CMS Announces Medicare Advantage and Part D Rates for CY 2025

On April 1^st, the Centers for Medicare & Medicaid Services (“CMS”) announced its Medicare Advantage (“MA”) Capitation Rates and Part C and Part D Payment Policies for Calendar Year (“CY”) 2025. This announcement builds on the Advanced Notice of Methodological Changes for CY 2025 for MA Capitation Rates and Part C and Part D Payment Policies (“Advanced Notice”) that CMS released on January 31, 2024. 

In the Advanced Notice, CMS (i) provided notification of the changes it planned to make in the MA capitation rate methodology and risk adjustment methodology applied under Part C of the Medicare statute for CY 2025, (ii) discussed the annual adjustments for CY 2025 to the Medicare Part D benefit parameters for the defined standard benefit, and (iii) noted that the MA capitation rates and final payment policies for CY 2025 would be forthcoming. CMS received numerous comments in response to the Advanced Notice and settled on the rates and payment policies outlined here. CMS expects payments from the federal government to MA plans to increase by 3.70% or over $16 billion from 2024 to 2025 and the federal government to make $500 to $600 billion in MA payments to private health plans in 2025.

Growth Rates

Every year, CMS estimates the growth rates for the anticipated changes in per capita costs for non-End Stage Renal Disease (“ERSD”) beneficiaries receiving benefits under the Medicare Fee-for-Service (“FFS”) program or from Medicare health plans, such as MA plans, Section 1876 Cost plans, Program of All-Inclusive Care for the Elderly (“PACE”) programs, and Medicare-Medicaid Plans. Then, CMS averages those estimates to determine the Effective Growth Rate, which it uses to establish MA capitation rates. The Effective Growth Rate is the national average of the expected change in Medicare per capita costs from one year to the next. 

For CY 2025, the Effective Growth Rate is 2.33%. This is a change from the 2.44% Effective Growth Rate that CMS presented in the Advanced Notice. CMS stated that the change is attributable to the incorporation of additional payment data prior to the most recent calculation. Specifically, to get the most accurate estimate, CMS noted that it included Medicare FFS payments from the fourth quarter of 2023, an updated FFS enrollment base figure, and an updated medical education adjustment, all of which were unavailable at the time of the Advanced Notice. Comparably, the Effective Growth Rate for CY 2024 was very similar at 2.28%.

The medical education adjustment is a continuation of a technical update from the 2024 Medicare Advantage and Part D Rate Announcement (“CY 2024 Announcement”), which removes the medical education costs for services received by MA enrollees from the historical and projected expenditures supporting the FFS costs that are included in the growth rate calculations. The adjustment is occurring because CMS developed the capability to separate the MA payments from those made for services furnished to FFS beneficiaries. The adjustment is being phased in, and the final adjustment is set to occur in CY 2026.

Part C Risk Adjustment

In the CY 2024 Announcement, CMS also announced an update to the Part C Risk Adjustment Model with routine data updates and clinical updates to the Hierarchical Condition Categories (“HCCs”), which were necessary to develop a risk adjustment model using the ICD-10 diagnosis codes implemented in 2015. The CY 2025 Announcement now builds on that effort. Notable actions that CMS will take in CY 2025 include:

• continuing of the phase-in of the 2024 CMS-HCC model by blending 67% of the risk score calculated using the updated 2024 CMS-HCC risk adjustment model with 33% of the risk score calculated using the 2020 CMS-HCC risk adjustment model; and
• finalizing the CY 2025 Normalization Factors, which were calculated using a five-year multiple linear regression methodology and average historical FFS risk scores from 2019 through 2023.

According to CMS, the new CMS-HCC model will allow for more accurate risk calculations because it (i) accounts for more recent diagnoses and costs, (ii) has predictive accuracy for all demographic segments, and (iii) includes clinically meaningful conditions that predict costs using ICD-10 and with clinician input. Also, according to CMS, the new normalization factors will allow for CMS to account for FFS risk score trends between the time that the risk adjustment model was recalibrated with new FFS data and the MA payment year.

MA Risk Score Trend

CMS computes the MA risk score trend by averaging the increase in MA risk scores across MA plans. For CY 2025, CMS used a combination of the 2020 and 2024 CMS-HCC risk adjustment models to compute the MA risk score trends, based on the 2024 CMS-HCC risk adjustment model. Under the 2024 CMS-HCC model, the MA risk score trend for CY 2025 is 3.30%, and under the 2020 CMS-HCC model, the MA risk score trend for CY 2025 is 5.00%. Therefore, CMS calculated the MA risk score trend to be 3.86%, after combining 67% of the MA risk score trend under the 2024 CMS-HCC model and 33% under the 2020 CMS-HCC model. This blend of the CMS-HCC models is expected to represent a $9.2 billion net savings to the to the Medicare Trust fund in CY 2025. By CY 2026, all of the MA risk score trend is expected to be calculated using the 2024 CMS-HCC model.

MA Beneficiaries in Puerto Rico

Due to the proportion of Puerto Rico residents receiving MA benefits compared to FFS benefits is higher than any other US territory or state, CMS will adjust the FFS experience in Puerto Rico to reflect the propensity of zero-dollar beneficiaries nationwide in CY 2025. The policy adjustments relating to Puerto Rico will continue to provide stability for the MA program in the Commonwealth and for Puerto Ricans enrolled in MA plans. Furthermore, the policy is a response to comments on alternative adjustment approaches for MA beneficiaries in Puerto Rico.

Inflation Reduction Act Updates

In CY 2025, the Part D program will be amended pursuant to the Inflation Reduction Act (“IRA”). The amendments include a $2,000 cap on out-of-pocket expenses and the elimination of the coverage gap phase of the benefit, resulting in a three-phase benefit involving deductibles, initial coverage, and catastrophic coverage. Previously instituted IRA amendments, such as a $35 supply cap per month on cost sharing for covered insulin products and no cost-sharing for vaccines recommended by the Advisory Committee on Immunization Practices, will remain for CY 2025.

Part D Risk Adjustment

In connection with the revisions to the Part D benefits required by the IRA, CMS will update the Part D Risk Adjustment Model in CY 2025, which will result in an increase in plan liability due to the $2,000 out-of-pocket cost cap. The Part D Risk Adjustment Model will also have to be adjusted to reflect the elimination of the coverage gap phase and the shift from a four-phase structure to a three-phase structure. In an attempt to improve payment accuracy, CMS will also be recalibrating the Model for CY 2025 based on data from recent periods with an updated normalization methodology based on differences between MA-prescription drug plan and stand-alone prescription drug plan risk score trends.

Part C and D Ratings

In CY 2025, CMS will make measurement updates for the Part C and D Star Ratings. These updates codify disasters eligible for adjustment and measure specification updates. Also, as in prior years, CMS is considering potential new measure concepts and methodological enhancements. The new measure concepts and methodological enhancements may be helpful for organizations to review as they prepare comments to proposals in the future.