The New Medicare Modernization Act of 2003: How it Affects Managed Care Organizations
 
March 30, 2004
 

On December 8, 2003, President Bush signed into law the Medicare Modernization Act (MMA). Although the centerpiece of the legislation is the implementation of a prescription drug benefit plan for senior citizens who qualify for Medicare benefits, the legislation also modifies payment to virtually every type of Medicare provider, replaces the current Medicare+Choice program with a new Medicare Advantage Program offering additional health plan options, establishes a controversial demonstration project to test direct competition between managed care plans and traditional fee for service plans, introduces administrative reforms to improve Medicare program operations, and directs the Secretary to promulgate regulations permitting pharmacists and wholesalers to import prescription drugs from Canada upon the Secretary’s certification of the safety of such imports. The following is a very brief summary of the Conference Agreement Sections affecting health insurers and health care plans.

I. Medicare Opportunities: The New Medicare Prescription Drug Benefit Program

MMA makes sweeping changes to the Medicare program by establishing a new Medicare Part D prescription drug benefit (the Part D benefit), which covers prescription drugs dispensed on an outpatient basis for the first time since the Medicare program was enacted over 30 years ago. Part D coverage will become effective on January 1, 2006. In the interim, Medicare beneficiaries will receive assistance with their outpatient prescription drug costs beginning in June 2004 through the implementation of a prescription drug discount card program (Discount Card Program or Program).

On January 1, 2006, Medicare beneficiaries will be entitled to enroll in Medicare Part D. Private non-governmental entities will provide the benefits either through Prescriptions Drugs Plans (PDPS) or through the Medicare Advantage Prescription Drug Plan (MA-PDs). Plans will be required to offer either standard or alternative drug coverage. Section 1860D–3 requires the Secretary to assure that each beneficiary has a choice between at least two qualifying plans. At least one plan has to be a Prescription Drug Plan (PDP), with a different sponsor than that of an MA-PD plan available in the PDP region(i.e. two MA-PDs do not fulfill this requirement).

If plan sponsors are unwilling to assume full risk in a given PDP region, the Secretary must enter into limited risk contracts, and, if these alternatives prove inadequate, the Secretary may approve offering of a fallback plan that assumes no risk of insurance loss.

1. Plan Requirements (Sec. 1860D-12)

The organizational requirements for PDP sponsors are found in Section 1860D–12. Many of the contract requirements are the same as those applicable to Medicare Advantage plans including minimum enrollment, contract periods, protections against fraud and abuse, intermediate sanctions and contract terminations. The PDP plan sponsor contract with the Secretary could cover more than one plan. In general, a PDP sponsor must be licensed as a risk-bearing entity eligible to offer health benefits coverage in each state in which it offers a prescription drug plan. However, the Secretary is authorized to promulgate solvency standards for entities not licensed by the state. These standards will supersede state law in the same manner that such laws are superseded for MA organizations. States are also prohibited from imposing premium taxes on premiums for PDP plans. The Secretary may not contract with a PDP sponsor if the entity submitted a bid for the year (as the first year of the contract period) to offer a fallback plan in any region or offered a fallback plan in the region during the previous year.

2. Bidding Process (Sec. 1860D-11)

If an entity meets the minimum solvency requirements, it must submit a bid to the Secretary before it may offer a plan. The bids must include: (1) the prescription drug coverage to be provided under the plan, including deductible and cost-sharing; (2) the service area for the PDP; (3) the actuarial value of the coverage in the region for a Part D beneficiary with a national average risk profile; (4) information on the bid including the basis for the actuarial value, the portion of the bid attributable to basic coverage and, if applicable, the portion attributable to supplemental benefits, and assumptions regarding the reinsurance subsidy payments and administrative expenses; and (5) the level of risk assumed. If the Secretary determines that a bid is actuarially sound, provides the required basic coverage, and is not likely to discourage enrollment by certain beneficiaries, the Secretary may approve the prospective sponsor’s bid.

3. Plan Approval (Sec. 1860D-11)

The Secretary has the authority to negotiate the contract terms with each approved plan (which is stated in the Conference Report to be similar to the authority the Director of the Office of Personnel Management with respect to Federal Employee Health Benefits plans). The Secretary has the authority to approve any number of full-risk plans, but may approve only the minimum number of limited risk plans necessary for a region to meet access requirements. Moreover, the Secretary must give priority to bidders willing to assume the highest level of risk.

4. Fallback Plans (Sec. 1860D-11(e))

If there are no acceptable submissions for full-risk of limited risk PDP plans, the Secretary must establish a separate process for the solicitation of bids from eligible fallback entities to offer coverage in fallback service areas. The Secretary may not enter into a single contract to offer a national fallback plan. Instead, the Secretary must choose a single fallback plan for each fallback service area, pursuant to a competitive bidding process with a contract period of three years.

The fallback entity may not submit a bid for a PDP plan for any region for the first year of a contract period. Fallback prescription drug plans are permitted to offer only standard prescription drug coverage, must pass on negotiated discounts and need to meet any other requirements specified by the Secretary. The fallback plan is not permitted to engage in any marketing or branding of the contract.

Under a fallback contract, the Secretary pays actual costs of Part D covered drugs net of negotiated price concessions, plus prescription management fees tied to performance management requirements. Beneficiary premiums under fallback plans would be uniform and equal to 26 percent of the Secretary’s estimate of the average monthly per capita actuarial cost to the entity offering the fallback plan.

5. Beneficiaries Protections (Sec. 1860D-4)

Section 1860D-4 provides for a variety of beneficiary protections for enrollees in PDP plans. For the most part, these protections are modeled on those that exist for MA plans, such as the disclosure of information related to the plan’s benefit structure; a drug utilization management program; quality assurance measures; a medication therapy management program; and a program to control fraud, waste, and abuse, and grievance and appeals procedures.

The PDP plan sponsor must provide an exceptions process so that beneficiaries are not penalized if their physician determines that the beneficiary requires a non-preferred drug for valid clinical reasons. In addition, each PDP sponsor must require plan pharmacies to inform enrolled beneficiaries at the time of purchase or delivery of any price differential between the price to the enrollee and the price of the lowest cost generic drug covered under the plan that is therapeutically equivalent and bioequivalent and available at the pharmacy. The Secretary may waive this requirement.

6. Any “Willing Provider” Requirements (Sec. 1860D-4)

PDP sponsors are subject to an “any willing provider” requirement to permit participation by any pharmacy that meets the plan’s terms and conditions. However, notwithstanding that requirement, PDP plans may reduce copayments and coinsurance for enrollees who use “in network” pharmacies.

The PDP sponsor may not rely only on mail order pharmacies, but must provide “convenient access” to retail pharmacies. The “convenient access” rules are modeled on those that currently apply to the TRICARE Retail Pharmacy program administered by the Department of Defense. Sponsors must also permit enrollees to receive benefits (which may include a 90-day supply) through a community pharmacy, rather than through mail order.

7. Cost Control and Quality Assurance Safeguards

A. Formularies (Sec. 1860D-4)

Plans may limit coverage and payment to some extent through the development and use of prescription drug formularies. A Plan must establish a committee that includes at least one practicing physician and one practicing pharmacist with expertise in the care of elderly or disabled persons, for purposes of reviewing and developing its formulary. The majority of committee members must be physicians and/or pharmacists. The formulary must include drugs from each therapeutic category and class of covered outpatient drugs, but may exclude specific drugs within such categories or classes.

B. Medication Therapy Management Program (Sec. 1860D-4)

The medication therapy management program must be developed to ensure that therapeutic outcomes are optimized, and the risk of adverse events reduced, for beneficiaries with complex or chronic diseases (e.g., diabetes, congestive heart failure) requiring multiple prescriptions. The program should include beneficiary education, counseling, case management and other means designed to promote the appropriate use of medications by beneficiaries and to reduce the risk of potential adverse events. The program should be developed in cooperation with licensed practicing pharmacists and physicians

C. Electronic Prescription Drug Program ( Sec. 1860D-4(e))

The Conference Agreement requires the Secretary to develop standards for the electronic prescription drug program no later than September 1, 2005. Prior to promulgation of the final standards for an electronic prescription drug program, the Secretary must conduct a one-year pilot project. The project must commence on January 1, 2006, and the Secretary must report the results to Congress on April 1, 2007. The final standards must be promulgated and published no later than April 1, 2008.

To promote development and use of electronic prescribing programs, MMA requires the Secretary to develop a safe harbor to the federal anti-kickback statute that would protect entities that offer or provide non-monetary compensation, including hardware, software, or information technology and training services that are intended to be used exclusively to transmit and receive electronic prescribing information. The new safe harbor would protect this form of compensation if offered or provided in three distinct categories: (1) by a hospital to the members of its medical staff; (2) by a medical group practice to the prescribing members of the practice; and (3) by a Plan to the pharmacists, pharmacies, and prescribing health care professionals participating in the Plan’s network.

8. Government Financial Support to Plans: Medicare Prescription Drug Account, Subsidies, Reinsurance and Risk Corridors

A. Medicare Prescription Drug Account (Sec. 1860D-16)

Sec. 1860D-16 creates a Medicare Prescription Drug Account (the Account) in the Part B Trust Fund. The Account will be used to pay low-income premium subsidies, direct subsidy payments to Plans, reinsurance payments, payments to qualified retiree prescription drug plans and payments to Medicaid programs for increased administrative expenses. Beginning in January of 2006, states will make cost-sharing payments to the Account for dual eligible beneficiaries.

B. Subsidies (Sec. 1860D-15)

In order to reduce the effects of adverse beneficiary selection among Plans and encourage entities to become Plan sponsors, Sec. 1860D-15 provides for direct monthly per capita subsidy payments to qualifying entities. The subsidies will reduce premiums for all beneficiaries consistent with an overall subsidy level of 74.5 percent for basic coverage. The subsidy payment will equal the Plan’s standardized bid amount adjusted for health status and risk and reduced by the base beneficiary premium as adjusted to reflect the difference between the Plan’s bid and the national average bid. The Secretary is required to develop an appropriate method for adjusting the standardized bid amount and the national average monthly bid.

C. Reinsurance (Sec. 1860D-15)

Sec. 1860D-15 also provides for reinsurance payments to Plans equal to 80 percent of allowable drug costs for a beneficiary whose costs exceed the annual out-of-pocket threshold. Allowable costs are generally the portion of gross covered prescription drug costs actually paid by the Plan under the basic coverage benefit, including costs related to the deductible, whether the Plan or the beneficiary paid the deductible.

D. Risk Corridors (Sec. 1860D-15)

In an effort to ensure that Plans assume equitable levels of risk, Sec. 1860D-15 provides for the establishment of what are referred to as “risk corridors.” Risk corridors are defined as specified percentages above and below a target amount that will be used to adjust Part D payments to a Plan, as necessary, to ensure the Plan is taking on the appropriate level of risk. The target amount is the total amount of payments paid to the Plan based on the Plan’s standardized bid amount, which is adjusted for risk and reduced by total administrative expenses assumed in the Plan’s bid. No payment adjustment will be made to a Plan if the adjusted allowable costs for the Plan fall within 2.5 percent above or below the target amount in 2006 and 2007. If adjusted allowable costs exceed 2.5 percent of the target but are below 5.0 percent, the Secretary will pay the Plan an amount equal to 50 percent of the difference between the adjusted allowable costs and 2.5 percent of the target. If the costs are more than 5.0 percent above the target, the Secretary will pay the Plan an amount equal to 50 percent of adjusted allowable costs between 2.5 percent and 5.0 percent and 80 percent of costs above 5.0 percent. On the other hand, if the Plan’s costs are more than 2.5 percent less than the target amount, the Plan will be required to pay the Secretary an amount equal to 50 percent of the allowable cost savings. The risk corridor provisions do not apply to coverage offered through fallback plans.

II. Medicare Competition: The New Medicare Advantage Program

Title II of MMA establishes the new Medicare Advantage program (MA), replacing and expanding on the prior Medicare + Choice program. In addition to the types of plans historically available under Medicare + Choice, the new program offers additional health plan options at the regional and local level. MA also changes the way that participating plans are reimbursed for the services provided under Medicare, and ties that reimbursement more closely to the levels paid under the original Medicare fee-for-service (FFS) program.

1. Immediate Changes in Reimbursement Methodologies (Sec. 211)

Starting in 2004, MA plans will be paid no less than the cost of providing FFS care to enrollees in traditional Medicare in their area, subject to limited adjustment for direct medical education costs and veterans health services. Rates will increase with the same growth rate as FFS Medicare costs, without the cap from recent years. The Secretary must calculate and announce the revised 2004 rates within six weeks of the law’s enactment, and then transiting them into effect for 2004. Plans which have already submitted notices of termination will have time to change their mind.

2. Program Changes Effective January 1, 2006: Medicare Advantage Competition (Sec. 221)

Effective January 1, 2006, Medicare beneficiaries will have two additional options available to them: MA regional and local plans.

A. Local Plans

Plans offering the existing Medicare + Choice-type program will now be known as “local” MA plans to distinguish them from “regional” plans. They would be able to operate in large regional service areas if they so choose, and would not have to meet the requirements for “regional” plans, but also would not get the financial incentives that are targeted at the new “regional” plans.

B. Regional MA Plans

Section 221 establishes a new Regional MA plan program, that will supplement, but not replace the existing Medicare + Choice program under which plans may continue to serve local service areas. The “regional plan” initiative is intended to make coordinated care programs more widely available in rural areas, and provides financial incentives for plans taking on regional plan status.

The Secretary will establish between 10 and 50 regions for the whole country. A participating plan would have to serve an entire region, but could sign up for more than one region. The Secretary will seek to avoid dividing states across regions, to include at least one entire state in each region and not to break up metropolitan statistical areas.

The existing “local” PPO Medicare + Choice program will be continued but there will be a two year moratorium during 2006 and 2007 on new PPO plans. PPO plans in operation prior to December 31, 2005 may continue, but will not be allowed to expand their service areas until 2008.

A regional plan must have a sufficient provider network to cover the entire region, but must also provide for reimbursement for covered benefits obtained outside the network. In effect, therefore, a closed panel HMO benefit design will not be permitted.

a. Stabilization Fund and Incentives for Entry and Retention (Sec. 221(c))

In order to provide incentives for regional plans to enter and remain in the MA program, Sec. 221(c) establishes an MA Regional Plan Stabilization Fund (Fund), from which entry and retention bonus payments will be made. For a six-year period beginning on January 1, 2007, the Fund will have $10 billion available for bonus payments. National and regional bonuses will be available to encourage organizations to offer MA regional plans in areas of the country in which those plans had not been offered in the previous year and to encourage plans not to withdraw from other areas. The payments generally will equal 3 percent of the benchmark amount applicable to the MA plan.

b. Competitive Bidding Program Starting in 2006 (Sec. 222)

For 2006 and future years, organizations (both regional and local, but not Medicare Saving Account (MSA) plans), that wish to offer MA plans must submit competitive bids to provide services to Medicare beneficiaries. These bids, which replace existing adjusted community rating (ACR) proposals, must indicate the proportions of the bid amount attributable to the provision of benefits under the original FFS program, the provision of basic prescription drug coverage, and the provision of supplemental health care benefits.

Plan payments will be determined by the Secretary based on the comparison of the submitted bid to an area-specific benchmark. If the plan’s bid is below the benchmark, the plan will be paid on the basis of its bid amount, less adjustments for beneficiary demographics. Intra-area variations in local payment rates and risk adjustments may also be taken into account by the Secretary to adjust payments. If the plan’s bid is above the benchmark, the plan will be paid the benchmark rate.

If the MA plan’s benchmark amount exceeds its submitted bid for providing services, 75 percent of the average per capita savings must be provided to the enrollee as a rebate. Rebates may take the form of supplemental health care benefits, premium payments toward prescription drug coverage, or payment toward the premium imposed under Medicare Part B.

Through this mechanism, price competition will be stimulated, since more expensive plans will be more costly to the beneficiary. MA plans, other than private FFS plans, must offer the new drug benefit coverage in at least one plan in each service area they have. Alternative plans offered by the same organization would not have to include the drug benefit.

c. Comparative Cost Adjustment Program

Beginning on January 1, 2010, a six-year Comparative Cost Adjustment (CCA) Program will evaluate the impact of competition between MA plans and the FFS program on beneficiaries and the Medicare program. Under the CCA Program, the Secretary will select certain metropolitan statistical areas that offer at least two MA local plans and have a minimum of 25 percent of beneficiaries enrolled in MA local plans. The Act contemplates that upon completion of the CCA Program, the Secretary shall submit a report to Congress that includes, with respect to both Part C and original FFS, an evaluation of the financial impact of the CCA Program, an evaluation of changes in access to physicians and other health care providers, an assessment of beneficiary satisfaction, and recommendations regarding extending or expanding the CCA Program.

d. Other Provisions

Other provisions of Conference Agreement related to the new MA program include:

• Permanent extension of Medicare MSAs and removal of enrollment caps
• Changing the reporting requirement regarding plan financial incentives to physicians from mandatory to discretionary at the request of the Secretary
• Optional development of specialized Medicare plans for special needs beneficiaries who are institutionalized or have severe or disabling chronic health conditions
• Changes in the reimbursement for federally qualified health centers (FQHCs) providing services under MA plans
• Indefinite extension of reasonable cost reimbursement contracts, unless there are two or more MA regional or local plans offered in the area (beginning January 1, 2008)
• Application of balance billing protections under MA to “Program of All-Inclusive Care for the Elderly” providers
• Preemption by MA standards of state law and regulation, other than state licensure or solvency laws

III. Other Provisions Impacting Health Insurers and Health Care Plan

1. Disease Management

The conference agreement requires each Medicare Advantage organization to have an on-going quality improvement program for improving the quality of care provided to enrollees (except for private fee-for-service plans or MSA plans) effective for contract years beginning January 1, 2006. As part of the quality improvement program, each MA organization is required to have a chronic care improvement program. Each chronic care improvement program is required to have a method for monitoring and identifying enrollees with multiple or sufficiently severe chronic conditions that meet criteria established by the organization for participation under the program.

Each MA organization is required to provide for the collection, analysis and reporting of data that permit measurement of health outcomes and other indicators of quality. The Secretary will establish through regulation appropriate reporting requirements for regional PPOs. The Secretary is permitted to change the types of data that are required of plans only after submitting to Congress a report on the reasons for the changes that was prepared in consultation with MA plans and private accrediting bodies. The Secretary is not permitted to collect data on quality, outcomes, and beneficiary satisfaction for the purposes of consumer choice and program administration if the data were not already being collected as of November 1, 2003. However, these provisions regarding data are not to be construed as restricting the ability of the Secretary to carry out the comparative information dissemination provisions regarding plan quality and performance that are contained in Section 1851(d)(4)(D).

The conference agreement also provides that MA organizations are deemed to meet the quality improvement program requirements as the Secretary determines to be appropriate if the MA organization is accredited (and periodically reaccredited) by a private accrediting organization under a process that the Secretary has determined ensures that the accrediting organization applies and enforces standards that meet or exceed the standards established by the Secretary.

2. Provisions Affecting Employers (Sec. 18060D-22)

New Section 1860D-22 of the conference agreement establishes special rules for employer-sponsored programs. Under certain conditions, the Secretary is required to make special subsidy payments to sponsors of qualified retiree prescription drug plans. These payments are to be made on behalf of an individual covered under the retiree plan, entitled to enroll under a PDP or MA-PD plan but elected not to. Subsidy payments will equal 28 percent of gross covered retiree plan-related prescription drug costs greater than $250 but not greater than $5,000, adjusted annually by the percentage increase in Medicare per capita prescription drug costs.

Qualified retiree prescription drug plans must be employment-based group health plans. Group health plans include welfare plans defined under the Employee Retirement Income Security Act, federal and state governmental plans, including such plans as the Federal Employee Health Benefits program and CalPERS, collectively bargained plans, and church plans. The sponsor must provide the Secretary with an attestation that the actuarial value of prescription drug coverage under the plan is at least equivalent to the actuarial value of standard prescription drug coverage. The sponsor, or administrator designated by the sponsor, shall maintain and afford the Secretary access to necessary records for the purpose of audits and other oversight activities. The sponsor is required to provide disclosure of information in accordance with disclosure of information on creditable coverage.

3. Health Savings Accounts (Sec. 1201)

The Conference agreement includes a modified version of the House proposal to establish portable, tax-free Health Savings Accounts (HSAs) to cover retiree health care expenses. HSAs can be established by workers under the age of 65 who are covered by a health plan with an annual deductible of at least $1,000 for individual coverage and $2,000 for family coverage, and with an out-of-pocket expense limit that is no more than $5,000 for individual coverage and $10,000 for family coverage. Individuals can make aggregate annual contributions to an HSA of up to 100 percent of the annual deductible under the high deductible health plan, subject to a maximum of $2,600 for individual coverage and $5,150 for family coverage (indexed for inflation). Savings can be used by individuals who attain the age of Medicare eligibility to pay for qualified medical expenses, such as prescription drugs, long-term care insurance and services, medical service, and health insurance premiums for individuals eligible for Medicare (other than premiums for Medigap policies). The HSA provisions are effective for taxable years beginning after December 31, 2003.

For more information, e-mail Jim Jacobson at jim.jacobson@hklaw.com or call toll free, 1-888-688-8500.