On February 15, 2013, the Centers for Medicare & Medicaid Services released for comment two key documents affecting the Medicare Advantage (MA) and Part D Programs: (1) the Advance Notice of Methodological Changes for Calendar Year (CY) 2014 for Medicare Advantage (MA) Capitation Rates, Part C and Part D Payment Policies and draft CY 2014 Call Letter, and (2) a proposed rule to implement the 85 percent medical loss ratio requirements for the MA and Part D Programs.  MA Organizations and Part D Plan Sponsors, as well as the health care organizations with which they contract, should review these documents carefully and prepare comments on relevant aspects of CMS’s proposals.

The Advance Notice sets out CMS’s preliminary estimates for components of MA and Part D Plan payments, including a negative national per capita MA growth percentage, as well as several proposed policy changes that will affect MA and Part D Plans’ operations.

The proposed MLR regulations would also have a fundamental impact on MA Organizations and Part D Plan Sponsors (Plan Sponsors), which will be required to issue refunds to CMS if the 85 percent MLR standard is not met.  The proposed MLR regulations generally track the existing regulations for MLR reporting in the commercial market, with some differences of note.

Advance Notice and Draft Call Letter

The Advance Notice describes CMS’s preliminary estimates for a number of factors that will affect MA and Part D Plan payments for Calendar Year (CY) 2014.  Comments on the Advance Notice are due by March 1, 2013, and the announcement of payment rates and final call letter will be issued by April 1, 2013, as required by statute.

The Advance Notice includes a number of items of note, including the following:

Request for Suggestions to Address Challenges to Payment Rates: One of the most significant statements in the Advance Notice is CMS’s solicitation for comments on suggestions to address challenges resulting from legislatively mandated changes affecting CY 2014 payments within the parameters of current law.  This is new language from the agency and provides an opportunity for MA Organizations and Plan Sponsors to provide ideas as to how CMS could modify the MA and Part D Programs in a manner that recognizes the financial challenges posed by the estimated payment reductions, such as delayed implementation of high-cost program requirements.

Negative MA Growth Percentage: CMS announced that the estimated change in the national per capita MA growth percentage, affecting MA benchmarks and potentially MA Plan payment rates, is –2.3 percent for CY 2014.  This estimate reflects the reduction in the Medicare Physician Fee Schedule payment rates scheduled for 2014 as well as other factors, such as corrections to prior years’ growth percentage estimates.

• Risk Adjustment: CMS is proposing to implement a revised CMS hierarchical condition category (HCC) risk adjustment model, including revising the HCCs.

1. CMS proposes to revise some HCCs to address the fact that MA Organizations code those conditions at a higher rate than fee-for-service providers. CMS predicts that average MA risk scores under the revised model would be lower than the average MA risk scores under the 2013 model. Accordingly, the agency is proposing to implement the coefficients of the revised model beginning in CY 2014, but transition to the revised model denominator over a multi-year period. CMS requests comment on this transition proposal.
2. CMS proposes to require MA Organizations to flag diagnoses collected in an MA “enrollee risk assessment,” which CMS describes as an evaluation of the member’s health often conducted in the beneficiary’s home after outreach from the MA Organization. CMS is planning to review the diagnoses that are submitted to determine whether these risk assessments “are being used as a vehicle for collecting risk adjustment diagnoses without follow-up care or treatment being provided to the beneficiary by the plan.” For 2015, CMS is “considering excluding, for risk adjustment payment purposes, the diagnosis data collected from MA enrollee risk assessments that are not confirmed by a subsequent clinical encounter by a provider type that has been approved for risk adjustment purposes.”

• Part D Benefit Parameters: CMS announced the 2014 Benefit Parameters for Part D, including a reduced deductible, initial coverage limit and out-of-pocket threshold, which reflect negative cost trends as well as decreases for prior year corrections that are incorporated into the annual updates. CMS is also proposing to reduce the minimum cost-sharing amounts for 2014.
• Patient Consent for Prescriptions: CMS proposes to require that network retail and mail pharmacies obtain member consent to deliver a prescription, new or refill, prior to each delivery. This is in response to automatic delivery practices where prescriptions are delivered without the pharmacy confirming that the member wants the prescriptions refilled. This requirement would not apply in instances where the member personally initiates the refill or new prescription request. Although this requirement would only be effective in CY 2014, CMS is “strongly encourag[ing] sponsors to make this a requirement of their network pharmacies that offer such automatic refill programs for 2013.”
• Agent/Broker Compensation: CMS intends to propose rules for the 2015 contract year to permit MA Organizations and Plan Sponsors to continue to pay agents/brokers renewal compensation beyond the current six-year cycle.
• Per-Claim Administrative Fees: CMS seeks comment on per-claim fees paid by pharmacies to Plan Sponsors or their intermediaries. By way of example, CMS describes post point-of-sale adjustments to result in the overstatement of the “negotiated price” paid for a Part D drug in contravention to the Part D regulations. CMS solicits comments on its conclusion as well as whether and the extent to which these types of adjustments are in the market.

MA Organizations and Plan Sponsors should review the Advance Notice for additional issues that may be significant in light of each organization’s unique circumstances.

Medical Loss Ratio Proposed Rule

Overview of the MA MLR Requirements

Congress, under the Patient Protection and Affordable Care Act, requires that MA Organizations achieve an 85 percent MLR beginning with 2014.  This statutory requirement is incorporated by reference into the Part D Program, and CMS confirms in the proposed rule that the MLR requirements apply to MA-only plans, MA-PD plans and stand-alone prescription drug plans.

If an MA Organization or Plan Sponsor fails to satisfy the MLR standard for a contract year, it must remit to CMS the amount by which the Plan Sponsor’s MLR is below 85 percent.  If a Plan Sponsor fails to meet the 85 percent MLR standard for three consecutive contract years, enrollment in the Plan Sponsor’s plans would be suspended for the subsequent contract year, and CMS will terminate the contract of a Plan Sponsor that fails to meet an 85 percent MLR for five consecutive contract years.

The MLR requirement interacts with a number of other MA and Part D Program requirements, including the bid preparation and submission requirements.  As described below, CMS is proposing that the MLR standards would vary from certain aspects of the MA and Part D bid preparation requirements, including the level at which the MLR is aggregated and reported.

Comments are due by 5:00 pm EDT on April 16, 2013.

Summary of Proposed Rule

CMS proposes to adopt generally the same expense and revenue classifications that apply for the commercial insurance market MLR standards.  This is significant because, unlike the statute creating the commercial MLR standards, the MA and Part D MLR statute does not define how a Plan Sponsor’s MLR is calculated or what expenses are permissibly included in the numerator of the MLR calculation.  By mirroring the commercial MLR rules, Plan Sponsors would be permitted to include quality improvement expenses with medical expenses in the numerator of the MLR.  The proposed rule does not, however, indicate whether CMS would apply “sub-regulatory” guidance that has been issued regarding expense reporting under the commercial MLR rules to the MA MLR calculation.

Noteworthy aspects of the proposed rule include:

• Contract-Level Reporting: CMS is proposing that Plan Sponsors would calculate their MLR at the CMS contract level rather than at the plan or parent organization level.  Thus, a Plan Sponsor would be required to “combine non-drug costs with prescription drug costs and non-drug revenues with prescription drug revenues, across all plans under the contract.”  This is distinct from the bid process where Plan Sponsors prepare each bid at the individual plan benefit package level.
• Credibility Adjustment for Small Plans: CMS is proposing to apply a credibility adjustment for MA contracts with less than 180,000 member months for a contract year and stand-alone prescription drug plan contracts with less than 360,000 member months for a contract year.
• Treatment of Program-Specific Issues: CMS is proposing to include risk adjustment, risk corridor and reinsurance payments in the revenue utilized for the MLR calculations.  MA Plan rebates also would be accounted for as revenue.
• Timing for Reporting: CMS is requesting comments on whether the MLR reporting deadline should be in July, September or December following a contract year.