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:

When it comes to innovation in health coverage, finance, and purchasing, states are the most likely innovators. The role states can play as laboratories of reform is a key advantage of our Federalist system of government. Right now, as many states find themselves in a strong fiscal condition, states are taking the lead in expanding health coverage, reforming market dynamics, and transforming Medicaid.

As with any kind innovation, states play different roles and vary in their ability and interest in adopting a particular innovation in coverage, financing, or care delivery. Some states will play the role of genuine innovators, while others will follow the leaders. Still others will take their time and a few will lag well behind the field.

You can see this play out in Medicaid managed care, where a few states like Wisconsin, Arizona, and Minnesota are serial innovators. Several other states follow their lead fairly quickly. And a few states, notably states like Mississippi, Illinois, and Alabama, tend to lag well behind the country.

Studies on the diffusion of innovation may be helpful to businesses, wonks, advocates, and others as they try to understand, navigate, influence, and ultimately take advantage of state health reforms.

Experts in the diffusion of innovation say that adopters of any particular new idea or approach can be reliably categorized into five groups:

Innovators: About 2.5% of players (individuals, businesses, or, in our context here, states) are the true innovators. They tend to be adventurous, open to new ideas, decisive, willing to take risks, highly educated, well versed in best practices, and connected to best sources of information.

Early Adopters: Studies say that early adopters are about 13.5% of a market. They are typically popular among their peers, smart, well educated. They are less creative, less venturesome than the innovators but are fairly decisive and like to ride the leading edge, gaining what they can from advances.

Early Majority: About 34% are deliberate in assessing a new idea. They take their time, prefer others to take the lead in advancing business or policy, and are more informally connected to thought leaders and mavens.

Late Majority: Late Majority players, also about 34% of population, are skeptics and traditionalists. With fewer resources, less internal expertise, and more moderate education, they are risk adverse, rather indecisive, and extremely cautious in adopting, implementing, and evaluating new ideas.

Laggards: About 16% are true laggards, often in every sense of the word. They are highly risk adverse, isolated from best practices and their peers, and conservative by instinct. They are often not so much indecisive as they are indifferent or nonplused by decision making.

Applying this to the world of states and health reform, we are likely to see about 3 states playing role as genuine innovators and another 7 states as quick adopters. Another 34 states will take more time, either in adopting an innovation as policy or in implementing it locally. Finally, about 8 states will likely do little or nothing. Of course, a state that is an innovator in one policy domain - like managed care - may be a follower in some other area like coverage expansion. And we should not underestimate the impact of leadership - a new governor or new Medicaid director - on moving a state from late player to innovator.

If you are a business interested in new opportunities created by state health reforms or a trade group or advocate interested in influencing state health policies, you need to know which states are the innovators or early adopters and which are the late players or laggards. Even if you are not interested in an innovator state's local market, you need to understand that state's role in influencing what other states will do. Working closely with the innovators and early adopters can generate invaluable market intelligence and lead to unique, powerful position as reforms move across the country.

To learn more, please visit my list of recommended reading on innovation.

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.

Science Business: The Promise, the Reality, and the Future of Biotech

Summary: Why has the biotechnology industry failed to perform up to expectations - despite all its promise? In Science Business, Gary P. Pisano, Ph.D. answers this question by providing an incisive critique of the industry. Dr. Pisano not only reveals the underlying causes of biotech's problems; he offers the most sophisticated analysis yet on how the industry works. And he provides clear prescriptions for companies, investors, and policymakers seeking ways to improve the industry's performance. According to Dr. Pisano, the biotech industry's problems stem from its special character as a science-based business. This character poses three unique business challenges: (1) how to finance highly risky investments under profound uncertainty and long time horizons for R&D, (2) how to learn rapidly enough to keep pace with advances in drug science knowledge, and (3) how to integrate capabilities across a broad spectrum of scientific and technological knowledge bases.

The Business of Healthcare Innovation

Summary: Robert Lawton Burns, Ph.D., MBA focuses on the key role of the 'producers' as the main source of innovation in this wide-ranging analysis of business trends in the manufacturing branch of the health care industry. Written by industry academics and executives, the book provides a detailed overview of the pharmaceutical, biotechnology, genomics / proteomics, medical device, and information technology sectors. Most importantly, it describes the growing convergence between these sectors and the need for executives in one sector to increasingly draw upon trends in the others.

Overdose: How Excessive Government Regulation Stifles Pharmaceutical Innovation

Summary: This book is the first to offer a comprehensive examination of the pharmaceutical industry by following the tortuous course of a new drug as it progresses from early development to final delivery. Richard A. Epstein looks closely at the regulatory framework that surrounds all aspects of making pharmaceutical products today, and he assesses which current legal and regulatory practices make sense and which have gone awry. While critics of pharmaceutical companies call for ever more stringent controls on virtually every aspect of drug development and approval, Professor Epstein cautions that the effect of such an approach will be to stifle pharmaceutical innovation and slow the delivery of beneficial treatments to the patients who need them.

The New Medicines: How Drugs are Created, Approved, Marketed, and Sold

Today, most people use prescription medications. Every year, the multi-billion dollar pharmaceutical industry produces new medicines that treat everything from arthritis to AIDS, from high cholesterol to depression. But, despite recent controversies regarding the safety of drugs, consumers know little about the medications that they ingest and inject. How are these new medicines invented? How do consumers know that drugs are safe and effective? How are they tested? Who regulates their production - and who watches the regulators? How do drug companies produce the vast quantities needed for the marketplace, and why do they market their drugs as they do? The New Medicines (by Bernice Schacter, Ph.D.) leads the reader through the maze of the modern drug industry - from bench to bedside - and provides consumers with a step-by-step understanding of how new medicines are created, approved, marketed, and sold.

Inside the FDA: The Business and Politics Behind the Drugs We Take and the Food We Eat

Because of the importance of what it regulates, the FDA comes under tremendous political, industry, and consumer pressure. But the pressure goes far beyond the ordinary lobbying of Washington trade groups. Its mandate - one quarter of the national economy - brings the FDA into the middle of some of the most important and contentious issues of modern society. From "designer" babies and abortion to the price of prescription drugs and the role of government itself, Inside the FDA takes readers on an intriguing journey into the world of today's most powerful consumer agency. In a time when companies continue to accuse the FDA of nitpicking and needlessly delaying needed new drugs, and consumers are convinced that the agency bends to industry pressure by rushing unsafe drugs to market, Inside the FDA digs deep to reveal the truth. Through scores of interviews and real-world stories, author Fran Hawthorne (senior contributing editor of Institutional Investor) also shows how and why the agency makes some of its most controversial decisions as well as how its recent reaction to certain issues - including the revolutionary cancer drug Erbitux, stem cell research, and bioengineering of food - may jeopardize its ability to keep up with future scientific developments.

More Excellent Books on Pharma and Biotech:

For additional reading on the pharmaceutical industry, biotechnology, and prescription drug issues, please check out my recommended reading lists:

Best Blog on FDA and Pharma Industry Communications:

For insightful, industry-savvy advice on the FDA, drug regulation, and pharma strategic communications, please visit Eye on FDA - the excellent blog by my friend and colleague Mark Senak, JD, senior vice president at Fleishman-Hillard.

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 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.

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).

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.

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