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2014 Final Call Letter: CMS Raises Medicare Advantage Rates but Foreshadows Other Significant Program Changes

After receiving many comments on its Draft Call Letter, CMS published its Contract Year 2014 Final Call Letter on April 1, 2013. The Final Call Letter addresses a wide variety of issues that will affect all parties involved in Medicare Advantage (“MA”) and Medicare Part D arrangements, including plans, beneficiaries, providers, and administrative services entities, such as pharmacy benefit managers (“PBMs”). In addition to announcing and explaining changes that parties must adapt to for CY 2014, CMS also provides insight into program modifications it is considering for CY 2015. Below we discuss some of the important changes that will affect plans, providers, and beneficiaries, and we highlight areas where CMS scrutiny is increasing.

Changes to Plan Reimbursement and Administration

Payment Increase – CMS Assumes Physician Fee Schedule Fix

CMS heeded the call from many commenters who took issue with CMS’s proposed methodology that would have led to MA rate reductions in 2014. The Social Security Act mandates that the MA growth percentage reflect HHS’s estimate of the per capita rate of growth in expenditures. The Draft Call Letter assumed a 25% reduction to the physician fee schedule based on no fix to the sustainable growth rate. In the Final Call Letter, CMS shifted its position to instead assume Congressional action to fix rate reductions and a 0% change for the 2014 physician fee schedule. The result of this change is monumental – instead of a 2.2% decrease, MA rates are expected to increase by 3.3%. Members of Congress and industry groups have praised CMS’s revised position. Annual rate setting is always a critical issue for Medicare Advantage Organizations (“MAOs”) and they will collectively breathe a sigh of relief, for now, given how close CMS came to finalizing the significant rate reductions.

Updated CMS-HCC Risk Adjustment Model/Recalibration

CMS responded to commenters requesting that CMS delay implementation of the updated CMS-HCC risk adjustment model proposed in the Draft Call Letter. The updated CMS-HCC model applies more current data in updates and includes clinical revisions of diagnoses in each HCC. Stakeholders identified a wide range of concerns with the new CMS-HCC model, including that it could decrease risk scores and payments, and negatively impact MA plans with a significant number of chronic conditions. As a result, CMS elected to finalize the proposed model, but limited the impact of the change by blending the risk scores to take into account both the 2013 and the 2014 CMS-HCC models. For 2014, CMS will weigh the normalized risk scores from the 2013 model by 25%, and the normalized risk scores from the clinically revised model by 75%. Although CMS may have mitigated some of stakeholders’ concerns by blending the risk scores to take into account the 2013 and 2014 models, MA plans should be aware of the specific clinical changes made to the CMS-HCC model that may impact risk scores and plan payments. CMS also adopted an MA Coding Adjuster of 4.91%. Some commenters were concerned that the Coding Adjuster and CMS-HCC risk adjustment model changes were duplicative but CMS believes that it has accounted for the changes to the risk adjustment model when it calculated the Coding Adjuster and therefore there is no duplication.

CMS Questions Value of MA Health Risk Assessments

CMS received many comments about its proposal to require MA plans to “flag” diagnosis codes reported as a result of a Health Risk Assessment (“HRA”) and to potentially exclude diagnoses reported through an HRA and for which the beneficiary did not receive follow-up care. CMS has delayed the “flag” requirement until 2014 dates of service and intends to propose and finalize a policy regarding the extent to which diagnoses from HRAs, without follow-up care, may be used to calculate risk scores for payment year 2015.

In its Draft Call Letter, CMS announced that it was considering whether or not the MA HRAs provide valuable information for risk adjustment purposes. CMS recognized that HRAs can identify gaps in care, contribute to improved care, and promote prevention, but was concerned that these evaluations were used to collect diagnoses codes and do not result in follow-up care or treatment for the beneficiary. Multiple commenters were concerned that the proposal conflicted with the current CMS-HCC risk adjustment methodology, how risk adjusted payments were calculated, and how the methodology was calibrated. Commenters were also concerned that the proposal would result in fewer HRAs being conducted and that the requirement would be administratively burdensome.

HRAs and the documentation they produce are important tools for both MA plans and their beneficiaries. When conducted properly, an HRA should result in a complete and accurate record of a beneficiary’s diagnoses and a well-developed personal plan of care. Many types of providers contract with MA plans to provide HRAs, such as traditional primary care providers and medical clinics. Moving forward, MA plans will need to review their arrangements with all entities providing HRAs to ensure that follow-up care and beneficiary outreach is being appropriately provided.

Star Ratings

The Final Call Letter references changes to the 2014 Star Ratings that are designed to “further align” with CMS policy goals. In November 2012, CMS solicited and subsequently received approximately 80 comments relating to proposed enhancements to Medicare Parts C and D Star Ratings. After reviewing the comments, CMS decided to make changes to certain measures (including those relating to call centers, quality improvement, high-risk medication use, medication adherence for diabetes medications, and others), but will not introduce new measures for 2014. The Final Call Letter also highlights, and Plan Sponsors should continue to monitor, CMS’s proposal to change the calculation of the overall rating and the Part C and D summary ratings that may be implemented in 2015 with the goal of more accurately classifying a contract’s “true performance.”

For more information about Star Ratings, please see BNA’s Medicare Star Ratings–What Plan Sponsors Need to Know, written by Theresa Carnegie and Roy Albert.

Employer Group Waiver Plan (“EGWP”) Guidance

All EGWP specific guidance in the Final Call Letter relates to CMS’s creation of “other health insurance” (“OHI”). In April 2012, CMS finalized a regulatory change to the definition of “Part D supplemental benefits” through which it excluded supplemental benefits offered by EGWPs. In the same notice, CMS established OHI as a defined term to encompass those supplemental benefits offered by EGWPs and benefits traditionally offered by EGWPs through commercial wrap products. The effective date of the changes announced in the April 2012 notice relating to the treatment of OHI was scheduled to be January 1, 2013, but CMS ultimately delayed the effective date to January 1, 2014 for EGWPs that were struggling to implement the changes in compliance with ERISA.

The Final Call Letter provides technical guidance to Plan Sponsors and their PBMs on how to properly adjudicate and map a claim that involves OHI. The Letter includes helpful examples and addresses what amounts count towards TrOOP, how to calculate patient liability reduction due to other payer (“PLRO”), and how to apply OHI to beneficiaries who are eligible for the low income cost subsidy (“LICS”). Depending upon the benefit design an EGWP selects, beneficiaries may have higher cost-sharing requirements as the result of OHI at certain coverage points. If OHI results in cost-sharing above the defined standard benefit, PLRO is reported as a negative amount. If the beneficiary is LICS eligible, negative PLRO offsets the LICS amount that the EGWP would otherwise receive. The full beneficiary cost sharing continues to count towards TrOOP regardless of whether PLRO is negative.

CMS also reminds Plan Sponsors that the OHI definition and the consequences of it will be effective January 1, 2014, and that while OHI is a non-Medicare benefit, most prescription claims will remain subject to Part D requirements because EGWPs will be using OHI in almost every instance to reduce cost sharing on a prescription claim already covered under the Part D benefit.

Changes for Beneficiaries

Beneficiary Costs

In contract year 2014, beneficiaries will enjoy some reduced deductibles and out-of-pocket maximums, will have increased coverage in the Part D coverage gap, and will be protected from their MA plans significantly increasing the effective cost of coverage.

The Final Call Letter sets the deductible and out-of-pocket maximums for the Part D Defined Standard Plan below all of the CY 2013 levels. This will result in beneficiaries receiving coverage faster but may also result in beneficiaries reaching the coverage gap sooner. Once in the coverage gap, beneficiaries will receive additional benefits as a result of the Part D program covering 2.5% (on top of the 50% discount provided by pharmaceutical manufacturers) of covered brand drugs and 28% of covered generic drugs.

MA beneficiaries who remain in the same MA plan in which they were enrolled in 2013 will generally experience a total beneficiary cost (“TBC”) change of no greater than $34 per member per month, down from $36 in 2013. CMS may deny an MAO’s bid if it would increase beneficiary cost sharing or decrease benefits too significantly year to year in a given MA plan, a concept referred to as the TBC change. In the Draft Call Letter, CMS proposed a TBC limit of $30 per member per month, but adopted a $34 limit for contract year 2014 after many commenters expressed the need for more flexibility due to the many payment-related changes MAOs face in 2014.

Capitated Financial Alignment Demonstration

CMS reiterated guidance from the Draft Call Letter addressing the Capitated Financial Alignment Demonstration (the “Demonstration”). Under the Demonstration, health plans enter into a three-party contract with CMS and States to manage care for individuals dually eligible for Medicare and Medicaid. The Final Call Letter cites additional CMS guidance it anticipates issuing in the near future.

For more detail about the Demonstration, please refer to CMS’s Financial Alignment Demonstration website and materials from last month’s Roundtable conducted by Susan Berson and Roy Albert sponsored by the Medicare Advantage and Part D Affinity Group of the Payors, Plans, and Managed Care Practice Group of the American Health Lawyers Association titled Financial Alignment Demonstration for Medicare/Medicaid Dual Eligibles: The Next Frontier? (subscription required).

Practices Drawing Increased Scrutiny

Inappropriate use of Prior Authorization Forms

CMS is concerned that some Part D Plan Sponsors and/or their PBMs are inappropriately using their prior authorization process to limit beneficiaries’ choice of pharmacies. These Plan Sponsors and PBMs have developed prior authorization forms that require so much information that once a form is complete, it can serve as a valid prescription. Upon approval of the claim, these Plan Sponsors and PBMs are filling the prescription through their own mail-order pharmacies, therefore ignoring the beneficiary’s right to choose a pharmacy. CMS has received many complaints about this practice and believes that using prior authorization forms in this manner violates CMS requirements. CMS instructs Plans Sponsors and PBMs to discontinue this practice. Plan Sponsors and PBMs should review their prior authorization practices and ensure that they comply with CMS requirements.

Auto-Ship Refill Programs through Mail Order Pharmacies

CMS believes that many Part D beneficiaries receive unwanted refill prescriptions as the result of mail order pharmacy auto-refill programs. According to CMS, if a beneficiary receives a prescription via mail that he or she does not want, generally the pharmacy is unable to restock the medication and does not reverse the claim, ultimately resulting in significant waste. To reduce the incidence of this, starting in 2014, Part D Plan Sponsors must require their network pharmacies, retail and mail, to obtain beneficiary consent to deliver a prescription prior to each delivery, regardless of whether the prescription to be filled is new or a refill. Additionally, CMS strongly recommends that Plan Sponsors require network pharmacies to implement this consent requirement for the remainder of 2013.

This new requirement will affect Plan Sponsors, their PBMs, and network pharmacies. All parties involved should consider the documentation and processes necessary in order to comply with the new consent requirement. Additionally, Plan Sponsors and PBMs will need to update their pharmacy audit plans to ensure each pharmacy is complying with the consent requirement.

CMS also states that it is reconsidering its approval of mail-service benefit designs that include 30-day mail-service supplies. Plan Sponsors should expect CMS to deny benefit designs that include very attractive mail-service cost sharing incentives for 30-day supplies unless the same cost sharing is available at retail pharmacies. CMS is concerned that some plans are using incentives to entice beneficiaries to use mail-order service even when mail-service may not be the best option for the beneficiary and believes that mail-service is more appropriate for longer term prescription supplies. Plan Sponsors and PBMs will need to closely examine the cost implications of transferring 30-day mail supplies to retail pharmacies and mail-order pharmacies that fill many 30-day supply prescriptions will need to prepare for the possible loss of these prescriptions.

Incremental Fills of Schedule II Controlled Substances Prescriptions

CMS cites a September 2012 OIG Report finding that the majority of Part D sponsors were inappropriately paid a total of $25 million in 2009 for Schedule II controlled substances billed as refills. CMS uses the Report to mandate that Plan Sponsors establish internal controls, such as retrospective auditing and adjusting or deleting PDEs that were erroneously submitted for illegal or improper refills, to prevent Part D payment for illegal refills of Schedule II controlled substances. Commenters to the Draft Call Letter emphasized that the industry, through the National Council for Prescription Drug Programs, has been actively addressing the limitation of the current HIPAA prescription drug billing standard with respect to distinguishing partial or incremental fills of an original prescription from refills. While CMS recognized the efforts of the National Council for Prescription Drug Programs, Plan Sponsors must still develop internal controls to prevent improper payment for Schedule II controlled substances, which have the highest potential for abuse of any prescription drugs that are legally available in the United States.

Post Point-of-Sale Claim Adjustments and Administrative Fees

The Final Call Letter provides significant guidance instructing Plan Sponsors and PBMs on how to properly report PDEs when a claim is adjusted after the point-of-sale. CMS does not believe the guidance sets forth new policy, but rather that it summarizes current guidance and provides more clarity. Whether or not the guidance establishes new policies, Plan Sponsors and PBMs should carefully review their claims processing and PDE reporting practices to ensure they are complying with CMS’s interpretation of its current guidance.

It has come to CMS’s attention that many Plan Sponsors and PBMs completely recoup the amount originally paid for a claim under inappropriate circumstances, and even when such recoupment is appropriate, they do not properly report the recoupment to CMS. CMS divides the types of claim errors into three categories; financial, administrative, and coverage. Financial errors occur when a Plan Sponsor or PBM inaccurately calculates and pays a valid claim. Administrative errors occur when a pharmacy includes inaccurate or incomplete data in fields that do not affect the financial calculation and coverage determination of the claim. Coverage errors occur when a claim is paid that should not have been covered under Part D, such as a fraudulent claim or a claim for an excluded drug. CMS clarifies that only claims that suffer from coverage errors should result in full recoupment; the other types of errors should result in adjustments when appropriate.

Further, Plan Sponsors and PBMs have been using the DIR reporting process to report certain claims adjustment to CMS when they should have been updating PDE submissions instead. CMS explains that PDE adjustment or deletion (in the case of full recoupment) is the only reporting methodology that is consistent with payment accuracy. PDEs are required to represent the amounts actually paid to the pharmacies and failing to submit an adjusted PDE when the original PDE record contains inaccurate information is a misrepresentation and results in the submission of erroneous data. According to CMS, reporting the adjustments to claims paid through DIR negatively affects the accuracy of the Part D payment and the reliability and usefulness of the PDE data. CMS recognizes that confusion exists regarding the field “pharmacy payment adjustments” in the DIR reporting tool and it will be providing further clarification on this field in the 2012 DIR reporting instructions.

Some Plan Sponsor and PBM commenters were concerned with CMS’s clarifications, believing that they would result in them bearing the cost of pharmacy errors when a pharmacy does not submit correct information that is required in order for CMS to accept the PDE. CMS believes that this will not be a problem because pharmacies should be able to provide the correct information if given a reasonable amount of time. CMS also reminded Plan Sponsors that it is their responsibility, not the pharmacy’s responsibility, to verify NPIs and to investigate apparently erroneous NPIs.

Pharmacy commenters were supportive of the guidance and also requested CMS to set PBM audit standards. While CMS declined to set such standards, as PBMs are well aware, many states have been adopting PBM regulations limiting PBMs’ rights to audit pharmacies and creating strict rules regarding how audits may be conducted.

Finally, CMS is considering revising its definition of “negotiated price” as a result of Plan Sponsors and PBMs charging pharmacies post point-of-sale claim administrative fees. According to some commenters, these fees are often associated with preferred pharmacy networks, but other commenters reported that these fees are standard in the industry. CMS believes that these fees, for example, $1.00 per claim, result in an overstatement of negotiated price and that this practice is inconsistent with the Part D rules. CMS acknowledges that its definition of negotiated price can be interpreted to permit these types of arrangements, but states that these arrangements are contrary to CMS’s intent that negotiated price transparently reflect all pharmacy price concessions on a per-drug-claim basis. While CMS considers how to revise the definition of negotiated price, Plan Sponsors will not be considered to be non-compliant so long as the fees are reported through DIR reporting.

Preferred Pharmacy Networks

Although regulations permit lower cost sharing at certain network pharmacies, CMS points out that cost sharing reductions cannot increase CMS payments to plans. CMS notes that its initial data suggests that aggregate unit costs weighted by utilization for the top 25 brand and top 25 generic drugs may be higher in preferred networks than non-preferred networks for certain plans. When this cost differential is combined with lower cost-sharing amounts, CMS is concerned that higher unit costs may make Part D payments greater for preferred networks when compared to non-preferred networks. Plan Sponsors should be cognizant of this area of concern for CMS, and ensure that cost sharing reductions do not increase CMS payments to certain plans. Further, Plan Sponsors should understand that communications to beneficiaries addressing preferred networks must be clear and unambiguous and that the designation of preferred and non-preferred networks in plan benefit packages and Medicare Plan Finder pricing submissions must be accurate.

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While the change in Medicare Advantage rates may capture the most immediate attention, the policies set forth in the Final Call Letter span the Medicare Advantage and Prescription Drug Benefit Programs. In addition to carefully reviewing the Final Call Letter, Plan Sponsors should continue to monitor future guidance, as CMS indicates that relevant policy statements are likely to be issued in the near future.


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Theresa advises clients on all aspects of the pharmaceutical supply chain, including counseling industry stakeholders on a range of business, legal, transactional, and compliance matters. She provides clients with strategic counseling and creative business modeling that considers legal restrictions and regulatory risk in light of innovation and business goals.
Tara advises managed care organizations, pharmaceutical services providers such as PBMs, and integrated delivery systems, and companies that invest in them, on matters relating to compliance with federal health care program regulations, federal and state fraud, waste and abuse laws and plan benefits.