The Inflation Reduction Act (IRA) introduced major policy changes to the healthcare industry, raising important questions about launch prices, pipeline strategy, and evidence requirements. In the IRA Question of the Week series, Avalere answers pressing questions shaping healthcare stakeholders’ strategic decision-making as the law is implemented.

In previous installments, Avalere experts outlined plans’ considerations for IRA implementation and the importance of long-term strategic planning. In this Insight, Avalere experts discuss how the IRA increases the importance of risk adjustment in Medicare Part D.

Part D Plan Bids and Risk Adjustment

Each year, plans submit bids to the Centers for Medicare & Medicaid Services (CMS) that predict the expected costs that plans will assume for providing drug coverage to enrollees. Plans adjust their bids based on the health status and demographic characteristics of their members using the CMS Part D risk-adjustment model, called the Prescription Drug Hierarchical Condition Category model.

Aside from cost-sharing and premium subsidies for certain low-income enrollees, plans receive two types of payments from CMS: a direct subsidy and a reinsurance payment. The direct subsidy is the plan’s standardized bid, multiplied by the Part D risk score for the enrollee, minus the beneficiary’s premium. The reinsurance payment covers the expected spending for the government’s share of costs for claims in the catastrophic phase of the benefit. For 2023, the National Average Monthly Bid Amount (NAMBA) was $34.71, while the government reinsurance amount was $93.68. Thus, about 27% of Part D drug spending is risk adjusted while the majority (73%) is paid by the government through reinsurance payments.

Higher Plan Liability

Under the IRA, plan liability—the portion of drug costs for which the plan is at financial risk—will increase dramatically, while government reinsurance will decrease. Avalere projects that the increased NAMBA will account for 84% of total drug spending in 2025 and, consequently, almost nine of every ten dollars of drug spending will be risk adjusted.

A previous Avalere analysis found that, for many classes of drugs, predicted plan liability from the Part D risk-adjustment model was 50% or less of the actual plan liability, with hepatitis C and autoimmune conditions seeing a predicted liability of only 30% of actual liability. Under the current benefit design with a $34.71 direct subsidy, the difference between predicted and actual spending could be up to $24.30. Under Part D redesign, with a $90 direct subsidy, the difference would be a $63 underestimate.

Due to this increase in plan liability under benefit redesign, if the risk-adjustment model does not accurately subsidize costs for specific therapeutic areas or for certain enrollees, this underpayment could create misaligned incentives for plans to design their formularies and benefits. Accurate risk adjustment will be particularly important for therapeutic areas and enrollees for which plan liability is likely to increase most under benefit redesign (i.e., for therapeutic areas with the majority of spending in the catastrophic phase of the benefit and for those more highly utilized by low-income subsidy enrollees).

Next Steps

Risk adjustment will increase in importance to plans, manufacturers, and other stakeholders under Part D redesign, as a larger portion of Part D plans’ spending will be risk adjusted. As such, risk adjustment is likely to play a key role in plan decision making during Part D formulary negotiations with manufacturers.

Stakeholders should consider engaging with CMS to shape changes and improvements to the risk adjustment model for the 2025 plan year. CMS is likely already taking steps to develop the 2025 model, and the agency will announce proposed changes to the Part D risk adjustment model no later than early February of 2024.

Avalere experts in Part D and health plan design can help you understand what IRA policy changes and CMS guidance mean for your organization and to weigh in on key implementation decisions. To better prepare for and shape the changing healthcare landscape in 2023 and beyond, connect with us.