Providers interested in risk contracts with Medicare Advantage payers often struggle with the decision of whether to take on risk in Part D or whether to carve it out. If you are a provider considering such an arrangement, here are a few key questions to ask yourself prior to agreeing to take risk on Part D:
1. Do I have a large enough population?
CMS deems a Part D population credible at 56,000 member months (or 4,667 average members). This relatively large threshold is due to the low frequency and high severity of extremely costly specialty medications, which make Part D expenses more difficult to predict than medical expenses. This means that if a provider group is responsible for less than this number of beneficiaries, they might do everything correctly and still be on the wrong side of a risk contract simply due to normal statistical deviation. A provider should consider the level of credibility of the population within each contract, as well as that of the combined population across all their Medicare risk contracts.
2. Do I have a transparent view into the payer’s Part D pricing?
This question extends beyond just the Part D component of the pricing; however, it is especially relevant here. If the bid pricing is aggressive, then the revenue by which your capitation will be determined may be understated to start with, which leads to lower revenue for the provider and a greater potential for failure. Moreover, if there are multiple provider groups within a specific plan benefit package (PBP), it is possible the members that you cover (and their associated mix of claims) could look meaningfully different from the remainder of the population in that plan. This means that while the revenue estimated in the bid may be appropriate for the entire population, it may not be for your specific subset of members. This latter risk is lessened when the population is sufficiently large to reduce statistical variation in costs, as noted in the prior question.
It may be not be possible to ascertain the bids themselves or you may not have the experience to dissect them. As such, it is important to, at a minimum, to have the payer walk you through the key assumptions included in the bid pricing, such as:
- What percentage (if not 100%) of the entire population enrolled in the PBP does my provider group represent?
- What level of gain/loss is included in the pricing?
- Are any of the assumptions potentially aggressive?
- Is there an actual-to-expected analysis the payer can provide showing how rebates, allowed claim costs, risk scores, and other assumptions have compared relative to projections in the past?
3. Do I have a clearly defined contract?
Terms commonly used elsewhere in healthcare such as “claims”, “premium”, and “revenue” need to be more clearly defined when it comes to Part D. Optimally, the contract will include detailed numerical examples in order to leave no piece up to interpretation.
Medicare Part D includes many different cash flows beyond member premiums, pharmacy claims, and associated member cost sharing. These items include, but are not limited to:
- Manufacturers’ rebates and pharmacy DIR
- CMS prospective payments for LICS, coverage gap discount, and reinsurance
- CMS risk adjusted direct subsidy
- Low income premium subsidy
- CMS Part D risk corridors
When net Part D claims exceed the percentage of revenue allocated to providers as Part D capitation, providers must make a settlement payment back to the payer. These payments are included as DIR for purposes of calculating the CMS basic risk corridors. Specifically, these payments increase total DIR and reduce net claims, thus reducing or eliminating any risk corridor payments that would have otherwise been owed to the payer/provider from the higher-than-expected claims. As such, if there are no other explicit downside limits written into the risk contract that transfer risk back to the payer, the CMS risk corridors will not provide protection against adverse experience.
4. How resilient are the terms of the contract?
Part D has remained central to the discussion in Washington over the last few years. Starting in 2024, CMS will require that all pharmacy price concessions (i.e., DIR) be reflected in costs at the point of sale. Previously, CMS has proposed eliminating all DIR which would significantly shift the financial incentives in Part D. Most importantly, three pieces of legislation (The Prescription Drug Pricing Reduction Act of 2019, H.R.3., and the Build Back Better Act (BBA)) included provisions to meaningfully alter Part D by altering the benefit design, instituting inflation caps, and establishing a process for government price negotiations. Despite BBA failing to pass in the Senate, it is likely that the provisions related to Part D will re-emerge separately in future legislation. If your contract with payers is multi-year and does not address these items or allow for renegotiation in the event of new legislation or updated regulatory guidance, there is the potential for unforeseen issues down the line. Furthermore, if these reforms are implemented, there will be heightened pricing risk in the first year as actuaries attempt to account for all the associated changes.
5. Do I understand the Part D benefit design, the PBM contracts, and the levers in Part D?
It is relatively clear on Part C how a provider might impact the total cost of care and perform well against a capitation amount (i.e., reduce unnecessary services, coordination of care, disease management, etc.). In Part D, it is not simply as black and white as “prescribe more generic alternatives”. There may also be countervailing incentives.
Under the current benefit design, Part D plans have significantly lower liability as a percentage of total gross drug costs in the Coverage Gap and Catastrophic phases of the benefit. Furthermore, this is where brand and specialty medications are commonly filled (as the highest cost members are the ones most likely to take these medications). Additionally, plans may receive rebates for some of these drugs that can sometimes exceed 50% of the total gross drug cost. As such, it may not make sense for providers to prescribe generics in certain instances. This dynamic is one reason legislators are pushing for both the elimination of Pharmacy DIR and the redesign of the Part D benefit, as noted previously. Unfortunately, both changes would come with additional risk and short-term uncertainty.
Given the extremely nuanced incentives in Part D, as a provider taking risk, it can be difficult to know on a case-by-case basis exactly what would be the best course of action given the terms of the risk contract. The best lever a provider has to safely generate savings against the risk contract without disrupting the underlying rebate dynamics, is to strictly prescribe in line with the plan’s formulary, as the formulary is theoretically created taking into account all of the different nuances of the benefit and associated incentives. “Exception spend” is common in Part D where the provider prescribes a more expensive non-formulary therapeutic equivalent. Once a provider initiates this exception request, the plan has very little recourse despite the alternative being more expensive, therapeutically equivalent, and off-formulary. Along this same vein, it is important for participating providers to understand the quantity limits, step therapy, and prior authorization protocols that the plan has put in place to help reduce total cost.
6. Is the percentage of revenue used on Part C appropriate for Part D?
It is not uncommon for administrative costs as a percentage of revenue to be higher on Medicare Part D relative to Part C. At a high level, this is driven by the majority of costs being allocated evenly as a percentage of revenue between Part C vs Part D with the exception of PBM fees. PBM fees are largely allocated to Medicare Part D. This means that a payer may need to utilize a lower percentage of revenue on Part D relative to Part C.
7. Do I have an estimate of my potential downside risk?
New to market high-cost specialty drugs represent the largest risk to unexpectedly high pharmacy costs for even a well-priced, credible population. As such, if the risk contract is two-sided, only a Part D actuary with a transparent view into the pricing and contract terms is fully equipped to help you estimate the downside risk associated with the Part D portion of the contract. The goal would be to work with the actuarial team of the payer and/or your actuarial consultants to estimate this risk.
It is meaningfully easier and safer for providers to carve out Medicare Part D risk. That being said, there are still reasons to consider taking risk on both C and D risk:
- An important Medicare Advantage risk contract may be contingent on accepting both Part C and Part D risk
- It is important for some providers who are taking on full risk to know the payer does not have the ability to move savings generated out of the Medical benefit towards Part D and/or supplemental benefits which may deteriorate the providers savings opportunity over time or give large payers the opportunity to retain higher profits from the payers related party entities (e.g., PBM)
- You have devised a specific strategy with the payer on how to reduce Part D costs, and their pharmacy and actuarial departments have validated this approach
If you proceed with taking on risk in both C and D the following items will serve as a helpful checklist:
- Insist on a very clearly defined contract, inclusive of detailed definitions of the components of revenue and numerical examples of the flow of funds
- Have an expert in the Part D field provide an independent review of the contract and the payers’ bid pricing, as well as develop an estimate of your downside risk
- Create a plan to effectively impact Part D claims taking into account the impact of Part D rebates, and focus on adherence to the formulary and prior authorization, step therapy, and quantity limits
- Develop a relationship with the payer’s actuarial, pharmacy, and contracting departments to better understand the incentives
- Constantly re-evaluate the contract in light of changes to Part D regulations