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Medicare Advantage Capitation Rates and Part C and Part D Payment Policies

This week, our In Focus section reviews the recently announced major policy updates from the Centers for Medicare and Medicaid Services (CMS) that affect the Medicare Advantage (MA) and Part D programs.

First, on January 30, CMS released the final Risk Adjustment Data Validation Final Rule, a highly anticipated and controversial policy that establishes the agency’s approach to auditing MA Organizations’ (MAOs) risk-adjustment payments and collecting overpayments as needed. Second, CMS released the CY 2024 Advance Notice for MA Capitation Rates (Part C) and Part D Payment Policies on February 1, 2023. HMA’s summary of the advance notice is available here.

Most recently, on March 31, 2023, CMS released the CY 2024 Final Rate Notice for Medicare Advantage (MA) Capitation Rates and Part C and Part D Payment Policies, which incorporates CMS’s responses to public comments on the Advance Notice. These changes reflect CMS’ continued efforts to strengthen oversight in the MA program, including improving payment accuracy, and implementation of Part D policies from the Inflation Reduction Act (IRA).

Below are highlights of some of the key provisions of the CY 2024 Final Rate Notice and significant changes CMS made from the Advance Notice to the Final Rate Notice.

Risk Adjustment: The Final Rate Notice details the updated risk adjustment model using restructured condition categories based on ICD-10 codes, newer data, and clinical adjustments made to ensure the conditions are stable predictors of costs in the model. Specifically, diagnoses data will come from 2018 rather than 2014 and expenditure data will come from 2019 rather than 2015 to reflect changes in costs. These updates should more accurately reflect the cost of caring for beneficiaries and make payments less susceptible to discretionary coding that can lead to excess payments to MA plans.

Also, CMS changed course from its initial proposal in the Advance Notice to implement the above risk adjustment model changes fully in 2024, and instead decided to phase in these changes over three years. The updated risk adjustment policy will be phased in over three years for organizations other than PACE. As a part of the agency’s phase-in plan, 67 percent of the CY 2024 risk adjustment will come from the risk scores measured under the 2020 adjustments and 33 percent will come from the 2024 adjustments. In CY 2025, 67 percent of the risk adjustment will come from the 2024 adjustment. In 2026, 100 percent of the risk adjustment will come from the 2024 adjustment. For PACE organizations in CY 2024, CMS will continue to use the 2017 risk adjustment model and associated frailty factors to calculate risk scores.

Effective Growth Rate: The effective growth rate identified within the Final Rate Notice for CY 2024 is 2.28%, up from 2.09% in the Advance Notice. The Effective Growth Rate is largely driven by growth in Medicare Fee-for-Service expenditures. CMS will phase in a technical adjustment to remove MA-related indirect medical education and direct graduate education costs from the historical and projected expenditures.  The technical adjustment to the Effective Growth Rate will be phased in over three years, where 33 percent of the adjustment will apply in CY 2024, 67 percent in CY 2025, and 100 percent in CY 2026.

Payment rate impact in MA: CMS expects that average payments to MAOs will increase by 3.32 percent in CY 2024 because of the finalized rate announcement, which is higher than the 1.03 percent increase outlined in the Advance Notice. This will result in an estimated $13.8 billion increase in MA payments for CY 2024.

Medicare Part D: The changes from the Inflation Reduction Act to the Part D drug benefit will be implemented as described in the Advance Notice. The changes for CY 2024 include:

  • Elimination of cost sharing for covered Part D drugs for beneficiaries in the catastrophic phase of coverage.
  • Increased income limits from 135 percent of the federal poverty limit (FPL) to 150 percent of the FPL for the low-income subsidy program (LIS) under Part D for the full LIS benefit with a $0 deductible.
  • Continuation of the policy to not apply the deductible for any Part D covered insulin product. Also, in the initial coverage phase and the coverage gap phase, cost sharing must not exceed the applicable copayment amount, which for CY 2024 is $35 for a month’s supply of each covered insulin product.
  • Continuation of the policy not to apply the deductible to any adult vaccine recommended by the Advisory Committee on Immunization Practices (ACIP). Also, the statute requires these vaccines to be exempt from any co-insurance or other cost sharing, including cost sharing for vaccine administration and dispensing fees for such products, when administered in accordance with ACIP’s recommendation, for beneficiaries in the initial coverage and coverage gap phases.
  • Base beneficiary premium (BBP) growth will be held to no more than 6 percent by statute. The BBP for Part D in 2024 will be the lesser of the BBP for 2023 increased by 6 percent or the amount that would otherwise apply under the original methodology if the IRA were not enacted.

Star Ratings: Medicare Advantage star ratings for CY 2024 will include 30 measures with 12 included in the 2024 categorical adjustment index (CAI) values. By contrast, Part D star ratings for CY 2024 will include 12 measures with 5 of those measures included in the 2024 CAI values. The CAI for the 2024 Star Ratings is expected to be issued later in 2023. The CAI was introduced in 2017 as an interim analytical adjustment to address the average within-contract disparity in performance among beneficiaries who receive a low-income subsidy, are dual eligible, and/or are disabled.

The Final Rate Notice also includes three criteria for determining if Part C and D organizations are eligible for the “extreme and uncontrollable circumstances” adjustment to their Star Ratings. To be eligible, an organization must be in a 1) service area that is within the “emergency area” during the “emergency period,” 2) service area that is within a geographic area designated in a major disaster declaration under the Stafford Act and the Secretary exercised authority under the Act based on the same triggering events, and 3) a certain minimum percentage (25 or 60 percent) of beneficiaries must reside in the Federal Emergency Management Agency (FEMA) designated Individual Assistance area at the time of the extreme and uncontrollable circumstance. If an organization meets the criteria outlined and meets the 25 percent minimum, then they will receive the higher of their measure-level rating from the current and prior Star Ratings years for purposes of calculating the 2024 Star Ratings. For organizations meeting the 60 percent minimum and the other criteria, they are excluded from the measure-level cut point calculations for non-CAHPS measures, and the performance summary and variance thresholds.

Upcoming LinkedIn Live: Join HMA for our Future Frame Conversation on Policy Changes in Medicare Advantage and the Implications for Coding, Risk Adjustment, and Reimbursement.  Tuesday April 11, 2023, at 12 p.m. E.T. Click here to register.

If you have questions about the contents of CMS’s MA final notice and how it will affect MA plans, providers, and patients, contact Julie Faulhaber ([email protected]), Amy Bassano ([email protected]), or Andrea Maresca ([email protected]).

Meet the HMA blog contributors

Julie Faulhaber

Julie Faulhaber, MBA

Managing Director, Medicare and Dual Eligibles
Chicago, IL
Amy Bassano

Amy Bassano

Managing Director, Medicare
Washington, DC
Andrea Maresca

Andrea Maresca, MPH

Managing Director, Information Services
Washington, DC