The Centers for Medicare & Medicaid Services (CMS) announced that the agency will collect $4 billion from Part D drug plan sponsors due to lower-than-expected drug costs in 2006, the first year of the Medicare drug program. This collection results from the payment reconciliation that CMS has completed for 2006, including the application of risk sharing created under the Medicare Modernization Act (MMA).
For the 2006 contracting year, Medicare will be collecting funds from plans due to the fact that actual drug costs for almost all Part D plans were below expected levels in their 2006 bids.
A number of factors led to this lower spending, including the fact that 2006 marked the first time that plans were bidding on the new Part D program and the fact there are higher levels of generic drug utilization in Part D than anticipated.
Plans submitted their bids for the 2006 contracting year in June 2005. At the time, there was limited information available with respect to the costs associated with beneficiary utilization in the new prescription drug benefit or the number of beneficiaries who would enroll. The 2006 bids, despite being developed based on the plans? best expectations and having been extensively reviewed by the CMS Office of the Actuary, were nevertheless somewhat uncertain predictions of what would actually happen when the drug benefit began in 2006.
Part D payments to plans are designed to be adjusted for the actual experience of the Part D program. Under the MMA, CMS is required to pay the plan sponsors prospectively based on their bids, and can only complete a final reconciliation of accounts after the end of the calendar year. Final payment reconciliation involves several different activities. For example, monthly subsidies paid by Medicare for low-income beneficiaries and for individuals who incur catastrophic spending are paid on a prospective basis based on estimates in each plan?s bid. After the end of the contracting year, when all the claims data are available, the prospective payments are compared to actual incurred costs and other related data, and appropriate adjustments are made to the plan payments. In addition, monthly premium subsidy payments to the plans are adjusted at the end of the year to reflect updated data about beneficiary health status and enrollment.
By statute, risk sharing limits the unanticipated losses or unexpected gains by Part D plans. For the first two years of the Part D program, if a plan?s drug spending is 2.5 percent or more higher than projected, Medicare makes additional payments to cover a portion of the unanticipated costs. If drug spending is 2.5 percent or more below the levels projected in a Part D plan?s bid, Medicare recoups a portion of the unanticipated cost savings. These risk corridors, which apply during the first two years of the Part D program, reflect the intent to not only mitigate plan risk through additional reinsurance, but also to assure that during the initial years of starting the new benefit, taxpayers would share more fully in any unanticipated savings.
Plans can appeal the final reconciliation calculation by contacting StrategicHealthSolutions, LLC by October 22, 2007. SHS will perform follow-up analysis of any disputed matters; the final decision on reconciliation issues will be made by CMS.
CMS expects that, as plans have further experience with the Part D program, their bid submissions will in future years will more accurately anticipate their actual costs to provide prescription drug coverage. In fact, the 2007 bid submissions were significantly lower than those submitted in 2006 and were a reflection of the actual 2006 Part D drug program experience. Accordingly, CMS anticipates that amounts collected from or paid to plans in future years as a result of final reconciliation and risk sharing will be significantly lower than the reconciliation for the 2006 plan year.
Beneficiaries in the Part D program continue to enjoy excellent value and consumer choice, due in large part to strong competitive bidding by plans. As previously reported, the actual average premium paid by beneficiaries for standard Part D coverage in 2008 is expected to be nearly 40 percent lower than originally projected when the benefit was established in 2003. Further, the program is 30 percent less expensive overall for the first 10 years than originally estimated.
CMS recently launched the 2008 national enrollment campaign. Working with State health insurance assistance programs (SHIPs) and other partners, this year’s campaign is targeted toward beneficiaries with limited means who are eligible for additional assistance. The 2006 plan reconciliation, the 2008 enrollment campaign, and all other parts of the agency?s efforts related to Part D are focused on fine-tuning the program to assure that it continues to deliver high value and lower costs to seniors and taxpayers.