Last week, CMS published a final rule implementing the ACA’s medical loss ratio (“MLR”) requirements that will apply to the Medicare Advantage (Part C) and prescription drug (Part D) programs beginning in contract year 2014.  CMS already issued a final MLR rule applicable to commercial plans last year, which CMS notes served as a model for the Medicare Advantage and Part D MLR rule.

The MLR regulations require Medicare Advantage and Part D Plan Sponsors to spend at least 85 percent of Medicare contract revenue on clinical services, prescription drugs, quality improvement activities, and direct benefits to beneficiaries in the form of reduced Part B premiums.  Plan Sponsors who fail to meet the 85 percent threshold must remit payment to CMS for the product of: (1) the total revenue under the contract for the contract year, and (2) the difference between 0.85 and the contract’s MLR.

As is the case with commercial plans, the purpose of the MLR requirements is to incentivize Plan Sponsors to become more efficient in their operations and to reduce administrative costs, profits, and other uses of funds earned by Plan Sponsors that are not directly related to patient care.  Plan Sponsors must submit data regarding expenses and revenue at the contract level.  CMS states that these reports “will allow enrollees of health plans, consumers, regulators, and others to take into consideration MLRs as a measure of health insurers’ efficiency.”

A number of commenters to the proposed rule noted that they believe CMS should not apply the MLR requirements to the Part D program because Congress intended the MLR requirements to apply only to Medicare Advantage and standalone Part D plans have either relatively low drug claims costs or more volatility compared to medical-only plans or plans with both medical and drug benefits.  CMS disagreed, and applied the MLR requirements to Parts C and D, explaining that the MLR provisions of the ACA requires CMS to apply the requirements to both programs.

Plan Sponsors should be cognizant of the consequences of failure to meet the MLR requirements.  In addition to having to pay CMS the amount of revenue the plan collects that is below the 85 percent threshold, Plan Sponsors will be subject to enrollment sanctions if they fail to meet the MLR requirements for three consecutive years.  CMS may terminate those contracts for which the MLR requirements are not met for 5 consecutive years.

While health plans should already be familiar with the MLR requirements for commercial plans, CMS’s final rule serves as yet another example of the breadth of the ACA.  Medicare Advantage and Part D Plan Sponsors must plan to report required data associated with MLR, and understand the consequences if less than 85 percent of a contract’s revenue is spent on clinical services, prescription drugs, quality improving activities, or direct benefits to beneficiaries in the form of reduced Part B premiums.