Boards of Trustees for the Federal Hospital Insurance & Federal Supplementary Medical Insurance Trust Funds Issue Annual Report to Congress (Part 7 of 12)

WASHINGTON, June 8 (TNSrep) -- The Boards of Trustees for the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds issued a 263-page annual report to Congress on June 2, 2022.

(Continued from Part 6 of 12)

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2. Part D

Part D is a voluntary Medicare prescription drug benefit that offers beneficiaries a choice of private drug insurance plans. Low-income beneficiaries can receive additional assistance on the cost sharing and premiums. Each year drug plan sponsors submit bids that include estimated total plan costs, reinsurance payments, and low-income cost-sharing subsidies for the coming year. Upon approval of these bids, a national average bid amount is calculated, and the result is used to determine the base beneficiary premium. The individual plan premium is calculated as the difference between the plan bid and the national average bid, which is then applied to the base beneficiary premium.

Each drug plan receives monthly risk-adjusted direct subsidies, prospective reinsurance payments, and prospective low-income cost-sharing subsidies from Medicare, as well as premiums from the beneficiaries and premium subsidies from Medicare on behalf of low-income enrollees. At the end of the year, the prospective reinsurance and low-income cost-sharing subsidy payments are reconciled-to match the plan's actual experience. During the annual reconciliation process, if actual experience differs from the plan's bid beyond specified risk corridors, Medicare shares in the plan's gain or loss.

Expenditures for this voluntary prescription drug benefit were determined by combining estimated Part D enrollment with projections of per capita spending. Estimates of Part D spending categories for 2021 were used as the base experience and were supplemented with information included in Part D plan 2022 bids. In addition, Medicare pays special subsidies on behalf of beneficiaries retaining primary drug coverage through retiree drug subsidy (RDS) plans.

General revenues primarily finance the various Medicare drug subsidies. Since Medicaid is no longer the primary payer of drug costs for full-benefit dually eligible beneficiaries, States are subject to a contribution requirement and must pay the Part D account in the SMI trust fund a portion of their estimated forgone drug costs for this population. From 2006 through 2015, the percentage of estimated costs paid by States was phased down from 90 percent to 75 percent. Beneficiaries can choose to have their drug insurance premiums withheld from their Social Security benefits and then forwarded to the drug plans on their behalf./60

In 2021, around 22 percent of the non-low-income enrollees in Part D drug plans exercised this option.

a. Participation Rates

All individuals entitled to Medicare Part A or enrolled in Part B are eligible to enroll in the voluntary prescription drug benefit.

(1) Employer-Sponsored Plans

There are two ways that employer-sponsored plans can benefit from the Part D program. One way is the retiree drug subsidy (RDS), in which, for qualifying employer-sponsored plans, Medicare subsidizes a portion of their qualifying retiree drug expenses. As a result of tax deduction changes, RDS program participation has declined significantly since 2012 and is assumed to decline further over the next several years. The Trustees expect that most of the retirees losing drug coverage through RDS plans will participate in other Part D plans.

The other way that an employer-sponsored plan can benefit from Part D is to enroll in an employer/union-only group waiver plan (EGWP) by either wrapping around an existing Part D plan or becoming a prescription drug plan itself. The subsidies for these types of arrangements are generally calculated in the same way as for other Part D plans. The Trustees expect that such plans will offer additional benefits beyond the standard Part D benefit package. From 2012 through 2014, EGWP enrollment increased significantly coinciding with the decrease in RDS coverage. Since 2014, steady participation increases in EGWPs have returned, but, due to some plan terminations, the participation rate is slightly lower than for the total Part D program. The vast majority of the enrollment increases have occurred in Medicare Advantage Prescription Drug Plans (MA-PDs). MA-PD EGWP enrollment has grown from approximately 1.8 million in 2014 to a projected 3.0 million in 2022; for Prescription Drug Plans (PDPs), on the other hand, the number of enrollees has decreased from approximately 4.7 million to a projected 4.3 million over the same timeframe. Future EGWP enrollment is projected to increase more slowly than overall enrollment through 2025, primarily due to the assumption that some plan terminations will continue. Beyond 2025, the Trustees assume that EGWP participation will increase at a rate similar to that for overall Part D enrollment.

(2) Low-Income Subsidy

Qualifying low-income beneficiaries can receive various degrees of additional Part D subsidies based on their resource levels to help finance premium and cost-sharing payments. Since 2016, low-income subsidy enrollment in MA-PDs has increased while enrollment in PDPs has declined. This pattern is primarily due to continued and substantial growth in the number of enrollees in Medicare Advantage Special Needs Plans (SNPs). Overall, the number of low-income enrollees constitutes a projected 27 percent of total Part D beneficiaries in 2022 and is assumed to grow at the same rate as that for Medicare beneficiaries who are enrolled in Part B.

(3) Other Part D Beneficiaries

Medicare beneficiaries not covered by employer-sponsored plans and not qualified for the low-income subsidy have the option to enroll in a Part D plan. Once enrolled, they pay for premiums and any applicable deductible, coinsurance, and/or copayment. In 2022, a projected 68 percent of non-employer and non-low-income Medicare beneficiaries61 have opted to enroll in a Part D plan. Based on recent experience, the participation rate for non-employer and non-low-income beneficiaries is projected to gradually grow to 72 percent throughout the short-range projection period.

(4) MA-PD versus PDP Beneficiaries

Enrollment in MA-PDs has been increasing more rapidly than in PDPs every year except 2013. In 2011, MA-PD beneficiaries accounted for 36.7 percent of the enrollment in Part D plans. This ratio grew to 50.6 percent in 2021 and is projected to increase to 53.7 percent in 2022 before reaching 61.2 percent by 2031.

Table IV.B7 provides a summary of the estimated average enrollment in Part D, by category.

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Table IV.B7.--Part D Enrollment

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b. Cost Projection Methodology on an Incurred Basis

(1) Drug Benefit Categories

Projected drug expenses are allocated to the beneficiary premium, direct subsidy, and reinsurance subsidy by the Part D premium formula based on the benefit formula specifications. Meanwhile, the additional premium and cost-sharing subsidies are projected for low-income beneficiaries.

The statute specifies that the base beneficiary premium is equal to 25.5 percent of the sum of the national average monthly bid amount and the estimated catastrophic reinsurance. The average premium amount per enrollee is estimated using the base beneficiary premium with an adjustment to reflect enrollees' tendency to select plans with below-average premium costs. Moreover, Part D collects income-related premiums for individuals whose modified adjusted gross income exceeds a specified threshold. The amount of the income-related premium depends upon the individual's income level. Before 2019, the extra premium amount was the difference between 35, 50, 65, or 80 percent and 25.5 percent applied to the national average monthly bid amount adjusted for reinsurance. Starting in 2019, the Bipartisan Budget Act of 2018 requires a portion of the beneficiaries currently in the 80-percent group to pay the difference between 85 percent and 25.5 percent.

(2) Projections

The projections are based in part on actual Part D spending data through 2021. These data include amounts for total prescription drug costs, costs above the catastrophic threshold, plan payments, and low-income cost-sharing payments. The estimates under the intermediate assumptions are calculated by establishing the total prescription drug costs for 2021 and then projecting these costs with both Part D expenditure and enrollment growth rates through the estimation period. The growth rate assumptions for Part D costs are based on a Part D-specific short-term trend model and the national health expenditure (NHE) growth rate assumptions./62

This short-term model provides the 2022 and 2023 drug-specific and therapeutic-class-specific growth rate projections. A transition factor is applied for 2024 and 2025 to converge to the NHE projected growth rates in 2026, which are then used for the remainder of the short-range projection period. The growth in expensive specialty drugs has been a major factor driving the gross drug trend rates, which in turn have resulted in fast-growing reinsurance in recent years.

Therefore, the trend rates for the catastrophic portion of the Part D benefits are also assumed to generally grow slightly more rapidly than the overall growth rates. Table IV.B8 shows the historical and projected Part D per capita growth rates along with the NHE trends. To determine the estimated benefits for Part D, the total per capita drug benefits are adjusted for two key factors: (i) the projected total amount of direct and indirect remuneration and (ii) the administrative costs that plans are projected to incur related to plan operations and profits. Table IV.B8 displays these key factors affecting Part D expenditure estimates.

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Table IV.B8.--Key Factors for Part D Expenditure Estimates/1

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(3) Direct and Indirect Remuneration

Direct and indirect remuneration (DIR) primarily consists of drug manufacturer rebates and pharmacy rebates that PDPs and MA-PDs negotiate./63

The average projected DIR from plan bids, which EGWPs are not required to submit, has increased substantially in recent years. Plans have continued to increase their projected DIR significantly for years 2021 and 2022 even though actual DIR for 2020 was noticeably lower than the plans estimated in their corresponding bid submissions for plan year 2020. Primarily based on the 2020 results and the 2022 plan bids, the Trustees expect actual DIR to have been lower than the assumed level in plan bids for 2021 and to be marginally lower than the 2022 plan bids in 2022. Utilizing the most recent historical data, the Trustees project modest increases to future DIR from the 2022 level throughout the projection period. This upward revision to projected DIR is a major reason for decreases in overall Part D spending when compared to the 2021 Trustees Report. Projected DIR is shown in table IV.B8./64

(4) Administrative Expenses Administrative costs and profit margins are estimated from the 2022 plan bids. Administrative expenses are projected to grow at the same rate as wages, while profit margins are projected to grow at the same rate as per capita benefits. Beginning in 2014, the law assessed an annual insurer fee on health insurance plans, which was subsequently suspended in 2017 and 2019 before being terminated in 2021. For 2023 and beyond, the Trustees project that the level of administrative expenses as a percentage of benefits will be stable. This is the case because the projected higher DIR would reduce the growth rates for net drug expenses even though gross drug expenses are projected to increase more rapidly than wages.

(5) Incurred Per Capita Reimbursements

Table IV.B9 shows estimated enrollments and average per capita reimbursements for beneficiaries in private plans, low-income beneficiaries, and beneficiaries in RDS plans. The direct subsidy and retiree drug subsidy are affected by the sequestration of Medicare benefit expenditures, which applies from April 1, 2013 through September 30, 2031, with the exception of May 1, 2020 through March 31, 2022 when it was suspended. Under the sequestration, Medicare administrative expenses are reduced by an estimated 5 to 7 percent for the period April 1, 2013 through September 30, 2031, with the exception of May 1, 2020 through March 31, 2022 when it was suspended.

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Table IV.B9.--Incurred Reimbursement Amounts per Enrollee for Part D Expenditures

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(6) Incurred Aggregate Reimbursements

Table IV.B10 shows the projected incurred aggregate reimbursements to plans and employers by type of payment.

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Table IV.B10.--Aggregate Part D Reimbursement Amounts on an Incurred Basis

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d. Projections under Alternative Assumptions

Part D expenditures for the low-cost and high-cost alternatives were developed by modifying the estimates under the intermediate assumptions. Separate modifications were applied to the assumptions for the 2021 base projection and to the assumptions for projected years 2022-2031. The 2021 base modifications include the following adjustments, since final data for 2021 will not be available until later in 2022:

* +-2 percent to account for the uncertainty of the completeness of the actual spending in 2021. The high-cost scenario increases the spending by 2 percent, and the low-cost scenario decreases the spending by 2 percent.

* +-2 percent for the average rebate that drug plans negotiate. The high-cost scenario decreases the average rebate by 2 percent, and the low-cost scenario increases the average rebate by 2 percent. For the projections beyond 2021, the per capita drug costs for the high-cost and low-cost scenarios are increased, relative to GDP, 2 percent more rapidly and 2 percent less rapidly, respectively, than under the intermediate assumptions. The 2-percent base-year modification to rebate percentage is also maintained throughout the short-range projection period. In addition, for RDS participation, participation in the low-income subsidies, and the participation rate for Part D-eligible individuals who do not qualify for the low-income subsidy or receive coverage through employer-sponsored plans, assumptions vary in the alternative scenarios. Table IV.B11 compares these varying assumptions.

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Table IV.B11.--Part D Assumptions under Alternative Scenarios for Calendar Years 2021-2031

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The report is posted at: https://www.cms.gov/files/document/2022-medicare-trustees-report.pdf

(Continues with Part 8 of 12)

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