February 8, 2024

CMS Previews Changes to Medicare Advantage Capitation Rates, Parts C and D Payment Policies

Holland & Knight Alert
Miranda A. Franco | Sarah Starling Crossan


  • The Centers for Medicare & Medicaid Services (CMS) released its Advance Notice of Methodological Changes for Calendar Year (CY) 2025 for Medicare Advantage (MA) Capitation Rates and Part C and Part D Payment Policies.
  • The Advance Notice details how program policies for Medicare Advantage and Medicare Part D will be updated in 2025, if finalized.
  • Comments on the Advance Notice are due by 6 p.m. ET on March 1, 2024, and CMS will announce the MA capitation rates and final payment policies for CY 2025 by April 1, 2024.

The Centers for Medicare & Medicaid Services (CMS) released its Advance Notice of Methodological Changes for Calendar Year (CY) 2025 for Medicare Advantage (MA) Capitation Rates and Part C and Part D Payment Policies on Jan. 31, 2024, that would update program policies for Medicare Advantage and Medicare Part D beginning in 2025, if finalized. CMS also issued its Draft Calendar Year (CY) 2025 Part D Redesign Program Instructions, which center on implementing provisions of the Inflation Reduction Act of 2022 (IRA) related to the Part D benefit for 2025. 

Comments on the Advance Notice are due by 6 p.m. ET on March 1, 2024, and CMS will announce the MA capitation rates and final payment policies for CY 2025 by April 1, 2024. With this Advance Notice, CMS has released the 2022 FFS cost data by county used in developing the 2025 rate book. It must be noted that this data does not reflect adjustments for Center for Medicare and Medicaid Innovation (CMMI) payment models and demonstrations, Medicare Shared Savings Program (MSSP) and advanced alternative payment models (AAPMs), and does not reflect adjustments for claim repricing for the most current available Medicare Fee-for-Service (FFS) payment final rules and parameters.

CMS has also released an accompanying fact sheet with FAQs and a fact sheet for the Part D Redesign.

MA Payment Changes/Growth Updates

  • If all the proposals are finalized, CMS anticipates an increase of 3.7 percent, or more than $16 billion, in MA plan payments compared to last year. This is only slightly higher than the 2024 increase but significantly higher than the 1.03 percent increase projection from the CY 2024 Advanced Notice.
  • The FFS per capita cost for each county is the product of 1) the national FFS per capita cost or United States per-capita cost (USPCC), and 2) a county-level geographic index called the average geographic adjustment (AGA).
  • The calculation of the kidney acquisition cost (KAC) carve-out for CY 2025 is the same as used for CY 2024.
  • 2018 to 2022 FFS expenditures and enrollment data for beneficiaries in dialysis status for each state to develop the CY 2025 MA end-stage renal disease (ESRD) rates.
  • CMS will continue to include organ acquisition costs for kidney transplants in the Program of All-Inclusive Care for the Elderly (PACE) rates, including PACE ESRD rates, and the IME payment phase-out does not apply to PACE capitation amounts. Therefore, for 2025, the ESRD rates for PACE organizations will continue to include KACs and indirect medical education (IME) amounts.
  • CMS noted that stakeholders raised concerns regarding ESRD payment adequacy and accuracy in recent years in light of the increase in ESRD enrollment in MA plans due to the 21st Century Cures Act, which allowed beneficiaries with ESRD to enroll in MA plans in 2021.
    • In the CY 2023 and CY 2024 Advance Notices, CMS provided details of its analyses regarding potential changes to the development of the MA ESRD rates, including the impact of rates at geographic levels smaller than the state by how geographic areas are measured on the area deprivation index (ADI). The results of these analyses suggested some potentially concerning impacts on specific geographic regions if CMS were to change the geographic level at which they apply the methodology for developing the MA ESRD rates. CMS analyzed the experience for ESRD enrollees for 2021 and 2022 as reported on Worksheet 1 of the CY 2023 and CY 2024 MA bid pricing tools (BPTs). CMS' analysis indicates that 2021 and 2022 revenues for ESRD enrollees exceeded the corresponding net medical expenses for most plans. Based on the analyses to date, CMS plans to continue its use of statewide MA ESRD rates for CY 2025.

Part C Risk Adjustment Model or CMS-HCC Model

CMS proposes several changes to the hierarchical condition category (HCC) risk adjustment model. The impact of the proposals on MA risk scores is projected to be minus 3.12 percent, representing $11 billion in estimated net savings to the Medicare Trust Fund in 2024.

The proposed changes include:

  • For CY 2024 payments, risk scores are calculated as a blend of 67 percent of the risk scores calculated with the 2020 CMS-HCC model and 33 percent of the risk scores calculated with the updated 2024 CMS-HCC model.
  • For CY 2025, CMS proposes to continue to phase in the implementation of the 2024 CMS-HCC risk adjustment model, as described in the CY 2024 Rate Announcement.
  • Specifically, CMS proposes blending 67 percent of the risk score derived from the updated 2024 MA risk adjustment model with 33 percent from the 2020 MA risk adjustment model.
  • This combination results in a 3.86 percent blended MA risk score trend for the CY 2025.
  • CMS completed a reclassification of diagnostic codes to align the underlying HCCs with the ICD-10 classification system and risk adjustment principles.
  • The 2024 CMS-HCC model includes fewer diagnosis codes for mental health conditions and diabetes than the 2020 CMS-HCC model (see FAQ).
  • CY 2025 growth rates are not expected to be impacted by the lump sum 340B payment as remedy payments are reflected in spending for years other than 2025.
  • Health Equity
    • CMS noted that dual-eligibles suffered under prior MA benchmarking methodology.
    • "CMS has concluded that continuing to implement the 2024 CMS-HCC model is necessary and appropriate. This conclusion is partly informed by plan bidding for 2024, which signaled strong growth in the dual SNP market for 2024, with the number of dual SNPs increasing by approximately 8 percent and projected enrollment in dual SNPs increasing by approximately 12 percent. The 2024 CMS-HCC model improves payment accuracy by using more recent data to reflect recent cost and utilization patterns and including condition categories developed using ICD-10 codes that reliably predict Medicare costs. Continued phase-in of the updated model ensures MA payments more accurately reflect more recent relative cost (2019 compared to 2015) and include clinically meaningful conditions that predict cost developed from experience with ICD-10, thereby ensuring plans are adequately paid for the sickest and most complex enrollees."

Part D Risk Adjustment

In compliance with the IRA, updates have been proposed to the Part D risk adjustment model, including:

  • calibrating the model using more recent data years
  • adjusting the normalization methodology to reflect differences in risk score trends between MA prescription drug plans (MA-PD) and stand-alone prescription drug plans (PDP)

CY 2025 Part D Redesign Program

For 2025, the IRA will make significant changes to the existing Part D benefit design:

  • Reduction of the Annual Out-of-Pocket (OOP) Threshold to $2,000 and Elimination of the Coverage Gap Phase:
    • With the elimination of the coverage gap phase, the new benefit will have three phases instead of four: the deductible phase, initial coverage phase and catastrophic phase.
    • The annual OOP threshold will be set at $2,000 for CY 2025. After meeting such a threshold, the enrollee will enter the catastrophic phase and will not have any cost-sharing for Part D drugs in the catastrophic phase.
  • Sunsetting of the Coverage Gap Discount Program (CGDP) on Jan. 1, 2025, and the Establishment of the Discount Program: Participating manufacturers that enter into a Discount Program agreement will provide discounts on applicable drugs, typically 10 percent of the negotiated price for enrollees in the initial coverage phase and 20 percent of the negotiated price for enrollees in the catastrophic phase in CY 2025. Detailed information about the Discount Program is provided in the Medicare Part D Manufacturer Discount Program Final Guidance and Medicare Part D Manufacturer Discount Program: Methodology for Identifying Specified Manufacturers and Specified Small Manufacturers.
  • Changes in the Part D Liability of Enrollees, Sponsors, Manufacturers and CMS: The defined standard (DS) benefit for CY 2025 will consist of the following phases: the deductible, initial coverage and catastrophic phases. Effective Jan. 1, 2025, these changes apply to all Part D plans, including employer group waiver plans (EGWPs).
  • Annual deductible phase: Enrollee pays 100 percent of gross covered prescription drug costs (GCPDC) until the deductible is met.
  • Initial coverage phase: Enrollee pays 25 percent coinsurance for covered Part D drugs. The sponsor typically pays 65 percent of the costs of applicable drugs and 75 percent of the costs of all other covered Part D drugs. The manufacturer, through the Discount Program, typically covers 10 percent of the costs of applicable drugs. This phase ends when the enrollee has reached the annual OOP spending threshold of $2,000.
  • Catastrophic phase: Enrollee pays no cost-sharing for Part D drugs. Sponsors typically pay 60 percent of all covered Part D drugs. The manufacturer pays a discount, generally equal to 20 percent, for applicable drugs. CMS pays a reinsurance subsidy equal to 20 percent of the costs of applicable drugs and equivalent to 40 percent of the costs of all other covered Part D drugs that are not applicable.

Changes to Costs in True Out-of-Pocket Costs (TrOOP)

TrOOP is the portion of spending on covered Part D drugs made by the beneficiary or on the beneficiary's behalf by certain third parties that determines when a beneficiary enters the initial coverage phase, becomes an applicable beneficiary for the Discount Program, reaches the annual OOP threshold and subsequently enters the catastrophic coverage phase.

The IRA changes the categories that count toward TrOOP spending, including payments for previously excluded supplemental benefits provided by Part D sponsors and EGWPs and excluding payments under the new Manufacturer Discount Program. CMS indicates that Part D sponsors must update their systems to ensure that TrOOP accumulators appropriately account for these costs in 2025. CMS plans to provide prescription drug event (PDE) reporting instructions later in 2024 with additional examples to demonstrate how this policy should be implemented.

New Policy for Drugs Not Subject to Defined Standard Deductible

The IRA changes the DS benefit to exempt certain drugs (certain insulins and vaccines) from the deductible. TrOOP-eligible costs for drugs not subject to the DS deductible, specifically covered insulin products, as well as TrOOP-eligible costs for drugs not subject to a non-DS plan deductible or drugs subject to a reduced deductible under non-DS plans, all count toward a beneficiary's satisfaction of the DS deductible.

For CY 2025, if a beneficiary has not satisfied the plan deductible but has incurred sufficient TrOOP-eligible costs to satisfy the DS deductible, the beneficiary will be both an applicable beneficiary under the Discount Program and deemed to have satisfied their plan deductible, which means manufacturer discounts would be available under the Discount Program. However, suppose the beneficiary satisfies the plan's deductible or utilizes a drug not subject to the deductible but is not eligible for Discount Program discounts because TrOOP-eligible costs have not incurred to satisfy the defined standard deductible amount. In that case, the plan will be required to cover the portion of costs a manufacturer would have owed had Discount Program discounts begun.

Changes to Government Reinsurance Calculation Methodology

As the IRA changes the government reinsurance calculation methodology for CY 2025 to be dependent on drug type, CMS is required to revise its direct and indirect remuneration (DIR) allocation methodology to vary for different types of drugs in CY 2025 correspondingly. CMS proposes calculating the reinsurance subsidy separately for applicable and nonapplicable drugs and allocating the share of DIR for applicable and nonapplicable drugs based on their respective share of gross covered prescription drug costs that fall in the catastrophic phase.

Revisions to EGWP Prospective Reinsurance Amount Approach

According to CMS, because the Part D redesign reduces the reinsurance percentage in CY 2025, using the existing methodology for calculating prospective reinsurance payments would result in CMS prospectively paying significantly more for employer group waiver plans (EGWPs) than necessary for CY 2025. This would result in CMS needing to recover sizable funds from EGWPs during the Part D payment reconciliation process. Thus, for CY 2025, CMS is updating the methodology to ensure that Part D calendar year EGWPs are paid a more appropriate prospective reinsurance amount in CY 2025 and plans to use the weighted average of per-member-per-month (PMPM) prospective reinsurance amounts submitted by Part D sponsors for enhanced alternative (EA) plans as part of the Part D bid submissions for the payment year in question.

CMS will not have final reconciled CY 2025 reinsurance amounts, reflecting the new benefit and reinsurance percentages that would allow CMS to revert to the previous methodology, until at least CY 2028. CMS plans to make a determination regarding the methodology and amount of prospective reinsurance payments for EGWP sponsors for plan years beyond CY 2025 at a later time. Given that the CY 2025 prospective reinsurance payment amount for Part D Calendar Year EGWPs will rely on CY 2025 bid submissions, CMS plans to announce the CY 2025 prospective reinsurance payment amount for Part D Calendar Year EGWPs with the annual release of the Part D national average monthly bid amount (NAMBA), Part D base beneficiary premium (BBP) and related Part D bid information later this year.

Definition of EA Benefit Design

In CY 2025, the Part D benefit redesign provisions under the IRA limit the available options for sponsors to enhance their benefits to offer an EA plan to the following:

  • coverage of drugs that are specifically excluded from Part D drug coverage and/or
  • any one or more of the following changes that increase the actuarial value of benefits above the actuarial value of the defined standard prescription drug coverage:
    • reduction (or elimination) of the defined standard deductible
    • reduction of cost-sharing in the initial coverage phase

Given the limited Part D benefit redesign options for EA plan design, CMS reconsidered what constitutes a permissible EA benefit design and established in this program instruction a process for ensuring that individuals receive value relative to the defined standard benefit when they enroll in an EA plan. For CY 2025, CMS will use the Part D Out-of-Pocket Costs (OOPC) model to estimate the value of EA plans relative to the value of the defined standard benefit.

Part C and D Star Ratings

CMS includes a list of the measures in Table IV- 1 in the Advance Notice that will be used to calculate the Star Ratings.

CMS is also soliciting comments in the following areas:

  • CMS is implementing a "Universal Foundation" of quality measures, which will create a core set of measures that are aligned across programs. CMS is working to include all of the Universal Foundation measures in the Part C and Part D Ratings, pending future rulemaking. Part C Star Rating measures that are currently part of the Universal Foundation are breast cancer screening, colorectal cancer screening, controlling blood pressure, diabetes care – blood sugar controlled, plan all-cause readmissions and Consumer Assessment of Healthcare Providers and Systems (CAHPS) overall rating measures.
  • Key proposed updates include changes to measure specifications for several measures, the retirement of two display measures (Antidepressant Medication Management (Part C) and Use of Opioid from Multiple Providers in Persons Without Cancer (OMP) (Part D)), and potential new measure concepts and methodological changes in future years for nine potential measures.

New measures CMS is considering for future years include:

  • Blood Pressure Control for Patients with Hypertension (Part C)
  • Breast Cancer Screening Follow-Up (Part C)
  • Social Connection Screening and Intervention (Part C)
  • Chronic Pain Assessment and Follow-Up (Part C)
  • Tobacco Use Screening and Cessation and Lung Cancer Screening and Follow-Up (Part C) (two measures)
  • Functional Status Assessment Follow-Up
  • Medicare Plan Finder Drug Pricing Measure (Part D)

CMS is requesting specific feedback on the potential new Medicare Plan Finder Drug Pricing measure for the Part D Star Ratings, noting limitations of the current Medicare Plan Finder Price Accuracy measure that is part of the Part C and D Star Ratings, including concerns that plans may be submitting artificially lower or high prices for the Medicare Plan Finder during the annual enrollment period (AEP). This measure would evaluate the accuracy of plan sponsors' pricing data displayed on the Medicare Plan Finder Tool and aims to gauge whether plan sponsors are substantially increasing or decreasing drug prices on Medicare Plan Finder after AEP. CMS is seeking initial feedback on the general measure concept and on specific concepts related to the measure, including how CMS should calculate and compare a drug's price during AEP and during the plan year, whether it is more important that AEP prices are stable or reliable, and how CMS should account for industry-wide price changes.

CMS is also considering methodological changes to the Health Outcomes Survey measure, including changes to better measure and address health equity. CMS is seeking OMB approval to conduct a field test of potential new survey items for this measure, including Patient-Reported Outcomes Measurement (PROMIS) Physical Function items, Generalized Anxiety Disorder 2 (GAD-2) items and Health-Related Social Needs (HRSN) items.

Proposed Part D Benefit Parameters for 2025

CMS is required to update the parameters for the defined standard Part D drug benefit each year. This is meant to ensure that the actuarial value of the drug benefit tracks changes in Part D expenses. The IRA set the annual out-of-pocket threshold at $2,000 for CY 2025. Additionally, under the IRA, beneficiaries previously eligible for the partial low-income subsidy (LIS) benefit will now be eligible for the full LIS benefit in CY 2025. Lastly, parameters for maximum or minimum beneficiary cost-sharing in the coverage gap or above the annual out-of-pocket threshold did not need to be updated for CY 2025, as the coverage gap phase and beneficiary cost-sharing above the annual out-of-pocket threshold have been eliminated.

Proposal to Adjust FFS Rates for Puerto Rico

CMS also proposes policies to help provide "stability" for the MA program in Puerto Rico, including basing the MA county rates in Puerto Rico on the costs of beneficiaries in traditional Medicare (i.e., have both Parts A and B). CMS invites comments on alternate adjustment approaches for Puerto Rico.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

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