The Centers for Medicare & Medicaid Services (CMS) has 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 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 Instructionswhich center on implementing provisions of the Inflation Reduction Act of 2022 (IRA) related to the Part D benefit for 2025. A press release and fact sheet for the Advance Notice and fact sheet for the Part D Redesignwere also released.

Changes and proposals include the following:

• Technical changes to effective growth rates for calculating MA payments,
• Changes related to implementing the IRA Part D benefit redesign for 2025,
• Changes to MA risk adjustment methodology,
• Continued risk adjustment model for Program of All-Inclusive Care for the Elderly (PACE) Organizations,
• Continued Part D risk adjustment model with plans for 2025 IRA-related changes,
• Continued End Stage Renal Disease risk adjustment model,
• Introduction of a frailty adjustment for PACE and Fully Integrated Dually Eligible (FIDE) SNPs,
• Adjustments to Fee-for-Service (FFS) per capita costs in Puerto Rico, and
• Solicitation of feedback on MA star ratings measure concepts for future years.

If all the proposals are finalized, CMS anticipates a 3.7%, or over $16 billion, increase in MA plan payments compared to last year.

Public comments on the Advance Notice and Part D Redesign Program Instructions must be submitted by 6:00 PM Eastern Time on Friday, March 1, 2024. If finalized, the Rate Announcement and final Program Instructions will be published no later than April 1, 2024.

CMS PROPOSES TECHNICAL UPDATE TO EFFECTIVE GROWTH RATE USED TO DETERMINE MA PAYMENT

The effective growth rate reflects the current estimate of growth in benchmarks used to determine payment for Medicare Advantage plans. The growth rate is calculated using the growth in Medicare FFS per capita costs, as estimated by the Office of the Actuary.

For 2025, CMS proposes continuing its three-year phase-in of this technical adjustment finalized in the CY 2024 Rate Announcement. The technical correction to the per capita cost calculations is related to indirect and direct medical education costs associated with services furnished to MA enrollees. The resulting effective growth rate (FFS growth percentage) for 2025 is estimated to be 2.44%, with a net impact of $9.2 billion.

AS REQUIRED UNDER THE INFLATION REDUCTION ACT OF 2022, CMS MAKES CHANGES TO IMPLEMENT PART D RELATED PROVISIONS

The Inflation Reduction Act of 2022 (IRA) requires several changes to the Part D benefit. Key changes in the Part D Redesign Program Instructions are outlined below. CMS plans to address provisions that will be effective in 2025 and beyond in future Advance Notices and Rate Announcements.

CMS Implements Part D Redesign Changes

For 2025, the IRA makes 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 elimination of the coverage gap phase, the new benefit will have three phases instead of four: the deductible phase, the initial coverage phase, and the catastrophic phase.
  • The annual OOP threshold will be set at $2,000 for CY 2025. After meeting such 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 January 1, 2025 and Establishment of the Discount Program: Participating manufacturers that enter into a Discount Program agreement will provide discounts on applicable drugs, typically 10% of the negotiated price for enrollees in the initial coverage phase and 20% 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 phase, the initial coverage phase, and the catastrophic phase. These changes, effective January 1, 2025, apply to all Part D plans, including employer group waiver plans (EGWPs).
  • Annual deductible phase: Enrollee pays 100 percent of their gross covered prescription drug costs (GCPDC) until the deductible is met.
  • Initial coverage phase: Enrollee pays 25% coinsurance for covered Part D drugs. Sponsor typically pays 65% of the costs of applicable drugs and 75% of the costs of all other covered Part D drugs. The manufacturer, through the Discount Program, typically covers 10% 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% of the costs of all covered Part D drugs. The manufacturer pays a discount, typically equal to 20%, for applicable drugs. CMS pays a reinsurance subsidy equal to 20% of the costs of applicable drugs, and equivalent to 40% of the costs of all other covered Part D drugs that are not applicable drugs.

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 their 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 specifically including payments for previously excluded supplemental benefits provided by Part D sponsors and Employer Group Waiver Plans (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 and 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 defined standard benefit to exempt certain drugs (certain insulins and vaccines) from the deductible. TrOOP-eligible costs for drugs not subject to the defined standard (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 towards a beneficiary’s satisfaction of the DS deductible.

For CY 2025, if a beneficiary has not satisfied their plan deductible but has incurred sufficient TrOOP-eligible costs to satisfy the defined standard deductible, they 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, if 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 they have not incurred TrOOP-eligible costs to satisfy the defined standard deductible amount, then 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 correspondingly vary for different types of drugs in CY 2025. CMS proposes to calculate the reinsurance subsidy separately for applicable and non-applicable drugs and allocate the share of DIR for applicable and non-applicable 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 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 in the summer of 2024.

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 establishes 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.

CMS PROPOSES TO CONTINUE PHASE-IN OF THE CMS-HCC RISK ADJUSTMENT MODEL WITH FULL IMPLEMENTATION BY 2026

In CY 2024, CMS introduced the CMS-HCC risk adjustment model, with plans to fully implement it by 2026. The model included updates such as restructuring condition categories, using ICD-10 codes, and incorporating more recent data. For the 2024 payment year, risk scores were calculated as a blend of the 2020 CMS-HCC model and the updated 2024 model.

For 2025, CMS proposes to continue the phase-in, with risk scores calculated as a blend of 33% from the 2020 model and 67% from the 2024 model.

CMS states that continuing the implementation of the 2024 CMS-HCC model is necessary, citing strong growth in the dual Special Needs Plan (SNP) market. CMS also asserts that the model improves payment accuracy by using recent data and clinically meaningful conditions developed from experience with ICD-10 codes. Additionally, this aims to ensure that MA payments more accurately reflect recent relative costs and adequately compensate plans for enrollees with complex health needs.

The MA risk score trend for 2025 was calculated by blending the trends from the 2020 and 2024 CMS-HCC models. The blended trend, at 3.86 percent, reflects the average change in population and coding practices across all MA plans, with variations possible among individual plans in terms of payment impacts.

CMS PROPOSES TO MAINTAIN 2017 CMS-HCC MODEL FOR PACE ORGANIZATIONS IN CY 2025

For CY 2025 payments to Programs of All-Inclusive Care for the Elderly (PACE) organizations, CMS proposes to continue using the 2017 CMS-HCC model to calculate risk scores. This model was initially employed for CY 2020 payments and relies on specialty-based filtering logic to select FFS diagnoses for calibration. Unlike more recent versions of the CMS-HCC model used for non-PACE organizations, which utilize encounter data, the PACE organization model maintains consistency by using the same filtering method for both encounter data and FFS claims. Therefore, implementing a newer version of the CMS-HCC model for PACE in CY 2025 is deemed inappropriate, as PACE beneficiary risk scores are not currently calculated solely from encounter data and FFS claims.

CMS PROPOSES UPDATES TO THE PART D RISK ADJUSTMENT MODEL IN ALIGNMENT WITH IRA MANDATE

CMS suggests revisions to the Part D risk adjustment model to align with the restructured Part D benefit mandated by the IRA. This includes adjustments for the $2,000 cap on annual out-of-pocket spending and the introduction of the new Manufacturer Discount Program for CY 2025. These changes are directed to support plan sponsors in accurately formulating bids for the specified year. Additionally, CMS proposes the calibration of the model using more recent data years and suggests updates to the normalization methodology. The aim is to account for variations in risk score trends between Medicare Advantage prescription drug (MA-PD) plans and stand-alone prescription drug plans (PDP).

CMS PROPOSES TO MAINTAIN EXISTING END STAGE RENAL DISEASE RISK ADJUSTMENT MODELS FOR CY 2025

For CY 2025, CMS will maintain separate End Stage Renal Disease (ESRD) risk adjustment models for MA plans and PACE organizations. MA plans will continue using the 2023 ESRD risk adjustment models, detailed in the CY 2023 Advance Notice, for beneficiaries in dialysis, transplant, and post-graft status. PACE organizations will continue to use the 2019 ESRD risk adjustment models, outlined in the CY 2019 Advance Notice, for calculating ESRD risk scores for PACE participants. CMS emphasizes the use of encounter data as a source of diagnoses for CY 2025 ESRD risk score calculation.

CMS PROPOSES INTRODUCTION OF FRAILTY ADJUSTMENT

For CY 2025, CMS proposes the introduction of a frailty adjustment for PACE Organizations and Fully Integrated Dually Eligible (FIDE) SNPs to predict Medicare expenditures for community populations with unexplained functional impairments. Compliance with statutory requirements involves considering frailty when establishing capitated payments for PACE organizations and allowing additional adjustments for frailty in FIDE SNPs. Frailty factors, calibrated based on ADLs, will be blended for FIDE SNPs in CY 2025 using a combination of 2020 and 2024 CMS-HCC model frailty factors. In CY 2025, CMS plans to continue using frailty factors finalized in CY 2024 for FIDE SNPs, aligning with the “exclusively aligned enrollment” requirement. The proposed blending involves 33 percent from the 2020 CMS-HCC model and 67 percent from the 2024 model. For CY 2025, CMS will use full Medicaid frailty factors to calculate FIDE SNP frailty scores, irrespective of respondents’ 2024 Medicaid status, aligning with the enrollment requirement starting in CY 2025. This approach is intended to align with FIDE SNP enrollment requirements for payment year 2026.

CMS PROPOSES CONTINUING TO ADJUST FFS PER CAPITA COSTS IN PUERTO RICO

In Puerto Rico, a significantly higher proportion of Medicare beneficiaries receive benefits through MA rather than FFS compared to other states or territories. To maintain stability for the MA program in Puerto Rico in CY 2025, CMS proposes to set MA county rates based on the relatively higher costs of individuals in FFS with both Medicare Parts A and B and offer an adjustment for individuals with zero claims.

CMS invites comments on alternate adjustment approaches for Puerto Rico.

CMS SEEKS FEEDBACK ON STAR RATINGS MEASURE CONCEPTS FOR FUTURE YEARS

Star Ratings are a quality rating system for Medicare Advantage (Part C) and Medicare Part D prescription drug plans. These ratings are released annually and consist of a one-to-five-point scale (with five indicating excellent performance). Measures used to calculate 2025 Star Ratings are included in Table IV-1 of the Advance Notice[1].

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 into 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 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; and
• 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 that is 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 on 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.[2]

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 PLAN YEAR

CMS updates the Medicare Part D benefit parameters for the defined standard drug benefit on an annual basis. Given IRA changes for CY 2025, only the defined standard benefit and low-income subsidy (LIS) benefit parameters have been updated by the methodology provided under the Social Security Act. The IRA set the annual out-of-pocket threshold at $2,000 for CY 2025. Additionally, under the IRA, beneficiaries who were previously eligible for the partial 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.

Standard Benefit	2024	2025 (Draft)
Deductible Beneficiary is responsible for 100% of drug costs.	$545	$590
Initial Coverage Limit Beneficiary is responsible for 25% of drug costs in the initial coverage phase. The Coverage Gap Discount Program sunsets effective January 1, 2025, and will be replaced with the Manufacturer Discount Program. Plans will be responsible for 65% of the cost of applicable drugs and 75% of the cost for non-applicable drugs. For applicable drugs, manufacturers will be responsible for 10% of the cost. An applicable drug is a drug approved under a New Drug Application or Biologics License Application.	$5,030	Eliminated for 2025 as the coverage gap phase is eliminated. The initial coverage phase will extend to the maximum out-of-pocket threshold of $2,000.
Out-of-Pocket Threshold Beneficiary does not have cost-sharing after out-of-pocket spending reaches $2,000. The Coverage Gap Discount Program sunsets effective January 1, 2025, and will be replaced with the Manufacturer Discount Program. For applicable drugs, plans will be responsible for 60% of drug costs, Medicare will be responsible for 20%, and manufacturers will be responsible for 20%. For non-applicable drugs, plans will be responsible for 60% of drug costs and Medicare will be responsible for 40%. An applicable drug is a drug approved under a New Drug Application or Biologics License Application.	$8,000	$2,000 Statutorily set under the IRA.
Maximum Copayments for Non-Institutionalized Dual Eligibles
Full Subsidy-Full Benefit Dual Eligible (FBDE) Beneficiaries Up to 100% of federal poverty level (FPL) Generic/Preferred Multi-Source Drug Other	$1.55 $4.60	$1.60 $4.80
Full Subsidy-FBDE Beneficiaries Between 100% and 150% of FPL Generic/Preferred Multi-Source Drug Other	$4.50 $11.20	$4.90 $12.15
Full Subsidy-Non-FBDE Beneficiaries Applied or eligible for QMB/SLMB/QI or SSI, income at or below 150 % FPL for 2024 and resources ≤ $15,720 (individuals, 2024) or ≤ $31,360 (couples, 2024) Generic/Preferred Multi-Source Drug Other	$4.50 $11.20	$4.90 $12.15

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This Applied Policy® Summary was prepared by Stephanie Lomas with support from the Applied Policy team of health policy experts. If you have any questions or need more information, please contact Stephanie Lomas at slomas@appliedpolicy.com or at 202-558-5272.

[1] See page 112 of the Advance Notice.

[2] See pages 138 and 139 for specific areas where CMS is seeking feedback.