Heads up: this issue is from January 22, 2025. Because it covers time-sensitive coding and regulatory topics, some details may have changed since. See the latest issues for current guidance.
On January 10, 2025, the Centers for Medicare & Medicaid Services (CMS) released the Calendar Year (CY) 2026 Advance Notice of Methodological Changes for Medicare Advantage (MA) Capitation Rates and Part C and Part D Payment Policies, which makes proposals to update program policies for Medicare Advantage (MA) and Part D beginning in 2026. CMS also issued its Draft CY 2026 Part D Redesign Program Instructions, which center on implementing provisions of the Inflation Reduction Act of 2022 (IRA) related to the Part D benefit for 2026. A press release, along with fact sheets for the Advance Notice and Part D Redesign Program Instructions, were also released.
Public comments on the Advance Notice and Draft Part D Redesign Program Instructions must be submitted by 11:59 PM Eastern Time on Monday, February 10, 2025. The CY 2026 Rate Announcement and the CY 2026 Part D Redesign Program Instructions will be published no later than April 7, 2025.
Remember that we have a new Administration, so all or some of this could be toast when the rules are finalized in March or April.
Here are some of the highlights (using the term loosely:
Payment Impact on Medicare Advantage Organizations
In the Advance Notice, CMS projects that payments to MA plans will increase by 4.33 percent (What?) from 2025 to 2026—which represents a $21 billion increase in expected payments to MA plans next year. CMS estimates that payments to MA plans in 2026 will total $590.9 billion.
The proposed increase in payments is based on several factors, including cost growth rates, changes to MA plan Star Ratings, continued phase in of the new risk adjustment model, and MA risk score trends. The estimated growth rate considers demographic changes in MA enrollment, including projected increases in the Medicare population.
The Advance Notice estimates represent the average increase in payments to MA plans and actual payments will vary from plan to plan according to actuarial and contracting factors.
MA Risk Adjustment Changes
CMS intends to complete the three-year phase-in of the MA risk adjustment model that was first published in the CY 2024 Rate Announcement (remember this proposal is for 2026). Specifically, CMS proposes to calculate 100 percent of the risk scores using the new MA risk adjustment model, referred to as the 2024 hierarchical condition categories ("CMS-HCC") framework. CMS maintains that the changes to the methodology for calculating risk have improved the predictive accuracy of the model while ensuring risk-adjusted payments to MA plans are accurate.
In addition, CMS has been working to calibrate the risk adjustment model based on MA encounter data, and CMS proposes to begin phasing in an encounter-based MA risk adjustment model as soon as CY 2027 as opposed to a population basis.
CMS also proposes to apply the statutory minimum MA coding pattern difference adjustment factor of 5.90 percent for CY 2026. Let me tell you why this is outrageous. This coding allowance deducts 5.9% for overcoding, but estimates are that overcoding is more like approximately 20%, leading to a $50 billion windfall. This has been going on for years,
Technical Adjustment to Cost Calculations Related to Medical Education Costs
CMS plans to complete the three-year phase-in of technical adjustments to the per capita cost calculations related to indirect and direct medical education costs associated with services delivered to MA beneficiaries. This technical adjustment—finalized in the CY 2024 Rate Announcement—has reduced growth rates for MA plans because of the removal of MA-related medical education costs from the benchmarks.
MA Star Ratings
The Star Ratings have produced several lawsuits over the past year. CMS reiterates its continued focus on creating metrics that center on clinical care, patient outcomes, and improved patient experiences and are aligned across CMS programs. In addition, CMS is soliciting initial feedback on both substantive measure specification updates as well as comments on new measure concepts. CMS also is seeking stakeholder feedback on modifications to the Health Equity Index, including adding social risk factors and geography (urban or rural) to the reward factor.
Medicare Part D Provisions
The CY 2026 Advance Notice and the CY 2026 Draft Part D Redesign Program Instructions include several payment and benefit updates as required in the Inflation Reduction Act (IRA) of 2022. The CY 2026 updates include:
- The CY 2026 annual out-of-pocket cost threshold for Part D covered drugs is $2,100, which is the original out-of-pocket cap of $2,000 adjusted for the annual percentage increase in average expenditures for Part D covered drugs
- Establishment of the selected drug subsidy program
- Changes to the liability of enrollees, plan sponsors, drug manufacturers, and CMS in the standard Part D benefit design, specifically to account for the start of the Medicare Drug Price Negotiation Program in 2026 (see more info on this above)
- Guidance on the successor regulation exception to the IRA’s formulary inclusion requirement for selected drugs under the Medicare Drug Price Negotiation Program
- Other previously implemented IRA reforms will continue in CY 2026, including no cost sharing for Medicare beneficiaries for Part D covered drugs in the catastrophic phase, which begins after the annual out-of-pocket threshold of $2,100 is reached; a $35 monthly cap on enrollee cost sharing for insulin; no cost sharing for adult vaccines recommended by the Centers for Disease Control and Prevention’s (CDC’s) Advisory Commission on Immunization Practices and covered under Part D; and the requirement for Part D plans to offer the Medicare Prescription Payment Plan to beneficiaries. Again, all or some of this could go bye-bye.
Administration Change Possibilities
Like the policy and technical changes included in the MA proposed rule, the CMS Advance Notice payment updates will be finalized under the incoming Trump Administration. MA plans should expect that the new leadership at the US Department of Health and Human Services and CMS will closely examine and take a fresh look at the proposed payment and policy changes. For example, officials in the Trump Administration could seek to delay the phase in of the risk adjustment changes as well as the technical adjustment regarding medical education costs. Even some IRA changes could possibly go away.
Stay Tuned.
