Each March, the Medicare Payment Advisory Commission (MedPAC) is required to report to Congress on the Medicare fee-for-service (FFS) payment systems, the Medicare Advantage (MA) program, and the Medicare prescription drug program (Medicare Part D). In this report, MedPAC provides payment update recommendations for Medicare FFS payment systems, status updates on ambulatory surgical centers (ASCs), the MA program, and the Part D program; and mandated reports on dual-eligible special needs plans and rural emergency hospitals. The report also includes a chapter on estimating MA coding intensity and favorable selection. The report was released on March 15, 2024, and can be found here.

MEDPAC HIGHLIGHTS TRENDS IN MEDICARE, INCLUDING INCREASING UTILIZATION OF MEDICARE ADVANTAGE PLANS AND EXEPECTED INCREASES IN MEDICARE SPENDING

National healthcare spending in the United States is growing faster than the GDP. In the past twenty years, healthcare spending has increased by 14.9 percent, and Medicare spending increased from 2.4 percent to 3.7 percent. Medicare spending is also expected to double in the next ten years. Higher Medicare spending is due to an increasing number of beneficiaries because of the baby boomer generation aging into the program, and an increased utilization of MA plans. MA plans are typically costlier to the Medicare program but have been an increasingly common option for beneficiaries as beneficiary cost sharing has increased because MA and Medi-gap plans help offset that cost for the beneficiaries. Medicare is facing difficulties financing the program because the number of workers per beneficiary will decrease to about 2.5 workers by 2031, which is down from 4.5 workers per beneficiary when Medicare was first created. The Commission believes that increasing the Medicare payroll tax or reducing Part A may help address this issue.

PAYMENT UPDATE RECOMMENDATIONS

To assess payment adequacy and provide payment update recommendations for Medicare FFS, MedPAC considers all available indicators of payment adequacy and the most recently available data. Due to data lags, the most recent complete data MedPAC has is from 2022. To arrive at payment update recommendations, MedPAC considers the following payment adequacy indicators: beneficiaries’ access to care, quality of care, access to capital, and Medicare payments and providers’ costs. Direct and indirect effects of the COVID-19 public health emergency (PHE) have impacted MedPAC’s ability to interpret some of its payment adequacy indicators. The table below summarizes MedPAC’s payment update recommendations and rationale.

Payment System	Payment Update Recommendation	Rationale
Hospital inpatient and outpatient services	For fiscal year 2025, the Congress should update the 2024 Medicare base payment rates for general acute care hospitals by the amount specified in current law plus 1.5 percent.	Indicators of overall payment adequacy were mixed, and recent volatility in hospital profit margins, in part due to the PHE, has made it difficult for MedPAC to assess overall payment adequacy. However, MedPAC expects that hospital will have a relatively low FFS Medicare margin in 2025 if Medicare’s current law update is maintained.
Physician and other health professional services	For calendar year 2025, update the 2024 Medicare base payment rate for physician and other health professional services by the amount specified in current law plus 50 percent of the projected increase in the Medicare Economic Index.	Physician payment adequacy indicators have remained positive or improved, but rising costs due to inflation have increased faster than they historically have.
Outpatient dialysis facility	For calendar year 2025, the Congress should update the 2024 Medicare end-stage renal disease prospective payment system base rate by the amount determined under current law.	Most indicators for outpatient dialysis services are generally positive.
Skilled nursing facility (SNF) services	For fiscal year 2025, the Congress should reduce the 2024 Medicare base payment rates for skilled nursing facilities by 3 percent.	MedPAC recommends a payment reduction to more closely align payments with costs, noting that the FFS Medicare margin for freestanding SNFs is projected to be 16 percent in 2024.
Home health care services	For calendar year 2025, the Congress should reduce the 2024 Medicare base payment rates for home health agencies by 7 percent.	MedPAC has found that FFS Medicare payments are significantly higher than costs.
Inpatient rehabilitation facility (IRF) services	For fiscal year 2025, the Congress should reduce the 2024 Medicare base payment rate for inpatient rehabilitation facilities by 5 percent.	MedPAC recommends a payment reduction to more closely align payments with costs, noting that the FFS Medicare margin for IRFs is projected to be 14 percent in 2024.
Hospice services	For fiscal year 2025, the Congress should eliminate the update to the 2024 Medicare base payment rates for hospice.	Hospice providers had generally positive payment adequacy indicators and high margins, indicating that current payment rates are sufficient.

MEDPAC REITERATES RECOMMENDATION IN FAVOR OF AN ALTERNATIVE MECHANISM TO SUPPORT SAFETY-NET HOSPITALS

MedPAC recommends that in addition to its payment update recommendation that the Congress should update the 2024 Medicare base payment rates for general acute care hospitals by the amount specified in current law plus 1.5 percent, the Congress should enact its recommendations related to supporting safety-net hospitals. This recommendation is the same as MedPAC’s recommendation from its March 2023 report to Congress, but increases the dollar amount it recommends be added to the Medicare Safety-Net Index (MSNI) pool from $2 billion to $4 billion.

MedPAC believes its MSNI would better target resources to support hospitals that are primary sources of care for low-income Medicare beneficiaries compared to the current disproportionate share hospital metric. Each hospital’s MSNI would be calculated using the following:

1. The share of Medicare volume associated with low-income Medicare beneficiaries, as identified by those who receive the Part D low-income subsidy (LIS);
2. The share of revenue the hospital spends on uncompensated care, as defined by bad debts and charity care; and
3. The share of total volume associated with Medicare beneficiaries.

The formal recommendation is as follows:

In addition [to the payment update recommendation for hospital inpatient and outpatient services], the Congress should:

• begin a transition to redistribute disproportionate share hospital and uncompensated care payments through the MSNI;
• add $4 billion to the MSNI pool;
• scale fee-for-service MSNI payments in proportion to each hospital’s MSNI and distribute the funds through a percentage add-on to payments under the inpatient and outpatient prospective payment systems; and
• pay commensurate MSNI amounts for services furnished to MA enrollees directly to hospitals and exclude them from MA benchmarks.

MEDPAC REITERATES RECOMMENDATION OF ADDITIONAL FINANCIAL SUPPORT FOR CLINICIANS WHO SUPPORT LOW-INCOME MEDICARE BENEFICIARIES

The Commission recommended that Congress enact the Commission’s March 2023 recommendation to establish safety-net add-on payments under the physician fee schedule for services delivered to low-income beneficiaries. MedPAC defines “low-income Medicare beneficiaries” as those who receive full or partial Medicaid benefits and those who do not qualify for Medicaid benefits but do receive the Part D low-income subsidy (LIS). Additionally, MedPAC suggested additional Medicare funding should only be allocated to support safety-net providers if 1) low-income Medicare beneficiaries are at risk of negative effects, 2) Medicare is not a materially profitable payer in the sector, and 3) current payment adjustments cannot be redesigned to adequately support safety-net providers.

The formal recommendation from March 2023 is as follows:

The Congress should enact a non-budget-neutral add-on payment, not subject to beneficiary cost sharing, under the physician fee schedule for services provided to low-income Medicare beneficiaries. These add-on payments should equal a clinician’s allowed charges for these beneficiaries multiplied by:

• 15 percent for primary care clinicians and
• 5 percent for non–primary care clinicians.

COMMISSION REITERATES THAT IT DOES NOT HAVE ENOUGH INFORMATION TO MEANINGFULLY CONDUCT AN ANALYSIS OF ASC QUALITY

Over the past year, the supply and volume of ambulatory surgical centers (ASCs) has increased, consistent with historical trends. This growth is due to factors such as changes in clinical practice and healthcare technology, greater convenience for beneficiaries, lower coinsurance, greater physician autonomy, and an increased interest in value-based care. Most ASCs continue to be for-profit and in urban areas, however, the concentration of ASCs is widely dependent on the state. There is also a shift of surgical and outpatient procedures from hospital outpatient departments (HOPDs) to ASCs when a new ASC is opened.

Most ASCs that bill Medicare specialize in one clinical area which has not changed for the past year, except for an increase in ASCs specializing in either pain management or cardiology. Similarly, the volume of services in ASCs rose in 2022 from 10.7% to 11.3% but there was not a change in which procedures tended to take up the most volume.

The Commission continues to believe that the ASC quality reporting program does not have enough measures to conduct a meaningful analysis of ASCs and highlights its previous recommendation that CMS implement a value-based purchasing program that rewards high-performing providers while penalizing low-performing providers. They recommend also adding quality measures such as number of surgical site infections, specialty-specific clinical guidelines to determine the appropriateness of services provided, and claims-based outcomes for cardiology services. The Commission also reiterated its recommendation from previous years that the Secretary should require ASCs to report cost data.

MEDPAC NOTES INFLATION REDUCTION ACT IMPACT AND GROWTH IN DRUG PRICES IN PART D STATUS REPORT

The Medicare Part D program provided coverage for more than 51 billion Medicare beneficiaries in 2023, with 2022 Part D expenditures totaling $117.3 billion. Medicare spending for the low-income subsidy (LIS), which provides assistance with premiums and cost sharing for nearly 14 million enrollees, totaled $39.7 billion in 2022, with $35.2 billion for cost sharing and $4.5 billion for premiums.

The Part D program has changed since it began in 2006. While use of generic drugs has significantly increased, spending on high-cost biologics and specialty medications accounts for a growing share of spending. Medicare spending on reinsurance and the LIS have also increased, which has reduced plans’ financial risks and their incentives to control costs. The passage of the Inflation Reduction Act (IRA) in 2022 has also impacted the Part D program given its numerous policies related to drugs, including the Part D benefit redesign, which is similar to recommendations MedPAC made in 2020. Overall Medicare Part D beneficiaries are satisfied with their coverage, and dissatisfaction tied to costs is likely to be lessened by the IRA’s $2,000 cap on Part D out-of-pocket costs, which will go into effect in 2025.

MedPAC’s key findings include the following:

IRA impact

MedPAC highlighted that implementing the IRA’s Part D benefit redesign, along with other changes mandated by the IRA, will involve complex decision making that will impact plan formularies, payments, incentives regarding drug development and beneficiary access and costs. Regarding these considerations, MedPAC noted the following:

• Plan sponsors may modify formularies in response to bearing more risk for enrollee drug spending, within the constraints of CMS’s guidance and formulary review processes.
• The $2,000 out-of-pocket cap on beneficiary Part D costs, which begins in 2025, may impact patients’ decisions regarding which drugs to take. Patients may be more likely to fill their prescriptions, and they may have fewer incentives to take generic or biosimilar medicines. MedPAC suggests this provision could increase revenue for some manufacturers if beneficiaries have improved access to drugs.
• Changes in patient and prescribing behavior, in addition to recent legislative changes, may influence manufacturer choices regarding the types of drugs they choose to development.
• The Drug Price Negotiation Program may impact biopharmaceutical innovation depending on the extent to which manufacturer revenues are lower than what they otherwise would have been, though estimates of these impacts have varied widely. The Congressional Budget Office has estimated that one less drug would be introduced to the US market from 2023 to 2032 due to the Drug Price Negotiation Program, but Avalere has estimated that more than 100 less drugs would be introduced to the market over the same period. MedPAC suggests it may be challenging to measure the Drug Price Negotiation Program’s specific impact on biopharmaceutical research and development with any certainty, and notes that near-term commentary suggests the impact on research and development has been more moderate than anticipated by some stakeholders.
• The impact of the IRA on enrollees’ drug accessibility will vary depending on the how CMS implements policies related to notifying enrollees that they may smooth out-of-pocket costs over the course of the year (known as the Medicare Prescription Payment Plan).
• MedPAC will continue to monitor the impact of the IRA’s changes, being mindful of the need for beneficiary access to drugs and for program efficiency.

Biosimilar trends

• MedPAC suggests that meaningful savings for biologics will depend mostly on successful launch and adoption of biosimilars by both prescribers and beneficiaries.
• Humira and adoption of its biosimilar products provides insight into biosimilar formulary coverage trends:
  • In 2024, nearly 60 percent of all Part D enrollees are in plans that include at least one Humira biosimilar. About half of these enrollees are in plans that cover just one biosimilar product, while the other half are in plans that cover at least two.
  • Around 2/3 of enrollees in plans that cover one or more biosimilars are in MA Prescription Drug plans.
  • When on formulary, most plans put Humira and the biosimilar product in the same cost-sharing tier, typically the specialty tier.
  • Of the biosimilar products, Cyltezo, an interchangeable biosimilar, is most likely to be covered, with inclusion on about 50 percent of plans in 2024. Most plans cover both Cyltezo and Humira products.
  • Having a low list price did not seem to give a biosimilar an advantage in formulary placement over biosimilars with higher list prices, as manufacturer rebates are important to plans’ formulary decisions.

Drug prices

MedPAC contracted with Acumen to contrast a series of volume-weighted price indexes that reflect total amounts paid to pharmacies for Part D prescriptions, including ingredient costs and dispensing fees. Indexes reflect prices measured at the median of the distribution, and reflect changes in prices of existing products, not launch prices of new products. This analysis finds that overall Part D prices have continued to rise, even with most Part D enrollees primarily using generic drugs. Indexes are shown below. See Table 11-3, page 335 of the report.

Pharmacy benefit managers (PBMs)

• About 300 organizations operate Part D plans, but most beneficiaries are enrolled in a concentrated number of plans sponsored by large health insurers. Most of the largest insurers have their own PBMs that operate mail-order and specialty pharmacies.
• In 2022, the top five prescription drug plan (PDP) sponsors accounted for 88 percent of covered lives, while the top five MA-PD sponsors accounted for 68 percent of covered lives.
• In 2022, the top five PBMs negotiated rebates on behalf of more than 90 percent of all Part D beneficiaries and prescriptions. While rebates can reduce premiums for all enrollees, they can also increase costs to Medicare.
• The magnitude of aggregate rebates has grown from $8.6 billion (11 percent of gross Part D spending) to $57.3 billion (24 percent of gross Part D spending) from 2010 to 2022.
• CMS finalized a rule redefining “negotiated price” of a Part D drug to include all possible pharmacy price concessions, so that the price reflects the lowest possible reimbursement a network pharmacy may receive for a drug. The negotiated price is the price paid at the point of sale to a network pharmacy or dispensing provider, and will be the basis for enrollee cost-sharing. The policy went into effect on January 1, 2024, and does not apply to manufacturer rebates. Pharmacy direct and indirect remuneration (DIR) has increased from $500 million in 2014 to $17.1 billion in 2022, leading to CMS concerns regarding how these fees disconnect beneficiary cost sharing to the actual price of a drug.
• Vertical integration of PBMs and high market concentration is concerning because it may be associated with anticompetitive behavior such as restricted pharmacy network participation or increased prices of PBM services for competing health plans that contract with that PBM.

IN MEDICARE ADVANTAGE STATUS REPORT, COMMISSION SUGGESTS MEDICARE ADVANTAGE POLICIES URGENTLY NEED REFORM

As of 2023, more than half of eligible Medicare beneficiaries were in MA plans, at 52 percent, more than double 2014 enrollment. The average beneficiary had access to 43 plans from eight plan sponsors. Rebates that finance extra benefits are near record-high levels. In 2024, Medicare payments to MA plans are expected to total $83 billion more than if MA enrollees were enrolled in FFS, with payments to MA plans estimated to be an average of 122 percent of what Medicare would have expected to spend on MA enrollees had they been enrolled in FFS. Estimates reflect higher MA coding intensity, favorable selection, benchmarks above FFS spending in low-FFS-spending counties, and quality bonus program benchmark increase payments. MedPAC’s March report includes a separate chapter on coding intensity and favorable selection in MA. A summary of this chapter is included below. As MA enrollment continues to increase, concerns with high MA spending compared to FFS grow. MedPAC has outlined five key reasons as to why MA policies must be changed given these issues:

1. Beneficiaries do not have meaningful information on plan quality when choosing a plan.
2. Medicare pays more for MA than for comparable beneficiaries in FFS plans.
3. Disparities in MA and FFS payment disadvantages beneficiaries who do not want to enroll in MA plans that use provider networks or utilization management policies and instead want to remain in FFS plans.
4. There is a lack of information regarding the use and value of many MA supplemental benefits, which prevents meaningful program oversight when there is uncertainty regarding whether enrollees obtain value from supplemental benefits.
5. The continued growth in MA will continue to create benchmark setting challenges as beneficiaries remaining in FFS may be higher risk with higher spending, and risk adjustment cannot adequately capture these differences.

Key MedPAC findings include the following:

Market concentration

• The MA market remains heavily concentrated, though concentration slightly decreased in 2024. Two studies have shown that MA concentration impacts whether competition benefits MA enrollees: One study found that increases in MA payment in concentrated markets are not completely passed through to enrollees, and another found that insurer exist was associated with decreases in benefit generosity among plans that remained active, especially in markets where concentration is high.
• MA enrollment concentration has grown amongst three insurers: UnitedHealth Group, Humana, and CVS Health Corporation. These organizations are also increasingly vertically integrated, likely due in part to factors in MA payment policy that promote these arrangements, including the structure of the quality bonus program, medical loss ratio requirements, and benefits in negotiations with providers. The Commission will continue to monitor integration trends and their effects on beneficiaries and the MA program.

Risk adjustment and coding intensity

• MA plan payments are enrollee-specific, based on a plan’s payment rate and an enrollee’s risk score. MA plans have a financial incentive to ensure that providers record all possible diagnoses on a claim because it can raise an enrollee’s risk score, resulting in higher plan payment that plans can use to offer extra benefits, allowing them to attract more enrollees. Plans also have mechanisms not available in FFS Medicare to document patient diagnoses, including through chart reviews and health risk assessments.
• In 2022, based on MedPAC’s estimates, MA risk scores were about 18 percent higher than scores for comparable FFS beneficiaries due to higher coding intensity. MedPAC projects that in 2024, MA risk scores will be about 20 percent higher than scores for comparable FFS beneficiaries. CMS reduces all MA risk scores by the same amount to make them more consistent with FFS coding and has the authority to impose a larger reduction than required by law (5.9 percent) but has never done so. In 2024, following this reduction, MA risk scores will be about 13 percent higher for MA enrollees than if they had been enrolled in FFS Medicare. These scores will result in a projected $50 billion in higher payments to MA plans.
• Medicare payments to MA plans for uncorrected coding intensity has continued to increase, with this coding intensity leading to increased payments to plans by an estimated $124 billion from 2007 to 2022. $94 billion more is expected in 2023 and 2024.
• Coding intensity varies significantly across plans, with some plans having coding intensity above the reduction applied by law and other plans having coding far above that amount. MedPAC estimates that the eight largest MA organizations have a 15 percent point variation in coding intensity.

Quality in MA

• MedPAC reiterates its continued concerns that the current MA quality bonus program does not help beneficiaries meaningfully differentiate across plans or promote high-quality care. The Commission has previously recommended that the current quality bonus program be replaced with a new value incentive program.
• In a future report, MedPAC plans to provide a more detailed chapter on MA quality and access to care, which will include additional information on the Commission’s approach to these topics and some empirical analysis of MA plan performance.

COMMISSIONS REVIEWS METHODS FOR ESTIMATING MEDICARE ADVANTAGE CODING INTENSITY AND FAVORABLE SELECTION

MedPAC reviewed its methods to estimate MA coding intensity and MA favorable selection. Unlike FFS Medicare providers, who do not receive adjusted payments based on beneficiary health, MA providers have a financial incentive to code diagnoses. MA plans also utilize two tools, chart reviews and health risk assessments (HRAs), that are not used in FFS and that add diagnoses that are used for risk scoring. Accordingly, MA beneficiaries have higher risk scores than equivalently healthy FFS beneficiaries. MedPAC has been working for years to better estimate this difference, referred to as “coding intensity.” Medicare accounts for coding intensity via a coding intensity adjustment that decreases MA risk scores. For the 2024 cycle, the MedPAC reviewed three different estimates of coding intensity: the demographic estimate of coding intensity (DECI), MedPAC’s cohort method, and a revised cohort method. MedPAC plans to use the DECI method moving forward. The section above provides more detail on coding intensity in MA and FFS.

MedPAC has also estimated favorable selection in MA as compared to FFS Medicare. Favorable selection occurs when spending on an MA enrollee is lower than the average FFS beneficiary with the same risk score. In the June 2023 report to Congress, the Commission estimated that spending on MA enrollees in 2019 was about 11 percent lower than spending on FFS beneficiaries with the same risk score. For this report, the Commissioned refined and made technical changes to the same analytic framework used in their June 2023 report. Some of the technical changes include expanding estimates to include overall estimates from 2017 to 2021, including employer plan enrollees and hospice enrollees in the estimate, and improving the method for estimating the expected “regression to the mean” during MA enrollment. With these adjustments to the estimate, the Commission’s analysis suggests that the estimate in June 2023 was off by 2 percentage points and that spending on MA enrollees in 2019 was 13 percent lower than spending on FFS beneficiaries with the same risk score. The overall trend is the same between the two estimates and favorable selection is likely to persist. The Commission will continue to refine their estimates if a sensitivity analysis suggests adjustments are needed.

MEDPAC REVIEWS DUAL-ELIGIBLE SPECIAL NEEDS PLANS IN MANDATED REPORT

Dual eligible beneficiaries in Medicare have grown rapidly, especially those using MA plans. This population reflects a unique problem within the Medicare/Medicaid sphere because it requires the two programs to work together to provide more specialized coverage to this population. Beneficiaries who are dual-eligible are more likely to have higher utilization of benefits, especially if they are full-benefits. Historically, dual eligible beneficiaries were less likely to enroll in managed care plans, but as dual-eligible special needs plan (D-SNPs) became more specialized than conventional plans, more dual-eligible beneficiaries enrolled in them. 71 percent of full benefit dual-eligible beneficiaries enroll in D-SNPs and 25 percent of partial eligible beneficiaries enroll in a D-SNP plan.

The Bipartisan Budget Act of 2018 mandates the Commission evaluate the effectiveness and quality of dual eligible plans each year to compare the plans with each other. This includes both D-SNPs and MMP (Medicare-Medicaid Plans). In the evaluation of the 2021 data from the Healthcare Effectiveness Data and Information Set (HEDIS) the Commission found that there was no clear plan that was most effective. Each plan had its own strengths and weaknesses that did not allow for an easy comparison. The most variability between plans was seen in MMP plans. However, the other plans did not perform noticeably better or worse on any of the factors MedPAC assessed. The Commission notes it is hard to make comparisons because HEDIS is not based on clinical outcomes or patient experience.

The Commission also evaluated plans using Consumer Assessment of Healthcare Providers and Systems (CAHPS) data. This program measures patient experience through a survey of sample enrollees. The survey found that coordination-only D-SNPs as a group had higher scores on many measures, and that MMPs had lower scores. These findings are counterintuitive since the level of integration is low with coordination-only D-SNPs and high with MMPs. The Commission theorized that structural differences may be causing differences in scores. In the next few years, most MMPs will convert to D-SNPs, requiring new methods for evaluations. In the next mandated report, the Commission plans to include ambulatory care-sensitive hospitalization rates to provide another means of assessment.

MEDPAC REVIEWS MEDICARE’S EFFORTS TO SUPPORT RURAL HOSPITALS THROUGH THE NEW RURAL EMERGENCY HOSPITAL DESIGNATION

Medicare’s support for rural hospitals has focused on making inpatient services more affordable. However, the volume of inpatient services has declined and therefore has made Medicare’s efforts less effective. To address this, in 2021, Congress created the new Rural Emergency Hospitals (REH) designation under the Consolidated Appropriations Act, 2021 (CAA), with the goal of having hospitals switch to a REH designation rather than close. Under the CAA, MedPAC is required to report on payments to REH. Since the program started in 2023, complete REH claims data are not yet available, but to enhance further reports, MedPAC performed background research on REHs. Throughout 2023, MedPAC visited REHs to understand their decision to become an REH instead of closing the hospital. In 2023, 21 hospitals converted to REHs and only eight rural hospitals closed. The MedPAC Commission investigated the eight that did close and identified reasons why:

• At least 2 of the hospitals that closed were considering switching to a REH but did not have time before the closure.
• One was two miles away from another critical access hospital, another was becoming an outpatient department for a neighboring hospital.
• Three others are re-opening as full-service hospitals.

Results show that a REH designation will not prevent any hospital closures but will help improve access to emergency care. The Commission will continue to monitor how many hospitals transition to REHs, and what other possibilities or options are available for REH in the future.

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This Applied Policy® Summary was prepared by Emma Hammer with support from the Applied Policy team of health policy experts. If you have any questions or need more information, please contact her at ehammer@appliedpolicy.com or at 202-558-527.