Many of you asked me to expound a little more on the recent controversy over the Centers for Medicare and Medicaid Services’ (CMS) establishment of a special off-budget premium stabilization program for standalone Part D plans and why it was needed. Your questions were as follows:
- What exactly happened?
- Why was the program needed?
- What does it mean for the future?
In my various blogs, podcasts, and newsfeed commentary on the subject, I alluded to potential huge ramifications for the program (the previous entries are listed at the end of this blog). Let me dive a little deeper here and tell you why I am so worried. It continues to be a lesson in the unintended consequences of lawmakers – especially in campaign mode – making major changes to government programs.
What happened in the Inflation Reduction Act (IRA)
The IRA was passed on August 16, 2022 and included two major healthcare reforms – the enactment of Medicare drug price negotiations and major changes to the Medicare Part D program. These Part D changes included major reductions in out-of-pocket (OOP) costs to enrollees, including:
- Capping the cost of insulin at $35 per month as of 1/1/2023.
- Elimination of the 5% cost-sharing in the Catastrophic Phase as of 1/1/2024.
- Enhancement (for those who received partial help) of the Low Income Subsidy (LIS) Program as of 1/1/2024.
- Elimination of the Coverage Gap Phase as of 1/1/2025.
- The capping of total out-of-pocket costs at $2,000 as of 1/1/2025.
- The ability for enrollees to pay their out-of-pocket costs over a calendar year as of 1/1/2025.
What’s more, the bill also deliberately transferred additional costs to health insurers, including:
- As of 1/1/2025, costs in the Catastrophic Phase are moved from Medicare to plans and brand drug manufacturers. Medicare’s direct costs drop from 80% to 20%. Plan responsibility will move from 15% to 60% in this phase. There will be a 20% discount from brand drug makers. The government wanted to address rising reinsurance costs for Medicare.
- In an offsetting change for plans, in the initial phase brand drug makers must give a 10% brand discount in addition to rebates negotiated with plans. Thus, a plan’s obligations for brand costs drop to 65% from 75% if the level of rebate remains the same, which I think is doubtful.
- PBMs are now required to pass certain price concessions on to pharmacies.
The problem
Now, the Democratic supporters of the provisions celebrated the fact that enrollees will see huge savings due to the changes. I guess that is something to celebrate. But what they didn’t tell you were the ramifications – if they even knew of them.
The provisions related to Part D had two main goals – an election-cycle political win by reducing enrollee out-of-pocket (OOP) costs in many areas and shifting budgetary risk to plans. In each case, the government did not fully fund the Part D plans for these changes.
In the case of OOP cost reductions, the government funds a standard benefit. But the plans have long furnished additional enhanced benefits in Part D. When the government passed the IRA, some funding was there in the structure for the changes against the basic benefit, but not really for the enhanced portion of Part D, which has grown over the years and Americans rely on to limit their costs.
And while the IRA funded some costs when the government transferred liability to plans (moving funding from a catastrophic payment to an upfront subsidy payment), the ongoing risk was now placed on the plans. It now must forecast and plan for the lion’s share of future catastrophic costs. It cannot count on the government to primarily fund this as it had in the past. And we know these future costs will be huge. The government transferred the liability to plans because CMS’ costs had risen dramatically over the years. High drug prices, huge annual price increases, and the aging demographic will mean these costs grow even more in the future.
The two together created huge new exposure for plans. Without funding for the changes and exposure, the plans had no choice but to diminish benefits, increase premiums, and contract their footprints.
Take it out of profits
The IRA proponents might argue that plans should take the costs out of profit. One could argue that Medicare Advantage (MA), with its big premiums and potential for cost-savings, could do so, but this is just not the case for Part D. Premiums are small and margins narrow. Much of the revenue goes out in the sheer cost of drugs. A plan has administrative costs and commissions to pay in Part D. It simply cannot shoulder the increased risk and financial burdens from margins.
The fallout
Plans integrating Part D into a greater MA benefit dealt with the changes, although we will see some benefit contraction and premium increases as well for numerous reasons. But the profound shift in liability and increased costs meant standalone Part D plans had no choice but to contract footprints in the program, reduce benefits and increase premiums as costs to them increased in 2023, 2024 and 2025.
Enrollment-weighted average premiums in standalone PDPs were to go up an average 21.5% in 2024 due in part to the IRA changes already on line, from about $40 in 2023 to about $48. The average increase was mitigated to $43 or 5% by existing members switching to and new members enrolling in lower premium plans (with higher ongoing OOP costs).
In 2025, estimates suggested enrollment weighted average premiums would increase 50% to 100% or more. Plan switching and new enrollment in lower-premium plans could reduce the average increase again, but the premium hikes would still be huge.
This is what CMS saw when they opened the so-called bids for 2025. While the IRA had a premium stabilization subsidy that caps the base program premium amount to no more than a 6% increase per year from 2024 to 2029, the program does not consider the unfunded costs of the enhanced benefits provided by plans. The OOP caps and transfer of liability impact the costs of the enhancements as well.
The additional premium support program
To deal with the unforeseen circumstances of increased premiums, benefit reductions, and contraction in the program, CMS unveiled what I believe is an extra-legal additional premium stabilization program. The Paragon Institute thinks it will cost $10 billion over three years. What’s more it really does not fit the traditional parameters of a demonstration program.
What does the additional premium stabilization program do? If standalone PDP plans voluntarily join, they get the following:
- CMS will apply a uniform reduction of $15 to the base beneficiary premium or bring it to $0.
- A year-over-year increase limit of $35 will be imposed on a plan’s total Part D premium, which includes the enhanced benefit portion.
- Risk corridors will be adjusted to provide for greater government risk sharing for potential plan losses.
The additional fallout
The program no doubt will have its takers and reduce premiums dramatically from what they would have been. But it is only for three years and may not reduce all premium hikes. Indeed, it still leaves open the prospect of an up to 80% premium increase in some plans from 2024. MA plans cannot participate.
CVS Health used its political muscle and influence with CMS and lobbied hard for the program. It is happy it will be in place. But there is reason to believe that all is still not rosy in Part D. The biggest enroller of standalone Part D recipients, Centene, has announced that it is dropping all commissions in its Part D products (both new enrollments and renewals). Some of this could be a push by the insurer to move people to Medicare Advantage (MA), but most of it is the fact that the already narrow-margin standalone Part D program has become even less profitable with all the IRA Part D changes. From a financial standpoint, Centene may have had no choice but to stop commissions. As an example, the renewal commission removal could be worth between 2% and 2.5% against the base benefit. I think others will have to follow suit on the commission front in the future, especially if financial pictures further erode in PDP.
The Part D paradigm shift
In many ways, the IRA has flipped the Part D program on its head. The original concept of Part D was to offer seniors and the disabled some relief from huge retail drug costs by:
- Offering a reasonable but lean benefit to lower overall government expenditures and plan risk.
- Have insurers run the program on a narrow administrative budget and low margin (a couple percentage points).
- Excess profits and losses would be shared between the insurers and government through a risk corridor arrangement.
- The government would cover the vast majority of the catastrophic costs.
But politicians have changed the paradigm over the years by:
- Enriching the benefit substantially.
- Increasing administrative costs and regulatory burdens on plans substantially.
- Transferring a great deal of risk to plans.
From Part D stability to uncertainty
One thing policymakers could take pride in was the relative success and stability of the Part D program since it was launched in 2006. It had low and sometimes decreasing premiums throughout the years. It served enrollees well with significant enhancements beyond the basic benefit construct.
But lawmakers began fiddling – sometimes both sides of the aisle. The latest changes threaten to take a stable program and create great uncertainty. Indeed, not only have premiums been on the rise but plan offerings and plan selection have dwindled to their lowest level since the 2006 launch for both Low Income Subsidy (LIS) and non-LIS enrollees.
Remember that there are some 23 million in traditional Medicare or in an MA Part C only plan that rely on the standalone Part D program. Further, about 87% of all enrollees are supported by just five national health plans.
- Centene (over 6.7M)
- CVS Health (over 4.9M)
- United (over 3.8M)
- Cigna (over 2.5M)
- Humana (over 2.1M)
These plans support about 9% to 29% each of the enrollees in the program. For example, Centene, which enrolls almost 30% of all PDP enrollees, has been a bulwark of the program. It has members in all 50 states (+ DC) and grew over 1.7 million lives in about a year.
It is clear that the IRA as well as CMS’ and Capitol Hill’s poor planning have already jeopardized the long-term participation of one of these key plans. Centene is rethinking the historic commitment it has made to the program (WellCare, acquired by Centene, was one of the early innovators in Part D.) Ending commissions was a huge decision to make. I do not blame Centene at all, but what will the impact be to the open enrollment season due both to the IRA and the commission decision by Centene?
- How much will premiums still go up?
- Will increases in premiums lead some to drop coverage?
- Will the increase in PDP premiums lead more to abandon traditional Medicare in favor of MA?
- If so, what will that mean to the selection in the PDP program?
- Will selection become more adverse and will that send premiums up even more in the future?
- Will a so-called rate death spiral emerge?
- How much of the enhanced benefit in Part D will go away even with the premium stabilization?
- Will plan choices and plan participation drop further even with the premium stabilization?
- Will the lack of commissions on about a quarter of the population lead to huge churn in the market and impact beneficiaries’ consistent coverage?
- Will the increased risk in PDP lead more players to abandon commissions?
- Will the five big PDP players and more leave PDP or covertly speed up strategies to move people from PDP to MA?
- What does that mean for traditional Medicare enrollees who rely on PDPs?
While CMS will not admit it, in the end the passage of the Part D changes has put the standalone Part D program in precarious shape. While everyone might celebrate the IRA reductions in OOP costs, the fallout to premiums, benefits, and plan choice could far outweigh the help it provides. It, too, could mean a program that reliably served the traditional program enrollees implodes as more and more enrollees abandon it for MA. While MA growth is not a bad thing, there is no question traditional enrollees would be hurt.
Previous blogs and podcasts:
https://www.healthcarelabyrinth.com/part-d-premium-woes-due-to-the-inflation-reduction-act/
https://www.healthcarelabyrinth.com/36-are-the-democrats-in-for-an-october-healthcare-surprise/
#partd #pdp #medicare #medicareadvantage #cms
— Marc S. Ryan
