Low Income Benchmark Methodology for Drug Plans Under Medicare

By Jason Halpin

Photo by Genbug via Flickr

Each year, Prescription Drug Plans (PDPs) and Medicare Advantage Prescription Drug (MA-PD) plans submit bids to the Centers for Medicare and Medicaid Services to determine what their beneficiary premia will be. And each year, Medicare calculates the Part D premium low-income subsidy (LIS or the “benchmark premium”) for low-income beneficiaries based on the new premiums.

The upshot of the annual change in both the beneficiary premium and the LIS is that one year, the subsidy could pay for a low-income beneficiary’s premium in its entirety, but the next year, the premium could increase or the subsidy could decrease, leaving the beneficiary with the possibility they could have to pay a monthly premium equal to the difference between the premium and the subsidy.

Fortunately for low-income beneficiaries, Medicare seeks to avoid this scenario. If full-benefit dual eligible beneficiaries do not actively choose a plan when they first enroll in Medicare, they are enrolled into a PDP plan where they would not pay a premium. If, in the following year, they would have to pay a premium, LIS-eligible beneficiaries may “elect,” by doing nothing, to be reassigned to a PDP with no premium. LIS-eligible beneficiaries can also choose to stay in their plan and pay a premium or pick another plan with or without a premium.

Unfortunately for low-income beneficiaries, those who are subject to reassignment may also be subject to the complexity and hassle of having to change their pharmacy and their medications, and perhaps having to get new prescriptions from their doctors. Congress and CMS, therefore, have adopted a policy of seeking mechanisms to avoid reassignment.

When establishing the guidelines for determining the LIS, Congress mandated, in 42 U.S.C. § 1395w-114(b), that weighted averages should be used, presumably to ensure that the benchmark premium accurately reflects the actual average premium for an individual PDP or MA-PD beneficiary in the region and is not skewed by outliers, such as a comparatively lightly subscribed PDP with abnormally low premiums. Maintaining stability in the benchmark premium helps to promote continuity for beneficiaries and cost predictability for the government.

Figuring out the precise formula for the benchmark premium is in the hands of CMS, pursuant to its authority to administer the Medicare program under 42 U.S.C. § 1395hh. Accordingly, on April 3, 2008, CMS issued a final rule, Modification to the Weighting Methodology Used to Calculate the Low-Income Benchmark Amount.

While 42 U.S.C. § 1395w-114(b) states that Part D premium amounts must be “weighted,” to calculate the benchmark premiums, it says nothing about what that weight should be. Prior to the promulgation of the rule the weight given a particular PDP or MA-PD plan equaled a percentage, with the numerator being the number of Part D eligible beneficiaries enrolled in the plan and the denominator being the number of Part D eligible beneficiaries enrolled in all PDP and MA-PD plans in the PDP region.

The new regulations change the formula such that the weight given a particular PDP or MA-PD plan now equals a percentage, with the numerator being the number of Part D LIS-eligible beneficiaries enrolled in the plan and the denominator being the number of Part D LIS-eligible beneficiaries enrolled in all PDP and MA-PD plans in the PDP region.

By changing the formula to reference only LIS-eligible beneficiaries, the rule gives more weight to the premiums of plans that serve more low-income beneficiaries. Proponents of this formulation argue that it stabilizes and, in general, increases the benchmark premium, thereby reducing the risk of reassignment.

As CMS suggested in its response to comments on the rule, PDPs typically support a greater share of LIS enrollment, thanks to auto and facilitated enrollment. PDPs also typically have higher premiums than MA-PDs because MA-PDs can apply Part A and B rebates to lower their Part D premiums. The rule’s proponents argued that giving more weight to the higher PDP premiums–due to their higher LIS enrollment–would push the benchmark higher, bring more plans under the line, and protect more beneficiaries from reassignment. CMS estimated that if  LIS-enrollment weighting were used in 2008, reassignments would have been reduced by 850,000 from 2.1 million.

Critics still cried foul. Because the rule, and its predecessor regulations, dictated that MA-PD post-rebate premiums (which are about $20 less than PDP premiums on average) be factored into the benchmark formula, MA-PD premiums exerted downward pressure on the benchmark regardless of the weight given PDPs, leaving more PDP plans than necessary above the line and forcing more reassignments than the critics would tolerate.

In 2009, the critics’ views were largely borne out. The predicted benchmark increases were less dramatic than anticipated; though 28 out of 34 regions experienced increases (CMS predicted 27 out of 34), the increases in six of these regions were negligible (50 cents or less). Six regions saw decreased benchmarks. In addition, 1.6 million LIS-eligible beneficiaries were reassigned to new PDPs, and 620,000 were notified they would need to either pick a new plan or start paying a premium; the anticipated reduction was not as large as CMS expected.

To its credit, however, CMS responded appropriately in 2009, establishing a Medicare Demonstration to use pre-rebate MA-PD premiums in the benchmark formula. This greatly reduces the skewing effect of low post-rebate MA-PD premiums. According to the Kaiser Family Foundation, the pre-rebate MA-PD premiums  are actually slightly higher than PDP premiums. The weight of LIS-heavy PDP premiums thus pushed benchmark premiums up in all but one region for 2010, and 1.1 million beneficiaries were reassigned.

While some critics maintain that CMS could do more to reduce reassignments, the methods they suggest have rightly been rejected by CMS. Critics suggest the similar options of either allowing plans to waive the difference between their premiums and the benchmark, or reinstituting CMS’ de minimis policy, whereby an LIS-eligible beneficiary left with a premium that is less than a de minimis amount after recalcuation and application of the subsidy would not have to pay that de minimis amount.

CMS rejected both ideas because both provide a disincentive to plans keeping their bids low. If plans knew they could reduce their premiums for LIS-eligible premiums regardless of the premium their bids produced, they would not even try to keep their bids low. Also, if a plan had to write off a large amount of its premium, the revenue estimates in its bid would be undermined.

While recrafting the benchmark formula has not eliminated all reassignments, it has been very successful in reducing them. The new formula has reduced reassignments by half since 2008 and assured that less than 10 percent of LIS-eligible beneficiaries are reassigned. While CMS must work on reducing this number further, the reformulation of the benchmark premium is a good start.