The Accountable Care Organization (ACO) model is a new Medicare option for physicians, hospitals, and other providers to share in cost-savings. ACOs represent a dramatic change in Medicare policy and an opportunity to transform care delivery and provider alignment.

The Medicare Gain Sharing Program, part of the newly enacted healthcare reform law, creates the option for healthcare providers to form ACOs. Through an ACO, providers will take responsibility for quality and overall care of their Medicare patients. Medicare will
then share with ACO providers the savings from improved quality, fewer hospitalizations, and the elimination of unnecessary costs.

Starting in 2012, the ACO model will be a nationwide option in Medicare fee-for-service (FFS). In addition to shared savings, the ACO option includes freedom of choice for Medicare beneficiaries, national quality measures, evidence-based medicine, patient-centered care delivery, advanced care coordination, and information sharing.

Because the ACO model is designed to break down old barriers for providers to work together to improve care and reduce medical costs, state Medicaid programs and private health insurers will likely join Medicare in supporting the ACO model. Medicare may give preference to ACOs that are participating in similar arrangements with Medicaid, private payers, and other third parties - that is, multi-payor ACOs.

Specifically, Section 1899 of the Social Security Act governs the new Medicare Shared Savings Program and the option for providers to form ACOs. The law was created by Section 3022 of the Patient Protection and Affordable Care Act of 2010 (PPACA). The Centers for Medicare and Medicaid Services (CMS) must implement the ACO option no later than January 1, 2012. CMS plans to release proposed rules by late 2010.

To learn more about Accounable Care Organizations, please read my primer article on ACOs in the journal American Health & Drug Benefits.

Under the Patient Protection and Affordable Care Act (PPACA) of 2010, Medicare providers, including physician groups and hospitals, will soon have the option to form Accountable Care Organizations (ACOs) to improve quality and efficiency.

ACO providers may share financial gains generated from improved clinical and economic performance, provided that quality goals and patient safeguards are met. Through future regulations, the Centers for Medicare and Medicaid Services (CMS) must implement the Medicaid ACO option no later than January 1, 2012. Proposed rules are expected by late 2010.

In this interview, Dr. Mark B. McClellan, former CMS Administrator and FDA Commissioner, discusses the extraordinary implications of the new ACO option for improving patient care and reducing unnecessary costs.

Mark is director of the Engelberg Center for Health Care Reform at the Brookings Institution, a influential think tank in Washington, DC. The Engelberg Center is engaged in several interesting projects.

To read this interview in the journal American Health & Drug Benefits, click here (opens PDF).

Comparative Effectiveness Research holds extraordinary implications for healthcare stakeholders, notably the pharmaceutical, biotechnology, and medical technology industries; patients; physicians; hospitals; the federal Medicare program; state Medicaid programs; and health plans. In addition to guiding and hopefully improving day-to-day decisions by clinicians and patients, Comparative Effectiveness Research will be extraordinarily influential in coverage and reimbursement decisions.

Here is a quick primer on the massive new Comparative Effectiveness Research program in the U.S., including major changes enacted in the new health reform law.

Comparative Effectiveness Research Defined:

Comparative Effectiveness Research (CER) means research evaluating and comparing health outcomes and the clinical effectiveness, risks, and benefits of two or more medical treatments, services, or items (e.g., drugs, biologics, devices).

More specifically, this includes comparisons of:

• Prescription drugs and biologics
• Medical devices
• Diagnostic tests and diagnostic tools
• Surgical procedures
• Protocols or guidelines for patient treatment
• Care management practices
• Prevention activities

Conceptually, CER looks at medical interventions across the range of prognostic, preventive, diagnostic, therapeutic, rehabilitative, and palliative care. Health policy experts have increasingly proposed that CER should also assess the effectiveness of models or systems of health care delivery. Therefore, there is a degree of interaction and overlap between CER and health services research.

CER studies may compare similar treatments - like comparing several drugs in a therapeutic class - or compare clinical effectiveness of different approaches, like comparing a drug and a surgical procedure for the treatment of the same condition.

CER employs a variety of research methods, including randomized controlled trials, meta-analyses, and observational cohort analyses. In addition to conducting the clinical effectiveness and comparative effectiveness research itself, CER also involves building of the necessary infrastructure (data, research methods, staff, training, etc.). To meet the demands of CER, researchers are developing and testing new methodologies and data sources.

To have any real value, the results of CER must be actionable, with findings effectively translated for and disseminated to the full range of decision makers.

Challenges and Controversies in Comparative Effectiveness Research:

The goal of CER is to increase our collective knowledge of what works and to improve decision making by physicians, patients, purchasers, and payors. However, by its very nature and because of the aggresive use of CER in the UK and other countries, CER raises many difficult or controversial questions. Here are a just a few examples:

1. Should CER look only at clinical effectiveness, with eye to giving physicians and patients more information to guide their decisions?
2. Should CER also look at cost effectiveness and cost-benefit analysis?
3. Should CER influence or drive coverage and reimbursement decisions by Medicare and other government health programs?
4. Who should set research priorities? How should research priorities be set? What are the research priorities?
5. Since many studies look at large populations, how do we ensure research reflects special populations and doesn't unintentionally discriminate against sub-groups? For example, if a drug, device, or surgical procedure works best for 80% of patients, what about the other 20%?
6. How should CER guide physician decision making or should government and payor policies be used to incent or require physicians and other providers to practice consistent with CER findings?

In a new issue brief, Gene Rich, MD from Mathematica Policy Research and Elizabeth Docteur, MS from the Center for Studying Health System Change discuss key challenges to successful implementation of the large and ambitious federal CER program. They explain how resolution of these challenges "may prove critical to the future role of this research in U.S. health care."

Comparative Effectiveness Research in Other Countries:

Here is an interesting new comparison on the Use of Comparative Effectiveness Research in Drug Coverage and Pricing Decisions in Denmark, England, France, Germany, the Netherlands, and Sweden.

Comparative Effectiveness Research Prior to 2009:

In the U.S., federally sponsored Comparative Effectiveness Research has been conducted largely by the HHS Agency for Healthcare Research and Quality (AHRQ). The bulk of the AHRQ managed CER is conducted through university-based research centers under contract with AHRQ.

Prior to 2009, the AHRQ Effective Health Care Program spent a modest $15-$30 million annually. The AHRQ Effective Health Care Program was established under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA).

AHRQ posts a wealth of reader-friendly information at www.effectivehealthcare.ahrq.gov.

Expansion of Federal Comparative Effectiveness Research in 2009:

In 2009, as part of the ARRA (Recovery Act), Congress appropriated $1.1 billion for comparative effectiveness research - $300 million for the Agency for Healthcare Research and Quality (AHRQ), $400 million for the National Institutes of Health, and $400 million for allocation at the discretion of the HHS Secretary.

Congress created a Federal Coordinating Council through which various federal agency heads could set CER priorities. Under a federal contract, an Institute of Medicine (IOM) committee recommended 100 priorities for CER.

HHS' latest status report on Recovery Act spending details how AHRQ, NIH, and the Secretary's office are using the $1.1 billion.

Major Changes to Federal Comparative Effectiveness Research in Health Reform Law:

In the new federal health reform law - Patient Protection and Affordable Care Act (PPACA) - Congress created several major changes to the federal Comparative Effectiveness Research program.

Starting October 2010, a new Patient Centered Outcomes Research Institute (PCORI) will be responsible for overseeing the federal comparative effectiveness research program. PCORI will set the national CER agenda and conduct research through contracts with federal agencies and grants and contracts with universities and researchers.

PCORI will operate as federally funded quasi-independent non-profit organization. The PCORI 19-member governing board will have 17 members appointed by Comptroller General of the US (head of the Government Accountability Office, an agency of Congress) plus directors AHRQ and NIH. The Comptroller General will designate the board chair and vice chair. Congress disbanded the Federal Coordinating Council for CER.

Patient Centered Outcomes Research Institute has a a very broad mission in the law:

Assist patients, clinicians, purchasers, and policy-makers in making informed health decisions by advancing the quality and relevance of evidence concerning the manner in which diseases, disorders, and other health conditions can effectively and appropriately be prevented, diagnosed, treated, monitored, and managed through research and evidence synthesis that considers variations in patient subpopulations, and the dissemination of research findings with respect to the relative health outcomes, clinical effectiveness, and appropriateness of medical treatments, services, and items.

The actual research will be delegated by PCORI to AHRQ and NIH. AHRQ and NIH, in turn, will contract out work to universities and research centers.

The Patient Centered Outcomes Research Institute will use a variety of expert panels. To help to ensure rigor of research methods, this includes a 15-member Methodology Committee appointed by the Comptroller General.

By law, PCORI is required to use open, transparent processes for decision making and include peer review. Wide, fast dissemination of research finding is also required. AHRQ will be responsible for translation and dissemination of evidence from CER to patients, clinicians, and other decision makers.

Expect to see federal officials, particularly the Obama Administration, using terms like "patient-centered research" instead of comparative effectiveness.

Permanent Funding Stream for Comparative Effectiveness Research:

PPACA, the health reform law, establishes a new, permanent funding stream for CER that, once fully implemented, will generate about $600 million annually for PCORI research priorities.

Specifically, health plans and self-insured employers (via TPAs) must pay a new federal tax of $2 per person they insure, generating $300 million or more each year starting in FY 2013. Another $150 million will come annually from Medicare. Finally, Congress also appropriated $50 million in FY 2011 and $150 million annually from FY 2012 through FY 2019. In effect, PCORI will also have unused ARRA CER funding at its disposal.

Federally mandated rebates for prescription drugs in Medicaid were expanded significantly - by $38 billion - under the new health reform law, with extraordinary financial, administrative, and compliance implications for pharmaceutical manufacturers, Medicaid health plans, and state Medicaid programs.

In a new journal article, I explain changes to the Medicaid drug rebate program and implications for drug makers, health plans, and states. The article appears in the June 2010 issue of the peer-reviewed journal American Health & Drug Benefits.

The article provides a primer on the basics of the Medicaid drug rebate program, including Average Manufacturer Price (AMP), Best Price, federal rebate agreements with drug manufacturers, supplemental rebates, Preferred Drug Lists (PDLs), reporting of drug prices by pharma and biotech companies, and drug utilization reporting by state Medicaid agencies.

The article then summarizes the major changes effective for 2010, notably (1) increased minimum federal rebate percentages for brand and generic drugs and (2) extension of federallly mandated minimum drug rebates to Medicaid drug utilization in Medicaid managed care organizations. It concludes with a brief discussion of implications for states, drug makers, and health plans.

The latest issue of the journal American Health & Drug Benefits includes a valuable mix of studies and articles on economic, regulatory, and clinical issues of particular interest to payors, purchasers, and policymakers.

Obesity: Effective Treatment Requires Change in Payers' Perspective by Rhonda Greenapple, MSPH and Jackie Ngai, MS, with Stakeholder Perspective by Jeff Januska, PharmD.

Health Insurance Premium Increases for the 5 Largest School Districts in the United States, 2004-2008 by John R. Cantillo, MBA, with Stakeholder Perspective by F. Randy Vogenberg, PhD, RPh.

Evolving Trends in Insulin Delivery: In Pursuit of Improvements in Diabetes Management by Firas Akhrass, MD; Nancy Skinner, RN, CCM; Kimberly Boswell, MD; and Luther B. Travis, MD, with Stakeholder Perspective by James V. Felicetta, MD.

Healthcare Costs Associated with Switching from Brand to Generic Levothyroxine by Michael Katz, PharmD; Joseph Scherger, MD, MPH; Scott Conard, MD; Leslie Montejano, CCRP; and Stella Chang, MPH, with Stakeholder Perspective by Michael S. Jacobs, RPh.

Pay-for-Performance Initiatives: Modest Benefits for Improving Healthcare Quality by Amit Sura, MD, MBA and Nirav R. Shah, MD, MPH, with Stakeholder Perspective by Steven T. Kmucha, MD, JD.

Pharmacogenomics and Drug Development by Michael F. Murphy, MD, PhD.

First Anti-Inflammatory Generic Drug Promising New Therapy for Diabetes by Dalia Buffery, MA, ABD.

The Cardiovascular Pipeline: ACC 2010 Features Late-Stage Drugs by Wayne Kuznar.

NCCN Panel Debates the Economics of Cancer Care by Caroline Helwick.

PET Scans Not Recommended for Most Patients with Breast Cancer: Potential New Controversy in Breast Cancer Testing by Caroline Helwick.

American Health & Drug Benefits:

American Health & Drug Benefits is available in print and online at www.AHDBonline.com. AHDB is a peer-reviewed journal for 30,000 decision makers in health plans, prescription drug plans, PBMs, the federal Medicare program, state Medicaid programs, and the pharma, biotech, and medical device industries. Kip Piper is health policy editor of American Health & Drug Benefits.

Creating a wellness-based healthcare system is the focus on a new series of articles published by American Health and Drug Benefits, a peer reviewed journal. They cover a wide spectrum of topics on how to build and support prevention and wellness, particularly for chronic conditions. The ideas and information are particularly timely given the array of prevention and wellness initiatives in the Patient Protection and Affordable Care Act (PPACA):

The 5 Eras of Healthcare Finance: Wellness as a Clinical Model by Thomas McCarter, MD, FACP; Farrah N. Daly, MD, MBA; and Keri Cooper

Epidemiology and Impact of Chronic Diseases: The Promise of Prevention by Nirav R. Shah, MD, MPH

Bending the Curve, Changing Provider Organization: Implications for Wellness-Based Healthcare by Lawton Robert Burns, PhD, MBA

Wellness-Based Healthcare: Economic Incentives and Benefit Design by Gene Reeder, RPh, PhD

Wellness-Based Healthcare Policy: Medicare, Medicaid, and Private Insurance by Kip Piper, MA, FACHE

FDA Policies and Wellness-Based Healthcare: Approving and Paying for Prevention by Scott Gottlieb, MD

The Diabetes Ten City Challenge: Value-Based Benefit Design for Wellness-Based Care by Toni Fera, BPharm, PharmD

The Role of Wellness for Large Corporations: Trends and Models by Wayne M. Lednar, MD, PhD

Employers and a Culture of Health by Alberto M. Colombi, MD, MPH

Healthcare Reform: Impacts on Business by F. Randy Vogenberg, RPh, PhD

Pharmaceutical R&D Strategy and the Transition to Personalized Healthcare Planning by Michael F. Murphy, MD, PhD

The Role of Health Plans in Prevention and Wellness by Gary M. Owens, MD

Patient Engagement: From Medication Adherence to Health and Wellness by James T. Kenney, Jr, RPh, MBA

The Geisinger Model: Research Is a Core Asset by
Nirav R. Shah, MD, MPH; J.B. Jones, PhD, MBA; and Walter F. Stewart, PhD, MPH

Click here to read or download the above collection on Wellness-Based Healthcare System of Chronic Diseases: Prevention, Intervention, and Innovation (PDF).

Kip Piper is health policy editor of American Health and Drug Benefits. The journal's 30,000 subscribers include decision makers in health plans, drug plans, Medicare, and Medicaid.

An interesting new report assesses a variety of medical malpractice reforms. The study synthesizes the evidence or theoretical predictions regarding several leading medical malpractice reform ideas.

The report synthesizes published evidence on 8 reforms widely used by states:

• Caps on non-economic damages
• Pretrial screening panels
• Certificate of merit requirements
• Attorney fee limits
• Joint and several liability rule reform
• Collateral source rule reform
• Periodic payment
• Statutes of limitation or repose

These reforms are evaluated based on their effects on frequency and cost of malpractice claims, medical liability system overhead costs, health care providers' liability costs, defensive medicine (including utilization and spending), supply of health care services (including physician supply and patient health insurance coverage), and quality of care.

The report also reviews 6 other, more innovative but largely untested medical malpractice reforms:

• Schedules of non-economic damages
• Health courts
• Disclosure and offer programs
• Safe harbors for physician adherence to evidenced-based clinical practice guidelines
• Subsidized reinsurance that is made conditional upon meeting particular patient safety goals
• Enterprise medical liability

Based on theoretical predictions, the authors suggest that most of these latter reforms are promising enough to merit demonstrations.

The study was commissioned by the Medicare Payment Advisory Commission (MedPAC) and produced by Michelle M. Mello, JD, PhD, professor of law and public health at the Harvard School of Public Health and Allen Kachalia, MD, JD, assistant professor at the Harvard Medical School and medical director for quality and safety, Brigham and Women's Hospital.

The Medicare Payment Advisory Commission (MedPAC) has released its Medicare payment recommendations to Congress for 2011. In addition to specific recommendations for payment updates for fee-for-service providers and Medicare Advantage plans, MedPAC's report includes interesting information and analysis on spending trends, consequences of rapid spending on Medicare and the overall health care system, and the process of assessing payment adequacy.

MedPACs informative, 381-page report includes detailed Medicare reimbursement recommendations for:

• Inpatient hospital services (Inpatient Prospective Payment System or IPPS)
• Outpatient hospital services (Outpatient Prospective Payment System or OPPS)
• Physician services
• Ambulatory surgical centers
• Outpatient dialysis services
• Hospice services
• Post-acute care providers: Skilled nursing facility services, home health services, inpatient rehabilitation facility services, and long-term care hospital services
• Medicare Advantage plans (Medicare Part C)

The report also includes:

• Status report on the Medicare Part D prescription drug program.
• Comparison of quality among Medicare Advantage plans and between Medicare Advantage and fee-for-service Medicare.

To read or download the full report, click here (PDF). To select specific topics in the report, click here.

The Centers for Medicare and Medicaid Services' Office of the Actuary (CMS/OACT) has released its projections of U.S. health care spending for the ten years 2010 through 2019, with premliminary estimates of 2009 health spending. The projections, released each year around this time, offer a fascinating, detailed look at patterns and trends in public and private health spending across programs and provider types.

Health Care Spending in 2009:

In 2009, National Health Expenditures (NHE) is projected to have reached $2.5 trillion, up 5.7 percent from 2008. This compares to 1.1 percent GDP decline in 2009. Health spending grew by a slow rate of 4.4 percent in 2008.

The health care share of GDP is expected to jump from 16.2 percent of GDP in 2008 to 17.3 percent in 2009 - the largest one-year increase in history.

Medicare, Medicaid, and Private Health Insurance in 2009:

In 2009, Medicare was projected at $507.1 billion, a 8.1 percent increase over 2008. Medicaid spending is estimated at $378.3 billion (federal and state funds), an increase of 9.9 percent.

The fast grow in Medicare and Medicare compares to continued slow growth in spending on private health insurance premiums, again largely due to the poor economy and unemployment. CMS projects spending on private health insurance premiums at $808.7 billion in 2009, up 3.3 percent from 2008.

Hospital, Physician, and Prescription Drug Spending in 2009:

In 2009, hospital spending increased by 5.9 percent to $760.6 billion (inpatient and outpatient). Physician and clinical services spending is expected to have reached $527.6 billion or a 6.3 percent increase in 2009. Note that in 2008 hospital and physician spending increased at more moderate rates of 4.5 percent and 5.0 percent, respectively.

Prescription drug spending increased by an estimated 5.2 percent, for total of $246.3 billion in 2009. Part of this increase was driven by higher use of antiviral drugs. Political perceptions and grandstanding notwithstanding, drug spending continues to grow more slowly than other, much larger components of health spending and has declined as a proportion of total health costs.

Projected Health Care Spending in 2010:

Assuming that Congress stops the 21.3 percent cut in Medicare physician payment rates required under the Sustainable Growth Rate (SGR) provisions of current law, total U.S. health care spending is projected to increase by 4.7 percent in 2010. If Congress fails to stop the physician rate cuts, overall NEHs would grow by a more modest 3.9 percent. Fixing SGR could easily cost over $300 billion but a fix is likely, especially given the enormity of the cuts and fact this is an election year.

Private health care spending in 2010 is projected to grow by 2.8 percent because of declining private health insurance enrollment because of high unemployment and the expiration of federal subsidies for COBRA coverage.

Out-of-pocket spending is expected to have slowed from 2.8 percent in 2008 to 2.1 percent in 2009, reaching $283.5 billion in 2009. The recession slowed the ultization of medical services, thereby slowing growth in out-of-pocket spending on co-payments and deductibles.

Ten Year Projection Through 2019:

For 2010 through 2019, the CMS team of actuaries and economists project:

Not surprisingly, public sector spending on health care is projected grow faster on average than private spending for 2009 through 2019. Average annual growth rate of 7.0 percent for taxpayer financed health care versus 5.2 percent for private spending (by employers and individuals).

Public health care programs (Medicare, Medicaid, CHIP, VA, TRICARE, et al) will account for half of all health spending by 2012.

By 2019, CMS Office of the Actuary projects that U.S. health spending will reach $4.5 trillion or about 19.3% of the economy as measured by GDP. (Yikes!)

Learn More About Health Spending Projections:

The CMS Office of the Actuary projections for U.S. health spending are nicely summarized in a new article in Health Affairs. To read the article, click here (PDF).

To learn more, check out CMS' projections, historical tables, and methodology here.

Payment reform is an integral part of national and state-based health reform efforts. Indeed, payment reform is essential to moving from quantity-based reimbursement to a performance-based health care system. That is, moving from fee-for-service to fee-for-value. Payment innovations, such as global payment, are designed to reward efficiency and higher quality, while supporting providers as they invest in patient-centered models of care.

Massachusetts, a leader in health policy innovation, is exploring global payment concepts in an effort to rein in costs and improve care coordination and quality. The Massachusetts Medicaid Policy Institute (MMPI) has released a new report on global payment in the Medicaid context.

The report, prepared by Mark Heit of Sellers Dorsey and Kip Piper of Health Results Group, assesses global payment options while addressing the concerns of applying the innovative payment mechanism to MassHealth, the Massachusetts Medicaid program.

To read the report, click here (PDF).

Global payments have been recommended for public and private payors by the Commonwealth's Special Commission on Health System Payment and the Massachusetts Health Care Quality and Cost Council.

The MMPI report was funded through a grant from Blue Cross Blue Shield of Massachusetts (BCBSMA). BCBSMA is implementing global payments with select hospitals and physician groups.

The Massachusetts Medicaid Policy Institute is an independent and non-partisan source of information about the Massachusetts Medicaid program. Learn more at www.massmedicaid.org.

A series of new articles from the journal American Health and Drug Benefits address key issues in stroke prevention and management, with a special focus on transient ischemic attacks. A transient ischemic attack (TIA), a transient stroke that lasts only a few minutes, can be a warning sign that a person is at risk for a more serious, debilitating, and potentially deadly stroke.

Many strokes can be prevented by heeding the warning signs of TIAs, a carotid ultrasound test, and treating underlying risk factors (e.g., smoking, high blood pressure, obesity, and high cholesterol). Unfortunately, our health care system under diagnoses and under treats patients at risk for stroke, leading to preventable deaths and disabilities and significant costs, particularly for Medicare and Medicaid.

The articles are based on presentations given at a symposium earlier this year on stroke prevention and treatment strategies:

Epidemiology of Stroke:

Nirav R. Shah, MD, MPH discusses stroke as the third-leading cause of death in the U.S. and a crushing burden on patients, families, the healthcare system and the economy. Dr. Shah gives an overview of the two main types of stroke, ischemic and hemorrhagic, as well as describes typical patients. He highlights areas of stroke and TIA incidence throughout the U.S., as well as the average Medicare cost in per region. Dr. Shah is assistant professor of Medicine, New York University School of Medicine, and a researcher and clinical investigator, Geisinger Health System, Danville, PA.

TIA and Stroke: Pathophysiology, Management, and Prevention:

Mitchell S.V. Elkind, MD, MS explores the risk factors for both TIA and stroke as well as how advances in imaging techniques have enhanced the understanding of stroke and called into question the traditional definitions of the difference between TIA and stroke. These advances have also led to new concepts of managing stroke, and have, in turn, led to new advances in therapies, with several new compounds now in clinical trials. Dr. Elkind is associate professor of neurology, and associate chairman for research and training, Columbia University.

An Actuarial Analysis of TIA and Recurrent Stroke Costs to Commercial Payers and Employers:

Kathryn Fitch, RN, MEd, examines the link between TIA and stroke and the costs to health plans and employers. Ms. Fitch outlines the risk factors for key populations and underscores the overall costs to employers and insurers for both primary and secondary strokes and TIA. She concludes that educating patients about risk and implementing stroke prevention initiatives can dramatically reduce the exposure of employers and insurers to these conditions. Ms. Fitch is a principal and healthcare management consultant at Milliman and based in New York.

TIA and Recurrent Stroke Prevention Practices: Current and New Developments:

Robert J. Adams, MS, MD looks at the gaps in the U.S. healthcare system in its approach to TIA and ischemic stroke. Dr. Adams concludes that these gaps result in barriers to the delivery of proper stroke management and prevention. He examines the unresolved issues of stroke prevention and management, as well as the place of stroke in the disease pantheon in the U.S. Unlike diabetes or heart disease, stroke does not receive its due attention as the third largest killer despite its enormous financial and human toll. Dr. Adams is a professor of neuroscience; director, South Carolina Center of Economic Excellence; and director, MUSC Stroke Center, Medical University of South Carolina.

Care Management for TIA and Stroke Patients: Riding the Quality Improvement Wave:

Barbara Lennert, RN, BSN, CRRN, MAOM connects the quality improvement movement to the problem of stroke management and discusses how many quality-focused organizations still do not see stroke and stroke prevention as key concerns. Ms. Lennart asserts that while there is widespread agreement on the seriousness of stroke and TIA, there is also agreement that these diseases are not taken seriously enough by health plans and quality / safety groups leading to inadequate attention to prevention and care. Ms. Lennart is director of quality improvement at Xcenda, part of the AmerisourceBergen Specialty Group.

Healthcare Reform and Public Programs: Opportunities for TIA / Recurrent Stroke Prevention:

Kip Piper, MA, FACHE links stroke prevention and management to health policy changes underway as a result of health reform, particularly as they relate to Medicare and Medicaid. These two programs provide valuable models as to how to include stroke care in policy. As health reform moves forward there are risks that stroke prevention and management may be left out of the equation. Mr. Piper insists that it is critical to ensure that elements of health reform are aligned with stroke prevention, care, and management.

Integrating Patient-Centered Care and Clinical Support: A New Research Paradigm:

Nirav M. Shah, MD, MPH explains how a "smart" electronic health record (EHR) can increase efficiency and substantially improve outcomes in the prevention and care of stroke. Dr. Shah describes how EHRs can identify and target risk factors and help modify patient behavior by allowing shared decision-making, thus improving outcomes. Dr. Shah and his colleagues at the Geisinger Health System have developed one of the nation's most sophisticated and flexible health information platforms to support patient care and clinical research.

TIA and Recurrent Stroke: The Case for Prevention in Working Populations:

Alberto M. Colombi, MD, MPH addresses the importance of ensuring that working populations are included in programs that focus on prevention and management of cerebrovascular diseases. With more and more people delaying retirement, government and employers must find ways to confront stroke and TIA proactively through a broad range of health programs that will reduce costs and improve outcomes among older working populations. Dr. Colombi, a top thought leader in health and productivity management (HPM). is corporate medical director, PPG Industries

For all the articles in a single PDF, click here.

Kip Piper is health policy editor for American Health and Drug Benefits, a peer review journal with 30,000 subscribers. Issues are available at www.ahdbonline.com.

Here are articles from the latest issue of American Health & Drug Benefits. AHDB is a peer-reviewed journal for 30,000 decision makers in health plans, PBMs, Medicare, Medicaid, and the pharma and biotech industries:

June - July 2009 Issue:

Applying Evidence for Medical Technologies: Closing the Gap between R&D and Decision Maker Need
Interview with Sean R. Tunis, MD, MSc

The Working Patient with Cancer: Implications for Payers and Employers
By Grant D. Lawless, BSPharm, MD, FACP

Lower Copay and Oral Administration: Predictors of First-Fill Adherence to New Asthma Prescriptions
By Zackary Berger, MD, PhD; William Kimbrough, MD; Colleen Gillespie, PhD; Joseph A. Boscarino, PhD, MPH; G. Craig Wood, MS; Zhengmin Qian, MD, PhD; J. B. Jones, PhD, MBA; and Nirav R. Shah, MD, MPH

Use Pattern and Off-Label Use of Atypical Antipsychotics in Adults with Bipolar Disorder, 1998-2002
Jeffery A. Demland, MS; Yonghua Jing, BPharm, PhD; Christina M. L. Kelton, PhD; Jeff J. Guo, BPharm, PhD; Hong Li, MPH, PhD; and Patricia R. Wigle, PharmD

Biosimilars Policy Forum: Perspectives on Safety and Efficacy of Future Products
By F. Randy Vogenberg, RPh, PhD

Payer Perspectives on Healthcare Reform
By Peyton Howell, MHA; Gene Reeder, RPh, PhD; and Timothy S. Regan, BPharm, RPh, CPh

Prioritizing Healthcare Resources to Keep the Baby Boomers Out of Nursing Homes
By Robert E. Henry

The View from Washington: Healthcare Reform
By John Gorman

Read Current and Past Issues:

American Health & Drug Benefits is available in print and online at www.AHDBonline.com. To view the current or past issues or download in PDF format, click here.

AHDB also published web exclusives, available for reading here.

Kip Piper is health policy editor of American Health & Drug Benefits.

The incoming leadership at the U.S. Department of Health and Human Services (HHS) face a number of serious management challenges. These challenges, recently identified by the Office of the Inspector General (OIG), will require close, sustained attention by the Secretary's Office and the agency heads, particularly at CMS and FDA.

The nominees for Secretary and Deputy Secretary - Tom Daschle and Bill Corr, respectively - are wise choices, especially given President-elect Obama's policy perspective and strong interest in national health reform. They are smart, seasoned policy gurus with strong relationships on the Hill. However, as the Obama Administration populates the agencies with appointees, the White House and HHS leadership should seriously consider the need for strong executives and senior management types for top positions at agencies like CMS, FDA, CDC, and NIH. Yes, they will need requisite policy and technical expertise, but at the agency level management savvy should be a priority.

The reason is simple. The existing management challenges certainly require attention. Further, the ultimate success of the Obama Administration's health care agenda may well depend on fixing these problems. Also, the HHS Secretary's Office and the new White House Office of Health Reform will have their hands full with health reform legislation, Medicare fixes, and FDA legislation. And the White House and HHS leadership will need strong executives to effectively implement the range of major, complex new policies expected in 2009 and 2010. The Democrats have a fairly deep bench when it comes to policy wonks, researchers, and academics generally. Their bench for executives and managers is relatively thin - but they could look within the agencies themselves and in state government for management talent friendly to the Administration's policy views.

Here is the OIG's list of top management challenges at HHS:

Oversight of Medicare Part D Prescription Drug Benefit:

Medicare Program Integrity:

Integrity of Medicaid and State Children's Health Insurance Program:

Quality of Care:

Emergency Preparedness and Response:

Oversight of Food, Drugs, and Medical Devices by FDA:

Grants Management:

Integrity of Information Systems and the Implementation of Health Information Technology:

Ethics Program Oversight and Enforcement:

Historically, traditional payment policies - coupled with lax oversight by regulators, weak leadership from many corners of the hospital and physician communities, and an uninformed, reverential public - have served to perpetuate (sometimes even reward) the use of unsafe practices and antiquated technologies in the hospital industry. This, in turn, resulted in a frightening number of adverse events - instances where patients are harmed by medical care. The consequences are tens of thousands of deaths and millions of injuries - the vast majority quite avoidable.

Fortunately, reduction of adverse events is now a priority. This is led by new payment and reporting policies by Medicare and some state Medicaid programs, influential players like IHI and the Leapfrog Group, the Hospital Quality Alliance, and a growing demand for disclosure of hospital and physician performance. Through realigned payment policies, public reporting of adverse events, and readily available best practices, hospitals are being given powerful new incentives to use safer practices.

Key Issues in Adverse Event Reporting by Hospitals:

The HHS Office of the Inspector General (OIG) has identified key issues affecting reporting of adverse events in hospitals:

The OIG believes we are finally "on the threshold of accelerated progress" in reducing the incidence of adverse events in hospitals. Yeah, their optimism is heavily couched but there has been some genuine progress. The OIG identifies a series of strategies that could hasten this.

For the OIG report on key issues in reporting and reducing adverse events in hospitals, click here (PDF).

State Requirements for Reporting Adverse Events:

Today, 26 states now have adverse event reporting programs. The Institute of Medicine (IOM), which supports mandated reporting, says reporting helps hold individual hospitals accountable for performance while providing information to improve patient safety and save lives. States vary somewhat by the list of reportable events and criteria for identifying reportable events. Most of the 26 state systems focus on adverse events in hospitals but some also require or support reporting in other care settings.

Most states told the OIG that "hospitals do not always report when adverse events occur." Underreporting is apparently common and probably substantial. To encourage better reporting, states have implemented various strategies. For example:

For the OIG report on state reporting programs, click here (PDF).

To aid the incoming 111th Congress and Obama Administration, the Congressional Budget Office (CBO) released a 235-page report outlining 115 budget options for health care reform. The report catalogs most of the hottest legislative ideas on Capitol Hill, with useful background information and scores of costs and savings. Here's the list of reform ideas in the report:

The Private Health Insurance Market:

The Tax Treatment of Health Insurance:

Changing the Availability of Health Insurance Through Existing Federal Programs:

The Quality and Efficiency of Health Care:

Geographic Variation in Spending for Medicare:

Paying for Medicare Services:

Financing and Paying for Services in Medicaid and State Children's Health Insurance Program:

Premiums and Cost Sharing in Federal Health Programs:

Long-Term Care:

Health Behavior and Health Promotion:

Serious and costly performance problems riddle U.S. health care. Because of overuse, under use, and misuse of health care, researchers at the Juran Institute and elsewhere estimate that about 30 percent of health care costs are generated by poor quality. Therefore, poor quality medical care will cost about $720 billion in 2008 (30% of $2.4 trillion).

Poor quality also reduces productivity. For every dollar of health care spending caused by poor quality, poor care costs an estimated 50 cents in lost productivity. When applied to the $822 billion in care provided through employer-sponsored insurance, this translates to an additional $123 billion in costs.

A recent study by the Health Research Institute at PricewaterhouseCoopers estimates that wasteful health care spending costs $1.2 trillion annually. Analyzing findings from a wealth of published studies, the PwC researchers looked at the cost of waste from clinically inappropriate care and overt errors, individual behaviors leading to costly health problems, and antiquated operational processes that add costs without providing any value.

Making matters worse, research on the care patients receive from physicians, hospitals, and other providers paints a frustrating, even scary picture. For example, studies conducted by the respected RAND Corporation show that Americans receive clinically inadequate or inappropriate care at shockingly high rates.

Specifically, RAND's research shows that acute care for insured adults is appropriate only 53.5 percent of the time on average. In other words, about 46 percent of acute care is clinically incorrect. Similarly, about 43.9 percent of chronic care and 45.1 percent of preventive care is inappropriate according to accepted medical standards. Children receive 68 percent of recommended care for acute medical problems, 53 percent of recommended care for chronic medical conditions, and 41 percent of recommended preventive care.

The bottom line is health care - whether for adults or children - is inappropriate or unnecessary about half the time. Basically, it's a coin flip.

Root Causes of Poor Quality, High Costs:

Ultimately, three immutable laws of economics explain the underlying causes of this poor performance:

1. Price is what you pay but value is what you get:

Taking a page from Warren Buffet's playbook, buyers of health benefits must focus on value, not price. Price is an important part of the equation but meaningless if you don't know the value of what you are receiving for that price. Unfortunately, in health care we obsess on unit prices. In no other marketplace or domain of life do Americans - corporations, consumers, federal and state policymakers, news media - pay so much attention to price and so little to value.

2. You get what you pay for:

Today, we pay for quantity, not quality. Poor performers are sustained and rewarded. The best performers are financially penalized and professionally demoralized. The consequences are all too obvious.

3. You can't fix what you can't see:

In sharp contrast to virtually every other industry, health care is highly opaque. American health care is full of decision makers - consumers, physicians, and other providers, health plans, public officials - who lack the information needed to make decisions.

Five Steps to Higher Performance:

The problems are daunting but solvable. To improve the quality and cost effectiveness of health care delivery, purchasers and payors must tightly focus on strategies to expect, measure, disclose, reward, and support results:

1. Expect Results:

2. Measure Results:

3. Disclose Results:

4. Reward Results:

5. Support Results:

Support the infrastructure and processes essential to results-driven health care. These include:

More purchasers and payors are moving away from simplistic cost-driven drug benefit designs to formularies and cost sharing based on value. The impact of value-based drug benefit designs on manufacturers will depend on how quickly individual firms adapt their business thinking and communications strategies.

Until recently, the path to success for a drug manufacturer was based largely on product novelty, physician-centric marketing, and revenue strategies balancing unit prices and concessions against formulary position.

To maximize market share and margins in the world of value-based drug benefit designs, drug manufacturers will need to:

(1) Demonstrate the clinical and economic case for each product and each therapeutic class with an indication,

(2) Build absolute and comparative evidence on a continuous basis,

(3) Develop new value-based pricing models and market partnerships, and

(4) Communicate far more effectively with public and private payors.

For many firms, this will require a significant, even scary change in thinking and tactics; payor-centric communications; comfort with a massive increase in transparency; and a greater willingness to partner. Therefore, while the financial risks of moving to a value-based world are daunting, ultimately the greatest challenges are intellectual.

Value-based drug benefit designs will pose the greatest challenges to manufacturers with product lines (or pipelines) dominated "me too" drugs; rigid, risk-adverse organizational silos; and out-dated, prescriber-centric communications.

The latest issue of the American Journal of Managed Care has several interesting articles on diabetes, demonstrating several opportunities to improve outcomes and reduce costs:

How Managed Care Organizations Contribute to Improved Diabetes Outcomes: Patricia Salber, MD, chief medical officer and SVP at Universal American, a large Medicare health and drug plan, outlines how MCOs are improving outcomes for patients with diabetes.

Diabetes Complications Severity Index and Risk of Mortality, Hospitalization, and Healthcare Utilization: This study show that the Diabetes Complications Severity Index (DCSI) performs better than complication counts and is a useful tool to predict mortality and hospitalization risk.

Lower Severe Hypoglycemia Risk: Insulin Glargine Versus NPH Insulin in Type 2 Diabetes: Findings shows cost savings and lower incidence of hypoglycemia with insulin glargine.

Diabetes Diagnosis, Resource Utilization, and Health Outcomes: Article highlights the clinical and economic case for much earlier detection of hyperglycemia.

Do Diabetes Group Visits Lead to Lower Medical Care Charges?: Findings show that group visits (shared medical appointments) significantly reduce outpatient costs of diabetes care, primarily by substituting group visits for more expensive individual specialty care visits.

To read or download all the articles in the January 2008 issue of AJMC, click here.

The journal Medical Care has published series of outstanding articles on emerging methods and tools to compare the effectiveness of medical therapies, prescription drugs, and devices. The peer-reviewed articles are an outgrowth from a symposium on comparative effectiveness research sponsored by the Agency for Healthcare Research and Quality (AHRQ).

Here are links to the individual articles in PDF format:

The well-regarded industry trade journal Biotechnology Healthcare has an excellent article by Patrick Mullen on The Arrival of Average Sales Price. In it, Mr. Mullen interviews several top industry experts (yes, including me) on the rationale for and impact of Average Sales Price (ASP) and how health plans are following Medicare's lead:

Health plans are beginning to adopt the average sales price method of paying oncologists and other specialists for office-administered drugs. ASP is more transparent and has a smaller markup than its much maligned predecessor, average wholesale price. The speed of ASP uptake will affect everyone who makes, sells, prescribes, and takes these medications.

Average Sales Price and Drug Reimbursement:

In 2005, as part of the Medicare Modernization Act (MMA), the way Medicare Part B reimbursed physicians and clinics for biologics and other physician-administered injectable drugs changed fundamentally. Medicare Part B, the nation's largest payor of injectable drugs, started using Average Sales Price (ASP) to base payments for most drug products covered by Part B fee-for-service.

Using a new, tighter, and more accurate definition of ASP, drug manufacturers must report the Average Sales Price of each of their products. CMS, through its Part B claims processing contractors, reimburses physicians for covered drug products administered to Medicare benies at 106% of ASP, adjusted for volume.

Wide Ranging Impact of ASP in Marketplace:

Physician offices, particularly oncologists, have seen significant drops in Medicare revenue. While the impact on drug makers is mixed, overall the switch to ASP has tightened profit margins and required many manufacturers to revise projections.

Also, like the move of Medicaid to a new and publicly reported version of Average Manufacturer Price (AMP), the ASP reforms are another way drug prices are becoming transparent and flatter or less variable. The transformative effect on business practices and strategy should not be underestimated.

For Medicare Part B, the switch to ASP-based payment has saved billions of dollars and dramatically slowed the growth in Part B prescription drug spending. Beneficiaries have benefited as well, since they are paying the 20% Part B copay on lower prices. However, there is some evidence that some docs are switching drug therapies (which may or may not be clinically optimal for patients) or forcing patients to receive injections from other settings, such as outpatient hospitals. The behavioral effect on physician practices is still hard to discern beyond the realm of anecdote but is something worth monitoring closely, especially in light of low Medicare rates for professional fees.

To Learn More About ASP:

In addition to the article in Biotechnology Healthcare mentioned above, here are some MedPAC resources to understand ASP, Medicare spending on drugs and biologics, and Medicare reimbursement of physician services:

In the Deficit Reduction Act (DRA), Congress made major, controversial, and technically complex changes to Medicaid prescription drug pricing and pharmacy reimbursement. The policy changes, which are expected to save the feds and states $8.4 billion over the next five years, present significant challenges to both drug manufacturers and retail pharmacies.

To implement the DRA changes, the Center for Medicare and Medicaid Services (CMS) issued final rules that, most notably: (a) revise the definition of average manufacturer price (AMP), (b) create a new formula for calculating Federal Upper Limits (FULs) on multisource drugs, (c) require rebates for certain physician-administered drugs, and (d) clarify rebate liability for authorized generic drugs.

Significant Implications:

For pharmacies, the DRA changes represent significant cuts to Medicaid reimbursement - unless states act to mitigate the changes or increase dispensing fees to compensate for lower product reimbursement. While CMS tried to mitigate the impact on pharmacies, studies by GAO, OIG, and pharmacy trade groups suggest that pharmacies could easily lose money with many drugs dispensed under Medicaid, with the biggest loss in generic drugs.

The changes also hold major implications for pharmaceutical companies. The new policies create new financial, operational, and compliance challenges. They will require most drug makers to rethink pricing strategies and access the impact across all their classes of trade. Average Manufacturer Price (AMP), a calculation that has been a closely held secret under the law since 1991, will become transparent through monthly public reporting of AMP-based prices of every drug on sale in the U.S. You may expect this to have some interesting effects on marketplace behavior and payor negotiations. And, of course, the changes will increase rebate payments to states.

States will benefit from the resulting cost savings. However, state Medicaid directors face strong pressure from community and chain pharmacies to compensate for lost revenue. States also have concerns about the reliability of CMS and pharma industry data, especially in the first couple years given the big change in methodology, scope, and frequency of data reporting. States must also make a variety of systems changes under short notice.

Across the health care system, the DRA changes are further evidence of the increasing power of government policy on the pharmaceutical supply chain. Now that taxpayer-funded health programs pay for the majority of drugs, changes in Medicaid or Medicare drug policy are no longer limited to affected program. Federal changes ripple throughout the industry, forcing changes in commercial practices and business strategy.

Finally, the new rules put a few more nails in the coffin of Average Wholesale Price (AWP) or published prices.

Average Manufacturer Price:

In concept, Average Manufacturer Price (AMP) is the average unit price paid to the manufacturer for the drug in the U.S. by wholesalers for drugs distributed to the retail pharmacy class of trade. (Try to repeat that ten times fast.) However, how this plays out has been highly controversial, leading to inconsistencies across manufacturers, numerous highly critical studies by the HHS Office of the Inspector General (OIG) and Government Accountability Office (GAO), allegations of gaming, and countless law suits against drug makers by U.S. attorneys and state attorneys general.

Following the statutory changes made by the DRA, CMS' final rule makes several fundamental changes to AMP. Most notably, the final rule:

Prior to the DRA, sales by a manufacturer of covered outpatient drugs below 10% of AMP were defined as "nominal sales" and generally excluded from Medicaid best price. While the final rule continues to define nominal sales as those sales at less than 10% of AMP, the best price exemption will now be limited to sales to: 340B covered entities, intermediate care facilities for the mentally retarded (ICF-MRs), and state-owned or operated nursing facilities.

Federal Upper Limits:

For twenty years, the federal rules have limited the amount state Medicaid programs may reimburse pharmacies for generic drugs. Using a Federal Upper Limit (FUL) for each affected drug product, the idea is to help ensure the government is a prudent buyer and pays close to market levels. Before the DRA, the FUL was set at 150% of the published price for the least costly therapeutic equivalent using all available national price compendia.

However, that never worked well. Over time, the old FUL system became very costly to states and problematic for nearly everyone involved.

As a result, the DRA changed the methodology used to establish a FUL on multiple source drugs:

Requirements for Drug Manufacturers:

To accomplish all these changes in AMP and FUL, the law creates new requirements for pharmaceutical manufacturers. As I discussed in an earlier post, these new requirements, when coupled with the new approach to AMP, create significant financial, operational, and compliance challenges to pharma companies.

Most notably, pharma companies must:

Rebates on Physician-Administered Drugs:

Before DRA, most States did not collect rebates on physician-administered drugs. Physician drug claims typically did not contain the National Drug Codes (NDCs) necessary for state to invoice drug manufacturers for rebates. Per the DRA, the CMS rule requires states to collect NDC numbers from providers to enable rebate collection on biologics and other physician-administered drugs in Medicaid.

This year, state Medicaid agencies must require providers to submit claims for single source, physician-administered drugs using HCPCS codes or NDC numbers that allow states to bill for rebates. Starting next year, states must require providers to submit claims for single source physician-administered drugs and 20 Secretary-specified, multiple source physician-administered drugs using NDC numbers. States that require additional time to comply may ask for a hardship waiver.

Normally, $15 million a year doesn't buy you much in the federal government. A notable exception is the Effective Health Care Program at the Agency for Healthcare Research and Quality (AHRQ). Drug manufacturers, device makers, health plans, state Medicaid agencies, Wall Street analysts, physicians, and patient groups should all follow it closely.

The Medicare Modernization Act of 2003 (MMA) authorized AHRQ to conduct and support research on outcomes, comparative clinical effectiveness, and appropriateness of pharmaceuticals, devices, and health care services. With a modest budget, a tiny but dedicated staff, and partnerships with top research institutions, AHRQ's Effective Health Care Program involves three approaches to research the comparative effectiveness of different medical treatments, drug therapies, and clinical practices:

1. Review and Synthesize Knowledge: AHRQ's network of 12 Evidence-based Practice Centers systematically review published and unpublished scientific evidence on what is known. Given the huge volume of studies and journal articles produced every year, it is next to impossible for providers, payors, and other key decision makers to keep up and even harder for them to thoughtfully weigh the evidence. AHRQ and its research partners synthesize the science and build a meaningful evidence base.

2. Promote and Generate New Knowledge: The DEcIDE Research Network studies new scientific evidence and analytic tools in an accelerated and practical format. DEcIDE stands for "Developing Evidence to Inform Decisions about Effectiveness." Comprised of 13 university research centers and think tanks, the DEcIDE network conducts accelerated practical studies about the comparative clinical effectiveness, safety, and appropriateness of specific health care services, drugs, and devices. In other words, what works best for patients.

3. Compile Findings and Translate and Disseminate Knowledge to Decision Makers: AHRQ's John M. Eisenberg Clinical Decisions and Communications Science Center takes the research results and transform them into into a variety of useful, actionable formats for stakeholders (e.g., providers, payors, purchasers, patients, manufacturers). Specifically, these include (a) consumer guides (short summaries of health care research that can help with decisions about treatments), (b) clinician guides (brief evidence summaries to assist clinical decision making), (c) policymaker guides (short reports of research evidence for use in health care policy making), and (d) white papers on state-of-the-art concepts in health communication.

The past couple years, the initiative has focused on ten priority health care conditions, selected because of their high impact on Medicare, Medicaid, SCHIP, and other federal health programs:

Later this year, AHRQ will entertain nominations for other priority conditions.

Here's a sampling of the excellent work already generated. For a directory of these reports, with free access in PDF format, click here:

The Effective Health Care Program has 40 other reports in the works, covering a wide range of topics. These include more comparative effectiveness reviews of specific drugs as well as tools to measure quality, reduce errors, and monitor therapies. To get notified when new research becomes available, sign up for AHRQ's email list.

In health policy, bad ideas never go away. Case in point is the proposal in California to require that health plans spend at least 85% of premium revenue on provider payments. Specifically, as part of his $12 billion Stay Healthy California package of reforms, Governor Arnold Schwarzenegger proposes to set a new minimum medical loss ratio for health plans.

In a nutshell, a health insurer's medical loss ratio (MLR) is an accounting construct and relative differences from one health plan to another has absolutely nothing to do with affordability of premiums, access to care, quality of care, patient satisfaction, adequacy of provider networks, or virtually anything else of interest to policy makers.

Further, it is based on a staggering array of faulty assumptions about health care delivery, insurance markets, and the uninsured, and ignorance of the difference between price and value. And artificial medical loss ratio standards result in many unintended consequences, including less competition, fewer consumer options, pushing more people into taxpayer-financed Medicaid and SCHIP, and restricting resources needed to improve quality and reduce medical errors.

Jamie Robinson, Ph.D., professor of economics and chair of the health policy program at the University of California, Berkeley, put it best in a definitive article in Health Affairs:

The medical loss ratio is an accounting monstrosity that enthralls the unsophisticated observer and distorts the policy discourse.

Juxtaposition of low medical loss ratio with forprofit status has fed the flames of HMO bashing but is completely without substance.

Thanks to the hard work of Secretary Kim Belshe and her excellent team, Governor Schwarzenegger's health reform initiative has many components worthy of serious consideration. However, further regulation of medical loss ratios - a long discredited idea that will only hinder the Governor's coverage objectives - is not one of them.

In health care, states serve as the nation's laboratories of reform - able to test innovations in financing, coverage, regulation, and care delivery. In 2007, states are leading the way on health insurance coverage expansion, leveraging a mix of policies including universal coverage, individual mandates, tax credits and Section 125 plans, and insurance "exchanges" or "connectors" to facilitate buying of affordable health plans.

Because so much is going on and since I do a fair amount of workin this area, several readers of the Piper Report asked me to post some resources on what's going on in the states. So here you go.

State Health Reform Commissions:

Several states have created task forces or study committees to examine options for coverage expansion and make recommendations. Most are appointed by the governor or governor and legislative leaders. A few are special committees of the legislature. Here are states with health reform commissions:

Governors' Health Care Reform Initiatives:

Several governors have announced detailed health reform proposals. Most focus largely or entirely on coverage expansion but several also thankfully include initiatives to improve quality of care, combat medical errors, and/or increase transparency of provider prices and performance.

More Resources on State-Based Health Reform:

Massachusetts, of course, started the ball rolling with its groundbreaking, bipartisan reform initiative in 2006. To learn more, here's an excellent article from BNA's Health Policy Report on the impact of Massachusetts health reform on coverage expansion efforts in others states (PDF).

The National Conference of State Legislatures (NCSL) maintains a helpful list of legislative bills on universal coverage proposed in states.

For the best books on health reform, Medicaid, and other hot topics in health care, please visit my book recommendations.

For latest state-specific data on health care coverage and spending, check out the free, easy-to-use tools on StateHealthFacts.org.

Questions on State Health Reform:

Feel free to contact me if you have questions on what's going on in the states.

When asked about health care innovations, especially practices directed at controlling costs, most policymakers and wonks point to private sector solutions, such as the cost-constraining effects of HMOs in the 1990's or today's ideation of consumer-directed health plans. But is this conventional wisdom wrong? What about public sector health policies, most notably in Medicare or Medicaid?

In a fascinating new book, two top thought leaders show how a powerful and complex Medicare payment formula led to fundamental changes across the health care system, facilitating a dramatic power shift from providers (hospitals and physicians) to buyers (Medicare, Medicaid, and employers).

Influence of Medicare PPS on U.S. Health System:

In Medicare Prospective Payment and the Shaping of U.S. Health Care, Rick Mayes, Ph.D. and Robert A. Berenson, M.D. describe how Medicare's transformation from retrospective, cost-based payment methods to prospective payment systems (PPS) "both initiated and repeatedly intensified the economic restructuring of the U.S. health care system." In addition to providing a thoughtful history of Medicare PPS from a research concept to the single most powerful financial driver in health care, Drs. Mayes and Berenson make the case that the public sector has been the major innovator.

In building their case and exploring how PPS works in the real world, they interviewed 65 health financing experts, including several former CMS administrators. Bob Berenson and Rick Mayes do a nice job challenging conventional wisdom, which in health policy is always a good thing.

Earlier in my career, I cut my teeth on PPS at the White House Office of Management and Budget, where my scope included Medicare Part A and hospital reimbursement policy. Therefore, for me, Medicare Prospective Payment and the Shaping of U.S. Health Care made for a particularly intriguing read. But you don't need to be a Medicare wonk to understand and benefit from this crisp, well-written book.

Prospective Payment Systems in a Nutshell:

Old style cost-based or retrospective systems are inherently inflationary, reward inefficient providers, and reimburse largely for factors unrelated to the patient. In a nutshell, prospective payment is based on reimbursing health care providers for factors outside their control - notably the diagnosis and other relevant characteristics of the patient and outside, industry-wide factors like inflation and geographic variation in wage rates.

Under a prospective payment system (PPS), a provider receives a fixed payment to cover an episode of care during a period of time. The payment formulas are highly complex, with many adjustments to address everything from outliers, teaching-related costs, and uncompensated care to more purely political issues. The idea is to set the bundled, prospective payment on what it costs an efficient provider to serve the patient. The efficient players make money; the inefficient lose money.

Every year, rates are modified to reflect inflation or technical refinements. However, annual increases are often driven by federal budget constraints or attempts to moderate provider profit margins. Also, because PPS is about promoting economic efficiency, payments have little to do with quality of care or patient safety - hence, recent interest in adding elements of Pay for Performance (P4P) into the system.

Medicare began using the PPS approach for inpatient hospital services in 1983-84. Through a series of Congressional changes, PPS-based approaches are now used in Medicare to pay outpatient hospital services, skilled nursing facilities, home health agencies, and hospice organizations. While each provider type has its own kind of prospective payment method, the concept is the same. Prospective payment is also used heavily by state Medicaid programs and employer-sponsored health plans.

With sound, furry, and a fair quota of sound bites and photo opps, House Democrats are pushing for quick adoption of H.R. 4, the Medicare Prescription Drug Price Negotiation Act of 2007. The bill would require the Secretary of HHS to negotiate with pharmaceutical manufacturers on drug prices in Medicare Part D.

As I explained in an earlier post, federal drug price negotiations would not generate savings above what are already achieved via the marketplace - unless Congress wants to severely limit the number of new and existing drugs available to seniors. However, the conclusion is counter intuitive to the uninitiated, especially given media hype and partisan palaver.

Today, the Congressional Budget Office (CBO) told Rep. John Dingell, new Ways and Means Committee chairman, that federal drug price negotiations under H.R. 4 would save nothing. Here are the salient points of CBO's official estimate:

CBO estimates that H.R. 4 would have a negligible effect on federal spending because we anticipate that the Secretary would be unable to negotiate prices across the broad range of covered Part D drugs that are more favorable than those obtained by PDPs under current law. Since the legislation specifically directs the Secretary to negotiate only about the prices that could be charged to PDPs, and explicitly indicates that the Secretary would not have authority to negotiate about some other factors that may influence the prescription drug market, we assume that the negotiations would be limited solely to a discussion about the prices to be charged to PDPs. In that context, the Secretary's ability to influence the outcome of those negotiations would be limited. For example, without the authority to establish a formulary, we believe that the Secretary would not be able to encourage the use of particular drugs by Part D beneficiaries, and as a result would lack the leverage to obtain significant discounts in his negotiations with drug manufacturers.

Instead, prices for covered Part D drugs would continue to be determined through negotiations between drug manufacturers and PDPs. Under current law, PDPs are allowed to establish formularies - subject to certain limits - and thus have some ability to direct demand to drugs produced by one manufacturer rather than another. The PDPs also bear substantial financial risk and therefore have strong incentives to negotiate price discounts in order to control their costs and offer coverage that attracts enrollees through features such as low premiums and cost-sharing requirements. Therefore, the PDPs have both the incentives and the tools to negotiate drug prices that the government, under the legislation, would not have. H.R. 4 would not alter that essential dynamic.

To read CBO's letter to Chairman Dingell, click here (PDF). To learn more about the issue, please check out my earlier story.

The federal False Claims Act has been an effective tool in combating fraud and abuse in government programs, particularly Medicare. Several states have their own state versions of false claims legislation. The federal Deficit Reduction Act (DRA), enacted last February, gives states a powerful new financial incentive to enact state false claims acts modeled after the federal version and directed at fighting Medicaid fraud and abuse.

Specifically, states with state false claims acts that meet certain federal standards are able to keep more of whatever is recovered from fraudulent Medicaid providers or suppliers. The incentive amounts to ten percentage points of any recovery. For example, if a state has a 50% federal Medicaid match, it would normally have to return to the feds 50% of anything recovered. However, if the state has a federally compliant false claims act, the state gets to keep 60% or a 10 percentage point jump in its share. For most states, this could easily result in millions of dollars kept in the state.

OIG Review of State False Claims Acts:

Under the DRA, the HHS Office of the Inspector General (OIG) is responsible for looking at state false claims laws (whether new, existing, or amended) to see if they meet the federal standard and therefore if the state gets the incentive. To read the OIG's review guidelines, click here.

So far, at the request of state officials, the OIG has looked at existing statutes in ten states: California, Florida, Illinois, Indiana, Louisiana, Massachusetts, Michigan, Nevada, Tennessee, and Texas. According to the OIG, the state false claims statutes in Illinois, Massachusetts, and Tennessee meet the DRA requirements and therefore these states' Medicaid programs may keep more of any Medicaid recoveries. The other states will need to amend their statutes if they wish to qualify for financial incentive.

Background on Federal False Claims Act:

Since the nation's founding, federal law has permitted private citizens to sue on behalf of the government to combat fraud in public programs. If the fraud or false claim is proven in court, the citizen bringing the suit gets to keep a portion of the funds recovered as an incentive.

Today, fraud fighters and whistleblowers use the federal False Claims Act, which was enacted in 1863 to stop fraud by military suppliers to the Union Army. Revised several times by Congress, the federal False Claims Act (FCA) has been increasingly used to bring lawsuits against health care providers and suppliers.

Of course, federal prosecutors may also bring criminal charges but in criminal cases they must prove guilt beyond a reasonable doubt. Civil cases are much easier to win in the complex world of health care claims since the standard is a preponderance of the evidence.

How the False Claims Act Works:

Under the False Claims Act, a person with knowledge of fraud against the U.S. government may file a civil suit on behalf of the government against the person or business that allegedly committed the fraud. These are referred to qui tam cases. "Qui tam" (pronounced "key tam" or "kwee tam" and Latin for "who as well") is used in short for longer Latin phrase meaning "he who (sues) for the king as well as for himself." (Okay, for Latin buffs, it's qui tam pro domino rege quam pro seipse. Now you know why everybody just says Qui Tam.)

Qui tam lawsuits are first filed with the federal district court in secret, to give the U.S. Justice Department time to decide whether to intervene and take over prosecuting the case itself. DOJ takes on about a quarter of these cases. If DOJ decides not to take the case, the qui tam plaintiff or "relator" - who is often an internal whistleblower since they need to be the source of information in the case - may pursue the case on behalf of the federal government but at his or her own expense. However, unlike other civil actions where a person can represent themselves (unwise but possible), the relator must hire an attorney to represent them.

The False Claims Act provides for treble damages. Therefore, if fraud is proven through the civil case, the defendant(s) are liable for three times the original cost of the fraud to the taxpayers - plus civil fines of $5,000 to $10,000 for each instance of fraud or false claim.

The amount received by a successful qui tam plaintiff depends on whether the DOJ took the case. If the Justice Department takes the case, the qui tam plaintiff gets between 15% and 25% of the recovery. If the Justice Department declines to take the case and the relator pursues the civil suit on their own, the qui tam plaintiff receives 25% to 30% of the recovery.

Given the size of some of these incentives, the Justice Department often balks and tries to get them reduced, arguing that the plaintiff lacked the direct knowledge required to qualify. Therefore, the payouts to successful whistleblowers often lead to legal battles long after the fraud is proven and defendants pay up.

Earlier this month, the U.S. Supreme Court heard oral arguments in just such a case where the federal government was challenging the right of a successful qui tam plaintiff to collect a portion of recoveries. The ruling, expected by this summer, could have a major impact on future qui tam suits.

Please check out my previous posts on Medicaid program integrity issues.

In the Deficit Reduction Act (DRA), Congress made a series of significant changes to pharmaceutical pricing, Medicaid best price rebates, and Medicaid payments to pharmacies for prescription drugs. The new policies, which are expected to save the feds and states $8.4 billion over the next five years, create major challenges to both pharmaceutical manufacturers and pharmacies.

DRA Drug Pricing Changes in a Nutshell:

While the DRA has many moving parts, in general the new policies will:

1. Drive more Medicaid drug spending toward generics and reduce the market advantages of authorized generics.

2. Make Average Manufacturer Price (AMP) - a key measure of drug prices in the marketplace and the metric used in determining Medicaid rebates - transparent to the public. Previously, AMP was confidential and known only to government officials.

3. Lower AMP on many prescription drugs, putting drug makers under increased cost pressures and increasing Medicaid rebates to states.

4. Increase the compliance risks of drug manufacturers.

5. Reduce Medicaid reimbursement to pharmacies.

6. Put another nail in the coffin of Average Wholesale Price (AWP) by moving Medicaid pharmacy reimbursement systems from AWP to AMP.

Federal Proposed Rules:

Today, the Centers for Medicare and Medicaid Services (CMS) released proposed rules on implementing the DRA drug pricing policies. Final rules are expected in June 2007.

However, because key provisions are effective on January 1, 2007, pharma companies must come into compliance based on incomplete guidance and be prepared to make major changes again this summer.

DRA Changes to Average Manufacturer Price (AMP) and Medicaid Best Price:

The law requires significant changes to how drug manufacturers calculate Average Manufacturer Price (AMP) and Medicaid Best Price (BP), reducing the market power of some key price concessions used by manufacturers:

Drug manufacturers must report AMP on a monthly basis starting January 2007. More importantly, average manufacturer prices on all drugs will publicly posted on CMS' website starting Spring 2007 after CMS resolves some data and systems issues. Previously, reporting was quarterly and confidential by law.

DRA also mandates significant changes to the federal upper payment limit (FUL) for multiple source drugs. The feds are widening the definition of what is a multiple source drug and setting FUL at 250% of AMP. Previously, FUL was set at 150% of the Average Wholesale Price (AWP). This will further increase pricing pressure on brand drugs when generics are available.

Operational Challenges of DRA for Pharmaceutical Industry:

The drug industry faces many practical, operational challenges in meeting the new requirements for 2007:

1. Incomplete federal guidance. Until the final rules arrive, the drug industry must implement the DRA changes with limited federal guidance. Key factors still unclear include class of trade designations, treatment of administrative and service fees, adjusting for lagged price concessions and returned goods, correcting and restating AMP, and a variety of baseline AMP issues.

2. Moving from quarterly to more complex monthly reporting, plus adjusting for each month's transactions.

3. Adapting data, systems, staff, and reporting to accommodate different pricing methodologies required by CMS. For example, calculating and reporting AMP under Medicaid vs. calculating and reporting Average Sales Price (ASP) under Medicare Part B.

Financial Challenges of DRA for Pharmaceutical Companies:

The new DRA policies also pose significant financial challenges for pharma companies. For example:

Compliance Challenges of DRA for Drug Manufacturers:

The DRA changes present new or expanded compliance challenges for drug manufacturers. Given the frequency, changes, and overall complexity, there are many ways to inadvertently screw up federal reporting. Ensuring compliance will require heavy reliance on other parts of company and on external partners. Transparency of pricing will likely lead to new regulations, audits, and Congressional hearings. Finally, while over time DRA reporting may make it easier to defend against suits, companies should expect dramatic increase in whistleblower suits under federal and state False Claims Acts.

Learn More:

For the DRA statutory changes affecting drug pricing, click here (PDF).

For the proposed rule, click here (PDF). For CMS' fact sheet on the proposed rule, click here (PDF).

Read the OIG's recommendations to the HHS Secretary on DRA implementation issues. The OIG report includes useful background information.

For more information or a briefing, feel free to contact me.

There's a lot of truth in the old joke about the problem with Republicans and Democrats: Republicans need a heart and Democrats need a brain. As Democrats prepare to take control of Congress, they appear eager to prove the joke by pursuing legislation to require government "negotiations" on prescription drug prices in Medicare Part D.

The idea has emotional appeal, so let's see if there is any evidence to support the idea. (If you come from the Bumper Sticker School of Health Policy, stop here. The facts will only confuse you and don't easily make for emotive talking points.)

Non-Interference Requirement in MMA:

In the Medicare Moderation Act, the massive 2003 legislation that created the Medicare Part D drug benefit among other Medicare reforms, Congress prohibited the Centers for Medicare and Medicaid Services (CMS) from interfering with drug pricing in the competitive market. Part D prescription drug plans - Medicare Advantage drug plans (MA-PDs) and prescription drug plans (PDPs) - would battle among themselves to cut the best deals with pharmaceutical manufacturers and pharmacies and openly compete for enrollees.

The statute at controversy, found at section 1860D-11(i) of the Social Security Act, is short and sweet:

(i) NONINTERFERENCE. In order to promote competition under this part and in carrying out this part, the Secretary:

(1) may not interfere with the negotiations between drug manufacturers and pharmacies and PDP sponsors; and

(2) may not require a particular formulary or institute a price structure for the reimbursement of covered part D drugs.

Estimated Savings of Federal Drug Price Negotiations:

Supporters of federal staff negotiating drug prices argue that it would generate billions of dollars in savings for taxpayers and seniors. However, the Congressional Budget Office (CBO) - the highly respected, non-partisan fiscal advisor to both houses of Congress and the agency that officially scores the cost and savings of all legislative proposals - agrees with top health economists and Medicare experts that federal price negotiations will save precisely zip.

Following passage of MMA, Senate leaders asked CBO to examine the effect of striking the 'noninterference' provision. CBO reported:

We estimate that striking that provision would have a negligible effect on federal spending because CBO estimates that substantial savings will be obtained by the private plans and that the Secretary would not be able to negotiate prices that further reduce federal spending to a significant degree. Because they will be at substantial financial risk, private plans will have strong incentives to negotiate price discounts, both to control their own costs in providing the drug benefit and to attract enrollees with low premiums and cost-sharing requirements.

CBO was then asked if the federal government could save anything if CMS centrally negotiated prices with makers of single-source drugs. (Single-source prescription drugs are brand-name drugs that have no generic equivalent on the market and are generally available from only one manufacturer.) Again, CBO concluded that savings are unlikely, unless of course federal officials are willing to play hardball and restrict patient access to therapeutically unique drugs until the manufacturers agree to government price demands:

Most single-source drugs face competition from other drugs that are therapeutic alternatives. CBO believes that there is little, if any, potential savings from negotiations involving those single-source drugs. We expect that risk-bearing private plans will have strong incentives to negotiate price discounts for such drugs and that the Secretary would not be able to negotiate prices that further reduce federal spending to a significant degree.

Nevertheless, there is potential for some savings if the Secretary were to have the authority to negotiate prices with manufacturers of single-source drugs that do not face competition from therapeutic alternatives. Private plans offering a prescription drug benefit to Medicare beneficiaries will have less leverage in negotiating discounts for drugs without therapeutic alternatives than they have in price negotiations for drugs that do face such competition. (In that regard, the Medicare plans will be no different than private health plans that offer prescription drug coverage to other populations.)

Under current law, there already are significant pressures that limit the prices that manufacturers charge for drugs - whether those drugs face competition from therapeutic alternatives or not. Those pressures include the prospects that plans will not cover a drug (or will substantially limit the amount they pay for a drug) and that manufacturers will provoke a backlash (potentially including legislation) if they set prices too high. Moreover, the creation of the Medicare drug benefit has given federal officials greater opportunity and incentive than under prior law to bring pressure on manufacturers - for example, by influencing public opinion and policy makers--if the prices that manufacturers set for single-source drugs that are not subject to competition from therapeutic alternatives are perceived as being too high. Giving the Secretary an additional tool--the authority to negotiate prices with manufacturers of such drugs - would put greater pressure on those manufacturers and could produce some additional savings.

Ample Evidence Against Federal Drug Price Negotiations:

Not only would federal price negotiations save little or nothing compared to the increasingly competitive private marketplace, there are host of other arguments against the idea.

In a fascinating new study - The Human Cost of Federal Price Negotiations: The Medicare Prescription Drug Benefit and Pharmaceutical Innovation - Benjamin Zycher, Ph.D., an economist and senior fellow at the Manhattan Institute's Center for Medical Progress, carefully "estimates the impact that federal negotiation of prescription drug prices would have on pharmaceutical research and development (R & D) investment through 2025."

Dr. Zycher concludes that, while federal price negotiations could save some Medicare dollars, "the longer-term human costs of government price-negotiation...are likely to be large and adverse." Most notably, the data show government mandated negotiations would dramatically reduce the development of new, life-saving drugs (about a dozen annually), resulting in "...a loss of 5 million expected life-years annually, an adverse effect that can be valued conservatively at about $500 billion per year, an amount far in excess of total annual U.S. spending on pharmaceuticals."

In Compromising Quality: The High Cost of Government Drug Purchasing, Edmund F. Haislmaier provides a crisp, devastating critique of the idea of federal drug price negotiations. He disects the core myths and outlines how it would only serve to threaten quality and access.

Proponents of government price negotiations assume that Medicare has more bargaining leverage than the private sector. In Why the New Congress Should Not Fix Drug Prices, researcher Greg D'Angelo does a nice job dismantling this faulty assumption.

Wait, It Gets Worse:

Many advocates of federal negotiations point to the VA's prescription drug program as an example of how to reduce drug prices. As I have explained to many audiences, comparing the VA approach to Medicare Part D is not even an apples to oranges comparison. It's more like comparing apples and poodles - and makes as much sense.

A groundbreaking study, by Frank R. Lichtenberg, Ph.D. of the Columbia School of Business, should put such comparisons to rest. In Older Drugs, Shorter Lives? An Examination of the Health Effects of the Veterans Health Administration Formulary, Dr. Lichtenberg shows the VH approach is not about prices or genuine negotiations. With the VA's tight budget, it is all about restricting veterans' access to new (and many old) medications to save dollars and hit budget targets.

The VA's highly restrictive national formulary excludes 62% of drugs approved by the FDA during the 1990's and 81% of new medications approved since 2000. Even worse, the drug benefit designed for our nation's veterans does not pay for a staggering 78% of new, high-priority prescription drugs approved by the FDA on an expedited basis since 1997 because of their life-saving impact. By comparison, commercial health plans, Medicare Part D drug plans, and state Medicaid programs cover the vast majority of new drugs and move quick to add coverage for most drugs given fast-track by the FDA.

Dr. Lichtenberg's 2005 study shows that the VA's prescription drug system - seen by many as the "model" for Medicare Part D - reduced the life span and survival rates of vets since its 1997 introduction. Note to Congress: Death is always cheaper than life but rarely preferable.

Recap:

So, let's recap. Even putting aside the dangers of a massive increase in government power, fact it would dramatically reduce consumer and physician decision making, fact it would shift costs to other payors, and fact it would inevitably lead to economically disastrous price controls, the federal government negotiating drug prices will likely save little or nothing - unless Congress wants to severely restrict patient access to new and existing medications, thereby shortening lives, reducing quality of life, and increasing costs well beyond any savings. And that's if it's even feasible for CMS to do it. Trust me, it's not.

The Bush Administration remains intent on issuing new regulations to implement several Medicaid budget cuts proposed in the President's FY 2007 budget last February. Most notably, the Administration wants to reduce state use of provider taxes by capping assessments at three percent, instead of the current six percent. This could be done by mandating that states phase down state provider assessment rates over three to five years.

The current six percent cap was set in federal rules 14 years ago. Provider assessments, commonly a tax on hospitals or nursing homes, generate revenue for many state treasuries. These tax receipts are then matched with federal dollars, thereby doubling or even tripling or more the dollars available. That is, depending on the state's federal Medicaid matching rate, one dollar raised from a provider tax can ultimately generate anywhere from two dollars to nearly five dollars in new Medicaid funding.

The total is used in Medicaid to fund provider rates increases and other state Medicaid budget priorities. In 1991, Congress enacted limits on state use of provider taxes to generate federal Medicaid funds. In 1992, federal rules imposed a six percent cap on assessment rates, with any tax higher than six percent presumed to be out of compliance.

Cutting the maximum assessment in half would reduce federal Medicaid funding by about $6 billion and create big budget holes for affected states. The Administration has drafted the rule but is expected to wait until after the election to publish it, if then. While CMS and the White House are interested in the federal savings such a rule would generate, they are even more interested in the leverage it would provide over states. Specifically, it would encourage more states to come to the table and make deals for major Medicaid reforms using section 1115 waivers.

A majority of House members and many in the Senate are opposed to the proposal. Therefore, there's a chance the Congress may block, at least temporarily, any rule to cut state use of provider taxes. As part of the annual appropriations bill for the Departments of Health and Human Services, Labor, and Education, the House Appropriations Committee included a provision prohibiting CMS from issuing the rule during FY 2007.

Because getting a statutory change is so difficult, riders to appropriations bills are another way to stop an Administration action. If passed, such a rider makes it illegal for CMS to spend any staff time issuing or enforcing a particular policy during that fiscal year.

The full House plans to take up the Labor-HHS-Education appropriations bill in November. However, the Senate would need to agree to the language and there is a good chance the entire appropriations process could fall apart after the election.

Meanwhile, the Senate Appropriations Committee passed its version the Labor-HHS-Education funding bill for FY 2007. In it, they included a provision asking CMS to hold off issuing new rules curtailing the ability of schools to claim Medicaid payments for administrative and transportation services for children with disabilities. The Committee wants HHS to study the possible impact of proposed cuts to school-based services, with a report on March 1, 2007. They want CMS to take no action until the Committee reviews the study.

Congress will try to resume the appropriations process after the election. But the two chambers will need to pass their respective versions of the Labor-HHS-Education bill and then resolve differences in a conference. And, given the political environment, that may be tough.

Congress may be in recess but the Bush Administration is already busy developing the President's budget for FY 2008. With federal tax receipts coming in at a rate much higher than expected, some in the Administration see a window of opportunity to propose a budget that would eliminate the federal deficit in three or four years. However, even with rosy figures for economic growth, a balanced budget would require dramatic reductions in current levels of Medicaid and Medicare spending.

Sources tell me that the Bush Administration is looking - albeit carefully - at proposing a series of Medicaid and Medicare budget cuts as part of the President's FY 2007 budget submission to Congress this February. The bulk of the specific details will be ironed out late this fall but we do know that Administration budget writers have not given up on their eagerness to reduce significantly federal outlays for health programs.

But it's still very early. At this point, the budgeteers are running scenarios and crafting options for internal briefings later this fall. With Medicaid spending growth at its slowest pace in a decade and Medicare spending seen by many as a much bigger fiscal problem, the White House may ultimately decide to focus on Medicare reforms.

Of course, with a few exceptions, any proposals in the President's budget will require Congressional approval. And right now, Capitol Hill has no stomach for major cuts to either Medicaid or Medicare. If Democrats take control of the House, which looks increasingly likely according to the latest polling figures, you can expect a genuine battle royale, as the two parties position for the 2008 presidential election.

The Office of the Inspector General (OIG) at HHS has released its 93-page work plan for FY 2007. The OIG plans to examine nearly 100 issues in Medicaid, with particular attention on:

1. Medicaid reimbursement of hospitals, nursing homes, managed care organizations, home and community-based care, and mental health providers.

2. Medicaid prescription drug benefit issues, including pharmaceutical industry practices affecting pricing and rebates.

3. Financing practices used by states, most notably provider taxes, certified public expenditures, and upper payment limit issues.

4. Budget neutrality of Medicaid waivers, specifically Section 1115 Medicaid reform waivers and Section 1915 waivers for managed care or home- and community-based care programs.

Role and Influence of OIG in Medicaid:

The federal government has significantly increased staffing at both CMS and the OIG to review or audit state Medicaid agencies, Medicaid providers, drug manufacturers, and Medicaid managed care organizations. This, in turn, has increased the number, diversity, and complexity of Medicaid issues under review by the two federal agencies.

OIG studies and evaluations often help states learn about ways to improve Medicaid program efficiency. They also help CMS target its limited resources. OIG reports also provide valuable insights on best practices and program innovations. And, of course, OIG reports can lead to recommendations that CMS recover federal funds from states or recoup payments from providers.

Part of the OIG's work plan focuses on checking to ensure that CMS, states, or providers are compliant with newly enacted or even long standing federal requirements. Other projects will look to see whether inappropriate or questionable practices recently found in a few locations are isolated cases or indications of a broader, national problem in Medicaid.

However, several of the OIG's Medicaid related projects for 2007 will look at controversial Medicaid policy issues such as whether waivers approved by the Secretary of HHS are budget neutral and if some states are using Medicaid to pay for non-emergency care for illegal immigrants.

Medicaid Hospital Payments:

In the hospital arena, the OIG will look at the reasonableness of cost outlier payments for inpatient admissions, state compliance with OBRA '93 limits on disproportionate share hospital payments, and whether states are correctly determining hospital eligibility for disproportionate share payments.

Medicaid Long-Term Care Services:

The OIG intends to look more closely at home and community-based services. For example, the OIG will examine whether states are inadvertently paying for home and community-based services after a beneficiary's death or during a hospitalization. They are also looking at whether certain states are improperly claiming federal match on state costs of administering home and community-based waiver programs. As I mentioned earlier, they are also evaluating whether home and community-based waiver programs are budget neutral. That is, whether they are no more costly than nursing home care.

Elsewhere in Medicaid long-term care, the OIG plans to study state determinations of nursing home eligibility and the adequacy of state safeguards against improper asset transfers. They also want to know if states are recovering funds from estates as required by federal law. In addition, they plan to study possible duplicate payments to nursing homes and hospitals. Specifically, they want to get a handle on whether some hospitals are being paid for patients already discharged to a nursing home and if nursing homes are being paid while a beneficiary is a hospital inpatient. Further, the OIG plans to see if some home care providers were improperly paid for care provided to residents of assisted living facilities. The OIG also has projects to examine the appropriateness of Medicaid payments to personal care providers and physical and occupational therapists.

Mental Health and Substance Abuse Services:

Mental health and substance abuse services and providers are also coming under greater scrutiny. For example, the OIG is looking at the appropriateness of Medicaid payments for community mental health centers, outpatient clinics, day treatment programs, inpatient and outpatient alcohol and drug treatment, and community residencies for persons with mental disabilities.

Medicaid Drug Costs:

The OIG work plan for FY 2007 naturally includes a long list of projects looking at Medicaid prescription drug costs. This includes reviews of how drug companies determine average manufacturer price (AMP) and the adequacy of CMS' oversight of Medicaid drug rebates. Other OIG studies will assess drug price fluctuations and whether states overpay for drugs to treat HIV.

Medicaid Managed Care:

The OIG work plan also calls for several evaluations of issues affecting Medicaid managed care organizations (MMCOs). For example, the OIG wants to know if some states are inappropriately paying Medicaid MCOs for dual eligibles and if states are paying fee-for-service claims for beneficiaries covered under Medicaid health plans. The OIG also intends to examine the completeness and accuracy of encounter data submitted by Medicaid MCOs.

State Administration of Medicaid:

The Office of the Inspector General is also eager to evaluate a wide range of issues regarding day-to-day administration of Medicaid by states. Again, the list of target issues is long. For example, the OIG work plan includes projects to examine state administrative costs, program integrity efforts, information systems, administrative claiming by counties, state overrides of claims system edits and audits, revenue maximization practices, and third party collections.

To Learn More:

Those are just some of the Medicaid related topics the OIG plans to study in FY 2007. Most of the OIG projects will likely result in a public report in 2007. To read the full work plan, click here (PDF).

With far-reaching implications for states, providers, and health plans, the Deficit Reduction Act (DRA) dramatically increased the role of the federal government to combat Medicaid fraud and abuse. Together with a substantial increase in funding for federal contractors and staff, the DRA gives the Centers for Medicare and Medicaid Services (CMS) new, potentially massive authority in areas previously managed exclusively by state Medicaid agencies.

New Federal Authority in Medicaid:

Under the DRA, Congress mandates that "States must comply with any requirements determined by the Secretary (of Health and Human Services) to be necessary for carrying out the Medicaid Integrity Program...." This new, open-ended authority to impose directives on state Medicaid agencies - and, via states, on health plans, health care providers, and Medicaid fiscal agents - will be implemented by CMS through new rules and instructions.

Key Components of Medicaid Integrity Program:

The Medicaid Integrity Program (MIP) includes:

CMS, after consulting with the National Association of State Medicaid Directors (NASMD), developed a 37-page plan detailing the initiative.

The DRA also boosts Medicaid anti-fraud funding for the HHS Office of the Inspector General and the Program Integrity Group in CMS' Office of Financial Management (OFM). The OIG gets an additional $25 million a year from FY 2006 through 2010. The DRA also created a new position of Medicaid chief financial officer within CMS.

The Medicaid Integrity Program is in addition to the Medicaid Payment Error Rate Measurement (PERM) initiative I reported on last week.

Perspective:

Overall, the Medicaid Integrity Program holds the promise of saving taxpayer dollars. Like much of American health care, Medicaid is certainly rife with waste, fraud, and abuse. And it's reasonable for the federal government, which covers about 55% of Medicaid costs nationally, to take a more hands on role in combating Medicaid fraud and abuse. However, the MIP creates many challenges for CMS and states, with a high risk of conflict, confusion, overlapping bureaucracy, and worse. This is especially so if CMS fails to work with states as genuine partners and leverage the expertise of state staff.

Learn More:

The Kaiser Commission on Medicaid and the Uninsured recently released an excellent report on key issues raised by the Medicaid Integrity Program. This report, which will be followed by a more detailed study later this year, does a good job describing many of the challenges, conflicts, and potential unintended consequences of the MIP.

The Government Accountability Office (GAO) has long been critical of both CMS and states on issues involving Medicaid financial management. After passage of the DRA, the GAO released its ideas for how CMS should implement the Medicaid Integrity Program and make best use of staff and contractors. A June 2006 GAO report assessed CMS' ability to "identify and address emerging issues that put federal Medicaid dollars at risk."

As part of a larger, federal government-wide congressionally mandated initiative to reduce inappropriate payments, CMS has published its final rule on Medicaid / SCHIP payment error rate measurement. As expected, it represents a significant expansion of federal oversight of day-to-day state Medicaid operations and of the lives of Medicaid providers and Medicaid managed care organizations.

Medicaid Payment Error Rate Measurement:

The Medicaid Payment Error Rate Measurement (PERM) initiative is a complicated process but means that every state will undergo a detailed examination of paid claims, capitation payments, reimbursement and premium policies, coding, and more. States must turn over vast amounts of data every quarter, plus virtually everything else on rates, policies, and claims processing edits and audits.

CMS will hire a series of new contractors to examine all this, run samples, and identify errors. CMS will then set maximum acceptable error rates (based on what it or its contractors determine is an "error") and then state must take corrective action. These corrective actions could include recovering payments, changing reimbursement policies, and revising claims processing requirements.

States Targeted for Federal Review:

States will rotate, with each state going through the entire process every three years. The states selected for the first round (FY 2006) are Pennsylvania, Ohio, Illinois, Michigan, Missouri, Minnesota, Arkansas, Connecticut, New Mexico, Virginia, Wisconsin, Oklahoma, North Dakota, Wyoming, Kansas, Idaho, Delaware.

Second round states (FY 2007) are North Carolina, Georgia, California, Massachusetts, Tennessee, New Jersey, Kentucky, West Virginia, Maryland, Alabama, South Carolina, Colorado, Utah, Vermont, Nebraska, New Hampshire, Rhode Island. Third round states (FY 2008) are New York, Florida, Texas, Louisiana, Indiana, Mississippi, Iowa, Maine, Oregon, Arizona, Washington, District of Columbia, Alaska, Hawaii, Montana, South Dakota, Nevada.

Opportunities and Challenges:

If CMS manages the process well and works cooperatively with states, the PERM may help (1) save taxpayer dollars, (2) improve the operations of the less sophisticated state Medicaid programs, (3) showcase the best run Medicaid shops and best fiscal agents, (4) help CMS develop greater respect for the hard work of states, (5) identify inappropriate provider practices across state lines, (6) facilitate comparative research and analysis of Medicaid, and (6) allow CMS and states identify, build, and share best practices.

However, PERM raises many practical concerns, especially given the enormous complexity of Medicaid and wide technical and programmatic variation among state Medicaid programs. Even if a state has a low error rate, the administrative burden could be intense, with a steep learning curve for CMS and the new federal contractors and endless arguments among the parties on what is or is not a genuine error. For states with high error rates, the implications include need to update systems, modernize procedures, redirect or replace fiscal agents, change payment and claims procedures, and much more. And add to this, controversial recoveries of federal dollars from states and providers.

Medicare Advantage Special Needs Plans (MA-SNPs) are a fast growing innovation in the marketplace. A new Medicare managed care option created under the Medicare Modernization Act (MMA), MA-SNPs are able to tailor plan designs and delivery to serve the needs of dual eligibles, beneficiaries in nursing homes or at risk of institutionalization, and beneficiaries with chronic, severe conditions.

For CY 2006, there are 276 federally approved MA-SNPs with an enrollment of over 500,000. More insurers are jumping in to offer Special Needs Plans in 2007 and others are moving to market the new plans to millions of high-cost, high-need Medicare beneficiaries. Given this competition and the many advantages of MA-SNPs for dual eligibles and other chronically ill beneficiaries, MA-SNP should exceed one million in 2007 and two million in 2008.

As I reported earlier, states and CMS are working to dovetail Medicare's requirements for MA-SNPs and state and federal requirements for Medicaid managed care organizations (MMCOs). The objective is to provide states with an exciting new voluntary option to integrate health care for the nation's 6.3 million dual eligibles.

In close collaboration with the National Association of State Medicaid Directors (NASMD), CMS has released a new guide for states on integrating Medicaid and Medicare services and a series of how-to guides on integrating enrollment, marketing, and quality assurance.

To learn more about MA-SNPs or integrated Medicare-Medicaid health plans, check out my earlier posts or contact me for more resources.

In the Deficit Reduction Act (DRA), Congress authorized the new $150 million Medicaid Transformation Grant Program to help states design and implement reforms to increase quality and efficiency of Medicaid. This is a unique opportunity to help states restructure and modernize Medicaid, save taxpayer dollars, and improve services. But states must act fast to take advantage.

State Medicaid agencies may submit grant proposals to CMS by September 15, 2006. For grants, CMS has a total budget of $75 million in FFY 2007 and another $75 million in FFY 2008. The amount of each grant will vary and will depend on the number of applications received. State matching funds are not required.

While states have wide discretion in proposing projects and may propose multiple projects in a single grant application, CMS is encouraging states to look at ways to improve Medicaid program operations and efficiency.

In the area of improving Medicaid program efficiency, CMS is particularly interested in grant projects to:

CMS is also interested in projects to improve the effectiveness of Medicaid. Examples include projects on:

In the arena of improved care delivery, CMS is particularly interested in grant proposals to:

This is a unique, one-time opportunity for states but, with grant applications due in six weeks, the timeline is tight. States needing help or advice in writing an application may contact me or my friends at Sellers Feinberg for assistance.

The White House Office of Management and Budget (OMB) released new Medicaid spending projections, showing a significantly lower rate of growth. Nationally, while federal Medicare costs continue to rise dramatically and far faster than medical inflation, Medicaid spending growth has moderated considerably.

Twice each year, OMB releases its latest projections of federal revenues and expenditures. Projections are announced in February as part of the President's proposed budget and updated in July as part of what's called the Mid-Session Review. Falling in the middle of each year's Congressional session, the Mid-Session Review gives Capitol Hill the Administration's latest fiscal projections.

For Medicaid, OMB works with CMS budget staff and actuaries to update estimates of federal Medicaid spending in the current fiscal year and for the next five years. They rely heavily on spending estimates and enrollment reports prepared by state Medicaid agencies.

From FY 2002 through FY 2005, the federal share of Medicaid grew at an average annual pace of 7.2 percent. Federal Medicaid spending is now expected to grow by a modest 1.8 percent this year (FY 2006) and by 4.6 percent in FY 2007.

Compared to earlier estimates, aggregate federal spending on Medicaid is now expected to be 8 percent lower. Specifically, the new projections of federal Medicaid spending for FY 2007 through FY 2016 are $53.3 billion lower than the projections contained in the President's 2007 Budget.

Naturally, Medicaid spending growth varies widely from state to state. However, 16 states now expect to spend less on Medicaid this year than last year. States with flat or negative Medicaid spending growth this year include Georgia, Maryland, Michigan, New Hampshire, Nevada, South Carolina, South Dakota, Texas, and Wisconsin. Medicaid spending in large states - most notably Florida and California - continues to grow but at a much lower pace.

While some of this slowed growth in the federal share of Medicaid is an artifact of the shift of prescription drug benefits for dual eligibles from Medicaid to Medicare Part D, slower spending growth is a byproduct of a variety of factors. These include improved economic conditions, cost containment initiatives, new waiver-based programs, greater use of private health plans, increased use of generic drugs, and the steady shift away from nursing homes to home and community-based programs.

As we reported earlier, CMS is considering new rules to restrict state use of provider taxes and cut back on Medicaid payments to publicly owned providers and facilities. The new OMB figures give states, provider groups, and advocates new ammunition to oppose this and other Bush Administration efforts to cut federal Medicaid spending. It also highlights the effectiveness of state-based initiatives to reform Medicaid - that is, reforms that are initiated by states themselves but with federal support and cooperation.

While OMB's new Medicaid projections are good news for states and the feds, the new Medicare projections show faster spending growth in Medicare Part A and Part B. The five-year cost estimate for Medicare Part A (inpatient hospital and post-acute care) is $17 billion higher. The five-year cost estimate for Medicare Part B (physician and other outpatient services) is $30 billion higher. The jump in Medicare Part A and Part B growth rates are largely attributable to rapid increases in per capita use of services.

However, because of stiff price competition among drug plans and a slower than expected sign-up rate, the five-year cost estimate for Medicare Part D is $34 billion lower than the projections last February. For FY 2006 through FY 2016, the projected cost of the new Medicare drug benefit is $76 billion lower.

Medicare's high growth rate increases pressure on Congress and the White House to reform Part A and Part B. In addition to putting greater pressure on the federal budget, higher Medicare costs also mean big, politically tough jumps in beneficiary cost sharing (e.g., the 11% increase in Part B premiums for 2007). And of course, state Medicaid programs are on the hook to pay for Medicare cost sharing for dual eligibles and other low-income Medicare beneficiaries. Bottom line: because so much of state Medicaid budgets are now driven by the health care costs of dual eligibles, higher Medicare costs and utilization can increase state Medicaid costs.

For better or worse, a byproduct of Medicare's problems may be to divert attention from Medicaid inside the Beltway. However, federal money is fungible (especially in the hunt for budget savings) and states continue to press for greater flexibility. For many on Capitol Hill and in the Bush Administration, fiscal frustrations with Medicare are part of larger frustrations with federal entitlements. So even with slow growth in the near-term, Medicaid remains in the spotlight.

Patient-centered care - one of the new buzz phrases in health care - is all about aligning the delivery of medical care with the needs and preferences of patients. Research shows that the practices and tools of patient-centered care result in:

Unfortunately, despite overwhelming support of the medical community and patient advocates, only 22 percent of physicians practice patient-centered care.

Patient-Centered Care Defined:

Patient-centered care is one of the six essential components of high quality medical care, according to the Institute of Medicine (IOM), the respected healthcare arm of the National Academy of Sciences. The IOM defines patient-centered care as:

Health care that establishes a partnership among practitioners, patients, and their families (when appropriate) to ensure that decisions respect patients' wants, needs, and preferences and that patients have the education and support they need to make decisions and participate in their own care.

Key Components of Patent-Centered Care:

At its core, patient-centered care is all about improved patient-provider communication, where patients and providers collaborate for the benefit of the patient. Ideally, patient-centered care delivery involves an array of tools and practices, including:

To learn more, check out these resources:

The Commonwealth Fund's excellent initiatives on patient-centered care.

Report from the Economic and Social Research Institute on the key components of patient-centered care that are unique to underserved populations.

Tools from the HHS Agency for Healthcare Research and Quality (AHRQ).

The Bush Administration is preparing regulations to cut federal Medicaid funding to states by about $6 billion.

In the President's budget for FY 2007, the Bush Administration proposed a series of Medicaid budget cuts. Most of these would require legislation and the House and Senate have shown no desire to cut federal Medicaid spending in advance of the November election. However, Administration officials have signaled their intention to proceed with several billion dollars of Medicaid cuts that can be implemented by regulation.

Specifically, the Bush Administration is eager to (1) restrict state use of provider taxes and (2) cap Medicaid reimbursement to publicly owned hospitals and nursing homes. Together, these changes would reduce federal funding to state Medicaid programs by about $6 billion - perhaps more - over the next five years.

Currently, many states use provider taxes to help fund Medicaid costs. Revenues received from these assessments - usually on nursing facilities or hospitals - can then be matched with federal funds and used to pay providers. Depending on the state's federal matching rate (which range from 50% to nearly 80% based on the state's per capita income), each dollar of provider tax revenue can in turn generate another $1 to $4 in federal dollars for use in Medicaid.

Since 1991, federal law has limited state use of provider taxes. Most notably, Medicaid provider tax programs must be broad based, applied uniformly across all health care providers in the same class, and not hold providers harmless for tax payments. (For specific federal requirements, see section 1903[w] of the federal Social Security Act and 42 CFR 433.68.)

Federal rules also say that taxes imposed on providers may not exceed six percent of a provider's total revenues. The Bush Administration wants to phase down the allowable provider tax rate from 6 percent to 3 percent. This would reduce federal Medicaid funding to states by about $2.1 billion over five years. Because it would also end up to half of state provider assessment revenues, the fiscal hit on states and Medicaid would be magnified by a billion dollars or more.

The feds are also eager to refine rules to cap Medicaid payments to government-owned providers to no more than the cost of providing services to Medicaid beneficiaries. Projected to cut federal Medicaid spending by $3.8 billion over five years, the change would hit many large public hospitals particularly hard. Federal officials believe that some states pay government owned providers more under Medicaid in order to cross subsidize other state and local costs. However, states and advocates counter by showing how Medicaid funding helps cover fiscal demands of the uninsured and keep key facilities operating.

Adding to state concerns, federal officials may implement the cuts by bypassing the traditional proposed rule process. In most cases of federal rulemaking, agencies start by publishing a proposed rule and reviewing comments before publishing a final rule. To implement the changes to provider taxes and payment of publicly provided facilities, the Centers for Medicare and Medicaid Services (CMS) wants to issue final rules with comment. While states and other interested parties could still send in comments, the cuts would take effect without further rules. From the federal perspective, the contemplated changes are "clarifications" of policy and therefore don't warrant proposed rules.

Using new flexibility created by the Deficit Reduction Act (DRA), states may restructure Medicaid benefits. States may now customize Medicaid health care benefits to specific populations, model some benefit package after commercial-like health plans, and offer additional benefits as incentives to reward healthier patient behavior.

Based on the concept of benchmark benefit packages first used in the State Children's Health Insurance Program (SCHIP), the new restructuring options are expected to save $11 billion over the next ten years (about $6 billion federal savings, $5 billion state savings) and ultimately affect 1.6 million Medicaid beneficiaries.

Kentucky, West Virginia, and Idaho are the first states to use the new options. With help from leading consultants, other states are exploring ways to use DRA flexibility to reform some benefit packages and section 1115 waivers to modernize Medicaid, contain costs, and expand coverage.

Here is a quick briefing on Medicaid benchmark coverage permitted under the DRA:

1. Through the state plan amendment (SPA) process, states may provide Medicaid benefits through benchmark or benchmark equivalent packages for children and some non-disabled adults. The benchmark packages would replace existing Medicaid benefits for the targeted populations.

2. The newly designed benefit packages may include wrap-around services or additional benefits not now covered by the state's Medicaid program. Every benchmark benefit package must cover Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) services for children under 19, federally qualified health center (FQHC) services, and rural health clinic services.

3. Benchmark coverage means the same health benefit package offered by (a) the state for state employees, (b) standard Blue Cross Blue Shield Plan offered under the Federal Employee Health Benefits Plan (FEHBP), (c) the state’s largest commercial HMO, or (d) other models approved by the HHS Secretary.

4. Benchmark-equivalent coverage means a package with the same actuarial value as one of the benchmark plans. If a state uses this route, benchmark-equivalent coverage must include (a) inpatient and outpatient hospital services, (b) physician services, (c) lab and x-ray services, (d) well child care and immunizations, and (e) other preventive services designated by the Secretary. For prescription drugs, mental health services, and hearing and vision services, a benchmark-equivalent package must provide at least 75 percent of the actuarial value of coverage. States must use generally accepted actuarial principles and methodologies.

5. States may only use benchmark or benchmark-equivalent packages to beneficiary groups already covered under the state Medicaid plan. Therefore, by itself, the DRA benchmark package option cannot be used to expand health coverage to new populations.

6. In addition, many beneficiary groups are exempt from benchmark coverage, including (a) dual eligibles, (b) persons with disabilities or special health care needs, (c) beneficiaries needing long-term care services, (d) foster care children, (d) pregnant women with federally mandated coverage, and (e) individuals eligible for Medicaid via the TANF welfare reform law.

Medicare drug plans will dramatically increase coverage of over-the-counter (OTC) drugs in 2007 based on new guidance from the Centers for Medicare and Medicaid Services (CMS).

In creating Medicare Part D, the Medicare Modernization Act (MMA) excluded OTCs from coverage. Taxpayer dollars could not be used to pay for OTC products even when clinically appropriate and cost effective. This was in sharp contrast to pharmacy benefit designs common in commercial coverage and Medicaid, where employers, states, health plans, and PBMs try to take advantage of new, inexpensive OTC alternatives to popular prescription drugs.

For 2006, CMS allowed Medicare prescription drug plans (PDPs) and Medicare Advantage drug plans (MA-PDs) to cover OTCs under narrow circumstances. For example, OTC coverage was limited to federally approved step therapy programs, with no prior authorization for the OTC. To pay for OTC products, drug plans must use administrative dollars and not federal benefit dollars.

For 2007, CMS is loosening restrictions on PDP and MA-PD coverage of safe, effective over-the-counter drugs that are less expensive than prescription alternatives in the plan's formulary. Medicare drug plans must still use administrative dollars because of the statutory limit. However, OTC products may be covered outside of a step therapy program. To ensure Part D enrollees have continued access to prescription versions, drug plans that decide to cover OTCs outside a federally-approval step therapy protocol may not use prior authorization or other tools to require OTC use before a formulary legend drug is covered. Plans must also educate enrollees on differences between the prescription and non-prescription available for a given need.

Compared to their prescription alternatives, OTCs often represent savings of 60-70 percent or more. Seniors tend to be heavy users of proton pump inhibitors (PPI), non-steroidal anti-inflammatory drugs (NSAIDs), and antihistamines - categories with low-cost OTC alternatives likely appropriate for many patients. Therefore, next year many Medicare drug plans will likely offer free OTCs to drive utilization, reduce costs, ease the doughnut hole, and improve enrollee satisfaction and retention.

In addition to reducing costs for drug plans and many beneficiaries, wider access to OTCs in Part D may also reduce state Medicaid spending. Under MMA, 6 million dual eligibles were moved from Medicaid to Medicare for purposes of most drug coverage. However, Medicaid drug coverage is broader than Medicare Part D in many states. To save dollars, most states cover some OTCs. If a state Medicaid program covers an OTC for one group of Medicaid recipients, federal law requires the state to cover the OTC for all, including dual eligibles. The continued overlap of Medicare and Medicaid drug coverage for duals creates opportunities for confusion, cost shifting, even gaming. But the new OTC coverage options in Part D should allow states to save some Medicaid pharmacy dollars - provided CMS is proactive in working cooperatively with states, drug plans, and pharmacies on the issue.

While drug plans and beneficiaries will win - and states may win - from the new OTC coverage guidance, pharmacies will lose because of lower product and dispensing fee revenue. Some pharmaceutical manufacturers will also lose, notably those prescription drug makers facing competing OTCs in hot categories like proton pump inhibitors.

Using new benefit design and cost-sharing options created by the Deficit Reduction Act (DRA), states are busy restructuring Medicaid programs. With recently announced approvals from HHS Secretary Mike Leavitt, Kentucky, West Virginia, and Idaho are the first states to take advantage of DRA flexibility.

With the help of top advisors, other states are working on their own Medicaid initiatives, using a mix of DRA options and creative Section 1115 waivers.

Here's a quick summary of the new Medicaid reforms in Kentucky, West Virginia, and Idaho:

Kentucky Medicaid Reform:

Kentucky will offer benefit packages aimed at meeting the health care needs of three different groups: (1) children, (2) the elderly and people with disabilities who need institutional care, and (3) the general Medicaid population.

Through four new benefit packages, Medicaid enrollees will be offered the most appropriate benefit plan based on their needs:

1. The Family Choices program will serve healthy children.

2. Comprehensive Choices and Optimum Choices will serve individuals with complex health care needs.

3. Global Choices, which is most similar to Kentucky's traditional Medicaid program, will serve other vulnerable populations.

Kentucky's Medicaid restructuring includes a new disease management program with special incentives to encourage healthier behavior by chronically ill beneficiaries. After successfully participating in a disease management program for one year, participants will be eligible for services not otherwise available, such as dental or vision services.

The Kentucky reform program will also help Medicaid recipients buy employer-sponsored coverage. If a beneficiary chooses their employer's plan instead of Medicaid, the state will help cover the premium.

West Virginia Medicaid Reform:

West Virginia will offer enrollees a choice of two benefit packages:

1. A Basic plan modeled after current Medicaid benefits.

2. An Enhanced plan that includes a broader range of health services in exchange for complying with all recommended medical treatment and wellness behaviors.

The new benefits under the Enhanced plan will include tobacco cessation, nutritional education, diabetes care, chemical dependency services, mental health services, cardiac rehabilitation, chiropractic services, and emergent dental services.

West Virginia's Enhanced plan will also cover skilled nursing care, orthotics, and prosthetics for children. Both the Basic and Enhanced plans will cover Early, Periodic Screening, Diagnosis, and Treatment (EPSDT) services for children.

To enroll in the Enhanced benefit, beneficiaries must sign a member agreement stating they will comply with all recommended medical treatment and wellness behaviors. The Basic plan - with the standard Medicaid package - is the default benefit for those who chose not to join the Enhanced plan or who decide they want to leave the Enhanced plan.

Idaho Medicaid Reform:

Idaho will offer three new benefit packages aimed at meeting the health care needs of different groups: children, people with disabilities, and beneficiaries who are eligible for both Medicaid and Medicare (aka dual eligibles).

All three new packages - Basic, Enhanced, and Coordinated - are voluntary. Any enrollee who chooses one of the new plans can opt out and return to standard Medicaid at any time they wish.

Here are some details on Idaho's three plans:

1. The Basic plan will serve healthy children and adults and will cover most of traditional Medicaid benefits, including EPSDT services for children. However, the Basic plan will not cover long-term care, organ transplants, and intensive mental health treatment.

2. The Enhanced plan is designed to serve individuals with more complex medical needs, most notably the elderly and disabled. The Enhanced plan will cover all the traditional Medicaid benefits, including long-term care. Beneficiaries enrolled in the Basic plan who need services not available in that plan will be moved to the Enhanced plan.

3. The Coordinated plan will serve dual eligibles. It will include all services now covered under Idaho's traditional Medicaid program. For coverage under the Coordinated plan, dual eligibles must also be enrolled in Medicare Part B and Part D.

Each of these benefit plans will include new preventive services, including nutrition services and other benefits to help smokers, the obese, and others adopt healthier habits.

Idaho's Medicaid restructuring includes several other important reforms:

1. The working disabled may purchase the basic benefit package.

2. Eligibility for children in Medicaid and the State Children's Health Insurance Program (SCHIP) will be streamlined. This includes elimination of an asset test for some children.

3. Using SCHIP dollars, the state will help schools offer preventive health services to low-income children.

The world's leading guru of competitive strategy, Michael Porter, Ph.D., has turned his sights on explaining the fundamental cause of high costs, poor quality, consumer dissatisfaction, uneven access, and skyrocketing premiums in American health care.

In Redefining Health Care, Porter and innovation expert Elizabeth Teisberg, Ph.D. provide a thoughtful, groundbreaking framework to use competition to drive dramatic increases in quality and efficiency.

Unlike many wonks who foolishly believe that health care is not a market, Drs. Porter and Teisberg see competition " of a sort " in operation. They show us that the current competitive environment in health care is designed to "shift costs, accumulate bargaining power, and restrict services." That is, what we have now is dysfunctional, zero-sum competition serving to limit, even reduce value for patients. And they see all this taking place "...at the wrong level-among health plans, networks, and hospitals " rather than where it matters most, in the diagnosis, treatment, and prevention of specific health conditions."

Focusing on how to move American health care to positive-sum competition based on economic and clinical value for patients, Redefining Health Care provides a series of specific recommendations for the key players " including physicians, hospitals, health plans, employers, Medicare, and Medicaid.

To learn about the Massachusetts health care reform initiative, here are two podcasts on this groundbreaking new program to cover virtually all the uninsured in the Commonwealth.

For Sellers, Feinberg and Associates, the lead consultants on the Massachusetts reform project, I host a biweekly podcast on hot issues in Medicaid. These concise audio briefings help state leaders and business executives keep tabs with Medicaid on Capitol Hill and CMS.

In Part 1 of the special audio briefing on the Massachusetts health reform initiative, Marty Sellers, President and founder of Sellers Feinberg, describes the key components of the Massachusetts initiative, how it was developed, and implications for other states and the healthcare market.

In Part 2, Peggy Handrich, the former Wisconsin Medicaid director and now leader of Sellers Feinberg's strategic Medicaid consulting practice, describes the key financial and programmatic characteristics of the Massachusetts health reform.

To listen directly on your computer, click here for Part 1 and here for Part 2. The podcasts are in the popular MP3 format, so you may also right-click to save and upload them to your iPod or other MP3 player for listening on the road.

For a useful two-page fact sheet on the Massachusetts health care reform plan, click here (PDF).

To subscribe to receive the free podcasts on Medicaid, please contact Sellers Feinberg. The folks there are working with a number of other states on health reform and Medicaid restructuring initiatives.

Being a Medicare prescription drug plan can be a profitable business. For the smart players, it will be highly profitable over time and indispensable to market position. But Medicare Part D can also be financially risky and volatile - particularly given:

It is an immutable truth of economics. Transparency is an essential ingredient for a market to function with any semblance of efficiency or effectiveness. Lack of transparency - what economists call asynchronous information - leads to rapid inflation, gross inefficiency, gaming and abuse, ignorant consumers, poor quality, rampant error rates, and misaligned resources. In other words, you get America's $1.9 trillion health care system.

After years of behind the scenes work by top health care thought leaders, the White House and key Congressional leaders are jumping on board and calling for reforms to ensure transparency (read public reporting) of health care provider prices. While prices are only part of the information needs of patients, purchasers, and payors, nationwide transparency of medical prices is essential. Health Savings Accounts and other consumer-driven health reforms such as Medicaid Health Opportunity Accounts are largely pointless in a health care system otherwise rooted in incomplete, inaccurate, and inaccessible information.

As leaders contemplate specific measures to promote transparency of prices, they should also consider sending every Medicaid and Medicare beneficiary a quarterly report on the cost of their care. (I am not talking about Explanation of Benefits [EOB] notices. EOBs don't give a picture of their overall costs or utilization and offer no comparative, trend, or historical information.)

Using simple, colorful charts and tables and an emphasis on decision relevant information, a well-designed report would show them what care they received, what providers charged, what public programs paid, how much they paid in cost sharing, and how their medical costs compare to their peers (age group, sex, health status, and geography).

For Medicare beneficiaries, the reports could help bust a core myth of Medicare financing by showing what Medicare has paid for their care compared to what as an individual they paid in Medicare taxes and cost-sharing to date. In Medicaid, the reports would be invaluable to state efforts to move toward consumer-directed models where chronically ill or disabled patients and their families take active control of their medical lives. It would also help low-income families better understand the health care system. For dual eligibles - the 6.3 million Americans with annual health costs of a quarter trillion dollars - these personalized reports would be truly eye opening for patients and their families.

Over time, the reports could help Medicaid and Medicare beneficiaries see how their providers, health plans, and drug plans compare on measures of quality, errors, and cost effectiveness. And they could include simple health reminders.

Of course, not every benie would read the reports much less change their behavior based on the information. But the vary act of creating the reports would require Medicare and Medicaid to modernize information systems, turn transaction data into genuine decision-relevant information, and begin thinking of program beneficiaries as consumers in need of more than monstrously dull doorstops masquerading as handbooks.

Americans, including Medicaid and Medicare beneficiaries, are not stupid. But when it comes to health care costs, they are too often ignorant or oblivious. That must stop. Yes, there is a learning curve and some people prefer the bliss of ignorance to the dilemmas of judgment. Nonetheless, as consumers, as Americans, as human beings we are entitled to the information we need to make decisions. Keeping Medicare and Medicaid beneficiaries and their families in the dark is as costly as it is insulting.

Coming on the heels of Medicare Part D and the new Part B drug-pricing schema based on Average Sales Price (ASP), the new Competitive Acquisition Program (CAP) for Medicare Part B drugs and biologics represents yet another major change to the pharmaceutical supply chain. While it is too early to reliably predict the impact or even viability of CAP, it's critical for players to understand the initiative. Ultimately, CAP may have a dramatic impact on drug manufacturers, distributors, physicians, and beneficiaries.

Road to Average Sales Price (ASP):

While Medicare Part B drug coverage is complex, generally speaking Part B drug coverage is limited to physician-administered drugs and therefore primarily injectibles. Prior to the Medicare Modernization Act of 2003, Medicare reimbursed physician offices for Part B drugs based on percentages of Average Wholesale Price (AWP). Physicians would buy what they need, administer drugs to patients as necessary, charge beneficiaries for their deductible and 20% Part B co-payment, and bill Medicare for the drug and the office visit.

This approach was widely criticized by MedPAC, GAO, and the OIG as well as outside experts. Under the AWP-based system, Medicare drug payments were far higher than other payors. It also meant higher patient co-payments. However, in fairness to physicians, in many ways the higher drug reimbursement helped make up for Medicare's below-market office visit rates.

Under MMA, Congress changed that way Medicare reimburses physicians for drugs and biologics covered under Medicare Part B. Since January 2005, Medicare reimburses physicians using a new formula based on Average Sales Price (ASP). For most Part B drugs, physician offices are now paid 106% of ASP.

In brief, ASP is what a pharma or biotechnology company makes on a given product, net of rebates and other price concessions. The Centers for Medicare and Medicaid Services (CMS) calculates ASP using net sales data provided by drug makers. Medicare adds 6% to help cover physicians' costs of buying, storing, and billing. The new ASP-based payment system results in substantial savings to Medicare but of course also lower revenues for physicians.

Basics of the Competitive Acquisition Program (CAP):

Starting in July 2006, physicians will have an alternative to buying and billing for Part B drugs and ASP-based payment. The upcoming Competitive Acquisition Program (CAP) will give physicians the option of obtaining most Part B drugs needed by Medicare patients from vendors selected by CMS. Medicare physicians may elect to participate in CAP on an annual basis.

The CMS-approved vendors, selected through competitive bidding, will negotiate with manufacturers, buy and distribute supplies to physicians, bill beneficiaries for any applicable deductible and coinsurance, and bill Medicare's designated national carrier for drug costs. The carrier will pay the CAP vendor after verifying that the physician administered the drug. To do this, the carrier will match the CAP vendor's claim for the drug with the corresponding physician claim for drug administration. Following this verification, the CAP vendor will bill the beneficiary (or the beneficiary's Medigap policy or other third party insurance) for applicable cost sharing.

For the Part B drug categories they have selected, physicians opting for CAP will receive all of those drugs (used for Medicare patients) from the approved CAP vendor. Physician offices participating in CAP will continue to bill Medicare as usual for the drug administration fee and other office fees.

Under certain conditions, a participating CAP physician may provide a drug to a Medicare beneficiary from his or her own stock and obtain the replacement drug from the CAP vendor. There is also an exception for "furnish as written" situations when the physician specifies that a certain brand of a drug is medically necessary and that drug is not available from the CAP vendor. In those cases, the participating CAP physician may buy the drug, administer it to the beneficiary, and bill Medicare using the ASP system.

CAP Bidding and Contracting:

Every three years, CMS will solicit bids from qualifying vendors - primarily major distributors and specialty pharmacy shops. MMA gives CMS the authority to select drugs or categories of drugs that will be included in the program. Drugs may be excluded from the CAP if competition will not result in significant savings compared to the ASP system or when necessary to avoid disruption in access to a drug.

In April, CMS is expected to announce the CAP vendors for the program's July 1, 2006 start.

Market Implications of CAP:

In an upcoming story, I will comment on the implications of CAP for drug manufacturers, drug distributors, and physicians.

The HHS Office of the Inspector (OIG) is studying a long list of issues related to Medicare Part B physician-administered drugs, the new Medicare Part D outpatient prescription drug benefit, and state Medicaid pharmacy benefits. In addition to its investigative and audit function, the talented staff at the HHS OIG also conduct analyses and evaluations, typically resulting in public reports. Below are the drug benefit-related topics that the OIG selected for close examination this year. Some were mandated by Congress, others requested by CMS or OMB. Think of it as a useful sentinel of upcoming hot issues and controversies.

Medicare Part B Physician-Administered Drugs:

Medicare Part D Prescription Drug Benefit:

State Medicaid Prescription Drug Benefits:

Naturally, the list is subject to change and should not be considered as the only topics under review. The OIG changes its work plan to accommodate new problems and changing conditions. Therefore, the topics will fluctuate. For more information, including past studies and reports, visit the OIG site.

Medicare Advantage Special Needs Plans (MA-SNPs) are an important new innovation in the healthcare marketplace. Ultimately, as I reported last fall in the Piper Report, MA-SNPs may evolve to serve an untapped $250 billion market. Here's a quick briefing on Special Needs Plans and how they become integrated Medicaid / Medicare health plans:

Brief History of Medicare Managed Care:

Since 1970's, Medicare has included an HMO option as alternative to receiving all Medicare Part A and Part B services from traditional fee-for-service Medicare. The Balanced Budget Act of 1997 (BBA) renamed Medicare managed care to "Medicare+Choice" and added a new range of options for Medicare beneficiaries: preferred provider organizations (PPOs), provider-sponsored organizations (PSOs), private fee-for-service (PFFS) plans, and Medical savings accounts (MSAs) linked with high deductible insurance plans.

Medicare Modernization Act of 2003:

In addition to creating the new Medicare Part D prescription drug benefit, the Medicare Modernization Act of 2003 (MMA) renamed Medicare+Choice to "Medicare Advantage" (MA) and created new MA plan options for beneficiaries - regional preferred provider organizations (PPOs) and "Special Needs Plans" for dual eligibles, the institutionalized, or those with severe and disabling conditions. MMA also created new incentives for health plan participation in the over $300 billion Medicare market, most notably risk adjustment to Medicare Advantage plan premiums and increased Medicare Advantage plan premiums.

Basics of Medicare Advantage:

The Medicare Advantage program is governed under Medicare Part C, which refers to Part C of Title XVIII of the federal Social Security Act. Medicare Advantage (MA) plans provide all Medicare-covered benefits under Part A and Part B and serve as an alternative to traditional Medicare fee-for-service. Most kinds of MA plans (including all the most popular ones) must also offer a voluntary drug benefit under Part D.

This way, beneficiaries may get all Medicare-covered benefits (Part A, Part B, and Part D) through one health plan. If a benie wants to sign up for Part D but stay in unmanaged fee-for-service for Part A and B services, they must enroll in a stand-alone prescription drug plan (PDP) to receive Medicare drug coverage. (Part D thankfully does not have a government-run fee-for-service option.)

Part D is major draw for new Medicare Advantage enrollment. Compared to the alternative (fee-for-service for Part A and Part B benefits and a stand-alone prescription drug plan for Part D benefit), Medicare Advantage plans are able to offer lower cost sharing, more benefits, fewer hassles, and higher performing mix of providers. However, because they have higher expectations regarding provider quality and cost-effectiveness, Medicare Advantage plans (particularly HMO-based plans) tend to offer a narrower choice of providers than Medicare fee-for-service.

Medicare Advantage Enrollment:

More private insurers are participating in Medicare than ever - 459 approved Medicare Advantage plans, up from 247 in 2005. Currently, over 14% of beneficiaries (6+ million) are enrolled in Medicare Advantage plans - up from 12% (4.9 million) in 2005. Plan enrollment varies widely state to state, with the highest penetration (20% to 30%+) in AZ, CA, CO, OR, PA, and RI.

Long-range projections of Medicare Advantage enrollment vary widely. The White House Office of Management and Budget (OMB) believes that by 2013 30% of Medicare beneficiaries will be enrolled in Medicare Advantage plans. The Congressional Budget Office (CBO) projects that 16% of beneficiaries will be in a Medicare Advantage plan by 2013. At the current path, MA plan enrollment should exceed 16% in 2006.

Medicare Advantage Premiums:

Medicare uses a complex system to calculate plan premiums, blending administrative pricing with competitive bidding, market benchmarking, and risk adjustment. There are separate bidding and rate-setting processes for Parts A/B and Part D.

For example, for the Part A and Part B portion of Medicare Advantage plan payments, Medicare uses a benchmarking process to compare bids and leverage competition to maximize value for beneficiaries and taxpayers. If a plan's bid is above benchmark, enrollees in that plan pay the difference. If lower, 75% of difference goes to enrollees as extra benefits or lower cost sharing (or a reserve fund) and 25% goes to Medicare.

Basics of Special Needs Plans:

Prior to MMA, Medicare health plans were required to market generally to the Medicare population in their geographic service area and could not limit enrollment to specific population. Under the new Special Needs Plan option, insurers may propose a Medicare Advantage plan that is restricted to a special needs population either exclusively or disproportionately.

The ability to separately market and enroll special needs populations - coupled with Part D and risk adjustment - has created significant interest in this market. It's important to note that authority for Medicare Advantage Special Needs Plans (MA-SNPs) expires in December 2008. Therefore, Congressional action required to continue after 2008.

Target Populations for Special Needs Plans:

Under MMA, there are three target populations for Medicare Advantage Special Needs Plans:

1. Institutionalized Beneficiaries (~3.5 million): Medicare beneficiaries who reside or are expected to reside for 90 days or longer in a long-term care facility. Also includes Medicare beneficiaries who live in the community but who require an equivalent level of care to those residing in a long-term care facility.

2. Dually Eligible beneficiaries (~7.5 million): Medicare beneficiaries who are also in Medicaid for full Medicaid benefits (~6.2 million) and low-income Medicare beneficiaries who receive subsidies from their state Medicaid program for their Medicare cost sharing (~1.3 million in QMB, SLIM, or QI programs).

3. Medicare Beneficiaries with Chronic, Severe Conditions (~millions more): The feds are particularly interested in MA-SNPs designed to serve Medicare beneficiaries with cardiovascular disease, diabetes, congestive heart failure, osteoarthritis, mental disorders, end-stage renal disease (ESRD), and/or HIV/AIDS. However, there is no preset definition for this target group. CMS evaluates MA-SNP proposals on case-by-case basis. CMS focuses on appropriateness of the target population, clinical programs and special expertise of the MA-SNP, and how the MA-SNP will cover full target population it specifies without discriminating against "sicker" members.

Basics of Dual Eligibles:

Health care spending for dual eligibles now hovers at a massive quarter trillion dollars - about 60% provided by Medicaid and 40% from Medicare. While dual eligibles drive over a quarter of all Medicare costs, dual eligibles drive over 40% of state Medicaid budgets. (For variety of reasons, including different definitions of duals and accounting for Part D costs, estimates vary. For example, when talking about "dual eligibles" some wonks are referring to the 6.2 million full-benefit duals. Other times the term refers to both the full-benefit folks plus the 1.3 million Medicare-only beneficiaries with partial Medicaid subsidy.)

Dual eligibles are a vulnerable, high cost population in desperate need of coordinated care. About 2/3 live in community and 1/3 reside in long-term care facilities. They commonly have multiple morbidities (5-8) and some 45% have severe mental illness. Compared to the overall Medicare population, they are lower income, older, disproportionately female, disproportionately minority, and less educated. They are often live highly isolated lives, with little or no support system.

MA-SNP Market for 2006:

Since passage of MMA, the number of approved Medicare Advantage Special Needs Plans (MA-SNPs) has steadily increased, from 11 in 2004 to 276 in 2006. Of the 276 MA-SNPs approved for CY 2006, 226 are designed for dual eligibles, 37 for beneficiaries with institutional level of care, and 13 for specific chronic conditions (e.g., ESRD). One or more MA-SNPs now operating in most states: AL, AZ, AK, CA, CO, CT, FL, GA, HI, IA, ID, IL, IN, KS, KY,LA, ME, MD, DE, MA, RI, MI, MN, MO, MS, NE, NE, NV, PA,NJ, NM, NY, NC, OH, OK, OR, PR, SD, TN, TX, UT, WA, WI.

Integrating Medicaid and Medicare via MA-SNPs:

Historically, integration of health care for dual eligibles has been a major challenge. Medicaid and Medicare vary radically in financing, coverage policies, delivery systems, beneficiary rights, and day-to-day administration. For dual eligibles, this results in misaligned benefit structures, little or no care coordination, lower quality, over and under utilization, huge opportunities for cost-shifting, and seemingly endless conflicts between the feds and states. The human and economics costs are extraordinary.

While created to serve the Medicare side of the market, Medicare Advantage Special Needs Plans create new opportunities to integrate Medicaid and Medicare coverage for dual eligibles. Last fall, I laid out the rationale here in the Piper Report (click to read that story). The idea is picking up steam, generating considerable interest from states and health plans.

Basics of Integrated Medicaid-Medicare Health Plan:

In brief, here's how it could work. A health plan contracts with both Medicare (with CMS as a MA-SNP) and the state Medicaid program. For its dual eligible enrollees, the plan is then responsible for all Medicare and Medicaid benefits. The integrated Medicare-Medicaid plan would also be responsible for coordinating benefits with other payors like VA.

The combined Medicaid / MA-SNP would receive fully capitated, risk adjusted premiums for (1) Medicare Part A and Part B (MA plan bidding and benchmarking), (2) Medicare Part D drug benefit (MA-PD bidding and benchmarking), (3) Medicaid benefits (actuarially determined, with bid or proposal process determined by the state), and (4) state Medicaid payment for Medicare cost sharing. The state Medicaid program could create incentives to encourage dual eligibles to enroll in integrated plans. For example, the state could limit coverage of popular home- and community-based long-term care services to duals enrolled in integrated plans.

With some grant support from The Robert Wood Johnson Foundation, five states are developing concept: Florida, Minnesota, New Mexico, New York, and Washington. To make integrated Medicaid / Medicare plans practicable, they are working to standardize and simplify: (1) plan rate setting and risk-adjustment; (2) performance standards, measurement, and reporting; (3) grievance and appeal procedures; (4) marketing guidelines; and (5) state contracting processes with MA-SNPs.

Long-term care expenditures now exceed $200 billion a year and growing fast. State Medicaid programs pay the lion's share and cover a far broader range of institutional, community, and home-based services than Medicare. To encourage folks to buy long-term care insurance and take pressure off taxpayers, the new Deficit Reduction Act of 2005 (DRA) allows any state to create a Long-Term Care Partnership Program.

The Long-Term Care Partnership Program - a public-private partnership between states and private insurance companies - helps reduce Medicaid expenditures by delaying or eliminating the need for some people to rely on taxpayers to pay for long-term care services. The idea was developed in the late 1980's and early 1990's with support from The Robert Wood Johnson Foundation (RWJF).

Here's how it works:

1. To qualify for Medicaid, applicants must meet certain eligibility requirements, including income and asset requirements. Traditionally, Medicaid applicants cannot have assets that exceed certain thresholds. They must deplete ("spend-down") their assets until the Medicaid financial eligibility threshold is met. Many folks, particularly wealthier individuals, hire elder law attorneys to find ways to legally hide or divert assets so heirs get the bulk of their assets while taxpayers pay for nursing home care.

2. Under the Long-Term Care Partnership Program, individuals are encouraged to buy long-term care (LTC) insurance policies that meet state and federal standards on private LTC coverage and consumer protections.

3. If the privately insured individual eventually needs long-term care services, they first rely on benefits from their private long-term care insurance policy to cover LTC costs before they access Medicaid.

4. To encourage the purchase of private LTC coverage, long-term care insurance policyholders are allowed to protect some or all of their assets from Medicaid spend-down requirements during the eligibility determination process. They still must meet income requirements for Medicaid.

5. Four states now have Long-Term Care Partnership Programs: California, Connecticut, Indiana, and New York. Since 1993, federal law had limited the program to these states. The Deficit Reduction Act of 2005 (DRA) now permits any state to participate. (The DRA also made a number of other LTC-related changes to Medicaid.)

To learn more, check out:

- Briefing by Government Accountability Office (GAO)

- The Long-Term Care Partnership Program: Issues and Options from the Brookings Institution.

- Medicaid's Long-Term Care Insurance Partnership Program, a detailed report from the Congressional Research Service (CRS).

- Who Will Pay for Long Term Care?: Insights from the Partnership Programs, an excellent book edited by Nelda McCall at Laguna Research Associates.

Since Medicaid is administered by the states, traditionally virtually all Medicaid anti-fraud efforts were managed by state Medicaid agencies, with civil enforcement and payment recoveries by the Medicaid agency and criminal prosecutions by the state attorney general and the AG's Medicaid fraud control unit (MFCU). States vary widely in their approaches, the relative sophistication of tools used, and staff resources dedicated. For example, Northern and Western states tend to focus on provider fraud and Southern states tend to focus more on beneficiary fraud.

The recently enacted Deficit Reduction Act of 2005 (DRA) significantly expands the federal government's role in combating Medicaid fraud and abuse. The new provisions have far-reaching implications for states, providers, and health plans as well as for the federal-state relationship. If managed well and in close coordination with the states, it could save taxpayers billions of dollars. If not, it could easily result in chaos and confusion for Medicaid providers and health plans and a time sink for state Medicaid agencies.

It also creates (1) significant new business opportunities for anti-fraud contractors and systems vendors, (2) new financial incentives for states to beef up their own systems and staff, and (3) new opportunities for whistleblowers and for qui tam suits.

The DRA creates a federal Medicaid Integrity Program, including new contractors, additional federal staff, and financial incentives for states to increase their own efforts at fraud detection and payment recovery. Congress is giving the Centers for Medicare & Medicaid Services (CMS) an additional 100 staff plus $50-$75 million a year for outside contractors. If a state enacts its own false claims act, it will be able to retain a larger share of any payment recoveries. (Only 15 states and DC now have some form of state false claims act.) The effect is that compliant states could increase their savings from anti-fraud efforts by as much as 20 percent.

The new law also requires organizations with more than $5 million in annual Medicaid payments to regularly train employees on Medicaid fraud laws and reporting. Across the country, this will apply to thousands of hospitals, nursing homes, home care providers, Medicaid managed care organizations, and counties, as well as many chain pharmacies, clinics, other providers, and the Medicaid fiscal agents like EDS and ACS.

There's a hot debate over the pros and cons of health savings accounts (HSAs). Like most other health policy issues these days, the debate is based more on differences in political and economic ideology than on facts. While on its face it may appear as a debate between Republicans and Democrats, in reality its a classic debate between Capitalists and Socialists, between believers in the power of markets and belivers in the power of government.

HSAs were made possible by the Medicare Modernization Act of 2003 and build on the earlier concept of medical savings accounts. In his State of the Union address, President Bush proposed several reforms to increase the availability of HSAs. While only three million Americans now have coverage through HSAs and the linked high-deductible health plans, many market watchers expect dramatic growth over the next couple years.

Here are some resources to understand health savings accounts (HSAs) and high-deductible health plans:

Fundamentals of Health Savings Accounts: Briefing paper from National Health Policy Forum (NHPF).

Primer on Health Savings Accounts for Consumers: Presentation by National Association of Health Underwriters (NAHU).

Health Savings Accounts as a Tool for Market Change: Issue brief from the HCFO program at AcademyHealth.

High Deductible Health Plans and Health Savings Accounts - For Better or Worse? From By Dr. Karen Davis, president of The Commonwealth Fund.

Health Savings Accounts - Health Care Reform's Best Kept Secret: By Robert F. Hamilton, MD, FACS

What High-Deductible Plans Look Like - Findings From A National Survey of Employers: Shows availability, enrollment, premiums, and cost sharing for high-deductible health plans offered with HSAs, from Kaiser Family Foundation and Center for Studying Health System Change.

Turning Medicaid Beneficiaries into Purchasers of Health Care: Critical success factors for using consumer-driven health plans in Medicaid, by Chuck Milligan, JD and colleagues.

HSA Information from U.S. Department of the Treasury: Includes directory of organizations, tax information, frequently asked questions, online resources, and glossary of terms.

Online Tools for Consumer-Directed Health Plans: The Kaiser Family Foundation hosted a demonstration of some online tools made available to enrollees in consumer-directed health plans.

Health care reform is a hot topic again. President Bush is rolling out a series of initiatives to improve health insurance coverage. Congress is poised to approve a 1,000-page budget reconciliation bill with dozens of key changes to Medicaid and Medicare. CMS continues to work hard to implement the Medicare drug benefit. And the national Medicaid reform commission is holding meetings to construct a package of long-range reforms to the world's most complex health program.

Through all of this, states remain the nation's laboratories for genuine health reform. One of the many advantages of our Federalist system is the ability of states to design and test new approaches. State-based reforms are inherently more pragmatic - allowing for faster, less risky implementations and designs that reflect local political and market needs. Compared to federal agencies, states are closer to the ground level, more nimble in responding to inevitable problems, better positioned to partner with employers, and tend to have a deeper bench of real-world, operational expertise.

In Massachusetts, Governor Mitt Romney's health reform plan will cover virtually all of the Commonwealth's uninsured by 2009. It's an ingenious mix of Medicaid financing, market reforms, and public-private partnerships. In Michigan, Governor Jennifer M. Granholm has proposed her own innovative health reform initiative - Michigan First Health Care Plan - to cover over a half million uninsured Michiganders. The good folks at Sellers Feinberg, experts in Medicaid restructuring and super waivers, are advisors to both states.

Governors Romney and Granholm differ in many respects, most notably politics and state situations. However, they share the same goal and have the courage to think out of the box and take action.

1. You get what you pay for.

2. Price is what you pay but value is what you get.

3. You can't fix what you can't see.

4. Incentives matter, whether you intend them to or not.

5. No matter what they say, it's always about money and autonomy.

6. There are no essential providers, only essential services.

7. More is rarely better and often worse.

8. Health care providers are not your children. You are under no obligation to treat them the same for different performance.

9. If you pay them, they will come. If you don't pay them, they'll come anyway and it will cost you.

10. Never let a health plan or provider do what you would do if you were they.

11. Uninformed choice is not choice.

12. It's all in the execution and in the communication of the execution.

13. Health care is a game of chess. The player who thinks the most moves ahead wins.

14. Health care policy making is like puppetry. If you can see the strings it doesn't work.

15. In health politics, complexity and chaos can be your friends or you enemies. Your choice.

16. Death is always cheaper than life but rarely preferable.

17. Until they award a Nobel Prize for health policy, style rules substance and perception rules reality.

18. Health care policy is an art - but more sculpture than painting. What you leave out is more important than what you put in.

19. Get paid for what is in your control but only pay for what is outside theirs.

20. Results matter. Period.

When enacted in 1996, the federal Medical Health Parity Act (MHPA) was expected to increase health insurance premiums by 3.2% to 8.7%. For employers with 50 or more employees, the Act required parity between annual and lifetime dollar limits for mental health and physical health services.

Specifically, the MHPA:

1. Requires parity of mental health benefits with medical and surgical benefits with respect to aggregate lifetime and annual dollar limits under a group health plan.

2. Says that employers still have discretion regarding the scope of mental health benefits offered to employees and their dependents (e.g., cost sharing, limits on number of visits, and medical necessity).

3. Does not apply to benefits for substance abuse or chemical dependency.

4. Does not apply to a coverage if the parity provisions result in an increase in the cost one percent or more.

An excellent new analysis by Steve P. Melek, a principal and consulting actuary with Milliman, shows that the federal mandate did not increase costs as expected. In fact, MHPA had little effect on overall health costs and, in some cases, may have helped save dollars. This is at least partially due to the fact that MHPA came at the same time as a big increase in the use of managed behavioral health care.

Coverage mandates are rarely a good idea, are driven largely by political expediency and health system naivete, and often generate unintended consequences. But Mr. Melek's analysis shows how health policy and market interventions by the government are not made in a vacuum. Indirectly, it also suggests that employers, health plans, and legislators should focus their attention on what patients need - not on arbitrary or discriminatory limits on access.

Sophisticated health care purchasers and health plans know the value of prescription drug data. When analyzed with paid claims data from physicians and hospitals, data from pharmacy claims can be used to identify, understand, and track a wide range of issues.

Starting January 2006, when the 6.5 million dual eligibles move from Medicaid to Medicare for their prescription drug benefits, state Medicaid agencies will no longer have access to data on drug use by these extremely expensive, at-risk beneficiaries - patients who drive over 40 percent of Medicaid costs. As a result, Medicaid managers will lose an invaluable source of information, severely handicapping the ability of states to monitor quality, access, and costs and catch waste, fraud, and abuse.

The Centers for Medicare and Medicaid Services (CMS) lacks the legal authority to require Medicare prescription drug plans (PDPs and MA-PDs) share data with Medicaid. However, nothing precludes voluntary Rx data sharing between Medicare drug plans and states.

Voluntary data sharing would be an easy, inexpensive way for Medicare drug plans to gain goodwill among states and advocates, generate positive publicity, and differentiate themselves from the mass of competitor plans. In addition, because dual eligibles may switch plans any time and multiple times each year, two-way data exchanges with states would aide drug therapy transitions, utilization review, and medication therapy management. Stand-alone PDPs, which are at risk only for drug costs and therefore will not have access to any non-drug data, could greatly benefit from data from state Medicaid programs (e.g., diagnoses, prescription history, providers seen)

To help make this happen:

- A major pharmaceutical manufacturer should offer to fund a national initiative to show the business and clinical case for information exchange, develop data sharing agreements, iron out any technical obstacles (e.g., data safeguards), and cover the modest start-up costs (e.g., systems changes). In addition to generating goodwill, this would help minimize disruption in drug therapy, quality problems, and errors - and reduce lost revenue and bad publicity that will inevitably result if duals have problems accessing vital medications.

- In their standards for a Medicare drug plan to be designated as a preferred plan for low-income beneficiaries, State Pharmaceutical Assistance Programs (SPAPs) should require that preferred drug plans to exchange duals' Rx data with states.

Medicare Advantage is the new name for voluntary managed care options in Medicare (also know as Medicare Part C and formerly "Medicare+Choice"). Medicare Advantage plans are now available in nearly every area of the country. Beneficiaries who select a MA plan elect to receive all Medicare benefits through the health plan (HMO or PPO). This includes all Part A and Part B services, plus the new Part D drug benefit as an optional add-on.

The Medicare Modernization Act (MMA) created a Medicare Advantage option called "specialized MA plans for special needs individuals" ("special needs plans" or "SNPs"). These Medicare health plans limit their enrollment to special needs beneficiaries (or disproportionate percentage of special needs beneficiaries). The idea is to encourage greater access to Medicare Advantage plans for special needs individuals and allow plans to tailor programs to meet unique needs. MMA also created risk adjustment, removing a major disincentive to serve high-cost populations. Two groups of special needs individuals are specified in MMA: (1) beneficiaries who are institutionalized and (2) dual eligibles. CMS may also establish other "special needs" groups among beneficiaries with severe or disabling chronic conditions. Like other Medicare Advantage plans, special needs plans have the ability to lower beneficiary cost sharing and cover services not available to beneficiaries in fee-for-service Medicare.

This creates a new opportunity for state Medicaid programs to extend the benefits of managed care to dual eligibles, who nationwide account for over 40 percent of Medicaid costs. Because of a labyrinth of conflicts between federal Medicare and Medicaid laws, it has been very hard for states to implement large-scale programs to improve care delivery for their highest cost, most vulnerable beneficiaries. The result has been high costs, extraordinary inefficiency, frustration for patients and their families, and higher risk for poor quality.

Working with CMS and Medicare Advantage special needs plans (MA-SNPs) operating in the state, a state Medicaid agency could offer to capitate all Medicaid services to any MA-SNP with dual eligible enrollees. The MA-SNP would then be responsible for all Medicare and Medicaid benefits, including all long-term care and prescription drug benefits. To ensure appropriate payment and oversight, the state would risk adjust the Medicaid side of the capitation and MA-SNPs would have one set of quality standards and grievance procedures (presumably based on the more stringent Medicaid protections). Enrollment would remain voluntary like it is for other Medicare beneficiaries, but states could create powerful incentives for duals to enroll in MA-SNPs. For example, the state could limit coverage of home- and community-based services (HCBS) to MA-SNP enrollees when two or more MA-SNPs are available.

Beneficiaries would benefit from higher quality, better access (in real terms), modern care coordination, less paperwork, closer oversight of their rights, and likely more services. States would win from a range of benefit and administrative savings, plus more predictable spending.

For a fact sheet on Medicare Advantage, click here. To learn about plans, enrollment, and other key issues, click here.

Once the Food and Drug Administration (FDA) approves a new prescription drug for one medical indication, physicians are free to prescribe it for virtually any condition. While there are downsides of prescribing drugs "off-label," it allows patients and payors to benefit as physicians test drugs under real-world conditions and identify new applications.

Because formal clinical trials and the FDA review process can take years, valuable new uses of a drug may be validated by studies in peer-reviewed medical journals years before the new indication becomes officially approved. And because of research and regulatory costs, drug makers cannot justify pursuing FDA approval for new indications, even when a new indication is highly cost-effective for purchasers, plans, and patients. Indeed, some diagnoses have no "on-label" drugs and are treated entirely on an off-label basis.

With the new Medicare drug benefit (Medicare Part D), the federal government will become the world's largest buyer of prescription drugs. In Part D, a prescription drug is coverable by a Medicare drug plan (PDP or MA-PD) only if it is prescribed for a medically accepted indication as defined under federal Medicaid law. This includes uses that are approved by the FDA or supported by a citation in one of four drug compendia:

· American Medical Association Drug Evaluations
· American Hospital Formulary Service Drug Information
· DRUGDEX Information System
· United States Pharmacopeia Drug Information

Because of this restriction in the Medicare Modernization Act, indications that are supported in peer-reviewed medical literature but not yet approved by the FDA or accepted in one of the compendia are not "medically accepted" by Medicare. In such cases, the Medicare drug plans may not pay for the drug.

While this helps Medicare drug plans manage their financial exposure and allows them to crack down on inappropriate drug therapy, it also means that it'll be harder for physicians to identify valuable new uses of medications. As we loose this critically important path to expanding our evidence base, patients and the economy will suffer.

This is yet another reason why we need a comprehensive approach to post-market surveillance and assessment of prescription drugs, continuous improvement of the evidence base of what works, and more effective ways to bring that evidence to day-to-day clinical practice.

In response to criticism from major drug distributors and lackluster response to a request for bids, the Centers for Medicare and Medicaid Services (CMS) is delaying implementation of the Competitive Acquisition Program (CAP) for physician-administered drugs paid under Medicare Part B. Originally scheduled to launch January 2006, CAP will now start July 2006 " provided CMS modifies the proposed requirements to make the program workable and sufficiently profitable for distributors.

Part of the series of reforms enacted by Congress in the Medicare Modernization Act (MMA) of 2003, the Competitive Acquisition Program is designed to help Medicare leverage its market share to reduce prices for injectable drugs and save money for taxpayers and beneficiaries. However, both CMS and the major drug distributors face huge, albeit different learning curves.

The feds are learning the complex, less than transparent ways and means of the pharmaceutical supply chain ' all while also trying to implement the massive new Medicare Part D outpatient drug benefit. Moreover, given the politics of Medicare, historically it has been tough for CMS to introduce competition to the program.

Meanwhile, the prospective players in CAP ' likely including the four big drug distributors ' are learning about their own complex new world ' the often-inscrutable, always Byzantine domain of Medicare, CMS, federal rulemaking, and government procurements.

And physicians ' who will need to decide whether to participate in CAP and select among wholesalers under contract with CMS ' are none too happy these days. Earlier, MMA reduced what Medicare reimburses docs for Part B drugs. While the new pricing is defensible and more in line with the market, it reduced physician office revenues, particularly for oncologists. In addition, unless Congress acts this fall, physicians face unsupportable fee cuts of 5 percent a year for several years.

The Part B Competitive Acquisition Program is a major change to Medicare and the multi-billion dollar market for physician-administered, injectable drugs. It'll be interesting to watch if Medicare can make it work.

For cash-strapped state governments, the "clawback" is the most controversial and costly provisions of the Medicare Modernization Act (MMA) and the new Medicare prescription drug benefit.

Now, as state begin new fiscal years and grapple with the latest Medicaid spending projections, some state leaders are balking at paying the federal treasury $124 billion over the next ten years to cover the drug costs of a federal benefit. Most state fiscal gurus also predict MMA will impose other costs on state taxpayers. California, for example, projects that Medicare Part D will cost the state $215 million more next year. And many legal experts believe the clawback is simply unconstitutional.

The feds maintain that MMA will save states money but to achieve any savings states must drop drug coverage for their retirees - this is only possible for states that make direct contributions to fund Rx coverage and if the state decides to renege on union contracts. This scenario is not available or practical for many, perhaps most, states.

Is Medicare facing a modern-day version of the Boston Tea Party? Leaders in Texas and New Hampshire reportedly intend to not pay the clawback. And the National Governors' Association's national Medicaid reform proposal calls on Congress to modify MMA, saying that "The clawback provisions should not be a further financial burden on states..."

The fireworks have just begun.

By Michael H. Bailit, MBA
President of Bailit Health Purchasing, LLC

Introduction

The serious problems in our health care system have been more than adequately documented in this journal and many others over the two past decades. Rates of uninsurance rise with a steadiness fueled by costs that seemingly know no bound. Quality varies with little or any relationship to cost, and ill-informed consumers cannot be confident that they are receiving the care that they need.

It initially appears astounding that that these problems are not getting resolved despite the well-intended efforts of many, many people. In fact with respect to cost growth and insurance coverage, the problems with our health care system are getting worse. Much worse. We who work in the field of health policy have failed.

Yet, the reasons for this failure are not difficult to understand. The health care industry represents a whopping 14.9% of the GDP (Levit, Smith, Cowan, Sensenig, and Catlin, 2004). It is an economic monolith, that becomes larger and, hence, more difficult to change every day. There are two sectors which foot the growing health care bill, neither of which is up to the challenge of curbing the expansion: government and employers.

Government

"One person's waste is another person's income.' (Wasson, 2004)

Federal and state government pay the largest share of the health care bill. They fight valiantly to control health expenditure growth, but rarely, if ever, by addressing the problem. Instead government purchasers often end up shifting costs to private payers. States and the federal government also reduce covered health care services in times of profound economic hardship. Finally, state and federal government assume loans (especially the federal government) and cut other service expenditures to meet the growing demand for health care dollars.

Ultimately, however, government fails to manage the growth of health care costs for two primary reasons. First, constituting a large economic sector, health care employs many Americans, thus creating a mission conflict for those elected and appointed to serve us. Reductions in healthcare expenditures result in lower income and potentially reduced employment for many Americans, including some who are politically influential. Second, most Americans don't want health cost growth restricted since the impact of costs is not directly visible to most Americans. That is, American taxpayers don't appear to appreciate how growing health care costs reduce available funds for other government programs and contribute to government debt.

To continue reading, click here.

Medicaid has become a fiscal disaster for states. With spiraling costs, bulging enrollment, and a degree of complex only a quantum physicist could love, Medicaid is in desperate need of large-scale reform.

The National Governors Association (NGA) has adopted an interim policy on comprehensive Medicaid reform. The policy, which all the governors will vote on at their mid-summer meeting, calls for:

1. A series of new flexibilities to promote cost-effectiveness. These include (a) adopting average sales price for pharmacy reimbursement; (b) tighter controls on creative asset transfers to quality for nursing home care; (c) new cost-sharing options similar to the SCHIP model; (d) ability to modify benefit designs to better accommodate the very different needs of low-income families, the disabled, and frail seniors; (e) comprehensive waiver reforms to make new waivers easier to get and allow proven reforms through the normal state plan process; and (f) litigation reform to make it harder to challenge a state when it exercises its discretionary authority for optional benefits and eligibility, as well as require HHS to join the state in defending approved waiver programs in federal court.

2. Congress should establish a National Health Care Innovations Program to support the implementation of 10 to 15 state-led, large-scale demonstrations in health care reform over a three- to five-year period.

3. A series of federal reforms to strength employer-sponsored health insurance and other private coverage. These include a refundable tax credit for individuals, a new federal tax credit to help small employers, federal grants to establish state purchasing pools, and a new reinsurance program to help buffer employers from the cost of catastrophic cases.

4. Reforms to slow the grow of Medicaid-financed long-term care, including (a) tax credits and deductions for long-term care insurance; (b) ability to expand the range of home- and community-based models; (c) allow every state to create long-term insurance partnerships, which federal law now limits to four states; and (d) allow states to expand chronic care case management across both Medicaid and Medicare services, with savings shared between the state and federal government.

5. Changes to the Medicare Modernization Act (MMA) to ensure that no state is hurt financially. State budget gurus increasing believe that that the new Medicare drug benefit will likely increase state Medicaid costs.

To read details of NGA's excellent Medicare reform proposal, click here (PDF).

States continue to serve as laboratories for health care reform. In recent years, many of these state-based efforts have focused on:

1. Leveraging Employer-Based Coverage: With the goal of making health insurance coverage more affordable to small businesses and their employees, state tools include (a) premium assistance, (b) reinsurance to moderate high-risk cases, (c) state negotiated health plan options, and (d) hybrids mixing taxpayer and employer-sponsored models.

2. Pharmaceutical Purchasing: To improve the cost-effectiveness of prescription drug benefits, state-based reforms include (a) intra-state and multi-state purchasing pools, (b) negotiated discounts for low-income populations, and (c) evidence-based coverage combining preferred drug lists (PDLs) and supplemental rebates from pharmaceutical manufacturers.

3. Care Management for High-Cost Patients: With over 75 percent of Medicaid costs driven by a small proportion of patients, states are developing new programs based on the latest care and disease management techniques.

4. Modernizing Uncompensated Care Programs: While taxpayers invest billions of dollars each year to help compensate hospitals for serving uninsured patients, most of these efforts are blunt, highly inefficient programs with misaligned incentives. Therefore, some states are exploring alternatives designed to leverage these funds to promote primary care.

To learn more about state-based reforms, including lessons learned, check out the work of our friends at the Economic and Social Research Institute (ESRI). ESRI�s excellent team, with support from the Commonwealth Fund, has a series of informative reports.

In 2005, state Medicaid programs will pay for over 18 percent of the nation's quarter trillion dollar pharmaceutical market. Thanks to an excellent new analysis by Jim Verdier and colleagues at Mathematica Policy Research, we have new insights into cost and use patterns in Medicaid.

Some highlights:

● Average monthly Medicaid fee-for-service (FFS) pharmacy reimbursement for all beneficiaries nationally was $69, ranging from $43 in South Carolina to $165 in Connecticut.

● The monthly average was $154 for disabled beneficiaries, $129 for aged beneficiaries, $31 for non-disabled adults, and $12 for children.

● Generics accounted for 46 percent of all Medicaid FFS prescriptions nationally, ranging from 37 percent in New York to 52 percent in Utah.

● Anti-psychotics accounted for nearly 11 percent of total Medicaid drug spending, with antidepressants accounting for 7 percent. Anti-psychotic drugs were the top-ranked drug group in terms of total in 38 states, and ranked second in 9 other states and the District of Columbia.

Mathematica's work, which was sponsored by the Centers for Medicare & Medicaid Services (CMS), also provides interesting information on the prescription drug use and costs of dual eligibles:

● Disabled Medicaid beneficiaries accounted for 58 percent of total Medicaid FFS reimbursement nationally, aged beneficiaries 28 percent, non-disabled adults 6 percent, and children 8 percent.

● Average national monthly FFS reimbursement for dual eligibles was $157, ranging from $109 in New Mexico to $315 in Colorado.

● Dual eligibles accounted for 56 percent of Medicaid FFS pharmacy reimbursement in 1999, ranging from 39 percent in West Virginia to 90 percent in New Mexico.

● Average annual FFS pharmacy costs nationally for disabled dual eligibles under age 65 was $2,143. It was $1,431 for duals age 65 to 74, $1,447 for duals age 75 to 84, and $1,247 for duals age 85 and older.

● Dual eligibles in nursing homes accounted for 14 percent of Medicaid FFS pharmacy reimbursement, with the percentage ranging from 2 percent in South Carolina to 30 percent in Maryland.

● Medicaid residents in nursing homes received an average of 5 prescriptions per month, with the number ranging from 1 percent in the District of Columbia to 13 percent in Colorado.

To learn more, read Mathematica's thoughtful issue brief (PDF) or check out the data tables.

A new breed of physician is coming to a hospital near you: the hospitalist. And they hold tremendous promise for improving quality and lowering costs.

Hospitalists, who specialize in caring for hospitalized patients, are specially trained to effectively diagnose and treat high-acuity patients. Assuming primary responsibility for managing medical and surgical patients, hospitalists also help determine admissions from emergency departments and keep the patient's office-based docs in the loop.

While traditional office-based physicians visit hospitalized patients before or after office hours, hospitalists are onsite and immediately accessible to patients and their families. A fulltime hospitalist can care for ten times the number of inpatients than an office-based physician.

Supported by an array of new information management technologies, evidenced-driven protocols, and a team-based approach to care, the hospitalist model dramatically improves clinical decision-making. When done right, this translates to fewer medical errors, better patient outcomes, and lower costs from shorter stays and fewer re-admissions.

The hospitalist model is gaining attention among cost and quality conscious employers, health plans, and hospitals. Hospital services represent some 40 percent of health spending and physician decisions direct more than 80 percent of hospital services.

An excellent new study by the Center for Studying Health System Change says "Mounting financial pressures, increasing problems with patient flow in hospitals, a growing focus on patient safety, and rising malpractice costs..." are increasing use of the hospitalist model.

The number of hospitals increased from a few hundred in the mid-1990s to more than 8,000 in 2003, according to the Society for Hospital Medicine, the professional society of hospitalists.

From 2000 to 2003, a sharp rise in enrollment during the economic downturn triggered Medicaid budgets to increase by a third - an average annual increase of 10.2 percent. A new analysis in Health Affairs found that during this four-year period:

● In per capita terms, average annual Medicaid costs for acute care services grew by 6.9 percent, compared to 12.6 percent for employer-sponsored insurance.

● While low-income families represented 90 percent of enrollment growth, they accounted for 44 percent of cost increases. Elderly and disabled beneficiaries, with their dramatically higher per capita costs, drove 56 percent of Medicaid spending growth.

The implications are clear. First, state Medicaid programs are often more effective than employers in controlling health expenditures - especially during economic downturns and the worst part of the commercial underwriting cycle. Second, in a slow economy states will always experience big budget hits from increased enrollment of low-income kids and their parents. However, over the long-term, states must focus most of their cost containment efforts on high-cost beneficiaries, where care is notoriously inefficient.

To learn more, read the full article in Health Affairs or watch a webcast of the briefing.

Community hospitals outperform teaching hospitals, according to a new study that compares cost and quality of hospitals in six states. The researchers conclude that patients served by lower-cost community hospital for secondary care receive care of similar quality to that provided in academic health centers.

Findings include:

- Inpatient costs per case are 19 percent higher in teaching hospitals, even after even after adjusting for patient case mix, severity, and other controllable characteristics.

- Community hospitals and academic health centers are comparable in their frequency of poor clinical outcomes.

- In terms of the likelihood seven adverse outcomes, the teaching hospitals were best on two and the community hospitals outperformed on three. There was no meaningful difference in two of the adverse outcomes.

- Lengths of stay in the two kinds of facilities are virtually the same.

The study, released by the Pioneer Institute for Public Policy Research, has implications for consumer-driven health plans. As consumers become more sensitive to the cost of care, the superior performance of community hospitals - at least for common secondary conditions that represent the greatest volume of inpatient care - will present new challenges to teaching hospitals and their affiliated clinical programs.

The study was authored by Nancy M. Kane, DBA of the Harvard School of Public Health, Jack Needleman, Ph.D. of the UCLA School of Public Health, and Liza Rudell of MassHealth.

In a thoughtful article in The New Yorker, Malcolm Gladwell debunks common assumptions about prescription drug prices. Gladwell, bestselling author of The Tipping Point, cuts through the faulty thinking of the pharma bashers. His 4,000-word piece makes for interesting reading. Known for getting to the heart of matters, Gladwell says it all: "For sellers to behave responsibly, buyers must first behave intelligently."

A new report examines the impact of state budget cuts on Medicaid managed care programs in four states: Florida, Massachusetts, Michigan, and Oregon. Developed by Bailit Health Purchasing LLC for the National Academy for State Health Policy, the study offers valuable insights. It's recommended reading for state Medicaid executives, state budget staff, Medicaid health plans, consultants, and advocates.

Medicaid health plans are the Ginger Rogers of managed care. They have to do everything commercial and Medicare health plans do but have to do it backwards and in high heels. Despite dealing with more complex requirements and the toughest, most vulnerable patient populations, Medicaid health plans often provide higher quality and better access to care than their commercial counterparts.

To reward the highest performing health plans, state Medicaid agencies are increasingly using a new tool - performance-based auto-assignment. Auto-assignment is when new Medicaid beneficiaries are automatically assigned to a health plan when they don't voluntarily select a plan within the required time frame. While a state may simply assign new patients randomly among available plans, it may also use auto-assignment to incentivize the best health plans with increased enrollment. The better the perform, the greater the plan's proportion of auto-assigned enrollees.

Michael Bailit, CEO of Bailit Health Purchasing LLC and a leading expert on Medicaid and employer managed care, says for auto-assignment to work as an incentive additional assignment volume must be desired by the health plans. States must also:

- Establish clear goals at the outset and involve stakeholders early in the process.
- Focus on data that is reliable and measures that can be audited.
- Revisit measures on a regular basis and view the algorithm as something that is modifiable.
- View auto-assignment as an incentive strategy that can be use in complimentary fashion with other incentive strategies.

With the help of Bailit Health Purchasing, California Medicaid (MediCal) is developing a performance-based auto-assignment program. Starting in 2005, MediCal will use the approach to reward health plans with superior performance (relative to other health plans in the county), create a quality improvement incentive for all plans, and support the preservation of the safety net. Medicaid programs in Michigan and New York state already have experience using auto-assignment to drive quality improvement.

When the new Medicare prescription drug benefit begins in January 2006, 7 million dual eligibles (persons enrolled in both Medicare and Medicaid) will receive their drug benefits through prescription drug plans (PDPs). If they don't select a PDP, Medicare will auto-assign them into a plan. Given the positive experience of state Medicaid programs, Medicare may wish to consider using performance-based auto-assignment to help drive drug plan quality.

In 2002, Medicaid became the world's largest health program, with expenditures exceeding the better-known Medicare program. With over a third of trillion dollars in spending and over 50 million beneficiaries, America's most complex and fastest growing health program is also its largest.

Not surprisingly, Medicaid is now the largest part of state government budgets - surpassing public education. In a new report on state budgets, the National Association of State Budget Officers (NASBO) provides a fascinating snapshop on state Medicaid costs, including helpful state-to-state comparisons.

State Medicaid programs are the nation's largest buyers of prescription drugs, serving over 50 million Americans, including the most vulnerable and costly patients. However, Medicaid drug benefits are complex and vary from state to state and among the diverse populations served.

We now have an wealth of new information on Medicaid drug spending and utilization, thanks to excellent work by Mathematica Policy Research under a project for the federal Centers for Medicare and Medicaid Services (CMS).

For the first time, CMS is able to provide state-by-state and national data on the use of and reimbursement for prescription drugs in Medicaid. Available free on CMS' website in both PDF and Excel spreadsheet formats, the data breakdown use and costs by:

- Beneficiary demographic characteristics (age, sex, and race).

- Basis of eligibility (children, adults, disabled, and aged).

- Medicare-Medicaid dual eligible status.

There are detailed tables for all Medicaid beneficiaries combined, plus separate tables for dual eligibles and for full-year residents of nursing facilities. The tables show prescription drug use and spending by:

- Brand status (patented brand name, off-patent brand name, and generic).

- Therapeutic category (cardiovascular agents, central nervous system drugs, etc.).

- Drug group (anti-psychotics, anti-depressants, ulcer drugs, etc.).

Starting in 2006, seven million dual eligibles will receive their drug benefits under the new Medicare Part D program. Prospective Medicare drug plans will find this new information incredibly helpful in understanding the drug needs of this unique population.

Congratulations to Jim Verdier and colleagues at Mathematica for this outstanding work. And thanks to CMS' outstanding, foresighted research office for making this happen.

In the typical hospital, nurses spend only about 30 percent of their time on patient care. The remaining 70 percent of their long days are spent largely on paperwork. This lopsided situation is seen as a major cause of poor quality, patient dissatisfaction, nurse turnover, and operating inefficiency.

Thanks to the ideas of the Institute for Healthcare Improvement and funding from The Robert Wood Johnson Foundation, a dozen of the nation's most innovative hospitals are studying ways for nurses to spend the bulk of their time taking care of patients.

Transforming Care at the Bedside, a two-year pilot program, is designed to improve the patient-caregiver relationship. The effort will look at practical ways to reduce paperwork, improve teamwork among nurses and physicians, reduce medication errors, increase the quality of bedside care, and increase job satisfaction and retention.

Health insurers, whether commercial health plans or public programs like Medicaid and Medicare, only wish to pay for care that is necessary. Every day they make decisions on what is and is not "medically necessary."

Gov. Phil Bredesen has proposed a new definition of medical necessity for TennCare, Tennessee's long-troubled Medicaid program. To be covered by TennCare, a health care service must be (1) required to diagnose and treat an enrollee's medical condition, (2) safe and effective, (3) the least costly alternative course of treatment adequate to address the enrollee's medical condition, and (4) not experimental or investigational.

Beneficiary advocates, who have a long and effective history of challenging TennCare in federal court, are concerned that the new definition is vague and overly restrictive. The Governor has promised to further refine it in regulations to minimize unintended consequences.

All this reminded me of the definition of medical necessaity I wrote for the Wisconsin Medicaid program in the 1990's. While no definition is perfect, you might find this one interesting:

“Medically necessary” means service or item that is:

(a) Required to prevent, identify or treat a recipient’s illness, injury or disability; and

(b) Meets the following standards:

1. Is consistent with the recipient’s symptoms or with prevention, diagnosis or treatment of the recipient’s illness, injury or disability;

2. Is provided consistent with standards of acceptable quality of care applicable to the type of service, the type of provider and the setting in which the service is provided;

3. Is appropriate with regard to generally accepted standards of medical practice;

4. Is not medically contraindicated with regard to the recipient’s diagnoses, the recipient’s symptoms or other medically necessary services being provided to the recipient;

5. Is of proven medical value or usefulness and is not experimental in nature;

6. Is not duplicative with respect to other services being provided to the recipient;

7. Is not solely for the convenience of the recipient, the recipient’s family or a provider;

8. With respect to prior authorization of a service and to other prospective coverage determinations made by the department, is cost–effective compared to an alternative medically necessary service which is reasonably accessible to the recipient; and

9. Is the most appropriate supply or level of service that can safely and effectively be provided to the recipient.

Rick Wagoner, chairman and CEO of General Motors, is calling on both political parties to work together to solve the nation’s crisis of health care costs. US manufacturers, especially in the heavily unionized auto industry, are at a severe competitive disadvantage to their European and Asian counterparts. Foreign manufacturers benefit from taxpayer-financed health insurance, fewer retirees, and a younger workforce.

General Motors will spend $4.8 billion this year on health care for its one million retirees, employees, and their dependents. While unions are pushing for government-run, taxpayer-financed health care, Wagoner appears to favor a middle path that includes transparency of provider performance, a greater role for consumers, and incremental, yet major reforms to existing health programs.

To address the enormous deficiencies in quality of health care, health care organizations need to make a business care for improvement. That is, they need to demonstrate a compelling rationale for the significant financial investments necessary to improve quality and reduce medical errors.

To make decisions, businesses traditionally look at the potential return on investment (ROI). However, ROI projections are tough to make in health care. Data sources are limited and decision support tools are often outdated or nonexistent. Most health services research is purely academic, offering no actionable or timely advice to decision makers. The fragmented delivery system means that organizations that invest in performance improvement benefit other players more than themselves. Finally and most critically, incentives are terribly misaligned. Providers are paid for how much they do, not how well they do it. When patient care improves and medical mistakes decline, provider revenues can drop like a stone.

The savvy folks at Bailit Health Purchasing LLC offer a new framework for building a business care to invest in quality improvement. In an excellent new issue brief published by The Commonwealth Fund, Michael Bailit, MBA and Mary Beth Dyer, MPP provide “a mechanism for an organization to consider a broad set of factors affecting a business case for quality.”

Taking into account key financial, strategic, and organization factors, they offer 10 practical business care arguments. By looking beyond bankable dollars, hospitals, clinics, and other providers can create compelling business cases to improve their performance.

In Medicaid, health plans save money and improve quality of care. While this is no surprise for state Medicaid execs, the mounting evidence of HMO performance in Medicaid is in sharp contrast to public and media perceptions.

In a carefully analysis of 14 studies, The Lewin Group found that "In the overwhelming majority of cases, the state Medicaid managed care programs were found to have improved Medicaid beneficiaries’ access to services, and both the programs and individual MCOs have earned high satisfaction ratings from enrollees."

Overall, compared to fee-for-service, Medicaid health plans typically save taxpayers between 2 and 19 percent. In Medicaid HMOs, prescription drug costs are 10-15 percent lower and preventable inpatient admissions are 25-38 percent lower.

While the AHIP-sponsored analysis focused on cost savings, The Lewin Group found ample evidence that Medicaid managed care programs improve access and quality.

In a new study, HealthGrades, a respected leader in measuring and reporting health care quality, estimates that preventable hospital mistakes kill 195,000 Americans each year. That's twice the Institute of Medicine's 1999 estimate, which many experts observed was conservative.

Fortunately, some courageous hospitals are showing their peers how to improve clinical outcomes at reasonable cost. A new report describes the key factors contributing to the success of four high-performing hospitals. In it, my friend Jack A. Meyer, Ph.D. and his colleagues at the Economic and Social Research Institute and The Severyn Group offer an outstanding blueprint for improving patient care and safety in hospitals.

The study, which was commissioned by The Commonwealth Fund, recommends 18 specific actions hospitals should take to improve patient care and save lives.

In Consumer-Driven Health Care, Regina E. Herzlinger, a leading health care thought leader and a professor at the Harvard Business School, provides a thought-provoking look inside a new, powerful force transforming America's dysfunctional health care industry. Consumer-Driven Health Care builds on her popular 1997 book Market-Driven Health Care: Who Wins, Who Loses in the Transformation of America's Largest Service Industry.

In the first part of her new 900-page book, Dr. Herzlinger makes a convincing case about how and why health care is broken and why market-based solutions - which empower consumers - are best. She restates the case she made in Market-Driven Health Care for putting consumers directly in charge of their own decisions (picking insurance plans, making medical decisions).

Through transparency of information, a realignment of incentives, and new tools to support decision-making, the consumer-driven model gives individuals a clear stake in their own health care. While not unique to other parts of the US economy, the approach is a radical departure for the $1.7 trillion health care market. As Dr. Herzlinger makes clear in her energetic analysis, the absence of these proven market-based tools goes a long to explain how health care became our most inefficient, outdated, and error-prone industry.

The second part – 80 percent of the book - is a collection of 73 think pieces written by 92 other experts. With short introductions by Dr. Herzlinger, these articles serve as a useful initial knowledge base for a growing field with an uncertain future.

Consumer-Driven Health Care has its limitations. For example, Dr. Herzlinger's case for the consumer-driven model fails to address the Medicare and Medicaid systems. It also leaves a variety of practical transition and execution issues unaddressed, although these are beyond the purpose of this volume. Because articles were written several years ago as part of a conference and most of the writers lack purchaser-side experience, the book also does not deal with the growing list of market-based reforms underway by large employers and innovative health plans.

In addition, since the field is still in its infancy, Dr. Herzlinger is a business researcher, and the contributors are largely wide-eyed entrepreneurs, the book will likely frustrate health policy wonks and others stuck in the technical minutia and ideological fights that characterize most health care discussions. But then, that’s just as well. Too often analysts forget that health care is a business and operates as a market, albeit a flawed one insulated from tools proven to drive quality and efficiency.

Dr. Herzlinger also has her detractors. It reminds me of the old joke that there are two kinds of people in the world – people who like Wayne Newton and people who don’t. Well, it seems that health care wonkdom is divided by those who like Reggie Herzlinger’s ideas and those who don’t. However, given the massive problems in American health care, her contributions remain as useful as they are provocative.

For a primer on consumer-driven health care, I recommend Let's Put Consumers in Charge of Health Care, a concise article by Dr. Herzlinger in Harvard Business Review (July 2002 issue).

Preventable medication mistakes in hospitals is a leading causing of death. Top patient safety experts and The Leapfrog Group have called upon hospitals to replace risky, paper-based prescriptions with computerized physician order entry (CPOE) systems.

If installed in every major hospital, CPOE systems would save tens of thousands of lives each year. However, few hospitals have CPOE systems and few plan to get them any time soon. In addition to costing $3-10 million per facility, hospital execs often face stiff resistance from docs unwilling to learn, replace their Rx pads with Palm Pilots, and work as teams. Even worse, because facilities are paid for quantity and not quality, improved patient safety often lowers a hospital's revenue (fewer errors = fewer patient days = lower revenue).

Harvard Medical School researchers Eric G. Poon, David Blumenthal, and colleagues recently interviewed senior managers in 26 hospitals to identify ways to overcome barriers to adopting and implementing CPOE. Their thoughtful, on-target recommendations appear in the latest issue of Health Affairs.

Solutions, not unexpectedly, include financial incentives to hospitals, stronger hospital and physician leadership, greater public attention to patient safety, establishing more uniform data standards, and modernizing hospital IT infrastructures.

For further reading on savings lives through improved technology, check out my reading lists on:

- Health care quality.

- Medical errors.

- Health care information technology.

- Electronic medical records.

The June 2004 issue of the Harvard Business Review contains an outstanding article on Redefining Competition in Health Care by Michael E. Porter, Ph.D. of the Harvard Business School and Elizabeth Olmsted Teisberg, Ph.D. of the University of Virginia's Darden School of Business.

Their carefully researched, well-argued, actionable recommendations include:

- Standardized information about individual diseases and treatments should be collected and disseminated widely so patients can make informed choices.

- Purchasers, providers, and health plans should establish transparent billing and pricing to reduce cost shifting, confusion, pricing discrimination, and a host of other inefficiencies.

- Providers should be experts in specific conditions and treatments rather than try to be all things to all patients.

The Congressional Budget Office (CBO) estimates that re-importing prescription drugs from Canada will save virtually nothing.

Many will find this counter intuitive, especially in light of all the misinformation and political rhetoric - and the uneven reporting on the issue. As with so many of the "Taste Great vs. Less Filling" debates in health policy, perceptions are overly simplistic and out of touch with economic reality.

CBO - an independent, skilled, and studiously nonpartisan arm of Congress - examined the real-world economic dynamics. Read the CBO report here (PDF). It's a quick, eye-opening read.

Consumer-driven health care - new models and technologies to empower consumers to make informed choices - is growing in popularity. At it's core, consumer-driven health care is all about transparency of costs and quality of care, and giving consumers the tools and information they need.

To learn more, check out the best books on consumer-driven health care, including Regina E. Herzlinger's excellent new book. Read it first.

Preventable medical mistakes and inappropriate, outdated medical care is the third leading cause of death in America, according to the Institute of Medicine and other experts.

The new Medicare drug discount cards will save seniors a whopping $6.4 billion, according to a study commissioned by The Business Roundtable.