Key Topics We’ll Cover
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What's Changing in MA?
- V28
- Part D
- Patient centric stars
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How do organizations need to evolve strategy?
- Patient centric technology
- Cost management
- Flexible approach to VBC Contracts
After coasting through years of continuous growth for Medicare Advantage, most Health Plans are seeing signs that the tide has begun to turn. Plans continue to dominate headlines with razor thin margins, underwater bids, and hospitals exiting their networks. Several quiet rounds of layoffs have occurred within Plans, with a general perception across the industry that there’s more to come.
As Plans, Health Systems, and others across the industry navigate through increasingly choppy waters for Medicare Advantage, they are asking themselves what changes are on the horizon and how to chart their paths forward.
In this article, we break down three major shifts in Medicare Advantage, their practical implications, and how organizations can evolve their strategies for future models.
Shift 1: Transitioning to V28
CMS is sunsetting the V24 Hierarchical Condition Category (HCC) model and transitioning to V28, with a blended transition in Performance Year 2025 and a full transition in Performance Year 2026. This shift is expected to save an estimated $11B to the Medicare trust fund, which is beneficial for taxpayers and the long-term financial solvency of Medicare. It also creates significant headwinds for plans and delegated risk organizations and is expected to decrease revenue for plans by an estimated 3.12%.
Let’s break this down. To ensure health plans are compensated appropriately based on the expected costs of managing their particular patient populations, the Centers for Medicare and Medicaid Services (CMS) uses Risk Adjustment Factor (RAF) scores to calculate payments — this is how CMS accounts for the fact that some health plans manage sicker patient populations with higher expected costs than others do.
Using RAF scores, CMS makes risk-adjusted payments based on patient-level demographic factors and diagnoses. Each annually-reported diagnosis for a patient corresponds to a Hierarchical Condition Category (HCC), which has a correlated increase in the calculated model RAF; the higher the RAF score, the more revenue a plan will receive from CMS. Breaking this down, if Medicare is looking at an average Medicare beneficiary, the beneficiary would have a risk score of 1.0. Based on the region, they might expect to spend $10,000 per year on their care (1.0 RAF score x $10,000 base rate). However, in an example where a patient has more chronic illnesses, they may lead to having a RAF score of 1.5, which Medicare would then increase their cost expectation to $15,000 (1.5 x $10,000) and compensate the plan accordingly.
CMS continually evaluates which HCCs most closely predict spend and periodically makes adjustments based on their findings. In the transition to V28, CMS seeks to address three major issues with V24 of the HCC model:
- Removal of several diagnoses that are uncorrelated with predicted cost. Some codes are now no longer included in an HCC that adjusts RAF. This adjustment encompasses two shifts — better alignment with the ICD-10 classification system (following the transition off of ICD-9), and codes that are no longer accurate predictors of cost (in comparison to the FFS reference population).
- Reduction of coefficients on certain disease states. The RAF-impact of HCCs are getting adjusted to better correlate with the amount of spend they predict. For example: CMS has constrained the model to no longer vary RAF adjustment based on Diabetes with complications or without. In our view, the threshold for establishing “Diabetes with complications” was previously so low that the model had nothing to do with predicted cost; instead, in practical application, it reflected whether or not a provider knew how to document it properly. This example illustrates the issue that CMS seeks to address with these RAF-impact adjustments. In some cases, this is an upward adjustment; however, the net impact of this presents a substantial RAF headwind.
- Addition of new codes. This allows for the addition of new diagnosis codes that didn’t previously map to HCCs in V24. For example, Anorexia nervosa or Severe, Persistent Asthma are now included in the updated model.
Shift 2: Evolving Part D
CMS has made major changes to Part D as it issued both its Final Calendar Year (CY) 2025 Part D Redesign Program Instructions as well as its Final Rule. A summary of some of the notable updates are broken down below.
Part D Drug Benefit
CMS finalized improvements to the structure of the Medicare Part D drug benefit for CY 2025 that will result in lower drug costs for millions of people with Medicare. Below provides some of the specific changes associated with the CMS improvements to Part D effective as of January 1, 2025:
- New standard Part D benefit design consisting of three phases: annual deductible, initial coverage, and catastrophic coverage;
- Lower annual out-of-pocket (OOP) threshold of $2,000;
- Sunset of the Coverage Gap Discount Program (CGDP) and establishment of the Manufacturer Discount Program (Discount Program); and
- Changes to the liability of enrollees, sponsors, manufacturers, and CMS in the new standard Part D benefit design
The overall revenue impact from these changes remains to be seen; however, the White House has estimated a financial impact of ~$400/patient per year. Payers will now need to consider subsidizing these increased costs either through increased premiums, reduced supplemental benefits, and/or may put pressure on downstream at-risk providers as they look to retain margin through negotiations, etc.
Medication Therapy Management (MTM) Program
Another notable change cited by CMS for the 2025 Final Rule is to the Medicare Part D Medication Therapy Management (MTM) Program. To address concerns about increasingly restrictive criteria implemented by payers, CMS is significantly expanding the eligible MTM population.
Through the most recent CMS changes, MTM eligibility rates will increase from 7% of Part D enrollees in 2022 to 13% in 2025, increasing eligibility from 3.6M to 7.1M beneficiaries. This expansion will ensure more consistent and equitable access to MTM services while also improving the targeting criteria for Part D.
While there is much to address with the MTM changes, here are a few notable areas that payers and at-risk providers should consider as they develop and refine their MTM strategies:
- Need for additional resources. With these MTM changes, both payers and providers will need to re-evaluate their MTM strategies in totality, with a focus on how they will manage the significantly expanded eligible population — will they utilize in-house resources, external vendors, or a combination of both to administer the MTM program? There will most certainly be increased administrative costs for payers to manage the expanded population, and payers should get out in front of estimating implementation costs.
- MTM Automation. Another area of focus should be around MTM automation in order to mitigate increased administrative expenses incurred by the MTM updates. CMS offers guidance to those looking to leverage MTM automation through the HPMS Memorandum, dated April 21, 2023.
- Medicare Part D Star Ratings. Payers and providers need to focus on leveraging effective MTM programs and associated costs to improve several other measures in the Medicare Part D Star Ratings and display page, such as medication adherence, polypharmacy, and gaps in therapy. This combined MTM/Part D Stars strategy maximizes the impact of effective MTM and Stars providing a big bang for the buck.
Despite some of the financial and operational challenges that result from an expanded MTM population, providers and payers can benefit with an efficient and targeted MTM strategy. When managed effectively, there are several benefits of MTM. Strategic MTM has the ability to drive overall net savings and the potential to reduce hospital admissions. Some other residual benefits of MTM are that they foster collaboration between clinicians in ways that add value to the healthcare system and can help offset physician and nursing shortages through leveraging Pharmacists.
Shift 3: Patient-Centric Stars
Background on Stars
Most physicians wince when you bring up stars — from its onset, the stars program has had low correlation with patient outcomes and high correlation with time away from patient care. HEDIS measures largely established quality for physicians in a binary manner: “gaps in care” have been either open or closed. These metrics can easily be measured and tracked, and the “open gaps” had relatively equal weighting within a measure, regardless of potential impact at the patient level.
As a result of this dynamic, HEDIS quality measures with clearly defined care gaps and a clear ROI case took precedence over measures of patient experience — if you looked at a plan 10 years ago, you would likely have seen large teams and ample resources devoted to HEDIS, with only 1–2 people attempting to drive CAHPS/HOS impact.
While it reduced patients to a gap on chase list, when the stars program was launched, this may have been the right approach; PCPs were historically relying on fee-for-service (FFS) revenue only, this simple program helped get an incentivization model in place for them to start earning revenue for focusing on quality. Naturally, as data and our thinking on value based care has evolved, so has the way NCQA and CMS have viewed the quality measures.
Looking Forward
However, gone are the days of a care “gap list” being an effective management strategy. The prevalence of data availability, physician alignment, and outcomes data on the previous stars models has led to a new landscape for stars where plans can no longer view gaps as binary — and instead need the capabilities to prioritize on not just the “open gap”, but the whole patient. Health equity is not equality — and CMS is shifting away from the equal weighting of stars, and designing a new ecosystem whereby patients are viewed and stratified to focus plans based on need.
To highlight a few key changes among many:
- Risk-adjusted Medication Adherence: Medication Adherence metrics are being risk-adjusted for sociodemographic status (SDS) factors for three medication adherence Measures. Practically, this means that plans and providers need to be looking at patients first, rather than a gap-in-care list. Increasingly, we anticipate this trend toward three-dimensional metrics to continue.
- Increasing Focus on Patient Experience: While the CAHPS measures are being reduced from 4x weighting down to 2x, the concurrent increase of HOS measures mean patient survey measures continue to drive ~⅓ of a plan's star performance. These are tough to measure and can’t be “closed” like HEDIS metrics — they are based on how patients feel about their care instead of what comes through on a claim.
- Replacement of the Reward Factor: CMS will be removing the Reward Factor, replacing it with the Health Equity Index (HEI). Historically, the Reward Factor benefits plans with high performance and low variability measures up to a +.4 star rating boost. For many high performing plans, the Reward Factor in combination with the improvement measure was the path to achieving 5 stars. With the introduction of the HEI, plans now get rewarded for taking on the difficult populations with high Social Risk Factors (SRFs), which means they need to evolve to more patient-centric models for managing their populations.
What we’re reading on this change
- Reward Factor: Prepare Star Ratings Work Plans for the Health Equity Index
- Stars shifts: Future of Medicare Star Ratings: The reimagined CMS bonus system
- Melissa Newton Smith’s post on the final rule
- Jessica Assefa: Strategizing Success: Navigating Continued Star Ratings Evolution Post-CMS 2025 Final Rule
Practical Implications for the Future
- Leverage technology to develop a dynamic, patient-centric — not gap-centric — approach. The future requires physicians to ingest longitudinal data across a variety of clinical and non-clinical sources — and adjust strategy dynamically as priorities and models evolve. For Pearl, that means powering prioritization dynamically for our PCPs, helping them focus on patients over “care gaps” and enabling them through simplified workflows.
- Focus on cost of care management. In the new world where revenues are lower, managing medical expenses well and doing so efficiently are the key to success. We believe plans and providers who shift their focus to prioritize cost management — where patients get timely interventions and coordination to the best locations and types of care for them — will develop competitive advantages that position them for long-term success. At Pearl, our focus is on providing the the most actionable possible cost insights, and engaging providers around the key interventions that drive VBC performance.
- Pricing intentional and aligned VBC contracts. Given the practical implications of the revenue and Part D headwinds, we anticipate significant fluctuation in supplemental benefit strategy and plans needing to reprice their bids. With that in mind, value-based care contracts need to be priced to provide safe harbors for both plan and providers as they navigate uncertainty. Taking intelligent risk in the near term is key, with a focus on charting a course toward deeper, longer-term relationships between plans and providers.
Resources
CMS Final Rule Medicare Program; Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Program for Contract Year 2024 — Remaining Provisions and Contract Year 2025 Policy and Technical Changes to the Medicare Advantage Program, Medicare Prescription Drug Benefit Program, Medicare Cost Plan Program, and Programs of All[1]Inclusive Care for the Elderly (PACE) 2024-07105.pdf (federalregister.gov)
Contract Year 2025 Medicare Advantage and Part D Final Rule (CMS-4205-F) | CMS
