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. CMS will announce the MA capitation rates and final payment policies for CY 2025 by April 1, 2024. CMS also released its Draft CY 2025 Part D Redesign Program Instructions concurrently with the Advance Notice which included a detailed description of IRA-related changes to the Part D benefit which take effect in CY 2025.
More on Proposals
If all of the proposals in the Advanced Noticed 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 rate change is modestly disappointing for insurers, but there’s a good chance the reimbursement rate could improve in the final notice, analysts said.
Additionally, CMS proposed 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.
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).
Furthermore, the Inflation Reduction Act (IRA) will make significant changes to the existing Part D benefit design. One notable change is the reduction of the annual out-of-pocket (OOP) threshold to $2,000 and elimination of the coverage gap. 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.
CMS will also sunset the coverage gap discount program on January 1, 2025, and CMS is establishing 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.
There are also changes to the 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.
CMS is also 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.