session 60 panel discussion: medicare advantage bids: how to

Session 60 PD, Medicare Advantage Bids – How to Manage Related

Party Issues

Moderator/Presenter:

Scott O'Neil Jones, FSA, MAAA

Presenter:

Lynn Fukumoto Dong, FSA, MAAA

Medicare Advantage Bids: How to Manage Related Party Issues

SOA 2016 Health Meeting, Philadelphia

Lynn Dong and Scott Jones

June 16, 2016

Agenda

Introduction

Related Party Arrangements: Definitions and Examples

Acceptable approaches

Comparability

Pricing to actual costs

Documentation standards

MLR and margin

Recap the role of the certifying actuary

2

Scope and Perspective of the Presentation

This presentation is primarily from the perspective of an actuary who is preparing and certifying BPTs

Actuary has joint duty to their principal (employer MA or client) as well as CMS.

Caveats and Considerations:

This presentation is not about pricing or negotiation strategy.

Presentation discusses methods to prepare appropriate bids that meet CMS’ requirements and provide CMS sufficient documentation to reasonably understand the MA sponsor’s revenue requirements.

Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of the Society of Actuaries, its cosponsors or its committees, nor of Milliman as an organization. This presentation should not be used as definitive guidance, as each actuary is responsible to ensure that filed MA/PD bids reflect compliance with his/her best understanding of CMS’ requirements and guidance.

3

IntroductionMedicare Advantage plan sponsors, related parties, and CMS

An Example – Revenue Requirements for Three MAOs

5

Medicare Advantage Organizations

Providers

ABC

Health Plan

XYZ

Health Plan

Narrow

Health Plan

Healthy Hospital $40 $5

Caring Hospital $10 $40

Patient Hospital $10 $5 $50

Doctors Medical Group $20 $40

Physicians Medical Group $20 $10 $40

Dental Cap Company $5 $10 $5

Benefit Cost $105 $110 $95

Admin $10 $10 $10

Margin $5 $5 $5

Revenue Requirement $120 $125 $110

An Example – Related Party Status

6

Medicare Advantage Organizations Medicare Advantage Organizations

Providers

ABC

Health Plan

XYZ

Health Plan

Narrow

Health Plan

Healthy Hospital

Caring Hospital

Patient Hospital

Doctors Medical Group

Physicians Medical Group

Dental Cap Company

CMS’ Stated Objectives (from 2017 Bidder’s Training)

“The objective is to ensure that financial arrangements between the bid sponsor and related parties:

Are comparable to those negotiated at arm’s length, and

Do not provide the opportunity to over-or under-subsidize the bid

The bid must reflect the revenue requirements of the plan

The plan sponsor must provide full disclosure of and support for the costs of the RP arrangements”

7

Related Party ArrangementsDefinitions and Examples

Definitions

Definition of Related Party (from 2017 MA BPT Instructions):

“The related-party requirements apply to all MAOs that enter into any type of arrangement with or receive services from an entity that is associated with the MAO by any form of common, privately held ownership, control, or investment. This includes any arrangement where the MAO does business with a related party through one or more unrelated parties. The requirements apply to all related-party arrangements supporting the bid which are in effect during the base period and/or contract year.”

9

Definitions

Definition of Related Party (from 2017 PD BPT Instructions):

“The related-party requirements apply to all Part D sponsors that enter into any type of arrangement with or receive services from an entity that is associated with the Part D sponsor by any form of common, privately-held ownership, control or investment. This includes any arrangement where the Part D sponsor does business with a related party through one or more unrelated parties, such as a pharmacy or a pharmacy benefit manager. The requirements apply to all related-party arrangements supporting the bid which are in effect during the base period and/or contract year.”

10

Definitions

Further Clarifications Regarding Related Parties (2017 MA BPT Instructions):

“The objective of the requirements for related-party medical or service arrangements is to assure that financial arrangements between the MAO and related parties (i) not significantly different from the financial arrangements that would have been achieved in the absence of the relationship, and (ii) do not provide the opportunity to over- or under- subsidize the bid.

CMS requires all MAOs to disclose whether or not they are in a business arrangement with a related party. MAOs in a business arrangement with a related party must disclose and support each and every related-party arrangement at the time of the initial bid submission and prepare the bid and documentation in accord with the requirements in this section and Appendix B for each identified related party.”

11

CMS Specifies Methods for Related Party Agreements

12

Medical Services Agreements

Administrative Services Agreements

–MA Bids

–PD Bids

–MA Bids

–PD Bids

Impacts historical allowed and net benefit costs and non-benefit expenses (NBE) on Worksheet 1

As well as projected amounts used to develop projected revenue requirements (e.g., on Worksheet 2 (PD) and Worksheet 4 (MA))

Examples of Related Parties

Provider-owned health plan

Sister organizations with common parent

Administrative services organization related to health plan

PBM is a subsidiary to the health plan

Provider-system pharmacy contracts with health plan

13

Acceptable Approaches:Actual cost, market comparison, 100% FFS

Acceptable Approaches

From 2017 MA BPT Instructions:

“The MAO may have one or more of the following options for entering in the BPT costs associated with related-party arrangements, as explained in this pricing consideration and summarized in Appendix H.

Enter the actual costs of the related party as that of the MAO when preparing the BPT (Method 1, Actual Cost).

Show that the arrangement with the related party is comparable to other arrangements and enter all fees paid by the MAO to the related party as non-benefit or benefit expenses (Method 2, Market Comparison; and Method 3, Comparable to FFS).

Use 100 percent FFS costs as a proxy for benefit expenses (Method 4, FFS Proxy).”

15

Available Methods: MA Medical Related Party Arrangements

Method When Available Parties Treated as:Medical Costs of

Related Party

Gain/Loss Margin of

Related Party

Method 1:

Actual CostAlways Permissible Not independent

Actual cost of

medical

services

Included in plan

sponsor’s

gain/loss

margin

Method 2:

Market Comparison

(through Plan Sponsor or

Related Party)

Must demonstrate

comparison (within

5%/$2 PMPM)

IndependentMedical

expenses

Medical

expenses

Method 3:

Comparable to FFS

Method 1 not possible;

Fees are comparable to

100% of FFS (within

5%/$2 PMPM)

IndependentMedical

expenses

Medical

expenses

Method 4:

FFS Proxy

Methods 1, 2, 3 not

possibleNot independent

Re-price to

100% of

Medicare FFS

NA

16

Comparison of Methods: Part D Related Party Benefit Costs

Method When Available Parties Treated as:Part D Costs of Related

Party

Gain/Loss Margin of

Related Party

Method 1:

Actual CostAlways Permissible

Not

independent

Benefit expense:

cost always remain

consistent with the

PDE experience of

the plan

Declare gain/loss

margin of related

party’s Part D

benefit costs

outside the BPT, in

supporting

documentation

Method 2:

Market Comparison

(through Part D

sponsor or Related

Party)

Must demonstrate

comparison (within

5%); both contracts

need to have

sufficient costs

Independent Benefit expense Benefit expense

17

Comparison of Methods: MA Administrative Related-Party Arrangements

Method When Available Parties Treated as:

Non-benefit

Expenses of

Related Party

Gain/Loss Margin of

Related Party

Method 1:


Actual cost of

non-benefit

services

Included in plan

sponsor’s

gain/loss

margin

Method 2:

Market Comparison

Must demonstrate

comparison

(within 5%)

IndependentNon-benefit

expenses

Non-benefit

expenses

18

Comparison of Methods: PD Administrative Related-Party Arrangements

Method When Available Parties Treated as:

Non-benefit

Expenses of

Related Party

Gain/Loss Margin of

Related Party

Method 1:


Actual cost of

non-benefit

services

Included in plan

sponsor’s

gain/loss

margin

Method 2:

Market Comparison

Must demonstrate

comparison

(within 5%)

IndependentNon-benefit

expenses

Non-benefit

expenses

19

ComparabilityThe market comparison method

Which comparisons can be made to a related party medical services contract?

Compare to related party’s contract with another unrelated MA sponsor

Must also be in Medicare Advantage

For similar population and services

Existence and nature of this contract likely to be confidential, not obtainable by certifying actuary

Compare to another unrelated party provider’s contract with the MA sponsor

For similar services, must have meaningful volume, sufficient cost of services

21

22


Providers

ABC

Health Plan

XYZ

Health Plan

Narrow

Health Plan








Admin $10 $10 $10

Margin $5 $5 $5


Comparison of Methods: Medical Related Party Arrangements

Method Comparable contract Population Service Area Other requirements

Market Comparison

through Plan Sponsor

Plan sponsor contract

with an unrelated party

Medicare

population

Bid’s service

area

Comparison

performed by

plan sponsor/

certifying

actuary

Market Comparison

through Related Party

Related party contract

with an unrelated plan

sponsor

Medicare

population

No

requirement

Must receive

attestation from

related party

CMS can

request

comparison

23

Comparison Metrics

Method Comparison Metric

MA Administrative Services 5%

MA Medical Services5% or $2 PMPM,

whichever is greater

PD Benefit Costs 5%

PD Administrative Services 5%

24

25


Providers

ABC

Health Plan

XYZ

Health Plan

Narrow

Health Plan

Healthy Hospital 110% 100% X

Caring Hospital 110% 90% X

Patient Hospital 100% 100% 100%

Doctors Medical Group 100% 120% X

Physicians Medical Group 100% 100% 110%


Related Party Agreements: Comparing Reimbursement Levels

26

Related Party Agreements Satisfying Market Comparison

%FFS Reimbursement Medicare Advantage Organizations

Providers

ABC

Health Plan

XYZ

Health Plan

Narrow

Health Plan

Healthy Hospital 110% 100% X

Caring Hospital 110% 90% X

Patient Hospital 100% 100% 100%

Doctors Medical Group 100% 120% X

Physicians Medical Group 100% 100% 110%


CMS Examples: Medical Related Party ArrangementsRelated hospital provider at 105% of FFS

Method Comparison BPT Reflects: Relevant Information

Example 1: Comparison

through Related Party

Related party has

contract at 109% of

FFS (within 5%)

105% of FFS as

medical

expenses

Agreement is for the Medicare

population

Example 2: Market

Comparison through Plan

Sponsor

Plan sponsor has

contract at 108% of

FFS (within 5%)

105% of FFS as

medical

expenses

Agreement is for Medicare

population; in the bid’s service

area

Example 3:

Comparable to FFS

100% of FFS is

benchmark/

comparison

(within 5%)

105% of FFS as

medical

expenses

Actual cost method not possible

27

CMS Examples: Medical Related Party ArrangementsRelated hospital provider at 110% of FFS

Method Comparison BPT Reflects: Relevant Information

Example 4:

FFS Proxy

100% of FFS (does

not meet 5%

comparison)

100% of FFS as

medical expense

Actual cost method not possible;

no comparable agreements for

either MA sponsor or related

hospital

28

Part D Benefit Services Example

Part D Example #1 (Related Party Pharmacy)

Related Party Situation

Hospital owns the health plan. Hospital’s pharmacy is a related party to the health plan.

PBM is not a related party.

Relevant Part D instructions: Related party requirements apply to “any arrangement where the Part D sponsor does business with a related party through one or more unrelated parties, such as a pharmacy or a pharmacy benefit manager.”

Additional Requirement: Per Part D requirements, all pricing must be on pass-through basis. Therefore, contracted reimbursement levels (ingredient cost + dispensing fee) are already required to be shown on a transparent basis.

29

Part D Benefit Services Example

Part D Example #1 (Related Party Pharmacy)

Used Market Comparison through Part D Sponsor Method

MA plan also contracts with other pharmacies that are unrelated parties, via the PBM contract. Sufficient volume in the unrelated party contracts to provide a valid comparison.

Compared discount rates and dispensing fees at related party pharmacy and unrelated pharmacies

Ensured that contracted reimbursement was within 5% of reimbursement to unrelated parties.

In a past year, comparison showed that reimbursement to the related party pharmacy was not within 5% of reimbursement to unrelated parties

Discussions with hospital regarding contracted rates.

Determined appropriate adjustments to the contract, so that the comparison would be met in the projection year.

30

Pricing to Actual CostsApproaches and examples

Contracted Rates to be Reported at Actual Cost

32


Providers

ABC

Health Plan

XYZ

Health Plan

Narrow

Health Plan

Actual

Cost

Healthy Hospital 110% 100% X 90%

Caring Hospital 110% 90% X 100%

Patient Hospital 100% 100% 100% 95%

Doctors Medical Group 100% 120% X 100%

Physicians Medical Group 100% 100% 110% 100%

Dental Cap Company $5 $10 $5 $4

Revenue Requirements for Three MAOs

33


Providers

ABC

Health Plan

XYZ

Health Plan

Narrow

Health Plan








Admin $10 $10 $10

Margin $5 $5 $5



Providers

ABC

Health Plan

XYZ

Health Plan

Narrow

Health Plan


Caring Hospital $10 $44.44


Doctors Medical Group $20 $33.33

Physicians Medical Group $20 $10 $36.36

Dental Cap Company $5 $4.00 $5


Admin $10 $10 $10

Incorporate R.P. Margin $0 $8.22 $3.64

Margin $5 $5 $5


Pricing to Actual Costs

34

= $40 x 100% / 120%

Cost Sharing in Worksheet 3, Section III, Column I

Provider Reimbursed at 125% of FFS, Actual Costs are 110%

Approach Based on Related Party Method

Actual

Adjudication

Actual Cost

(Method 1)

Independent

(Method 2)

Re-Price to FFS

(Method 4)

Coinsurance in PBP 20% 20% 20% 20%

PMPM Allowed $25 $22 $25 $20

Eff. Coins Before OOP Max 20% 22.7% 20% 25%

Eff. Coins After OOP Max 19% 21.6% 19% 24%

PMPM Cost Sharing $4.75 $4.75 $4.75 $4.75

35

Estimating Costs for Hospitals - Example

CMS Cost Reports are available for each hospital, per year

Measure costs using a consistent approach by department

Audited by CMS

One approach: Map costs and charges by department to IP vs. OP

Calculate Cost to Charge Ratio

Project costs and charges to base year and contract year

Apply cost to charge ratio to billed charges to project costs

Use as a substitute for allowed amounts in the encounter data

36

MA Administrative Agreement ExampleSpecialty Company Administration of Limited Services


Specialty company is a related party to the health plan. Health plan contracts with the specialty company to administer benefits for limited services (e.g., vision services).

Neither the specialty company nor the health plan have comparable contracts with unrelated parties.

Actual Cost Method for Administrative Services applies

Specialty company provides breakdown of actual and projected non-benefit expenses vs. margin.

Actual cost of non-benefit services of the related party is entered as the non-benefit expense of the plan sponsor.

Gain/loss margin of the related party is included in the gain/loss margin of the plan sponsor.

37

Part D Administrative Services Example

Part D Example #2 (Related Party PBM)


Health plan and PBM are related parties.

Neither the health plan nor the PBM have a comparable contract with an unrelated entity.

Related party situation applies only for administrative costs; health plan does not contract with related party pharmacies.

Actual Cost Method for Administrative Services applies

PBM provides breakdown of actual and projected non-benefit expenses vs. margin.

Actual cost of non-benefit services of the related party is entered as the NBE of the plan sponsor.

Gain/loss margin of the related party is included in the gain/loss margin of the plan sponsor.

38


Part D Example #2 (Related Party PBM)

Requirement applies to all services provided by related party PBM, including (partial list from Part D instructions):

Claims processing

Network (retain and mail order pharmacy) access

Clinical services, such as Utilization Management

Formulary management

Rebate contracting

39


Part D Example #2 (Related Party PBM):

Requested that related party PBM provide breakdown of each type of administrative fee into actual / projected costs vs. gain/loss components (for base year and projection year).

Examples of fees:

Per script admin fee

Retained rebates / Rebate administration fee (PBM retains a portion of rebates). CMS considers this an administrative expense, since 100% of rebates must be reported as a part of DIR.

MTM fees

40

Documentation StandardsSupporting CMS’ review of bids

Supporting Documentation

CMS’ requirement for transparency

Related Party Declaration

Declare all agreements with related parties for medical and administrative services

Applies to the base period and the contract year

Practical Considerations

Key health plan employees supporting bid development may not be aware of all related parties

Status of related party can change over time

42

Supporting Documentation (continued)

Related Party Attestations

Needed in Market Comparison through Related Party Method (comparable to unrelated plan sponsor). Need to maintain confidentiality and avoid noncompetitive practices

Needed when related party provides actual cost or indicates that all fees are going to costs.

Certifying actuary and MA sponsor may not be able to see comparisons, but attestation must allow CMS/reviewers/auditors to view comparisons.

Need to support Market Comparison through Plan Sponsor Method

Certifying actuary and MA sponsor can provide comparisons.

43


Actual Cost Method

Need to document methodology, data, and assumptions used

Show calculations

Practical Considerations

May not be able to get information from the related party

Some costs of the related party may be directly measured (e.g., a sub-capitation); others may need to be estimated using cost reports, financials, etc.

44


Comparable to Fee-for-Service Method

Must show that it is not possible to re-price to actual costs.

Document how contract is comparable to 100% FFS

100% FFS-Proxy Method

Must show that the other methods all failed or were not possible. Must show “exhaustion” of other potential methods

Show re-pricing calculations

45

MLR and Margin

Different perspectives on gain/loss

CMS requires that BPTs reflect related party adjustments; yet this may not be the way company management measures profitability

47

Topic Related Party Adjustments Issues

CMS Review of Margins (negative margin,

profit tests)

Per BPT, after related party

adjustment

Margin could be negative if

related party subsidizing

bid

Health Plan evaluation of historical and

projected margin

Could be either before or after

related party adjustments

Difficult to target health

plan goals and meet CMS

gain/loss margin rules

Different perspectives on actual-to-expected, trend

Historical A-to-E and prospective trends shown in BPTs affected by whether and when related party adjustments apply

48


CMS Review of TrendsPer BPT, after related party

adjustment

e.g., Base year could have

related party adjustment,

contract year none

CMS Review of A-to-EPer BPTs, after related party

adjustment

Prior BPT (E) could have

related party adjustment,

current BPT (A) may not

Differences can be explained through proper supporting documentation

Different perspectives on MLR

MLR measurements on BPT may not be consistent with MLR filing

49


Medical Loss Ratio (e.g., 85% minimum)

MLR Report on a Contract

basis, no related party

adjustment

BPT MLR could differ from

actual MLR in filing

50

Providers

ABC

Health Plan

XYZ

Health Plan

Narrow

Health Plan

Benefit Cost (at contract) $105 $110 $95

Taxes and Fees (non-Income) $2 $2 $2

Other Admin, Income Taxes $8 $8 $8

Margin $5 $5 $5


Margin % 4% 4% 5%

MLR 89% 89% 88%

Providers

ABC

Health Plan

XYZ

Health Plan

Narrow

Health Plan

Benefit Cost (at contract) $105 $102 $91

Taxes and Fees (non-Income) $2 $2 $2

Other Admin, Income Taxes $8 $8 $8

Margin $5 $13 $9


Margin % 4% 11% 8%

MLR 89% 83% 85%

Without related party adjustments:

After related party adjustments:

Recap the Role of the Certifying Actuary

Identifying related parties

Actuary may not have the full picture

Should discuss related party rules with management to ensure they are not forgetting to disclose

For example:

Should express reliance on management’s related party declaration

52

Health Plan

Holding Company

Vision Capitation Co.

Comparing arrangements

Maintain clear documentation of method selected, results of any comparisons, specifics regarding incorporation into BPTs

When related party is doing the comparison themselves (confidentiality), can still provide guidance and a model/utilization benchmarks to use in their calculation, anticipating what will assist CMS reviewer the most.

Can also arrange for an independent actuary to assist the related party to maintain confidentiality and avoid conflict of interest

Ultimately, have to rely on attestations

Can make contingency plans to understand potential impact of re-pricing to cost; should communicate to principal at MA sponsor

53

Communication

Actuary’s duty is to the MA sponsor, whether employer or client, also CMS, as well as public

Duty is primarily one of communication, permitting CMS to reasonably evaluate the revenue needs of the bid through supporting documentation

Actuary should be clear about what they can and cannot measure; hence, the need for related party attestations at times

54

Thank you

Lynn Dong, FSA, MAAA

[email protected]

Scott Jones, FSA, MAAA

[email protected]

session 60 panel discussion: medicare advantage bids: how to

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