MedPAC released its Medicare Data Book for 2010, with a wide range of useful information on Medicare spending, utilization, beneficiaries, providers, health plans, drug plans, access, and quality. The format is reader-friendly charts and tables with bulleted summaries.

Specifically, the latest MedPAC Data Book includes information on:

MedPAC also provides an array of charts and tables on Medicare providers and care settings, with data on Medicare spending, percent of beneficiaries using the service, number of providers, volume, length of stay, and, where available, profit margins, if
applicable. Provider types covered include inpatient hospitals, outpatient hospitals, physicians, skilled nursing facilities, home health agencies, long-term care hospitals, inpatient rehabilitation facilities, ambulatory surgical centers, dialysis facilities, and hospice.

MedPAC - the Medicare Payment Advisory Commission - advises Congress on Medicare policy.

Medicare Advantage plans and Medicare Part D prescription drug plans face an extraordinary array of changes as a result of the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act (HCERA). These include:

Following the legislation is tricky, since HCERA amends or replaces language Congress adopted a few days earlier in PPACA.

Fortunately, Milliman actuaries Earl Whitney, Matt Chamblee, and Jian Yu just released an exceptionally clear and concise 7-page briefing paper on the PPACA and HCERA changes affecting Medicare Advantage plans and Medicare prescription drug plans (PDPs).

Meanwhile, Troy Filipek and Brian Anderson, also from Milliman, have written an excellent summary of the changes made to the Part D drug benefit, including the closing of the coverage gap (donut hole) and elimination of federal tax deductibility of the retiree drug subsidy for employers. They nicely lay out the provisions and key implications.

These two briefs may help to tide you over pending release of more detailed guidance and rule changes from CMS.

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

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

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

The report also includes:

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

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

The Medicare Payment Advisory Commission (MedPAC) has updated its excellent series of reader-friendly primers on Medicare payment methodologies for hospitals, physicians, Medicare Advantage plans, prescription drug plans, and other health care providers. MedPAC is an advisory agency to Congress and is highly influential, particlarly on payment methods, delivery systems, and Medicare reforms.

Medicare Part A Reimbursement of Hospitals:

Medcare Part A Reimbursement of Post-Acute Providers:

Medicare Part B for Physician Services, Other Outpatient Services, Medical Equipment, ad Supplies:

Medicare Payment of Health Plans and Drug Plans:

As the new Obama Administration and the 111th Congress focus on health care issues, here is a quick list of some of the Medicare policy changes Democrats will likely seek in 2009-2010:

Likely Changes in Medicare Advantage:

1. Phase-out of difference between Medicare Advantage plan rates and Medicare fee-for-service:

2. Significant increase in MA plan oversight, especially on marketing, quality, data reporting, and process compliance. Expect new CMS requirements via both rules and guidelines, plus tighter audits and faster action on plan sanctions.

3. Special Needs Plan (SNP) law sunsets on December 31, 2010. Reauthorization prospects depend largely upon:

Likely Changes in Medicare Part D Drug Benefit:

1. Federal negotiation of prescription drug prices in Medicare Part D. Political symbolism with no budget savings unless feds unwisely use the authority to:

2. Create a "Public Plan" option in Part D. This would be a government-run Part D drug plan to compete with commercial plans (MA-PDs and PDPs). Would mean federal government getting far more and directly involved in marketplace and key decisions over formularies and pricing. Huge implications for health plans, drug plans, PBMs, pharma manufacturers, and pharmacies.

3. Require Medicaid-like best price drug rebates in the Medicare Part D benefit. Initially, this will likely apply only to prescription drugs used by dual eligibles. However, in future, it will likely extend to all of Part D. The political temptation will be too great.

4. Like with Medicare Advantage plans (for Part A and Part B services), increased federal compliance oversight of MA-PDs and PDPs for Part D benefits.

Other Likely Changes in Medicare Program:

1. Development of new payment models in Medicare, notably demos of bundled hospital-physician payments, episode-based payment, and gainsharing. These reform will create new opportunities, realign incentives in the marketplace, and could help focus federal policy makers on fixing the biggest drivers to high costs.

2. More transparency. Public reporting of prices, quality, and safety. Reporting will be increasingly tied to payment penalties for non-reporting. Policy makers are losing patience with provider trade groups balking at disclosure.

3. Promote use of patient-centered care models and medical home concept, especially for the chronically ill.

4. Reform Medicare physician payments, either another temporary fix or permanent change. Otherwise, docs face an automatic 20% rate cut in 2010. The current system is absurd but permanent fix will cost $262 billion to $460 billion over ten years (depending on whether rates are frozen or docs get modest annual increases).

The changes described here range from the necessary to the useful, from the shortsighted to the unwise. But the Obama Administration and Dem leaders in the House and Senate have a long, ambitious wish list of changes for Medicare. And it is still unclear how the tough economy, budget realities, and larger health reforms will affect their Medicare agenda. Regardless, buckle up for a wild ride.

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

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

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

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

Oversight of Medicare Part D Prescription Drug Benefit:

Medicare Program Integrity:

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

Quality of Care:

Emergency Preparedness and Response:

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

Grants Management:

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

Ethics Program Oversight and Enforcement:

Medicare beneficiaries in Special Needs Plans (SNPs) have higher Part D prescription drug utilization and costs than enrollees in other Medicare Advantage Prescription Drug Plans (MA-PDs) do. This is no surprise since, by design, Special Needs Plans serve higher-risk Medicare patients, including many dual eligibles. However, despite higher drug utilization rates in SNPs, SNP enrollees and other MA-PD enrollees have similar rates of inappropriate drug pairs (therapeutic duplications and drug-drug interactions).

Compared to enrollees in other (non-SNP) Medicare Advantage drug plans, SNP enrollees fill 11% more scripts. The average annual prescription cost per SNP beneficiary is 49% higher compared to that of other MA-PD beneficiaries. The difference in per capita drug costs between SNPs and other MA-PDs appears due to a combination of factors: SNP beneficiaries' higher utilization, use of costlier drugs, lower utilization of 90-day prescriptions, and SNPs paying more for some highly utilized drugs.

While SNP beneficiaries fill more prescriptions on average than other MA-PD beneficiaries, SNP and other MA-PD beneficiaries are exposed to potentially inappropriate drug pairs at similar frequencies. However, at higher levels of drug utilization, SNP beneficiaries are less likely to be exposed to a potentially inappropriate drug pair than other MA-PD beneficiaries.

Most inappropriate drug pairs (65%) in SNPs and MA-PDs are drug-drug interactions. Of these, 83% presented a moderate risk and 17% a serious or severe risk of an adverse drug event. The remaining potentially inappropriate drug pairs (35%) are therapeutic duplications. The majority of inappropriate drug pairings - in both SNPs and other MA-PDs - recur and involve drugs prescribed by the same physician and filled by the same pharmacy.

These findings, from a new analysis of 2006 data by the HHS OIG, provide further evidence for the urgent need of e-prescribing nationwide. There is also a need for genuine medication therapy management programs and more information and decision support tools for physicians and pharmacists - as well as sharpened accountability for those relatively small number of prescribers and dispensers who apparently generate the majority of potentially dangerous drug pairings.

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:

Medicare reimbursement policies are highly complex. Yes, that could be the litotes of the decade. Thankfully, the outstanding staff at the Medicare Payment Advisory Commission (MedPAC) produce and routinely update a series of basic primers on Medicare payment methodologies for hospitals, physicians, other providers, Medicare Advantage plans, and Part D prescription drug plans.

MedPAC's primers are reader friendly and crafted for a general audience. Typically 2 to 4 pages in length, they summarize the basic elements of each given payment methodology, with some history, policy context, and a flow chart(s) diagramming how payments are generally calculated.

Here are the latest primers on the basics of Medicare payment methods:

Medicare Hospital Services:

Medicare Outpatient Services:

Medicare Post-Acute and Related Services:

Medicare Health Plans and Prescription Drug Plans:

The next President and Congress will face many fiscal and policy challenges from the $436 billion Medicare program. Following my earlier quick primers on Medicaid policy making and Medicare and Medicaid waivers, here is a similar briefing on the primary vehicles of Medicare policy making.

As a federal health program operating nationwide, Medicare policies are made through:

Federal Medicare Statutes:

Title XVIII of the Social Security Act sets forth the bulk of federal Medicare laws. Given the political importance and visibility of Medicare, Medicare statutes are extremely specific, especially on provider reimbursement, benefits, cost sharing, managed care, and provider conditions of participation. Therefore, CMS' rulemaking discretion is often limited.

In the House, the Ways and Means Committee has primary jurisdiction over Medicare but often shares jurisdiction on certain issues with the Energy and Commerce Committee. In the Senate, the Finance Committee has primary jurisdiction for Medicare. The Medicare Payment Advisory Commission (MedPAC) advises Congress on Medicare issues and often proposes major policy changes. Like with Medicaid, Medicare legislative changes are typically accomplished through budget reconciliation bills rather than separate stand-alone legislation.

Federal Medicare Rules:

Most federal Medicare rules are promulgated by CMS (42 CFR Part 400 through 429). CMS must follow the same rulemaking and clearance processes for federal Medicaid rules. Medicare rules are developed by the relevant operating center or office with CMS, such as the Center for Medicare Management (CMM) for fee-for-service Part A and Part B issues and the Center for Drug and Health Plan Choice (CDHPC) for Part D and Medicare Advantage issues. Legal advice comes from the HHS Office of General Counsel (OGC).

Before publication in the Federal Register, all proposed and final rules require approval of the HHS Secretary and the White House Office of Management and Budget (OMB). OMB's Medicare rule reviews are conducted primarily by the Medicare Branch in OMB's Health Division.

Federal Medicare Guidance:

CMS uses numerous vehicles to convey Medicare guidance, including tens of thousands of pages of manuals, instructions, and program transmittals to contractors, providers, suppliers, health plans, and drug plans. Within the framework of the statutes and rules, considerable operational and technical policy is also set through the Medicare Advantage and Part D drug benefit applications, bids, and contracts.

Unlike in Medicaid - where CMS is often criticized for setting substantive policy through sub-regulatory guidance - Medicare guidance is more a product of a layering effect of highly specific statutes and regulations. Therefore, the Medicare administrative guidance focuses on execution issues, operational details (e.g., coding), and clarifications within and across the four complex, sometime conflicting parts of Medicare.

Under a new Executive Order, OMB now has the right to prior review and approval of CMS guidance, particularly any sub-regulatory guidance involving issues about $100 million, which is virtually anything in Medicare or Medicaid. To learn more, read my earlier post on expansion of OMB's review authority and implications for policy making by CMS and the FDA.

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

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

Hospital Inpatient and Outpatient Services:

Physician Services:

Outpatient Dialysis Services:

Skilled Nursing Facility Services:

Home Health Services:

Inpatient Rehabilitation Facility Services:

Long-Term Care Hospital Services:

Medicare Advantage Special Needs Plans:

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

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

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

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

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

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

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

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

The Medicare Payment Advisory Commission (MedPAC), the savvy nonpartisan shop that advises Congress on Medicare program issues, has updated its excellent series of primers. Extremely complex and changing constantly, Medicare payment policy will drive $479 billion in health spending in 2008. MedPAC's primers, typically four crisply-written pages, explain the basic steps and methodologies Medicare uses to reimburse fee-for-service providers, Medicare Advantage plans, and Medicare prescription drug plans.

Here are MedPAC's updated primers on the basics of Medicare reimbursement policy (click on links to open in PDF format):

Medicare Hospital Reimbursement:

Medicare Post-Acute Provider Reimbursement:

Medicare Physician Reimbursement:

Medicare Managed Care (Part C and Part D):

Other Medicare Reimbursement Policies:

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

1. Efforts to Hold Confirmation Hostage to Policy Commitments:

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

2. A Maze of Medicare and Medicaid Controversies:

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

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

3. Nomination of a Non-Wonk:

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Non-Interference Requirement in MMA:

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

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

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

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

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

Estimated Savings of Federal Drug Price Negotiations:

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

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

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

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

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

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

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

Ample Evidence Against Federal Drug Price Negotiations:

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

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

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

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

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

Wait, It Gets Worse:

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

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

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

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

Recap:

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

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.

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.

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

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.

For outpatient prescription drugs, Medicare has two distinct programs with a maze of complex policies. Physicians, Medicare patients, retail pharmacies, Medicare drug plans, Medicare Advantage health plans, nursing homes, and long-term care pharmacies are all struggling with how to navigate Medicare drug coverage under Part B and Part D. To help you, here's an overview:

Basics of Medicare Part B Drug Coverage:

Drug coverage applies under Part B under this basic situations:

1. Drugs billed by physicians and provided incident to physician service for that patient (e.g., chemotherapy drugs).

2. Drugs billed by pharmacy suppliers and administered through durable medical equipment (DME) benefit (e.g., respiratory drugs given via nebulizer).

3. Some drugs billed by pharmacy suppliers and self-administered by the patient (e.g., immunosuppressive drugs, some oral anti-cancer drugs).

4. Separately billable drugs provided in hospital outpatient departments. Increasingly, Medicare is bundling drug costs within outpatient hospital payment rates.

5. Separately billable End Stage Renal Disease (ESRD) drugs (e.g., erythropoietin). Increasingly, Medicare is bundling ESRD drug costs within ESRD facility payment rates.

Medicare Part B Drug Coverage in Physician Offices:

For Medicare Part B drug coverage in a physician's office, here are the basics:

1. Must be furnished "incident to" a physician service. Normally, this means the drug is physician prescribed and dispensed or physician prescribed and administered during a patient office visit.

2. As a result, Medicare Part B drug coverage is usually limited to drugs or biologicals administered by injection or infusion.

3. If the injection is generally self-administered it is not covered under Part B (e.g., Imitrex). That is, in most cases Part B coverage of a specific drug stops if more than half of Medicare beneficiaries on the drug self-administer it.

4. Medicare uses mix of local and national coverage decisions. Therefore, in absence of a national coverage decision by CMS, local coverage decisions are made my individual Medicare contractors (Part B claims processors, commonly called "carriers"). Therefore, regional differences can and do occur. That is, a specific drug could be covered in one state and not another.

Formulary Basics in Medicare Part D Drug Benefit:

1. While Medicare drug plan formularies are subject to CMS review during the annual bidding process, the Medicare Modernization Act (MMA) gives Medicare prescription drug plans (PDPs and MA-PDs) wide latitude.

2. There is no national drug formulary or mandated formulary. Most Medicare drug plans use commercial-like drug formularies.

3. Regarding therapeutic classes or categories used to structure a formulary, Medicare drug plans may use USP model guidelines or use their own structure. The USP model is not a formulary and not mandated.

4. Medicare drug plans must use P&T committees for formulary decisions.

5. For most drug classes, PDPs and MA-PDs must cover at least two drugs. CMS reviews each formulary to make sure Part D plans are not cherry picking or otherwise discriminating against certain kinds of patients.

6. Plans must cover "all or substantially all" of the drugs in six classes: Antidepressant, Antipsychotic, Anticonvulsant, Anticancer, Immunosuppressant, and HIV / AIDS.

7. Step therapy, prior authorization and cost tiers are allowed. Many Medicare drug plans are using four tiers in their benefit designs.

Coverage of Non-Formulary Drugs Under Medicare Part D:

1. The Medicare Modernization Act (MMA) requires Medicare drugs plans to ultimately cover any drug (not otherwise excluded under Part D) if "medically necessary" and "medically accepted", regardless of formularies.

2. Drug plans are not required to list off-label on formularies, but physicians may still prescribe off-label drugs for medically accepted indications. Physicians must justify off-label use and the indication must be listed one of four compendiums accepted by CMS (e.g., DRUGDEX, USP).

3. To justify off-label coverage for a medically necessary, medically accepted drug, the physician must determine that all drugs on plan's formulary for the treatment of the same condition (a) would not be as effective and/or (b) have adverse effects for patient. The same applies to justify an exception from a higher tier co-payment.

4. A multi-step appeal process is available to beneficiary to seek coverage of a non-formulary drug or an exception from a tier. Steps include drug plan review, independent review, administrative law judge, HHS department appeals board, and the federal courts. The exceptions and appeals process may be initiated by the beneficiary, their physician, or another person designated by the patient.

Prescription Drugs Excluded from Medicare Part D:

1. The following kinds of drugs are not covered under Part D:

- Weight-related, fertility, cosmetic, symptomatic relief cough or colds, vitamins (except prenatal), barbiturates, and benzodiazepines.

- Over-the-counter (OTC) drugs, unless through a CMS-approved step therapy program and then only if free using the drug plan's non-benefit dollars. Few Medicare plans are covering OTCs this year.

- Drugs covered by Medicare Part A or Part B for that individual in that instance.

2. For dual eligibles, Medicaid may cover drugs not covered by Part D. State Medicaid programs must cover if drug is covered for non-dual Medicaid population (e.g., OTCs). This means dual eligibles will obtain drugs through multiple programs.

Naturally, this is a high-level overview and is neither comprehensive or an official statement of federal policy. For more details, click here to read CMS' draft guidance explaining differences between Part B and Part D drug coverage. There are many nuances, twists and turns. So please be careful and closely monitor guidance from CMS and OIG.

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.

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.

The new Medicare prescription drug benefit presents major marketing challenges for both the competing drug plans and officials at CMS and SSA. While the feds must conduct a massive outreach campaign to educate 43 million Medicare beneficiaries about the complex program, the drug plan sponsors must market their plan designs, which vary widely in delivery, cost sharing, and formularies.

With over 2,000 drug plan options across the country and each beneficiary having to select among 40-50+ plan designs in their own regions, the marketing challenges are extraordinary. Add to this the intricate, anti-intuitive program design set up by Congress in the Medicare Modernization Act and how Part D handles the dual eligibles, low-income seniors, retirees with employer sponsored drug coverage, veterans, and others all differently - and, well, you have the makings of quite a mess.

Yet, the challenges don't end there. The Medicare population is not homogeneous, media stereotypes notwithstanding. Beneficiaries vary widely by income, assets, age, disability status, setting, ethnicity, and existing drug coverage. Almost 70 percent already have prescription drug coverage without Part D. Those without drug coverage are a diverse mix of rich and poor, healthy and sick, active and isolated, urban and rural. As a group, American seniors are one of the wealthiest cohorts in world history but among them, there are many low-income seniors struggling every day.

In terms of race and ethnicity, African Americans and Latinos make up 15 percent of Medicare's beneficiaries ages 65 and older and 27 percent of Medicare's under-65 disabled beneficiaries. However, while less than a third of white beneficiaries are sufficiently low in income to qualify for federal drug subsidies, over 60 percent of African Americans and Latinos on Medicare may qualify for the low-income subsidy. While a sizable majority of all Medicare beneficiaries have access to drug coverage without Part D, African American and Latino beneficiaries are more likely to have no drug coverage now. In addition, the vulnerable dual eligible population, with its 6.5 million souls, is disproportionately African American or Latino beneficiaries.

Traditional, television-centric marketing tactics are necessary but not sufficient to reach Medicare's diverse population and offer the benefits of Part D, particularly the substantial savings available through the low-income subsidy. To differentiate themselves in a crowded market and maximize both enrollment and retention, Medicare prescription drug plans need to adopt a more sophisticated, multi-facetted array of marketing tactics and mediums. Among them, viral or word-of-mouth marketing is essential. In addition to being extremely effective in situations like this, the costs and risks are low.

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.

It's still early in the nationwide push to get millions of low-income Medicare beneficiaries to sign up for the subsidy that could cover the bulk of their prescription drug expenses. But, as many of us expected, applications are coming in at a trickle.

The low-income subsidy is one of the most positive aspects of the new Medicare prescription drug benefit (aka, Medicare Part D). Of the 43 million Medicare beneficiaries, up to seven million may be eligible for the generous, taxpayer-financed subsidies of most of their drug costs. However, they must apply for the subsidy, navigate the application form, meet the income and asset tests set by Congress, and later sign up for the drug benefit and pick a drug plan.

Experience from other subsidy programs tells us that it's tough to get low-income seniors to apply for benefits. They are hard to reach and risk adverse. They don't like the idea of signing up for what is seen as a welfare benefit. In addition, they are often struggling with multiple health issues and low health literacy. Ultimately, you can lead people to a subsidy but you can't make them take it.

The Medicare savings programs are a good case in point. For low-income Medicare beneficiaries who do not otherwise qualify for full Medicaid benefits, the feds mandate that state Medicaid programs pay some or all of the individual's Medicare cost sharing. But, after years of outreach efforts, perhaps only 30 percent of eligible beneficiaries are enrolled.

Inside the Beltway, a host of players is worried that signup for the low-income subsidy will be painfully slow. Even putting aside the primary objective of ensuring access to needed medications, response to the low-income subsidy will drive perceptions of whether Part D is a success or failure.

Like virtually every aspect of Medicare Part D, it will take time, effort, money, creativity, partnerships, luck, and patience to make the low-income subsidy a success. However, whether we like it or not, this is a public program, operating in a media and politically driven fish bowl - and expectation are foolishly unrealistic. We need to show patience, but ultimately perceptions will rule reality. And if, come January 2006, only a small portion of eligible beneficiaries sign up for the subsidy, expect a lively blame game.

To read other stories on the Medicare drug benefit, click here.

Medicare observers expect heavy competition for drug plan contracts with the Centers for Medicare & Medicaid Services (CMS). It now appears CMS will receive several hundred applications, including applications from major insurers offering drug benefit packages in every state.

Since adoption of the Medicare Modernization Act (MMA), most observers - most notably CMS itself - feared inadequate competition for 2006 contracts. Only a few wonks, including your humble editor, believed the Medicare business, while complex and unprecedented, is too strategic and lucrative for insurers to ignore.

Prospective drug plan sponsors skillfully played up CMS? fear and perceived inexperience, consistently warning against policies that might restrict the discretion of drug plans. In addition, CMS has a long tradition of taking a ?light touch? to health plan contracting under Medicare+Choice (now called Medicare Advantage).

The result is Medicare?s drug plan rules, guidelines, and application procedures are highly deferential to drug plan bidders. Add to this (a) the captive market of nearly seven million dual eligibles, (b) the financial safety valves of risk corridors and risk adjustment, and (c) strategic imperatives of a quickly changing pharmaceutical supply chain ? and you have market opportunities that are hard, if not foolish, to refuse.

This, of course, merely indicates there will be heavy competition. However, do not confuse this with smooth implementation, profitable operation, or a successful drug benefit. Stay tuned for ongoing commentary on the predictable surprises of the Medicare prescription drug benefit.

Under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), Congress increased payments to Medicare Advantage plans. The objective is to increase participation by health plans and thereby create more choices for Medicare beneficiaries.

While many pundits have criticized the payment increases as a “give away” to the health plan industry, those same critics fail to mention that Medicare Advantage plans must use the increased funding to reduce beneficiary cost sharing, enhance benefits, or improve access.

According to a new study from Mathematica Policy Research:

• About half of March 2004 MMA increase was used by Medicare Advantage plans to reduce beneficiary premiums and other cost sharing or to enhance benefits.

• Most of those benefit changes were used to reduce plan premiums, which dropped an average of $9 per month. The rest was used to improve physician and hospital reimbursement.

• Average out-of-pocket costs declined to the 2003 level.

• Among those plans that offer prescription drug coverage, a higher proportion now cover brand name drugs instead of only generics.

• Coinsurance for physician services was reduced slightly and the proportion of plans with any cost-sharing for hospital services remained about the same.

• Coverage of dental, vision, or hearing services (which are not covered through fee-for-service Medicare) increased some.

Authored by Lori Achman, MPP and Marsha Gold, Sc.D. at Mathematica, the study was sponsored by The Commonwealth Fund as part of a larger project to understand benefits and premiums in Medicare managed care.

To download the complete study (PDF), click here.

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.

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.