This afternoon, CMS issued guidance to Part D plan sponsors regarding implementation of the new safe harbor regulation. According to the guidance, CMS will conduct a demonstration “if there is a change in the safe harbor rules effective in 2020.” The purpose of the demonstration would be to test an efficient transition to the new rebate rule. Under the demonstration the government will bear 95% of the deviation from the target amount and the actual incurred costs beyond the first 0.5%. Participation would be voluntary.
Between the lines, CMS appears committed to changing the safe harbor rule. What is less clear is if that work will be done in time to provide a clear direction for plan submissions. The demonstration has the effect of creating enforcement discretion of new safe harbor standard. Plans that wish to comply will participate in the voluntary demonstration; those that do not or cannot will stick with the old standard.
The new guidance puts Part D plans in a bit of a quandary. If they enter the demonstration helped along by changes to risk corridors, they will be able to offer greatly reduced prices, in some cases, to enrollees at the drug counter, while having limited impact on premiums. If they do not enter the demonstration, plans lose a competitive edge on their drug prices while relying on current risk corridor structure. As many plans have been preparing dual bids, the analysis to determine the best market strategy is being done and much will depend on the competitive environment in which a plan operates.
The new guidance also throws a wrench in the industry’s strategy to force a legislative delay as a budgetary offset to pending surprise billing legislation, while appealing to congressional concerns about premium increases. If the effectiveness of the rule is determined by voluntary participation, a delay probably won’t score well enough to act as an offset, even with a higher cost to the Treasury for risk corridor payments. Because the demonstration would be voluntary, the need for a delay becomes less pressing. The use of a demonstration also means that CMS only needs to let the program expire to fully implement the new safe harbor.
That being the case the guidance appears to be a sly bit of political maneuvering. A two-year delay could easily become a four year or infinite delay as everyone on Capitol Hill knows. With the demonstration, CMS will let the market players sort out what is more important to the customers, gives them two years to do it and the White House get a win with lower drug prices at the retail counter.
The change notwithstanding, the problems for UNH and other Part D plans remains. They are facing increased utilization, lower than expected growth in MA plan enrollment and flat growth in commercially insured. See our presentation of short thesis from last week.
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Emily Evans
Managing Director – Health Policy
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