1 January 30, 2019 NOTE TO: Medicare Advantage Organizations, Prescription Drug Plan Sponsors, and Other Interested Parties SUBJECT: Advance Notice of Methodological Changes for Calendar Year (CY) 2020 for Medicare Advantage (MA) Capitation Rates, Part C and Part D Payment Policies and 2020 Draft Call Letter Medicare Advantage and Part D have been successful in providing Medicare beneficiaries with options so that they can choose the healthcare that best fits their individual health needs. These programs demonstrate the value of private sector innovation and creativity and CMS is committed to continuing to makes changes that promote greater innovation, transparency, flexibility, and program simplification. On December 20, 2018, we released for comment proposed changes to the Part C risk adjustment model used to pay for aged and disabled beneficiaries with a comment deadline of February 19, 2019. We are extending this deadline and are continuing to solicit comment on those proposed changes until Friday, March 1, 2019. In accordance with section 1853(b)(2) of the Social Security Act, we are now notifying you of additional planned changes in the MA capitation rate methodology and risk adjustment methodology applied under Part C of the Medicare statute for CY 2020. Also included with this notice are proposed changes in the payment methodology for CY 2020 for Part D and annual adjustments for CY 2020 to the Medicare Part D benefit parameters for the defined standard benefit. For 2020, CMS will announce the MA capitation rates and final payment policies on Monday, April 1, 2019, in accordance with the timetable required by section 1853(b), as established in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-173) and amended by the Securing Fairness in Regulatory Timing Act of 2015 (SFRTA) (Pub. L. 114-106). The Advance Notice of Methodological Changes is published no fewer than 60 days before the publication of the Rate Announcement and provides a minimum 30-day period for public comment. Attachment I shows the preliminary estimates of the national per capita MA growth percentage and the national Medicare fee-for-service growth percentage, which are key factors in determining the MA capitation rates. Attachment II sets forth changes in the Part C payment methodology for CY 2020. Attachment III sets forth the changes in the Part D payment methodology for CY 2020. Attachment IV presents the annual adjustments for CY 2020 to the Medicare Part D benefit parameters for the defined standard benefit. Attachment V presents the preliminary risk adjustment factors. Attachment VI provides the draft CY 2020 Call Letter for MA organizations; section 1876 cost- based contractors; prescription drug plan (PDP) sponsors; demonstrations; Programs of All- Inclusive Care for the Elderly (PACE) organizations; Medicare-Medicaid Plans (MMPs); and 2 employer and union-sponsored MA or Part D group plans, including both employer/union-only group health plans and direct contract plans. The draft CY 2020 Call Letter contains proposals relating to the quality rating system and information these plan sponsor organizations will find useful as they prepare their bids for the new contract year. In addition, the draft CY 2020 Call Letter includes draft bid and operational guidance for plans. To submit comments or questions electronically, go to https://www.regulations.gov, enter the docket number “CMS-2018-0154” in the “Search” field, and follow the instructions for “submitting a comment.” Comments will be made public, so submitters should not include any confidential or personal information. In order to receive consideration prior to the April 1, 2019 release of the final Announcement of Calendar Year 2020 Medicare Advantage Capitation Rates and Medicare Advantage and Part D Payment Policies, comments must be received by 6:00 PM Eastern Standard Time on Friday, March 1, 2019. / s / Demetrios Kouzoukas Principal Deputy Administrator and Director, Center for Medicare I, Jennifer Wuggazer Lazio, am a Member of the American Academy of Actuaries. I meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained in this Advance Notice. My opinion is limited to the following sections of this Advance Notice: The growth percentages and United States per capita cost estimates provided in Attachment I; the qualifying county determination, calculations of Fee for Service cost, IME phase out, MA benchmarks, EGWP rates, and ESRD rates discussed in Attachment II; Medicare Part D Benefit Parameters: Annual Adjustments for Defined Standard Benefit in 2020 described in Attachment III and in Attachment IV. / s / Jennifer Wuggazer Lazio, F.S.A., M.A.A.A. Director Parts C & D Actuarial Group Office of the Actuary Attachments 3 2020 ADVANCE NOTICE TABLE OF CONTENTS Attachment I. Preliminary Estimates of the National Per Capita Growth Percentage and the National Medicare Fee-for-Service Growth Percentage for Calendar Year 2020 ...............5 Section A. MA Growth Percentage ..........................................................................................5 Section B. FFS Growth Percentage ..........................................................................................5 Attachment II. Changes in the Part C Payment Methodology for CY 2020 ..................................9 Section A. MA Benchmark, Quality Bonus Payments and Rebate ..........................................9 Section B. Calculation of Fee for Service Cost ......................................................................15 Section C. IME Phase Out ......................................................................................................22 Section D. ESRD Rates...........................................................................................................22 Section E. Location of Network Areas for PFFS Plans in Plan Year 2021 ............................23 Section F. MA Employer Group Waiver Plans ......................................................................24 Section G. CMS-HCC Risk Adjustment Model for CY 2020 ................................................28 Section H. ESRD Risk Adjustment Model for CY 2020 ........................................................29 Section I. CMS-HCC Risk Adjustment Model Used for PACE Organizations in CY 2020 ................................................................................................................................32 Section J. Frailty Adjustment for PACE Organizations and FIDE SNPs ...............................35 Section K. Medicare Advantage Coding Pattern Adjustment ................................................36 Section L. Normalization Factors ...........................................................................................36 Section M. Medical Loss Ratio Credibility Adjustment .........................................................41 Section N. Encounter Data as a Diagnosis Source for 2020 ...................................................42 Attachment III. Changes in the Payment Methodology for Medicare Part D for CY 2020 .........44 Section A. Update of the RxHCC Model ................................................................................44 Section B. Encounter Data as a Diagnosis Source for 2020 ...................................................46 Section C. Part D Risk Sharing ...............................................................................................47 Section D. Medicare Part D Benefit Parameters: Annual Adjustments for Defined Standard Benefit in 2020 ................................................................................................49 Section E. Reduced Coinsurance for Applicable Beneficiaries in the Coverage Gap ............54 Section F. Dispensing Fees and Vaccine Administration Fees for Applicable Drugs in the Coverage Gap ...........................................................................................................56 Section G. Part D Calendar Year Employer Group Waiver Plans Prospective Reinsurance Payment Amount .......................................................................................56 Attachment IV. Medicare Part D Benefit Parameters for the Defined Standard Benefit: Annual Adjustments for 2020 ............................................................................................57 Section A. Annual Percentage Increase in Average Expenditures for Part D Drugs per Eligible Beneficiary (API) .............................................................................................57 Section B. Annual Percentage Increase in Consumer Price Index (CPI) ................................58 4 Section C. Calculation Methodology .......................................................................................59 Section D. Retiree Drug Subsidy Amounts ............................................................................61 Section E. Estimated Total Covered Part D Spending at Out-of-Pocket Threshold for Applicable Beneficiaries ................................................................................................62 Attachment V. RxHCC and ESRD Risk Adjustment Factors ......................................................64 Attachment VI. Draft CY 2020 Call Letter ...................................................................................98 5 Attachment I. Preliminary Estimates of the National Per Capita Growth Percentage and the National Medicare Fee-for-Service Growth Percentage for Calendar Year 2020 For 2020, the MA county rates are based on the specified amount as defined in Attachment II Section A2 below. Section 1853(n)(2)(A) defines the specified amount as the base amount (which in rebasing years is the adjusted average FFS per capita cost) multiplied by the applicable percentage for the area (set under section 1853(n)(2)(B) through (D)). Section 1853(n)(4) of the Social Security Act requires that the benchmark for an area for a year (increased by quality bonus percentages where applicable) be capped at the level of the 1853(k)(1) applicable amount. The 2020 FFS cost is calculated, in part, using the FFS growth percentage. CMS intends to rebase the county FFS rates for 2020 as part of the calculation of the rates for 2020. Throughout this document, the Social Security Act will be referred to as “the Act.” Section A. MA Growth Percentage The current estimate of the change in the national per capita MA growth percentage for aged and disabled enrollees combined in CY 2020 is 4.84 percent. This estimate reflects an underlying trend change for CY 2020 in per capita cost of 3.757 percent and, as required under section 1853(c)(6)(C) of the Act, adjustments to the estimates for prior years as indicated in the table below. Table I-1 below summarizes the estimates for the change in the national per capita MA growth percentage for aged/disabled beneficiaries. Table I-1. Increase in the National Per Capita MA Growth Percentages for 2020 Prior NPCMAGP for Increases Current Increases 2020 With 2003 to 2003 to 2019 to 2003 to §1853(c)(6)(C) 2019 2019 2020 2020 adjustment1 Aged+Disabled 68.178% 69.936% 3.757% 76.320% 4.84% 1 Current increases for 2003-2020 divided by the prior increases for 2003-2019 Section B. FFS Growth Percentage Section 1853(n)(2) of the Act requires that the specified amount for a county be calculated as a percentage of the county FFS costs. Table I-2 below provides the current estimate of the change in the Aged/Disabled FFS United States per capita cost (USPCC), which will be used as the basis for the county FFS rates. The percentage change in the FFS USPCC is shown as the current projected FFS USPCC for 2020 divided by the prior projected FFS USPCC for 2019. 6 Table I-2 also shows the change in the FFS USPCC for dialysis-only ESRD. Statewide dialysis- only ESRD rates are determined by applying a historical average geographic adjustment to a projected FFS dialysis-only ESRD USPCC. We will use a 5-year average of State data to determine the average geographic adjustment, similar to the method used to determine the geographic adjustments for non-ESRD rates. Table I-2. Increase in the USPCC Growth Percentage for CY 2020 Total USPCC – Non- FFS USPCC – Non- Dialysis-only ESRD ESRD ESRD USPCC Current projected 2020 USPCC $958.90 $931.38 $7,949.52 Prior projected 2019 USPCC $914.62 $891.07 $7,833.28 Percent increase 4.84% 4.52% 1.48% Table I-3 compares last year’s estimate of the total non-ESRD USPCC with current estimates for 2003 to 2022, and Table I-4 compares last year’s FFS non-ESRD USPCC estimates with current estimates. The total USPCCs are the basis for the National Per Capita MA Growth Percentages. In addition, these tables show the current projections of the USPCCs through 2022. Caution should be employed in the use of this information. It is based upon nationwide averages, and local conditions can differ substantially from conditions nationwide. None of the data presented here pertain to the Medicare prescription drug benefit. Attachment II Section B contains additional information regarding the calculation of FFS costs. 7 Table I-3.-Comparison of Current & Previous Estimates of the Total USPCC – Non-ESRD Part A Part B Part A & Part B Last Last Last Calendar Current Current Current Year’s Year’s Year’s Ratio Year Estimate Estimate Estimate Estimate Estimate Estimate 2003 $296.18 $296.18 $247.66 $247.66 $543.84 $543.84 1.000 2004 314.08 314.08 271.06 271.06 585.14 585.14 1.000 2005 334.83 334.83 292.86 292.86 627.69 627.69 1.000 2006 345.30 345.30 313.70 313.70 659.00 659.00 1.000 2007 355.44 355.44 330.68 330.68 686.12 686.12 1.000 2008 371.90 371.90 351.04 351.04 722.94 722.94 1.000 2009 383.91 383.91 367.93 367.93 751.84 751.84 1.000 2010 383.94 383.95 376.79 376.81 760.73 760.76 1.000 2011 388.15 388.18 386.41 386.45 774.56 774.63 1.000 2012 377.72 377.72 392.97 392.97 770.69 770.69 1.000 2013 380.30 381.73 399.64 399.67 779.94 781.40 0.998 2014 372.59 372.77 418.60 418.59 791.19 791.36 1.000 2015 376.08 376.31 435.61 435.76 811.69 812.07 1.000 2016 379.90 380.07 445.65 446.33 825.55 826.40 0.999 2017 385.90 384.70 460.45 464.36 846.35 849.06 0.997 2018 391.53 390.02 489.44 488.79 880.97 878.81 1.002 2019 404.56 400.52 519.62 514.10 924.18 914.62 1.010 2020 415.59 412.19 543.31 537.91 958.90 950.10 1.009 2021 431.13 427.98 571.75 568.79 1,002.88 996.77 1.006 2022 451.96 603.07 1,055.03 Table I-4. Comparison of Current & Previous Estimates of the FFS USPCC – Non-ESRD Part A Part B Part A & Part B Last Last Last Calendar Current Current Current Year’s Year’s Year’s Ratio Year Estimate Estimate Estimate Estimate Estimate Estimate 2010 $371.20 $371.20 $374.92 $374.92 $746.12 $746.12 1.000 2011 371.70 371.70 384.70 384.70 756.40 756.40 1.000 2012 357.52 357.52 392.25 392.25 749.77 749.77 1.000 2013 364.32 366.28 396.04 396.04 760.36 762.32 0.997 2014 367.61 367.40 409.50 409.08 777.11 776.48 1.001 2015 372.34 372.76 428.66 429.23 801.00 801.99 0.999 2016 374.82 374.86 435.56 436.55 810.38 811.41 0.999 2017 378.52 376.30 450.84 456.25 829.36 832.55 0.996 2018 385.43 381.58 477.10 474.83 862.53 856.41 1.007 2019 394.17 391.63 502.64 499.44 896.81 891.07 1.006 2020 405.95 403.45 525.43 523.29 931.38 926.74 1.005 2021 421.68 417.97 553.72 552.01 975.40 969.98 1.006 2022 441.78 583.82 1,025.60 These estimates are preliminary and could change when the final rates are announced, no later than April 1, 2019, in the Announcement of CY 2020 Medicare Advantage Capitation Rates and Medicare Advantage and Part D Payment Policies. Further details on the derivation of the 8 national per capita MA growth percentage and the FFS growth percentage will also be presented in the April 1, 2019 Announcement. 9 Attachment II. Changes in the Part C Payment Methodology for CY 2020 Section A. MA Benchmark, Quality Bonus Payments and Rebate Section 1853(n)(2) requires that, in determining the specified amount, CMS use as the base amount the amount described in section 1853(c)(1)(D) for a rebasing year or, for years that are not a rebasing year, the base amount from the previous year increased by the national per capita MA growth percentage. Section 1853(c)(1)(D)(ii) of the Act requires CMS to rebase the county FFS rates, which form the basis of the specified amount described in Section A2 below, periodically but not less than once every three years. When the rates are rebased, CMS updates its estimate of each county’s FFS costs using more current FFS claims information. CMS intends to rebase the county FFS rates for 2020 using FFS claims data from 2013 through 2017. (Please note that throughout this document, the terms “benchmark” and ”county rate” are used interchangeably, and the term “service area benchmark” indicates the bidding target for an MA plan based on its specific service area.) The Programs of All-Inclusive Care for the Elderly (PACE) plans are exempt from the use of the specified amount, per section 1853(n)(5) of the Act. A1. Applicable Amount The applicable amount is the rate established under section 1853(k)(1) of the Act. As CMS intends to rebase the rates in 2020, the applicable amount for 2020 is the greater of: (1) the county’s 2020 FFS cost or (2) the 2019 applicable amount increased by the CY 2020 National Per Capita Medicare Advantage Growth Percentage. As discussed in Section A5, section 1853(n)(4) of the Act requires that the benchmark (determined taking into account the quality bonus percentage increase) for each county must be capped at the county’s applicable amount. A2. Specified Amount Under section 1853(n)(2)(A) of the Act, the specified amount is based upon the following formula: (2020 FFS cost1 minus IME phase-out amount) × (applicable percentage + applicable percentage quality increase) Where: IME phase-out amount is the amount of indirect costs of medical education that is required to be phased out as specified at section 1853(k)(4) and sections 1853(n)(2)(E) and (F); 1 As described in more detail below in section B, the FFS cost is adjusted to exclude costs attributable to payments under sections 1848(o), and 1886(n), and 1886(h). 10 Applicable percentage is a statutory percentage applied to the county’s base payment amount, as described at section 1853(n)(2)(B); and Applicable percentage quality increase, referred to in this document as the quality bonus payment (QBP) percentage, is a percentage point increase to the applicable percentage for a county in a qualifying plan’s service area. Section 1853(n)(2)(C) of the Act requires CMS to determine applicable percentages for a year based on county FFS rate rankings for the most recent year that was a rebasing year. To determine the CY 2020 applicable percentages for counties in the 50 States and the District of Columbia, CMS will rank counties from highest to lowest based upon their 2019 average per capita FFS rate, because 2019 is the most recent rebasing year prior to 2020. CMS will then place the rates into four quartiles. For the territories, CMS will assign an applicable percentage to each territory county based on where the territory county rate falls in the quartiles established for the 50 States and the District of Columbia. CMS is publishing the 2020 applicable percentages by county with the Advance Notice at https://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/Announcements- and-Documents.html. Each county’s applicable percentage is assigned based upon its quartile ranking, as follows: Table II-1. FFS Quartile Assignment Applicable Quartile Percentage 4th (highest) 95% 3rd 100% 2nd 107.5% 1st (lowest) 115% Section 1853(n)(2)(D) of the Act provides that, beginning in 2013, if there is a change in a county’s quartile ranking for a payment year compared to the county’s ranking in the previous year, the applicable percentage for the area for the year shall be the average of: (1) the applicable percentage for the previous year and (2) the applicable percentage for the current year. For both years, CMS will calculate the applicable percentage that would otherwise apply for the area for the year in the absence of this transitional provision. For example, if a county’s ranking changed from the second quartile to the third quartile, the applicable percentage would be 103.75 percent for the year of the change – the average of 107.5 percent and 100 percent.