CMS Finalizes Risk Adjustment Model in 2024 Rate Announcement

CMS Finalizes Risk Adjustment Model in 2024 Rate Announcement for Medicare Advantage and Part D


On March 31, 2023, the US Centers for Medicare & Medicaid Services (CMS) issued its Announcement of Calendar Year (CY) 2024 Medicare Advantage (MA) Capitation Rates and Part C and Part D Payment Policies, otherwise known as the Rate Announcement (press release; fact sheet). The Rate Announcement is released on an annual basis and includes updates to the capitation and risk adjustment methodologies used to calculate payments to MA plans, as well as other payment policies that impact Part D. In one key decision, CMS finalized a proposal to significantly revise the Medicare Advantage risk adjustment model, which had been the subject of extensive commentary from stakeholders. However, CMS said it would phase in the new model over three years. The Rate Announcement estimated a 3.32% increase in payments, as compared to the 1.03% estimated increase in the Advance Notice.

In Depth

Among other provisions, the Rate Announcement includes the following:

Payment Changes/Growth Rates: The effective growth rate for 2024 MA non-End-Stage Renal Disease (ESRD) rates is 2.28%, a slight increase from 2.09% in the Advance Notice. Accounting for the impact of the benchmark rate cap, MA rebate and other policies, the net impact on the Medicare Trust Funds for CY 2024 is expected to be $8.1 billion.

CMS estimates that the policies, as finalized, will increase average payments to MA organizations (MAOs) by 3.32% in CY 2024 (approximately $13.8 billion), compared to the 1.03% increase initially proposed. Below is the year-to-year percentage change in MAO payment, along with a comparison to the Advance Notice.

Treatment of Risk Score Trend: During the comment period, some stakeholders asserted that the Advance Notice amounted to a rate cut because the risk score trend was not a result of the Advance Notice policies and should not be included in the projections. CMS continued to include the risk score trend in its financial projections because it is a key factor in the overall level of payments. As discussed below, the estimated risk score trend increased compared to the estimate in the Advance Notice.

Part C Risk Adjustment Model Revision: CMS is finalizing proposed changes to the Hierarchical Condition Category (HCC) risk adjustment model but will phase in the changes over three years. For 2024, CMS will calculate risk scores by blending 67% of the risk scores as calculated under the current 2020 model and 33% of the risk scores as calculated under the updated 2024 model. For 2025, the blend will shift to 33% of risk scores calculated with the 2020 model and 67% calculated with the 2024 model. For 2026, CMS expects 100% of the risk scores to be calculated with the 2024 model. The phase-in is consistent with how CMS has implemented prior model updates.

CMS projects the payment impact of the finalized model with the phase-in to be -2.16%, which represents $7.6 billion in estimated net savings to the Medicare Trust Fund in 2024, less than the -3.12%, or $11 billion in savings, originally estimated in the Advance Notice without the phase-in. CMS also projects that the risk score trend will be higher than initially projected due to the decision to blend risk scores using both the 2020 and 2024 risk adjustment models, with an impact of 1.14%, as compared to the projected risk score increases had the new model been implemented immediately. As such, the combined estimated overall 2024 impact from the new model will be closer to -1%.

The Rate Announcement provided extensive additional discussion about the new model and asserted that the new model had a higher level of accuracy across multiple methods of evaluating its predictive power in forecasting expected costs.

Key changes in the new model include:

  • Restructuring of condition categories using the International Classification of Diseases (ICD)-10 code classification system instead of the ICD-9 classification system
  • Updating the fee-for-service (FFS) data years underlying the model from 2014 for diagnoses and 2015 for expenditures to 2018 for diagnoses and 2019 for expenditures
  • Revising from 2015 to 2020 the denominator year that is used in determining the average per-capita predicted expenditures to create relative factors in the model
  • Clinical revisions to the model adding constraints and removing several HCCs to reduce the effect of MA coding variation from FFS on risk scores.

Specifically, the Rate Announcement finalizes the following updates:

  • Clinical Revisions: CMS explained in the Advance Notice that it reviewed conditions where coding variation in MA was highest relative to FFS with its clinical experts to identify conditions with discretionary coding variation. Pursuant to Risk Adjustment Model Principle 10, discretionary diagnostic categories that are “particularly subject to intentional or unintentional discretionary coding variation or inappropriate coding by health plans/providers, or that are not clinically or empirically credible as cost predictors,” should be excluded from the model. Under the revised model, CMS will constrain (e., apply equal coefficients) the values of all diabetes HCCs (HCCs 36, 37 and 38) and all congestive heart failure HCCs (HCCs 224, 225 and 226). It will also remove HCC 47 Protein-Calorie Malnutrition, HCC 230 Angina Pectoris and HCC 265 Atherosclerosis of Arteries of the Extremities, with Intermittent Claudication.
  • Changing HCCs: The revised model will increase the number of payment HCCs from 86 to 115. This is because of newly created HCCs and the splitting of existing HCCs as a result of moving from ICD-9 to ICD-10. The number of ICD-10 diagnosis codes mapped to an HCC for payment would decrease from 9,797 to 7,770. The summary statistics reflecting the reclassifications can be found in Table III-3 of the Rate Announcement.
  • ESRD Risk Adjustment Model: CMS will continue to use the 2023 ESRD risk adjustment models for MA plans and the 2019 ESRD risk adjustment model for Program of All-Inclusive Care for the Elderly (PACE) organizations.
  • Frailty Adjustment for PACE Organizations and Fully Integrated Dual Eligible Special Needs Plans (FIDE SNPs): CMS must account for the frailty of the PACE population when establishing capitated payment amounts. It must also make a payment adjustment to account for the frailty of beneficiaries enrolled in FIDE SNPs if the average frailty level in the FIDE SNP is similar to the PACE program. For 2024, CMS will finalize frailty factors that do not include the Consumer Assessment of Healthcare Providers and Systems (CAHPS) survey weight to account for the potential of non-response bias. CMS will continue to use the frailty factors associated with the 2017 CMS-HCC model to calculate frailty scores for PACE organizations.

Treatment of Indirect Medical Education (IME) and Direct Graduate Medical Education (DGME) Costs: CMS finalized a technical change to the Fee-For-Service United States Per Capita Cost (FFS USPCC) baseline regarding MA-related medical education expenses, but the change will be phased in over three years. CMS will remove the medical education payments it makes to hospitals that are associated with services rendered to MA enrollees from the FFS USPCC estimates, which will reduce the MA county benchmarks. To minimize disruption, CMS will phase in the technical update to the data used to develop the USPCCs over a three-year period, with 33% of the adjustment to medical education costs applied in 2024, 67% applied in 2025 and 100% applied in 2026. CMS believes that this update will improve the accuracy of payments to MAOs.

Inflation Reduction Act of 2022 (IRA): The Rate Announcement implements several updates made by the IRA for 2024, including the following:

  • Part D Drug Cost Sharing: Cost sharing for covered Part D drugs will be eliminated for beneficiaries in the catastrophic phase. This means Part D sponsors will be on the hook for 20% of the costs incurred after a Part D beneficiary’s costs exceed the annual out-of-pocket threshold, compared to roughly 15% of costs in prior years.
  • Low-Income Subsidy (LIS) Program: The income limit for the full LIS benefit will increase from 135% to 150% of the federal poverty level (FPL). Individuals who earn between 135% and 150% of the FPL and meet certain resource requirements will now be eligible for the full low-income premium and cost-sharing subsidies, as well as a $0 deductible.
  • Insulin Cost Sharing: In the initial coverage and coverage gap phases, cost-sharing may not exceed $35 for a month’s supply of covered insulin products. The deductible will not apply to Part D-covered insulin products.
  • Adult Vaccine Cost Sharing: As before, the deductible will not apply to adult vaccines that are recommended by the Advisory Committee on Immunization Practices (ACIP). At any point in the benefit, these vaccines are exempt from cost sharing when administered consistent with ACIP’s recommendations. Part D sponsors will provide this coverage as a basic benefit, and such costs should be reflected in plan bids.
  • Premium Stabilization: If average premiums increase by more than 6% following the submission of bids in June, the base beneficiary premium growth will be capped at 6%, as required by the IRA.

IRA provisions that take effect in 2025 or later will be addressed in future Advance Notices and Rate Announcements.

Part C and D Star Ratings: CMS includes the list of the measures that will be used to calculate the 2024 Star Ratings, as well as a list of the emergency areas that were affected by emergency declarations in 2022 for purposes of making adjustments under the extreme and uncontrollable circumstances policy. CMS also solicited comments in the Advance Notice on potential future policy changes to the Star Ratings. CMS continues to consider these proposals and provided insights in the Rate Announcement on initial comments received from stakeholders, including:

  • Universal Foundation Measures: For the 2023 measurement year and beyond, CMS is considering a core set of measures that are aligned across quality rating and value-based care programs, in what CMS is calling a “Universal Foundation” of quality measures. Each program would add aligned or program-specific measures to this measurement base. The Advance Notice and Rate Announcement outline a preliminary set of measures that would be included in the Adult Universal Foundation, including Adult Immunization Status, Screening for Depression and Follow-Up Plan and Screening for Social Drivers of Health/Social Need Screening and Intervention, among others. CMS reports that there was overwhelming support from commenters to align measures across federal and private payors and to streamline measures across programs. However, there was mixed reaction to some of the measures currently listed in the Universal Foundation set. Any measures ultimately added to the Star Ratings would need to go through the rulemaking process.
  • Substantive Measure Updates: CMS outlined in the Advance Notice potential updates to a number of measures, including possibly retiring the Care for Older Adults (COA)–Pain Assessment (Part C) measure, reevaluating the specifications of the Diabetes Care–Eye Exam and Diabetes Care–Blood Sugar Controlled (Part C) measures and revising the eligible population for the Breast Cancer Screening (Part C) measure, among other changes. CMS describes in the Rate Announcement that most commenters opposed the retirement of the COA-Pain Assessment measure until a replacement measure has been introduced and evaluated. Commenters had varied reactions to changes to the Diabetes Care–Eye Exam and Diabetes Care–Blood Sugar Controlled (Part C) measures; however, most commenters supported revising the eligible population for the Breast Cancer Screening (Part C) measure. CMS shared this feedback with the National Committee for Quality Assurance (the measure steward).
  • New Measure Concepts: CMS also requested feedback in the Advance Notice on potential new measure concepts for future years, including Health Equity (Parts C and D), Chronic Pain Assessment and Follow-Up (Part C), Sexual Orientation and Gender Identity for Healthcare Effectiveness Data and Information Set (HEDIS) Measures (Part C), Identifying Chronic Conditions in HEDIS Measures (Part C), Blood Pressure Control Measures (Part C), Kidney Health (Part C) and more. Commenters generally supported these measure concepts but requested additional information regarding measure specifications and longer implementation timeframes.

Annual Adjustments to Part D Benefit Parameters: CMS is required to update the parameters for the defined standard Part D drug benefit each year. This is meant to ensure that the actuarial value of the drug benefit tracks changes in Part D expenses. For non-LIS beneficiaries, the Rate Announcement outlines the benefit parameters for defined standard benefits in 2024 as follows:

Additional detail can be found in the 2024 Rate Announcement.