Wall Street miscalculated the cost of the free lunch
The honeymoon is officially over. For years, the narrative surrounding Medicare Advantage was one of unstoppable growth and effortless profit. In 2023, the market celebrated a milestone of 30 million enrollees. Today, as we close out November 2025, that celebration has turned into a calculated retreat. The aggressive marketing of gym memberships and dental perks has hit a brick wall of regulatory reform and rising medical utilization. What was once a high-margin engine for insurers has become a liability, and the seniors caught in the middle are seeing their benefits evaporate in real time.
The shift is not accidental. It is the result of a deliberate squeeze by federal regulators and a fundamental change in how insurance companies are paid to manage risk. While the 2023 data suggested a market in its prime, the November 2025 reality shows a sector undergoing a painful correction. Insurers are no longer competing to offer the most perks. They are competing to see who can cut the most costs without triggering a mass exodus of members during this final week of the 2026 Open Enrollment period.
The V28 model and the death of easy coding
Revenue growth has stalled because the math has changed. The transition from the old V24 risk adjustment model to the more stringent V28 model is currently in its second year of phase-in. For the uninitiated, this is not just a technical update. It is a targeted strike on how insurers claim payments for chronic conditions. Under the old system, insurers could identify hundreds of codes to increase the monthly payment for a senior. The V28 model has eliminated or consolidated these codes, effectively lowering the per-member revenue. By the time we reach the full implementation in late 2026, the industry expects billions in aggregate revenue to vanish.
This explains why the 40 percent of unused benefits mentioned in older studies has now become a survival mechanism for insurers. In 2023, unused dental or vision benefits were a source of quiet profit. In 2025, they are a necessity. If every senior actually used the $2,000 dental allowance promised in glossy brochures, half of the major carriers would be insolvent by next Tuesday. The business model relied on apathy, but as medical inflation rises, even apathy cannot save the margins of companies like Humana, which saw its stock pummeled this year after a catastrophic drop in Star Ratings.
The Inflation Reduction Act is a double edged sword
The most significant disruption this year came from the Inflation Reduction Act. While the headline news for seniors is the $2,000 out-of-pocket cap on prescription drugs that officially goes live in five weeks, the back-end reality for insurers is a nightmare. This cap shifts the financial burden of high-cost medications from the senior and the government directly onto the Medicare Advantage plans. To compensate for these massive new drug costs, insurers have spent the last 48 hours refining their final 2026 projections, which show a sharp reduction in non-medical benefits.
Per the latest CMS rate announcements, the federal government is maintaining a tight grip on base payment increases. This puts providers in an impossible position. If they don’t cut benefits, they lose money. If they do cut benefits, they lose members to competitors who are still burning through cash to maintain market share. We are witnessing a race to the bottom where the loser is the senior who chose a plan based on a 2023 promise that no longer exists in a 2025 economy.
Star Ratings are the new battleground
Quality scores are no longer a vanity metric. They are the difference between a profitable year and a corporate restructuring. The recent volatility in Star Ratings has proven that the Centers for Medicare and Medicaid Services is no longer grading on a curve. When a plan drops from 4.5 stars to 3 stars, it loses the ability to claim quality bonus payments, which often represent the entirety of the plan’s profit margin. The industry is currently reeling from these shifts, as the threshold for ‘excellence’ has moved just as medical expenses for the aging Boomer population have spiked.
Healthcare providers are feeling the friction. Prior authorization requests are at an all-time high as insurers look for any way to curb utilization. This has created a fractured ecosystem where a senior might have a ‘zero premium’ plan but faces a three-week wait for a basic diagnostic test because the insurer is guarding its cash flow. The KFF drug provision data suggests that while seniors will save at the pharmacy counter, they may pay for it with decreased access to specialists and higher copays for outpatient services.
The era of the diversified health giant
The clear winners in this environment are not the pure-play Medicare Advantage insurers, but the vertically integrated giants. Companies that own the pharmacy benefit manager, the doctor’s office, and the insurance plan are the only ones capable of navigating this margin compression. By moving money from the ‘insurance’ pocket to the ‘provider’ pocket, they can hide the impact of the V28 model and the Inflation Reduction Act. The independent, regional plans that many seniors have trusted for decades are being forced into mergers or outright liquidation because they lack the scale to absorb these regulatory shocks.
Investors should stop looking at enrollment numbers as a sign of health. Enrollment is easy; profitability in the current regulatory climate is hard. The 30 million members seen in 2023 were the peak of the easy-money era. The 2025 landscape is defined by ‘right-sizing’ portfolios, which is a polite way of saying insurers are firing their least profitable customers by raising premiums and cutting benefits until they leave voluntarily.
The next critical milestone occurs on January 1, 2026. This is the date when the $2,000 out-of-pocket cap for Part D prescription drugs becomes the law of the land. Financial analysts are watching the first-quarter 2026 claims data with intense scrutiny, as it will reveal exactly how much that cap will bleed the remaining reserves of the nation’s largest insurers. Watch the 2026 medical loss ratios closely, they will tell you if the Medicare Advantage experiment is still viable or if a return to Traditional Medicare is the only logical path forward for the American senior.
