Chris Klomp joins HTN to discuss the 2027 MA Final Notice

As many of you have undoubtedly seen by now, CMS released the hotly anticipated Announcement of Calendar Year (CY) 2027 Medicare Advantage (MA) Capitation Rates and Part C and Part D Payment Policies (the CY 2027 Rate Announcement) yesterday after market close.

The Overall Expected Average Change came in at 2.48%, up from the proposed 0.09% change in the Advance Notice, primarily due to a delay in implementing additional changes to the risk adjustment model. Stocks of the major insurers have reacted favorably to this news in the Final Notice, with Medicare Advantage players trading up ~10% today.

Chris Klomp, the Director of Medicare and Deputy Administrator of CMS and Senior Advisor to HHS, joined me for a conversation about the Final Notice and its broader implications for Medicare Advantage. We chatted about the following topics:

Check out the conversation with Chris below!

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Here is a transcript of the conversation, lightly edited for clarity.

Kevin: Chris, welcome to Health Tech Nerds Radio. I know there’s a lot going on in your world these days, so I appreciate you taking the time to join us. I thought I would jump right in and set the table for the conversation.

The 2027 file notice came out last night. The expected average change came in at 2.48%, which is nearly a 2.5% increase from the 0.09% increase that was contemplated in the advanced notice. We’ve covered a lot of ground in the two months since the advanced notice came out in January, which was worse than expected and saw a negative reaction from Wall Street. It prompted, I think, 40,000-plus comments from the industry that you all have waded through over the past few months, to a final notice that seems like it’s come in slightly ahead of where the markets were expecting.

Stocks are trading up eight to ten percent over the last 24 hours since the news came out. I’d be curious to hear your context on the changes from advance to final notice, the changes you contemplated, why it ended up where it did, and perhaps how you hope it’s received by the industry on the whole.

Chris: Several things. First, I think you just saw democracy in action. As you mentioned, we received well over 40,000 comments on this one particular point of publication, from the advanced notice through the comment period. As we’ve said before, we take very seriously the comments that we receive. This is every American exercising their civil responsibility and right to comment on regulations and laws that are created. I’m grateful for that process. We learned a lot.

If I were to deconstruct what changed between the advanced notice and the final notice, obviously on the top line, the bottom line table, the effective growth rate, we saw a roughly 40 basis point increase. This is informed by additional and more recent data helping us understand underlying medical cost trends and making sure that we are being as accurate as possible.

We continue to normalize general coding risk patterns. That’s consistent with how we always pay from an accuracy perspective. And then we delayed one of our proposed considerations around updating the model itself. The reason for that is several fold, but most importantly, V28 is just in its third year of implementation right now. That has been a significant change for the industry. And I don’t just mean Medicare Advantage issuers, I mean providers who also participate and provide care for our beneficiaries alongside those plans, who are in global or sub-capitated risk arrangements. We heard loud and clear from many folks that additional time for them to reach a period of stability, to catch their breath so to speak, would be a good thing for a variety of reasons.

That idea of stability or predictability is an interesting one. As we’ve talked about before, we serve beneficiaries and we serve taxpayers. We need to be wise stewards of the resources entrusted to us. On the stability front, we define that as predictability for those who participate from a provider or a payer perspective, but stability also from the beneficiary’s perspective. Can they get the plans that they want? Do they have competition and choice in their sub-markets? Are they able to access the providers they need and want to access? Are they needing to switch because plans are exiting, or are they having a consistent, excellent experience?

We also have to balance that with long-term program sustainability. The bottom line table came in as you said, 2.48%. That’s roughly in line with GDP. That would be a reasonable or appropriate long-term growth rate for underlying healthcare costs. In practice, it’s about half of what we’ve seen of underlying medical cost trend over the last year. And through this we are sending a very loud signal, not just to Medicare Advantage payers, but to providers who care for our beneficiaries, and frankly to all segments of the healthcare economy, that the days of unlimited increases in rate must end.

We need to hold insurers and providers and health systems and others who care for our beneficiaries accountable to actually control cost, and to make sure that we are spending on care that is most beneficial for the patient, and that we’re not spending and creating profit pools on things that don’t earn their keep. Those profit pools need to go away. We need to eliminate them, and if we don’t, then this program won’t be around for the long term to serve the beneficiaries who have spent their whole lives paying into it and who expect it to be there, and not just to be there, but to be great when they turn 65 for the balance of their lives.

So we moved toward a point of stability. And then of course we did finalize our policy related to unlinked chart review. Through this, again, we are sending what we hope is an extremely loud message to all participants in the market: we will not reward risk coding games or RevCycle games. We want to reward participants who win on the basis of helping our beneficiaries lead their healthiest lives, given the resources that they have available to them. And we will continue to pay attention to this. But that’s how we get to the 2.48%. That’s what changed between the advanced notice and the final notice.

Kevin: Super helpful context. That risk adjustment point seemed like one of the bigger changes, I think it was a 2.2% improvement on that number, which drove a lot of the increase between advance and final notice. You’ve talked a lot publicly about your desire to level the playing field from a risk adjustment perspective, making sure that all players are on that level playing field. I’d be curious how you perceive the playing field today coming out of this process, for the industry and all the players at hand from a risk adjustment perspective.

Chris: We pay attention to the industry across many different dynamics. One of which is that we pay attention to different types of Medicare Advantage plans or issuers based on scale, based on which markets they participate in, what their offerings are, how robust they are. Are they new? Are they old? Are they insurgents? Are they incumbents?

We want to, and we’ve been very clear about this, Administrator Oz has been very clear about this consistently, we want to incentivize insurgents into the healthcare economy. We want them to attack profit pools that don’t earn their keep, that are not justified, where the cost outweighs the benefit of that profit pool generation.

Insurgents are really good at that. That’s the entrepreneurial mindset. That’s not always what we’ve seen in this program. The program depends on choice and competition. We need empowered, informed beneficiaries. That means price transparency, quality transparency. They’re able to select plans and select providers on the basis of providing exceptional care at reasonable costs so that they are shopping for care, they’re shopping for plans. That creates more competition, which also means you have to have stability because you have to have enough participants to create competition.

But at the same time, we want to make sure that we are not creating incentives that allow incumbents to generate margin or market share on the basis of things that don’t actually add value to the beneficiaries that they are charged to steward and serve. This policy around unlinked chart review, it’s very clear what we’re saying. Risk adjustment is a good concept. It exists for a simple reason: to ensure that a beneficiary who wishes to be covered by a particular plan is not discriminated against as a function of how sick they may be. We at Medicare sit and say, we will pay you more if a patient is sicker and we’ll pay a little bit less if they’re really healthy. On balance, you’re being fairly compensated to take that risk so that you do not adversely select against that beneficiary.

Risk adjustment should not be an ounce more or an ounce less than that, but it most certainly should not be a place of competitive advantage. That competitive advantage should entirely come as a function of how well you do helping our beneficiaries lead their healthiest lives. And that’s an area where insurgents are advantaged. They come in with fresh thinking and fresh ideas. There are no sacred cows. They’ve got all sorts of opportunity to do things differently, to work with providers differently, to help their beneficiaries, our beneficiaries, their patients, live their healthiest lives.

That’s where we want competition to exist, not in the sphere of rev cycle. That’s why the finalization of that policy is so important. I want to be abundantly clear: we were very clear about this in our release, and we’ll continue to be clear: we have finalized this policy. We will continue to look at this extremely closely, and we have many additional policy levers in our regulatory toolbox should we need them to ensure that games are not being played at this level. We want folks competing on the basis of generating exceptional cost-adjusted quality outcomes.

Kevin: There’s been a lot of conversation recently about the merits of Medicare Advantage as a program. It’s been in the crosshairs on both sides of the political spectrum. You’ve noted your strong support for Medicare Advantage on the whole. I’d be curious to hear, when you talk about that strong support, what’s the bull case in your mind? Why are you so excited about Medicare Advantage?

Chris: There are many reasons, and you’re exactly right, Medicare Advantage remains a cornerstone or bedrock component of the future of Medicare. About 54% of our 68 million beneficiaries are in a Medicare Advantage plan right now. By the way, when they enroll in a plan, they tend not to switch off. When we ask them why, it’s because they like the coverage. They tend to have a good experience. That’s a good thing. That’s stability from the beneficiary’s experience: stability of the plan, stability of how to navigate the plan, stability of the providers in that plan, stability of the benefits that they receive. These are all good things. We want this to be an excellent experience for them while being a great deal for taxpayers. That’s the balance of stability and sustainability that we’re trying to strike in our policies.

There is a principal reason why we love, and I’m going to broaden this, accountable care relationships or value-based care arrangements. Reasons one through ten all center around the same principle: accountable relationships outperform on virtually every single quality metric that we track at the Center for Medicare. This means patients lead healthier lives when they’re in a serial, long-term, accountable, value-based arrangement with the right incentives, where providers and the plans who are administering that benefit have the incentives to deliver the right care to the patient. They’re not just jamming volume through, they’re thinking about what is the right care. How do I help this patient reach their goals? How do I help them reach their full potential?

That begins to align with our mission at CMS that Dr. Oz has spoken about repeatedly: we want to unlock the full potential of every American. It’s hard to do that if you’re not healthy. We want people to be healthy so that they can reach their full potential, so that we as a country can reach our full potential. And the best way we’ve seen to do that is in an accountable relationship.

Now, I’m saying “accountable relationship” intentionally. That could be in a Medicare Advantage plan with an appropriate aligned set of provider incentives. That could be in an accountable care organization participating in Medicare Shared Savings Program, or in a successor derivative CMMI model. Either’s fine. We’ve considered ways to drive more adoption. This is a longstanding principle of CMS, this is not new with this administration. We seek to have every beneficiary in an accountable relationship.

Additionally, we have seen that Medicare Advantage plans are well positioned to provide additional benefits to beneficiaries that may not be available in original Medicare. That’s a good thing. They’re competing, and that notion of competition is so powerful, especially when a patient is equipped with information to make a choice. Because the patient wins. Competition tends to lead to improved outcomes at lower cost. We’ve seen this across our economy. We want to induce the same market principles in the Medicare program.

Additionally, we tend to see less fraud in the program. As you know, we finalized policies late last year related to skin substitutes, which we saw grow extraordinarily—and in not all, but many ways, the wrong way. Going from roughly $256 million of spend to this year projected $23 billion of spend and uptake. Interestingly, we did not see that same problem in Medicare Advantage. Why not? We had aligned incentives with the providers. They were paying attention, they were making sure that they were appropriately stewarding the program, meeting the needs of their patients, and using those products judiciously and appropriately as they were intended. So Medicare Advantage provides many benefits outside of original Medicare, which is why we’re such big fans of that program and why we’re investing in it so deeply.

Kevin: So when I hear the recent conversation about default enrollment potentially being in a Medicare Advantage plan moving forward…

Chris: And to be clear, I’m saying default enrollment potentially in an accountable relationship. That could be MA, that could be in an ACO, could be in something else. Really what I want is default enrollment in an accountable, value-based arrangement that will lead to better quality outcomes and healthier patients.

Kevin: Makes total sense. One of the other things I’ve seen recently in commentary is this discussion of whether MA is managing costs well enough in its current state today. What’s your perspective on the state of MA from a cost management and performance perspective, and where do you see that heading?

Chris: In some regards, MA is doing a good job of managing costs. But you asked the question, is MA managing costs well enough? No, categorically not.

The president has been very clear, as a core component of his great healthcare plan, that insurers must be held accountable, and that is a critical signal that we sought to send in this rate notice. We need plans to step up, and I’m not just talking to Medicare plans now, I’m talking to all plans. We need plans to step up and do a better job managing cost while ensuring that our beneficiaries continue to have an excellent experience and excellent clinical outcomes. That’s critical. The worst care, the most expensive care, is bad care. So we start with good care and then we build from there.

Why do we do that from a financial perspective? Because healthy patients not only meet their full potential, they cost less. Additionally, we are interested in our health systems and other providers working hard to manage cost. We need to not just invite but insist that hospitals and providers and health systems reexamine their cost structures. They reexamine how they are rendering care and are honest with themselves about the things that are adding value to their patients, which they should continue to do, and some of the things that may not be adding as much value but are driving up cost.

We need folks to take seriously the notion that healthcare cannot continue to grow from a cost trend perspective at twice the rate of the economy. That is not sustainable. If I saw corresponding stunningly impressive increases in the health of Americans everywhere, perhaps we could have a different conversation about that return on investment. But that’s not what we’re seeing. What we’re seeing is Americans who are sicker than they have ever been before—more than six in ten Americans with chronic disease, 74% of Americans overweight, 43% of Americans obese.

We have to do better. We have to figure out root causes of what’s causing us to be sick as a country. We need to address those. That’s the basis of Secretary Kennedy’s focus on the MAHA agenda. But we also have to control costs to make sure we’re being wise stewards, that we’re spending wisely so that healthcare can actually be affordable for all Americans. It’s one of the reasons I’m very proud of this rate notice. We sent out a rate notice that was aligned with GDP. That wasn’t actually what we were solving for, but that’s where it landed. That seems reasonable and appropriate. As a sustainable growth rate, when healthcare grows at twice the rate of GDP, three times the rate of GDP, some of the increases that we’ve seen in the past, it prices Americans out of the care that they need.

Kevin: Chris, one last question for you. You talked a little bit earlier about encouraging insurgents to come into the market. I’d be curious about your perspective for entrepreneurs thinking about building in MA today. Obviously over the last decade, MA was a hot space for healthcare innovation, a lot of entrepreneurs, investment, and new models. And then there was this question around V28, the advanced notice, has that period of time passed? Should I be building in other markets? What would be your message for folks thinking about building a Medicare Advantage business today?

Chris: The field has never been wider. Insurgents should enter. We’re open for business. This is a perfect and opportune time to come build and be an insurgent in Medicare, which, as you know, is the epicenter of healthcare. Where Medicare goes with its rates, its policies, its benchmarks, so too does the rest of U.S. healthcare. So come join, come build.

We are closing out the opportunity for gamesmanship that might disadvantage an insurgent, for example, on unlinked chart reviews and RevCycle games that we’ve just talked about, so that you can focus on the things that you do best: helping patients live their healthiest lives. Thinking about novel, creative ways to engage patients, to help them make great choices, to help them get the care they need when they need it in the most cost-effective and convenient manner possible. Those are all things that are benefited by fresh thinking.

We’ve discussed before, and I’ll mention again here, the ACCESS Model that came out from Centers for Medicare and Medicaid Innovation director Abe Sutton, a brilliant piece of work. For two reasons. Number one, it’s a payment system that pays for outcomes related to cardio, kidney, and metabolic disease. If you hit a certain threshold of a key quality indicator that we know is correlated with a healthier patient and a healthier patient population. And two, we tie that to what we know is an implicitly deflationary or hard-to-achieve price point.

You get a bifurcated response from the market. Incumbents look at that and say, “Gosh, no way am I going to hit that quality target for that price point. That’s impossible.” And then you have insurgents who show up and say, “Yeah, I think we could do that. I think that’s possible. We’re going to have to get a little bit creative. We’re going to have to invent some technology that we don’t have just yet, couple that with some services in a creative way, but I think we could hit that quality outcome. And I think we could do it for that price. It might even have a little bit left over for some margin to be incentivized to build an insurgent business.”

In that moment, we’ve created a new profit pool, but we’re doing it the right way. It’s deflationary and it’s clinically superior. It leads to healthy patient outcomes. That’s what we want. This is the opportunity to do that. We’re thinking about all sorts of ways to streamline the regulatory framework to make the market inviting for insurgents to come in and do what they do best, which is innovate and help our patients succeed.

In the process, one of two things will happen for the incumbents. They themselves will fail to innovate, in which case empowered consumers will choose against them and their profit pools will atrophy and die—or better, they will become insurgents themselves. They will disrupt their own business models, and in the process the patient wins every time. So I think there’s never been a better time. We hope that they join.

Kevin: Well Chris, that wraps this up. Appreciate you sharing the theory of the case. It’s been fun to hear the update from the final notice. Thank you for taking the time to chat with us here today. Hopefully we see you around these parts of the internet before we’re talking about 2028’s advanced notice.

Chris: Kevin, it’s great to see you. Be well.

Kevin: Likewise.