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Maximize Value February 15, 2019

2020 CMS Advance Notice Summary: Increase in Part C Normalization Factors May Cause Slight Headwind for MAOs

Principal, Oliver Wyman Actuarial Consulting
Principal, Oliver Wyman Actuarial Consulting
Senior Consultant, Oliver Wyman
Senior Consultant, Oliver Wyman

On January 30, 2019, the Centers for Medicare & Medicaid Services (CMS) released the Advance Notice of Methodological Changes for Calendar Year 2020 Medicare Advantage (MA) Capitation Rates and Part C and Part D Payment Policies (the 2020 Advance Notice) (Part 2). Part 2 of the 2020 Advance Notice outlines the planned changes to MA capitation rates applied under Part C for CY 2020 and other regulatory changes that will affect plan reimbursement.

CMS released Part 1 of the Advance Notice on December 20, 2018 covering changes to CMS' Hierarchical Condition Category (CMS-HCC) risk adjustment model. Oliver Wyman Actuarial Consulting, Inc. is working with MA plans and industry leaders to understand and evaluate these 2020 policies implications. Below is our summary of key proposed modifications in payment policy. Keep in mind some of these factors may change when the final announcement is released on April 1, 2019.

2020 Medicare Advantage Growth Rates

Because the Affordable Care Act (ACA) Part C benchmark calculation methodology is fully implemented, benchmarks for all counties are calculated as the specified percentage (95 percent, 100 percent, 107.5 percent or 115 percent) multiplied by the projected fee-for-service (FFS) rates in each county. CMS is estimating the FFS growth percentage at 4.52 percent for 2020, which includes an underlying trend of 3.85 percent plus an update of the 2019 US per capita cost (USPCC) estimate of 0.65 percent.

The applicable amount (the pre-ACA payment methodology) is still relevant because it continues to be used as a cap on payments. The MA growth percentage for aged and disabled enrollees, which is used in the calculation of the applicable amount, is projected at 4.84 percent. This amount is higher due to restatement of prior years’ estimates. Both these projections are likely to change slightly once CMS releases the final announcement in April.

Please note CMS' Fact Sheet is using 4.59 percent as an effective growth rate. CMS is using this blended growth rate to recognize some counties in 2020 are subject to the applicable cap, while others will be subject to the USPCC rate change. We also note county-specific growth rates will vary depending on FFS rebasing that CMS will complete as part of the final announcement.

CMS HCC and RxHCC Risk Adjustment Models and Data Sources

As outlined in Part 1 of the CMS Advance Notice and as mandated by the 21st Century Cures Act, the 2020 Part C Risk Adjustment Model will account for the number of conditions each beneficiary has been diagnosed with. CMS has outlined two Payment Condition Count ("PCC") models for comment. The “proposed” model contains the same demographic, HCC, and interaction variables as the HCC model implemented for PY2019, with the enhancement of including coefficients for the number of conditions a member has. The “alternative” model mirrors the proposed model with one primary difference: the alternative model includes three additional HCCs, which CMS believes could increase the accuracy of payments.

As outlined in the 21st Century Cures Act, the PCC model will be phased in over 3 years with all risk adjustment payments being calculated using the PCC model for 2022. This phase in requirement will be recognized in PY2020 by applying a 50 percent weight to the PCC model and a 50 percent weight to the 2017 CMS-HCC model.

The part C risk scores calculated on the PCC model will be calculated using data from the Encounter Data System (“EDS”) and FFS claims, supplemented with inpatient records from the Risk Adjustment Processing System (“RAPS”) records. The 2017 CMS-HCC model will be calculated using data from RAPS records and FFS claims. Plans should continue to monitor and validate their encounter data submissions.

CMS has proposed to update the coefficients for the prescription drug hierarchical condition categories (RxHCC) model to reflect the 2020 benefit parameters, keeping the core structure the same as the PY2018 model. CMS is considering two different data sets for recalibration. The first would continue to calibrate the model using 2014 diagnoses and 2015 Prescription Drug Event (“PDE”) data. The second would utilize 2015 diagnoses and 2016 PDE data. CMS has identified strengths and weaknesses of each model and is seeking comment on which model should be finalized.

Normalization Factors

Since the 2020 Part C risk scores will be calculated on two different models and then weighted together at 50 percent each, each of the two risk score models will be normalized using different factors. The normalization factor for the proposed PCC model is 1.069 and the normalization factor for the 2017 CMS-HCC model is 1.075.

CMS has calculated two sets of normalization factors for each of the outlined RxHCC Models. The 2020 normalization factor for the RxHCC model calibrated on 2014 diagnoses and 2015 PDE data is 1.043. The 2020 RxHCC model normalization factor for the model calibrated on 2015 / 2016 data is 1.035.

Adjustment for MA Coding Pattern Differences

In 2010, CMS began reflecting an observed difference in the way that MA plans were coding diagnoses versus coding in FFS Medicare. In 2010, CMS reduced risk scores for MA organizations by 3.41 percent to reflect the perception that, on average, MA plans code diagnoses better than what is observed in FFS Medicare. The ACA legislated that this amount be increased by 1.3 percent in 2014 and the Fiscal Cliff bill increased this adjustment to 1.5 percent. Thus, the coding intensity adjustment for 2014 was 4.91 percent. Each year since, the American Taxpayers Relief Act of 2012 required the coding intensity adjustment to increase by 0.25 percent and required that the MA coding adjustment be at least 5.9 percent by 2020. Consistent with 2019, CMS is proposing the statutory minimum of 5.9 percent for 2020. This means no change to the coding intensity adjustment for 2020.

Employer Group Waiver Plans (EGWPs)

In 2019 CMS fully implemented changes to the payment methodology for EGWPs to set payment rates using non-EGWP, individual bid amounts as the basis for plan payment. CMS is proposing to continue this payment methodology for 2020. For 2020, CMS is also to allow EGWPs to buy-down the Part B premium amount using rebates consistent with the rules for individual MA plans. This use of rebates on EGWPs was prohibited between 2017 and 2019.

CMS plans to continue its policy that Part C Bid Pricing Tools (BPTs) should no longer be submitted for EGWPs. In the past, plans were required to only submit Part C BPTs. By removing the requirement to submit BPTs, CMS has eliminated some administrative burden for EGWPs, and we expect this change in policy to be permanent.


The Part D deductible ($435), initial coverage limit ($4,020) and out-of-pocket maximum ($6,350) were updated for trend for 2020. These changes are the result of a 5.21 percent annual percentage increase in average expenditures for Part D drugs per beneficiary (API) (including -0.04 percent for prior year’s adjustments). Please note that the out-of-pocket maximum is expected to be $6,350, which is a substantially larger increase than 5.21 percent. The Social Security Act (the Act) held down increases in the out-of-pocket maximum between 2014 and 2019. However, the Act now requires that the 2020 parameter be calculated using the API from 2014 as though the methodology for prior years’ out-of-pocket maximum increases was never changed.

CMS is now allowing a limited update window to make enhancements to Part D formularies in August 2019. Plans may remove drugs only if they can be replaced by a generic drug or other therapeutically equivalent drug. If a drug is substituted, the replacement drug must be on the same or lower formulary tier than the drug being removed.


CMS has extended the deadline for comments on the proposed changes to the Part C risk adjustment model outlined in Part 1 of the advanced notice to March 1, 2019. The MA capitation rates and final payment policies will be announced on April 1, 2019. Medicare Advantage Organizations should utilize this time to understand the potential impact of the proposals outlined in Part 1 and Part 2 of the Advance Notice to their success as a plan.

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