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.

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.

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 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 journal Medical Care has published series of outstanding articles on emerging methods and tools to compare the effectiveness of medical therapies, prescription drugs, and devices. The peer-reviewed articles are an outgrowth from a symposium on comparative effectiveness research sponsored by the Agency for Healthcare Research and Quality (AHRQ).

Here are links to the individual articles in PDF format:

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:

The well-regarded industry trade journal Biotechnology Healthcare has an excellent article by Patrick Mullen on The Arrival of Average Sales Price. In it, Mr. Mullen interviews several top industry experts (yes, including me) on the rationale for and impact of Average Sales Price (ASP) and how health plans are following Medicare's lead:

Health plans are beginning to adopt the average sales price method of paying oncologists and other specialists for office-administered drugs. ASP is more transparent and has a smaller markup than its much maligned predecessor, average wholesale price. The speed of ASP uptake will affect everyone who makes, sells, prescribes, and takes these medications.

Average Sales Price and Drug Reimbursement:

In 2005, as part of the Medicare Modernization Act (MMA), the way Medicare Part B reimbursed physicians and clinics for biologics and other physician-administered injectable drugs changed fundamentally. Medicare Part B, the nation's largest payor of injectable drugs, started using Average Sales Price (ASP) to base payments for most drug products covered by Part B fee-for-service.

Using a new, tighter, and more accurate definition of ASP, drug manufacturers must report the Average Sales Price of each of their products. CMS, through its Part B claims processing contractors, reimburses physicians for covered drug products administered to Medicare benies at 106% of ASP, adjusted for volume.

Wide Ranging Impact of ASP in Marketplace:

Physician offices, particularly oncologists, have seen significant drops in Medicare revenue. While the impact on drug makers is mixed, overall the switch to ASP has tightened profit margins and required many manufacturers to revise projections.

Also, like the move of Medicaid to a new and publicly reported version of Average Manufacturer Price (AMP), the ASP reforms are another way drug prices are becoming transparent and flatter or less variable. The transformative effect on business practices and strategy should not be underestimated.

For Medicare Part B, the switch to ASP-based payment has saved billions of dollars and dramatically slowed the growth in Part B prescription drug spending. Beneficiaries have benefited as well, since they are paying the 20% Part B copay on lower prices. However, there is some evidence that some docs are switching drug therapies (which may or may not be clinically optimal for patients) or forcing patients to receive injections from other settings, such as outpatient hospitals. The behavioral effect on physician practices is still hard to discern beyond the realm of anecdote but is something worth monitoring closely, especially in light of low Medicare rates for professional fees.

To Learn More About ASP:

In addition to the article in Biotechnology Healthcare mentioned above, here are some MedPAC resources to understand ASP, Medicare spending on drugs and biologics, and Medicare reimbursement of physician services:

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

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

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

1. Efforts to Hold Confirmation Hostage to Policy Commitments:

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

2. A Maze of Medicare and Medicaid Controversies:

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

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

3. Nomination of a Non-Wonk:

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

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

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

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

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

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

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

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

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

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

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

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

Normally, $15 million a year doesn't buy you much in the federal government. A notable exception is the Effective Health Care Program at the Agency for Healthcare Research and Quality (AHRQ). Drug manufacturers, device makers, health plans, state Medicaid agencies, Wall Street analysts, physicians, and patient groups should all follow it closely.

The Medicare Modernization Act of 2003 (MMA) authorized AHRQ to conduct and support research on outcomes, comparative clinical effectiveness, and appropriateness of pharmaceuticals, devices, and health care services. With a modest budget, a tiny but dedicated staff, and partnerships with top research institutions, AHRQ's Effective Health Care Program involves three approaches to research the comparative effectiveness of different medical treatments, drug therapies, and clinical practices:

1. Review and Synthesize Knowledge: AHRQ's network of 12 Evidence-based Practice Centers systematically review published and unpublished scientific evidence on what is known. Given the huge volume of studies and journal articles produced every year, it is next to impossible for providers, payors, and other key decision makers to keep up and even harder for them to thoughtfully weigh the evidence. AHRQ and its research partners synthesize the science and build a meaningful evidence base.

2. Promote and Generate New Knowledge: The DEcIDE Research Network studies new scientific evidence and analytic tools in an accelerated and practical format. DEcIDE stands for "Developing Evidence to Inform Decisions about Effectiveness." Comprised of 13 university research centers and think tanks, the DEcIDE network conducts accelerated practical studies about the comparative clinical effectiveness, safety, and appropriateness of specific health care services, drugs, and devices. In other words, what works best for patients.

3. Compile Findings and Translate and Disseminate Knowledge to Decision Makers: AHRQ's John M. Eisenberg Clinical Decisions and Communications Science Center takes the research results and transform them into into a variety of useful, actionable formats for stakeholders (e.g., providers, payors, purchasers, patients, manufacturers). Specifically, these include (a) consumer guides (short summaries of health care research that can help with decisions about treatments), (b) clinician guides (brief evidence summaries to assist clinical decision making), (c) policymaker guides (short reports of research evidence for use in health care policy making), and (d) white papers on state-of-the-art concepts in health communication.

The past couple years, the initiative has focused on ten priority health care conditions, selected because of their high impact on Medicare, Medicaid, SCHIP, and other federal health programs:

Later this year, AHRQ will entertain nominations for other priority conditions.

Here's a sampling of the excellent work already generated. For a directory of these reports, with free access in PDF format, click here:

The Effective Health Care Program has 40 other reports in the works, covering a wide range of topics. These include more comparative effectiveness reviews of specific drugs as well as tools to measure quality, reduce errors, and monitor therapies. To get notified when new research becomes available, sign up for AHRQ's email list.

The Enhancing Drug Safety and Innovation Act of 2007 (reintroduced as Senate Bill 484), sponsored by Senator Mike Enzi (R-WY) and co-sponsored by Senator Ted Kennedy (D-MA), is worth watching as the new Congress contemplates pharmaceutical industry legislation.

As proposed, The Enhancing Drug Safety and Innovation Act of 2007 has five components:

1. Amends the Federal Food, Drug, and Cosmetic Act to require an application for approval for a new drug or biological product to include a proposed Risk Evaluation and Mitigation Strategy (REMS). Designed to be an integrated, flexible mechanism to acquire and adapt to new safety information about a drug, REMS would require (a) labeling for the drug for use by health care providers; (b) submission of reports for the drug; and (c) a statement as to whether the analysis and surveillance are sufficient to assess the serious risks of the drug. REMS is modeled after the risk management approach taken by the European Union.

2. Establishes a Drug Safety Oversight Board.

3. Requires the Secretary of Health and Human Services to establish the Reagan-Udall Institute for Applied Biomedical Research as a nonprofit corporation to advance the Critical Path Initiative to modernize medical product development, accelerate innovation, and enhance product safety. Requires the Institute to have a Board of Directors. Allows the Board to coordinate and collaborate with other entities to conduct research, education, and outreach and to modernize the sciences of developing, manufacturing, and evaluating the safety and effectiveness of diagnostics, devices, biologics, and drugs.

4. Amends the Public Health Service Act to require the Secretary, acting through the Director of the National Institutes of Health (NIH), to establish and administer a clinical trial registry database and a clinical trial results database. Requires a responsible party for a clinical trial to submit clinical trial information to the NIH Director for inclusion in the databases.

5. Requires each individual under consideration for a term on an FDA advisory committee providing advice or recommendations to the Secretary regarding FDA activities to disclose industry financial interests.

To learn more, check out the Senate Committee on Health, Education, Labor, and Pensions' hearing on the bill.

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

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

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

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

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

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

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

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

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

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

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

Background on OMB Regulatory Review:

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

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

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

Written Guidance Instead of Formal Rules:

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

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

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

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

When asked about health care innovations, especially practices directed at controlling costs, most policymakers and wonks point to private sector solutions, such as the cost-constraining effects of HMOs in the 1990's or today's ideation of consumer-directed health plans. But is this conventional wisdom wrong? What about public sector health policies, most notably in Medicare or Medicaid?

In a fascinating new book, two top thought leaders show how a powerful and complex Medicare payment formula led to fundamental changes across the health care system, facilitating a dramatic power shift from providers (hospitals and physicians) to buyers (Medicare, Medicaid, and employers).

Influence of Medicare PPS on U.S. Health System:

In Medicare Prospective Payment and the Shaping of U.S. Health Care, Rick Mayes, Ph.D. and Robert A. Berenson, M.D. describe how Medicare's transformation from retrospective, cost-based payment methods to prospective payment systems (PPS) "both initiated and repeatedly intensified the economic restructuring of the U.S. health care system." In addition to providing a thoughtful history of Medicare PPS from a research concept to the single most powerful financial driver in health care, Drs. Mayes and Berenson make the case that the public sector has been the major innovator.

In building their case and exploring how PPS works in the real world, they interviewed 65 health financing experts, including several former CMS administrators. Bob Berenson and Rick Mayes do a nice job challenging conventional wisdom, which in health policy is always a good thing.

Earlier in my career, I cut my teeth on PPS at the