How Plans Get Paid

Medicare Advantage payment runs on three linked numbers: the benchmark, the bid, and the rebate. Together they explain both what plans earn and why MA plans can offer dental, vision, and reduced cost sharing that traditional Medicare does not.

The benchmark

The benchmark is the maximum amount CMS will pay a plan to provide Medicare services in a given area. It is set from local fee-for-service spending, adjusted by county, and it is the ceiling the whole system hangs from.

The bid

Each plan submits a bid: what it says it costs to provide the standard Medicare benefit to an average beneficiary in that area. The bid is then compared to the benchmark, and one of two things happens.

For 2026, almost 100 percent of plans bid below their benchmarks, so the second case is effectively universal:

If the plan bids	Then
Above the benchmark	Enrollees pay the difference as a premium
Below the benchmark	The plan gets its bid plus a rebate

The rebate

When a plan bids below the benchmark, it receives its bid plus a rebate, a defined share of the difference. The rebate comes with a condition that shapes the entire MA market:

Worth remembering: the rebate must be returned to enrollees, as supplemental benefits, reduced cost sharing, or reduced premiums. It cannot simply be kept. This is why MA plans advertise dental, vision, hearing, and low or zero premiums: those benefits are largely rebate dollars, funded by bidding below the benchmark. Understanding the rebate is understanding MA’s entire consumer value proposition.

The share a plan keeps depends on its Star Rating, which is where quality enters the payment formula:

Star Rating	Share of the gap returned as rebate
4.5 stars and above	70 percent
3.5 to 4.5 stars	65 percent
Below 3.5 stars	50 percent

A higher-rated plan converts the same bid gap into more benefit dollars, which makes its product more attractive, which wins enrollment. The next lesson follows that thread.

Key takeaways

• The benchmark is the maximum CMS will pay in an area; the plan’s bid is what it claims the standard benefit costs.
• Almost all plans bid below benchmark and receive a rebate, which must be spent on enrollees as benefits, lower cost sharing, or lower premiums.
• The rebate share scales with Star Ratings, from 50 percent to 70 percent, tying quality directly to a plan’s competitive offering.

Sources

• KFF, How Medicare Pays Medicare Advantage Plans: Issues and Policy Options (opens in a new tab)
• MedPAC, The Medicare Advantage Program: Status Report (March 2026) (opens in a new tab)