The Centers for Medicare & Medicaid Service’s release of the final Medicare medical loss ratio regulations allows Medicare Advantage Organizations and Part D Plan Sponsors to evaluate their operations in order to come into compliance with the regulations and to implement measures to manage new risks created by these requirements.

Two weeks before the deadline for CY 2014 bid submissions, the Centers for Medicare & Medicaid Services (CMS) released the final rule (Final Rule) implementing the medical loss ratio (MLR) requirements for the Medicare Advantage and Part D Programs.  These Medicare MLR requirements take effect on January 1, 2014, so this Final Rule allows Medicare Advantage Organizations and Part D Plan Sponsors (collectively, Plan Sponsors) to incorporate the regulatory concepts into their Contract Year (CY) 2014 bids, to evaluate their operations in order to come into compliance with the regulations, and to implement measures to manage new risks created by these requirements. 

Overview of the Medicare MLR Requirement

Congress, under the Affordable Care Act, amended the Medicare Advantage (MA) Program provisions in the Social Security Act (SSA) to require MA Organizations to achieve an 85 percent MLR beginning with CY 2014.  Through a cross-reference embedded in the Part D Program provisions in the SSA, CMS concludes that this statutory requirement also applies to Part D Plans, whether offered in conjunction with MA Plans or offered as stand-alone prescription drug plans.

Unlike the commercial MLR regulations, which require health insurance issuers to provide premium rebates to policyholders if the issuers fail to satisfy the applicable MLR requirement, the Medicare MLR statute and the Final Rule require a Plan Sponsor to remit only to CMS the amount by which the MLR requirement exceeds the contract’s actual MLR multiplied by the total revenue for the contract.  CMS will deduct the remittance from its future payments to the Plan Sponsor, which provides significant administrative simplicity for Plan Sponsors as compared to the commercial MLR regulations.  Medicare beneficiaries and employer group health plans offering employer group waiver plans (so-called EGWPs) to their working aged Medicare beneficiaries and retirees, however, will not receive any portion of a Plan Sponsor’s remittance, even if they have a premium obligation under the MA/Part D Plan.

The statute provides that if a Plan Sponsor fails to meet the 85 percent Medicare MLR standard for three consecutive contract years, CMS must suspend enrollment in the Plan Sponsor’s Medicare plans.  Failure to satisfy the Medicare MLR requirement for five consecutive years will result in contract termination. 

Implications of the Final Rule Relative to Existing MA and Part D Program Requirements

The Final Rule remains consistent with the February 2013 proposed rule in many areas.  For example, CMS adopts its proposal to apply the Medicare MLR requirements at the contract level (rather than the plan benefit package or parent organization levels), citing consistency with other aspects of the MA and Part D Programs’ administration and status most similar to the commercial MLR reporting requirements.  The Final Rule also provides that expenses that relate to multiple MA/Part D contracts (or contracts other than those being reported, such as commercial health insurance coverage) would be allocated on a pro rata basis. 

The Final Rule does not address, though, CMS’s ongoing requirement that Plan Sponsors estimate their Medicare MLR in their CY 2014 bid submissions, which are developed at the plan benefit package level.  These requirements impose additional administrative burdens on Plan Sponsors, which must create dual tracking systems in order to meet bid submission estimate obligations and MLR reporting obligations.  These requirements also raise questions as to how CMS may use MLR estimates in bid submissions—will they be audited, similar to other bid submission components?  Will CMS take enforcement action against Plan Sponsors if their MLR estimates in bid submissions differ materially from actual MLRs ultimately reported for the contract year?  This is an area where significant uncertainty exists, and Plan Sponsors should be attuned to circumstances in which their bid submission Medicare MLR estimates, aggregated for the appropriate contract, differ from the Medicare MLR reports for the same contract year.

Expense Classification—CMS adopts in the Final Rule the MLR expense and revenue classifications set forth in the proposed rule, which reflect the same concepts adopted by CMS for commercial health insurance issuers.  This is significant because, unlike the statute creating the commercial MLR standards, the Medicare MLR statute does not define how a Plan Sponsor’s MLR is calculated or which expenses are permissibly included in the numerator of the MLR calculation.  By mirroring the commercial MLR rules, Plan Sponsors are permitted to include quality improvement expenses with medical expenses in the numerator of their MLR calculations.  CMS’s approach also attempts to achieve some efficiencies in Plan Sponsors’ internal operations, enabling them to undertake a single analysis (with some modifications) for quality improvement activity (QIA) expenses affecting both their Medicare and commercial lines of business, rather than having to undertake separate analyses (and potentially reaching different conclusions) under differing regulatory schemes. 

CMS does not, however, recognize the administrative obligations—and thus costs—that are unique to the MA and Part D Programs and have a negative effect on Plan Sponsors’ MLRs.  For example, CMS states in the preamble to the Final Rule that agent and broker commission payments must be treated as non-medical/administrative expenses for purposes of the Medicare MLR calculation, similar to the commercial MLR requirements.  The agency does not acknowledge that unlike the commercial market in which agent/broker commission payments may not be regulated, Plan Sponsors are subject to a CMS-imposed six-year commission cycle (which potentially may be extended beginning with CY 2015) and CMS-mandated 50 percent renewal commission, if Plan Sponsors elect to pay commissions to independent agents and brokers.  These and similar administrative obligations, such as MA Organizations’ obligation to prepare and submit encounter data to the agency, that are imposed on Plan Sponsors by virtue of their participation in federal health care programs may present challenges for Plan Sponsors with non-medical expenses that hover around the 15 percent threshold.

A Plan Sponsor may find it useful to review its CY 2012 expenses through the lens of the Medicare MLR requirements, in order to evaluate how the organization may fare.  Such an analysis also may enable a Plan Sponsor to determine whether certain activities, such as activities in support of Quality Star Ratings, meet the definition of a QIA such that these expenses would receive favorable treatment under the MLR calculation, or whether modifications may be necessary to meet the regulatory definition.  On a moving forward basis, Plan Sponsors—like their commercial counterparts—now need to view their transactions, contracts and other activities through the MLR lens given the implications of these requirements for all facets of Plan Sponsors’ operations.

Subcontracts—The MA and Part D Programs currently require Plan Sponsors to make available to CMS and other government authorities—and require their “first tier” and “downstream” entities to similarly make available—their books, contracts, computer systems and other records and documentation relating to the CMS contract.  Nonetheless the Final Rule includes new record maintenance and access obligations specific to the Medicare MLR requirements, which differ slightly from the existing regulations.  For example,  under the Final Rule, Plan Sponsors “are required to maintain evidence of the amounts reported to CMS and to validate all data necessary to calculate MLRs” for 10 years from the date such calculations were reported to CMS.  Additionally, MA Organizations “must require any third party vendor supplying drug or medical cost contracting and claim adjudication services” (“drug cost contracting and claim adjudication services” for Part D Plan Sponsors) to provide the Plan Sponsor with “all underlying data associated with MLR reporting … regardless of current contractual limitations.” 

Accordingly, Plan Sponsors should review their current and template contracts to assess whether modifications may be necessary (1) to ensure the contractor is retaining such data for the requisite time period (10 years from the CMS reporting date, not the termination of the contract as referenced in existing regulations), and (2) to preserve the Plan Sponsor’s and government’s ability to obtain data and records, as necessary to satisfy any government information request during the 10-year period. 

Priority should be given to contracts with vendors that retain medical/drug cost data on behalf of the Plan Sponsor and for which the Plan Sponsor does not have independent access.

Payment Adjustments—CMS also has concluded that Medicare MLR calculations will not be subject to reopening, notwithstanding the post-contract year reconciliations and payment adjustments that often occur under both Programs (including, but not limited to, Part D reconciliation or risk adjustment data validation audits).  The agency states in the preamble that “remittances owed based on a failure to meet the MLR standard should be based on the revenue figure at the time of the report, and should not be subject to change if this revenue figure is decreased or increased in a future year.” 

Enforcement Actions—Consistent with the statute, the Final Rule promulgates regulations for imposing enrollment suspension and contract termination for Plan Sponsors that fail to achieve the 85 percent Medicare MLR threshold for three and five consecutive years, respectively.  The Medicare MLR regulations for contract termination cross-reference to the existing contract termination regulations under the MA and Part D Programs.  Per CMS, this is intended to afford Plan Sponsors the opportunity to appeal a contract termination (based on the MLR calculation, not the agency’s effectuation of the termination itself, which is required by statute).  CMS suggests in the preamble that appeal right also would be afforded for enrollment suspensions. 

The Final Rule’s changes to §§ 422.510 and 423.509, however, which set forth contract termination bases, appear to be inconsistent with the new regulations providing for contract termination based on failure to achieve the MLR threshold for five consecutive years (§§ 422.2410 and 423.2410).  This arguably is a technical error (rather than a policy change) that the agency can correct before a Plan Sponsor would seek to appeal a contract termination based on five consecutive years of missing the Medicare MLR requirement.  Significantly, the new regulations also do not appear to include a cross-reference supporting appeal of an enrollment suspension, as the agency suggests is available.  A Plan Sponsor that misses the Medicare MLR threshold for two consecutive years may need to consider pursuing a regulatory change if CMS has not yet addressed it.

Potential False Claims Act Issues

The Medicare MLR requirements create potential new risks for Plan Sponsors under the False Claims Act (FCA).  A Plan Sponsor that improperly avoids an obligation to make payment to the federal government—such as improperly avoiding non-compliance with the Medicare MLR requirements and a corresponding remittance obligation—may create a “reverse false claim” for which liability can arise under the FCA if the payment avoidance is knowing or reckless.  Plan Sponsors also must be sensitive to the obligation under SSA § 1128J(d), as created by the Affordable Care Act, which requires reporting and returning an overpayment within 60 days of it being identified.  The knowing and improper failure to do so creates liability under the FCA as well.  Notably, the avoidance of an obligation to pay money to the federal government or return an overpayment could expose a Plan Sponsor to treble damages and penalties under the statute, which could be pursued by the federal government and/or a qui tam relator.  (A similar risk does not appear to exist for commercial health insurance issuers, as they issue premium rebates to policyholders, not the federal government.)

Medicare MLR reports that are found by CMS to be “materially incorrect or fraudulent” may subject the Plan Sponsor to intermediate sanctions under the MA and/or Part D Program regulations as well.

Plan Sponsors therefore may consider incorporating into their operations additional measures intended to facilitate accurate and complete reporting and to reduce the potential for submission of Medicare MLR reports that include materially incorrect or fraudulent statements.  An internal certification process that corresponds to the development and finalization of Medicare MLR reports may be an appropriate step to ensure each organization employee or officer with responsibility for information supporting the Medicare MLR report is in agreement with the report’s information.  A process that documents an organization’s deliberations regarding how to handle an issue that is ambiguous under the regulations may negate allegations of reckless disregard for the truth or falsity of the information.