Academic journal article Health Care Financing Review

Diagnosis-Based Risk Adjustment for Medicare Prescription Drug Plan Payments

Academic journal article Health Care Financing Review

Diagnosis-Based Risk Adjustment for Medicare Prescription Drug Plan Payments

Article excerpt


The 2003 MMA created Medicare Part D, a voluntary prescription drug benefit program. The benefit is a government subsidized prescription drug benefit within Medicare and is administered by private sector plans. Such plans may be standalone prescription drug plans (PDPs) or Medicare Advantage prescription drug plans (MA-PDs). While there are numerous important components determining how these plans are paid, this article focuses on the development of the prescription drug risk-adjustment model used to adjust payments to reflect the health status of plan enrollees. According to the MMA, payments are based on a standardized plan bid that represents the estimated cost for an enrollee with average risk and a score of 1.0. payments for each enrollee are risk adjusted by multiplying the standardized bid by a person-level risk factor so that plan payments reflect the projected health of actual enrollees. Higher standardized bids result in higher per enrollee revenues, but also higher premiums in the competitive market. The process of developing the prescription drug risk-adjustment model, CMS prescription drug hierarachical condition categories (RxHCC) are also described in this article.


The basic Medicare prescription drug benefit structure partially covers the expenses of the majority of plan enrollees and has a catastrophic benefit for very high users. A Part D enrollee pays a premium, which was expected to be approximately $35 (1) a month. Enrollment is on a voluntary basis. There is a premium increase for those who enroll after their initial opportunity, as there is in Medicare Part B. The structure of the standard benefit for 2006 is shown in Figure 1.


Enrollees are responsible for the first $250 in drug expenditures. The standard benefit package covers 75 percent of the next $2,000 in drug expenditures. Once total expenditures reach $2,250, the beneficiary is responsible for all costs in what has become known as the "donut hole." The 100 percent coinsurance continues until total drug expenditures reach $5,100 ($1,500 plan liability plus $3,600 out-of pocket expenses). The catastrophic portion of the benefit covers 95 percent of any additional drug expenditures: 15 percent of the cost is the plan's responsibility; 80 percent is reinsurance paid by Medicare. In the early years there is also plan-Medicare risk sharing for the difference between Medicare payments and actual plan operational costs computed in a year-end reconciliation. The coverage thresholds are to be indexed for inflation in future years. PDPs and MA-PDs have some flexibility in offering plans that differ from the standard benefit. In addition, formularies are set by the plans, subject to legislated requirements, and may vary across plans.

Payments to PDPs and MA-PDs are risk adjusted, since payments are based on a standardized bid amount, which assumes an enrollee with a risk factor of 1.0. Using a standardized bid to determine the beneficiary premiums insulates the beneficiary from the variation in health status of plan enrollees. Medicare pays the adjustment for risk. The starting point for the bid is the projected monthly revenue requirements to provide defined standard drug coverage for an enrollee with the plan's projected average risk factor. The standardized bid is computed by dividing monthly revenue requirements by the plan's projected average risk factor. Payment adjustments above the risk-adjusted rate are made for low-income and long-term institutionalized beneficiaries due to their higher expected utilization.

The risk factor is derived from the model presented in this article. The CMS-HCC model used for the MA program served as the basis for our work here and is prospective. It uses diagnoses in a base year to predict medical costs in the following year. The CMS-HCC model groups the approximately 15,000 International Classification of Diseases, Ninth Revision Clinical Modification (ICD-9-CM) codes into 178 disease groups (Centers for Disease Control and Prevention, 2006). …

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