What’s at Stake

• Alignment’s largest California Medicare Advantage contract fell from 4 stars to 3.5 stars, putting federal quality-bonus payments at risk.
• The insurer claims CMS used rating measures and methodologies that were not lawfully established through required federal rulemaking.
• The financial impact comes in 2028, turning a half-star downgrade into a potentially significant reimbursement fight.

WASHINGTON - Alignment Healthcare has taken the federal government to court after its largest Medicare Advantage contract fell below a rating threshold that can mean real money — potentially millions in future federal bonus payments.

The California-based insurer filed suit October 9 in the U.S. District Court for the District of Columbia against the Department of Health and Human Services, the Centers for Medicare & Medicaid Services, HHS Secretary Robert F. Kennedy Jr. and CMS Administrator Mehmet Oz. The case is Alignment Healthcare, Inc. et al. v. Department of Health and Human Services et al., No. 1:26-cv-03550.

At issue is Alignment’s California HMO contract H3815. CMS gave the plan 3.5 stars for 2027, down from 4 stars in 2026. That is especially important because H3815 covers roughly 75% of Alignment’s health-plan membership. The company’s six other eligible contracts maintained ratings of at least four stars.

This is where Medicare’s star system stops looking like a Yelp-style quality rating.

CMS uses its one-to-five-star system both to help seniors compare Medicare Advantage plans and to determine eligibility for quality bonus payments and rebates. The 2027 ratings released October 8 will affect Medicare Advantage quality-bonus payments in 2028.

Alignment told investors that the downgrade will not affect revenue in 2026 or 2027, but acknowledged that its 2028 quality-bonus payments will be affected. The company says provider risk-sharing arrangements may offset part of the financial damage.

The lawsuit goes beyond arguing that CMS simply got a number wrong.

Alignment alleges CMS departed from federal law by making important parts of the Star Ratings methodology through technical guidance rather than properly adopted regulations. The company argues that Congress intended the system to rely on predictable, validated quality measures developed with public and industry input.

That argument puts the Administrative Procedure Act at the center of the case. Alignment contends CMS cannot make substantive changes affecting billions of dollars in Medicare payments merely by placing them into technical notes rather than subjecting them to notice-and-comment rulemaking.

CMS itself has said that substantive measure changes, new measures and methodological changes must go through rulemaking.

Alignment also says higher industry cut points and declines in certain heavily weighted Health Outcomes Survey and Part D measures contributed to H3815’s lower score. Separately, the insurer criticized CMS for eliminating bonus calculations tied to the Excellent Health Outcomes for All Index after the performance period had concluded, saying it had already invested resources based on the earlier framework.

There is history here.

Alignment previously sued CMS over earlier Star Ratings. In June 2025, a federal judge rejected most of its claims but found CMS acted arbitrarily and capriciously when it included two appeals in calculating one contract’s rating.

And Alignment is not attacking CMS methodology in a vacuum. Other insurers have mounted similar challenges, including litigation over whether CMS exceeded its legal authority in calculating particular Star Rating measures.

The stakes extend beyond Alignment. CMS says 71% of Medicare Advantage prescription-drug-plan enrollees are in contracts rated four stars or higher for 2027. Quality bonuses across the Medicare Advantage system involve billions of taxpayer dollars.

For insurers, then, half a star can be far more than a reputational bruise. It can determine how much federal money flows into a plan — which explains why increasingly sophisticated disputes over statistical methodology are ending up before federal judges.

About the Author

Samuel López is a USA Herald reporter and correspondent covering legal, insurance and regulatory matters. A seasoned legal professional with more than two decades of experience analyzing state and federal litigation, López brings a legal-analyst perspective to disputes involving insurers, government agencies, regulatory procedure and the financial consequences that can follow administrative decisions.

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