The Medicare Payment Advisory Commission (MedPAC) - the influential independent Congressional agency charged with advising Congress on a wide range of Medicare policy issues - has released its Medicare payment policy recommendations for 2009. The 355-page report includes a weath of information for those tracking Medicare provider or health plan issues, particularly annual provider payment updates, reforms to Medicare Advantage, and quality incentives.

In summary, here are MedPAC's recommendations to Congress:

Hospital Inpatient and Outpatient Services:

Physician Services:

Outpatient Dialysis Services:

Skilled Nursing Facility Services:

Home Health Services:

Inpatient Rehabilitation Facility Services:

Long-Term Care Hospital Services:

Medicare Advantage Special Needs Plans:

Part D Enrollment, Benefit Offerings, and Drug Plan Payments:

Medicare Savings Programs and Part D Low-Income Drug Subsidy:

To read the full MedPAC report, click here (large PDF file).

Enrollment in Medicare Advantage plans has jumped 63 percent since 2005. Over 22 percent of all Medicare beneficiaries - 8.8 million total - now receive their Medicare Part A and Part B benefits through a private health plan instead of the traditional fee-for-service system. About 88 percent of all Medicare Advantage plan enrollees also receive their Part D drug benefits from the same health plan (as part of a MA-PD).

A new analysis confirms that Medicare Advantage plans provide significantly more health benefits and lower cost sharing than traditional fee-for-service (FFS). The value-added of health plan enrollment is greatest for Medicare beneficiaries enrolled in the genuinely managed care options, notably HMOs, PPOs, and Special Needs Plans (SNPs). The 20 percent of Medicare Advantage enrollees in relatively unmanaged Private Fee-for-Service (PFFS) plans receive extra benefits compared to the government-run traditional fee-for-service system. However, the HMO, PPO, and SNP options provide substantially more benefits and lower cost sharing than the PFFS model plans. The PFFS plans, which are controversial on Capitol Hill, typically operate only in rural areas.

To sum up, in terms of extra benefits for Medicare beneficiaries, Medicare Advantage plans using the HMO, PPO, or SNP models are superior to both traditional fee-for-service and PFFS plans. The PFFS plans are superior to traditional fee-for-service, at least in terms of extra benefits and cost sharing.

To read the issue brief - by Mark Merlis and sponsored by the Kaiser Family Foundation - click here (opens as a PDF).

To learn more, please check out my other posts on Medicare and Medicare Advantage issues.

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 10-year old, extremely popular, and reasonably successful State Children's Health Insurance Program (SCHIP) expires in six weeks. Congress and the White House must agree on a reauthorization bill, and so far the parties are far apart.

Here are some key resources to understand the radically different House and Senate bills. Most notably, the House bill is far more expansive and expensive. While the bill is ostensively to reauthorize and expand SCHIP, the House bill would also make dozens of significant changes to both Medicare and Medicaid. The more moderate Senate bill focuses on renewing SCHIP, providing additional federal dollars to cover more children, and proposing higher tobacco taxes to offset the new federal SCHIP costs.

Children's Health Insurance Program Reauthorization Act (Senate Bill 1893):

The Senate bill, called the Children's Health Insurance Program Reauthorization Act of 2007, would extend coverage to an additional 2.2 million children. This is a net figure. An estimated 4.5 million kids would move to SCHIP coverage, but CBO estimates that 1.7 million of these would move from private insurance to SCHIP because of crowd-out and another 600,000 would move from Medicaid to SCHIP. Because of interactions between Medicaid and SCHIP coverage, the Senate bill would increase add, net of crowd-out, about 1.5 million kids to Medicaid.

To sum up, the Senate approach would provide SCHIP or Medicaid health coverage to a net 4 million uninsured children. But about 2.1 million privately insured children would have to move from their existing private insurance coverage to taxpayer financed care. To read the Congressional Budget Office's cost and enrollment estimates for the Senate bill, click here.

Children's Health and Medicare Protection Act (HR 3162):

Based on CBO projections, the House bill, called the Children's Health and Medicare Protection Act, would increase coverage for a net 5 million children. About 3.1 million uninsured kids would be newly covered by Medicaid and about 1.9 million by SCHIP.

Again, because government financed health coverage "crowds out" private coverage, the House bill would cause about 2.5 million insured children to lose existing private coverage and move to taxpayer-funded coverage. Click here to read CBO's cost and enrollment estimates for the House bill, including the bill's many unrelated changes to Medicare and Medicaid.

Before closing, it's important to note that whatever Congress does with SCHIP reauthorization, the program is highly dependent on subsequent state policies, including appropriation of state budget dollars. And several aspects of the Congressional SCHIP proposals would hurt state finances and restrict flexibility, making children's health coverage at the state level more costly and complex.

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:

The Carlyle Group, a large private equity firm, announced today that it is buying Manor Care, a large operator of nursing homes and long-term care services, for $6 billion. This got the good folks at Marketplace Radio to ask why private equity firms seem to be so interested in buying up health care companies. And the resulting radio story broadcast today brought together an unusual cast of characters, including myself and Michael Moore. Yes, that Michael Moore.

To listen to the radio interview, click here. To read the transcript online, click here.

Kerry Weems, Secretary Mike Leavitt's deputy chief of staff and President Bush's nominee to head the Centers for Medicare and Medicaid Services (CMS), faces tough Senate confirmation hearings in July. A savvy, career HHS insider with a wealth of experience in the fiscal and organizational mechanics of federal health programs, Mr. Weems is a good choice for an administrator to steer CMS in the last 18 months of the Bush Administration. But he nonetheless faces several serious challenges during the confirmation process. A few examples:

1. Efforts to Hold Confirmation Hostage to Policy Commitments:

Senators, trade groups, and advocates of all flavors have long policy wish lists. As FDA Commissioner Andrew C. von Eschenbach, M.D. can attest, the confirmation process - in committee and on the Senate floor - is a unique opportunity for Democrats and even some Republicans to hold up confirmation until the nominee or Department concedes to certain policy demands. And the wish lists for the FDA are nothing compared to what many want from CMS.

2. A Maze of Medicare and Medicaid Controversies:

For better or worse, a wide range of delicate issues at CMS were left unexamined during Republican control of Congress. The Democrats now in charge of the Hill are eager to make political hay with health issues, reshape policy, and give their core constituencies a crack, albeit by proxy, at challenging CMS actions in a public forum.

Regardless of the Administration or the party running the Executive Branch, Medicare and Medicaid are full of dirty little secrets, some real and some imagined, intertwined within a massive level of complexity prone to misconception and manipulation by political foes and those of varying motivations eager for a larger slice of an $800 billion+ pie. Many critics of CMS see the Weems nomination hearings and floor debate as a unique opportunity.

3. Nomination of a Non-Wonk:

While Kerry Weems has a lot going for him and CMS would likely benefit from leadership by a career insider, he is not a health policy wonk. That is, he is not a academic, researcher, health policy maker, or lobbyist (not that most lobbyists are mavens but they like playing them on TV). He's a budget and finance guy and a career one at that. Not a bad thing at all, but a potential problem in a town that grossly overvalues what MD's and PhD's typically know about health policy or finance and sees "budget guys" in health programs as somehow being on a first name basis with the devil.

Some advocacy groups, who naturally have the ear of Dems in the Senate, are concerned that Mr. Weems lacks the requisite substantive expertise in Medicare or Medicaid policy (well, make that Medicare, since unfortunately few inside the Beltway understand or track Medicaid). When a Republican is in charge of the White House, Dems and advocates are much more comfortable with an academic running CMS. And when a Democrat is in charge, they virtually insist on it. In its 30-year history, CMS (formerly named HCFA) has had nearly as many administrators and acting administrators. Add to this extremely high turnover the fact that CMS is rather unique in having a tiny number of political appointees.

There are notable exceptions. Gail Wilensky, Ph.D., one of the nation's most talented health policy experts, turned out to be an excellent administrator in the early 1990's. And there have been times where the agency was led by a budget guy, most notably Leonard Schaeffer, who ran HCFA is its early days. He came to HCFA from managing health budgets for the State of Illinois and later was the founding chairman and CEO of WellPoint.

Kerry Weems will have his hands full next month. But he's a smart fellow, with a keen sense for detail, and HHS and CMS staffs are briefing him around the clock in preparation. He'll do well before the Senate if given a fair shake.

Of the 45 million Medicare beneficiaries, 19 percent are enrolled in a Medicare Advantage health plan. The other 81 percent choose to remain in traditional fee-for-service Medicare for Part A and Part B services. Governed under Part C of Medicare, Medicare Advantage health plans come in several flavors, most notably HMOs, PPOs, special needs plans (SNPs), and private fee-for-service plans.

While only about 16% of Medicare Advantage enrollees and about 3 percent of all Medicare beneficiaries are in private fee-for-service plans, these PFFS plans are receiving considerable attention by Congress and Wall Street. To help you understand the unusual dynamics at play, here are some helpful resources:

An Examination of Medicare Private Fee-for-Service Plans: This paper by Jonathan Blum, et al from Avalere Health, covers the history, features, trends, and policy and market implications of PFFS plans.

The Medicare Advantage Program: Trends and Options: Congressional Budget Office (CBO) report, with CBO's projections for Medicare managed care enrollment.

Private Fee-For-Service Plans in Medicare Advantage: Testimony by Mark E. Miller, Ph.D., executive director of the Medicare Payment Advisory Commission (MedPAC) on MedPAC's observations and recommendations.

Private Fee-For-Service Plans In Medicare: Rapid Growth and Future Implications: In testimony before the House Ways and Means Committee, Patricia Neuman, Ph.D, a Kaiser Family Foundation vice president, offered a thoughtful overview of many of the key issues.

The Impact of Reductions in Medicare Advantage Funding on Beneficiaries: This study, by Adam J. Atherly, Ph.D. and Kenneth E. Thorpe, Ph.D. of Emory University, shows financial savings Medicare Advantage enrollees receive and therefore the adverse impact on benies of proposed cuts to Medicare Advantage plans.

Medicare Advantage Program Payment System: An excellent 4-page primer by MedPAC on how CMS sets Medicare Advantage plan payments.

My sources in the Bush Administration tell me that the President will nominate Kerry Weems as the next administrator of the Centers for Medicare and Medicaid Services (CMS). Mr. Weems, a savvy finance expert with a long career at HHS, is well-liked by HHS Secretary Mike Leavitt, former Secretary Tommy Thompson, and the White House Office of Management and Budget (OMB). He served as HHS' budget director and is now deputy chief of staff.

Nomination of Mr. Weems will be a departure from tradition. Historically, CMS administrators have been either academics or lobbyists. The academics often lack leadership and executive skills and the lobbyists often come across as too Machiavellian. Since the agency's creation in 1978, CMS (formerly called HCFA) has had about 30 administrators or acting administrators - about one per year. As a respected career insider, Mr. Weems is well positioned to deal with CMS' powerful, technocratic, hardworking but often demoralized bureaucracy.

Leslie Norwalk, CMS acting administrator, is expected to resign sometime in April. Ms. Norwalk, a health industry lawyer, was counselor to the CMS administrator (Tom Scully) from 2001-2004 and became deputy administrator in 2004.

Herb Kuhn will likely take over as acting administrator while Kerry Weems goes through the grueling Senate confirmation process. Mr. Kuhn, a highly respected hospital industry guru, has been director of CMS' Center for Medicare Management (CMM), which oversees Medicare Part A and Part B policy and Medicare's vast fee-for-service operations. Mr. Kuhn, has been serving as acting deputy administrator. He's a talented, well-liked fellow, and an excellent prospect for deputy administrator.

As CMS goes through the musical chairs, speculation is growing that HHS Secretary Mike Leavitt plans to leave and rejoin the private sector this spring.

Under a new Executive Order, President Bush has significantly expanded the authority of the White House Office of Management and Budget (OMB) over policymaking by the Centers for Medicare and Medicaid Services (CMS) and the Food and Drug Administration (FDA).

Specifically, OMB now has the authority to review and approve a vast array of written guidance issued day-to-day by CMS and FDA. The expansion of OMB's oversight authority has far-reaching implications for Medicare and Medicaid policy and the regulation of the drug and device industries.

In recent years, an increasing amount of agency policymaking has come in the form of "sub-regulatory guidance." That is, written guidance that does not go through the formal rulemaking process. In the case of CMS, this written guidance shows up, for example, as memorandums to health plans, letters to state officials, and manuals or other instructions. In its role administering the Federal Food, Drug, and Cosmetic Act (FDCA), the FDA has its own system of guidance documents.

While the FDA approach to sub-regulatory guidance has its own critics and limitations, the FDA approach is better organized and managed than CMS' approach. FDA has been at it longer than CMS but also has (relatively speaking) a narrower, more explicit scope of work. The FDCA and all its amendments is no walk in the park, but Titles 18, 19, and 21 of the Social Security Act are exercises in pure legislative surrealism.

President Bush's new Executive Order means that much of this written guidance is now subject to prior review and approval by OMB. While OMB has always been a key player, particularly in Medicare and Medicaid policy, the E.O. greatly increases OMB's influence and may result in a substantial power shift in many day-to-day issues affecting providers, health plans, drug manufacturers, states, and other stakeholders. (In the interest of full disclosure, my career includes service on OMB's Medicare and Medicaid team.)

For those interested in more background, below is a quick overview of the rulemaking process and the increasing role of written guidance in lieu of rules.

Background on OMB Regulatory Review:

Virtually all CMS and FDA proposed and final rules are subject to prior review and approval of the Office of Management and Budget (OMB), the powerful policy management arm of the White House. (It's important to note that OMB also reviews Medicare and Medicaid waivers, agency budget requests and legislative proposals, and written testimony to Congress.) OMB's regulatory oversight was created by Presidential Executive Order in the Reagan Administration and modified but retained by the Clinton Administration.

The basic idea is to help ensure that agency rulemaking activities follow the sitting President's policy objectives to the extent possible under the laws passed by Congress. OMB oversight also allows for a more thoughtful and disciplined approach to regulations, to keep track of the impact of agency rules on individuals, businesses, and states and guard against such things as unnecessary or excessive regulations and conflicting rules across different federal agencies.

In principle, the rulemaking process is designed to (1) inform the public of planned rules in detail; (2) give the public, including stakeholders and experts, an opportunity to comment, provide new information, and suggest alternatives; (3) ensure the rulemaking agency considers and responds to public comments before issuing final rules; (4) ensure that all federal rules can be found in a central publication (published in the Federal Register and formally codified in the Code of Federal Regulations); and (5) provide a comprehensive public record for use by the courts, Congress, and the news media in overseeing an agency's use of power and interpretation of statutes.

Written Guidance Instead of Formal Rules:

In other words, the formal rulemaking process provides for far more thoughtful, documented, and transparent policymaking than the so-called sub-regulatory guidance. However, developing proposed and final rules is a laborious process taking months and sometimes even years. And CMS faces the imperatives of implementing massive pieces of legislation, such as the Deficit Reduction Act (DRA) and the Medicare Modernization Act (MMA). Even if CMS always had the necessary staff, expertise, systems, and budget to implement the avalanche of Medicare and Medicaid legislation on time (it never does, unfortunately), there are just not enough hours in the day to promulgate all the necessary rules to meet statutory deadlines.

Therefore, much of CMS policymaking is done through written guidance, letters, memos, and memos - and not regulations. While it's easy to understand the practical pressures, many legal observers seriously question CMS's compliance with the Administrative Procedures Act (APA). The APA, originally enacted in 1946, governs when and how agencies must go through the formal rulemaking process.

Privately, several players have told me how CMS's informal approach to many Medicare and Medicaid policies would likely not stand up in federal court. However, trade groups, states, and other stakeholders don't want to anger the increasingly powerful agency - and, in many cases, written guidance today is better than waiting months or even years for a rule.

Like its sister agency CMS, the FDA is increasingly using sub-regulatory guidance in lieu of formal rules. Given the demands facing the FDA, including a variety of reforms and pending legislative changes, this is expected to increase. To get a flavor, check out the list of guidance documents from the FDA's Center for Drug Evaluation and Research (CDRR). You'll see it includes various backgrounders mixed with policy statements and instructions.

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.

The $7 billion State Children's Health Insurance Program (SCHIP) is up for reauthorization in Congress this year. SCHIP, which began in October 1997, now covers over four million Americans, primarily children in families with incomes too high to qualify for Medicaid but too low to afford commercial health insurance coverage.

Popular with both Democrats and Republicans, SCHIP is certain to be reauthorized by Congress. However, members of Congress differ on whether and to what extent SCHIP should be expanded, how much to increase federal funding, whether SCHIP should be reserved for truly low income children or open to more moderate income families, and whether SCHIP should be used as a vehicle to expand coverage to uninsured workers. In addition, there remain serious questions about how much taxpayer-funded SCHIP has crowded out employer-sponsored coverage.

The policy issues and design options are many. Ultimately, the battle over SCHIP is a microcosm of the larger national debate on what government can or should do about the uninsured, the role of individual and employer responsibility, what is "affordable", what is an adequate package of covered benefits, and much more.

Overview of SCHIP:

Each state, within broad federal guidelines, determines the design of its own program, including eligibility, benefit design, cost sharing, and operating procedures. States may operate SCHIP separately or in conjunction with Medicaid. SCHIP benefits are delivered primarily through health plans under contract with states.

On a federal level, SCHIP is governed by Title XXI of the Social Security Act. However, several states have requested and received Section 1115 waivers to redesign the SCHIP eligibility, cost sharing, and/or benefits.

Unlike Medicaid, which is largely an open-ended entitlement, states may cap SCHIP enrollment and federal funds for SCHIP are capped. This year, unless Congress increases aggregate federal funds for SCHIP, about 16 states may need to either cap enrollment or appropriate additional state funds to maintain the program.

Budget Challenge of Funding Children's Health Coverage:

The best guess is Congress will need to increase the federal cap on SCHIP funding by $12 billion to $15 billion over the next five years to maintain coverage for the four million now enrolled. (During the year, about six million receive coverage at some point and about four million are covered at any given point in time.) Absent either a big increase in the federal cap or a big jump in state-only appropriations to SCHIP, about one million kids will lose coverage.

Resources to Understand SCHIP:

Here are several excellent resources to better understand the State Children's Health Insurance Program:

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.

President Bush has joined the health reform debate with a proposal of his own. The Bush approach is as intriguing as it is controversial.

First, the Administration seeks to reform the federal tax code to change the tax treatment of health insurance premiums and offer new tax deductions to help make coverage more affordable. Second, the White House wants to give states the ability to extend basic coverage to the uninsured by redirecting funds from uncompensated care pools.

Changes to Tax Deductibility of Health Insurance:

Today, most employees are not taxed on the value of employer-sponsored health insurance coverage. That is, the employer's share is not taxed and any employee contribution is taken out of income before taxes.

Many health economists believe this pre-tax treatment of health insurance tends, over time, to distort the market by giving a tax incentive to take income in the form of health coverage and insulating most working Americans from the cost of medical care. They argue this contributes to health inflation and creates a costly and unfair playing field for Americans without access to group coverage.

The Bush Administration proposes several major changes to the tax treatment of health insurance premiums:

If the tax changes are enacted, the Bush Administration estimates that about three million individuals who are now uninsured will gain health coverage. Of Americans with employer-sponsored coverage, about 80 percent (roughly 100 million taxpayers) would see a reduction in taxes. For example, a family with an annual income of $60,000 would see tax savings of about $4,500 annually. The other 20 percent - about 30 million, mostly higher income individuals - would see modest increase in their federal tax bill.

From a federal perspective, the proposal is expected to be budget neutral over the first ten years. In the early years, the proposal would cost the federal government $30-40 billion a year. However, by 2013 the changes are expected to increase net federal revenues. This is because it is structured to redistribute dollars in the system, over time taxpayers will tend to gravitate to health plans falling below the deductible amounts, and tax revenues will increase as more compensation shifts from benefits to wages.

Affordable Choices Grants to States:

The second component of the President's health reform package is called the Affordable Choices Initiative. Leveraging existing waiver authority and some likely legislative changes in Medicaid and Medicare, the Administration proposes to give states grants and new flexibility to offer basic, affordable health insurance coverage to the uninsured.

Specifically, the White House wants to allow states to redirect about $30 billion in dollars now used to help hospitals with uncompensated care. Both Medicaid and Medicare have disproportionate share hospital programs. While the methodologies differ, the federal Medicare program and state Medicaid programs use disproportionate share hospital (DSH) payments to send additional dollars to hospitals that serve a disproportionate number of uninsured patients.

Given the large number of states engaged in health reform initiatives and the presence of the large pools of dollars, the White House sees a unique opportunity to foster state-based coverage expansions and move dollars to subsidize health plans for the uninsured.

The Administration has also hinted at an interest in using savings that would result from new proposed federal rules to cap Medicaid payments to publicly owned providers. Right now, if the final rules are issued this summer as expected, many states and public hospitals will lose and the feds will pocket the savings for budget purposes.

However, because of the dollars involved and the pressure it places on many states and public providers, the proposed cap on Medicaid payments could be used to sweeten the Affordable Choices Initiative. For some states, it could become a case of "use it or lose it." In addition to giving states and public hospitals an added incentive to come to the table and perhaps soften Congressional opposition, it would add several billion dollars to the pool of funds for state-based coverage expansions.

More Details Forthcoming:

More details on the tax deductibility proposal and the Affordable Choices grants are expected on Monday, February 5, when the White House releases President Bush's proposed budget for FY 2008.

The tax deductibility proposal already faces stiff opposition from key Democrats in Congress. And hospital industry groups are lining up to oppose the Affordable Choices Grants. However, the two proposals certainly contribute to the debate and improve the chances of some major health reform legislation in 2007.

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.

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).