Are you curious or mystified by the intricucies and vagaries of Medicaid financing or federal Medicaid waivers? If so, please check out my new podcasts courtesy of Sellers Dorsey, the influential Medicaid and health reform consultancy.

Medicaid Financing 101: Concise review of Medicaid financing and the many opportunities available to find solutions to Medicaid budget needs. To listen, click here (opens MP3 file, right-click to save).

Medicaid Section 1115 Waivers: Primer on federal s. 1115 waivers used by states to reform Medicaid and the State Children's Health Insurance Program (SCHIP). To listen, client here.

The Sellers Dorsey Report is a regular series of free podcasts on Medicaid and federal and state health reform. The 8-10 minute podcasts include primers and updates on hot issues in Washington. You may listen on your PC or load the MP3 file to your iPod or other portable media player.

For alerts to new podcasts on Medicaid or health reform, register here.

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:

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.

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.

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.

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.

Medicare is a study in contrasts. In its financing, the program is modeled as what health wonks call "social insurance," which in reality is a euphemism for a politically effective but fiscally troubling mix of social welfare, health insurance, and cross-generational income transfers. Limited in coverage, slow to add coverage of new technologies, and often high in cost sharing, Medicare often cost-shifts to state Medicaid programs. While relatively cheap for the government to administer, Medicare is astonishingly complex, placing providers, supplies, health plans, and patients under a mountain of red tape.

In Medicare: A Policy Primer, Dr. Marilyn Moon - a respected researcher, former Medicare trustee, and one of the nation's leading Medicare policy gurus - "explains what Medicare is, how it works, and where is it headed." In this excellent introduction, Dr. Moon outlines the history of Medicare, taking readers from the program's origins in 1965 and the Great Society to today. The Medicare primer also walks readers through how the massive $370 billion program works in relation to the rest of the U.S. health care system and other federal programs.

While Dr. Moon is an unrepentant fan of Medicare and takes a decidedly Liberal, pro-entitlement approach to health policy, she takes pains to provide a thoughtful, balanced discussion of Medicare's key strengths and failings. She also debunks some lingering myths and assesses several of the more popular Medicare reform options.

Marilyn Moon, Ph.D. is currently vice president and director of the health program at the American Institutes for Research.

Published by Urban Institute Press, Medicare: A Policy Primer is available on Amazon.com here or direct from Urban Institute Press.

To learn more about Medicare, please check out my list of recommended Medicare books.

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

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

Non-Interference Requirement in MMA:

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

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

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

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

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

Estimated Savings of Federal Drug Price Negotiations:

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

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

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

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

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

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

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

Ample Evidence Against Federal Drug Price Negotiations:

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

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

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

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

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

Wait, It Gets Worse:

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

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

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

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

Recap:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Role and Influence of OIG in Medicaid:

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

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

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

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

Medicaid Hospital Payments:

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

Medicaid Long-Term Care Services:

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

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

Mental Health and Substance Abuse Services:

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

Medicaid Drug Costs:

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

Medicaid Managed Care:

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

State Administration of Medicaid:

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

To Learn More:

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