gap paid to plans as rebate, 2026
$218Average monthly rebate per enrollee, 2026
104.75%Enrollment-weighted average benchmark, as a share of local FFS costs
1997 / 2003Years the benchmark and competitive-bid mechanisms were introduced

The three building blocks

Every Medicare Advantage plan's payment starts from three numbers: a benchmark set by Medicare, a bid submitted by the plan, and — if the bid comes in below the benchmark — a rebate paid back to the plan.

Benchmark
The maximum amount Medicare will pay a private plan to cover a beneficiary in a given county, based on the cost of covering a comparable beneficiary in traditional Medicare in that area.
Bid
A plan's own estimate of what it will cost to cover an average, risk-adjusted enrollee's Part A and Part B benefits.
Rebate
The share of the gap between a plan's bid and its benchmark that the plan keeps. By law, rebate dollars must go toward supplemental benefits, reduced cost-sharing, or reduced premiums — not the plan's own medical costs or profit margin.
FIGURE 1 How Medicare Advantage payment works 1. THE BENCHMARK 2. THE BID 3. THE REBATE Ceiling on what Medicare will pay, based on county FFS costs Plan's own estimate of its cost to cover a beneficiary Only PART of the bid-benchmark gap goes to the plan $1,000 Benchmark $800 Bid Bid Rebate Retained $200 gap ~65% to plan, ~35% retained by Medicare (varies by star rating) Where rebate dollars go (2024, conventional MA plans) Cost-sharing reduction — 39% Dental/vision/hearing — 27% Part B premium — 22% Part D — 12% NOTE: Panel 3 figures illustrative ($1,000 benchmark example); rebate share of gap ranges 50%–70% by star rating. Allocation shares are actual 2024 national averages for conventional (non-SNP) plans. SOURCE: Panels 1–3, author's illustration of CMS methodology, 42 U.S.C. § 1395w-23; allocation shares, MedPAC, June 2025 Report to Congress, Ch. 2.
Figure 1. How Medicare Advantage payment works. Source: author's illustration of CMS payment methodology, 42 U.S.C. § 1395w-23; rebate allocation shares, MedPAC, June 2025 Report to Congress, Ch. 2.

If a plan's bid comes in above its benchmark, Medicare pays only the benchmark amount, and the plan (or the enrollee, in the form of a premium) is responsible for the difference. This caps what Medicare will pay regardless of a plan's bid. If a plan's bid comes in below its benchmark, the difference is split: part goes to the plan as a rebate, and the remainder is retained by Medicare. The split is set by the plan's Star Rating — 50% for plans below 3.5 stars, up to 70% for plans rated 5 stars.

Worked example. A plan operating in a county with a $1,000 benchmark submits a bid of $800. The $200 gap is split according to the plan's rebate percentage — at 65%, the plan receives a $130 monthly rebate to spend on supplemental benefits, premium reductions, or cost-sharing reductions for its enrollees, while $70 is retained by Medicare.

How benchmarks vary by county

Benchmarks are not set uniformly nationwide. Each county's benchmark is scaled relative to its own fee-for-service Medicare spending, then further adjusted based on how that spending compares to the national average, grouped into quartiles.

County FFS-cost quartileBenchmark scaling
Lowest-cost quartile115% of local FFS spending
2nd quartile107.5%
3rd quartile100%
Highest-cost quartile95%

Counties are re-evaluated periodically, and a county that shifts from one quartile to another receives a one-year blended rate — the average of its old and new quartile percentages — rather than an immediate jump.

Because the low-cost quartile's boost (+15%) is larger than the high-cost quartile's reduction (–5%), the enrollment-weighted national average benchmark comes out above 100% of local FFS spending, currently around 104.75%.

Where rebate dollars go

Plans allocate rebate dollars across several categories, and the mix differs by plan type. For conventional (non-Special-Needs) plans in 2024, MedPAC reports the following national average allocation:

UseShare of rebate dollars
Reduced enrollee cost-sharing39%
Non-Medicare supplemental benefits (dental, vision, hearing)27%
Part B premium reduction~22%
Part D premium reduction~12%

Special Needs Plans, most of whose enrollees are also eligible for Medicaid and so already have cost-sharing covered, allocate rebate dollars very differently — overwhelmingly toward non-Medicare supplemental benefits rather than cost-sharing reduction.