As part of health reform implementation, states will create a large and complex new marketplace for the buying and selling of health insurance coverage. Through State Exchanges, individuals and small businesses may buy federally defined benefit packages from state licensed and certified Qualified Health Plans.

For health plans, this is a huge new market with potential enrollment of 25 million to 40 million or more. For individuals and small employers, it will create a new, highly regulated pathway to buy coverage and access subsidies. Some 16 million uninsured Americans are projected to be insured through State Exchanges. For states, implementation will present extraordinary policy, regulatory, administrative, and systems challenges.

Briefing on State Exchanges and Qualified Health Plans:

For members of the Medicaid Health Plans of America (MHPA), I recently conducted a webinar on State Exchanges and Qualified Health Plans. For a variety of reasons, Medicaid health plans are better positioned for the Exchange plan market than many commercial plans. For the webinar slide deck, click here (PDF).

It was part of a series of webinars by Sellers Dorsey for Medicaid health plan leaders. Sellers Dorsey's other webinar topics included (1) grants and demonstrations under health reform law (PPACA), (2) Medicaid expansion, and (3) Medicaid drug rebate.

State Health Insurance Exchanges:

In a nutshell, starting January 2014:

At state option, large employers may buy coverage through State Exchanges starting in 2017. This, coupled with the strong possibility of crowd-out, could lead to major enrollment growth for QHPs.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The federal health reform legislation - Patient Protection and Affordable Care Act (PPACA) - includes an ambitious list of changes to long-term care (LTC) services for seniors and the disabled. Most include a massive infusion of federal funding to help state Medicaid programs provide more LTC through home and community-based settings. Here's a quick run-down of the new LTC reforms:

Community Living Assistance Services and Supports (CLASS) Program:

• Creates a national, voluntary insurance program for purchasing community living assistance services and supports (CLASS program).
• Following a five-year vesting period, the CLASS program will provide individuals with functional limitations a cash benefit of not less than an average of $50 per day to purchase non-medical services and supports necessary to maintain community residence.
• Financed through payroll deduction of about $75 a month. All working adults will be automatically enrolled in the program, unless they choose to opt-out. The new tax is effective January 1, 2011.
• Expected to cover $5 billion to $10 billion worth of non-medical services and supports annually.

Medicaid Money Follows the Person Rebalancing Demonstration:

• Extends the multi-billion dollar Medicaid Money Follows the Person Rebalancing Demonstration program through September 2016.
• Primary objective of moving Medicaid eligible seniors from nursing homes to home, group homes, or assisted living. The three-year old initiative helps states to reduce reliance on nursing homes, while developing community-based long-term care options and enabling frail seniors and people with disabilities to live in the community.
• Estimated $1.7 billion in additional federal funding.

New State Options for Home and Community-Based Services:

• Provides states with new options for offering home and community-based services (HCBS) through a Medicaid State Plan rather than through a waiver.
• HCBS programs provide an array of non-medical services and supports - such as personal care attendants and in-home technologies - to help frail seniors and persons with disabilities live independently in their own homes.
• PPACA ends the need for states to show federal budget neutrality to operate or expand a HCBS program.
• At state option, this applies for individuals with incomes up to 300% of the maximum SSI payment and who have a higher level of need.
• States may extend full Medicaid benefits to individual receiving home and community-based services under a State Plan.
• $2.4 billion new federal funding over ten years.
• Effective retroactively to October 1, 2010.

Community First Choice Option:

• Establishes the Community First Choice Option in Medicaid to provide community-based attendant supports and services to individuals with disabilities who require an institutional level of care.
• Provides states with an enhanced federal matching rate (FMAP) of an additional six percentage points for reimbursable expenses in the program.
• $6 billion in new federal funding over 10 years.
• Effective October 1, 2011. Option sunsets after five years unless renewed by Congress.

State Balancing Incentive Program:

• Creates the State Balancing Incentive Program to provide enhanced federal matching payments to eligible states to increase the proportion of long-term care services provided through the community (instead of nursing homes and similar institutional settings).
• Selected states will be eligible for higher federal match for Medicaid expenditures for the non-institutional long-term services and supports. HHS will select states based on an application process.
• Total federal incentives of $1.8 billion.
• Effective October 1, 2011 through September 30, 2015.

For More Information on Long-Term Care Reforms:

The new LTC initiatives in the PPACA create tremendous opportunities for state Medicaid agencies, state aging agencies, and health care organizations. For help or more information, I recommend that you contact my colleagues at Sellers Dorsey. Pat Brady and her highly skilled LTC reform team are already helping states and private organizations design and implement innovative LTC programs. These are true win-win efforts, supporting independent living and improving care, while saving dollars for taxpayers.

Health Insurance Exchanges - either state-based exchanges favored by moderate Democrats and Republicans (reflected in Senate bill) or a national, federally-run exchange favored by liberal Democrats (version in the House bill) - are an essential component of national health reform.

Bottom line, health insurance exchanges would provide a far more efficient, competitive, and seamless marketplace for consumers and small business to buy health insurance coverage, while also facilitating subsidies for low-income families, easy comparison of benefit packages, and transparency of premiums.

Deborah Maggart, a health care communications specialist at TogoRun, has written an interesting article on two competing visions of health insurance exchanges (HIEs) and implications for communications.

The article includes links to additional resources on HIEs.

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

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

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

To read the report, click here (PDF).

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

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

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

The Children's Health Insurance Program Reauthorization Act of 2009 (CHIPRA) created the Medicaid and CHIP Payment and Access Commission (MACPAC) to advise Congress on a wide range of Medicaid and CHIP issues. MACPAC will start operating in early 2010.

MACPAC Membership and Staff:

Modeled closely after the long standing and highly influential Medicare Payment Advisory Commission (MedPAC), MACPAC will be a Congressional agency like MedPAC, the Congressional Budget Office (CBO), and the Government Accountability Office (GAO). Like MedPAC, the 17-member MACPAC will include an executive director and a professional staff of ~25-40. MACPAC appoints the executive director.

The 17 Commission members will be appointed for three-year, staggered terms, by the Comptroller General (head of the GAO), with representation from health financing experts, physicians, health professionals, employers, third-party payors, consumers, and current or former state Medicaid / CHIP officials. Non-health care providers must constitute a majority of the MACPAC membership. MACPAC appointments must be made by January 1, 2010.

Qualifications for MACPAC Membership:

In general, MACPAC's membership must include individuals with direct experience as:

• Medicaid / CHIP beneficiaries or parents of beneficiaries.
• Individuals with national recognition for expertise in Medicaid, CHIP, health finance and economics, actuarial science, health plans, integrated health systems, reimbursement, health information technology, or health care providers (e.g., pediatricians, dentists).

In particular, the MACPAC membership must include physicians and other health professionals, employers, third-party payors, and individuals with expertise in the delivery of health services. This must include:

• Members representing children, pregnant women, the elderly, and individuals with disabilities
• Current or former state Medicaid agency officials.
• Current or former State CHIP agency officials.

Congress seeks a mix of different professionals, broad geographic representations, and a balance between urban and rural representatives.

Role and Duties of MACPAC in Advising Congress on Medicaid and Children's Health Insurance Program:

Starting in 2010, MACPAC will:

• Review Medicaid and CHIP policies affecting children's access to covered services and make recommendations to Congress, with a report due by March 1 each year.
• More broadly examine issues affecting Medicaid and CHIP, including implications of changes in care delivery and the marketplace. Make recommendations to Congress, with report due by June each year.

More specifically, Congress directs MACPAC to regularly review and assess:

• Medicaid and CHIP payment policies, including state payment methodologies and factors affecting expenditures in different sectors, including the process for updating reimbursement rates for hospitals, nursing facilities, physicians, and community health centers.
• The relationship of payment policies to access and quality of care for Medicaid and CHIP beneficiaries.
• Interaction of Medicaid and CHIP payment policies with health care delivery.
• Implications of health care delivery changes and other marketplace changes on access to care for Medicaid and CHIP beneficiaries.
• The effect of other Medicaid and CHIP policies on access to covered health care services, including transportation and language barriers.

MACPAC must also:

• Create an early warning system to identify provider shortage areas or any other problems that threaten access to care or the health care status of Medicaid and CHIP beneficiaries.
• Review and comment to Medicaid and CHIP related reports to Congress by HHS.
• Upon request of committee chairs or ranking members, conduct studies, produce special reports, and make recommendations to Congress on Medicaid and CHIP issues.
• Periodically consult with Congressional leadership (committee chairs and ranking members), make its reports available to the HHS Secretary and the public, record and report votes on all recommendations, and examine the budget consequences of recommendations.
• Before making any recommendations, MACPAC must consider the budget consequences of such recommendations, directly or through consultation with experts.

CHIPRA also contains provisions on MACPAC operations, data collection and access, authority, funding and staffing. Again, these closely align with existing policies governing MACPAC's sister agency MedPAC.

Committee Jurisdictions in Congress:

MACPAC will be accountable to the Congressional committees with jurisdiction for Medicaid and CHIP, namely:

• House Energy and Commerce Committee and its Subcommittee on Health.
• Senate Finance Committee.

As part of the FY 2009 Omnibus Appropriations Act, Congress created the State Health Access Grant Program. On a competitive basis, states may receive grants of $2 million to $10 million each year for five years to improve access to health insurance coverage. Grant funds will help cover the cost of staff, actuarial work, etc. to design and implement major state-based reforms.

The grant funds should help a dozen or more states jump start reforms such as (1) subsidizing access for the uninsured, (2) modernize inefficient enrollment systems, and (3) facilitating choice of affordable insurance products in the market.

The new program is a great opportunity for health care businesses, such as health plans, to partners with states. States must cover up with 20% match for the grants but some or all of the matching dollars may come from third parties, including health plans, provider groups, or drug manufacturers.

My friends at Sellers Dorsey have developed an excellent summary of the State Health Access Grant Program.

The State Health Access Grant Program is the brainchild of House Appropriations Committee Chairman Dave Obey (D, WI) and builds off the earlier State Health Planning Grant Program. The Health Resources and Services Administration (HRSA) will administer the grant program.

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

The Private Health Insurance Market:

The Tax Treatment of Health Insurance:

Changing the Availability of Health Insurance Through Existing Federal Programs:

The Quality and Efficiency of Health Care:

Geographic Variation in Spending for Medicare:

Paying for Medicare Services:

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

Premiums and Cost Sharing in Federal Health Programs:

Long-Term Care:

Health Behavior and Health Promotion:

Comprising 21% of state budgets and growing faster than revenues, Medicaid continues to be a serious challenge for governors, state legislatures, and state Medicaid directors.

The National Association of State Budget Officers (NASBO) has released its latest Fiscal Survey of the States. Every six months, NASBO provides a crisp, informative snapshot on the revenue and spending situation in every state. No surprise, Medicaid budget estimates figure prominently.

Highlights:

NASBO points out that:

Among the issues of greatest concern for states include, health care cost increases and greater utilization of services; the aging population and the impact on long-term care financing; regulatory actions at the federal level that would limit federal participation for key services; workforce shortages such as nurses; hospital finances; pressure to raise physician rates in order to maintain participation in the Medicaid program; State Children's Health Insurance Program (SCHIP) funding; mental health funding and access; expanding access to health care for the uninsured; and generally the pressure to maintain health care spending that on average consumes a greater share of state budgets over time.

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

The National Conference of State Legislatures (NCSL) released their own 60-page report on state budgets, including expected budget gaps in 2009 and 2010.

The budgetary impact of proposed health reform initiatives - whether through legislation, rules, or waivers - significantly affects the likelihood of success. The following provides a concise briefing on some key players and processes affecting cost estimates of federal health care initiatives.

Congressional Budget Office (CBO):

The Congressional Budget Office (CBO), a nonpartisan agency of Congress, provides Congressional committees with budgetary information and analyses. CBO's mandate is to provide Congress with objective and impartial analysis, with no policy recommendations.

Specifically, CBO prepares fiscal estimates for pending legislation, forecasts federal revenues and expenditures, independently re-estimates the President's proposed budget, and conducts various analyses for Congress. Therefore, CBO determines the official cost/savings estimate or "score" used by Congress in considering proposed legislation or the President's proposed budget. For estimating the impact on revenues of legislation involving income, estate and gift, excise, and payroll taxes, the Congressional Budget Act directs CBO to use exclusively the revenue estimates of the Joint Committee on Taxation.

CBO frequently calls on outside experts for advice on specific analytic matters, such as the outlook for health care spending, spending projections for Medicare and Medicaid, and the fiscal impact of major programmatic or regulatory changes. For its economic forecasts and assumptions, CBO draws on the advice of a distinguished panel of advisers that meets twice a year. CBO also has a panel of outside experts, mostly academics, to advise CBO on health care issues.

All CBO estimates and analytic products are reviewed internally for technical competence, accuracy of data, and clarity of exposition. Draft studies are also reviewed by experts outside CBO, and the preface to each study cites the many contributors who helped shape the final product. Although outside experts and advisers provide considerable assistance, CBO is solely responsible for the accuracy of its estimates and analyses. Due to its nonpartisan status and mandate to provide objective analysis, CBO does not make explicit policy recommendations in any of its analyses.

White House Office of Management and Budget (OMB):

The Office of Management and Budget (OMB), part of the Executive Office of the President, is the focal point of policy and budget oversight in the Executive Branch. OMB's mandate is to ensure policymaking by cabinet departments and agencies is consistent with the policies and priorities of the President.

In addition to making policy recommendations and preparing the President's proposed budget, OMB reviews and approves a wide range of policy and budget activities of federal agencies. This includes the authority to review and approve or disapprove proposed and final rules, waivers (e.g., Medicare or Medicaid demonstrations), legislation proposed by agencies, major "sub-regulatory" policy (e.g., program guidance, interpretations, and instructions by CMS), congressionally mandated reports, and Congressional testimony by Executive Branch officials.

OMB provides the Administration's official estimate of the cost/savings of policies contained in regulations, waivers, and the President's proposed budget, and the Administration's position of the cost/savings of legislation under consideration in Congress. OMB also estimates the impact of federal regulations on businesses and state and local government. However, in estimating Medicare or Medicaid related costs and savings of legislation, rules, and waivers, OMB works closely with the Office of the Actuary (OACT) at the Centers for Medicare and Medicaid Services (CMS). While OMB may occasionally revise estimates provided by CMS/OACT and request refinements or recalculations, it most cases OMB adopts CMS/OACT estimates without major changes.

PAYGO:

PAYGO - short for "Pay as You Go" - refers to rules in the House and Senate requiring that legislative changes to mandatory programs or taxes do not increase the federal deficit. To comply with PAYGO, new mandatory spending programs, changes to existing mandatory programs (most notably, Medicaid, Medicare, SCHIP, and Social Security), and tax cuts must be offset by an equal amount of tax increases or cuts to mandatory programs. In determining the net effect of proposed changes to mandatory programs and taxes, Congress uses CBO's projections of baseline spending and fiscal effects of individual legislative provisions.

PAYGO is a parliamentary rule, with some differences in the House and Senate. PAYGO may be overridden in the House if the House Rules Committee adopts a special order governing how a bill is considered on the floor. This allows the Majority to disregard PAYGO with support of the House leadership. The Senate may dispense with the PAYGO rule with a vote of at least 60 senators. While there are other rules applying to funding bills, PAYGO does not apply to discretionary programs funded through the annual appropriations process. In the Senate, PAYGO also does not apply to changes made through an annual budget resolution.

The effect of PAYGO is to impose some modest degree of spending discipline on new legislation affecting Medicare or Medicaid. Since offsets are required, it means major legislative changes to Medicare and Medicaid are carried out through massive reconciliation bills.

Budget Reconciliation and Budget Offsets:

Because of PAYGO and the practical demands of political "horse trading," passage of major changes to Medicaid or Medicare typically requires offsetting changes elsewhere in the same programs. PAYGO makes stand-alone bills increasing net federal spending difficult to pass, even with White House support. Further, tactically it makes little sense to enact stand-alone legislation that reduces Medicare or Medicaid spending. Sponsors of savings initiatives lose the fiscal "credit" that could be used to offset higher spending elsewhere in mandatory programs.

Therefore, budget reconciliation bills - which allow Congress to make a large number of simultaneous changes to mandatory programs and taxes to meet five-year spending targets set in the annual budget resolution process - are the primary vehicles for federal health care legislation. Enacting major changes through budget reconciliation bills has a variety of other practical benefits in the political process. For example, the massive bills make possible a large number of trades and compromises between key lawmakers, committees, and the two chambers. Budget reconciliation bills are also exempt from filibusters in the Senate.

Given this, budget offsets are often critical to the ultimate success of provisions to increase Medicare or Medicaid spending. Therefore, it is often important to identify, develop, or otherwise support offsetting provisions - changes that would reduce mandatory health spending in some way. For example, proponents of a Medicaid funding increase could support legislation to permit new versions of expensive biologic drugs that are off patent (commonly called "biosimilars"). CBO projects biosimilars could reduce Medicare Part B spending by about $5-6 billion over five years. Through a reconciliation bill, the Medicare savings from biosimilars could be used to offset the desired higher spending elsewhere in Medicare (e.g., physician reimbursement), in Medicaid or SCHIP.

Medicare-Medicaid Waivers:

While budget offsets between mandatory programs are routine in legislation, similar offsets are not permitted in combined Medicare and Medicaid waivers. Under longstanding policy, Medicare and Medicaid waivers must be budget neutral to the federal government. OMB, with advice from the CMS Office of the Actuary, determines if a proposed waiver is likely to be budget neutral to the federal government. Combined Medicare-Medicaid waiver projects are permitted and increasingly used to test major reforms, especially for dual eligibles. However, proposals for combined Medicare-Medicaid waivers may not use projected federal savings in one program to offset projected higher spending in the other.

For example, a waiver project could propose Medicaid care management to reduce hospital admissions by dual eligibles. The federal shared of the cost of Medicaid care management would be more than offset by lower federal Medicare hospital spending. However, OMB policy does not allow such cross-program offsets when determining whether budget neutrality is met. This policy, coupled with the widely different funding and programmatic characteristics of Medicare and Medicaid, make many innovative, cost-saving waiver-based initiatives impossible.

Like the budget neutrality policy, the policy against cross-program offsets in waivers is longstanding OMB policy but not required by statute or rule. Therefore, a new Obama Administration could easily alter or abolish the limitation - dramatically increasing the ability of states and HHS to design and test major health reforms.

Many of my clients ask me how Medicaid policy is made, particularly for coverage, reimbursement, and managed care and other delivery systems. The $360 billion Medicaid program is highly complex and there are many nuances and exceptions, but here is a high-level primer on the basics.

Given the Medicaid program's shared federal-state funding and governance, underlying complexity, and variability across the respective states, Medicaid policy is set through several distinct vehicles, some federal and some state.

Medicaid Policy Making by Federal Government:

The primary federal policy making vehicles are:

Federal Medicaid Statutes:

Title XIX of the Social Security Act provides the federal statutory framework for Medicaid nationwide. Like its Medicare counterpart, Title XIX is extraordinarily complex and frequently amended by Congress. The federal Medicaid statutes are a mix of mandates and options for states. Medicaid legislative changes are often accomplished through budget reconciliation bills rather than separate stand-alone legislation. Short-term fixes may be made through appropriations bills.

Federal Medicaid Rules:

The vast bulk of federal Medicaid rules are promulgated by the Centers for Medicare and Medicaid Services (CMS). As with Medicare rules, CMS must follow the rulemaking process required by federal Administrative Procedures Act (APA) and the same clearance process. Most proposed and final rules affecting Medicaid are drafted by staff in CMS' Center for Medicaid and State Operations (CMSO), with legal advice from the HHS Office of General Counsel (OGC). Before publication in the Federal Register, proposed and final rules require approval of the HHS Secretary and White House Office of Management and Budget (OMB). OMB's Medicaid rule reviews are conducted primarily by the Medicaid Branch in OMB's Health Division but coordinated through OMB's Office of Information and Regulatory Affairs.

Federal Medicaid Guidance:

CMS uses several mechanisms to make or clarify Medicaid policy through "sub-regulatory guidance." This includes CMS' State Medicaid Manual and an important and influential ad hoc series of letters to State Medicaid directors - both issued by CMSO.

Federal law requires formal rulemaking for most substantive policy making, including interpretations of federal statutes. However, CMS often sets policy administratively, either in lieu of or far in advance of formal rule making. For example, if Congress makes significant changes to Title XIX with a tight deadline for implementation, CMS often issue a guidance letter or directive months in advance of issuing necessary conforming regulations. CMS must perform a balancing act to comply with the intent of APA and still implement frequent changes enacted by Congress or expected by the White House or HHS Secretary.

Officially, letters to State Medicaid directors (SMDs) are not intended to make policy per se but many states and experts believe some of these SMD letters make policy that requires formal rulemaking. Under a new Executive Order, OMB now has the authority to review and approve CMS guidance. This is consistent with its longstanding authority to review rules and waivers and a response to growing use of sub-regulatory issuances by agencies across the Executive Branch. OMB's new role continues to evolve.

Federal Medicaid Waivers:

Under sections 1115 and 1915 of the Social Security Act, the HHS Secretary may waive a variety of federal statutes and rules to permit state Medicaid programs to change benefit packages, eligibility, cost sharing, and care delivery in ways not permitted by current law. For my recent primer on federal Medicaid and Medicare waivers, click here.

Medicaid Policy Making by States:

The state-level policy making mechanisms in Medicaid are:

Medicaid State Plan:

Each state Medicaid program has its own "State Plan," which serves as the funding agreement between the state Medicaid agency and CMS. The State Plan specifies all of the state's key policies on Medicaid eligibility, benefits, cost sharing, reimbursement, managed care, quality assurance, utilization management, and program integrity. Here's an example of a Medicaid State Plan.

State Plans are highly detailed (typically 1000-2000 or more pages in length) and subject to frequent revision to reflect changes in federal law or rules, CMS guidance, state policy choices, and court rulings. State Plan Amendments (SPAs) are drafted by the state Medicaid agency and submitted to CMS for approval. Many SPAs are routine, following "preprints" - boilerplate checklists that allow states to propose SPAs needed to conform the State Plan to federal mandatory policies or common practices already approved for other states. States don't have to follow the preprints but it makes routine SPAs much easier. The state publishes a prior public notice for each SPA.

Routine SPAs are handled by the CMS regional offices but CMSO's central office staff in Baltimore handles all major and controversial SPAs. CMS may ask questions and may deny SPAs that it determines fail to comply with federal requirements. If an SPA rejected, the state may appeal CMS' decision to the HHS Departmental Appeals Board (DAB) and thereafter to the federal courts.

State Statutes and Administrative Rules:

Each state also sets some degree of Medicaid policy through state statutes and administrative rules. States vary widely in the degree to which state Medicaid policies are set forth in statutes or rules. Most states set eligibility, benefit packages, and cost sharing in statute and/or rules. Other policies, such as specific reimbursement methodologies and rates, are sometimes set administratively by the state Medicaid agency through manuals and instructions to providers. The basic parameters of hospital and nursing home payment formulars are often set in state statute. Still other policies are made through the state budget process or contracting mechanisms, such as managed care RFPs and Medicaid health plan contracts.

However, some states, specify a considerable amount of Medicaid policy through rules. While state Medicaid rules are drafted and promulgated by the state Medicaid agency, some states require legislative committee review and approval of all rules. (Note that regardless what is addressed in state statutes or rules, the State Plan must reflect the latest policies.)

Federal waivers are powerful tools to demonstrate Medicare or Medicaid reforms, including new payment methods, benefit packages, and delivery systems. The business and policy opportunities are considerable. Here's a quick primer.

Demonstration Waivers:

Historically, federal policymakers have understood the need to test new ideas in the complex Medicare and Medicaid programs. Research and demonstrations projects - whether initiated by states, health services researchers, providers, health plans, CMS, or Congress - often lead to models or reforms available or mandated nationwide.

Therefore, federal law permits the Secretary of Health and Human Services to waive certain provisions of the Social Security Act and associated regulations as needed to conduct demonstration projects in Medicare, Medicaid, or both Medicare and Medicaid. Waivers are purely discretionary unless legislation mandates a specific project.

Medicaid Waivers under Section 1115:

Section 1115 of the Social Security Act is the principal waiver authority in Medicaid. The HHS Secretary may waive most federal requirements regarding Medicaid benefit packages, eligibility, cost sharing, managed care, and other care delivery. A Medicaid demonstration may be statewide or for only a portion of the state (select counties). (States may also request similar waivers of federal law to reform SCHIP.)

Ostensively, Medicaid waiver projects are research-oriented and intended to test the merits of a new reform(s) not permitted under current law. However, in practice, many Medicaid "demonstrations" are or soon evolve into indefinite, alternative models of Medicaid. Although under no obligation to do so, the HHS Secretary may approve similar or even identical waivers for multiple states.

Medicaid waivers must be requested by the state Medicaid agency, with the approval of the governor. Federal officials may encourage states to propose waivers and Congress occasionally enacts legislation calling for waivers to demonstrate specific reforms. However, the vast majority of Medicaid waiver-based projects are initiated and designed by state governments, often with the assistance of outside experts.

Once approved, Medicaid demonstration projects are operated by the state Medicaid agency, with oversight by CMS. The state may contract with third parties, such as health plans or other contractors, but s. 1115 demonstrations remain part of Medicaid and therefore the state is also responsible for the demonstration project.

Roughly speaking, between a quarter and a third of Medicaid spending operates under s. 1115 waivers instead of standard Medicaid statutes and rules.

Medicare Waivers under Sections 402/222:

Under Sections 402/222, the HHS Secretary may waive Medicare statutes and rules to demonstrate new approaches to provider reimbursement, including tests of alternative payment methodologies, demos of new delivery systems, and coverage of additional services to improve the overall efficiency of Medicare. (Sections 402/222 refer to section 402[a] of the Social Security Amendments of 1967, as amended by section 222[a] of the Social Security Amendments of 1972.)

Medicare demonstrations may be national or limited to certain states, regions, populations, provider types, or even providers or plans designated in advance. They may also be limited in other ways, such as capped in number of participating beneficiaries or providers. Unlike Medicaid demonstrations, participation in Medicare demonstrations, whether by beneficiaries or providers, is rarely mandatory and then only if required by a Congressional mandate.

Any organization or individual may propose a Medicare waiver project. This includes providers, health plans, state Medicaid agencies, and health services researchers. CMS maintains an open invitation for outside parties to propose Medicare demonstration projects and the necessary waivers. However, the bulk of Medicare waiver-based demo projects are congressionally mandated in legislation or initiated administratively by CMS. CMS-initiated Medicare demonstration projects are often developed at the behest of the HHS Secretary, the White House Office of Management and Budget (OMB), the Medicare Payment Advisory Commission (MedPAC), or the Office of the Inspector General.

Unlike many Medicaid waiver-based projects, most Medicare waiver projects tend to be genuine demonstrations projects with a careful research design and evaluation methodology. Given this research emphasis, requests to replicate currently operating Medicare demonstrations are often denied unless a research value can be shown.

Occasionally, ss. 402/222 authority is used to issue what CMS informally calls "operational waivers." These later waivers are often made to address emergencies or fix short-term operational problems (e.g., provider payments after a natural disaster, reimburse states for drug payments during Medicare Part D transition).

Once approved, Medicare waiver projects are administered by CMS either directly, through contractors (e.g., Medicare administrative contractors, Medicare Advantage plans), or (rarely) through states. Except for operational waivers, CMS evaluates each demonstration projects. Major Medicare demonstrations, including congressionally mandated projects, are evaluated by independent health services researchers hired by CMS. CMS' budget for evaluations is small, with congressionally mandated demonstrations using most of the available funding. This, coupled with the administrative burden of designing, operating, and monitoring waivers, tends to limit the number of Medicare waivers CMS is able to consider.

Combined Medicare-Medicaid Projects:

States may propose demonstration projects involving the waiver of both Medicaid and Medicare statutes and rules. Combining the authority offered by s. 1115 (Medicaid) and ss. 402/222 (Medicare), the HHS Secretary is able to consider an array of Medicare-Medicaid demonstration ideas, most notably state-wide or regional initiatives changing care delivery, benefit packages, and service reimbursement for dual eligibles.

Examples of combined Medicare-Medicaid waiver projects include:

Historically rarer than Medicaid-only and Medicare-only demonstrations, combined waiver-based projects are increasingly popular as states develop integrated care models for dual eligibles and managed long-term care models. A variety of other activities by policymakers and the marketplace have also dramatically increased interest in and practicality of combined waiver demonstrations. These include the advent and popularity of Medicare Advantage Special Needs Plans (MA-SNPs), advances in risk adjustment methodologies and quality measurement, sharing of best practices, and collaborations among influential states, foundations, thought leaders, think tanks, and CMS.

Waiver Application Process:

Applications for Medicare or Medicaid waivers must include project scope and objectives, the specific statutes and rules to be waived, spending and enrollment projections, research design, evaluation plan, and details on safeguards appropriate to the project (e.g., quality, access, appeal rights).

Applications for s. 1115 Medicaid waivers are submitted to the HHS Secretary or CMS Administrator and reviewed by the CMS Center for Medicaid and State Operations (CMSO). Other CMS offices - such as the Office of Research, Development and Information (ORDI) - may provide technical advice to CMSO.

Proposals for Medicare waiver projects are submitted to the HHS Secretary or CMS Administrator and reviewed by the Office of Research, Development and Information (ORDI) and the affected operating center: the Center for Medicare Management for projects related to fee-for-service Part A or Part B and the Center for Drug and Health Plan Choice for Medicare Advantage or Part D related projects.

The Medicare and Medicaid Cost Estimates Group in the CMS Office of the Actuary (OACT) estimates the fiscal impact of proposed Medicaid and Medicare waivers.

Proposals for combined Medicaid-Medicaid waivers are naturally reviewed by several units of CMS, with a center, a cross-agency team, or the Administrator's office taking responsibility for coordinating the review. The particulars vary and are highly situational.

Waiver Approval Process:

Waiver applications - particularly the details of s. 1115 Medicaid waivers and combined Medicare-Medicaid demonstrations - are subject to complex and often lengthy negotiations. Given the technical complexity and policy and fiscal implications of Medicaid or combined Medicare-Medicaid waiver requests, specialized consultants often support senior state staff during CMS negotiations. Senior federal and state officials often weigh in during negotiations. This may include active participation by the HHS Secretary, CMS Administrator, Governor, and State Medicaid Director.

Every proposed Medicaid or Medicare waiver program must be budget neutral to the federal government. That is, Medicaid or Medicare under the requested waivers must be projected to cost the applicable federal program no more than expected spending without the waivers. By tradition, proposed Medicare-Medicaid demonstrations may not claim federal savings in one program to offset higher federal costs in the other.

While not required by federal law, the last four Administrations have enforced the policy expectation that all waivers are determined to be budget neutral prior to approval. The budget neutrality requirement applies only during the review process. Unless the waiver includes a cap on the federal share of spending, there is no fiscal penalty if a demonstration is ultimately not budget neutral.

There is no set methodology - economic or actuarial - for determining federal budget neutrality. Successful Medicaid waiver negotiations are highly dependent on a state's ability to demonstrate budget neutrality to the satisfaction of federal officials, particularly to CMS actuaries and White House budget staff. Modeling budget neutrality often requires a rigorous mix of creative policy work and analytically sound forecasting. Political priorities and imperatives - together with caution regarding setting new precedents - often informally influence waiver negotiations and assessments of budget neutrality.

Authority to issue waivers under s. 1115 and ss. 402/222 rests with the HHS Secretary. However, all Medicaid and Medicare waivers, regardless of size and scope, require the prior review and approval of the White House Office of Management and Budget (OMB). OMB may require changes, additional terms and conditions, or reject the proposed waivers.

Once approved, waivers include specific terms and conditions negotiated with CMS. These vary considerably, depending on the nature of the demonstration.

Medicaid demonstrations are typically approved for an initial five-year period. Thereafter, they may be renewed ever three years indefinitely. Renewals must be budget neutral and receive OMB approval.

Medicare waiver projects initiated by CMS are typically operated for three or five years, depending on how much time is needed to test the policy change. Congressionally mandated waivers vary in length, with most three to five years in length and some indefinite.

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.

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.

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

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

OIG Review of State False Claims Acts:

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

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

Background on Federal False Claims Act:

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

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

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

How the False Claims Act Works:

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

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

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

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

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

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

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

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

DRA Drug Pricing Changes in a Nutshell:

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

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

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

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

4. Increase the compliance risks of drug manufacturers.

5. Reduce Medicaid reimbursement to pharmacies.

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

Federal Proposed Rules:

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

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

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

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

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

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

Operational Challenges of DRA for Pharmaceutical Industry:

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

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

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

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

Financial Challenges of DRA for Pharmaceutical Companies:

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

Compliance Challenges of DRA for Drug Manufacturers:

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

Learn More:

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

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

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

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

The 109th Congress ended in the early morning hours on Saturday, with both houses passing by comfortable margins the Tax Relief and Health Care Act of 2006. With Democrats taking control of both the House and Senate when the 110th Congress begins the first week of January, GOP leaders were anxious to resolve some key policy items before Democrats take the helm.

The final legislation, which President Bush is expected to sign, includes an array of changes in tax laws, Medicare, and health savings accounts (HSAs), along with technical corrections to drafting errors in the Medicare Modernization Act (MMA) and the Deficit Reduction Act (DRA). Today, I'll walk you through the Medicaid-related changes of importance to states and Medicaid health plans and providers.

Medicaid Legislative Changes:

As I reported earlier, the White House had been signaling its intention to issue a rule to cut Medicaid provider tax rates from a maximum of 6 percent - the ceiling that's been in place since 1993 - to 3 percent. The effect would have been to reduce federal funds to state Medicaid programs by $6 billion or more. Members of both parties were anxious to enact legislation to stop the Bush Administration's planned rule to restrict state use of provider taxes. States, provider groups, and beneficiary advocates were lobbying hard to stop the controversial rule change.

In Section 403 of the Tax Relief and Health Care Act, Congress codifies the maximum provider tax rate at 6 percent. From January 1, 2008 through September 30, 2011, the rate will be temporarily reduced to 5.5 percent. On October 1, 2011, the cap on tax rates goes back to 6 percent.

Implications for States and Providers:

Ah, the joys of Medicaid complexity. In a nutshell, here's what this means:

1. The planned CMS rule to drop the maximum provider tax rates to 3% is now moot. If the President signs the bill, the section will become law and negate the planned rule change.

2. The legislated change from 6 percent - which is what's now set in rule - to 5.5 percent is expected to cause few, if any, problems for most states that now use provider taxes to leverage federal match to help finance Medicaid. States not in compliance with the new 5.5 percent cap have a year to either modify their assessment program or make likely modest changes to how the resulting funds are distributed within Medicaid.

3. The fiscal effect on states is relatively small, especially when compared to the $6 billion hit states were looking if the rule was issued. Specifically, the Congressional Budget Office (CBO) projects the half percent change will only save the feds $200 million over the next five years. As federal budget estimating goes, that's barely above a rounding error.

The federal requirements governing Medicaid provider taxes are complex, with many moving parts. In general, federal law requires that health care-related assessments are uniform, broad-based, and do not hold providers harmless. The percentage cap is part of how the feds determine whether a state provider tax is compliant with the hold harmless requirement. States needing to revise their policies should consult an experienced Medicaid financing specialist. I recommend Sellers Feinberg, the leading advisors on Medicaid financing and reform.

Other Federal Medicaid Changes:

While most of the other Medicaid-related changes were technical corrections, the legislation made a couple other substantive changes of note.

One deals with Transitional Medical Assistance (TMA). TMA is the continuation of Medicaid benefits for up to one year for certain low-income families who would otherwise lose Medicaid coverage because of changes in their income, usually due to increased hours of work or child or spousal support. The legislation extends Transitional Medical Assistance for the first half of CY 2007 (two quarters of funding). Linked to TMA, Congress also provides funding for matching grants to states to provide abstinence education.

The new legislation also provides Tennessee with $131 million to help cover hospital uncompensated care. The $131 million represents a partial restoration of federal funding for Medicaid disproportionate share hospital (DSH) payments. As part of creation of the TennCare in 1994, Tennessee's Medicaid DSH program was discontinued. This is a big win for retiring Senator Bill Frist.

State Children's Health Insurance Program (SCHIP):

Some issues were left unresolved and deferred to the next Congress. Most notably, as part of the overall legislative package, Congressional leaders were hoping to address a federal funding shortfall for the highly popular State Children's Health Insurance Program (SCHIP).

Unlike Medicaid, which has no federal funding cap, states are given state-specific SCHIP funding caps. Some 17 states will run out of federal SCHIP dollars in FY 2007. Nationally, the shortfall is projected at $920 million. Unless Congress reallocates funds or states decide to use 100% state funds to fill the gap, about 630,000 children are at risk of losing health coverage, at least temporarily.

The Senate Finance Committee wanted to fill the gap by reallocating unused federal SCHIP funds from 2004 and 2005. Unfortunately, this was dropped during negotiations with the House. With many in both parties eager to avoid cuts in kids' health coverage, states hope to get the funding problem fixed in early 2007, either as part of an omnibus appropriations bill or SCHIP reauthorization.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Role and Influence of OIG in Medicaid:

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

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

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

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

Medicaid Hospital Payments:

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

Medicaid Long-Term Care Services:

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

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

Mental Health and Substance Abuse Services:

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

Medicaid Drug Costs:

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

Medicaid Managed Care:

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

State Administration of Medicaid:

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

To Learn More:

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

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

New Federal Authority in Medicaid:

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

Key Components of Medicaid Integrity Program:

The Medicaid Integrity Program (MIP) includes:

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

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

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

Perspective:

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

Learn More:

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

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

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

Medicaid Payment Error Rate Measurement:

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

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

States Targeted for Federal Review:

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

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

Opportunities and Challenges:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Patient-Centered Care Defined:

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

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

Key Components of Patent-Centered Care:

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

To learn more, check out these resources:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Kentucky Medicaid Reform:

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

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

1. The Family Choices program will serve healthy children.

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

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

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

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

West Virginia Medicaid Reform:

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

1. A Basic plan modeled after current Medicaid benefits.

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

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

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

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

Idaho Medicaid Reform:

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

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

Here are some details on Idaho's three plans:

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

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

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

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

Idaho's Medicaid restructuring includes several other important reforms:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Medical errors are rampant in American health care, particularly in physician and hospitals services. The human and economic costs are extraordinary. And because these mistakes are virtually 100 percent avoidable, so are the deaths, injuries, pain, and cost.

A diverse range of players - policy makers, thought leaders, researchers, consumer groups, purchasers, and clinicians - are working to reduce error rates and promote the use of safer systems and practices. However, reformers continue to hit the great blue wall of medical secrecy. Physicians, hospital administrators, and other health professionals are extremely reluctant to disclose or discuss a harm-causing mistake.

This is not surprising, of course. No one likes to talk about his or her mistakes, especially mistakes that result in injury or death. These conversations are awkward and painful for all concerned. What's more, disclosuring the truth can lead to lawsuits, disciplinary action, embarrassment, self-doubt, and diminished status in society and among peers. But ethically, all this is beside the point. Patients and their surviving family have a right to the unvarnished truth, something they rarely get absent costly and protracted lawsuits. And the health care system cannot fix what it cannot see.

Medical Errors and Medical Narcissism - a groundbreaking book by John Banja, PhD, assistant director of health services and clinical ethics at Emory University - examines the concept of "medical narcissism." Specifically, Dr. Banja explains why a health professional's need to preserve his or her self-esteem often robs patients and their families of the truth and perpetuates high-error medicine. He describes the "common psychological reactions of healthcare professionals to the commission of a serious harm-causing error and the variety of obstacles that can compromise ethically sound, truthful disclosure."

In Medical Errors and Medical Narcissism, Dr. Banja explains how and why talented, hard working medical professionals often fall into narcissistic traps. Living in a world of intense stress, long hours, and high, often unfair expectations, the "medical narcissist" works hard to maintain the respect of patients and colleagues. As Dr. Banja says:

When a medical error occurs, that world of competence, adequacy, and ability is turned upside-down. It is no wonder that even when such persons want to do the right thing and disclose error, they might do it clumsily and make an already bad situation worse.

This fascinating, thoughtfully researched book includes detailed recommendations, including advice on how to:

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

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

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

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

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

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

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

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

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

Medicare Part B Physician-Administered Drugs:

Medicare Part D Prescription Drug Benefit:

State Medicaid Prescription Drug Benefits:

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

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

Brief History of Medicare Managed Care:

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

Medicare Modernization Act of 2003:

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

Basics of Medicare Advantage:

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

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

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

Medicare Advantage Enrollment:

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

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

Medicare Advantage Premiums:

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

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

Basics of Special Needs Plans:

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

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

Target Populations for Special Needs Plans:

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

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

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

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

Basics of Dual Eligibles:

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

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

MA-SNP Market for 2006:

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

Integrating Medicaid and Medicare via MA-SNPs:

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

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

Basics of Integrated Medicaid-Medicare Health Plan:

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

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

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

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

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

Here's how it works:

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

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

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

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

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

To learn more, check out:

- Briefing by Government Accountability Office (GAO)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

While the feds work to fix a series of technical problems plaguing the new Medicare Part D drug benefit, governors are stepping in to help ensure dual eligibles and other vulnerable beneficiaries have access to prescription drugs. As a result, states are incurring millions of dollars of costs. They shouldn't have to - by federal law, drug coverage for these patients is now the sole responsibility of CMS and the prescription drug plans. However, governors of both parties are doing the right and necessary thing. Of course, Congress should be the one doing this. But Congress is too distracted to act quickly and the Bush Administration has been adamant in opposing changes to Part D until well after implementation.

The crisis creates a great opportunity for the pharmaceutical industry to step in and help make Part D work. As I've pointed out before, drug makers have a lot riding on the success of Part D. No, it's not that they will make more money. In fact, it's more likely that most brand manufacturers will see lower margins under Medicare. It's because failure of Part D - whether real or imagined - will undoubtedly lead to more government regulation of the industry and a new push for price controls. And the much-maligned industry needs all the good will it can get.

Pharma manufacturers should act immediately to offer to make states whole for the cost of temporary drug coverage for dual eligibles. Specifically, drug makers should work with the National Governors Association (NGA), National Association of State Medicaid Directors (NASMD), and the HHS Office of the Inspector General (HHS) to create a private trust fund that reimburses states for all of their costs associated will filling the gaps while CMS and the drug plans get things fixed. The trust fund can be set up through a non-profit and be totally neutral as to the drug products being reimbursed. The point is to step in, help make it work, create good will, and avoid further pain and frustration.

Rube Goldberg believed there were two ways to do things - the simple way and the hard way. And that, for some inexplicable reason, many people preferred doing things the hard way. His famous cartoons illustrated the tendency of human beings to exert maximum effort to achieve minimal results.

Notwithstanding the best of intentions, an influx of a mountain of taxpayer cash, the savings available to many low-income seniors, and the hard work of unfairly maligned federal staff, the Medicare drug benefit has become a Rube Goldberg cartoon.

Since passage of the Medicare Modernization Act (MMA) in December 2003, I have been warning about predicable surprises and inevitable consequences. The good news is I am batting 1000 on predictions. The bad news is I am batting 1000 on predictions. If it were not for the fact real people are affected, I'd be happy to sit back and gloat about my prescience. Or perhaps hire a skywriter to paint "I Told You So" high above Security Boulevard.

But truth is, this was easy to see and I was far from alone. While there are many flaws in the design of MMA and lost opportunities in the implementation, the most troubling problems revolve around the chaos and risks of transferring over six million vulnerable dual eligibles from Medicaid drug coverage to Medicare Part D. Virtually all of the other problems of Part D implementation can be ironed out with some more time, experience, and legislative tinkering.

1. You get what you pay for.

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

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

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

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

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

7. More is rarely better and often worse.

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

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

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

11. Uninformed choice is not choice.

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

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

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

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

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

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

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

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

20. Results matter. Period.

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

Specifically, the MHPA:

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

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

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

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

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

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

As promised, here's my list of likely losers under the new Medicare prescription drug benefit:

● Dual Eligibles: These 6.5 million highly vulnerable beneficiaries will lose their Medicaid drug benefit and be enrolled in the less generous, slightly more expensive, far more complex Medicare drug benefit. They also face the likelihood of a dangerous transition in drug therapy. If there is a silver lining here, it's the prospect of Medicare Advantage Special Needs Plans (MA-SNPs). That is, the hope that over time dual Medicare-Medicaid beneficiaries will sign up to get all their Medicare benefits from health plans tailored to their needs. Even better states work with MA-SNPs to bundle all Medicaid services with Medicare Part A, Part B, and Part D. See my earlier post on this idea and other stories on dual eligible issues.

● Retirees with Employer-Sponsored Drug Coverage: The trend has certainly been toward employers reducing retiree health coverage. With $100 billion in new taxpayer-financed incentives and an array of options to cost shift, Medicare Part D ensures that millions of retirees will move - slowly but inevitably - from relatively generous employer-sponsored drug coverage to more limited, more costly taxpayer-subsidized coverage. Employers are in a bind, to be sure, so don't blame them for taking advantage of this gift horse. It's anyone's guess whether Part D and the $100 billion in subsidies for employers will serve to slow or hasten the death of employer-sponsored drug coverage for retirees.

● States: Because of the now notorious "clawback" and variety of other factors, including a likely strong woodwork effect, loss of supplemental rebates, and unfunded mandates, drug benefits for dual eligibles will cost cash-stripped state governments more under federal management. Under Part D and the resulting fragmentation of benefits across multiple, uncoordinated programs, state Medicaid programs also lose critically important data and face greater challenges to managing the health costs of the most expensive, most vulnerable Medicaid beneficiaries. Since it's highly likely that many dual eligibles will have problems getting their prescriptions in the early months of Part D, states may be forced to step in and use their own money to cover drugs as the bugs are worked out.

● Community Pharmacies: The shift of dual eligibles to Medicare for their prescription drugs also means a large chunk of retail pharmacy business is moving from Medicaid (which, in most states, is the highest payor of pharmacy services) to private drug plans (which are the lowest payors). Specifically, state Medicaid programs commonly pay much higher dispensing fees and pay a higher rate for a pharmacy's drug acquisition costs. Commercial insurers, including those offering Medicare drug plans, are just the opposite. States do get better deals from drug manufacturers because of rebates and the Medicaid "best price" law, but those dollars are on the backend and pharmacies don't benefit. The large drug store chains have some flexibility to juggle the business impact of Part D. However, many small independent pharmacies face significant financial losses.

● Big Pharma: Some, perhaps most, pharmaceutical manufacturers will see a temporary boost in their top lines. Yet, most will experience a significant and likely steady, long-lasting hit to the bottom line. Yes, some drug makers will benefit from the pent-up demand released by the Medicare drug benefit. But the potential for increased sales in the short term is nothing compared to pricing pressures generated by the confluence of market dynamics, including drug plan competition, price transparency, and price sensitivity of at-risk drug plans. Add to this the likelihood of a massive increase in government oversight, substantially higher compliance risks, and challenges of shifting from a sales-based to research-based strategy. Some drug makers will win but it will depend on how quickly and deftly they can adapt to a brave new world of Part D.

Please check out my previous post on the Medicare drug benefit, including post on the likely winners in the business of Part D.

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

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

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

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

To help make this happen:

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

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

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

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

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

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

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

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

Under the Medicare Modernization Act, employers will receive about $124 billion in tax-free subsidies to encourage them to continue prescription drug coverage for retirees. Because of a long history of taxpayer-funded health benefits "crowding out" employer-sponsored coverage, Congress wanted to reduce the incentive for employers to drop retirees into the new Medicare drug benefit (Medicare Part D).

The subsidy works out to roughly 28 percent of what Medicare would pay under the Part D benefit and is available as long as the employer can show that their retiree drug coverage is actuarially equivalent or better than the federal program. Per retiree, it'll work out to $668 on average in 2006. According to a survey of large employers by Mercer Human Resource Consulting, about 60 percent of employers plan to take the subsidy.

While the subsidy payments are exempt from federal taxation, nothing stops a state from considering it as taxable income. Looks like some states are noodling about it. Nationwide, it could generate several billion dollars in new state tax revenue over the next ten years. And it might serve as modest form of policy revenge for the $100 billion clawback. However, it may encourage employers to cost shift retiree drug costs to federal taxpayers and retirees themselves...at least faster than they would otherwise.

It looks increasingly likely that several states will challenge the constitutionality of a key element of Congress' financing of the new Medicare prescription drug benefit (also known as Medicare Part D).

To help fund the massive new Medicare drug benefit, Congress mandated that state governments send monthly checks to the federal treasury. The so-called "clawback" - amounting about $100 billion over the next ten years - is intended to cover a big chunk of the drug costs of dual eligibles.

In addition to being an unprecedented exercise of federal power that many experts believe is unconstitutional on its face, the clawback raises a mix of troubling policy issues. For example, it means state governments must pay for costs of federal beneficiaries in a federally created and operated entitlement. States are already grumbling that, because of a long history of federal cost shifting to state taxpayers, over 40 percent of state Medicaid spending this year will go to cover the health care costs of federal Medicare beneficiaries.

The clawback also comes at a time when Congress plans to cut $10 billion from federal Medicaid spending. And states are facing new costs created by the Medicare Modernization Act.

As a matter of law, states cannot let the clawback go unchallenged. Regardless of the many positive aspects of the new Medicare drug benefit, the clawback simply raises too many fundamental issues to be left unexamined by the Supreme Court.

As part of the HHS appropriations bill for FY 2006, Congress is moving fast to drop federal funding for erectile dysfunction (ED) drugs in Medicaid, Medicare, and other federal health programs. This makes sense but there is a catch, albeit an unintentional one. Federal law will still require state Medicaid programs to pay for ED drugs. They'll just will have to do it with 100% state dollars.

Because this is being done as a rider to the appropriation, it does nothing to change the statutory mandate that states must cover ED drugs like any FDA-approved drug when medically necessary. Under OBRA '90, amended in 1993, if a state decides to cover prescription drugs for the Medicaid population and accept rebates from manufacturers, they must cover virtually all drugs when medically necessary. Every state opts to provide a Medicaid Rx benefit.

The other big policy done this way is the Hyde Amendment on Medicaid coverage of abortions. This too is done through the appropriation and not the statute. Federal matching dollars are available only for pregnancy terminations that are the result of rape or incest, but many states still must provide other "medically necessary" abortions with 100% state funds - all battled out via messy court challenges.

Medicaid spending on erectile dysfunction drugs is modest but the problem is symbolic of how byzantine Medicaid has become. And it's further evidence of the need for national reform to modernize the $333 billion program and allow states the flexibility to manage it.

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

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

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

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

The fireworks have just begun.

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

Introduction

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

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

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

Government

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

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

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

To continue reading, click here.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The new Medicare prescription drug benefit presents many challenges to the nation's seven million dual Medicare-Medicaid eligibles. On January 1, 2006 they must move from broader, more flexible Medicaid drug coverage to the narrower, extraordinarily complex Medicare drug benefit. Among those in jepordy are about a half million frail seniors and severely disabled persons served by state home- and community-based waiver programs.

State Medicaid programs offer a range of home- and community-based services to help frail seniors and severely disabled individuals avoid costly institutionalization. Of course, adequate drug coverage is essential to this effort. Most individuals enrolled in these programs are dual eligibles and thus face dramatic changes in their drug benefits.

An excellent new report discusses the impact of Medicare Part D on this subset of dual eligibles. The author, Chuck Milligan, JD, MPH, is a highly respected Medicaid and long-term care guru. Formerly vice president at The Lewin Group and New Mexico Medicaid director, he's executive director of the Center for Health Program Development and Management at the University of Maryland, Baltimore County (UMBC). Chuck offers several thoughtful recommendations:

● Allow states to dispense 90-day prescriptions in December 2005 with full federal matching funds.

● Allow Medicaid to share drug information with the Medicare prescription drug plan as soon as auto-enrollment is finalized.

● Require Medicare prescription drug plans to honor a beneficiary?s existing pharmacy regimen until an in-network physician develops a new care plan.

● Require Medicare prescription drug plans to offer dual eligibles open formularies or Medicaid-equivalent formularies during the first six months to a year.

● Allow states to pick up the cost of noncovered drugs with full federal matching funds and be eligible for a credit to the state ?clawback.?

● Lengthen the period for auto-enrollment.

Please also check out the Piper Report's recent story on the risks of Part D to nursing home residents.

Many Americans living with HIV/AIDS receive critically important prescription drug coverage from state Medicaid programs. For these beneficiaries, Medicaid typically offers broad formularies, low cost sharing, and access to a large network of pharmacies.

However, about 50,000 to 60,000 persons with HIV/AIDS will be losing Medicaid drug coverage on January 1, 2006. These dual eligibles will required to enroll in the new Medicare prescription drug benefit (Medicare Part D). In Medicare D, these beneficiaries face more restrictive drug formularies, narrower pharmacy networks, the possibility of higher cost sharing, and private drug plans inexperienced the needs of large numbers of persons with life-threatening chronic conditions.

State AIDS Drug Assistance Programs (ADAPs) are another critically important lifeline for persons living with HIV and AIDS. ADAPs provide HIV/AIDS-related prescription drugs to about 30 percent of Americans with HIV/AIDS who are receiving care. Operating in every state with a mix of $1.2 billion in federal and state funding, each ADAP has different eligibility criteria. Drug formularies, also set by the states, vary widely.

The National ADAP Monitoring Project, an initiative of the Kaiser Family Foundation and the National Alliance of State and Territorial AIDS Directors, provides a wealth of useful information, including:

● Fact sheet on ADAPs. Many other fact sheets on HIV/AIDS policy issues are also available.

● Comprehensive annual report with the latest on state ADAPs. An executive summary is also available.

● Details on state HIV/AIDS drug formularies.

● State-level data on HIV/AIDS, spending, and programs.

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

Some highlights:

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

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

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

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

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

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

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

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

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

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

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

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

In his proposed federal budget for FY 2006, President Bush is proposing $60 billion worth of cuts to the Medicaid program. Concerned about perceived gaming by states and not wanting to open up the far more troubling can of worms that is Medicare, the Administration singled out Medicaid for the largest cuts. Their eagerness to contain Medicaid is not surprising given 211 percent spending growth over the past five year.

However, this comes at a time when states face enormous challenges in meeting the relentless fiscal demands of the world's largest, most complex, and fastest growing health program. In recent years, the bulk of cost increases are due to a massive 40 percent increase in enrollment and the demands of caring for low-income seniors and persons with disabilities. In fact, 42 percent of state Medicaid budgets go to cover health care for Medicare beneficiaries.

Working through the National Governors Association (NGA), the governors are united in resisting cuts to Medicaid and pushing for greater flexibility. And provider groups and patient advocates are organized in their opposition as well.

To better understand the debate over Medicaid spending, check out Medicaid in 2005: Principles & Proposals for Reform. This excellent new briefing paper describes the toughest issues and challenges facing Medicaid today, dispels key myths, and offers principles and basic options for reform. Written by Vern Smith and Greg Moody of Health Management Associates, the paper was commissioned by the NGA.

New evidence on the high incidence of preventable, often deadly drug errors in nursing homes raises serious implications for the new Medicare prescription drug benefit.

Each month, one in ten nursing home residents suffer a medication-related injury, according to a new study in the American Journal of Medicine. The lead author, Jerry H. Gurwitz, MD from the University of Massachusetts Medical School, is a top expert on the safe use of drugs by seniors.

Extrapolating to the 1.6 million nursing home residents, the study suggests a staggering 1.9 million medication errors each year - including over 86,000 fatal or life-threatening mistakes. These scary new figures, still considered conservative, indicate the problem is five times worse than previously believed. To read the study, click here (PDF).

Under the new Medicare prescription drug benefit, most nursing home residents face dramatic changes to their drug benefits starting January 1, 2006. While some aspects of the Medicare drug benefit may ultimately help improve care, the highly complex Medicare program will likely exacerbate the problem of medication errors.

Some key factors to consider:

1. More restrictive formularies: The drug formularies offered by the Medicare drug plans will be far more restrictive than state Medicaid formularies. For many nursing home residents, this will mean changes to drug therapy regimens.

2. More complex drug management: It's unlikely that all of a facility's residents will be enrolled in the same drug plan. Therefore, nursing homes face the challenge of navigating multiple formularies and benefit procedures. In addition, the Medicare drug plans will likely force significant changes to nursing home?s long-established relationships with the specialty pharmacies that know and serve this market.

3. Misaligned financial incentives: Most Medicare beneficiaries in nursing homes will be enrolled in brand-new kind of creature, i.e., stand-alone drug plans that are at financial risk only for the drugs. This is in sharp contrast to health plans (HMOs, PPOs) which are at risk for all care and therefore have a built-in incentive to maintain a safe, therapeutically sound drug benefit to guard against hospitalizations and other more costly events. Because of the serious misalignment of incentives and the potential for cost-shifting and other gaming, no employer or Medicaid program would ever consider a similar at-risk carve out of drug benefits.

When the Medicare prescription drug benefit begins on January 1, 2006, about seven million beneficiaries face more restricted drug formularies. Currently, these "dual eligible" individuals receive their drug benefit through state Medicaid programs, which offer more liberal formularies than what will be expected of the new Medicare drug plans.

In addition, most of these high-risk patients will be enrolled in stand-alone prescription drug plans (PDPs) at risk for drug costs only. Unlike health plans, which are at risk for the full spectrum of care, PDPs will have no financial incentive to use drugs to avoid costlier hospitalizations.

A new report sponsored by the American Society of Consultant Pharmacists (ASCP) describes a variety of health risks to seniors and disabled persons (particularly those in nursing homes) posed by drugs excluded under the Medicare drug benefit.

The author, Dr. Richard G. Stefanacci, executive director of the Health Policy Institute at the University of Sciences in Philadelphia, concludes:

While the magnitude of the change from the current Medicaid coverage of many medications for dually eligible residents is enormous, the real costs may not be realized for some time. These will come in the form of costly medication substitutions, potentially avoidable emergency room visits and admissions and, even worse, untimely deaths.

Some legal gurus are questioning the constitutionality of a key provision of the Medicare prescription drug benefit: the so-called "clawback" provision that requires states to send the federal government cash to help cover the cost of drugs for dual eligibles. The mandatory payments are enormous - $6 billion in 2006 and over $48 billion (likely much more) during the first five years. And controversial idea of making states pay for a federal program benefit has generated strong criticism from governors and state Medicaid directors.

Recent decisions by the U.S. Supreme Court and appeals courts have placed new restrictions on the ability of Congress to use its spending power to "encourage" state action. The clawback - and the consequences of late payment - would appear to cross the line. When Congress attaches conditions to federal funding, the Supremes say "the financial inducement offered by Congress might be so coercive as to pass the point at which pressure turns into compulsion."

No doubt some states will go to court to challenge the clawback. It may be hard for the feds to argue in court that states, by signing up for the federal-state Medicaid partnership, somehow waived their sovereignty and agreed to remit state cash to the Centers for Medicare and Medicaid Services to pay for a federal program.

For more on this, check out an excellent article by James N. Gardner, JD, in the January 2005 issue of State News, published by the Council of State Governments. Mr. Gardner, a former Oregon state senator, also served as a law clerk to Justice Potter Stewart.

Under President Bush's FY 2006 budget, state Medicaid programs face the prospect of significant changes, including funding cuts of $60 billion, some new expansions, and additional flexibility. Now costing taxpayers over $300 billion a year and growing at 8-12 percent in most states, Medicaid is a hot topic inside the Beltway and in state capitols.

However, Medicaid is extraordinarily complex. To prepare for the policy debate and budget battle, here are some free materials to help you understand Medicaid:

● Medicaid Program at a Glance: Two-page fact sheet summarizing the program.

● Medicaid Benefits: Services covered, limits, copayments, and Reimbursement Methodologies for each state.

● Medicaid Expenditures: State-by-state information on Medicaid spending by type of service (e.g., hospital, physician, prescription drugs).

● Medicaid Resource Book: Comprehensive reference on how the Medicaid program operates - who it covers, what it covers, how it is financed, and how it is administered.

● Medicaid Waivers: Fact sheet explaining Section 1115 Medicaid reform waivers.

Our hat is off to the great folks at the Kaiser Family Foundation, who continue to make available an impressive array of background materials and studies.

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

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

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

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

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

Adjusted for cost-of-living differences, rural physicians have 13 percent more purchasing power than urban physicians. And while there are fewer physicians per capita in rural areas, the overall urban-rural disparity is likely due to an over supply of physicians (particularly specialists) in urban areas.

So says a new study by the Center for Studying Health System Change, a respected nonpartisan policy research shop funded primarily by The Robert Wood Johnson Foundation. Their findings dispel the widely held myth that low pay is an obstacle to recruiting docs to serve rural areas. The authors acknowledge that this higher purchasing power may be "needed to compensate physicians for other disadvantages of rural practice, including less control over work hours, professional isolation and a lack of amenities associated with urban areas."

Some implications to consider:

● Future Medicare and Medicaid rate increases for rural docs should target those specific areas with inadequate patient access.

● Policy makers should invest in innovative ways to reduce the professional isolation and inflexibility of rural medical practice.

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

As a tool to control costs and improve care for vulnerable patients, disease management is now used in some form by over half of all state Medicaid programs. To help states craft their disease management programs, a variety of technical resources are now available.

The National Pharmaceutical Council offers a series of reports detailing best practices and evidence-based protocols for disease management for:

● Asthma.

● Diabetes.

● Chronic obstructive pulmonary disease (COPD).

● Congestive heart failure.

● Depression.

● Schizophrenia.

They also offer an online decision support system to help state Medicaid directors select priority diseases for disease management programs.

The Disease Management Association, which represents DM organizations and consultants in the industry, offers a journal and conferences to keep up on the latest practices.

Prescription drug utilization varies dramatically among individuals. To make sure Medicare payments to Prescription Drug Plans (PDPs) reflect the health status of enrollees, the Centers for Medicare & Medicaid Services (CMS) is developing a risk adjustment methodology. Risk adjustment is a statistical process used to identify and adjust for variation in patient costs that stem from differences in key risk factors - each a demographic or diagnostic characteristic of the patient.

The CMS methodology, which is mandated by the Medicare Modernization Act (MMA), will use various inputs ? age, sex, disability status, and diagnoses ? to create a reasonable estimate of a PDP?s cost liability. Risk adjustment will result in more fair and accurate drug plan payments and help ensure access for the most vulnerable beneficiaries.

For PowerPoint slides on CMS? planned approach, click here.

Under the new Medicare prescription drug benefit, drug plans will have a fair amount of discretion in setting formularies. The idea is to encourage competition among drug plans and offer Medicare beneficiaries choice. The Centers for Medicare & Medicaid Services (CMS) will review the benefit designs of drug plan bidders to ensure the beneficiaries have appropriate access to needed drugs.

CMS has released draft guidelines for reviewing prescription drug plan formularies. CMS' strategy for drug benefit review is designed to promote "appropriate operation of beneficiary protections and formulary oversight that includes access to all Part D covered drugs, while providing flexibility in plan design as expected under the Medicare Modernization Act (MMA)." Public comments are due by Thursday, December 30, 2004.

CMS also released a helpful fact sheet that summarizes the formulary review process.

Over nine million American children - 12.8 percent of kids - have special health care needs. They face a wide range of conditions, including congenital anomalies, severe physical disabilities, severe asthma, complex organ system diseases (e.g. cystic fibrosis, sickle cell anemia), major depression, and the devastating effects of physical and sexual abuse.

Medicaid health plans serve a large portion of children with special health care needs. With support from the Center for Health Care Strategies, eleven Medicaid health plans and a primary care case management (PCCM) program collaborated over two years to develop, pilot, and refine best practice models for serving this population. The result is an excellent new toolkit on clinical and administrative best practices.

The toolkit includes specific advice on how to identify children and their needs, create comprehensive medical homes, help parents navigate the delivery system, improve preventive services, establish enhanced care management systems, and ensure coordination among specialists.

It also includes informative case studies of innovations by Health Net of California, Lovelace Community Health Plan in New Mexico, Partnership HealthPlan of California, and Access II Care, a provider-led PCCM program in North Carolina.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

- Medicare-Medicaid dual eligible status.

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

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

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

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

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

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

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

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

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

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

“Medically necessary” means service or item that is:

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

(b) Meets the following standards:

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

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

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

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

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

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

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

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

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

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

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

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

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