The Centers for Medicare & Medicaid Services (CMS) Center for Medicare and Medicaid Innovation (Innovation Center) began the Part D Payment Modernization Model in January 2020 to test how changes in Part D benefit design and incentives would affect overall Part D prescription drug spending and beneficiary out-of-pocket costs. The Model aimed to reduce Medicare expenditures while preserving or enhancing beneficiary quality of care. The Model was open to eligible standalone Prescription Drug Plans (PDPs) and Medicare Advantage-Prescription Drug Plans (MA-PDs) approved to participate.
This voluntary Model tested whether changes to the Part D payment structure created new incentives for plans, patients, and providers to choose drugs with lower list prices, as a way to address rising federal reinsurance Part D subsidy and beneficiary out-of-pocket costs. By taking increased risk for CMS’s federal reinsurance subsidy (80 percent of catastrophic phase liability), plans participating in the Model received performance-based payments or send payments to CMS based on spending.
As part of the Model, in CY 2021, CMS made available optional programmatic flexibilities to participating Part D sponsors, to help them better manage drug spending, increase engagement with their enrollees, and to promote better enrollee understanding of their Part D benefit, out-of-pocket costs, and clinically equivalent therapeutic options. They included:
- Part D rewards and incentives programs;
- Medication Therapy Management+ (MTM+) Programs;
- Flexibility to lower costs for beneficiaries through limited initial days’ supply and cost-sharing smoothing;
- Cutting or removing cost-sharing on generic drugs and biosimilars for Low-Income Subsidy (LIS) beneficiaries (allowed for basic and enhanced alternative plan types); or
- Plan timeliness for standard initial coverage determinations.
The Medicare Part D program began providing prescription drug coverage in 2006 to people with Medicare. To make sure people with Medicare had access to a robust choice of Part D plans, the original benefit design included risk-abating mechanisms, including direct subsidy risk corridors, risk adjustment, and federal reinsurance in the catastrophic phase of the benefit. This structure let CMS successfully implement and administer a market-based Medicare Part D program, giving critical access to prescription drugs, keeping premiums low over time, and promoting high enrollee satisfaction with their Part D benefit.
Over time, however, pharmaceutical innovation and patent expirations have led to a bifurcation in Part D prescription drug utilization and spending. While the percentage of Part D prescriptions filled with safe and effective generic medications is higher than ever, overall Part D spending almost doubled between 2010 and 2018, increasing from $77.5 billion in total spending to $168.1 billion, with costs projected to increase further. The trend toward a high list price for new specialty and branded medications for cancer, Hepatitis C, rheumatoid arthritis, and other conditions, led to a roughly seven-fold increase in Part D catastrophic phase spending by 2018 compared to 2006. This increase is caused, in part, by the fact that, in general, the list price determines both beneficiary out-of-pocket costs and where an enrollee is in their Part D benefit.
Because there’s a potential difference between the list and net price of specialty and branded medications, beneficiaries keep paying more through premiums and out-of-pocket costs, and CMS keeps paying more through the federal reinsurance subsidy and low-income subsidies. However, while payments to Part D plan sponsors to administer the benefit have more than doubled from 2006 to 2017, the portion of the Part D benefit they are liable for managing, termed the direct subsidy, has decreased. In 2017, the direct subsidy was 14 percent lower than it was in 2006, the first year of the Part D program. This has prompted recommendations from the Medicare Payment Advisory Commission (MedPAC), the U.S. Department of Health and Human Services Office of the Inspector General, and other stakeholders, that the original Part D risk-sharing mechanisms be updated to better reflect the current and future prescription drug landscape.
Through this Model, CMS tested how a modernized Part D payment structure increased and better aligned Part D plan sponsor liability with the costs that CMS and people with Medicare paid. The PDM Model allowed CMS to attempt to address the high list price of drugs. CMS offered flexibilities to Part D sponsors so that they could lower costs and improve quality of care for Medicare beneficiaries. The voluntary Part D Payment Modernization Model aimed to promote a decrease in total Part D program spending in these 2 ways:
- Creating new incentives for plans, patients, and providers to choose drugs with lower list prices. Better managing catastrophic phase federal reinsurance subsidy spending through two-sided risk will align incentives for plan sponsors with their enrollees and CMS.
- Providing several programmatic flexibilities to make sure people with Medicare keep affordable access to the prescription drugs that they need.
For questions regarding the Part D Payment Modernization Model, please contact PartDPaymentModel@cms.hhs.gov.