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Medicare Program; Part D Reinsurance Payment Demonstration

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Centers for Medicare & Medicaid Services (CMS), HHS.




This notice informs interested Prescription Drug Plan (PDP) sponsors and Medicare Advantage (MA) organizations of an opportunity to participate in the Part D Reinsurance Payment Demonstration beginning in contract year 2006.

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Mark Newsom, (410) 786-3198; Jennifer Harlow, (410) 786-4549;

Application Requirements: Organizations intending to offer a stand alone prescription drug plan must submit an application in accordance with the instructions found in the Solicitation for Applications from Prescription Drug Plans posted on the CMS website on January 21, 2005.[1] Organizations intending to offer a prescription drug benefit in combination with a Medicare Advantage plan must submit a completed Medicare Advantage Prescription Drug application in accordance with the Solicitation for Applications from Medicare Advantage Sponsors posted on the CMS Web site on January 21, 2005.[2] Applications are due to CMS on or before March 23, 2005.

Eligible Organizations: All PDP sponsors may participate in option one as described below.[3] Medicare Advantage organizations offering Prescription Drug Plans (MA-PD plans) are eligible to participate in options one and two (as described below) [4] with the exception of the following: Program of All Inclusive Care for the Elderly (PACE), MA employer only plans, and employer direct contract plans.

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I. Background

A. Legislative Authority

Section 402(a)(1)(A) of the Social Security Amendments of 1967 authorizes the Secretary to conduct demonstrations designed to test whether methods of payment or reimbursement will have the effect of increasing the efficiency and economy of programs without adversely affecting the quality of those programs' services.

Section 402(b) of the Social Security Amendments of 1967 authorizes the Secretary to waive requirements in title XVIII that relate to reimbursement and payment in order to carry out demonstrations authorized under section 402(a). Section 1860D-42(b) of the Act provides that the provisions of section 402 of the Social Security Amendments of 1967 apply with respect to Part D and Part C in the same manner as they apply to Parts A and B, except that any reference with respect to a trust fund in relation to an experiment or demonstration project relating to prescription drug coverage under this part will be deemed a reference to the Medicare Prescription Drug Account within the Federal Supplementary Medical Insurance Trust Fund.

B. Issue

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) Conference Report notes that provisions of the new Part D benefit Start Printed Page 9361that relate to the out-of-pocket (OOP) threshold established in section 1860D-2(b)(4)(B) of the Social Security Act (the Act) may create a disincentive for Part D plans to provide supplemental prescription drug benefits through the enhanced alternative coverage option. Reinsurance benefits provided for in the MMA are not available until this OOP threshold is reached. The provision of supplemental coverage thus might prevent Sponsors or MA organizations offering Part D benefits from benefiting from reinsurance. This concern was also strongly voiced among the commenters to the proposed rule.

The reinsurance demonstration proposal allows for a budget neutral alternative payment approach, over a 5-year period, that may provide an incentive for private sector plans to offer supplemental prescription drug coverage to Medicare beneficiaries.

C. MMA Part D Reinsurance

Reinsurance begins at the annual OOP threshold, defined by section 1860D-2(b)(4)(B) of the Act and § 423.104(d)(5)(ii) of 42 CFR as $3,600 for 2006 (which, under the defined standard benefit, would equal $5,100 in total drug expenditures). The enhanced alternative benefit with supplemental coverage, as defined by 1860D-2(a)(2) of the Act and § 423.104(f)(1)(ii) of the regulation, could have the effect of changing the catastrophic attachment point for reinsurance, or preventing it from attaching altogether.

D. MMA Conference Committee

The MMA Conference Committee noted that “the conditions under which the government provides reinsurance subsidies may create significant disincentives for private sector plans to provide supplemental prescription drug coverage.” [5] To address this concern, the conferees suggested use of Medicare demonstration authority to “allow private sector plans maximum flexibility to design alternative prescription drug coverage.” [6]

Our authority to conduct Medicare demonstrations is provided in section 402 of the Social Security Amendments of 1967 (42 U.S.C. 1395b-1). Under section 402(b), the Secretary is authorized to waive requirements in title XVIII that relate to reimbursement and payment. As noted above, this authority applies for Parts C and D in the same manner as Parts A and B under the provision of section 1860D-42(b) of the Act. The conferees specifically recommended that we demonstrate the effect of filling in the gap in coverage by reimbursing participating plans a capitated payment that is actuarially equivalent to the amount that plans would otherwise receive from the government in the form of specific reinsurance when an individual plan enrollee reaches the catastrophic attachment point ($3,600 in OOP costs for 2006).[7]

The conferees specified that we are not permitted to waive the minimum benefits provided by the plans.[8]

In summary, the MMA conference report urged CMS to conduct a demonstration for the purposes of creating an incentive for plans to offer supplemental benefits filling in the coverage gap. Consequently, in the proposed rule published on August 3, 2004 (69 FR 46633), we stated that we were considering establishing a demonstration to evaluate possible ways of achieving extended coverage. During the subsequent public comment period, we received support from key stakeholders for conducting a demonstration in this area, and in the final rule, we agreed to conduct this demonstration.

II. Provisions of the Notice

A. Demonstration Design

This reinsurance demonstration proposal represents an alternative payment approach; however, unless specifically noted, all other Part D rules will apply. This demonstration will be limited to a 5-year period. Participation in this Part D reinsurance demonstration will require the provision of supplemental benefits through an enhanced alternative benefit package, as well as payment based on either one of the two reinsurance options described below.[9]

Enhanced Alternative Coverage: Under this Part D reinsurance demonstration, eligible participants must provide supplemental benefits through enhanced alternative coverage. Under Part D rules, enhanced alternative coverage may include a supplemental benefit covering non-Part D drugs, reducing cost sharing, increasing the initial coverage limit, reducing the deductible, or any combination of these actions. For this demonstration, however, the supplemental benefit may only fill in part or all of the coverage gap. To clarify, other supplemental benefits that are part of enhanced alternative coverage (as defined in § 423.104(f)) are not included in this demonstration. Thus, a PDP Sponsor or MA organization offering an MA-PD plan under this demonstration would provide coverage between the initial coverage limit and the out of pocket threshold ($3,600 of True Out-of-Pocket (TrOOP) in 2006). The coverage gap may be filled in part or completely. The Sponsor or MA organization must provide catastrophic coverage.

Two Part D Reinsurance Options: Under our demonstration authority, two Part D reinsurance options will be made available. Again, note that unless otherwise stated, all other Part D payment rules apply.

  • Option One: Eligible PDP Sponsors, including organizations offering MA-PD plans, could offer an enhanced alternative drug benefit package and receive a capitated drug reinsurance payment, inaddition to the normal direct subsidy, low income subsidy, and risk sharing payments. This reinsurance payment would be capitated (instead of specific reinsurance payments of 80 percent of drug costs after the beneficiary incurred $3,600 in TrOOP drug costs). The plan specific capitated reinsurance payment will be negotiated during the bidding process.
  • Option Two: For organizations offering MA-PD plans that use MA premium rebates to cover the additional cost of enhanced alternative drug coverage, this option would permit enrollees to count supplemental benefit payments toward meeting the TrOOP spending requirement for Part D catastrophic coverage. For this option, all the supplemental benefit must be funded by MA Part A and Part B rebate dollars. To clarify, MA-PD plans may not include a supplemental premium for the supplemental benefit under this option. This is because it is not possible to distinguish A and B rebate dollars that would count toward TrOOP under this option from beneficiary premium dollars that would not count toward TrOOP.

For more details regarding the payment options one and two, please see the Part D Reinsurance Payment Demonstration Fact Sheet on the CMS Web sites​pdps/​ and​researchers/​demos/​.

Bid Submission Process: PDP sponsors or MA organizations wishing to participate will submit a bid following the bid submission protocol for the Part D benefit. The bidding Start Printed Page 9362process will be the same as for Part D, with the exception of including information relating to the demonstration model selected. There will be no additional burden associated with the submission of a bid.

B. Demonstration Evaluation Design

An evaluation of the CMS reinsurance demonstration will examine the impacts on beneficiaries, PDP sponsors, and MA organizations. From the beneficiary perspective, the analysis will focus on the availability of, and enrollment in, enhanced alternative benefit packages offered by PDP sponsors and MA organizations, as well as patterns of utilization of enrollees. The evaluation will also explore the advantages and disadvantages of participation from the organizations' perspectives.

C. Budget Neutrality

This demonstration must be budget neutral. This means that the expected Medicare costs under the demonstration can be no more than expected costs to the Medicare program in the absence of the demonstration. In order to ensure budget neutrality, PDP sponsors and MA organizations participating in the demonstration will have their capitation payments offset. The amount will be dependent on the demonstration reinsurance payment option chosen by the plan.

The CMS Office of the Actuary prepared an analysis of the demonstration for CY 2006 and determined that this demonstration is budget neutral if the capitated payments are reduced by at least $3.13 per member per year for option one and at least $7.57 per member per year for option two. Budget neutrality could be at risk under this demonstration if employer groups are allowed to participate, because this demonstration could provide an incentive for employer groups to drop their provision of drug coverage and encourage individuals to seek coverage under Part D. Further, in order to ensure budget neutrality for this demonstration initiative, we will consider prior year(s) of data and bidding information in establishing capitation amounts. Note that CY 2006 offsets are based on first-year impacts. The amounts shown may increase annually in a similar manner as other Part D costs for the duration of the demonstration.

III. Collection of Information Requirements

Other than a simple affirmation, as discussed below, no additional data will be collected from plans for the purpose of this demonstration.

Pursuant to this demonstration, plans must affirm to CMS that any funding of premiums will not come from any respective employer or union with whom the plan conducts business.

Whereas, this notice does not impose information collection and record-keeping requirements, it does not need to be reviewed by the Office of Management and Budget under the authority of the Paperwork Reduction Act of 1995 (PRA). Further, it is not subject to the PRA as stipulated under 5 CFR 1320.3(h)(1).

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Authority: Section 402 of the Social Security Amendments of 1967.

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Dated: February 11, 2005.

Mark B. McClellan,

Administrator, Centers for Medicare & Medicaid Services.

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1.  See​pdps/​. See section 2 of the application.

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3.  See II(A) Demonstration Design—Two Part D Reinsurance Options.

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5.  U.S. House of Representatives, 108th Congress (November 21, 2003). Medicare Prescription Drug, Improvement, and Modernization Act of 2003 Conference Report to accompany H.R. 1. Report 108-391. Washington DC: Government Printing Office. Available online at​serialset/​creports/​index.html.

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9.  See Two Part D Reinsurance Options in this section.

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[FR Doc. 05-3621 Filed 2-18-05; 4:24 pm]