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Key Concepts

All-payer claims database

Biologics

Bundling or bundled payment

Consumer-driven (or consumer-directed) health plans

Critical illness policies

Diagnostic errors

Diagnosis related groups (DRGs)

Employee Retirement Income Security Act

Financial toxicity

Global payment

Health insurance co-ops

Herfindahl–Hirschman Index

Insurance status of young adults

Medical funding

Medical loss ratio

The Medicare Access and CHIP Reauthorization Act of 2015

Mental health parity

Narrow network

Orphan drugs

Perverse financial incentives

Pharmacy benefit managers

Private Health Insurance Exchanges

Precision medicine (aka personalized medicine)

Public Health Insurance Exchanges

Qualified entity

Quality Payment Program

Reference pricing

Relative Scale Update Committee (RUC)

Relative Value Units (RVUs) and Resource-based Relative Value Scale (RBRVS)

Risk adjustment

Risk and market stabilization programs under the Affordable Care Act

Self-Insured Employers

Site of service differential

Site of service payment

Step therapy

Transparency

Upcoding

Value-based care

Value-based drug pricing

Value-based insurance design (V-BID)

Value-based payment

Value-based purchasing (VBP)

All-payer claims database

The demand for more price transparency in health care seems to be driving an increase in the development of all-payer claims databases (APCDs). The databases are designed to help consumers and other purchasers of health care services (such as employers and health plans) see the prices doctors and hospitals charge for the same procedures. For consumers, for example, APCDs can help them choose the lowest-priced hospital for any surgery, such as a knee replacement. Health plans use the data to choose physicians, hospitals and other providers for their networks. Employers use the data to choose to set reference prices for certain procedures or set reimbursement levels under their benefit plans. Before the Affordable Care Act was passed and signed into law in 2010, only a few states had APCDs, such as Maine, Maryland, Massachusetts, and New Hampshire. Since the act was passed, 19 states have APCDs in varying stages of development and at least 21 states are considering laws to create them, the APCD Council reported in June 2014.

Biologics

A biologic drug is a complex and costly medication made from living organisms and is not easily identified or characterized. They are different from most drugs, which are chemically synthesized and have known structures. The FDA says biological products include vaccines, blood and blood components, allergenics, somatic cells, gene therapy, tissues, and recombinant therapeutic proteins. Biologics may contain sugars, proteins, or nucleic acids or complex combinations of these substances, or may be living entities such as cells and tissues.

Manufacturers isolate biologics from natural human or animal sources or from microorganisms. Some biologics are gene-based. Often they are used for patients who have medical conditions for which no other treatment is available. As a result, biologics often cost more than $100,000 for a course of treatment over one year. Physicians prescribe biologics for patients who have arthritis, cancer, multiple sclerosis and other conditions. 

Bundling or bundled payment

The Affordable Care Act introduces and tests new ways of paying for care that are designed to promote quality and control costs. One of these new ways of paying for care is called bundling or bundled payment. Instead making many different payments to different providers who deliver various services in and out of a hospital, Medicare or a health plan would pay a lump sum to one provider, hospital, or group of providers for an episode of care, such as a hip or knee replacement or a heart bypass operation. The one payment would cover all care for certain period, such as 30 days before the operation and perhaps as much as 90 days after the surgery and including any post-surgical complications such as infections or the need for repeat surgery.

Medicare and health plans also are making bundled payments to providers for patients with certain chronic conditions such as asthma and diabetes. The fee covers all care for a patient with certain conditions for one full year.

The hospital and the various physicians and other providers would decide how to divide the payment. The idea behind bundled payment is that all providers would want to keep costs low because if costs exceed the bundled payment the providers would need to pay for those extra costs. If costs are lower than the bundled payment, the providers could share in the savings. Bundled payment also encourages providers to focus on delivering high quality care by eliminating potentially avoidable complications such as ER visits, rehospitalizations, and other services that cause costs to rise.

Under the Affordable Care Act, the federal Center for Medicare & Medicaid Innovation is testing four models of bundled payment. Some private insurers have introduced bundled payment in various markets. Both CMS and private insurers believe bundled payment has the potential to control costs because such payment provides a financial incentive for hospitals, physicians, and other providers to keep costs low.

Consumer-driven (or consumer-directed) health plans

Consumer driven health plans (CDHPs) are high-deductible health plans that typically have three features: a high deductible, a tax preferred personal spending account often called a health savings account (or HSA), and information tools to help enrollees make informed decisions about care. Under the Affordable Care Act, employers are offering more CDHPs to workers than they did previously because doing so allows employers to shift from a defined benefit to a defined contribution plan. Defined contribution plans allow employers to pay a set dollar amount for each employee and his or her dependents each year regardless of whether health insurance costs rise. Under defined benefit plans, an employer would pay for certain health insurance benefits and if costs rose from one year to the next, the employer or the employee or both would need to pay more to main the same coverage. Defined contribution plans thus allow employers to control their costs and have more predictable costs from year to year.

CDHPs allow consumers or employers to put pre-tax dollars into the HSAs and those funds are available for health expenses under the deductible. The high-deductible insurance plan means the beneficiary needs to pay a large deductible before the health benefits plan kicks in. Advocates say high deductibles help to make consumers smarter and more conscious of the cost of health services, but critics say high deductibles leave consumers at risk of high health bills and discourage consumers, particularly those in lower-income groups, from getting needed care.

Critical illness policies

As employers shift more costs to workers and retirees through high-deductible health insurance plans, the employees and retirees are increasingly vulnerable if diagnosed with a critical illness, such as a heart attack, stroke, or cancer. Recognizing that the trend toward shifting more costs to employees leaves them without coverage until they meet their deductibles, many employers are providing critical illness policies as a voluntary benefit, meaning employees can accept the coverage or not. Another example of a voluntary benefit is vision coverage.

Insurance companies of all kinds have long offered critical illness coverage options but they these policies have become more common in recent years as employers have asked employees to pay a greater share of the cost of health insurance. In 2014, 45 percent of percent of employers with 500 or more workers offered critical illness policies, up sharply from the 34 percent of employers who offered such plans in 2009, benefits consultant Mercer reported in a survey. Many employers pay for a basic critical illness policy that would pay $5,000 to $10,000. If an employee or retiree wanted more coverage, he or she would have the option to buy more critical illness coverage, typically up to $40,000.

Under a critical illness policy, an insurer would pay cash to a policy holder for any expense after the policy holder demonstrates that he or she has been diagnosed with a critical illness. The cash could help pay for deductibles and coinsurance or out­of­pocket expenses such as travel to and from a hospital, a hotel stay if needed before surgery, lost income if the policy holder is out of work for an extended time.

One health insurer offering such coverage said its policies cover patients who have been diagnosed with cancer, a heart attack or stroke. These three conditions account for more than 75 percent of all critical illnesses. Once a patient has a diagnosis of a covered condition, he or she would receive a lump sum payment ranging between $5,000 to $40,000 to pay for any expense whether medical or the usual costs of living. In recent years, health insurers have added coverage for such conditions as amyotrophic lateral sclerosis (ALS), Alzheimer’s disease and Parkinson’s. Some policies cover conditions that affect children, such as cerebral palsy, cystic fibrosis and muscular dystrophy diagnosed from birth to age 26.

Diagnostic errors

In a report, Improving Diagnosis in Health Care, released in September 2015, the Institute of Medicine said about 5 percent of U.S. adults who seek outpatient care experience a diagnostic error each year. Diagnostic errors contribute to about 10 percent of patient deaths and about 6 percent to 17 percent of adverse events in hospitals, the report said. One way such errors harm patients is by preventing or delaying appropriate treatment, by causing physicians or other providers to deliver unnecessary or harmful treatment, or by causing psychological or financial repercussions, the report said.

As with its earlier reports on quality and patient safety, this IOM report identified failures in the U.S. health care system that have gone mostly unnoticed, the report said. To date, efforts to improve health care quality and safety have not addressed the problems built into the diagnosis process and the occurrence of diagnostic errors, according to the report. “Urgent change is warranted to address this challenge,” it said.

To write the report, the IOM convened a committee of 21 experts who defined diagnostic error as, “the failure to (a) establish an accurate and timely explanation of the patient’s health problem(s) or (b) communicate that explanation to the patient.”

“Diagnostic errors stem from many causes, including inadequate collaboration and communication among clinicians, patients, and their families; a health care work system that is not well designed to support the diagnostic process; limited feedback to clinicians about diagnostic performance; and a culture that discourages transparency and disclosure of diagnostic errors, which in turn may impede attempts to learn from these events and improve diagnosis,” according to the report.

Diagnosis related groups (DRGs)

Diagnosis related groups (DRGs) is a system insurers use to classify patients and pay for care by establishing categories based on the patients’ expected relative use of inpatient services. DRGs are a clinical risk adjustment system that uses each patient’s diagnosis and associated services and procedures to group patients into similar categories. Medicare uses a version of DRGs called MS-DRGs and private health insurers use a version called APR-DRGs. Different health insurers may assign different weights to each DRG based on the relative cost of caring for patients in each category when compared to the costs of care for other patients in other categories. Also, because care for some populations is higher than it is for other populations, the weights can differ based on the population being served. Usually, insurers set weights by calculating the average cost for care for patients in each category relative to all patients in the population being served.

By assigning different weights for different populations, DRGs can be used to set a hospital’s risk score or case mix index and thus they can be used as a risk-adjustment system for payment. Also, Medicare uses DRGs for bundled payments in its Inpatient Prospective Payment System and other payment models. When used for bundled payments, the hospital get a single DRG payment for each patient admitted to the hospital and that amount is designed to cover all costs of care for that patient except if there are certain agreed-upon exceptions.

Employee Retirement Income Security Act

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established health insurance and pension plans in private industry. The minimum standards are designed to protect individuals in those plans. What that means is that under ERISA employers that self-insure rather than higher health insurers to provide insurance coverage need to follow the regulations spelled out in ERISA. For employers, there are substantial benefits from being self-insured (also called being self-funded) under ERISA that they would not get by contracting with health insurers. But funding their own insurance plans, they would pay for any losses and reap any profits as well. Therefore, they aim to keep their employees healthy so that they don’t lose money while setting aside funds to cover the health care costs of their workers, workers’ families, and retirees.

As a federal law, ERISA pre-empts state law and thus it allows self-insured employers to avoid having to comply with state rules and regulations governing health insurance. Each state has its own rules and regulations, which health insurers say drive up insurance costs and are an administrative burden as well. For example, some states require health insurers to cover the cost of wigs for patients who suffer hair loss during treatment for cancer. ERISA pre-emption allows employers to avoid this requirement if they choose.

Just as commercial health insurers do, employers under ERISA still need to provide employees and other plan participants with information about the features of their plans and they must provide grievance and appeals processes for participants. Also, ERISA allows participants the right to sue for benefits and breaches of fiduciary duty.

One amendment Congress has added to ERISA is the Consolidated Omnibus Budget Reconciliation Act (COBRA), which allows some workers and family members to continue their health coverage for a limited time after a job loss and other events. Two other amendments to ERISA are the Health Insurance Portability and Accountability Act (HIPAA), which provides certain privacy protections to insured patients and the Mental Health Parity Act, which requires insurers to have similar coverage for mental health and physical ailments.

Financial toxicity

Financial toxicity is the financial burden on a patient (whether insured or not) from the cost of treatment, meaning how much a patient must pay for that treatment, and it is the financial stress that the cost of treatment causes, particularly when the cost of care is so high that a patient foregoes care because it’s unaffordable.

Oncologists were the first to identify financial toxicity, because the cost of cancer care can be high for many patients. Seeing the distress those costs caused their patients, oncologists described financial toxicity in a pair of articles published in Oncology on Feb. 15, 2013, Financial Toxicity, Part I: A New Name for a Growing Problem; and April 15, 2013, Financial Toxicity, Part II: How Can We Help With the Burden of Treatment-Related Costs?

It’s no surprise that oncologists would identify this problem given that the average cost of new tumor-fighting medications can be $10,000 per month and that cancer is the leading cause of bankruptcy in the United States. Cancer specialists have responded by developing tools to help identify treatments that have the most value for patients and to get patients involved in conversations about which treatments they would prefer (when there is a choice) and which treatments they can afford.

But other treatments besides cancer also be financially toxic, particularly those treatments that require physicians to prescribe high-cost specialty drugs for patients with chronic conditions. High costs for any condition can reduce a patient’s quality of life and can prevent patients from getting the highest quality care. Health plans and employers contribute to the problem by passing along the cost of care by increasing what health plan members and employees must pay for health insurance in the form of higher premiums, deductibles and co-insurance.

Global payment

Global payment is a relatively new way for health insurers to pay hospitals, physicians, and other providers for health care. Instead of paying providers a fee for every service they deliver, health plans using global payment pay providers a monthly fee to provide all care for each of a group of patients. Under a global payment contract, a physician or group of physicians would receive a budgeted amount to cover all health care services for a group of patients for one month. The goal would be for the physicians to deliver care to patients efficiently. If health care costs are lower than the budgeted amount, the physicians can keep the savings. If the costs of care are higher than the budgeted amount, the physicians would pay a penalty.

Under this payment mechanism, physicians have a financial incentive to keep patients healthy and to refer them to low-cost hospitals, diagnostic services, and specialists.

In addition to sharing in any savings, physicians also can boost their income by achieving some of the quality goals that health insurers designate. Blue Cross Blue Shield of Massachusetts has more than 60 quality goals that it outlines for its physicians and hospitals under global payment contracts. When physicians and hospitals achieve certain levels of quality, they get paid more, BCBSMA says.

This payment mechanism has been criticized because it is similar to the capitation payment method that was used in the 1980s and 1990s. Under capitation, physicians received a payment to provide all care for each patient, but without any quality goals, there was the possibility that physicians would deliver minimal care.

By introducing quality metrics, global payment is designed to be an improvement on capitation by controlling costs and rewarding providers for delivering quality care. InMassachusetts, the state’s health insurers are shifting to this method of payment. In 2012, it was estimated that more than 1 millionMassachusettspatients were enrolled in health plans using global payment. In 2012, the state legislature voted to move all 1.7 million government employees and Medicaid recipients into health plans using this payment system. Experts predict that by 2015, about half of the state's 6.5 million residents could be in health plans that use global payment. The state has the highest medical costs in the nation and has had an individual insurance mandate since 2007.

Health insurance co-ops

Under the Affordable Care Act, Congress called for the establishment of the Consumer Operated and Oriented Plan (CO-OP) Program. The program is designed to support the development of qualified nonprofit health insurance plans that would offer competitive health plans to individuals and small businesses. These co-ops will compete with for-profit insurers and thus have the potential to stimulate competition and drive down health insurance costs. Bloomberg Businessweek has reported that the federal government issued loans totaling $2.1 billion to help start the co-ops, and that as of March 2014, 23 co-ops were operating and had enrolled 300,000 members.

When the ACA was passed in 2010, some critics of the law predicted that co-ops would fail but, in fact, the successful co-ops are the price leaders in many markets. A report by McKinsey & Co. in October 2013 said that among new entrants to the health exchange marketplaces, the co-ops were the price leaders, offering 37 percent of lowest-price health insurance products in the 22 states where co-ops operate. Kaiser Health News has reported that the private, non-profit co-ops are designed to compete against the nation’s largest health insurers and were added to the health law as an alternative to a “public option” that some say might have been the ideal method to drive competition.

Herfindahl–Hirschman Index

The Herfindahl–Hirschman Index (HHI) is a commonly accepted measure of market concentration of buyers or sellers in a geographic area. The U.S. Department of Justice, the Federal Trade Commission, and other federal and state agencies consider the effect of a merger on the HHI score for a market when evaluating the consequences of one company acquiring another. For example, federal and state regulators will use the HHI when examining the effect on health insurance markets when one health insurer proposes to acquire another. Economists and anti-trust enforcement agencies use the HHI to assess whether a consolidation of providers or payers in a state or region, or an organizational arrangement such as joint contracting among a group of providers (for example an accountable care organization) would limit competition in a market.

The HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers, the DOJ says. When a market has four companies competing for market share and the four firms have shares of 30, 30, 20, and 20 percent, the HHI would be 2,600 (302 302 202 202 = 2,600). The HHI ranges from zero (when a large number of companies of relatively equal size compete in a market) to 10,000 points when a single company controls a market. The HHI increases as the number of companies in a market drops and as the disparity in size among those companies rises, DOJ says.

In general, federal agencies consider markets in which the HHI is between 1,500 and 2,500 points to be moderately concentrated, and consider markets in which the HHI is more than 2,500 points to be highly concentrated. Transactions that raise the HHI by more than 200 points in highly concentrated markets are presumed likely to enhance market power under the DOJ and Federal Trade Commission’s Horizontal Merger Guidelines.

Insurance status of young adults

One key to the success of the Affordable Care Act will be how many young adults enroll in health insurance plans offered under the act, particularly those who enroll in the public health insurance exchanges. Young adults are important because they are typically healthier than older adults and thus need fewer health care services than older adults. Enrolling a large number of younger adults allows insurers to typically higher balance the costs of caring for older Americans against the usually lower costs of insuring younger persons. An article, “Insurance Status Affects Where Young Adults Seek Health-Care” about the report was published by the Center for Advancing Health Center’s Health Behavior News Service. The news service noted that the study will serve as a baseline for health care availability and use for young adults before the changes brought on by the ACA.

The source for the news service article was a study published by researchers in the Journal of Adolescent Health, “Young Adults’ Health Care Utilization and Expenditures Prior to the Affordable Care Act.” By evaluating data in the 2009 Medical Expenditure Panel Survey, the researchers identified disparities in young adults’ utilization and expenditures based on access to insurance and other sociodemographic factors. The study shows that adults aged 18 to 25 used the health care system more frequently when they had health insurance. The report’s lead author, Josephine Lau, M.D., M.P.H., a clinical assistant professor of adolescent and young adult medicine at the University of California-San Francisco, said adults aged 18 to 25 who had a full year of private insurance coverage had the optimal utilization of the health care system when compared with the uninsured and when compared with young adults who had public insurance. Optimal utilization was associated with the highest office-based visit rates and the lowest emergency room visit rates, she said.

Medical funding

Medical funding covers the medical costs of patients who have had a serious injury and require ongoing medical care but lack health insurance to cover these ongoing costs. The ongoing care can be expensive because it may include surgery, rehabilitation and other costly medical services. Often physicians, hospitals, and other health care providers will provide these services to patients in exchange for a letter of protection, which is a promise to pay after treatment is complete, or a lien on the patient’s property. In either case, the health care providers assume the financial risk of providing care and hope to be paid at some time in the future.

Often patients use medical funding if they have been injured and have a legal claim for damages that is pending. While awaiting payment on their claim, the patients get the care they need and the medical funder pays the physicians, hospitals and other providers.

Journalists have reported, however, that unscrupulous medical funders have taken advantage of patients by purchasing bills from physicians and hospitals for the medical treatment of injured plaintiffs at a deep discount. Then they claim the full amount of the bill is due and place a lien against the patient’s property through a settlement or secure a verdict in court. In some cases, the medical funders will charge as much as 10 times what a health insurer would pay for the same procedure.

Critics of medical funders have charged that medical funders need to be regulated more strictly. The federal Consumer Financial Protection Board has been asked investigate medical funders on the basis that medical funders are operating as predatory lenders. Medical funders say they operate under strict state laws and that more regulation is unneeded.

Medical loss ratio

During the debate over the Affordable Care Act in 2010, some members of Congress wanted to include protections for consumers to ensure that health insurers provided adequate coverage. One way to do so was to require insurance companies to spend a minimum of 80 percent of premium income on patient care. To institute this idea, Congress included the rules governing the medical loss ratio, which is the amount insurers spend on medical claims and quality improvement divided by the amount collected in premiums minus federal and state taxes and licensing and regulatory fees.

In the ACA, Congress said insurers must spend a minimum of 80 percent of premium income in the small group and individual markets and no less than 85 percent of premium income in the large group market. Some states have higher MLR standards, such as Massachusetts, which set the MLR at 90 percent for small groups and individuals. Also, the federal Department of Health and Human Services can adjust the MLR in a state’s individual market.

If insurers fail to spend to these levels, they need to rebate those amounts to consumers, Congress said. The MLR rules went into effect on Jan. 1, 2011, and, in the first two years of operation under these rules, insurers paid $1.620 billion in refunds to consumers. They paid $1.1 billion in 2011 and $550 million in 2012, according to a report in July 2014 by the Government Accountability Office, “Private Health Insurance: Early Effects of Medical Loss Ratio Requirements and Rebates on Insurers and Enrollees.

The report details how insurers spend the premium income they collect from consumers and businesses. It shows, for example, that insurers spend little on quality improvement, that they report modest profit numbers, and that MLR rules have not caused them undue harm. The report also shows what insurers reported spending to pay members’ claims, other costs unrelated to claims, quality improvement and any net premium surplus or loss. The spending is reported in three categories: the large group, small group, and individual markets.

The Medicare Access and CHIP Reauthorization Act of 2015

The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) what many experts said was the most significant change in Medicare’s 50-year history. The law repealed the flawed Medicare sustainable growth rate (SGR) formula that calculated payment rates to physicians and established an alternative set of annual payment increases instead. MACRA establishes two bonus payment tracks beginning in 2019. One track is for physicians in alternative payment models the other is for those who stay in fee-for-service and participate in the Merit-Based Incentive Payment System (MIPS).

The new payment tracks are designed to shift physicians and other providers away from fee-for-payment into value-based payment. The MIPS replaces other incentive programs into one program that will give doctors a quality score. If their scores are high, reimbursement rates will rise.

The bonuses for part of systems that use alternative payment models are designed to get doctors to join together to earn lump sums to care for certain groups of patients such as they do in patient-centered medical homes and in accountable care organizations. In these arrangements, the physicians and other providers would have and incentive to provide the care for less and to achieve certain quality scores. If costs are lower enough, the physicians can keep some of the savings cash.

Critics of the law say the increases in payment are not likely to keep pace with inflation. If so, physicians may return to Congress to request more money or drop out of the Medicare program. Another concern about the law is how Medicare will set new standards for quality.

Mental health parity

Rules issued in November 2013 require health insurers to offer the same limits for mental health care that they offer to patients receiving medical and surgical care. Called the mental health parity rules, these requirements do not allow health insurers to discriminate against health plan members when they seek treatment for mental or behavioral health or substance use disorders. Essentially, insurers must cover mental and physical health equally under the rules issued by the federal Department of Health and Human Services under the Mental Health Parity Act. The rules become effective for all plan years beginning after July 1, 2014. For most plans, that means Jan. 1, 2015. Medicaid and the Children’s Health Insurance Plans are not required to comply with the new mental health parity rules but may need to comply depending on when HHS and other departments issue separate rules for Medicaid and CHIP. Under the rules, health insurers cannot have any restrictions on benefits for patients seeking mental health or addiction treatment benefit if that same restriction does not also exist for all benefits for medical-surgical patients. For example, if a health plan has a $20 copayment for outpatient mental health therapy that plan also must require a $20 copayment for most medical-surgical services that are similar, such as outpatient medical visits. Also, under the mental health parity rules, insurers could not set limits on mental health and substance abuse benefits that are more stringent than those applied for medical-surgical patients.

Narrow network

A narrow network refers to a short list of physicians, hospitals, and other providers that a health insurer considers to be in-network. All other providers would be out-of-network. According to a study by the McKinsey Center for U.S. Health System Reform in 2014, a narrow network is one that includes 30 percent to 70 percent of all hospitals in a given area. A broad network is any plan that covers 70 percent or more of hospitals in an area, and an ultra-narrow network is one that includes fewer than 30 percent of facilities. In 2014, about half of all plans offered on federal and state health insurance marketplaces were narrow-network plans, McKinsey reported.

Orphan drugs

The Orphan Drug Act of 1983 was designed to foster the development of medications for patients with rare and unusual diseases. The idea behind the law was that pharmaceutical companies have such high drug-development costs that any medication for a relatively small population would be unprofitable.

Under the law, a company that develops a drug for a market of fewer than 200,000 Americans would get tax credits, subsidies totaling as much as $500,000 annually for as many as four years, and seven years of patent protection to market the drug exclusively. In addition, the FDA would waive its application fees, which can total $2 million. Since the law was passed, more than 200 drug makers have introduced more than 450 orphan drugs.

In 2016 and 2017, researchers and journalists have raised questions about whether pharmaceutical companies are misusing the law. Kaiser Health News reported that pharmaceutical companies have used the ODA, “to secure lucrative incentives and gain monopoly control of rare disease markets where drugs often command astronomical price tags.” Another way pharmaceutical companies benefit from the ODA is that after getting approval for some drugs for the mass market, the companies earn orphan status for those same drugs by identifying smaller populations who would benefit based on their genetic or biomarker profile. In doing so, researchers say, the drug companies are not following the spirit of the ODA even though they may not be breaking the law.

Following the Kaiser Health News report, members of the U.S. Senate called on the Government Accountability Office to review the orphan drug approval process.

Such concern is significant because reports show that worldwide orphan drugs sales will total $209 billion by 2022 and that the rate of growth of 11 percent annually would be about twice as fast as the rise of prescription drug sales overall. Rising costs have caused health insurers to restrict coverage of some orphan drugs and to develop new contracting strategies such as proving the medications work as promised and paying rebates when they don’t work.

Perverse financial incentives

One of the problems with any system in which health insurers pay providers for delivering care is that payment mechanisms often have unintended consequences that result from perverse financial incentives. Consider, for example, the issue of overuse of tests and procedures, a widespread problem throughout health care. Under fee for service payment, there is little an insurer can do to reward physicians and other providers who eliminate needless tests or procedures. Also under fee for services, health insurers do not usually pay for innovative services that might help reduce overall costs. Neither CMS nor most health plans will pay physicians to discuss a patient’s care over the phone, for example, and yet a phone call might help the patient avoid a costly visit to the emergency room. CMS and most health plans will not pay primary care physicians to discuss a patient’s treatment with a specialist when such coordination of care may be a key to reducing costly duplicative services such a clinical lab tests or diagnostic imaging.

Another unintended consequence of fee for service payment is that it provides a financial incentive to do more for every patient without regard to the cost of care. If physicians, hospitals, and other health care providers were interested in reducing unnecessary services, for example, they would lose the income they receive from those services. Under fee for service, for example, a clinical laboratory would have no incentive to identify and eliminate needless, outdated tests.

Pharmacy benefit managers (PBMs)

PBMs manage the pharmacy benefits for health insurers, self-insured employers, unions, Medicare Part D plans, the Federal Employees Health Benefits Program (FEHBP), state government employee plans, and managed Medicaid plans, among other payers. For these clients, PBMs deliver medications to patients by delivering medications to retail pharmacies or filling prescriptions for patients through mail order. Of the 30 or so PBMs operating in the United States, the largest are CVS/Caremark, Express Scripts, and Optum. In 2016, PBMs managed pharmacy benefits for 266 million Americans, according to the Pharmaceutical Care Management Association (PCMA), a trade association for PBMs.

These pharmacy management companies handle so much prescription-drug volume that they can extract rebates and discounts with pharmaceutical manufacturers that others cannot get. Insurers themselves do not usually have the expertise to negotiate deals as favorable as PBMs can.

Critics charge that one of the problems with PBMs is that they get rebates from drug companies for promoting certain drugs and then do not pass along those rebates to insurers or consumers. PBMs do not disclose the savings they get from pharmaceutical companies and so it’s impossible for consumers, health insurers, or employers to know if PBMs are steering consumers to higher-cost medications or if they are passing on the savings they get from rebates and other incentives from drug makers.

In March 2016, Anthem, one of the nation’s largest health insurers, sued Express Scripts, charging that the PBM was not passing along billions of dollars in savings it negotiated with drug manufacturers. A month later, Express Scripts sued Anthem, saying Anthem did not pass along savings from its contract with Express Scripts to its members and used those funds to purchase stock instead.

Critics also charge that PBMs make deals with drug makers to promote high-cost drugs over other lower-cost drugs and do not require prior approval for patients buying high-cost medications. Insurers and employers generally want PBMs to promote the use of generic drugs and low-cost brand name medications over high-cost brand-name drugs. They also want PBMs to require prior approval for patients seeking high-cost medications. All of these measures would help to control costs, but because PBMs do not disclose the deals they make with drug manufacturers, there is no way for health insurers and employers to know if they are getting the best deals, critics say. The PBMs countered that their efforts help to keep costs down.

Precision medicine (aka personalized medicine)

The National Institutes of Health describes precision medicine (also known as personalized medicine) as “an emerging approach for disease treatment and prevention that takes into account individual variability in genes, environment, and lifestyle for each person.” In 2015, the federal government invested $215 million in an initiative to promote precision medicine initiative, which it designed to generate the scientific evidence needed to move the concept of precision medicine into clinical practice. Initially, the precision medicine initiative will be aimed at treating patients with cancer.

In the budget for fiscal 2016, the federal Department of Health and Human Services said the $215 million would be used to develop new treatments, diagnostics, and prevention strategies tailored to the individual genetic characteristics of each patient. Of the $215 million, HHS said $200 million will go to the National Institutes of Health to do research on one million or more Americans who volunteer to share their genetic information, to expand current cancer genomics research and to study how a tumor’s DNA affects prognosis and treatment. The FDA will get $10 million to modernize the regulatory system for molecular diagnostic tests, and the Office of the National Coordinator for Information Technology will get $5 million to develop technology and define standards and certification criteria to enable the exchange of genomic data. The Office for Civil Rights will ensure that adequate privacy protections.

While precision medicine is promising, some experts believe it could be several years before the initiative produces useful results. Researchers face high hurdles given that the Human Genome Project overpromised what could be gained from their international research effort to determine the DNA sequence of the entire human genome, critics say.

Private Health Insurance Exchanges

Some private exchanges have existed since the 1990s while others were developed after the Affordable Care Act was signed into law in 2010. The private exchanges are different from the public exchanges offered under the ACA in several ways. The public exchanges will serve individuals and small businesses likely to be eligible for federal subsidies and will offer insurance coverage from Qualified Health Plans (QHPs). Public exchanges also will have some reinsurance and other mechanisms to protect them against financial failure if payments greatly exceeded income. Private exchanges have no such protections and are under no obligation to offer QHPs. Also private exchanges will serve employees and small businesses with as many as 100 employees that are unlikely to qualify for federal subsidies.

Examples of private health insurance exchanges include

  • Bloom Health, in Minneapolis, which is working with WellPoint and some Blue Cross and Blue Shield plans to offer coverage to employees of large employers;

  • HealthPass New York, which works with sole proprietors and small businesses of as many as 50 employees and offers insurance plans to about 4,000 employers; and

  • Aon Hewitt’s Corporate Health Exchange, which is a multi-insurer exchange for large national employers. As of the spring of 2013, the Corporate Health Exchange had enrolled more than 100,000 employees in health benefits plans.

Public Health Insurance Exchanges

The Affordable Care Act allows for state-based public health insurance marketplaces or health insurance exchanges that are designed to let consumers choose among various health insurance options. Beginning in October 2013, the public exchanges will allow consumers to enroll in insurance plans that will be effective on Jan. 1, 2014.

Health insurers that choose to participate in the public exchanges will offer a choice of different health plans. The states will certify that each plan offered in the exchanges is a Qualified Health Plan (QHP), meaning it meets certain minimum requirements by providing essential health benefits and limits cost-sharing. Also, the states will provide information to help consumers understand their options and enroll in insurance plans.

States have the option to establish exchanges. As of July 2013, 17 states and the District of Columbia had said they would run their own exchanges. The federal government may establish the exchange in the other 33 states.

Whether established by the states or the federal government,, the exchanges will allow individuals to apply for insurance and choose high, low, or mid-cost options. Also, the exchanges will let consumers know if they qualify for free or low-cost coverage options available through Medicaid or the Children’s Health Insurance Program (CHIP).

For consumers and some small businesses, private health insurance exchanges will be available as well. Workers in small businesses will supposed to enroll through exchanges operated under the Small Business Health Options Program, or SHOP exchanges, under the ACA. But in June 2013, the Obama administration delayed the implementation of the SHOP exchanges.

Qualified entity

The federal Centers for Medicare & Medicaid Services designates qualified entities (QEs), which are organizations that may use data collected under section 1874(e) of the Affordable Care Act to evaluate the performance of providers and suppliers, and to generate public reports on their performance. Section 1874 requires standardized extracts of Medicare claims data from Medicare parts A, B, and D to be made available to QEs.
The purpose of the QE program is to share Medicare data to improve quality and reduce costs for Medicare and the entire health care system, to increase the transparency of provider and supplier performance, and to provide Medicare members with information to make informed health care decisions. As of March 2016, CMS had designated 15 QEs, four or which publicly report on the performance of providers in all 50 states; the remainder report on the performance of providers in states or regions.

Quality Payment Program

When it passed the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA), Congress aimed to replace the sustainable growth rate (SGR) formula with a new system of payment to reward physicians serving Medicare beneficiaries for delivering quality care. Finding funds to pay physicians each year under the SGR was cumbersome because Congress too often could not decide how much to pay physicians each year, and, for 13 years, disagreements over the SGR affected negotiations over other spending priorities.

Under MACRA, Congress established the Quality Payment Program to get physicians to focus on care quality and to keep 55 million Medicare patients healthy under Medicare Part B. The federal Centers for Medicare & Medicaid Services said physicians who serve a certain number of Medicare patients could enroll in one of two quality payment programs starting in 2017: One is the Advanced Alternative Payment Models (APMs) and the other is the Merit-based Incentive Payment System (MIPS).

In an Advanced APM, a physician could earn an incentive payment for participating in this model depending on how well the model performed over one year. Physicians who participate in MIPS would earn a performance-based payment adjustment. Physician assistants, nurse practitioners, clinical nurse specialists and certified registered nurse anesthetists also could participate in MIPS.

Collection of physician performance data began Jan. 1, 2017, for the calendar year, although physicians could choose to delay participation. Physicians who do not participate in the QPP could have their Medicare payments reduced by 4% in 2019. Any physician who submits a minimum amount of performance data in 2017, such as information on one quality measure or one improvement activity in 2017, could avoid a reduced payment adjustment. Physicians who submit data on 90 days of activity in 2017 could see no change in payment or a payment increase, CMS said. Physicians who submit a full year of 2017 data could earn a payment increase as well.

Reference pricing

An effort by the California Public Employees’ Retirement System (CalPERS) to cap prices for joint replacement surgery used a strategy called reference pricing to cut hospital costs by about one third. The average cost of joint replacement surgery dropped from $43,308 before CalPERS made the change in 2011 to $28,465, according to an article in Health Affairs, “Increases In Consumer Cost Sharing Redirect Patient Volumes And Reduce Hospital Prices For Orthopedic Surgery.”

Other employers have tried this reference pricing strategy by setting limits on what they will pay for certain procedures or health care services. Usually employers will implement referent pricing for high-cost items, such as orthopedic surgery, where the employee has a wide choice or providers and prices vary widely. Under this strategy, the employer pays up to the contribution limit and employees pay the difference, Health Affairs reported. In this way, employees have a financial incentive to choose lower cost providers or at least choose providers who set prices at or below the reference price.

The Health Affairs researchers showed that in the first year after implementation of the reference pricing stategy, surgical volumes for CalPERS members increased by 21.2 percent at low-price facilities and decreased by 34.3 percent at high-price facilities. Prices for CalPERS members declined by 5.6 percent at low-price facilities and by 34.3 percent at high-price facilities, the researchers wrote. “Our analysis indicates that in 2011 reference pricing accounted for $2.8 million in savings for CalPERS and $0.3 million in lower cost sharing for CalPERS members,” they concluded.

Such reference pricing strategies work only when the prices of the procedure are available to the public and so reference pricing requires full price transparency. 

Relative Value Scale Update Committee (RUC)

The Relative Value Scale Update Committee (RUC) acts as an expert panel of 31 members who recommend to the federal Centers for Medicare & Medicaid Services (CMS) how physicians should be paid under the Resource-Based Relative Value Scale (RBRVS) that Medicare uses when setting the physician fee schedule each year. The American Medical Association and national medical specialty societies staff the committee..

Based on recommendations from the RUC, CMS publishes the rates it pays physicians for more than 6,000 procedures, services and tests every year. Payment is based on how much to pay for each of three components: the time and intensity of effort for the actual service provided, the facility where the procedure takes place, and the physician’s cost of medical malpractice insurance. Each component can be adjusted for geographic variations in costs.

Critics charge that the RUC is secretive and exaggerates how much physician time and effort is involved in performing many medical procedures, which skews payment in favor of medical specialty physicians, thus putting primary care at a payment disadvantage.

Relative Value Units (RVUs) and Resource-based Relative Value Scale (RBRVS)

The federal Centers for Medicare & Medicaid Services (CMS) uses a complex formula to determine how much to pay physicians for the 9,000-plus services and procedures it covers on its physician fee schedule each year. This system is important because private insurers follow CMS’ lead when setting physician payment rates. Designed to make Medicare’s reimbursement system uniform and to control the rising cost of physician services, the payment formula is based on what CMS calls relative value units (RVUs) for each physician service or procedure. The components of RVUs are the physician’s actual work to deliver the service plus the cost of practice overhead and malpractice insurance.

CMS also accounts for variation in expenses based on location by adding a factor called the geographic practice cost index (GCPI). The physician’s work is further divided into the time required to do the procedure or deliver the service, the technical skill or physical effort involved, the mental effort required, and the stress from any risk to the patient. Each of these four components is assigned an RVU. When setting each RVU, CMS uses a system to describe and quantify physician’s services called the Resource-based Relative Value Scale (RBRVS). (See also Relative Value Scale Update Committee, or RUC.)

Risk adjustment

Health insurers used risk adjustment systems as a way to avoid penalizing hospitals, physicians or other providers for for factors they cannot control. Usually these factors are the level of illness severity in a group of patients. Risk adjustment is also called acuity adjustment, severity adjustment, and case-mix adjustment. Most risk adjustment systems are used adjust levels of spending to match the illness level in the population of patients being served. Hospitals and physicians often complain that their patients are sicker than other patients and thus their payment should be risk adjusted or severity adjusted to account for that level of illness. Patients in a high-risk category may be those on Medicaid or those who were previously uninsured for many months, and thus hospitals or physicians would argue that their payment for serving that population should be higher than it would be if they were serving patients in a low-risk category. Low-risk patients may be those who have long had health insurance and access to excellent primary and specialty physician care when needed.

Risk and market stabilization programs under the Affordable Care Act

Under the Affordable Care Act, health insurers can no longer deny applicants if they have pre-existing conditions (a provision of the law called guaranteed issue) or charge them higher premiums than they charge others in the same rating area (a provision called modified community rating). For insurers, these two provisions increase their risk of higher costs by forcing them to insure everyone regardless of their health status or level of illness. In other words, because insurers need to cover the healthy and the sick (those individuals insurers previously considered to be uninsurable), they will need to spend more on the delivering care to sick Americans than they have in the past.

Before the ACA went into effect fully on Jan. 1, 2014, insurers had ways to attract more healthy individuals because these consumers were more profitable for them to insure. Attracting healthier consumers is called risk selection. When congress was considering the ACA, insurers argued that when required to cover all individuals who apply, they could face a similar problem – called adverse selection – if the number of unhealthy individuals applying for coverage outnumbered the number of healthy individuals who applied.

When drafting the Affordable Care Act, members of congress were concerned that guaranteed issue, community rating, and adverse selection could lead to severe financial losses among insurers, and thus could lead to premium volatility or put the health insurance market at risk of failure. To mitigate the effects of guaranteed issue, community rating, and adverse selection, congress added to the law certain provisions (called reinsurance and risk corridors) to increase market stability in the first three years of the law (2014 through 2016) and to foster competition among insurers. They also added risk adjustment as a permanent means of mitigating risk and fostering competition.

These three provisions (reinsurance, risk adjustment, and risk corridors) along with other regulations in the law also are designed to protect insurers against adverse selection and to protect consumers against risk selection.

Self-Insured Employers

For years, many of the nation’s largest employers have been self-insured for health care. This means the employers pay the health costs of its employees and dependents and assume all the financial risk of providing health insurance. A health plan acts as an administrator to enroll employees, process claims, and establish networks of hospitals, physicians, and other providers. In this way, the employers save the costs that they would normally pass along to health plans if they contracted with health plans in the traditional way and they can avoid some of the most costly requirements that states impose on health insurers. By self-insuring, employers assume the financial risk of paying all medical bills of their employees and dependents and have reinsurance for losses that exceed a certain threshold.

Seeing the advantages of self-insurance, many small employers are seeking to avoid the benefit requirements of the Affordable Care Act. But if too many small companies self insurer and thus take many young, healthy workers out of the small-business exchanges, traditional insurers may be left with older and sicker workers, causing costs to rise and possibly forcing insurers to leave the exchanges. For more on this topic, see “Self-coverage by small business could harm Obamacare exchanges.”

Site of service differential

One way to control rising health care costs is to eliminate the different rates that Medicare and private health plans pay based on where care is delivered, according to health policy experts. In physicians’ offices, the cost of delivering care is often lower than it is in hospitals, for example. This is the called the site-of-service differential. Eliminating this differential would mean payments would be site neutral. President Obama’s budget for fiscal 2016 included a recommendation to eliminate the site-of-service differential in hospitals for some outpatient services. The New York Times reported that the Obama administration estimated that Medicare could save $30 billion over 10 years by switching to site-neutral payments for certain outpatient procedures. One reason hospitals can charge more than physicians can charge for delivering the same service in a hospital rather than a physician’s office is that hospitals need to be open all day every day and they need staff on all patient floors and in the emergency and other departments. In other words, hospitals have more overhead, administrators say. 

Often the difference in payment is enough to drive hospitals to acquire physician groups so that they can charge more for outpatient services even though the physicians continue to deliver the care in their offices. In other words, the service is the same and it’s in the same location but the cost can be much higher, in part because hospitals have more overhead. The New York Times reported that a survey by the American College of Cardiology showed that from 2007 to 2012, the number of cardiologists working for hospitals more than tripled and the proportion of cardiologists in private practice dropped from 59 percent to 36 percent.

For patients, the difference can affect whether a copayment is low if care is delivered in a doctor’s office or high if the service is done in a hospital. The News and Advance in Lynchburg, Va., reported, for example, that one patient’s bill was $5,800 for chemotherapy in September 2014 but it rose to $16,124 one month later after a local health system acquired the patient’s physician’s group. 

Site of service payment

Depending on where care is delivered, most health insurers and the federal Centers for Medicare & Medicaid Services pay much different rates for clinical services. Based on the site of service, hospitals usually are paid more than physician practices are paid for the same clinical service. In some ways, this difference in payment makes sense in that hospitals have higher overhead than physician practices have and hospitals are better equipped to handle complications that may arise during the procedure. Also, a patient’s clinical condition may require treatment in more costly setting, but often the decision about where to treat a patient is discretionary. Medications for cancer patients administered in a hospital outpatient department, for example, can cost twice as much as when those same drugs are administered in a physician’s office.

In a report in 2013, the Society of General Internal Medicine said Medicare said CMS paid $450 for an echocardiogram when this test is done in a hospital and $180 when the same test is given in a physician’s office. The higher payment based on the site of service is one reason hospitals acquire physician practices: The price of procedures done in the physician’s office can rise immediately after the acquisition simply because the practice is owned by a hospital. For this reason, CMS and the Medicare Payment Advisory Committee have proposed eliminating different payments based on the site of service. Among private health insurers, most pay a higher rate for services delivered in a hospital. Highmark Inc., a health insurer in Pittsburgh, is unusual in that it announced in April 2014 that it would no longer pay more for chemotherapy drugs administered in hospitals and other high-cost settings.

Step therapy

Step therapy is a process health insurers use to control costs. Also known as fail first, this strategy is designed to ensure that patients, particularly those requiring high-cost medications, use the oldest and lowest-cost medications first. If after a number of weeks on this low-cost medication, the patient’s condition fails to improve, then the insurer will allow the patient to go on the next highest-cost medication. This process may be counter to what the patient’s physician recommends, particularly if the physician is recommending a high-cost medication first.

Requiring patients to fail on the first and successive medications until physicians find the appropriate one is a significant drawback to this cost-control strategy. While the patient waits to fail on each medication, his or her condition does not improve and may get worse. If a patient’s condition deteriorates significantly, this result would clearly be counter to the best medical practices. In some cases, physicians say that health insurers use step therapy even when the best evidence would require using the medications a physician would recommend.

Health insurers counter that they must manage costs for all patients and that all patients and those who pay for care (meaning employers, among others) want lower costs. Therefore, insurers say, it’s best to try lower-cost medications first. Also, they say, new medications may cause adverse reactions in some patients and so if patients improve on lower-cost medications then they can avoid the need to try newer, higher-cost medications and while also avoiding unnecessary complications.

Many patient advocacy groups have asked state legislatures to restrict the use of step therapy because it can be harmful to patients. Some of these advocacy groups track the progress of legislation in the states. 

Transparency

Transparency refers to making public the prices that physicians, hospitals and other providers charge and the quality ratings that are collected on these providers. As of 2013, both price and quality transparency efforts are weak throughout the nation.

On the issue of price transparency, one article that outlined the reasons it is so difficult for consumers to know how much they will be charged when they enter the health care system was a cover story in Time magazine in March, “Bitter Pill: Why Medical Bills Are Killing Us.”

But well before this article was published, health insurers and health policy makers recognized the importance of making price and quality information available to consumers, especially those are enrolling in high-deductible health plans (HDHPs). These plans make consumers responsible for choosing their providers and because these consumers are paying more for their care than consumers in traditional health plans, they should have more information available to them on what all providers charge and on how providers rank on quality scores.

Recognizing this need, health insurers are giving consumers more information on price and quality at the point of care. The tools health insurers are offering help their members to know how much a particular provider’s charge will affect deductibles for the year. These tools also show how much consumers have spent out of pocket for health care for the year as well. Among the health plans that have been in the news in 2013 for introducing tools such as smart phone apps to help consumers see what hospitals and physicians charge and how they rank on quality scores are Harvard Pilgrim Health Plan (HPHC), United Healthcare, and Aetna.

Some organizations, such as the Catalyst for Payment Reform (CPR), are working to improve the level of price and quality transparency. CPR has said, “the availability of provider-specific information on the price of specific health care services to a consumer, is a critical building block toward payment reform and has been a special initiative for CPR purchasers. Purchasers need transparency to help them contain health care costs and reduce unwarranted variation in prices. And consumers need price information because they are assuming greater financial responsibility for their care, CPR said.

In March 2013, CPR and the Health Care Incentives Improvement Institute issued a Report Card on State Price Transparency Laws. The report shows pricing information reported to the state only and what information was available upon request, in a public report, or on the web. States were scored on the variety of prices available (including charges, average charge, amount paid by the insurer, and the allowed amount paid by consumers. They also were scored on the scope of services covered under the law (including all medical services, inpatient or outpatient services, or both) and the scope of providers affected (meaning hospitals, physicians, and surgical centers).

CPR gave each state a letter grade from A (the best) to F (failing). Only two states (Massachusetts and New Hampshire) received A grades and five (Colorado, Maine, Minnesota, Virginia, and Wisconsin) received B grades. Most states (29) got Fs.

Upcoding

The practice of assigning a diagnosis code to a patient or a billing code for a service that results in a higher payment for a provider or health plan than the payment would be for a patient diagnosed correctly or for service delivered appropriately. Physicians, hospitals and other providers upcode in an effort to generate more income. Health insurers, particularly those operating Medicare Advantage plans, use upcoding to generate higher payment rates from the federal Centers for Medicare & Medicaid Services because CMS uses a risk-adjusted method to reflect the illness level of plan members. When health plans report that patients’ illness levels are high, CMS pays more.

Technically, upcoding does not necessarily mean that the codes used or services provided are inaccurate or inappropriate. For many patients, multiple codes can be used for the same condition or service and there is ambiguity about which code is appropriate to use in specific circumstances. Also, medical professionals may disagree about which services are appropriate for a particular patient.

But for Medicare Advantage plans, a report from the Government Accountability Office shows that when providers upcode diagnosis codes, the MA plans treating the elderly over-bill the government by billions of dollars and are rarely forced to repay the overpayments. In the report, the GAO explained how MA plans use upcoding to overbill using what CMS calls a risk adjustment data validation. RADV is an anti-fraud program that the Center for Public Integrity has reported cost CMS $117 million but recouped just $14 million. In the GAO report, researchers said CMS officials reported that the threat of RADV audits caused health plans to return about $650 million in overpayments voluntarily.

Value-based drug pricing

In an attempt to match a medication’s price to how well it works, health insurers have been negotiating value-based contracts with drug companies. These deals are also called performance-based contracts. In 2016, Novartis announced performance-based pricing contracts with Cigna Corp. and Aetna Inc. for its heart drug, Entresto (sacubitril/valsartan). The medication is for patients with chronic heart failure (CHF). When the FDA approved Entresto in July 2015, Novartis said it would cost about $12.50 a day, or $4,500 annually.

When the price of medications rises sharply, insurers want to ensure that the drugs work as expected or better, Cigna said. Pharmaceutical companies have been having discussions with health insurers about such deals, but few details have been made public. The contracts for Entresto are the exception.  

In the deal with Cigna, the insurer said it would link its payments to Novartis based on how well the drug improves patient outcomes as measured by the number of Cigna members with CHF who are hospitalized. The primary measure will be a reduction in the proportion of customers on the medication who are hospitalized for treatment of heart failure, Cigna said.

Aetna's payment will be based on replicating clinical trial results in its member population. Under the contract, Aetna will get deeper discounts for Entresto in exchange for gathering patient data to support what Novartis found in its clinical trials for the medication and reporting that data to Novartis, Aetna said.

Value-based insurance design (V-BID)

V-BID is a methodology health payers and purchasers use to identify clinically beneficial treatments (such as screenings, lifestyle interventions, medications, immunizations, diagnostic tests and procedures) for which copayments or coinsurance should be adjusted or eliminated because these treatments are of high value. When treatments are of high value they are deemed to be clinically effective when prescribed for particular clinical conditions.

One way to think about V-BID is that it calls for eliminating the benefit design concept of "one size fits all." So much of the U.S. health care is designed to everyone, but that design ignores the fact that each individual is different and each one may benefit from a more clinically nuanced benefit design, meaning the incentives that are used to drive the behavior that produces the best results may need to be adjusted based on each patient’s clinical condition or ability to pay for care.

Here’s an example: Almost all health insurers today require plan members to pay a deductible at the point of service. For a physician visit, plan members must pay $10, $25, $50 or more depending on whether the doctor is a primary care or specialist physician and whether the doctor is in network or not. The idea behind a copayment is that when an individual is paying out of pocket, he or she will be inclined to be a wise consumer of health care services and not abuse his or her insurance plan by seeking care needlessly.

While almost all health plan members are required to pay deductibles and copayments, not all can afford their deductible or copayments. And perhaps not all should have a deductible or copayment if their conditions are such that payment should be waived because the treatment is of such high value.

When patients can’t afford to pay these amounts, they may be inclined to skip a needed physician visit or not fill a prescription. If a low-income patient or someone with a chronic condition needs his or her medications to keep the conditions under control, failing to fill a prescription could result in the need for an emergency room visit or inpatient stay. If so, the deductible and copayments have acted as a barrier to care and a perverse incentive, driving up costs needlessly.

The need for clinically nuanced benefit design in this situation and in many others was described in more detail in a recent blog post, Clinical Nuance: Benefit Design Meets Behavioral Economics on Health Affairs. More information about V-BID is available from the Center for Value-Based Insurance Design at the University of Michigan.

Value-based payment

Value-based payment (also called alternative payment models) are programs that reward hospitals and physicians for the quality of care the deliver to patients rather than how much care they provide. Value-based payment could be defined as any payment model that pays physicians, hospitals, and other providers for hitting certain quality targets while limiting spending.

Health insurers use value-based payment to replace fee-for-service payment. FFS rewards providers for delivering high volume care and value-based payment rewards providers for delivering greater value. Health insurers define value as a combination of low cost (or highly efficient) and high quality care.

Insurers believe that value-based payment models will promote the shift from volume to value. Bundled payment and global payment (see separate entries) are forms of value-based payment. Accountable care organizations use value-based payment models because physicians, hospitals and other health care providers often are paid one lump sum per month to provide all necessary care for each patient. Health insurers use value-based payment when contracting with patient-centered medical homes because physicians in PCMHs often get one lump sum to provide care to all patients for one month.

Value-based purchasing (VBP)

Value-based purchasing (VBP) was developed by employers and the state Medicaid and Medicare programs as a strategy to measure, report, and reward excellence in health care delivery. It is designed to take into account the price of care and the quality and efficiency of providers. The National Business Coalition on Health (NBCH) says VBP rewards high-performing health care providers through public reporting of their results, higher payments through differential reimbursements, and increased market share through purchaser, payer, and/or consumer selection. By rewarding providers for excellence, NBCH says VBP is an external motivator that should encourage providers to re-engineer the delivery if health care.

The federal Centers for Medicare & Medicaid Services (CMS) has its own VBP program for hospitals, called the Hospital Value-Based Purchasing program and one for physicians, called the Physician Quality Reporting System (PQRS).

Under the hospital program, CMS reported in November 2013 that 1,231 hospitals got performance bonuses in fiscal 2014 and 1,451 hospitals go an overall decrease in Medicare payment. The second year of the hospital VBP program was fiscal 2014.

Since its inception, CMS has paid hospitals with little oversight. Under the Affordable Care Act Medicare got many new methods to foster improvements in quality and patient safety. The payments made in 2014 reflect CMS’ use of two dozen quality measures, including death rates and patient satisfaction survey results. Payments could be adjusted up or down by as much as 1.25 percent. For almost half of the hospitals in 2014, the changes in payment were negligible at about one-fifth of 1 percent of what Medicare would pay otherwise, according to Kaiser Health News. But one hospital was paid 1.14 percent less for each Medicare patient and the highest bonus went to a hospital that got a bonus of 0.88 percent per patient.

CMS funds the program by withholding 1.25 percent of payments from its inpatient prospective payment system, according to Bob Herman at Becker’s Hospital Review. In fiscal 2014, this amount totaled $1.1 billion, which would be available to hospitals based on how well they perform on CMS’ quality measures, such as treatment of patients who have had a heart attack or congestive heart failure or on patient satisfaction scores, he wrote.

CMS also runs the Physician Quality Reporting System (PQRS), a reporting and financial incentive program for physicians and other providers.  It uses a combination of incentive payments and payment adjustments to promote reporting of quality information. Beginning in fiscal 2015, the program will decrease payment to those providers who do not satisfactorily report data on quality measures for covered professional services. That means CMS will not make any bonus payments after 2014, and starting in 2016, will penalize physicians and other providers who do not participate. The penalty could be as much as 0.2 percent of Medicare charges. Previously, the PQRS program paid as much as a 0.5 percent bonus for satisfactorily reporting the requisite data.

Note that value-based purchasing (VBP) and value-based insurance design (VBID or V-BID) are both strategies that employers and health plans use but they are distinct programs. VBP is used to reward physicians, hospitals, and other providers for exceptional performance. VBID is used to steer consumers to the best-value treatments, procedures, providers, or medications.

Value-based care

A form of care delivery in which payment is based on the quality, effectiveness and efficiency of the care provided. This form of payment care is replacing fee-for-service payment in which physicians, hospitals and other providers bill for services rendered. FFS payment is considered one of the factor that drives up health care costs because there is no limit on what physicians, hospitals and other providers can charge. Critics have long charged that FFS offers a financial incentive by paying more for delivering more services, such as diagnostic tests and procedures. Conversely, value-based care is designed to limit what physicians, hospitals, and other providers charge for care.

One way to limit what providers charge is to pay a set amount per patient per year, called a capitated fee. Many of the payment models the federal Centers for Medicare & Medicaid Services and commercial health plans use to foster value-based care are based on paying a capitated fee. One of those models from CMS is called the Medicare Shared Savings Program. In this program, CMS would share the savings (if any) with physicians and hospitals in accountable care organizations (ACOs) if the ACOs save money compared with spending from previous years.

Commercial health insurers use capitated payment or global payments (which are similar to the Medicare Shared Savings Program) to limit what they pay for care. Global payments are similar to the MSSP payment model because the physicians, hospitals, and other providers provide all care to the health plan members and if costs are lower than what the insurer paid in previous year, then the insurer and the providers would share the savings. If costs are higher, the providers either pay for all of those losses or share them with the insurer.

Often, physicians, hospitals and other providers in value-based care programs are asked not only to improve care for individuals but also to improve the health of the population while cutting costs. Progress is measured against specific criteria such as reducing hospital readmissions, using certified health information systems, and providing preventive care services such as screening tests to all members under care.

Valued-based care also is designed to be coordinated care rather than fragmented care delivery. In a coordinated-care approach, physicians, hospitals, and other providers manage all care of their patients so that patients are not seeing different providers for different services unless the care those different care providers deliver is coordinated with the physicians or other providers managing patient care. This approach to care is designed to eliminate redundant services such as duplicative screening tests, unnecessary procedures, or prescribing too many medications that can lead to adverse events.

Value-based drug pricing

In an attempt to match a medication’s price to how well it works, health insurers have been negotiating value-based contracts with drug companies. These deals are also called performance-based contracts. In 2016, Novartis announced performance-based pricing contracts with Cigna Corp. and Aetna Inc. for its heart drug, Entresto (sacubitril/valsartan). The medication is for patients with chronic heart failure (CHF). When the FDA approved Entresto in July 2015, Novartis said it would cost about $12.50 a day, or $4,500 annually.

When the price of medications rises sharply, insurers want to ensure that the drugs work as expected or better, Cigna said. Pharmaceutical companies have been having discussions with health insurers about such deals, but few details have been made public. The contracts for Entresto are the exception.  

In the deal with Cigna, the insurer said it would link its payments to Novartis based on how well the drug improves patient outcomes as measured by the number of Cigna members with CHF who are hospitalized. The primary measure will be a reduction in the proportion of customers on the medication who are hospitalized for treatment of heart failure, Cigna said.

Aetna's payment will be based on replicating clinical trial results in its member population. Under the contract, Aetna will get deeper discounts for Entresto in exchange for gathering patient data to support what Novartis found in its clinical trials for the medication and reporting that data to Novartis, Aetna said.