How the Inflation Reduction Act Impacted Medicare Part D Benefit Design

Medicare Part D plan liability could lead to major changes in benefits and formulary design for beneficiaries in the coming years, according to an Avalere study that was funded by PhRMA.

The researchers used actual part D plan liability data from 2019 and predicted risk adjustment model Medicare advantage prescription drug plan and standalone prescription drug plan data to see if the risk adjustment model proved accurate.

The risk adjustment model consistently underestimated plan liability, the Avalere researchers discovered. Across all 11 therapeutic areas that the study covered, the actual liability in 2019 exceeded the predictable liability.

The conditions that saw the biggest difference between actual liability and predicted liability were hepatitis C, autoimmune conditions, and multiple sclerosis, which saw 75 percent, 73 percent, and 64 percent differences respectively.

Lack of accurate categorization or complete data contributed to this discrepancy. The current risk adjustment model relies on medical diagnoses and fails to account for prescription drug utilization. It also does not consider the stages or severity of a patient’s disease state. The disease categories do not represent all conditions and fail to capture spending for conditions like rare diseases.

Additionally, the risk adjustment model does not account for certain factors that contribute to net plan liability. For example, the model leaves out manufacturer rebates.

The conditions that saw the highest actual plan liability levels were anticonvulsants which cost plans $15.05 billion in 2019, asthma and COPD which resulted in $14.37 billion in plan liability, and non-insulin diabetes which cost $14.32 billion.

“These inaccuracies could impact how plans consider these TAs when setting their formularies, as conditions for which plan liability is underpredicted could result in a financial loss to plans,” the researchers indicated.

They added that the impact would be less extreme in 2023 since risk adjustment affects a smaller portion of the benefit design. Less than a third of current spending under the current benefit design is impacted by risk adjustment, as of February 2023.

In 2025, the benefit design will change dramatically due to the Inflation Reduction Act. The Act introduced that the catastrophic phase's pan liability will grow from 15 percent in 2023 to 60 percent in 2025. It also eliminated the Part D coverage gap. Lastly, plans will be responsible for 65 percent in plan liability for low-income subsidy beneficiaries, a significant increase from zero percent.

As a result, plan liability will increase across all 11 therapeutic areas that Avalere analyzed. Multiple sclerosis, autoimmune conditions, and hepatitis C saw the biggest increase in plan liability after the Inflation Reduction Act.

Higher plan liability will lead to more plan payments being risk-adjusted.

“Inaccuracies in the risk-adjustment model between actual costs and predicted costs could create misaligned incentives for plans. That is, given inaccuracies in the model, plans may choose formulary and benefit strategies that mitigate potential financial losses for conditions that may be consistently underpaid by the risk-adjustment model,” the Avalere researchers stated.

“In addition, plans may look to implement formulary and benefit designs that could be more favorable to conditions that receive more adequate payment adjustments under the risk-adjustment model.”

The study came shortly after CMS released the 2024 Medicare Advantage Notice. The notice mentioned that catastrophic phase coverage beneficiaries will not have Part D drug cost-sharing and that the low-income subsidy program will grow to include beneficiaries with incomes between 135 and 150 percent of the federal poverty level.