Medicare Advantage

Plan Sponsors’ Medicare Part D Liabilities to CMS May Be Huge, Add Up Quickly

Reprinted from the Dec. 21, 2006, issue of MEDICARE ADVANTAGE NEWS, biweekly news and analysis on the Medicare (and Medicaid) managed care programs.

Sponsors of Medicare drug plans ought to calculate payables and receivables associated with provisions in the Part D program such as the risk corridor, reinsurance and low-income cost-sharing subsidy provisions "as quickly as possible," an actuary tells AIS. He estimates that as many as 75% of Part D plans will owe money to CMS under the risk-corridor provision alone — in amounts that could climb above $10 million for even mid-sized plans with 40,000 to 50,000 members. For a plan with 100,000 members, it could be $18 million due.

"Plans should as quickly as possible quantify the amounts," says Brian Weible, a principal and consulting actuary with Wakely Consulting Group, Inc. of Clearwater, Fla. "Nobody likes surprises at year end. Get an idea of the amount you're owed or must pay."

Weible says his firm's discussions with auditors and regulators indicate that any settlements associated with the Part D risk corridor, reinsurance and low-income cost-sharing subsidy will be considered "actuarial" values on the statutory financial statement and therefore must be included in the year-end actuarial opinion that HMOs typically submit to state regulators by March 1. Yet CMS isn't expected to release its own calculations until later next year, he says.

"Plans are going to have to close their books prior to July when CMS calculates" potential Part D liabilities, says Tim Ford, vice president of government relations and strategy for Aveta Inc., which has 200,000-plus Medicare Advantage members in its MA prescription drug plans (MA-PDs). He predicts that the first-time Part D reconciliation process will run similar to the way in which Part D bidding was handled by CMS the first time — with rules coming out until the last minute and with a significant amount of industry confusion.

Ford agrees that perhaps three-quarters of Part D plans will owe money to CMS on the risk corridor. He says these plans probably anticipate some liability and anticipate giving back some of their revenue to CMS, but the real question is how close the plan's estimate of liabilities is going to be in comparison to CMS's estimate. He says for-profit plans, similar to other plans, won't have exact estimates of risk-corridor liabilities — because plans must make numerous determinations on whether various pharmacy services are eligible for inclusion — which may be difficult to explain to investors.

Ford asserts that MA-PDs, many of which have smaller enrollments than stand-alone Prescription Drug Plans (PDPs), may be better off in these complex calculations because even if a plan miscalculates 2006 Part D liabilities by only $10 per member, that adds up quickly if the plan has 1 million members.

While CMS has released some detailed guidance on how the agency is going to proceed with its calculations, Weible notes this is the first time it is being done — which further complicates the picture. Also, he notes that CMS isn't clear on payment, other than saying the agency could net it out of "future" payments to plans. At the agency's discretion, any owed amounts could come out of CMS's monthly payments to plans or could be settled in one lump-sum payment from plans.

Weible describes the Part D risk corridor as the most complicated, and probably the largest — though not the sole — source of liability to plans. He breaks down Medicare drug plans' potential liabilities for 2006 in the following way:

• Risk corridor. When plans submit Part D bids, they project costs for the basic Part D benefit. (Even if plans offer enhanced drug benefit options, the risk corridor applies only to the portion of the total cost for delivering the basic drug benefit.) CMS compares the plan's projected cost for the basic Part D benefit to its actual cost for the year; if the plan's claims amount isn't within 2.5% of the target, either CMS will pay the plan or the plan must pay CMS. If the plan's claims are higher than its projected cost by more than 2.5%, then CMS will pay the plan a percentage of the difference. If the plan's claims are lower than its projected cost by more than 2.5%, then the plan must pay CMS a percentage of the difference.

"I think at least 60% — and maybe as high as 70% to 75% — of Part D plans are going to end up owing CMS under the risk-corridor provision, meaning their claims are at least 2.5% less than what they originally projected," Weible says. As evidence of this, he notes that 2007 Part D bids were generally lower than 2006 bids, which he explains would indicate that "2006 bids must have been overstated, and claims were lower than everybody thought."

Weible says his firm is just getting started on risk- corridor calculations for clients sponsoring Part D plans. Some plans have nothing to pay out, he says, but for those plans that must return money to CMS, plans with about 5,000 members could owe up to $1 million, and plans with 40,000 to 50,000 enrollees could owe more than $10 million to CMS on the risk corridor alone.

• Catastrophic reinsurance payment. Plans get prospective payment from CMS based on their projected reinsurance costs. Once the catastrophic limit is reached on a Part D member's True Out-of-Pocket (TrOOP) costs, then the plan pays 95% of claims and CMS will reimburse the plan 80% of that 95% — with CMS prospectively paying plans based on what plans put in their bids. Weible says TrOOP reinsurance payments from CMS, which were based on expected costs submitted with the bid, are higher than actual claims, so plans will owe CMS for the difference. He says the most his firm has seen any of its clients owe on reinsurance is between $1 million and $2 million, with some smaller plans owing a couple hundred thousand dollars — amounts far below liabilities associated with the risk corridor.
  
  
• Low-income cost-sharing subsidy. This works similarly to reinsurance, with CMS paying amounts prospectively to plans. If a plan charges a $20 prescription copay and a member is Medicaid eligible, then that member would have a $5 copay and CMS would prospectively pay the other $15 to the plan based on the plan's estimated percentage of Medicaid-eligible enrollment. "We're finding that, unlike the risk corridor and reinsurance, which are subject to how good your cost estimate was in your bid, this depends on how many low-income members you have relative to what you projected," Weible says, describing whether a plan is owed money from CMS or owes money to the agency as "more up in the air." He describes the potential liability amount as a relatively small number, perhaps in the range of $1 million to $2 million for plans with 30,000 to 50,000 members, "and they could owe or be owed."

The risk corridor, Weible points out, is different from the other categories of potential Part D plan liabilities because the corridor is associated with a range — and CMS does nothing if a plan's claims fall within the 2.5% range. But he notes that the other categories are exact.

Weible says his firm developed software to calculate liabilities associated with each of these financial mechanisms. The input for these calculations is uniform for all plans and is already submitted to CMS or received from CMS through the Monthly Membership Report (MMR), Prescription Drug Event (PDE), or Bid Pricing Tools, he explains.

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