Building a Health Exchange Strategy – Part III


Understanding Your Operational Readiness – Step 1
Posted by Errol Pierre

In Part I of Building a Health Exchange Strategy the discussion centered on how payers will have to be more consumer centric in their approaches to delivering health care. Part II focused on being aware of the political climate and how that will impact strategic decisions on whether to enter a Health Exchange market and upon entrance how to operate within one. Both dynamics, though critical, outlined external factors. Part III dives into internal factors; particularly around operational readiness.

It is clearly recognized that Health Exchanges offer a tremendous opportunity for health insurance companies to broaden their consumer base and expand their market share. By making health coverage more affordable it is likely that 30 million of the 45 to 50 million uninsured Americans will enter the market and purchase coverage through a Health Exchange.  Despite this opportunity, there is a high degree of complexity behind implementing and operating a Health Exchange book of business. The work in 2012 and 2013 provides a barrier to entry for smaller firms who may not have the financial and human capital to build the necessary tools and operational foundation to effectively compete with the larger players. Additionally, there are many interdependencies that exist with heavy reliance on each individual state as well as select Federal agencies to coordinate the coverage and manage the financing of the Health Exchange. The three main areas of concern that health insurance companies are grappling with are (1) product and plan design, (2) subsidy calculations and premium collection, and (3) eligibility and enrollment. Today’s article, (Part III, Step 1) will focus specifically on products and plan designs.

Product and Plan Design
Health Exchanges require at a minimum four levels of benefit offerings; bronze, silver, gold, and platinum. The different metals denote the level of coverage each plan must provide. For example, a bronze plan must cover up to 58% and no more than 62% of the health care costs for the health benefits a state deems “essential “ for a health insurer to provide. Likewise, a platinum plan must cover up to 88% and no more than 92% of the health care costs. These plan designs may be dictated by the individual state depending on the type of Health Exchange the state decides to run. Active Purchaser states like New York would be more inclined to create standard plan designs while Facilitator state like Utah would allow health insurance companies to come up with products and plan designs independently.

Within the “Silver” plan offerings the Health Exchanges will require the reduction of cost-sharing levels such as deductibles, co-payments, coinsurance, and out of pocket maximums depending on the consumer’s federal poverty level (FPL). For example, a silver plan may have a $1,000 deductible before coverage from the health plan kicks in. However, if a consumer with a FPL below 250% purchases a silver plan, the $1,000 deductible would need to be lowered by up to $500. This provides a level of complexity for health plans that has not been seen before. Lowering the deductible actuarially increases the price of the plan since the plan will provide more coverage. However, that cost of lowering the deductible is returned back to the health plan by the Federal government and not the purchasing consumer.

Additionally, the silver plan created by a health plan will have to be replicated up to 4 times over to accommodate for the variations in cost-sharing reductions that change the plan design of the product for each FPL level. Operationally, this inevitably means multiple people can buy the same exact silver plan. However based on their income level, they will have very different plans and very different utilization trends. Accumulator calculators that help health plans count up health care dollars will be imperative to ensure that physicians, hospitals, health plans, and most importantly health care consumers know when they have reached their deductibles and coinsurance maximums. The costs of administering such a complex set of plan designs are still unknown to many health plans; however this has not deterred them from pursuing the Health Exchange opportunity. However, the bigger impact to the cost of administration is how it will work in parallel with minimum loss ratio requirements that mandate the percentage of health care revenue that must be spent on providing health care as opposed to administrative costs; particularly if administrative costs increase due to the complexity of administering these plans.  This undoubtedly eats away at the profit margins of health care plans that already operate with very low margins (2-4% on average).

Basic Health Option
In addition to the four metal plans a state may opt to offer a Basic Health Option. This basically extends the state’s current Medicaid plan eligibility from beyond the 133% FPL up to 200% FPL. It behooves a state to pursue such an option because the Federal government would reimburse 95% of the costs. Today, the Federal government only pays 50% of a state’s Medicaid costs. As a result, states could potentially realize huge savings by shifting a portion of its Medicaid population to this Basic Health Option.

However, this route is very complex. The nuances here are that the Basic Health Option must have the essential health benefits deemed by the state even though the current Medicaid plans do not. So the population over and above the 133% FPL level will have a similar product however the underlying benefits could be substantially different. This poses complexity to the providers with coding and claim submissions. The states will be free to choose the methodology for their essential health benefit package as long as it represents (1) the most popular small group health plan, (2) the most popular HMO health plan in the state, (3) the health plan offered by the State to its employees, or (4) the health plan offered by the Federal Government to its employees in that state. There is also added complexity to the Basic Health Option when it comes to cost sharing. Deductibles and coinsurance levels are regulated within the health care reform bill to be based on FPL as well. So a health plan would have to administer two different types of Basic Health Plans based on whether a consumer is 133% to 150% of the FPL or if they are 150% to 200% of the FPL. These intricacies cause added complexity when it comes to administering a health plan, accumulating consumers’ deductibles and out of pocket maximums, and ensuring the plan designs receive actuarially sound price increases and adjustments year to year.

Catastrophic Plan
Lastly, individual states will also have the ability to create catastrophic plans that can only be offered to health care consumers under the age of 30. Many industry insiders refer to this population as the “young invincibles”. These plans must also meet the essential health benefit requirements, however the deductibles and out of pocket maximums are allowed to be higher. As a safeguard against consumers forgoing care because of high out of pocket healthcare expense there are a number of protections put in place as well. For example, preventive care and particular routine care must be covered in full and not be subject to the deductible. Additionally, three to four primary care office visits must also be covered in full and not subject to the deductible as well. Pricing for these plans provides a unique opportunity for health insurers since the risk pool and experience of the population will reflect a younger demographic. This means that pricing should in theory be more affordable and subsidies from the Federal government potentially could go a longer way.

In the End
Health Exchanges present standardization of plan designs to the health care consumer market with the potential of commoditization of health insurers as they compete for market share. As a result, the emphasis on products and plan designs becomes imperative. How an insurer operationally administers health care products in this space will be the differentiator to the consumer. Innovation in finding the ability to be unique in a very regulated space produces an opportunity for insurers to make product development the focal point of their Health Exchange success strategy.

Errol Pierre is the Assistant Vice President of Product Management at a regional health insurance company focused on business development, sales, and strategy planning around Health Exchanges. He is currently pursuing a degree in Health Policy and Management with a specializing in health finance. He can be reached at errol.pierre@nyu.edu


The Hidden Healthcare Election


Posted by Errol Pierre

It’s Healthcare, Stupid!
James Carville famously coined the phrase “The Economy, Stupid!” while he was a campaign strategist for the 1992 Clinton Presidential campaign. Fast-forward to 2012 and for good reason both campaigns seemed to take heed to Carville’s advice. For good reason, the unemployment rate hovers around 8%.  On top of that 40% of the unemployed have been jobless for more than 6 months. The labor force participation is barely 64%. Lastly, more than 8 million people last month were employed only part-time specifically due to economic reasons.

However, there seemed to be an undercurrent of Healthcare specific issues in this election that never really surfaced or was given its due attention.  Many of these issues revealed themselves in the exit polling of the most contentious battle ground states.

Obamacare & Florida
16% of the U.S. population lacks health coverage. Obamacare would provide substantial subsidies to individuals that otherwise could not afford insurance. Even though Mitt Romney has proven experience with health care by being the first Governor to ever pass universal healthcare legislation in a state, he ran to repeal President Obama’s healthcare bill even though it closely mimicked the Massachusetts bill Romney himself signed into law just 3 years prior.

Florida has the highest uninsured rate and uninsured population of any battleground state standing at 20% and 4 million people respectively. Over 90% of the uninsured population falls below the 500% federal poverty level ($55,000 for an individual). In Florida roughly 50% of the electorate earns below $55,000 a year. Exit polling showed Obama carried 60% of that population with Romney winning only 40%.

Auto Bailout & Ohio
November 18, 2012 will mark the 4 year anniversary of Mitt Romney’s infamous New York Times Op-Ed entitled Let Detroit Go Bankrupt. Romney called for a managed bankruptcy for General Motors, Ford, and Chrysler standing in strong opposition to a pure bailout. He also called for the heads of the companies to step down and acknowledged that autoworker benefits, including health care, would need to be reduced in order to alleviate the $2,000 burden of additional costs Detroit cars had that made their cars foreign counterparts did not.  During the last leg of the Presidential election, Mitt Romney became unpopular in parts of Ohio for this stance. In fact, President Obama ran on the auto bailout with his Vice President claiming, “Osama Bin Laden is dead and General Motors is Alive!”

The Obama administration ended up moving forward with a plan that very much resembled the Romney Op-Ed. The Obama plan called for the heads of the car companies to step down, sought to have GM and Chrysler pursue Chapter 11 bankruptcy filings, and acknowledged that auto unions would face “belt-tightening in wages, healthcare, and retirement benefits”.  In the end, based on Ohio exit polling, 56% of Ohio voters approved of Obama’s auto bailout and Romney was never able to properly articulate how close his auto plan was to the President’s.

Minority Unemployment Rates & Ohio/Nevada/Colorado/Virginia
The majority of the country receives their health insurance from an employer-sponsored program. That means a job is more than just a paycheck, it’s a means to get health coverage as well. The unemployment rate for African Americans is 14%; six percentage points higher than the national average. Obama won 89% of the African American vote in Nevada, 93% of the African American vote in Virginia, and 96% of the African American vote in Ohio. The unemployment rate for Hispanics is 10%; two percentage points higher than the national average. In the battleground state of Colorado, Obama won 74% of the Hispanic vote. In Nevada  Obama won 69% of the Hispanic vote. In the end, Minorities were convinced that President Obama could grow jobs that offer comprehensive benefits like healthcare better than Mitt Romney.

Abortion & Ohio
Abortion is indeed more than a religious issue. It’s a healthcare issue as well.  Mitt Romney went on record vowing to defund Planned Parenthood during a campaign stop in Ohio. This was after Republican candidate, Todd Akin, interjected the phrase “Legitimate Rape” into the American lexicon justifying it as information he garnered from physicians. Overlay these two instances with Ohio exit polling and we witness that 56% of voters believe Abortion should either always or mostly be legal.  As a result, Obama won 80% and 63% of those votes leaving Romney on the losing end of an important Ohio issue.

Errol Pierre is the Assistant Vice President of Product Management at a regional health insurance company focused on business development, sales, and strategy planning around Health Exchanges. He is currently pursuing a degree in Health Policy and Management with a specializing in health finance. He can be reached at errol.pierre@nyu.edu


What’s Behind the Slowdown in Health Care Costs?


Posted by Joel Wittman

In my article in the September blog, I wrote about a systemic approach to containing health care spending.  I thought this article about the slowdown in health care spending would also be of interest. 

Democrats on the campaign trail have warmed up to health care in recent months, touting the benefits of their mammoth 2010 law. While trumpeting popular provisions such as coverage for preexisting medical conditions, Democrats are also linking the Affordable Care Act to a recent slowdown in the rise of health care costs.

Former President Clinton delved into the subject at his convention speech in Charlotte, N.C., suggesting that President Obama’s health care law produced the slower-than-average growth in health care spending in 2010 and 2011.

“Health care spending has been under 4 percent in both years, for the first time in 50 years,” Clinton said.

Health care spending increased by just 3.9 percent in 2010 and 3.8 percent in 2009. And within Medicare, the spending slowdown has been even more dramatic: Instead of the program’s average 6 percent annual increase per beneficiary in recent years, 2010’s rate was 0.2 percent. In 2011, it was 2.8 percent. This benefits household budgets but also the government’s coffers since the longer-term costs of Medicare and other health entitlements pose huge fiscal challenges for the nation.

But economists on both sides of the political spectrum say that a variety of forces are at work in the more restrained increases in health care spending. One factor is a weak economy, which means Americans might opt to postpone elective procedures like cataract or knee surgery to avoid out-of-pocket costs that aren’t covered by insurance. Or they might skimp on costs like prescription drugs. When fewer people visit the doctor or when people cut back on prescription-drug purchases, insurance companies see lower costs and that can eventually translate into cheaper premiums for consumers.

The Kaiser Family Foundation found that the average family premium for employer-sponsored health insurance rose to nearly $16,000 a year, about a 4 percent increase from last year. The numbers might give many Americans sticker shock, but it was a smaller rise than expected. KFF President Drew Altman said that it’s too soon to tell what the cause is, exactly.

David Cutler, a Harvard economist and frequent adviser to the Obama campaign, told the New York Times this week that the Affordable Care Act’s efforts to control costs were contributing to the slowdown.

“The slow economy is only part of it,” he told The Times.

The good numbers are fodder for Democrats on the campaign trail to argue that Obama’s health care law did, in fact, slow down health care costs. The law primarily saves money by slashing $716 billion from Medicare payment rates to hospitals and private Medicare plans. Those cuts just went into effect this year, and at least on the hospital side, they are contributing to the slower-than-expected growth in Medicare spending in 2012. But those cuts were largely put in place to offset the cost of helping an additional 30 million people get insurance coverage, not to stem the rising cost of health care.

There are also several pilot programs in the Affordable Care Act that reward hospitals and doctors with federal funding if they successfully save money by using new delivery methods, most of which emphasize greater coordination between health care providers. Many of those programs just started in the past year and haven’t been operating long enough to see savings.

As far as consumers’ pocketbooks are concerned, the law also included a new rule for insurance companies that limits how much they can spend from premiums on things like advertising and salaries. That went into effect in 2011, and consumers started seeing the dividends of that rule last month: the Obama administration reports that insurance companies paid back more than $1 billion to American consumers this year.

Gail Wilensky, a former top health official in the George H.W. Bush administration, said she hoped it was true that the health care law was contributing to a lasting trend of lower health care inflation. But Wilensky said in an interview, “Whatever is going on, it’s very hard to attribute it to anything in the ACA. It was starting before that.”

Wilensky said that though the slowdown in health spending outpaces the decline in incomes tied to the recession, that calculation does not include other losses in wealth that impact how much people spend on health care.

“It was not just job loss, but in a way that has been unusual, it was wealth loss, as reflected by the decline of the stock market and, for many people, the decline in their home values. That is such a big, big part of middle-class American’s wealth position, and we underestimate if we only look at income loss,” Wilensky said.

She also pointed to a slowdown in spending that occurred in the 1990s as health-maintenance organizations restricted health services. Eventually that spending slowdown was reversed as doctors, hospitals, and patients pushed back against insurance-company restrictions.

Robert Berenson, a fellow at the liberal-leaning Urban Institute, said that the talk of health care reform in general, and not the specific policies of the Affordable Care Act in particular, could potentially be credited with the spending slowdown.

“I do think it’s more of an environmental phenomenon that the world is going to change,” Berenson said in an interview. “I think something real is going on related to all the proposals for new payment models, and physicians and others are getting the message.”

In other words, the health care industry has seen the writing on the wall: They will no longer get paid for every single test and procedure they do.

Berenson, who spent 20 years practicing as an internist, said it might be that doctors are tired of getting criticized for not paying attention to costs.

“I suspect physicians are tired being criticized for not being able to restrain themselves,” Berenson said. “It’s more health reform in general, rather than specific provisions that are associated with ACA.”

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.


Free Market Lessons from Sweden’s Single Payer System


Posted by Errol Pierre

The United States with a population of over 313 million people spends over 17% of its GDP on health expenditures while over 14% of its population lack health insurance. This has led to runaway costs, access to care issues, and in the face of recent healthcare reform efforts, worries of severe physician shortages come 2014. On the contrary, Sweden, with a much smaller, homogenous population of 9.4 million people has been able to keep health expenditures less than 10% of its GDP while covering all of its population. If efficiency of health dollars were the metric to compare health systems internationally, Sweden would lead the U.S. in this regard for the last 30 years. Despite their successes, like all developed nations, Sweden faced threats of increasing costs in the 1990’s due to an economic downturn. Additionally, Sweden also saw an aging population with a longer life expectancy from advancements in technology and modern medicine. When healthcare is government run it inevitably will succumb to rationing when tax dollars are scare. However, Sweden has been able to achieve sustainable results through policy and market reforms focused on (1) the decentralization of healthcare management, (2) cost containment measures, and (3) physician and hospital competition.

Decentralization of Healthcare Management

While Sweden is a model for a single payer system, many of their reforms can be applicable to the United Stated. In Sweden the Health and Sickness Care Law of 1982 decentralized the Swedish government’s control of healthcare to keep it “accessible, efficient, and equitable.”  Counties within the country were given more autonomy to set up boards and administer health services. In turn, many of the national rules dissolved. This decentralization gave more power for regional decisions within the counties of Sweden. This is unlike America where the answer to the uninsured population in its most recent healthcare reform efforts was to use the national approach of health exchanges and essential health benefits rather than delegating the particular solutions to individual states and localities. For example the Department of Health & Human Services mandated that every state have a health benefit exchange by 2014 or the Federal government would create one within the state.

Lesson Learned: Place the burden of the uninsured into the hands of local governments to formulate strategies to address the issues that are sensitive to the local values.

For example, in the U.S. one third of the uninsured find insurance within 6 months. In Sweden, many counties pay for insurance costs for citizens up to 6 months until they find a new job. This would eliminate 15 million of the 45 million uninsured. Additionally, 50% of the uninsured work part-time. A U.S. state resolution would be a sickness fund (similar to Medicaid) that caters to individuals that work less than 40 hours a week with multiple employers, which would lower the uninsured rates to ~20 million. Lastly, 43% of the uninsured are located in only 4 states (New York, Florida, Texas and California). A focus on local initiatives to answer a national problem similar to Sweden could have potentially been a better use of resources and national funds than a Federal law impacting all 50 states.

Cost Containment

In 1984, with the passage of the Dagmar Reform of 1984, national revenues were divvied up and doled out to counties as block grants based on population size. As a result, private providers could no longer directly bill the national healthcare system for medical services rendered. This is very similar to how physicians who treat Medicare enrollees operate today. From 1984 to 1985 the count of practicing physicians went from well over 5,000 to just over 2,000 greatly controlling costs. Block grants also declined the percentage of GDP in Sweden spent on health expenditures. Sweden is one of the few countries that have been able to lower the percentage of health expenditures.

Additionally, as the economy worsened in the early 1990’s, the Swedish government froze taxes from 1991 until 1994. During this time 22% of the country’s beds for acute bed care were eliminated. Also self referrals received a higher copayment. This is very different in the U.S. where economic downturns cause private insurance enrollment decreases due to cost containments that occur in the private sector. However, since all health care cost controls are not vested in local state government, public spending and public health expenditures balloon during such times. For example, Medicaid spending increased by one third from 2000 to 2003 during the U.S. economic down turn. It grew by 10% between 2010 and 2011 representing 25% of all expenditures for states. U.S. healthcare reform efforts plan to reduce Medicare and Medicaid by 500 billion respectively which is likely to get caught up in the same political stalemate as the Medicare “doc-fix” since these decisions have not been decentralized and delegated to local governments. Since Sweden represents close to 80% of all health expenditures compared to less than 50% in the U.S., they are more sensitive to cost containment measures which lead to quicker reaction and better results.

The Federal government in the U.S. has continued to push off a fix to Medicare reimbursement reductions due to lobbying from physicians and trade groups. If these decisions were made at a local level to handle local concerns, States would have the ability to better control costs. Additionally, 50% of the Medicaid spend is handled by the states. This allows the states conversely to only handle 50% of the costs.

Lesson Learned: Medicare and Medicaid should be handled purely at the state levels since many states have balance budget amendments, cannot run deficits, and it is very costly for states to borrow funds.

Lastly, in 2002, Sweden introduced reference pricing and generic substitution for pharmacy coverage. This meant that when a drug was purchased, the health system would pick up 110% of the lowest priced drug. If a brand name drug was requested over a generic, the consumer would be responsible for the difference. From 2002 through 2005 Sweden realized $7 billion in savings which was close to 10% of total drug spend.

Lesson Learned: Adopt reference pricing and generic substitution in both Medicare and Medicaid programs across the U.S. to sharply cut pharmacy growth rates.

Physician & Hospital Controls

The United States is quickly facing a physician shortage when 20 million or more Americans will enter the insurance market in 2014 through Health Benefit Exchanges. In 1993 Sweden passed a law called The Point of Service Primary Care Reform which answered concerns of primary care shortages. The law made counties responsible for making sure every Swede had access to primary care. Additionally, it capped the amount of specialty training that occurred outside general medicine. It set ceilings and floors for the amount of patients treated by a single practice (1-3k patients per year). It provided credits and loan forgiveness to primary care doctors who started a new practice. And finally, the law allowed pay for performance measures that reduced the reimbursement to physicians who underperformed. Such controls including other initiatives has led to the use of electronic medical records for 94% of Swedish primary care physicians as compared to only 45% in the U.S. Additionally, 49% of Swedish physician practices have the capacity for advanced electronic health information compared to only 26% in the U.S. Lastly, 54% of Swedish practices will see patients after hours as compared to 29% in the U.S.

Lesson Learned: Strong controls on physicians at the local government level can greatly eliminate the potential of primary care shortages and improve the quality of care.

Conclusion

There are feasible lessons to be learned from recent healthcare reforms in Sweden particularly in the areas of decentralization, cost containment, and physician controls. In particular there are four lessons to be learned that are viable in the U.S. despite the current political climate and threat of the unconstitutionality of the Patient Protection and Affordable Care Act. Lesson 1: decentralize the burden of the uninsured to the individual states. Lesson 2: Allow individual states to budget for health care through block grants. Lesson 3: adopt reference pricing and generic alternative scripting. Lesson 4: place strong controls on physicians to eliminate shortages and increase access to care.

Despite America’s strong dislike for government run healthcare, roughly 40% of the population (125M Americans) is enrolled in a federally facilitated health program. Specifically there are 44M Medicare recipients, 62M Medicaid recipients, 10M Tricare recipients (health insurance for the U.S. military) , and 8M Federal Employee Health Benefit recipients. Sweden has been able to use free market principles within a government run system to manage care and cost. And yes, with any balance between quantity and quality, rationing of care does exist. But in a free market, when does rationing based on supply and demand not exist outside of anomalies like luxury and inferior goods?


A Systemic Approach to Containing Health Care Spending


Posted by Joel Wittman

In this election year, U.S. national spending on health care will reach $2.8 trillion, or about 18% of total spending on all goods and services. This high level of spending reduces the ability to invest in other important parts of the economy and also adds to the national debt. There is wide agreement that ways must be found to bend the health care cost curve.

National health spending is projected to continue to grow faster than the economy, increasing from 18% to about 25% of the gross domestic product (GDP) by 2037.1 Federal health spending is projected to increase from 25% to approximately 40% of total federal spending by 2037. These trends could squeeze out critical investments in education and infrastructure, contribute to unsustainable debt levels, and constrain wage increases for the middle class.

Although the influx of baby boomers will increase the number of Medicare beneficiaries, growth in per capita health costs will increasingly drive growth in federal health spending over the long term. This means that health costs throughout the system drive federal health spending. Reforms that shift federal spending to individuals, employers, and states fail to address the problem. The only sustainable solution is to control overall growth in health costs.

Although the Affordable Care Act (ACA) will significantly reduce Medicare spending over the next decade, health costs remain a major challenge. To effectively contain costs, solutions must target the drivers of both the level of costs and the growth in costs — and both medical prices and the quantity of services play important roles. Solutions will need to reduce costs not only for public payers but also for private payers. Finally, solutions will need to root out administrative costs that do not improve health status and outcomes.

The Center for American Progress convened leading health-policy experts with diverse perspectives to develop bold and innovative solutions that meet these criteria.  See the following solutions below that were recommended:

Promote Payment Rates within Global Targets

Under the current fragmented payment system, providers can shift costs from public payers to private payers and from large insurers to small insurers. Since each provider negotiates payment rates with multiple insurers, administrative costs are excessive. Moreover, continued consolidation of market power among providers will increase prices over time. For all these reasons, the current system is not sustainable.

Under a model of self-regulation, public and private payers would negotiate payment rates with providers, and these rates would be binding on all payers and providers in a state. Providers could still offer rates below the negotiated rates.  The privately negotiated rates would have to adhere to a global spending target for both public and private payers in the state.

Accelerate Use of Alternatives to Fee-For-Service Payment

Fee-for-service payment encourages wasteful use of high-cost tests and procedures. Instead of paying a fee for each service, payers could pay a fixed amount to physicians and hospitals for a bundle of services (bundled payments) or for all the care that a patient needs (global payments).

Use Competitive Bidding for All Commodities

Evidence suggests that prices for many products, such as medical equipment and devices, are excessive. Instead of the government setting prices, market forces should be used to allow manufacturers and suppliers to compete to offer the lowest price. In 2011, such competitive bidding reduced Medicare spending on medical equipment such as wheelchairs by more than 42%. The ACA requires Medicare to expand competitive bidding for equipment, prosthetics, orthotics, and supplies to all regions by 2016.  It is suggested that Medicare expand the current program nationwide to include all commodities and extend to all federal health programs, including the insurance exchanges that will start in 2014.

Require Exchanges to Offer Tiered Products

The market dominance of select providers often drives substantial price variation. To address this problem, insurers can offer tiered plans. These insurance products designate a high-value tier of providers with high quality and low costs and reduce cost sharing for patients who obtain services from these providers.

Require All Exchanges to Be Active Purchasers

If exchanges passively offer any insurance product that meets minimal standards, an important opportunity will be lost. As soon as reliable quality-reporting systems exist and exchanges achieve adequate scale, it is critical that federal and state exchanges engage in active purchasing — leveraging their bargaining power to secure the best premium rates and promote reforms in payment and delivery systems.

Simplify Administrative Systems for All Payers and Providers

The United States spends nearly $360 billion a year on administrative costs, accounting for 14% of excessive health spending.  It is suggested that payers and providers electronically exchange eligibility, claims, and other administrative information as soon as possible and public and private payers and providers should use a single, standardized physician credentialing system.  Electronic health records should integrate clinical and administrative functions — such as billing, prior authorization, and payments.

Require Full Transparency of Prices

Price transparency would allow consumers to plan ahead and choose lower-cost providers, which may lead high-cost providers to lower prices. Although price transparency could facilitate collusion, this risk could be addressed through aggressive enforcement of antitrust laws.

Make Better Use of Nonphysician Providers

Eliminate restrictive state scope-of-practice laws prevent non-physician providers from practicing to the full extent of their training and provide adequate reimbursement for those services.

Expand the Medicare Ban on Physician Self-Referrals

It is suggested that the Stark law should be expanded to prohibit physician self-referrals for services that are paid for by private insurers. In addition, the loopholes for in-office imaging, pathology laboratories, and radiation therapy should be closed. Physicians who use alternatives to fee-for-service payment should be exempted because these methods reduce incentives to increase volume.

Leverage the Federal Employees Program to Drive Reform

It is suggested that the FEHBP align with Medicare by requiring plans to transition to alternative payment methods, reduce payments to hospitals with high rates of readmissions and hospital-acquired conditions, and adjust payments to hospitals and physicians on the basis of their performance on quality measures. In addition, the FEHBP should require carriers to offer tiered products and conduct competitive bidding on behalf of plans for all commodities. Finally, the FEHBP should require plans to provide price information to enrollees and prohibit gag clauses in plan contracts with providers

Reduce the Costs of Defensive Medicine

Regardless of whether a claim results in liability, the risk of being sued may cause physicians to practice a type of defensive medicine that increases costs without improving the quality of care.  A promising strategy would provide a so-called safe harbor, in which physicians would be presumed to have no liability if they used qualified health-information-technology systems and adhered to evidence-based clinical practice guidelines that did not reflect defensive medicine. Physicians could use clinical-decision support systems that incorporate these guidelines.

Conclusions

Although many in the health industry perceive that it is not in their interest to contain national health spending, it is a fact that the current spending patterns cannot continue. In the absence of any meaningful change, payers could simply shift costs to individuals. As those costs become more and more unaffordable, people would severely restrict their consumption of health care and might forgo necessary care. Alternatively, governments could impose deep cuts in provider payments unrelated to value or the quality of care. Without an alternative innovative strategy, these options could become the default. They are not in the long-term interests of patients, employers, states, insurers, or providers.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

 


What Can Be Done About Hospital Readmissions? – Is Home Care Part of the Solution


posted by Joel Wittman

A comprehensive analysis of Medicare claims data demonstrates that Medicare payments more than double when the beneficiary’s care contains at least one hospital visit.  A report by the Alliance for Home Health Quality and Innovation examined the effects of hospital admissions and readmissions on Medicare expenditures.

Hospital readmissions play a key role in the amount Medicare spends per patient per episode.  The research aims to more fully explain how hospital readmissions affect the Medicare episode payment and to provide guidance on the Medicare home health benefit.  The data will provide information on to lawmakers as they look to revamp the Medicare fee-for-service payment system and eliminate unnecessary spending on avoidable hospitalizations.

In post-acute care episodes, patients whose episodes contained at least one readmission cost Medicare twice as much – roughly $33,000 compared to $15,000.  When the number of chronic conditions per patient increases, so does the average number of readmissions, suggesting that a more complex patient is more likely to be readmitted.  Services such as home health may be able to reduce the number of unplanned readmissions for some clinically appropriate patients by caring for them in home health and improving coordination and continuity of care.

There are interesting trends when an episode contains an admission.  With regard to chronic conditions, the severity of the primary chronic condition, rather than the number of conditions, plays a more significant role in the impact on Medicare payment for the episode.  For example, an episode with a primary chronic condition of diabetes and a prior admission generates a Medicare episode payment nearly three times that of a diabetes episode without a prior admission.  This suggest that better management of low-severity chronic conditions (as well as high-severity conditions), which can be provided by home health care, may limit prior admissions for pre-acute episodes or even prevent some hospital admissions and subsequent post-acute care.  As the severity of a chronic condition increases, so does the proportion of episodes in non post-acute care episodes.  However, when patient with low-severity chronic conditions require a hospital admission, the payment per episode nearly quadruples since the cost of caring for these patients is relatively low without the readmission.

The data suggest that better management of chronic disease through home health intervention could enable more patients to remain out of the hospital following an initial admission.  With clinically appropriate and effective care, patients have the potential to avoid some unnecessary admissions altogether, ultimately saving Medicare and taxpayers a significant amount.  Home health care combines the right mix of care management, prevention training, and close observation to significantly reduce hospital admissions.

A program conducted in upstate New York generated some positive results.  See below:

A group of hospitals in upstate New York have been able to cut inpatient readmissions by 25 percent as the result of a home visit program, reported the Rochester Democrat and Chronicle.

The collaboration between Rochester General Hospital and three other area facilities not only cut readmissions over 30 days but also cut down readmissions over a 60-day period, the article noted.

Reduction of readmissions is critical particularly for hospitals as the Centers for Medicare & Medicaid Services intends to cut payments for excess numbers of patients readmitted within 30 days of discharge for congestive heart failure, heart attacks and pneumonia. According to research, up to 75 percent of hospital readmissions may be avoidable, Consumer Reports magazine noted.  Specific cost savings from the initiative were not immediately disclosed but could be as much as $100 saved for every dollar invested. “The cost of the intervention is measured in hundreds of dollars,” said Martin Lustick, corporate medical director for Excellus BlueCross Blue Shield. “The cost of a readmission is upward of $10,000.”

The program, known as Care Transitions Intervention, was conducted in coordination with the hospitals, local home health agencies, Excellus and the Monroe Plan for Medical Care, a Medicaid managed care program, according to the article. State and federal grants will allow the initiative to expand.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.


What Did SCOTUS* Do?


Posted by Joel Wittman

In my article that was posted in the April 2012 Blog, I posed the question of how the Supreme Court will rule on the Patient Protection and Affordable Care Act (ACA) and what the effects might be of the decision.  I wrote in the April Blog: “Things are never as simple as they seem to be.  The good intention of the current administration to increase access to health insurance coverage for all individuals at affordable pricing may not be good enough to preserve the goals of the ACA.  Do you throw out the baby with the bath water if the entire plan is deemed unconstitutional?  Do you preserve part of plan and try to make the best of the remaining regulations?  Or, do you leave the ACA as is and have the first meaningful health care reform since the Great Society?  Only SCOTUS can let us know.”  Well, now we know.

In a landmark and surprising decision, the Court ruled 5 to 4 to uphold the ACA but with a change to the penalty phase for states that do not comply with the expanded Medicaid program (states would lose any new financing related to the expansion and not their entire federal Medicaid contribution).  The controversial “individual mandate” provision was not overturned by the Court because of the crossover vote cast by Chief Justice Roberts.  By siding with the liberal bloc of the Court, the Chief Justice exhibited, in my opinion, a common sense approach to resolving this issue.  While he did write that the individual mandate cannot be supported under the commerce clause of the constitution, he approved its legality as a tax, ergo Congress has the constitutional authority to impose taxes.  Again, in my opinion, a sensible approach to resolving a divisive matter.  The Chief Justice commented that it is not the judiciary’s responsibility to set policy; this falls to the people in the form of their elected officials.  A wise decision given that a rescission of the ACA would have created wholesale chaos in the healthcare industry, not to mention the deleterious effects it would have on that portion of the population that would be denied health care coverage.

The ACA addressed only one part of the holy health care trinity – access, quality, and cost – that comprises health care.  It does a wonderful job of increasing access and does suggest changes to curtail costs and improve quality.  But, it’s a start.  And the industry had already reacted to the provisions of the ACA well before its constitutionality was upheld.  The reform train has left the station, is gaining momentum, and is transporting change to the way in which health care services are delivered and reimbursed.

The ACA has already introduced changes to the health care landscape.  Its effects on the health care industry include creation of Accountable Care Organizations, bundled reimbursement methodologies, outcomes measurement, financial sanctions for poor quality results, and greater emphasis on care coordination and management (see Inspiris and Humana).

All sectors of the industry are affected.  Hospitals stand to improve their profitability as their uncompensated care will be reduced as a larger portion of the population receive health care coverage.  The effects on the insurance industry seem to be mixed:  those companies that focus on the Medicaid population should experience an increase to their business (see Amerigroup and Molina Healthcare) while it is not certain that the access to new clients would be enough to offset the cost to insurers related to the requirements to cover patients with pre-existing conditions, charge sick patients the same as healthy ones, eliminate the coverage caps on patient reimbursement, and adhere to the medical-loss ratio.  Medical device companies face a 2.3% tax on sales starting in January 2013 to help finance the ACA while pharmaceutical firms have already agreed to pay more taxes and offer additional rebates and subsidies in an effort to close the Medicare “doughnut hole.”   It would also seem that corporate America would encounter reductions in profitability because of the requirement to provide coverage to employees.

The times they are “a-changin’.”  Adaptation to the ACA should not come as a surprise to the health care community.  The law was a known quantity and the result of bargaining between industry executives and politicians.  I’m confident that the industry will continue to innovate, will be able to meet these challenges, and will provide affordable, quality health care to patients while experiencing a positive impact on the bottom line.  After all, health care is a business.

* Supreme Court of the United States

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

 


The Role of Mergers and Aquisitions in the Not-For-Profit Healthcare Sector: Part II


Posted By Joel Wittman

Part II: Part II – What to consider when a not-for-profit is the acquirer

In last month’s post, I wrote about the considerations to take into account when evaluating the sale of a not-for-profit health care entity.  In this month’s article, I will look at the issues to consider when a non-profit is the acquirer.

Since Congress enacted health reform legislation in 2010, there has been a marked increase in mergers and acquisitions in the healthcare space. Although for-profit organizations drove the bulk of the nearly 1,000 transactions taking place in 2011, a growing number of nonprofits have begun to see mergers and acquisitions as part of a larger strategy to effectively navigate the reformed healthcare marketplace. This reflects the increasing role that nonprofit organizations play in the delivery and financing of healthcare in the US – according to an estimate by a nonprofit healthcare trade group, about 60 percent of community hospitals are nonprofit, roughly one-third of nursing homes are nonprofit, and almost 20 percent of home health agencies are nonprofit. Further, over 40 percent of all private health insurance enrollees receive services from a nonprofit health plan.

Nonprofit healthcare organizations consider mergers and acquisitions for the same reasons for-profit entities do. They seek to improve quality or efficiency; they desire increased access to capital, enhanced capital base or expansion of cash flow; they want to expand service lines, enhance product offerings or target other geographic areas; or they seek to gain specific types of talent or other assets. But unlike the for-profit environment, nonprofit organizations have other specific issues to consider as they plot a merger or an acquisition strategy. It is recommended that a nonprofit organization’s board and management perform a detailed strategic analysis before executing an M&A strategy.  The following four considerations are a solid start.
Fit. The idea of considering organizational fit when thinking about pursuing a merger or an acquisition with another company seems simple, but it can be a rather complicated matter. Although for-profit companies also consider whether a potential buyer or acquisition fits strategically or organizationally, nonprofit organizations have their mission to the communities they serve to consider beyond these primary issues when it comes to fit. Unlike for-profit companies, nonprofit healthcare organizations exist within a framework of mission-based operations, and the mission colors everything from operational strategy to daily execution. The leadership of every nonprofit organization considering an M&A strategy needs to be clear about its mission, how open to change that mission might be, how an M&A strategy will affect that mission, and what limitations – or opportunities – that mission offers. And if acquiring another non-profit, boards must think about how changing the target’s mission affects perception or buy-in among the target’s patients, providers, staff or payers.

Financial impact. Nonprofit board members and staff management need to think carefully about the financial implications of the potential transaction. Naturally, a common part of the M&A process is to weigh the financial advantages and disadvantages of the transaction, as well as to evaluate an organization’s financials and assess its real value. Part of the discussion is whether an acquisition is best the use of funds to further the organization’s mission.  In today’s environment, many providers are leveraging their healthy balance sheets to reach a level of scale that can offset future reimbursement cuts.  This may be an appropriate strategy, but an organization that may not have internal acquisition and integration experts must evaluate if the use of funds for an acquisition is priced appropriately considering the internal and external integration risk.  Nonprofits also need to consider additional layers of financial impact; any partners advising a nonprofit about a transaction need to be well-versed in these layers. Special tax situations must be considered, as well as the value and disposition of certain types of charitable assets.
Process. There is a logical process to every transaction – but nonprofit organizations have additional steps to follow and angles to consider. The additional steps can extend the acquisition timeline and put the nonprofit buyer at a disadvantage when they are competing for a target.  An experienced advisor can help a nonprofit board and leadership prepare and execute the specific processes that need to happen and minimize the potential disadvantages. All nonprofit M&A transactions will naturally need to involve a realistic valuation of the transaction, a substantive due diligence process, evaluation of legal and antitrust issues and a detailed analysis of financial impact. The legal and financial implications of a nonprofit transaction differ from those of a for-profit transaction, so any strategic process should accommodate not only specific evaluation and analysis of these implications, but appropriate planning to execute them.

Access. Probably the biggest difference between a for-profit entity considering a merger or an acquisition and a nonprofit entity is that in the nonprofit world, there are relatively few knowledgeable financial and strategic advisors who understand the nonprofit environment, and of these, even fewer have significant access and deep relationships across the industry. As your organization considers an M&A strategy, ask yourself whether you have the right access – not just to sources of capital, but also to potential buyers or acquisition targets. Do you know how to source and evaluate potential targets? Do you how to begin a conversation with a target? Finding the right partner with the right access and market credibility is critical to the success of your M&A strategy.

Last month’s and this month’s postings provided the reader with some thoughts about both the sell and buy sides of mergers and acquisitions in the non-profit health care community.  So, for all of you not-for-profit health care organizations out there, are you a seller or, perhaps, a buyer?  Either consideration will require a thoughtful and careful approach.   Please let me know what you decide to do.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry.  He can be reached at joel.wittman@verizon.net.


The Role of Mergers and Aquisitions in the Not-For-Profit Healthcare Sector: Part I


Posted by Joel Wittman

Part I – What to consider when evaluating the sale of a not-for-profit organization

Nonprofit health care organizations are faced with a conundrum.  Is entering the world of mergers and acquisitions (M&A) on either, or both, the sell and/or buy sides, a strategy to be undertaken by nonprofit healthcare organizations in response to the changing healthcare landscape?

In March of this year, Moody’s Investor Service predicted increased M&A activity in the nonprofit healthcare arena.  They cited as reasons for this increase decreased Medicare reimbursements, changes to state funding schemes for Medicaid, and a reform environment that urges increased efficiency and care coordination.  As a reaction to these compelling reasons, and in an effort to continue providing care to its constituent communities, some nonprofit providers are being forced to consider merging with another organization or putting the organization up for sale.  This is a very complex and emotional issue facing the Boards of nonprofit providers.  Sink or swim?  Don’t sell or sell?  How to evaluate the options?

Nonprofit providers historically have played a large role in healthcare as a traditional care provider; their work with the surrounding community and their focus on their nonprofit missions not only embeds them in a community, but often limits the creative thinking that might allow the expansion and extension of the mission. However, in today’s healthcare environment, it is imperative that board members of nonprofit provider organizations evaluate all of the options available to them.  Nonprofit Boards of Directors typically do not have vast experience working on the M&A process and, therefore, have struggled to identify issues and considerations when evaluating their strategic options, including selling the organization.  This lack of experience makes it necessary for the organization to conduct a thorough analysis, including the option of its sale.

Easier said than done.  What should the Boards and management consider as they begin their strategic review.  The following may be an appropriate way to begin

Sustainability of the Mission

With the deterioration of the reimbursement environment and decreasing margins, nonprofit boards are being forced to consider the sustainability of the organization.  First, a Board has to evaluate what strategies it could pursue that will better position the organization for survival in the post-reform environment

A key component of this evaluation is the organization’s ability to access capital. One of the greatest challenges reported by nonprofit healthcare organizations is obtaining necessary funding or financing to upgrade facilities and equipment. Boards are often reluctant to use reserve funds to invest in innovation or changes in strategy. Many Boards view reserve funds as their mission’s backstop. The critical decision point is whether the use of funds will truly sustain the mission or just provide a temporary fix to a fatal decline.

Ultimately, a Board may come to the conclusion that its long-term mission is at risk and decide it is better to sell the company and use current cash reserves and proceeds from the sale to alter or extend the mission. Evaluating this issue is a complex process, requiring a deep understanding of trends in the industry combined with a thorough analysis of an organization’s strategic options.

Impact on the Mission

After wrestling with the question of whether their organization is sustainable, the top concern for nonprofit Boards when they think about selling is how the transaction will ultimately affect the organization’s mission.

Although Boards will examine multiple variables in the acquisition process, the impact on mission is critical – it is the Board’s ultimate fiduciary responsibility. Boards need to consider the potential positive impact on the community if they sell to another provider and use the proceeds of the sale and current cash reserves to expand, extend or alter the mission.

Some Boards find that the community can still receive high quality care from another provider, and the use of proceeds from a sale can allow the organization to serve more community members in need in other ways. This is especially so for those providers faced with declining margins who might struggle to survive as the environment worsens. Such a scenario requires board members to consider how flexible the organization’s mission is, how open to adjustment it might be, and how any changes to its mission would affect its ability to serve the surrounding community.

Impact on Community/Stakeholders

Consideration of stakeholder impact goes along with thinking critically about how an acquisition will affect an organization’s mission. Any nonprofit Board thinking about selling to a for-profit company should think carefully about how a potential sale might affect all of the various stakeholders – patients, staff, surrounding community members, donors and volunteers.

How a Board begins the search for a buyer can be a delicate matter. Any advisors the Board retains should be well-versed in not only finding the right buyers, but in finding them in a way that is respectful of its role in the community.

Many stakeholder groups make negative assumptions about the effects of the purchase of a nonprofit organization by a for-profit entity, even though research suggests that such assumptions are not valid. Careful consideration and planning can ensure that all stakeholders are on board with a potential sale and the benefits it can bring to an organization and the community it serves.

Impact on Quality and Service Lines When Considering Selling to a For-Profit

A common concern by nonprofit Boards when considering selling the organization – particularly to a for-profit – is that they could experience a drop in quality of care.  Research shows that this is false – in many cases, providers maintain the same level of care or experience an increase in quality.

Board members should think about dedication to quality in examining potential buyers, as well as how an acquisition might affect service lines and community benefit. Most nonprofit providers offer services that are less lucrative or even unprofitable, usually as part of their stated missions or in service to the surrounding community. Board members should ask themselves whether they would be willing to see a change in service mix after an acquisition and how that might affect the organization and the community overall.

The Congressional Budget Office (CBO) has reported virtually no change in the amount of charity care provided before and after an acquisition of a nonprofit provider by a for-profit company. In fact, nonprofit Boards should consider the possibility that the right buyer could find ways to meet their mission profitably and efficiently. CBO analysts have cited studies showing that for-profit providers tend to be more efficient and cost-effective than nonprofit providers, adeptly changing their mix of services to respond to reimbursement patterns and aggressively coding to increase reimbursement.

No one ever said it was going to be easy.  This is the responsibility that Boards members have agreed to assume when consenting to serve on the Boards of Directors of nonprofit healthcare organizations.  Mission vs. Margin (profit, that is).  Are they mutually exclusive?  Can the differences be reconciled?

Next month I will write about issues to consider when a nonprofit organization is the acquirer.

 

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry.  He can be reached at joel.wittman@verizon.net.


How Much are Three Letters Worth?


Posted by Debbie Koh

Pursuing a graduate degree is a huge undertaking. At Wagner, getting a Masters of Public Administration typically means an investment of two years’ time (nights studying at Bobst Library you’ll never get back), tuition (roughly $40,000 per year), and any lost wages if you’re not working (opportunity cost).

It’s reasonable to question whether such a significant investment is worth it, especially when considering a public service career. So what convinced me that getting those three letters behind my name was worth the time and resources? I’d say the following areas: networking, experience and skills.

- Networking: No, I don’t mean the jaded, using-other-people’s-connections-to get-ahead kind of networking. I’m talking about being brought into a group of students and alumni who are joined by the desire to use their careers to achieve some sort of social impact. That shared motivation is what drove my day-to-day conversations with other students, helped me conduct information interviews with alumni, and encouraged me to connect with prospective and new students. Sometimes this kind of networking opened doors to career opportunities and sometimes it didn’t, but it helped me decide what made sense to keep pursuing and what to leave behind.

- Experience: Wagner offers a unique opportunity to build up one’s work experience. Being in New York meant that I had access to a huge array of institutions, organizations, and companies. If I wanted to work for a non-profit with US headquarters and overseas offices, or a small consulting firm with local and national clients, I could (and did). Capstone, which remains the highlight of my Wagner experience, provided me with solid experience that I could reference in job interviews and lessons learned that I apply in my current job. Finally, it was inspiring to learn from from the variety of backgrounds that were captured even in a specific program like Health Policy and Management, and from the larger student body.

- Skills: Probably the easiest, most obvious reason the go to graduate school, but it’s still worth noting. Economics, statistics, and finance skills are critical to have but difficult to get outside the classroom. In addition, taking time to become knowledgeable and stay current about one’s field – whether hospital management or international development – often falls prey to the daily demands of the workplace. Graduate school provides the opportunity to study the history, theory and recent developments in one’s practice area. I believe that this is a key component to producing high-quality work in any field.

The affordability and utility of an MPA or any graduate degree will always be a personal choice. It’s impossible to know how my career might be different or whether I would’ve had the same opportunities without attending Wagner. Certainly, no program is perfect – but for me, it was worth it.

Debbie graduated from Wagner in 2010 with her MPA in Health Policy and Management, International Health. She returned to her native California in 2011 and currently works for Venture Strategies Innovations. Follow her on Twitter at @thedebkoh or connect via LinkedIn. All views expressed are her own.