The Inflation Reduction Act (IRA) introduces significant changes to Medicare Part D, including a beneficiary maximum annual out-of-pocket cap, replacement of the Coverage Gap Discount Program with the Manufacturer Discount Program, and limited cost sharing for insulins and vaccines. These changes increase plan liability, particularly in the catastrophic phase, and necessitate adjustments to the Part D risk adjustment model (RxHCC) used by CMS to distribute direct subsidy payments.
Key findings and implications:
- Direct subsidy significance: Plan revenue is primarily composed of the direct subsidy, a risk-adjusted monthly payment compensating plans for the average risk of their members. The increase in direct subsidy due to IRA's impact on plan liability makes risk scores a critical component of plan revenue.
- Data lag in RxHCC model: The current RxHCC model uses 2018 data for calibration, creating a lag that fails to capture significant market events like the IRA's impact. This leads to underprediction of plan costs for high-cost beneficiaries and overprediction for low-cost beneficiaries.
- Plan implications: Without model recalibration, plans will be undercompensated for high-cost beneficiaries and overcompensated for low-cost beneficiaries. This may incentivize plans to restrict formularies or even exit the Part D market, potentially limiting beneficiary options or increasing premiums.
- Patient implications: Beneficiaries with conditions underpredicted by the RxHCC model, particularly those taking high-cost medications, may face limited plan options or higher premiums.
- Potential mitigation strategies: CMS could recalibrate the RxHCC model using updated data, incorporate drug claims to improve condition imputation and severity assessment, and provide early guidance to plans.
Research conclusions:
- The IRA's impact on plan liability is substantial and requires significant adjustments to the RxHCC model.
- The current RxHCC model's limitations, combined with the IRA's changes, may lead to significant disconnects between risk scores and expected plan liability.
- Plans need timely guidance from CMS on model updates to make informed strategic decisions.
