CMS ANNOUNCES 2008 MEDICARE ADVANTAGE PAYMENT RATES AND PART D PAYMENT UPDATES

CMS ANNOUNCES 2008 MEDICARE ADVANTAGE PAYMENT RATES AND PART D PAYMENT UPDATES

The Centers for Medicare & Medicaid Services (CMS) today released the Announcement of Calendar Year 2008 Medicare Advantage Capitation Rates and Payment Policies and the Notification of Changes in Medicare Part D Payment for Calendar Year 2008. 

For Medicare Advantage (MA) plans, the aged and disabled capitation rates will increase about 3.5 percent.  A statutorily-mandated adjustment to the MA rates (the budget neutrality factor, discussed below) results in an MA rate of growth that is less than the estimated Medicare growth trend for 2008 of about 4.3 percent.

This Fact Sheet discusses the factors shaping expected payment rate increases under Part C (original Medicare benefits and related supplemental benefits offered by MA plans), followed by a discussion of Part D payment.

Method for Calculating MA Payment Rates

The 3.5 percent increase in MA rates is a result of the following calculations CMS performs to determine the capitation rates for 2008.  The first step is to back-out the 2007 Budget Neutrality (BN) factor from the final 2007 rates (3.9 percent).  Next, we apply the National Per Capita MA Growth Percentage (also known as the “minimum percentage increase”) for 2008 (5.7 percent), and finally we apply the 2008 BN factor (1.7 percent).

National Per Capita MA Growth Percentage for 2008.  The final estimate of the 2008 growth percentage is 5.7 percent, which includes 4.3 percent for the 2008 underlying trend change and 1.3 percent due to corrections to prior years’ estimates, as required by law.  The MA Growth Percentage is used to determine the minimum percentage increase rate.  Because CMS is not retabulating the FFS rates in 2008, all MA capitation rates are minimum percentage increase rates. 

Budget Neutrality Factor.   The budget neutrality (BN) factor for 2008 is 1.7 percent.  The BN factor is calculated as the estimated difference for 2008 between payments to MA organizations at 100 percent of the demographic rates and payments at 100 percent of the risk rates, expressed as a percent of risk-adjusted payments.  As required by the DRA, 2008 is the second of four phase-out years; 40 percent of the total budget neutrality factor of 4. 2 percent is applied to the risk rates.  

Fee-For-Service Normalization Factor.  In addition to the factors above, which determine the annual capitation rates, we must apply an additional adjustment when calculating the payment amount for each beneficiary in a particular plan.  The fee-for-service normalization is applied as a downward adjustment to beneficiary risk scores when calculating CMS’ monthly payment to plans.  The fee-for-service normalization factor for 2008 is 1.04.  Because average predicted FFS expenditures increase after the model calibration year, CMS applies a FFS normalization factor to adjust beneficiaries’ risk scores so that the average risk score is 1.0 in any particular year.

Frailty Adjustment for PACE organizations

In order to allow for additional time for PACE organization to adjust to the updated factors and become fully informed about the assumptions underlying the new model, the transition to the updated frailty factors for PACE organizations will take place over five years instead of four years.

Changes in Medicare Part D Payment for Calendar Year 2008

Calculation of the National Average Monthly Bid Amount.  To continue the transition from the 2006 methodology for calculating the national average monthly bid amount to the enrollment-weighted average method, CMS will amend the “Medicare Demonstration to Limit Annual Changes in Part D Premiums Due to Beneficiary Choice of Low-Cost Plans” to extend it for 2008.  During this transition, the national average monthly bid amount is a composite of two different calculations: (i) a weighted average calculated based on the 2006 weighting methodology (“equal weighting” ) and (ii) a weighted average calculated based on actual plan enrollments (“enrollment weighting”).  In 2008, 40% of the national average monthly bid amount will be based on the uniform weighted average and 60% will be based on the enrollment weighted average.  When this demonstration ends, the national average monthly bid amount will be a weighted average based on prior enrollment. 

Calculation of the Low-Income Benchmark Premium Amounts.  CMS will amend the “Medicare Demonstration to Transition Enrollment of Low Income Subsidy Beneficiaries” to extend it for 2008.  Starting in 2008, CMS will conduct a transition from the 2006 methodology for calculating the regional low-income benchmark premium amounts to the regulatory methodology, which requires calculation of a weighted-average based on actual plan enrollments.  During the transition, the regional low-income benchmark premium amounts will be a composite of two different calculations:  (1) 50% will be based on the 2006 weighting methodology (equal weighting) and (2) 50% will be based on the enrollment-weighted average (enrollment weighting). 

CMS is also extending the de minimis policy to 2008, so that Part D plans will continue to be required to charge full subsidy eligible beneficiaries a monthly beneficiary premium equal to the applicable low-income benchmark premium amount if the plan’s monthly beneficiary premium attributable to basic prescription drug coverage exceeds the low-income benchmark premium amount by a de minimis amount.  The de minimis amount for 2008 will be $1.

Annual Updates to Medicare Part D Benefit Parameters.  The annual percentage increase used to update the deductible, initial coverage limit, and out-of-pocket threshold for the defined standard benefit for 2008 is 4.64%.  The annual percentage increase in the CPI used to update the 2008 maximum copayments below the out-of-pocket threshold for certain dual eligible enrollees is 2.42%.  

Normalization of the Part D Risk Adjustment Model.  When CMS calibrates a risk adjustment model, we establish model coefficients that will result in the average beneficiary risk score being equal to 1.0 in the calibration year.  Over time, the average Part D beneficiary risk score has risen and is now greater than 1.0.  For 2008, CMS will apply a Part D normalization factor of 1.065 to set the average risk score for all potential Part D plan enrollees to 1.0. CMS is applying this normalization factor to ensure that the direct subsidy remains stable over time as a proportion of the bid.  This adjustment will not affect total plan revenue.  CMS will provide further guidance in the 2008 Part D bid instructions on how this Part D normalization factor will be applied for 2008.

LINK TO 2008 RATE ANNOUNCEMENT AND PART D PAYMENT NOTIFICATION:  http://www.cms.hhs.gov/MedicareAdvtgSpecRateStats/AD/list.asp#TopOfPage