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2016 Payment Notice and Final Call Letter: CMS Gives with One Hand and Takes Away with the Other

 On April 6, 2015, the Centers for Medicare & Medicaid Services (“CMS”) issued the Announcement of Calendar Year (“CY”) 2016 Medicare Advantage (“MA”) Capitation Rates, and Medicare Advantage and Part D Payment Policies (“Announcement”) and Final Call Letter (“Call Letter”). The Announcement addresses stakeholder comments submitted in response to the February 20, 2015, Advance Notice and Draft Call Letter. Additionally, the Announcement outlines payment and risk adjustment methodology changes that will impact payments for MA (Part C) and Part D plans and the retiree drug program benefit parameters in the 2016 contract (calendar) year. The Call Letter describes policy modifications and other considerations for plan sponsors preparing bids for the 2016 contract (calendar) year. For further background, see the prior Epstein Becker Green Client Alert on the Advance Notice and Draft Call Letter. 

The Announcement surprised many industry observers with a greater-than-expected increase in MA benchmark rates for 2016 as compared to the relatively modest rate adjustments proposed in the Advance Notice. However, this favorable development for plans, primarily attributable to necessary adjustments to the effective fee-for-service (“FFS”) growth rate, was largely suppressed by the adoption of CMS’s proposed risk adjustment policies. As a result of these divergent factors, MA plans, on average, will realize an approximate 1.5 percent increase in MA plan payments over 2015 levels. Individual MA plan results will vary depending on the plans’ unique service areas and coding patterns.

This Client Alert focuses on some of the more significant payment and policy changes in the Announcement and Call Letter. These changes will affect a wide range of stakeholders, including MA and Part D plan sponsors, participating providers, pharmacy benefit managers, pharmacies, drug manufacturers, and the vendors that provide services and products to these segments of the health care industry. 


CMS Announces Effective Growth Rate of 4.2 Percent for MA Plan Payments

In its Fact Sheet accompanying the Announcement and Call Letter, CMS stated that policy changes on plan payments will result in a 4.2 percent effective growth rate for 2016—2.5 percent higher than the 1.7 percent increase projected in the Advance Notice. The updated growth rate is comprised of an approximate 2 percent increase produced by a correction to the prior year’s rate and a 2 percent projected growth trend in health care spending from 2015 to 2016.

Important factors impacting the final payment amounts to MA plans include the following:

  • FFS Growth Percentage: The Aged/Disabled FFS United States per capita cost (“USPCC”), which will be used for the county portion of the benchmark, is increased 4.08 percent to $800.21. The new FFS Growth Percentage is significantly higher than the 1.47 percent increase that had been estimated in the Advance Notice.

  • MA Growth Percentage: The change in the national per capita MA Growth Percentage is 5.04 percent, approximately 2.36 percent higher than originally proposed. CMS noted that this higher percentage accounts for adjustments to prior year estimates and is largely based on the assumption that Congress will implement the sustainable growth rate (“SGR”) reforms. In addition, the MA Growth Percentage accounts for adjustments to estimates for prior years. Currently, the MA Growth Percentage incidentally impacts MA plan rates. After 2017, the percentage will only impact the calculation of the benchmark caps.

  • Hierarchical Condition Categories (“HCC”) Risk Adjustment: The Announcement confirms the full transition to the clinically revised CMS-HCC risk adjustment model that was first proposed in 2014. This transition will result in a 1.7 percent reduction, which stems primarily from the fact that the 2014 model excludes several diagnoses, such as stage 1-3 chronic kidney disease and polyneuropathy, which, in CMS’s perspective, were being aggressively coded by certain MA plans. Although CMS designed this change to support payment fairness, special needs plans (“SNPs”) and other plans with a disproportionately large number of Medicare beneficiaries with chronic conditions will experience larger payment reductions. CMS will assess the impact of the model on certain populations, particularly dual eligibles, to determine if additional modifications are warranted to improve the model’s predictive accuracy.

  • 2016 Coding Adjustment Factor: As proposed in the Advance Notice, CMS will utilize a 5.41 percent coding pattern adjustment factor to MA payments that reflects an increase of 0.25 percent, the lowest amount possible under the statute.

  • Normalization Factors: CMS applied a “quadratic functional form” to risk scores from the last four years when calculating FFS normalization. This approach extends the normalization methodology used in 2015 that is designed to better reflect changes in population trends and the growing enrollment of “baby boomers” in the Medicare program.

Upcoming Transition to International Statistical Classification of Diseases and Related Health Problems-10 (“ICD-10”) Code Sets

In anticipation of the transition from ICD-9 to ICD-10 code sets, which is slated to occur by October 1, 2015, CMS confirmed that 2016 risk scores will be calculated using data from both ICD-9 codes (for dates of service between January 1, 2015, and September 30, 2015) and ICD-10 codes (for dates of service between October 1, 2015, and December 31, 2015). CMS reminded commenters that plans have until the end of January after the payment year to submit accurate risk adjustment data.

Calculation of Risk Scores Using Encounter Data

CMS is pursuing its agenda to overhaul the risk adjustment data collection requirements by transitioning to encounter data-based risk scores. In 2016, the risk score calculation will draw 90 percent of diagnosis data from the Risk Adjustment Processing System (“RAPS”) and 10 percent from the Encounter Data Processing System (“EDPS”). CMS plans to monitor the impact of using encounter-based diagnoses on a going-forward basis. While this policy could potentially be payment neutral, it will likely have a negative impact on many plans’ revenues.


Adjusting Part D Risk Adjustment Model to Account for Chronic Hepatitis C Medications

CMS finalized modifications to the Part D risk adjustment model for stand-alone Part D plans (“PDPs”) and MA prescription drug (“MA-PD”) plans. Among other things, CMS will include Part D data for MA-PD sponsors in the model calibration in order to improve the predictive accuracy of the model. In addition, the Chronic Viral Hepatitis C RxHCC coefficient will be increased to account for the impact of the growing use of high-cost medications for chronic Hepatitis C. Due to uncertainties regarding the future prevalence and pattern of Hepatitis C among Medicare beneficiaries, CMS will assess the need for further adjustments in the future.

Annual Update to Part D Benefit Parameters

Part D benefit parameters are indexed either to the percentage increase in the Consumer Price Index or to the percentage increase in average per capita total Part D drug expenses for Medicare beneficiaries. As a result, the actuarial value of the annual standard drug benefit changes mirrors trends in Part D drug expenses, thereby ensuring that the benefit continues to cover a constant share of drug expenses.

The 2016 Benefit Parameters reflect an 11.76 percent increase in Part D average per capita drug expenses in 2015. As a consequence, the Medicare Trust Fund will absorb a large percentage of the increasing Part D drug expense. In turn, Part D beneficiaries’ share of drug expenses, as represented in premiums, will increase along with Part D expenditures. This trend may accelerate and expand in future years due to the expanded utilization of high-cost specialty drugs and increases in prices of some generic drugs.

The revised 2016 parameters are as follows: 







Initial Coverage Limit



Out-of-Pocket Threshold



Total Drug Spending Out-of-Pocket Threshold for Those Ineligible for Coverage Gap Discount



Estimated Total Drug Spending Out-of-Pocket Threshold for Those Eligible for Coverage Gap Discount



Minimum Co-Pay in Catastrophic Portion of Benefit

  • Generic/Preferred Source Drug 

  • All Other Drugs



Retiree Drug Subsidy

  • Cost Threshold 

  • Cost Limit




The Call Letter sets forth relatively minor policy adjustments to several high-profile issues relating to Medicare Parts C and D. Nevertheless, CMS stated that it will consider more far-reaching changes relating to these issues in future plan years.

Provisions Relating to Star Ratings

  • Adjustments to Star Ratings for Socio-Economic Status: Following upon its September 2014 Request for Information seeking research demonstrating the impact of dual-eligible or low-income subsidy (“LIS”) status on a plan’s quality measures, CMS proposed to provide relief to plans by reducing by half the weights of six Part C measures and one Part D measure. However, in response to stakeholder concerns, CMS has abandoned this proposal and will not be modifying the 2016 star ratings in any way due to the effect of dual eligibles or LIS beneficiaries. CMS proposed to continue researching the issue with a goal of adjusting certain quality measures on the basis of enrollees’ socioeconomic status in a manner that is “budget neutral.” This agenda is not statutorily based but, instead, represents a policy decision by CMS.

  • Termination of Plans with Less Than Three Stars in Three Consecutive Years: CMS finalized a new timeline for conducting terminations of plans that have received star ratings of less than three stars in three consecutive years. Plans subject to termination for the first time with the release of the CY 2016 star ratings will receive a non-renewal notice in February 2016 with an effective date of December 31, 2016. In March 2016, CMS will issue notices advising Medicare beneficiaries enrolled in these plans of their need to choose a new plan during the fall 2016 annual election period. A plan’s 2017 star ratings cannot impact or cause CMS to reverse its non-renewal determination.

  • Enhancements and New Measures: CMS will proceed with its adoption of a new 2016 measure, Medication Therapy Management Program Completion Rate for Comprehensive Medication Reviews (Part D), in addition to changes to the following existing measures: Controlling Blood Pressure (Part C), Plan Makes Timely Decisions about Appeals (Part C), Plan All-Cause Readmission (Part C), Osteoporosis Management in Women who had a Fracture (Part C), Complaints about Health/Drug Plan (Part C & D), Improvement Measures (Part C & D), Appeals Auto-forward and Upheld Measures (Part D), Medication Adherence and Diabetes Treatment (Part D), Medication Adherence and Cholesterol (Part D), Obsolete NDCs (Part D), and CAHPS (Part C & D). Meanwhile, the following measures will be returned to the star ratings in 2016: Breast Cancer Screening (Part C), Call Center – Foreign Language and TTY Availability (Part C & D), and Beneficiary Access and Performance Problems (Part C & D). Finally, in 2016, CMS will remove the predetermined measure thresholds to enhance the accuracy of the assignment of overall Part C and D summary ratings.

Provisions Related to the Exceptions and Appeals Process

CMS will continue its campaign to identify and implement improvements designed to facilitate Medicare beneficiaries’ access to MA organization determination, appeal, and grievance (“ODAG”) and Part D coverage determination, appeal, and grievance (“CDAG”) processes.

  • Coverage Denial Notices and Requests for Clinical Documentation: Following up on its related August 2014 guidance as well as insights gained from recent plan audits and sanctions, CMS again emphasized plan obligations relating to coverage denial notices and clinical request documentation. With respect to denial notices, CMS will continue working with stakeholders to improve their notices and to solicit input. With regard to clinical documentation, CMS will revise Chapter 13 of the Medicare Managed Care Manual and Chapter 18 of the Medicare Prescription Drug Benefit Manual in order to articulate what constitutes “reasonable attempts” on the part of a plan to obtain clinical documentation.

  • Information at Point of Sale (“POS”): After receiving strong opposition from commenters, CMS determined that it would not require plans to treat any POS pharmacy transaction as a coverage determination. Nonetheless, in order to improve Medicare beneficiaries’ access to medically necessary Part D drugs, CMS will conduct a POS pilot to identify ways to resolve certain POS claims rejections without requiring an enrollee to request a coverage determination.

  • Appeals Tracking System: In recognition of Part D sponsor concerns about increased reporting burdens, CMS stated its plan to delay until 2018 its implementation of a Part D appeals tracking system that would include system requirements for the collection of case-level data. CMS may consider a similar data system governing Part C appeals in the future.

Access to Preferred Cost-Sharing Pharmacies

Due to its concerns about Medicare beneficiaries’ access to preferred cost-sharing pharmacies (“PCSPs”), CMS will publish information on PCSP access levels for each plan offering a preferred cost-sharing benefit. Rather than simply work with outlier plans during the bid review process, CMS has decided to mandate that these plans disclose their outlier status in 2016 marketing materials. Also, before approving 2016 bids, CMS will work with extreme outliers to improve beneficiary access and to validate marketing representations for these particular plans.

Network Adequacy Guidance

CMS reinforced that, in order to satisfy their network adequacy requirements, Medicare Advantage Organizations (“MAOs”) must ensure that their online provider directories for MA plans only include actively contracting providers. Among other things, MAOs are expected to establish and maintain a process to verify, on a timely basis, the true availability of network providers and their continued compliance with adequacy standards. CMS has secured additional contractor funding and will test a new audit protocol to verify the accuracy of MAOs’ online provider directories and the ability of these directories to meet provider network adequacy standards. Beginning in CY 2017, CMS may institute a new regulatory requirement for MAOs to furnish network information in a standardized format for inclusion in a nationwide provider database.

In-Home Health Risk Assessment Guidance

CMS finalized its list of best-practice standards for in-home health risk assessments (“HRAs”) and again encouraged MA plans to adopt and comply with them. In addition, CMS will track and analyze care provision following in-home visits in CY 2015 in order to ensure that HRAs are not being used for purposes of collecting diagnoses without providing appropriate follow-up care. CMS, again, refrained from finalizing its proposal to exclude, for payment purposes, diagnoses collected from HRAs that were not confirmed by a subsequent clinical encounter.

Standardized Initial Health Assessments

Under the MA statute, MA plans are required to conduct an initial assessment of each Medicare beneficiary’s health needs within 90 days of enrollment in the chosen MA plan. In the Call Letter, CMS noted that, while the initial assessments are not required to contain standardized components, it “strongly encourages” plans to incorporate components for the Centers for Disease Control and Prevention (“CDC”) Model HRA, as well as other elements, to address the needs of plan enrollees.

Value-Based Contracting

CMS will be reaching out to MA plans to address the extent to which they are using physician incentive payments and value-based contracting. Through this initiative, CMS will be seeking MA plans’ voluntary participation in discussions about the ways to advance innovative payments models. This initiative follows upon the January 2015 announcement by Sylvia Matthews Burwell, Secretary of the Department of Health and Human Services, which described the Obama administration’s initiative to base Medicare and other health care system payments on the quality rather than the quantity of care provided. 

©2022 Epstein Becker & Green, P.C. All rights reserved.National Law Review, Volume V, Number 100

About this Author

Thomas E. Hutchinson, Strategic Advisors, EBG Advisors
Strategic Advisor

THOMAS E. HUTCHINSON is a Strategic Advisor for EBG Advisors, Inc. He has more than 25 years of experience in both the private sector and in federal service implementing programs and policies directly affecting Medicare and Medicaid beneficiaries. Mr. Hutchinson advises clients on a wide range of payment policy and operations issues relating to the Centers for Medicare and Medicaid Services (CMS).

Prior to his joining EBG Advisors in this business advisory role, Mr. Hutchinson served as the director of the Medicare Plan Payment...

John S. Linehan, Epstein Becker Green, Health Care Attorney, Life Science
Senior Counsel

JOHN “JACK” S. LINEHAN is an attorney in the Health Care and Life Sciences practice, in the Baltimore and Washington, DC, offices of Epstein Becker Green. His practice focuses on pharmacy law, drug distribution and reimbursement, and related fraud and abuse issues, government investigations, and litigation matters.

Mr. Linehan:

  • Counsels retail and specialty pharmacies, drug manufacturers and distributors, pharmacy benefit managers (PBMs), insurers, and other health care providers and suppliers...