1. Diagnosis-Based Risk Adjustment for Medicare Prescription Drug Plan Payments John Robst Melvin Ingber Jesse Levy Centers for Medicare & Medicaid Services

2. The Drug Benefit – Part D Mandated by MMA; Starts in 2006 Covers self-administered prescription drugs not covered by Medicare Part B Beneficiaries may enroll in any one of the prescription drug plans (PDPs) or Medicare Advantage (MA)-PDPs in their region Formularies and prices are not standardized Premiums are set by bid and formula

3. The Drug Benefit – Part D Standard benefit, initial thresholds for beneficiary: –Monthly premium –(A) $250 deductible –(B) 25% coins. from $250 to $2250 total spending –(C) 100% coins. from $2250 to $5100 (out-of-pkt = $3600) –(D) above $5100, greater of (5% coins., $2 generic/preferred, $5 brand) Plan pays in (B) and (D); is paid capitated amount by Medicare for (B) and part of (D)

4. Bid to be Risk Adjusted Preferred approach by system implementers: Capitated payment = Bid * Risk factor * Geographic price index Bid - Average monthly cost incurred by plan under standard benefit for person with national average risk

5. Risk Adjustment Approach Build on underpinnings of prospective CMS-HCC model for Part A and B services –ICD-9 codes grouped into DxGs; DxGs grouped into HCCs –Expected spending = f (age/sex, HCC 1 … HCC n ) Hierarchies of severity ICD-9 codes needed go beyond the abbreviated set initially required for CMS-HCC model –Conditions with low inpatient/ambulatory costs may have significant drug costs – hypertension, high cholesterol….

6. Data Existing estimation data are far from perfect – inadequate Medicare prescription drug data Data for predictors must be available for FFS and managed care (MA) beneficiaries: demographics and diagnoses Due to the lack of data, we can’t include prior drug use in the model

7. Data Federal retirees with Medicare in the Blue Cross - Blue Shield FEHBP –~ 1 million persons, 3 years (2000-2002) –Link to Medicare diagnosis files –No disabled under 65 –Reasonable national representation after reweighting –No cap, 25% coinsurance for retail, copays for mail order ($35 brand, $10 generic) –Total enrollee and plan spending for each person

8. Estimation Linear additive model Model should have clinical credibility –Individual DxGs are grouped clinically –Hierarchies imposed –Models for total drug costs have R 2 of about.25 –Age/sex coefficients exceed deductible even in very comprehensive model CMS announced new data requirements in May 2004 –Codes required were published based on preliminary models

9. Other Data and Adjustments to Spending Other data: 5 percent Medicaid-Medicare dual eligible sample from 1999/2000 Policy makers required a low income subsidy and an institutionalized subsidy in payments Start everyone on same basis – i.e., BCBS with standard benefit - Adjust Medicaid expenditures downward - Adjust everyone downward

10. Model estimates - examples

11. Predictive Ratios

13. Subsidies

14. Geographic Price Adjuster MMA: Test for geographic price variation; adjust if needed 34 geographic regions Data sources –IMS, Verispan, BCBS –Variation in drug prices for third party payers –Indexes vary depending on method and market basket