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Flurry of Medicare Advantage and Part D Changes Includes Significant Policy Shifts


Last week, CMS released new regulations and guidance for Medicare Advantage Organizations (MAOs) and Part D Sponsors.  These documents—along with the Bipartisan Budget Act of 2018 that was passed in January—reflect significant policy and operational changes for the MA and Part D programs. The policy shifts affect supplemental benefit offerings, targeted benefits for certain populations, the Quality Star Ratings program, the MA risk adjustment model, physician incentive plan rules, medical loss ratio requirements, any willing pharmacy standards, and efforts to address opioid overutilization.

In Depth

Last week, the Centers for Medicare & Medicaid Services (CMS) released not one but two documents with significant policy and operational implications for Medicare Advantage Organizations (MAOs) and Part D Sponsors: a final regulation (Final Rule) stemming from a proposed rule issued in November 2017 and the Calendar Year (CY) 2019 Announcement and Final Call Letter (Final Call Letter). These documents—along with the Bipartisan Budget Act of 2018 (BBA) that was passed in January—implement significant changes to the Medicare Advantage (MA) and Part D programs.

In particular, MAOs are gaining greater flexibility to design targeted benefits and offer new types of benefits to members. MAOs and Part D Sponsors will also enjoy somewhat diminished administrative burdens under the new rules. Other significant policy shifts affect the Quality Star Ratings program, the MA risk adjustment model, physician incentive plan (PIP) rules, and medical loss ratio (MLR) requirements.

With respect to the Part D program specifically, CMS has issued new clarifications of the federal any willing pharmacy (AWP) standard and finalized new requirements for Part D Sponsors to address opioid overutilization.

Expanded Flexibility for MAOs to Target Benefits Based on Health Status

In combination, the BBA, the Final Rule, and the Final Call Letter implement significant changes to the uniform benefit, supplemental benefit, and meaningful difference rules, giving MAOs substantially more flexibility in designing and targeting benefits for members with specialized medical needs.

These changes could have a transformative effect on the MA program by encouraging MAOs to offer a wider variety of plans that are targeted to different populations, but the actual impact may depend on actuarial and financial considerations that are integral to benefit design determinations. Specifically, MAOs will now have expanded flexibility in the following areas:

  • Uniform Benefits. Pursuant to federal law and regulation, MAOs are required to offer plans with uniform benefits, premiums, and cost-sharing throughout the plan’s service area. CMS has historically interpreted this mandate to mean that all basic benefits and supplemental benefits must be available equally, at the same level of cost-sharing, to all members throughout a particular service area. CMS stated in the preamble to the Final Rule that it is revising its interpretation of the uniform benefit requirement, though the regulatory standard set forth at 42 CFR § 422.100(d)(2) is unchanged. 

    Beginning in CY 2019, CMS will permit variation in cost-sharing and supplemental benefits based on health status or disease state. For example, an MAO will be permitted to offer diabetic members lower cost-sharing on endocrinologist visits and expanded access to foot care as a supplemental benefit. The medical criteria used for these targeted variations in benefits must meet certain standards established by CMS. In addition to this new interpretation of the uniform benefit requirement, Congress has given CMS authority, beginning in CY 2020, to waive the statutory uniform benefit requirement entirely for enrollees that are chronically ill, as defined under the BBA. 

  • Supplemental Benefits. The BBA and the Final Call Letter also create new flexibility for MAOs to offer a substantially expanded array of supplemental benefits. Under the Social Security Act, CMS only has the authority to permit MAOs to offer supplemental “health care benefits” and has historically enforced this requirement by mandating that supplemental benefits be “primarily health related.”

    With the passage of the BBA, Congress has now authorized CMS to approve supplemental benefits for chronically ill enrollees that “have a reasonable expectation of improving or maintaining the health or overall function of the member” even if they are not primarily health related. In addition to this change for chronically ill enrollees, CMS has also expanded its interpretation of “primarily health related” for supplemental benefits available to all members.


    These changes are significant because they will open the door for substantially greater variation in benefits among MAOs and will permit experimentation with services that address underlying social determinants of health. MAOs will likely be able to cover non-skilled in-home care to assist with activities of daily living (e.g., dressing, eating, bathing), and may even be able to cover those services when they are provided by assisted living centers where members reside. The ability to offer these supplemental benefits may accelerate the trend of assisted living centers offering their own MA plans and/or foster new co-branding partnerships between MAOs and assisted living centers. 

    CMS has promised to issue clarifying guidance regarding the supplemental benefits authority in advance of CY 2019 bid submission. Depending on the scope of this guidance, other potential supplemental benefits that may be subject to expansion under these rules include home safety devices, expanded grocery and meal delivery services, and non-emergency transportation.

    Expanding the scope of reimbursable health care services may seem inconsistent with an effort to decrease overall health care costs. But there is a growing recognition that social determinants of health impose real health care costs on the system. Bringing a broader array of services within the “health care” umbrella may enable MAOs to address these factors and ultimately control costs, or at least experiment with the hypothesis that these expanded benefits will improve health and reduce overall medical expenditures for MA enrollees.

  • Other Changes: Meaningful Difference, Value-Based Insurance Design, and Telehealth. As part of the Final Rule, CMS also repealed the MA meaningful difference rules (42 CFR §§ 422.254 and 422.256), which opens the door for MAOs to take full advantage of the expanded uniform benefit and supplemental benefit rules described above. Without the meaningful difference limitation, MAOs will now have the ability to offer multiple plans with slightly varied benefit designs in order to target new disease- and condition-specific benefit plans towards particular populations. The BBA also expanded the Value-Based Insurance Design model into a national demonstration project and provided new authority for MAOs to offer telehealth benefits beyond Original Medicare limitations as basic benefits beginning in CY 2020. Both of these changes will create additional flexibility and new opportunities within the MA program.

As previously noted, CMS has promised to issue additional guidance on revised uniform benefit and supplemental benefit rules in advance of CY 2019 bid submission. With June rapidly approaching, MAOs may not have time to implement substantial changes in their benefits for CY 2019, but greater variation may be seen in the coming years.

Changes to MA Risk Adjustment Model

CMS finalized a number of provisions related to payments to MAOs in the Final Call Letter. Significantly, CMS finalized changes to the CMS-Hierarchical Condition Category (HCC) risk adjustment model and will begin relying more heavily on encounter data in the calculation of risk scores.

  • CMS-HCC Risk Adjustment Model. CMS adjusts payments to MAOs based on the health status of their enrollees using the CMS-HCC risk adjustment model. CMS finalized some proposed changes to the model for 2019, including the addition of HCCs for chronic kidney disease, mental health conditions, and substance use disorders. Perhaps most significantly, CMS decided not to finalize its proposal to add a new coefficient to represent the number of conditions a beneficiary has. CMS stated that it plans to phase-in this proposal, which is mandated by the 21st Century Cures Act, beginning in 2020.
  • Encounter Data. CMS finalized its proposal to calculate 2019 risk scores by weighting the risk score calculated with encounter data and fee-for-service (FFS) diagnoses at 25 percent and the risk score calculated with Risk Adjustment Process System (RAPS) and FFS diagnoses at 75 percent. This is a change from the 2018 risk scores, which were calculated weighting the encounter data-based risk score at 15 percent. CMS’s transition to the use of encounter data has been slow and plagued by operational and technical issues, leading some, including the Government Accountability Office, to question the reliability of encounter data. In order to address some of the concerns, CMS finalized its proposal to supplement the encounter data with inpatient RAPS data, noting that “[e]ncounter [d]ata inpatient submissions are low compared to corresponding RAPS inpatient submissions” and that using the “inpatient diagnoses from RAPS will improve the completeness of the data.” CMS stated that it intends this supplementation with RAPS data to be temporary.

New Star Ratings Regulations Address Consolidations and Data Integrity Downgrades

For the first time, CMS has finalized regulations implementing the Quality Star Ratings program, under which MAOs and Part D Sponsors are assigned ratings used in plan marketing and for Quality Bonus Payments (QBPs), which has previously been almost entirely governed through subregulatory guidance. In addition to codifying existing standards, CMS finalized a number of changes to its Quality Star Ratings policies. Most notably, CMS changed the way in which it calculates the Star Ratings for contracts that have recently been consolidated and contracts with data integrity problems.

  • Consolidated Contracts. CMS will use an enrollment-weighted average to calculate the Star Ratings for recently consolidated contracts of the same plan type under the same parent organization. The enrollment-weighted average will be used for two years after consolidation. CMS initially proposed this change in its November proposed rule; Congress subsequently mandated the change in the BBA, on a quicker time frame than CMS had proposed. As a result, this new method will be effective for contract consolidations that are approved on or after January 1, 2019.
  • Data Integrity Downgrades. CMS codified its policy of reducing Star Ratings when a contract’s data is “inaccurate, incomplete, or biased” and finalized its proposal to scale certain reductions. Under CMS’s previous data integrity policy, CMS would downgrade a contract’s Star Rating on a particular measure to 1 star when the Agency deemed the contract’s data to be “inaccurate, incomplete, or biased,” a concept only vaguely discussed in subregulatory guidance. The final regulations set forth a somewhat more concrete policy that is generally specific to the type of measure at issue. For appeals measures, CMS will reduce ratings by 1, 2, 3, or 4 stars depending on the degree to which data is missing.

Updates to PIP Rules to Reflect Changing Market

CMS updated the PIP stop loss deductible limits for the first time since the Agency promulgated the current PIP regulation at 42 CFR § 422.208 in 2000. Under the PIP rules, a physician or physician group that has more than 25 percent of its potential payments tied to the cost of referral services (i.e., is at “substantial financial risk”) must obtain stop loss coverage. The PIP rules have taken on increased significance as MAOs have increasingly adopted value-based reimbursement models where physicians or physician groups are compensated based on managing the cost of referral services.

The Final Rule significantly increases the maximum deductible limits for the required stop loss coverage. Further, the maximum deductible amounts will be updated every 2 to 3 years to account for cost inflation and utilization changes. Also, as an alternative to stop loss coverage consistent with the patient panel-deductible standards, MAOs may provide stop loss coverage that is certified by an actuary as actuarially equivalent to the coverage under the patient panel-deductible standards.

In addition to the new deductible limits, CMS provided further guidance regarding the application of the PIP rules:

  • Arrangements with Intermediaries. CMS addressed the application of PIP rules to MAO arrangements with intermediaries, such as IPAs and MSOs, using five examples in the preamble; however, CMS did not codify these examples in the regulatory text. CMS provided specific guidance for situations in which the intermediary receives a bonus from the MAO based on the downstream physician’s or physician group’s ability to manage referral costs.
  • Payment for Stop Loss. CMS confirmed that MAOs may require providers to pay for stop loss coverage.
  • Patient Panel Size. Non-risk patients may be included in the patient panel size calculation by using the annual claims for non-risk patients divided by the estimated per member per year payment for a capitated patient.
  • Upside-Only Arrangements. CMS confirmed that the PIP rules do apply to upside-only arrangements.
  • Future Changes. CMS is considering more fundamental changes to the PIP rule framework and plans to engage stakeholders in future discussions.

MLR Clarifications and Relief on Reporting Burdens

In the Final Rule, CMS finalized several changes to the MA and Part D MLR requirements, including changes with respect to how expenses for fraud reduction activities and medication therapy management (MTM) count for the purposes of the MLR calculation.

  • Fraud Reduction Activities. Under the Final Rule, all fraud reduction expenses will qualify as quality improvement activity expenses, including fraud prevention, fraud detection, and fraud recovery. This is a more generous reporting standard than the current MLR rules under which MAOs are permitted to exclude from incurred claims the amount of claims payments recovered through fraud reduction efforts, up to the amount of fraud reduction expenses. This change only affects the MA and Part D program MLR requirements; the commercial and Medicaid MLR standards are not affected.
  • MTM. CMS clarified that all MTM programs that meet Part D requirements will qualify as quality improvement activity expenses.

In addition to the changes described above, CMS will significantly reduce the amount of information that MAOs must provide in their annual MLR reports. Rather than providing line item information about the various expense categories, MAOs will now be required to provide only their organization name, contract number, adjusted MLR, and the remittance amount (if any). Despite the streamlined reporting obligation, MAOs should consider keeping more detailed records internally both to improve the accuracy of the reported MLR and to use in the event of a CMS audit.

New Tools and Obligations for Part D Sponsors in Combatting Opioid Overutilization

Both the Final Rule and the Final Call Letter contain provisions aimed at addressing opioid overutilization. The final regulations and policies provide Part D Sponsors with new tools with which to fight overutilization and abuse, but they also impose new expectations on Part D Sponsors. The new policies include the following:

  • Part D Sponsors must implement a hard safety edit to limit opioid prescriptions for acute pain to no more than a seven day supply;
  • Part D Sponsors may implement a “lock-in” whereby they can limit at-risk members’ coverage for frequently abused drugs to certain providers and pharmacies;
  • Part D Sponsors may apply member-specific point-of-sale claim edits;
  • Part D Sponsors are expected to implement:
    • Real-time safety edits to engage members and prescribers about overdose risk and prevention;
    • An opioid care coordination edit at 90 morphine milligram equivalents per day; and
    • Additional “soft” safety edits to alert pharmacies about duplicative opioid therapy and concurrent use of opioids and benzodiazepines;
  • Part D Sponsors are expected to have a written strategy for addressing overutilization of opioids; and
  • Part D Sponsors may establish a drug management program for at-risk beneficiaries.

    In addition to complying with the new requirements and expectations, CMS also reminds Part D Sponsors that they should not let the new programs and edits interfere with members’ access to medication-assisted treatment, such as buprenorphine.

    Limited Clarifications of AWP Policy

    While CMS implemented limited regulatory changes in connection with Part D pharmacy contracting, and ultimately declined to finalize a proposed definition of mail order pharmacy, the preamble to the Final Rule contains a long and expansive discussion of the Part D AWP requirements. This includes several “clarifications” of existing policy that may be seen by Part D Sponsors as going beyond existing guidance from CMS. For example, CMS expressed concerns about Part D Sponsors prohibiting retail pharmacies from delivering drugs by mail, but clarified that such pharmacies may need to enter into additional contracts with Part D Sponsors and that it would be reasonable to impose additional terms and conditions on such pharmacies specific to the mailing of prescription drugs. In addition, despite much discussion of accreditation requirements in the Proposed and Final Rules, CMS stated that it would not finalize any specific limitations on Part D plan accreditation requirements for pharmacies.

    In perhaps the most significant regulatory change related to pharmacy contracting, CMS lengthened the time frame for Part D Sponsors to respond to pharmacy requests for standard contracting terms and conditions. Under current subregulatory guidance—which the Proposed Rule would have codified—the time frame for providing such standard terms and conditions is two business days from the date of the pharmacy’s request. The Final Rule lengthens this time frame to seven business days, effective January 1, 2019. CMS also clarified that “it is incumbent upon the pharmacy to request terms and conditions that are applicable to the business model(s) and types of services the pharmacy provides so that the terms and conditions offered are reasonable and relevant” to that particular pharmacy, laying to rest any ambiguity about which terms and conditions must be provided to requesting pharmacies.


    In addition to the topics discussed above, the Final Call Letter and Final Rule also address a variety of other regulatory areas, including:

    • Expanded access to electronic health data for MA enrollees;
    • Inclusion of health risk assessments in rewards and incentives programs;
    • Encounter data listening forums, monitoring, and compliance activities;
    • Electronic delivery for certain required member documents;
    • More limited CMS review of marketing materials;
    • An expanded open enrollment period for MA plans;
    • Generic substitutions of brand name drugs;
    • Treatment of biosimilars as generics for certain cost sharing requirements; and
    • Use of CMS’s new preclusion list for providers and prescribers.
    © 2022 McDermott Will & EmeryNational Law Review, Volume VIII, Number 102

    About this Author


    Ankur J. Goel is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's Washington, D.C. office. 

    Ankur has experience in both government and the private sector, where he has assisted clients to successfully navigate significant litigation and enforcement matters.

    Kate McDonald Health Care Attorney

    Kate McDonald is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  She is a member of the Health Industry Advisory Practice Group. 

    Jeremy Earl, Healthcare Attorney, complex regulatory counseling health insurers, McDermott Will Law Firm

    Jeremy Earl is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  He is a member of the Health Industry Advisory Practice Group.

    Jeremy focuses his practice on providing complex regulatory counseling and advice to a variety of health care organizations such as health insurers, health maintenance organizations, pharmacy benefit managers, pharmaceutical companies and other industry stakeholders on a variety of federal and state regulatory matters.  He has experience counseling clients on compliance with the health...


    Mary (Mimi) Moll Alexandre works with clients across all sectors of the health care industry, with particular focus on providing regulatory advice regarding managed care, provider reimbursement, and pharmaceutical and medical device issues. In this regard, Mimi has a range of advocacy experience, including representing clients in matters before the Provider Reimbursement Review Board and drafting written comments for submission to various government agencies.

    Mimi also counsels clients on transactional matters and has experience in transactions...

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