Coretopic:Insurance

In 1992, Congress created the 340B drug-pricing program for hospitals serving large numbers of low-income patients. Named for a section of the Public Health Service Act, the program requires pharmaceutical companies to provide outpatient drugs to eligible health care organizations and other entities at significantly reduced prices. Drug companies that participate in Medicaid must provide discounts of 20% to 50% to hospitals and clinics for outpatient drugs.

The Health Resources and Services Administration (HRSA) of the U.S. Department of Health and Human Services manages the 340B program and defines the health care organizations that are eligible to participate in the program, including HRSA-supported health centers, Ryan White clinics, state AIDS drug assistance programs, Medicare/Medicaid Disproportionate Share Hospitals, children’s hospitals, and other safety net providers. To participate in the program, an eligible organization must register with HRSA before being allowed to purchase 340B discounted drugs. HRSA estimates the program saved hospitals $3.8 billion in 2013 and $6 billion in 2015 in drug costs.

In 2015, the Government Accountability Office found hospitals receiving medications for patients under 340B were billing Medicare for higher drug costs than they were billing under Medicare Part B, and drugs provided under Medicare Part B are typically provided in a physician's office. In its report, the GAO said, “This indicates that, on average, beneficiaries at 340B disproportionate-share hospitals were either prescribed more drugs or more expensive drugs than beneficiaries at the other hospitals in GAO's analysis.” In their defense, hospitals said that Medicare’s methodology for calculating payments was faulty and failed to account for that fact that hospitals in the 340B program often treat patients who are sicker than those at other hospitals, according to Modern Healthcare.

For years, Congress has been seeking ways to curb the program's growing budget due, in part, to criticism for not having sufficient guidelines on which hospitals receive the discounts and how the participating hospitals use those discounts.

In 2014, a report by consultants Avalere Health showed that about two-thirds of hospitals getting discounts under the 340B program were providing less charity care than the average hospital provides. In the next year, health care consultants Dobson DaVanzo & Associates found that 340B hospitals provided nearly twice as much care to Medicaid and low-income Medicare beneficiaries compared with hospitals not participating in the program.

In 2017, the Trump administration began seeking ways to cut funding to the program.

Actuaries’ report shows health care costs rising again in 2021 after declining in 2020

In 2021, the cost of health care for a hypothetical American family of four with an average, employer-based health insurance plan through a preferred provider organization will be $28,256, according to Milliman, an actuarial firm.

The 2021 Milliman Medical Index (MMI) showed that for the first time in the history of this annual report, health care costs declined in 2020 versus spending for health care in 2019. Milliman actuaries have published the MMI every year since 2005. In 2020, that same hypothetical family paid $26,078, down from $27,233 in 2019, a decrease of 4.2%, due to eliminated and deferred care during the COVID-19 pandemic, the report noted.

In 2020, all categories of health care costs were lower when compared with spending in 2019, except prescription drugs with and without rebates, the report said. Eliminated and deferred care more than offset the cost of testing and treatment for patients with COVID-19, the actuaries added.

In 2021, health care use is expected to rebound and push up spending by 8.4%, which would be higher than health care cost increases and gross domestic product growth over the past five years, the report predicted. But the actuaries added this caveat: “We now know much more about how COVID-19 has affected 2020 but there is still much unknown for 2021 and beyond.”

One reason for such uncertainty is that so much care was eliminated in 2020 rather than deferred. “It is unclear to what extent this eliminated care will lead to future adverse health outcomes, if any,” the report noted. “COVID-19 vaccine penetration rates and efficacy, public health policy and individual responses to new developments, and new utilization patterns and behaviors all add to this uncertainty.”

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.

Harvard study shows Alternative Quality Contract slowed spending over eight years

During the first eight years after its introduction, a population-based payment model called the Alternative Quality Contract (AQC) was associated with slower growth in medical spending on health care claims, resulting in savings that over time began to exceed incentive payments, according to researchers from the Harvard Medical School. Writing in the New England Journal of Medicine, the researchers explained that unadjusted measures of quality under this model were higher than or similar to average quality measures from other health plans. The study compared patients covered under the AQC to comparable populations in fee-for-service payment models.

Blue Cross Blue Shield of Massachusetts introduced the contract in 2009, as we have covered previously here and here.

The AQC uses a population-based global payment model that gives physicians and other health care providers an annual spending target to care for a defined group of patients. The contract also pays financial rewards to providers who control spending and improve quality and penalties for failing to do so. This form of payment with rewards and penalties is called two-sided risk.

Over the eight years, the increase in the average annual medical spending on claims for the enrollees in organizations that entered the AQC in 2009 was $461 lower per enrollee than spending in the control states, an 11.7% relative savings on claims, the researchers wrote. Savings on claims were driven in the early years by lower prices and in the later years by lower utilization of health care services, including use of laboratory testing, certain imaging tests, and emergency department visits, they added.

Savings were generally larger among patient groups that were enrolled longer. By 2016, enrollees who were cared for in provider groups that entered the AQC in 2010, 2011, and 2012 had medical claims savings of 11.9 percent, 6.9 percent and 2.3 percent, respectively, the researchers reported.

It’s important to note that in the later years of the AQC contract, the patients in the initial AQC provider groups and across the years of the groups that entered the contract in later years, the savings on claims exceeded incentive payments. Those payments included bonuses for hitting quality targets and they included payments when providers’ share of the savings were below the spending targets in the contract.

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.

Blended payment

A blended payment is a single payment based on a blend of other payments typically paid for the same health care service, such as by combining capitation with a fee-for-service payment when a physician sees patients in a hospital. Usually, blended payments are used to pay physicians and other providers delivering care to hospital inpatients. Conversely, blended payments are less widely used for outpatient specialist care. Specialty physicians seeing outpatients often are paid on a fee-for-service (FFS) basis.

Health insurers may use the term “blended payments” to mean that they are applying different payment mechanisms to different primary care providers, or that they are using a blended mix of payment types for individual providers.

In some cases, health insurers have blended forms of payment by paying a global budget, which is a form of capitation, along with a combination of pay-for-performance and other payments, such as FFS. In other cases, health insurers may combine a payment using the diagnosis-related group (DRG) method, global budgets, or fee-for-service or per-diem rates. The Medicare program uses the DRG payment method for many hospital charges.

Here’s an example of how a blended payment might work for a health insurer paying for obstetrical care and seeking to limit the number of high-cost complex procedures. A health insurer in this example will pay physicians and other providers more when complications develop. Therefore, the providers have a financial incentive not to limit complications. In this example, the health insurer might pay $10,000 as the FFS rate for a standard vaginal delivery with no complications and $15,000 as the FFS rate for a delivery by Caesarean section, also called a C-section or caesarean delivery. If the insurer wants to reduce the financial incentive for more complex deliveries, it could set a blended rate for all deliveries regardless of complications at $12,000. This blended rate would mean the insurer would pay more for all deliveries but less for deliveries by Caesarean section.

Blockchain for electronic medical records

Blockchain, a data structure that can be timed-stamped and signed using a private key to prevent tampering, is most commonly associated with digital currency such as Bitcoin. Some proponents also view blockchain as a potentially important development in health information technology to combat cybersecurity threats and advance the free and secure exchange of health information through electronic medical record (EMR) systems. When used with EMRs, blockchain could improve the secure sharing of medical records, protect sensitive data from hackers and give patients more control over their medical records. Such systems are not ready for use but are in development.

Here’s how one might work. In Boston, the hospitals and health systems use multiple EMR systems and each has its own method for presenting and sharing data. When a patient from one health system visits an out-of-network hospital, that providers in that facility might have no way to access the patient’s health records, a situation that often leads to duplicate imaging and diagnostic testing, increasing costs needlessly. Interoperability among health information systems was supposed to solve this problem, but many HIT systems remain unable to communicate with each other. Proponents say blockchain could solve this problem.

Take, for example, what happens when a doctor writes a new prescription for a patient. Without blockchain, that patient’s prescription would be available to those working in the health system and those who have access to the insurer’s network but may be unavailable to anyone outside of the network. If the patient agrees to have a reference or what blockchain users call a “pointer” added to a blockchain, then the blockchain would have a record of the prescription that any other blockchain users could view. The record would be stored in a virtually incorruptible cryptographic database, maintained by a network of computers accessible to anyone running the appropriate software, according to an article in MIT Technology Review.

Every pointer that a doctor adds to the blockchain would become part of a patient’s record, regardless of the EMR system the doctor used. Therefore, any caregiver could use blockchain to view the pointers without having to contend with issues related to system incompatibility, proponents say.

Before such a scenario is possible, however, HIT companies and researchers need to develop a blockchain specific for health care. Such a blockchain would need to allow the complex health information for each patient to be shared among providers and between providers and health insurers. The system also would need to be secure from cyber attacks and comply with privacy regulations such as the Health Insurance Portability and Accountability Act of 1996. Securing the information might be among the biggest challenges developers face given that cyber hackers consider health insurance and medical record data to be of more value that consumers’ credit card data.

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.

GAO report to Congress notes lack of CMS oversight of state Medicaid financing payments

In a recent report to Congress, the Government Accountability Office noted that the federal Centers for Medicare and Medicaid Services (CMS) needs to do more rigorous oversight of state expenditures for the Medicaid program.

The title of the report, “Medicaid: Primer on Financing Arrangements,” suggests that the GAO report explains how the states and the federal government share responsibility for financing the program and the report does so. It also includes a rebuke of CMS for providing limited oversight of state supplement payments. CMS does not collect sufficient information on supplemental payments to providers and so the full extent of spending on supplemental payments is unknown, the report said. Also, CMS does not have a policy or a standard process for determining whether Medicaid payments to individual providers are economical and efficient, the report added.

“We have made several recommendations to CMS to strengthen its oversight of financing and supplemental payments,” the report said. “In particular, we have recommended that CMS improve data collection on the financing of supplemental payments, and develop policies and standards to assess whether payments are economical or efficient.” Supplement payments are one of two kinds of payments that CMS makes to states for the Medicaid program. The other form of payment is called base payments.

On the first recommendation, CMS disagreed, the GAO said, and CMS agreed with the second. “As of May 2020, these recommendations remained unimplemented. Without good data on financing and criteria for assessing whether the payments are economical and efficient, the federal government could be paying states hundreds of millions, or billions, of dollars more than what is appropriate,” the GAO noted.

In 2019, the Medicaid program covered approximately 76 million individuals at an estimated cost of $668 billion, and the federal government paid for about $420 billion of that amount, the report showed. In the report, Medicaid: Primer on Financing Arrangements, GAO explained that Medicaid is a joint, federal-state program that finances health care coverage for low-income and medically needy populations.

In its role, CMS oversees Medicaid and generally matches each state’s Medicaid expenditures according to a formula designed so that the federal government pays a larger portion of Medicaid costs in states with lower per-capita income rates relative to the national average. During fiscal 2020, states’ federal matching rates ranged from 50.00 percent to 76.98 percent.

CMS reimburses states for a portion of their expenditures based on each state’s match rate. These expenditures include payments for care that providers deliver to Medicaid beneficiaries, including base and supplemental payments. Base payments include fee-for-service or capitated payments that are specifically tied to delivering care to individuals. Supplemental payments are not specifically tied to delivering care to individuals, but help offset any remaining costs of care that providers have for Medicaid enrollees, the report explained.

Under federal law, states must finance at least 40 percent of their share of total Medicaid expenditures through state funds and can use other funding sources too. For example, states can finance their nonfederal share of Medicaid expenditures through funds transferred from local governments (called intergovernmental transfers), or through local government expenditures (called certified public expenditures). Also, states can finance the nonfederal share through taxes levied on health care providers. States can use these financing arrangements to pay for any type of Medicaid expenditure, the report said.

In previous reports, that GAO showed that states rely heavily on local government expenditures and taxes on providers to finance supplemental payments, sometimes in ways that lowered the amount the states contribute to Medicaid expenditures while increasing payments to providers and shifting responsibility for a larger share of the payments to the federal government, the report showed.

By shifting Medicaid expenditures to different financing arrangements, the states can create incentives to maximize supplemental payments. For this reason, the GAO has said CMS should conduct oversight to ensure that Medicaid supplemental payments are being made for Medicaid purposes in an economical and efficient fashion.

In previous reports, GAO has identified instances in which supplemental payments have exceeded hospitals’ costs, raising questions about whether these payments are economical or efficient. For example, in November 2012, the GAO found that 39 states had made supplemental payments to more than 500 hospitals that, along with their regular Medicaid payments, exceeded those hospitals’ total costs of providing care to Medicaid enrollees by $2.7 billion.

Also in 2012, GAO reported that one hospital received almost $320 million in supplemental payments and $331 million in regular Medicaid payments, which exceeded the $410 million in costs reported for the hospital for providing Medicaid services by about $241 million.

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.

Copayment accumulator programs

For years, pharmaceutical companies have helped patients pay for their medications with consumer assistance programs, also called patient or prescription assistance programs. For consumers who cannot afford their mediations, drug companies tout these programs in their broadcast and print advertisements. For consumers who get such assistance, especially those taking high-priced medications, these programs are useful because patients may owe nothing or have to pay only a small copayment or deductible. By paying for the consumers’ copayment and deductible, the pharmaceutical companies are thus reducing consumers’ out-of-pocket maximum limits until the health plans have to pay for the entire cost.

But health insurers and their pharmacy benefit managers (PBMs) are undermining copayment assistance programs with a new tactic, called copayment accumulator programs. Under copayment accumulator programs, health insurers and their PBMs prohibit manufacturer coupons from counting toward a patient’s copayment, deductible or out-of-pocket maximum. That means that when payments end under a drug maker’s copayment assistance program, the consumer becomes responsible for his or her entire monthly copayment until he or she reaches the plan deductible and out-of-pocket spending maximum. Under copayment accumulator programs, consumers prescribed expensive drugs are no longer insulated by copayment assistance payments.

Copayment assistance programs from pharmaceutical companies have long been controversial because opponents and some researchers have said they help to increase spending on expensive, brand-name drugs by discouraging consumers from shopping for more cost-effective alternative drugs. Also, if copayment assistance programs cover most or all of the cost of the drug, then consumers have no incentive to use low-cost generic alternatives. Health insurers argue that their copayment accumulator programs are a way to fight back against drug-maker’s efforts to use copayment coupons to keep medication prices high.

On the other side of the argument, proponents of copayment assistance programs counter that since health insurers and employers are shifting more costs to consumers in the form of high deductibles and coinsurance charges, these programs help patients afford the medications they need.

But then employers, health insurers and PBMs argue that drug copayment programs help consumers evade their efforts to manage health care costs. For example, health insurers, PBMs and employers may set a high copayment on specialty drugs when lower-cost generic medications are available. When that happens, the specialty drug maker may offer consumers a copayment assistance program. In effect, employers, health insurers, and PBMs are using copayment accumulator programs in an effort to push back against pharmaceutical company efforts to shield patients from high drug costs.

Groups that represent patients who require high-cost medications, such as drugs for HIV and hepatitis C, have asked state insurance commissioners and attorneys general to investigate accumulator programs.

Reports show drug companies raised prices during the Covid-19 pandemic

Pharmaceutical companies raised the list prices on 245 prescription drugs by an average of 23.8 percent since the first case of the novel coronavirus was reported in the United States in January 2020, according to an analysis from Patients For Affordable Drugs. P4AD is an independent patient group seeking to reduce the price of prescription drugs.

For its report, “Drug Companies Keep Raising Prices During a Pandemic,” P4AD researchers Brianna Jones, a policy analyst, and Sarah Kaminer Bourland, the group’s legislative director, analyzed the price of 61 drugs used to treat patients who have been diagnosed with COVID-19, 30 drugs that were in clinical trials related to Covid-19, and 118 drugs used to manage chronic conditions. The researchers found that 75 percent of the price increases on those prescription drugs were directly linked to the treatment of patients.

As the need for medications to fight COVID-19 grew, pharmaceutical manufacturers increased the price of 20 key medications that hospitals use to treat patients in the intensive care unit, the report added. These drugs included such common medications as the non-steroidal anti-inflammatory drugs Tylenol and ibuprofen and the anti-vomiting drug Reglan. These medications are used to treat patients with such Covid-19 symptoms such as fever, aches and nausea. The price of these drugs rose by as much as 29 percent, the report showed.

In March, Hikma Pharmaceuticals, which makes Duramorph, an intravenous morphine that hospitals used to sedate Covid-19 patients on ventilators, raised the price by 59 percent, the report said.

At Politico, Sarah Owermohle reported that GoodRx, a company that reports the prices that consumers pay at pharmacies, showed that pharmaceutical companies reported more than 800 price increases in 2020 and raised the cost of 42 medicines by an average of 3.3 percent in July.

“While the size of that increase is not out of line with past years, the number of branded drugs seeing hikes this month [in July] was higher than it was last year,” Owermohle wrote.

Politico also cited prices increase on three drugs that physicians use for patients with respiratory illnesses but not specifically for patients with the coronavirus. Those three drugs were Bevespi Aerosphere, which went up by 5 percent, Daliresp (6 percent) and Tyvaso (4.5 percent). The increase in Tyvaso’s price in a year was 12.8 percent, raising the list price to $18,111, Owermohle added.

Peter Maybarduk, the director of the Global Access to Medicines Program at Public Citizen, told Owermohle, “These price increases contribute nothing to innovation, but greatly to suffering.” Public Citizen is a consumer advocacy group.

COVID: Projected costs of covering patients diagnosed with the coronavirus

In a 28-page report issued in March 2020, FAIR Health, a nonprofit organization that says it has the largest collection of privately billed health insurance claims, projected the costs of caring for patients in the United States infected with the novel coronavirus. For the report, The Projected Economic Impact of the COVID-19 Pandemic on the US Healthcare System, FAIR Health used its database of more than 30 billion private health care claims, and estimated Medicare and Medicaid costs to project the cost of caring for COVID-19 patients as inpatients.

In addition, FAIR Health researchers used a combination of inpatient ICD-10 procedure codes and revenue codes associated with influenza and pneumonia and on diagnosis-related groups (DRGs) associated with pneumonia. Also, they examined telehealth codes commonly used for respiratory infections and their costs. Among our findings:

Depending on the incidence rate of infection among Americans, FAIR Health said the total costs for all inpatient hospitalizations for COVID-19 patients would range from $139 billion to $558 billion in estimated allowed amounts and from $362 billion to $1,449 trillion in charges. Hospitals use the word ‘charges’ to describe the highest rate they will charge and yet they often get paid based on health insurers’ allowed amounts, which are lower.

The estimate for inpatient costs was based on published projections showing that some 66 million to 198 million Americans may become infected with the novel coronavirus and about 4.9 million to 19.8 million of them could require inpatient stays.

In the report, the researchers estimated the total average charge per COVID-19 patient requiring an inpatient stay at $73,300 and the total average estimated allowed amount for each commercially insured patient at $38,221.

The researchers also projected the cost of caring for patients using DRGs, which account for the severity of illness for each patient. The total average charges per patient range from to $42,486 for patients with no complication or comorbidity (indicated by DRG code 195) to $74,310 for patients with major complication or comorbidity (indicated by DRG code 193). The total average estimated allowed amounts for each commercially insured patient ranged from $21,936 for DRG 195 to $38,755 for DRG 193, the researchers reported.

Report shows COVID-19 pandemic worsened medical debt and hit communities of color the hardest

A report, Solving the Medical Debt Crisis, from the Greenlining Institute showed that the COVID-19 pandemic worsened the medical debt crisis, particularly for people of color. The pandemic caused more than 5 million Americans to lose their employer-sponsored health coverage, and, as a result, many of those consumers ran up unexpected medical and hospital bills. Even before the pandemic, medical debt caused about 62% of bankruptcies, the institute said.

The effects of the pandemic on medical debt were unequal. In the United States, about one-third of Black adults have had past-due medical debt, compared with less than a quarter of white adults, the report said. In California, people of color are more than half as likely as whites to have some past-due debt in collections, the institute estimated.

The government could solve the medical debt problem by:

Expanding financial assistance for all large, for-profit health care facilities,

Including ambulatory surgical centers and outpatient clinics,
Ending the practice of referring medical debt to third-party collection agencies,
Prohibiting these agencies from reporting medical debt to credit reporting bureaus, and
Mandating public reporting of debt collection practices that health care providers pursue against consumers.

The elimination of medical debt should be part of state recovery measures, the report added. Among those measures are provisions in a bill that would limit or suspend the medical debt collection incurred during the pandemic. Also, the report noted, the government cancel consumers’ debt by buying medical debt from debt collectors and health care providers at discounted rates. Also, California could incorporate debt cancellation into the state’s strategy of making reparations for racial injustice, the report added.

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.

Ensuring compliance with network adequacy standards

For many years and particularly since the Affordable Care Act went into effect, health insurers have used narrow provider networks to control costs. The problem with narrow networks is that sometimes they are so narrow that members, particularly those in rural areas, might not have access to nearby hospitals or primary care or specialty physicians. If networks are inadequate and consumers must go out-of-network for care, they often face large medical bills and lose the advantages of in-network care, such as cost-sharing reductions and limits on out-of-pocket expenses.

Network adequacy is defined as follows: “The most basic standard of adequacy is to have at least one provider in the network who can deliver each service that a patient could potentially need under the insurance plan or payment arrangement.” Insurers, consumer advocates and insurance regulators evaluate network adequacy based on the ability of the network’s providers to achieve certain standards in how they deliver services to network members

All health plans in the ACA’s marketplaces must provide enrollees with access to covered services “without unreasonable delay,” but defining the term “without unreasonable delay” can be challenging for insurers and regulators.

Among the challenges regulators face are ensuring the accuracy of provider directories, addressing the needs of rural communities, evaluating network adequacy when multiple plans count the same providers to meet state quantitative standards, and strengthening the systems for evaluating consumer complaints to identify inadequacies in a network.

Under the ACA, regulations establish federal network adequacy standards for all marketplace plans, but states can adopt their own, more stringent requirements for network adequacy. As a result, network adequacy standards vary considerably from state to state, as do the systems state regulators use to ensure compliance with such standards.

In early 2017, the Trump administration proposed to loosen federal network adequacy standards in the federal marketplace and delegate more responsibility to state regulators for network adequacy review. In report about that time, Ensuring Compliance with Network Adequacy Standards: Lessons from Four States, the Robert Wood Johnson Foundation said some states may respond to the proposal by loosening their network adequacy standards. In the four states (California, Colorado, Illinois and Nevada), regulators vary in the extent to which they require insurers to change or supplement networks and in how transparent they are about network submissions and their review of those submissions, the report says.

In these states, regulators use quantitative standards and related metrics and a combination of standardized forms and narrative submissions to evaluate network adequacy. Quantitative standards include minimum provider-to-enrollee ratios, maximum travel time or distance to providers, a minimum percentage of contracted providers that accept new patients, maximum wait times for appointments, and hours of operation requirements.

In addition to quantitative standards, states also use qualitative standards, or both. With qualitative standards, states use the words “sufficient,” “reasonable,” and the term “timely access to providers,” to define adequacy.

The standard for state and federal marketplaces mirrors the qualitative standards in the National Association of Insurance Commissioner’s 1996 NAIC Managed Care Plan Network Adequacy Model Act, Under this act, which applied only to managed care plans, all health insurers that offer qualified health plans (QHPs) were required to maintain a network of providers “sufficient in number and types of providers, including providers that specialize in mental health and substance abuse services, to assure that all services will be accessible without unreasonable delay.”

In 2015, the NAIC revised the act so that it applied to a wider variety of health plans and clarified that each state’s insurance commissioner could determine the sufficiency of a network by using “any reasonable criteria” that the commissioner identified.

The federal Centers for Medicare & Medicaid Services also has a network adequacy requirement. This requirement uses a quantitative standard to implement what is called the essential community providers (ECPs) requirement in the federally facilitated marketplace by requiring QHPs to contract with at least 30 percent of available ECPs in a service area. Insurers unable to meet this standard would be subject to a justification process before regulators. Some state marketplaces follow the CMS standard and some states, such as California, have developed their own ECP standards.

To control drug costs, Louisiana adopts subscription model for hepatitis C patients

As is the case with all health care purchasers, state governments strain to pay for the rising cost of health care and prescription drugs. Seeking new ways to control costs, states are experimenting with innovative payment methods such as the one Louisiana is adopting in July.

In June, state officials chose the pharmaceutical company Asegua Therapeutics, a subsidiary of Gilead Sciences, to increase access to hepatitis C drugs for Medicaid patients and prisoners. Under this plan, Louisiana will adopt a subscription form of payment known as the Netflix model.

Reporting for The Washington Post, Carolyn Y. Johnson explained that instead of paying for each individual prescription, the state would get unlimited access to Asegua’s hep C drug, similar to how consumers pay a monthly fee to stream unlimited television shows and movies on Netflix.

Under the subscription plan, the state will provide an unrestricted amount of Asegua’s sofosbuvir/velpatasvir, an antiviral medication that is the company’s authorized generic form of Epclusa for the treatment of patients with hep C. The plan limits what the state will pay for the medication to current levels of about $35 million annually. Under the subscription plan, Aseguar needed to offer unlimited access to hepatitis C treatment for five years without requiring the state to pay any more than it currently spends.

An estimated 39,000 members of the state Medicaid program and inmates in state prisons have been diagnosed with hepatitis C. By the end of the five-year effort, Rebekah Gee, secretary of the state Department of Health, said the goal is to treat at least 31,000 people and eventually eliminate the disease in these two populations. “An elimination plan and innovative payment model will ensure that we can cure this deadly disease and prevent long-term illness and disability in those who have it,” she said in a department press release.

The Centers for Disease Control and Prevention estimates that some 2.4 million people in the United States are living with hepatitis C, a blood-borne viral infection that can cause liver failure and death.

While new antiviral drugs can eliminate the disease, a full course of the medication costs about $20,000 to $30,000, Melinda Deslatte reported for the Associated Press. State officials estimated that paying for all 39,000 Medicaid recipients and state prisoners would cost $760 million. Last year, fewer than 3 percent of those on Medicaid and only a handful of people in prison were treated, she added.

In November, the Journal of the American Medical Association published an article, “Alternative State-Level Financing for Hepatitis C Treatment—The ‘Netflix Model.’” One of the authors of that article was Peter B. Bach, MD, a drug-pricing expert and director of the Center for Health Policy and Outcomes and at Memorial Sloan Kettering Cancer Center.

Federal regulator allows RIP Medical Debt to buy accounts receivable from hospitals, other health care providers

The Office of Inspector General (OIG) of the federal Department of Health and Human Services issued an advisory opinion in July 2020, allowing hospitals, physician groups, and other health care providers to sell their patients’ account receivables directly to RIP Medical Debt without having to go through a third-party. A nonprofit organization in Rye, N.Y., RIP Medical Debt became famous in 2016 when the HBO show, “Last Week Tonight with John Oliver,” purchased and forgave $15 million worth of unpaid medical debt.

In an effort to expand the number of organizations that could sell their debt, RIP Medical Debt made the request to the OIG. Potentially, the purchase of such debt could “generate prohibited remuneration” under the anti-kickback law if the intent of the transaction is to induce or reward referrals of patients whose health insurance is covered under a federal health care program, the opinion states. Even though such a possibility exists, the OIG said it “would not impose administrative sanctions on [name redacted],” under the law.

Before the OIG’s opinion, the nonprofit was limited to purchasing portfolios of unpaid health care debts from commercial debt sellers, which bought such accounts from hospitals and other health care providers, according to an article, “RIP Medical Debt Gets Thumbs Up From HHS OIG To Buy Directly From Providers,” at AccountsRecovery.net.

As part of the OIG blessed arrangement, hospitals, physicians, and other providers that sell debts to RIP Medical Debt would not publicize the sale or donation of portfolios, Accounts Recovery reported. Also, RIP Medical Debt agreed not to identify any providers that work with the organization in any of its promotional materials, the website added.

“The advisory opinion states that providers will not run afoul of anti-kickback regulations or civil monetary penalty laws should it sell or donate portfolios to RIP Medical Debt,” the site noted.

In keeping with its style, the OIG did not disclose RIP Medical Debt’s name in its opinion, OIG Advisory Opinion No. 20-04. But a reading of the opinion shows that the party that requested the opinion is one that purchases accounts receivable from health care providers.

As of early in 2021, RIP Medical Debt had purchased and canceled almost $3 billion in unpaid health care bills.

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.

Guaranteed issue

Guaranteed issue basically means that health insurers must cover everyone in a certain class. For example, the federal Medicare program must cover all Americans aged 65 or older. It effect, it means that a health insurer must issue insurance coverage for each person who applies for coverage even if that person has a pre-existing condition, a high-risk medical history, or some other factor in his or her history that would otherwise be disqualifying. When the state of Maine tested this requirement without issuing other regulations (such as an individual mandate) it found that insurance premiums rose due to what health insurers call adverse risk selection, which means that those people who were healthy did not apply for health insurance while those who were sick applied for coverage. Because the sick greatly outnumbered the healthy, health insurers’ cost rose dramatically, making the health insurance market unsustainable.

Note that guaranteed issue does not mean guaranteed affordability. While insurance companies must offer coverage to all who apply, the insurers can still underwrite, meaning assess each applicant’s health risk and charge each applicant accordingly. In this way, health insurers charge more for those who have higher health care costs. Under the Affordable Care Act, guaranteed issue (and guaranteed renewal for existing coverage) was effective of Jan. 1, 2014. At the same time, the ACA called for an individual mandate as well.

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.

Americans worry about high health care costs, but partisan views differ

Americans borrowed $88 billion in the past year to pay for health care services and 25% skipped care because of costs, according to a West Health-Gallup report, The U.S. Healthcare Cost Crisis. Based on a survey of 3,500 Americans, the report also showed that 45% of respondents reported being concerned that a major health event could lead to bankruptcy. Published in April 2019, the survey found that 25% of respondents also skipped treatments and that others cut back on household spending to pay for basic health care services in the past year.

Despite their worries about health care costs, Americans had divergent views about the health care system as a whole, the survey showed. This part of the survey may be the most significant for health care journalists because, despite the financial burden and fears caused by high health care costs, “partisan filters lead to divergent views of the health care system at large,” the survey report said.

“By a wide margin, more Republicans than Democrats consider the quality of care in the United States to be the best or among the best in the world —all while the United States significantly outspends other advanced economies on health care with dismal outcomes on basic health indicators such as infant mortality and heart attack mortality,” according to the report. West Health is a nonprofit, nonpartisan organization dedicated to reducing health care costs.

In the report, the authors showed that 48% of respondents believe the quality of care in the United States is the best or among the best in the world. “This swells to 67% of self-identified Republicans compared with just 38% of Democrats,” the report said. “Nonetheless, 76% of all Americans agree they pay too much relative to the quality of care they receive.”

The high cost of care in the United States is a significant source of apprehension and fear for millions of Americans, even in those households earning as much as $180,000 per year, the survey results show.

“Relative to the quality of the care they receive, Americans overwhelmingly agree they pay too much, and receive too little, and few have confidence that elected officials can solve the problem,” the report said.

In addition to concerns about costs, more than 75% of survey respondents also were worried that such high health care costs could damage the nation’s economy.

Members of both parties are pessimistic about the government’s ability to address the cost crisis. About 75% of all respondents (and 67% of Republicans) reported that government is not doing enough to ensure that prescription drugs are affordable.

“The time has come to take politics out of the equation and deal with the realities of the health care cost crisis with bipartisan and common-sense solutions that serve all Americans,” said Tim Lash, West Health’s chief strategy officer.

High utilizers

In 2011, Atul Gawande, M.D., wrote an article for The New Yorker about an unusual effort to care for what health insurers call high utilizers. In the article, The Hot Spotters, he asked this: “Can we lower medical costs by giving the neediest patients better care?” In the article, Gawande focused on the work of Jeffrey Brenner, MD, who founded the Camden Coalition of Healthcare Providers, an organization in Camden, N.J., that seeks to improve the quality of care delivered to vulnerable populations. Its community-based physicians, hospital staff, social workers, nurses, and other providers work in teams to deliver comprehensive preventive and primary care to the neediest patients.

These patients are often the poor and poorly educated members of society who use the emergency room so often for care that they are sometimes called super utilizers, high utilizers, or frequent fliers. Brenner recognized that these patients have complex medical conditions and often lack social services, such as transportation or knowledge about how to use the health system effectively. Perhaps most important, he showed that these patients account for a disproportionately high share of overall spending because they are the 5 percent of patients who account for more than 50 percent of all health care spending.

In 2013, Brenner won a grant MacArthur Foundation for his work with the coalition.

Health insurers often struggle to care for these members of society because these patients don’t have regular contact with the health care system through a primary care physician. Instead, they get incremental care in high-cost settings such as the ER or they getting admitted for inpatient stays. While Medicare, Medicaid, and commercial insurers paid for repeat ER visits and inpatient stays for high utilizers, they did not pay for the work the coalition does, providing the regular care and social support these patients’ needs.

For many years, the coalition operated without payment from insurers because Medicare, Medicaid, and commercial insurers would pay for repeat ER visits and inpatient stays but did not pay for the work the coalition does. Instead, its works was funded almost exclusively under grants from the Robert Wood Johnson Foundation, the Nicholson Foundation, and the federal Center for Medicare and Medicaid Innovation, a division of the Centers for Medicare and Medicaid Services.

“There are no billing codes for this,” Brenner said during an interview in 2011 on the PBS documentary news show Frontline. “There’s no way currently to bill insurance or to bill Medicaid or Medicare for the kind of care that a team like this delivers. Other people have tried this, but it’s just very hard to get sustainable funding for this kind of work.”

Gawande’s article in TNY and a similar story on the PBS news program Frontline helped to give the issue of high utilizers more prominence and the Affordable Care Act also directed resources to this population. Other researchers focused on the need as well. In 2011, for example, researchers writing in the Annals of Emergency Medicine reported that when 30 high utilizers of the ER were given appropriate and timely care, the number of ER visits for them dropped from 904 in one year to 104 the next year. Also, costs dropped from $1.2 million to $129,792. As a result, care for this population has improved in some areas.

Since that interview, the coalition has begun working with at least one health insurer to provide care to its members in Camden and get paid for that work as an in-network provider.

Hospitals could suffer financial losses if many Americans lose health insurance coverage

Job losses and the corresponding loss of health insurance due to the coronavirus pandemic could adversely affect the financial health of hospitals and health systems in the United States, according to researchers from Stanford University.

Historically, the U.S. health care system has been somewhat protected from economic downturns because so many Americans under age 65 have employer-sponsored health insurance (ESI) so that health care spending has continued through past recessions, wrote Ben Teasdale of the School of Medicine and Dr. Kevin A. Schulman, of the Clinical Excellence Research Center and the Graduate School of Business at Stanford. The article, Are U.S. Hospitals Still ‘Recession-proof’? was published in the New England Journal of Medicine on September 24, 2020.

Having health insurance through an employer has insulated these patients from the costs of care and helped to make the demand for care what economists call “price inelastic,” they wrote. The price of some goods or services is inelastic if the price does not change much when supply or demand fluctuates.

Many Americans who lost their jobs and job-based insurance would turn to Medicaid, which pays hospitals and health systems much less than employers and commercial health insurers pay, the researchers added. Shifting 10% of privately insured patients to Medicaid would result in a loss of revenue of 3.2%, they concluded.

How does the U.S. health care system compare with that of other Western nations?

The United States health care system spends far more than other high-income countries, yet has long had well- documented gaps in the quality of care. This finding a recent report and many reports in the past in which the US health care system has been compared to that of other countries contradicts the widely held idea that the US has the finest health care system in the world. According to this research, that idea is incorrect.

On many measures, the U.S. health care system scores poorly when its performance is compared against that of the health care systems in Australia, Canada, France, Germany, the Netherlands, New Zealand, Norway, Sweden, Switzerland, and the United Kingdom, according a report from the Commonwealth Fund, Mirror, Mirror 2017: International Comparison Reflects Flaws and Opportunities for Better U.S. Health Care.

For this report, researchers Eric C. Schneider, M.D.; Dana O. Sarnak; David Squires; Arnav Shah; and Michelle M. Doty compared the performance of the 11 health care systems on 72 indicators in five domains: care process, access, administrative efficiency, equity, and health care outcomes. The researchers used data from the Commonwealth Fund’s international surveys of patients and physicians and selected measures from the European Observatory on Health Systems and Policies, the Organisation for Economic Cooperation and Development, and the World Health Organization. Once they had the data in hand, the researchers calculated performance scores for each domain and produced an overall score for each country.

As researchers have found in the past, the U.S. health care system ranked last on performance overall, and ranked last or near last on the access, administrative efficiency, equity, and health care outcomes domains. The top-ranked countries overall were the United Kingdom, Australia, and the Netherlands. “Based on a broad range of indicators, the U.S. health system is an outlier, spending far more but falling short of the performance achieved by other high-income countries. The results suggest the U.S. health care system should look at other countries’ approaches if it wants to achieve an affordable high-performing health care system that serves all Americans,” the researchers wrote.

The first two paragraphs of the report explain the problem in stark detail as follows:

“The United States spends far more on health care than other high-income countries, with spending levels that rose continuously over the past three decades (Exhibit 1). Yet the U.S. population has poorer health than other countries. Life expectancy, after improving for several decades, worsened in recent years for some populations, aggravated by the opioid crisis. In addition, as the baby boom population ages, more people in the U.S. — and all over the world — are living with age-related disabilities and chronic disease, placing pressure on health care systems to respond.

“Timely and accessible health care could mitigate many of these challenges, but the U.S. health care system falls short, failing to deliver indicated services reliably to all who could benefit. In particular, poor access to primary care has contributed to inadequate prevention and management of chronic diseases, delayed diagnoses, incomplete adherence to treatments, wasteful overuse of drugs and technologies and coordination and safety problems.”

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.

Laboratory benefit managers

A report published as a blog post on the Health Affairs site in September explains that laboratory benefit managers have emerged in the past 10 years to help health insurers manage the cost and complexity of lab testing. In their role as laboratory benefit managers, LBMs are similar to pharmacy benefit managers, which have assisted health insurers in managing pharmacy benefits for health insurers since the 1990s.

While the role of both of these management companies is to improve the quality of the services LBMs provide and to control costs, the researchers could find no evidence that LBMs have any effect on clinical management and patient outcomes. The researchers who wrote report, “The Emerging Use By Commercial Payers Of Third-Party Lab Benefit Managers For Genetic Testing,” were Kathryn A. Phillips, PhD, and Patricia A. Deverka. Phillips is a health researcher at the University of California, San Francisco, and Deverka is director of value evidence and outcomes at Geisinger, a health insurer in Danville, Pa.

“We examine the increasing use by commercial payers of third-party administrators (“benefit managers”) to manage laboratory test utilization, focusing on the specific case of genetic testing,” they explained. Employer groups and health insurers contract with LBMs to reduce medical or pharmaceutical costs and to enhance the quality of care through utilization management practices.

As of the date of the article, September 2019, there were five major LBMs operating in the United States. Two are privately owned, two are divisions of health insurers, and one is a subsidiary of Laboratory Corporation of America, one of the largest clinical lab companies in the United States.

One of the independent companies is Kentmere Healthcare Consulting in Wilmington, Del., which was founded in 2000 as an LBM program serving health plans. It has contracts with Horizon Blue Cross Blue Shield in New Jersey among other health plans.

The other independent LBM is Avalon Healthcare Solutions, founded in Tampa in 2013. Avalon contracts with Blue Cross Blue Shield plans in North and South Carolina and in other states.

In 2010, LabCorp founded a subsidiary, Beacon Laboratory Benefit Solutions, and in 2015, Beacon started providing LBM services to physicians in Florida under a contract with UnitedHealthcare.

The two companies that are subsidiaries of health insurers are eviCore, a division of Cigna, and AIM Specialty Health, a division of Anthem. Anthem acquired AIM Specialty Health in 2017 when it merged with Wellpoint. Cigna acquired eviCore when it merged with Express Scripts in 2018. Express Scripts is one of the nation’s largest PBMs, meaning Cigna owns a PBM and an LBM.

How hospitals could suffer financial losses if many Americans lose health insurance coverage

Researchers from Stanford University suggest that deep job losses and the resulting loss of health insurance due to the coronavirus pandemic could adversely affect the financial health of hospitals and health systems in the United States.

Historically, the U.S. health care system has been somewhat protected from economic downturns because so many Americans under age 65 have employer-sponsored health insurance (ESI) so that health care spending has continued through past recessions wrote Ben Teasdale of the School of Medicine and Kevin A. Schulman, M.D., of the Clinical Excellence Research Center and the Graduate School of Business at Stanford. The article, Are U.S. Hospitals Still “Recession-proof”?, was published in the New England Journal of Medicine on July 1, 2020.

Having health insurance through an employer has insulated these patients from the costs of care and helped to make the demand for care what economists call “price inelastic,” they wrote. The price of some goods or services are inelastic if their prices do not change much when supply or demand fluctuates.

“Historically, this characterization has held true,” they added. “During the Great Recession, the numbers of health care jobs and national expenditures rose consistently, despite substantial cuts in other sectors. But the current economic crisis brought on by Covid-19 is clearly different: 1.4 million health care jobs were lost in April alone.”

In addition, the virus has caused hospitals and health systems to pay more for equipment and supplies while they were losing income when stay-at-home orders postponed routine care such as elective surgeries and nonessential physician visits. A report from the American Hospital Association showed that since March, the pandemic caused costs to rise and revenue to fall. The net effect of rising costs and falling revenue caused health care facilities to lose about $50.7 billion each month for a four-month total of almost $203 billion by the end of June.

So then, what happens if Americans who previously had job-based insurance lose their jobs during to the pandemic and their health insurance coverage as well, the Stanford researchers asked. Many of those Americans would then turn to Medicaid, which pays hospitals and health systems much less than employers and commercial health insurers pay, they wrote.

The disproportionate reliance on employer-based health insurance has evolved gradually over the past 20 years and grown substantially since the Great Recession, they added, citing reports from the AHA and other sources. Those reports show that hospitals and health systems show that in 2000 employers and commercial insurers compensated hospitals at 116% of costs but that by 2017, that percentage was more than 200% of costs, they wrote.

“These changes mean that shifting 10% of privately insured patients to Medicaid would result in a loss of revenue of 3.2%, whereas in 2000 it would have cost hospitals only 0.8%,” they concluded.

Revised payment policies needed to improve maternal health outcomes

In a report, “Payment Policy Levers to Address Maternal Health Disparities,” experts from the Maternal Health Hub listed four changes in payments and policy to improve the outcomes of patients getting maternal health care.

“When it comes to maternal health, the U.S. stands out as an anomaly: as the global rate of maternal mortality has declined significantly, the rate of pregnancy-related mortality has more than doubled in the United States in the past three decades,” the report noted. Systemic inequities exist for pregnant women of color: Black and Indigenous people are two to three times more likely to die in childbirth than white women are.

To address these inequities, the report recommended extending postpartum coverage, implementing parity for provider payment, using value-based payment and care delivery models and improving health equity in general.

“It is essential for women to have insurance coverage for the 12 months following birth,” the report said. “In states that have not expanded Medicaid to low-income adults, birthing persons that become eligible for and enroll in Medicaid during their pregnancies can lose coverage after 60 days postpartum.” Extending Medicaid coverage for low-income pregnant women to a full year postpartum could help 200,000 gain insurance coverage during what the report called “a critical window for new moms and babies.” In the 12 months after birth, more than half of deaths occur.

The states that have not expanded eligibility for Medicaid insurance could extend postpartum coverage by financing such insurance or by applying to the federal government to do so, the report added.

Under the Families First Coronavirus Response Act, which became effective on March 18, 2020, women cannot be disenrolled in Medicaid during the public coronavirus health emergency, the report noted. “Many states have also made it easier for Medicaid-eligible beneficiaries to enroll in coverage — a practice that should remain after the pandemic is over,” the report added.

The report was published on January 7, 2021, two months before the American Rescue Plan (ARP) became law. The ARP allows states to offer pregnancy-related coverage under Medicaid and the Children’s Health Insurance Program (CHIP) for one year after pregnancy ends, extending coverage beyond the current 60 days postpartum, according to a report, “Optional 12 Months Postpartum Medicaid Coverage Leaves Opportunity to do More,” from the Center for Children and Families at the Georgetown University Health Policy Institute. The option to offer pregnancy-related coverage will become available to state Medicaid programs beginning April 1, 2022.

The recommendation in the Maternal Health Hub report on pay equity says commercial and government health insurers should pay more for nurse-midwifery care in birth centers and for doulas, childbirth educators and peer-support programs. Also, value-based payment should replace the predominant fee-for-service payment model, creating misaligned incentives based on volume and acuity of services. Other payment models for maternity care should hold the health system accountable for cost, outcomes and reducing health disparities, the report noted.

Maternal mortality

Report shows U.S. women have high pregnancy and childbirth death rates and poor access to health care.

For women in the United States, pregnancy and childbirth are more dangerous than they are for women other high-income nations, according to a report in December 2018 from the Commonwealth Fund. Also, women in the United States have poorer access to health care than women in other countries, the study showed. The Commonwealth Fund published the report, “What Is the Status of Women’s Health and Health Care in the U.S. Compared to 10 Other Countries?” in December 2018.

Among 11 countries in a study, women in the United States had 14 deaths per 100,000 live births, the highest death rate the researchers recorded. For comparison, the lowest death rates were reported for women in Sweden (four per 100,000 live births) and Norway (five), the research showed. The factors that were potential contributing to the high death rate in the United States were a lack of prenatal care and higher rates of obesity, diabetes and heart disease, the research showed.

One other contributing factor could be a high rate of cesarean sections, the researchers wrote. Studies show that an elected C-section can increase a woman’s risk for life-threatening complications during childbirth and subsequent deliveries. Women in the United States had a C-section rate of 320 procedures per 1,000 live births. For comparison, Australia had 332 procedures per 1,000 live births and Switzerland had 327 but women in Norway and in the Netherlands had fewer C-sections at just more than 160 per 1,000 live births.

The study also shows that more women in the United States struggle to afford health care because they have higher out-of-pocket costs and have problems paying medical bills. “More than one in four U.S. women (26 perent) spent $2,000 or more out of pocket for health care while only women in Switzerland had a higher rate (28 percent) of spending. In the other countries in the study countries, fewer than 11 percent of women spent $2,000 or more out of pocket. Almost half (44 percent) of women in the United States reported having medical bill problems, such as being denied insurance coverage for health services while women in the United Kingdom has the lowest rate of such problems (2 percent), the study showed.

The high cost of health care in the United Sates caused 38 percent of women to forego a visit to the doctor when sick or to fill prescription when needed. This rate was the highest rate among the 11 countries in the study. In the Un ited Kingdom, only 5 percent of women skipped care because of cost and in Germany only 7 percent of women did so.

The study had some good news for women: they have the high breast cancer screening and survival rates. “U.S. women have among the lowest rates of breast cancer mortality, trailing only Norway, Sweden, and Australia,” the report showed. The lower mortality rate may be a result of high screening rates because screenings are associated with fewer breast cancer deaths. The highest screening rates were in Sweden where 90 percent of women over age 50 get such screening tests and in the United States where 80 percent of women over age 50 get these tests.

The Medicaid coverage gap leaves 2.2 million Americans uninsured

The American Rescue Plan (ARP) Act, which Congress passed and President Biden signed into law in March 2021, includes several provisions designed to make more Americans eligible for free or low-cost health insurance under the Affordable Care Act (ACA).

According to a report from KFF, some 29 million Americans were uninsured when the law was passed, and most of them qualify for increased subsidies under the ARP to help them buy health insurance on the ACA marketplaces with no monthly premium or a premium that would cost less than $50 a month. The law also includes funding for the 12 states that have not expanded eligibility to participate in their Medicaid programs as of July 23, 2021: Alabama, Georgia, Florida, Kansas, Mississippi, North Carolina, South Carolina, South Dakota, Tennessee, Texas, Wisconsin and Wyoming.

Yet, the ARP still leaves more than 2 million poor people uninsured because they earn too little to qualify for subsidized health insurance under their state Medicaid program rules. These uninsured adults fall into what health policy experts call the Medicaid coverage gap because these people have income above the level for Medicaid eligibility in their states but below the lower limit for premium tax credits under the ACA.

The Center on Budget and Policy Priorities (CBPP), a non-partisan research and policy institute, showed in June that 2.2 million poor people fall into this coverage gap in the report, “Closing Medicaid Coverage Gap Would Help Diverse Group and Narrow Racial Disparities.” CBPP also has a report on the states that have not expanded eligibility for Medicaid.

About 77% of the people who fall into the coverage gap are adults with dependent children, according to a report in January 2021 from KFF, “The Coverage Gap: Uninsured Poor Adults in States that Do Not Expand Medicaid.”

Most of these adults are in the states with the largest uninsured populations. “More than a third of people in the coverage gap reside in Texas, which has both a large uninsured population and limited Medicaid eligibility,” the report added. Some 19% of those in the coverage gap are in Florida, 12% live in Georgia and 10% are in North Carolina.

For adults in non-expansion states, Medicaid eligibility is limited. “The median income limit for parents in these states is just 41% of poverty, or an annual income of $8,905 for a family of three in 2020, and in nearly all states not expanding, childless adults remain ineligible,” KFF noted. Before the ACA became law in 2010, Congress envisioned that low-income people would get coverage under Medicaid and so did not include financial assistance to those people below the federal poverty level, KFF said. “In contrast, in states that have adopted the ACA Medicaid expansion, Medicaid eligibility is extended to nearly all low-income people with incomes at or below 138% of poverty ($17,609 for an individual in 2020),” the report added. In 2011, the U.S. Supreme Court ruled that the ACA’s mandatory Medicaid expansion was unconstitutional, as Health Affairs reported.

Medicaid Section 1115 Waivers

Critics of the Medicaid program for the poor and disabled often call the federal 1115 waiver program a “one-size fits all” approach to managing Medicaid benefits in the states. This characterization is inaccurate because, in fact, such waivers vary widely from one state to the next. After the federal Department of Health and Human Services approves one state’s approach, other states may copy that approach. In this way, these waivers serve as incubators for ideas that may work in several states. Under the Social Security Act, states can apply for several kinds of waivers from the federal Medicaid rules. The one waiver most states apply for when seeking to reform their Medicaid programs or to expand Medicaid coverage are called Section 1115 waivers. HHS lists its current Section 1115 waivers at Medicaid.gov.

Section 1115 of the Social Security Act gives the HHS secretary the authority to approve experimental, pilot or demonstration projects that would promote the objectives of the Medicaid program because these demonstrations give states a chance to implement reforms that go beyond providing routine medical care by focusing on evidence-based interventions that drive better health outcomes and quality of life improvements for beneficiaries, HHS says.

Also, some states seek Section 1115 waivers to promote certain approaches to health care delivery. The Trump administration and CMS Administrator Seema Verma have said, for example, that they would give states leeway to promote conservative ideas through 1115 waivers, including, for instance, the administration’s decision in January 2018 to give states the power to impose work requirements on Medicaid enrollees, to require beneficiaries to pay more out-of-pocket for care and possibly to impose lifetime limits on how long beneficiaries could receive Medicaid.

Section 1115 waiver demonstration programs allow HHS to approve various experiments in delivering care and typically are approved for five years at a time and can be renewed for three more years. Under law, they cannot add costs to the Medicaid program and so must be budget-neutral. According to HHS, states are invited to propose reforms that would:

Improve access to quality, person-centered services to improve patients’ health outcomes,
Promote efficiencies to ensure that the Medicaid program is sustainable,
Support strategies to address certain health determinants that promote independence and improve quality of life,
Strengthen beneficiary engagement in their care, including incentives to promote what HHS calls responsible decision-making,
Enhance alignment between Medicaid and commercial health insurers, and
Advance innovative delivery and payment models to improve provider networks and promote value for Medicaid.

For more on Section 1115 waivers, see resources from The Commonwealth Fund (April 2018) and from the Kaiser Family Foundation (March 2018).

Medicaid work requirements

In nine states, Medicaid work requirements could cause 800,000 Americans to lose health insurance coverage.

As of the end of June 2019, the federal Department of Health and Human Services had approved work requirements for Medicaid beneficiaries in nine states: Arizona, Arkansas, Indiana, Kentucky, Michigan, New Hampshire, Ohio, Utah and Wisconsin. Seven other states were seeking such approval and other states were considering doing so.

In a report for the Commonwealth Fund, researchers from the Milken Institute School of Public Health at George Washington University estimated that if all nine proposals are fully implemented, some 589,000 to 811,000 people would lose their Medicaid coverage after 12 months.

“This amounts to about one-quarter to one-third of the 2.5 million people who would be subject to the new rules, and includes 128,000 to 184,000 just in Kentucky and Arkansas combined,” wrote Leighton Ku and Erin Brantley. “These are losses only associated with the work requirements and do not account for other elements such as monthly premiums or new paperwork requirements that may trigger additional losses.” Ku is the director of the Center for Health Policy Research in the Department of Health Policy and Management, and Brantley is a senior research associate in the center. Lawsuits challenging the programs in three states (Arkansas, Kentucky, and New Hampshire) are pending, the researchers added.

In the report, Medicaid Work Requirements in Nine States Could Cause 600,000 to 800,000 Adults to Lose Medicaid Coverage, Ku and Brantley explained that previously work was never a condition of Medicaid eligibility.

In January 2018, the federal Centers for Medicare and Medicaid Services announced a new policy to allow states to “incentivize work and community engagement” among non-elderly, non-pregnant adult beneficiaries eligible for Medicaid on a basis other than disability. Under this new program, states needed to apply to HHS for approval of Section 1115 demonstration projects to test the claim that each state would improve health, employment, and incomes.

In all 50 states, the District of Columbia, and the U.S. territories, the Medicaid program provides health insurance coverage for low income adults and children. When it was established in 1965, Medicaid was designed to insure eligible low-income children and adults without regard to employment status. States run their own Medicaid programs under parameters the federal government sets.

Despite regulations requiring impact estimates along with their applications for Section 1115 demonstration projects, HHS did not require states to estimate how the demonstrations would affect coverage. Although the work requirements vary in each state, they typically require adult beneficiaries to work at least 80 hours each month; be searching for work; be engaged as a volunteer; or be exempt because they are medically frail, pregnant or serving as a parent, the researchers wrote. “Those who do not comply lose Medicaid coverage, often after three months,” Ku and Brantley added.

The problem with such work requirements is that most adult beneficiaries already work or are limited in their ability to work because of health problems, schooling, child care, or other needs, the researchers explained. “Many who would lose Medicaid eligibility are working or trying to work, but are unable to comply with the rules because they face major barriers to steady employment or cannot navigate the procedural barriers,” they added.

Included in the Commonwealth Fund’s section on Medicaid work requirements are a number of reports on the effects of work requirements in the states. One of those reports focuses on what happened after Arkansas implemented its work requirement. At the time of Ku and Brantley report, only Arkansas had terminated beneficiaries for failing to meet the work requirements.

In a separate report published in the New England Journal of Medicine, researchers from the Harvard T.H. Chan School of Public Health reported 17,000 adults were removed from Arkansas’ Medicaid program between October and December 2018, driving up the number of adults who were uninsured. They also found that the state’s work requirements did not increase employment or hours worked, and that almost all of the beneficiaries targeted under the program had already met or should have been exempt from the requirements.

A small free preview of the NEJM article, “Medicaid Work Requirements—Results from the First Year in Arkansas,” is available online. The lead researcher for this article was Benjamin Sommers, MD, a professor of health policy and economics at the Harvard T.H. Chan School of Public Health. The Commonwealth Fund provided funding.

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.

Medicare for All

Medicare for all would be a government-run single-payer health care system built on the Medicare program. Medicare is a federal entitlement program that provides health insurance coverage for 55.5 million Americans, most of whom are age 65 and over. Medicare also covers Americans who have permanent disabilities, end-stage renal disease and amyotrophic lateral sclerosis or ALS.

Sen. Bernie Sanders (I-Vermont) introduced the proposed bill, S.1804 - Medicare for All Act of 2017, in the 115^th U.S. Congress. Other Democratic senators agreed to cosponsor the bill but initially, no Republicans supported it, meaning the chance of passage was nil in a Republican-controlled congress.

If approved, the bill would replace the current multipayer system with the Medicare program. In the current multipayer system, consumers get coverage through their employers or they could purchase coverage from health insurers directly or through the marketplaces established under the Affordable Care Act. Critics of this multipayer system say that health insurers serve as middle men and that eliminating them would save consumers the costs that now go to both for-profit and nonprofit health insurers.

Under his bill, Sanders would eliminate premiums, deductibles and copayments for private health insurance. American families would need to pay more in taxes, but the increase in taxes would be less than Americans pay for health insurance, Sanders explained.

Americans would get a "Universal Medicare card" that would cover comprehensive health care services, including hospital stays, doctor visits, substance abuse treatment, dental, vision, mental health and reproductive care (including abortion), Sanders said. Consumers would still need to pay as much as $250 out-of-pocket for certain prescription drugs.

The bill would eliminate medical bankruptcy, Sanders said, adding that the high cost of health care is the top financial problem that U.S. families face.

In supporting his plan, Sanders argued that the United States spends $3.2 trillion per year on health care, which is almost twice as much per capita as any other high-income country spends on health care. For all that spending, the U.S. compares poorly in terms of life expectancy, infant and maternal mortality and access to health services.

Mental health parity

Rules iss ued 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.

Out-of-network billing

Health insurers try to keep costs down by steering members to in-network physicians, hospitals and other providers. Members getting care from in-network providers generally pay less in copayments and deductibles than if they sought care from out-of-network providers.

In generally, physicians, hospitals and other providers negotiate in-network rates with health insurers that are lower than they normally charge and lower than they charge uninsured patients or patients who are not covered by health insurers with which they contract. These providers accept lower in-network rates because they get increased patient volume as a result of caring for the health insurers’ members.

Not all providers contract with health insurers, however, which leaves them out of network and allows them to bill more for care than if they were in-network. One way in which they can bill more is by billing the patient for any amount left over after the health insurer pays the out-of-network bill. This practice is known as balance billing. For a patient needing surgery, for example, the hospital might be in network and charge $50,000 and the insurer will pay the negotiated rate of $10,000 and the patient might pay $1,000, or 10 percent of the negotiated rate, according to a report, “The Changing Landscape of Out-of-Network Reimbursement,” by David C. Lewis, a health care consultant with actuaries Milliman Inc.

The in-network surgeon might charge $25,000, the insurer would cover $5,000 and the patient would pay $500, or 10 percent of the covered amount. In such a scenario, it would not be unusual for the anesthesiologist (or other provider) to be out of network. In this case, the out-of-network anesthesiologist might charge $15,000, the insurer would pay $3,000, and the anesthesiologist might bill the member for the remaining balance or $12,000.

This balanced-billed amount may be a surprise to the patient who believed that by having surgery done at an in-network hospital, he or she would pay no more than 10 percent of the covered amount.

For such patients, it would be difficult to determine which providers in the hospital are in-network and which ones are not because physicians, even those who work at the hospital, are not always in-network. Most often the physicians who work in a hospital but are out of network are pathologists, emergency room doctors, anesthesiologists, and radiologists (sometimes known by the acronym PEAR).

As the number of such surprise out-of-network bills rises, patients and patient advocates have complained complain to state legislatures and insurance regulators. Medicare prohibits balance billing and California and Florida have passed laws prohibiting providers from balance billing patients with private health insurance. The Florida law prohibits balance billing from out of network providers (such as PEAR physicians) working at in-network hospitals, Lewis reported. Legislators in other states are considering such legislation.

Report explains why CMS should focus on patient-centered cancer care

In a new report, Harold D. Miller, an expert in health care payment and delivery system reform, called for a different approach to value-based care for patients with cancer. Instead of using the fee-for-service system or a recently proposed alternative payment model, the federal Centers for Medicare and Medicaid Services should develop a patient-centered approach to cancer care, wrote Miller, the president and CEO of the Center for Healthcare Quality and Payment Reform.

In November 2019, CMS’ Center for Medicare and Medicaid Innovation (CMMI) issued an informal request for information on an alternative payment model (APM) called Oncology Care First (OCF) to replace the Oncology Care Model (OCM), an APM in place since 2016.

“Cancer patients and those who care about them should be worried, because if Oncology Care First is actually implemented, it could prevent cancer patients from receiving the treatments they need and cause community oncology practices to close,” Miller wrote in a blog post about the report, “A Better Way to Pay for Cancer Care.”

Cancer patients should get the treatment that provides the best chance for a successful cure and services that minimize patients’ suffering, and the treatment and other services should be available at the most affordable cost possible, he wrote. For Medicare patients with cancer the current health care system fails to achieve these goals.

The Oncology Care First model also would fail to address most of these problems and would add new problems by encouraging oncologists to withhold and delay treatments patients need and by penalizing oncologists for using evidence-based care, he explained. Also, OCF would discourage oncologists from treating patients who need more expensive treatments and who have comorbid health conditions, he added.

The Oncology Care Model has been in place since July 1, 2016, and, as of September 2019, it had 175 oncology groups working with 10 health insurers to deliver cancer care in an episode-based payment system to Medicare patients undergoing chemotherapy. The program is scheduled to end on June 30, 2021.

The OCM pays for care management services, thus filling a gap in Medicare’s fee-for-service payment system, Miller wrote. These payments cover the costs of oncologists’ care so that when their patients have severe side effects from their treatment, they can avoid costly and time-consuming trips to the emergency room or an inpatient stay, Miller wrote.

Rather than building on the success CMMI has had with OCM by filling in additional gaps in care, the Oncology Care First program would go in the opposite direction by penalizing physicians for using new cancer treatments and paying them bonuses if they withhold the treatments that cancer patients need, Miller argued. Such penalties could force oncologists out of the program or out of business entirely, he added.

“Cancer patients and their physicians shouldn't be forced to choose between the flawed fee-for-service system and an even more flawed alternative payment model,” he wrote.

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.

Pharmacy claw backs

Insured patients often unknowingly overpay for prescription drugs when their copayments exceed the total cost of the drug to their insurer or their pharmacy benefit manager (PBM), according to a report, “Overpaying for Prescription Drugs: The Copay Clawback Phenomenon.” In the report published by the USC Leonard D. Schaeffer Center for Health Policy and Economics, researchers used pharmacy claims data from a large commercial insurer and combined that data with information on national average drug reimbursements to identify claims that likely involved overpayments.

The researchers showed that in 2013, almost one quarter of filled pharmacy prescriptions (23%) involved a patient copayment that exceeded the average reimbursement that the patient’s insurer paid by more than $2. Among these overpayment claims, the average overpayment is $7.69, the report showed.

In addition, the report showed that overpayments are more likely on claims for generic drugs than they are for brand-name drugs (28% vs. 6%), but the average size of the overpayment on generic claims is smaller ($7.32 vs. $13.46).

In the research data, overpayments totaled $135 million in 2013, or $10.51 per covered life. Given that more than 200 million Americans were commercially insured in 2013, the findings suggested that overpayments may account for a share of overall drug spending and patient out-of-pocket costs that is not negligible, the researchers explained.

The report also covers the fact that some investigations have shown that on some prescription claims, the total cost of the drug is less than the patient’s copayment. When that happens, the insurer or PBM keeps the difference in what is known as a “clawback" or it requires pharmacies to pay back that difference.

This research is significant given the focus from policymakers and journalists on patients’ out-of-pocket (OOP) costs for prescription drugs. For insured patients, an important element of OOP spending is the copayment, a fixed dollar amount that patient’s pay for each prescription. It’s important to note, however, that the term “copayment” suggests that the patient and insurer share the total cost of the drug.

Clawbacks are frustrating to pharmacists but many are bound by gag clauses in their contracts with insurers and PBMs and so cannot disclose to patients when they could save money by not using their insurance because of such practices.

Health insurers face lawsuits about this practice several states have taken steps to prevent it, including, Arkansas, Connecticut, Georgia, Louisiana, Maine, Maryland, North Dakota and Texas.

How prescription drug coupons increase health care spending

Since the mid-2000s, pharmaceutical companies have offered discount coupons to patients who are prescribed brand-name prescription drugs. The coupons are available online from the companies themselves, they’re advertised on television and in print ads, and physicians give them out when prescribing these drugs. They are also available online at Internet Drug Coupons and from sites such as GoodRx. For consumers, they are one way to keep the cost of payments and coinsurance down when paying for these medications at the pharmacy. But research by health policy experts and journalists shows that copay coupons actually help inflate drug prices.

In research published in 2017, researchers Leemore Dafny, Christopher Ody and Matt Schmitt studied the effect of copay coupons on brand-name drugs for which a generic equivalent was available. The research was published in an article, "When Discounts Raise Costs: The Effect of Copay Coupons on Generic Utilization,” in the American Economic Journal: Economic Policy, by Leemore Dafny, Christopher Ody and Matt Schmitt in 2017. Dafny is the Bruce V. Rauner professor of Business Administration at the Harvard Business School, Ody is research assistant professor in the Health Enterprise Management Program at the Kellogg School of Management at Northwestern University and Schmitt is assistant professor of strategy at UCLA Anderson School of Management.

In the Upshot blog at The New York Times, Austin Frakt explained the effect of using a drug coupon for the antidepressant Effexor XR from Pfizer. Here’s Pfizer’s site for its Effexor coupon program. The retail price of the drug in April 2018 was $412 for 30 capsules of the 75-mg dose. Under Frakt’s health insurance, he would pay $65 each month while GoodRx says consumers could get a 30-day supply of the generic version of the 75-mg dose for $11.43. Insurers are not likely to pay the highest price for drugs because they negotiate lower prices for medications but those negotiations and the prices they pay are unknown to the public.

For Frakt, the generic version of Effexos, venlafaxine, would cost his insurer less and his copayment would be only $10 per month. “My insurer and I would both save money if I purchased the generic,” he wrote. But now consider how a coupon from Pfizer affected Frakt’s cost: He said he would pay $4 per month for the brand-name drug, making it much more attractive.

As Frakt showed, coupons help patients to pay for brand-name drugs while insurers pay more for prescription drugs because consumers are not using the less-costly generic versions. “By encouraging patients to switch from generic to brand drugs, coupons effectively impose higher costs on insurers. That ends up increasing premiums, and not for any particularly good reason,” Frakt wrote.

Indeed, the researchers estimated that for brand-name drugs facing generic competition, coupons boosted retail sales by 60 percent or more. Over five years, coupons raised spending by $30 million to $120 million per drug for a total of as much as a $2.7 billion increase in spending for the 23 drugs studied, the researchers concluded.

The coupons help to keep patients on brand-name medications that face generic competition, counteracting insurers’ efforts to steer patients to generics. The FDA reports that brand-name drugs cost about five times more than their generic equivalents.

As students of economics know, companies risk losing customers when they increase prices. “But with copay coupons, drug manufacturers have created a new playbook, the researchers explained in an article at KelloggInsight: “If you raise the price by a dollar, and the price to consumers goes up by 20 cents, and you can give the consumer 20 cents,” you’ve essentially discovered “a money tree,” Ody said in the KelloggInsight article. Coupons give pharmaceutical companies a way to raise prices infinitely without reducing demand while insurers pay for the rising costs.

Given how much drug-copay coupons distort the market for prescription drugs, Ody was surprised they are allowed, he said.

In a report in February 2018 on copayment coupons (pdf), researchers at the University of Southern California Leonard D. Schaeffer Center for Health Policy & Economics wrote, “Coupons are banned from use on drugs purchased with federal health care insurance, including Medicare and Medicaid, because they violate federal anti-kickback statutes. Prior to 2012, Massachusetts banned all coupon use in the state; in 2012 the ban was repealed and limited to the use of coupons only on drugs with generic equivalents. The repeal included a sunset provision calling for the full ban to be reinstated in June 2017, but the reinstatement has been postponed. In 2017, California passed a state law banning the use of coupons to purchase drugs with generic equivalents, and New Jersey is currently considering similar legislation.”

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.

Report explains premium tax credits under the ACA and the American Rescue Plan

A report from the Congressional Research Service explains the details behind the premium tax credits under the Affordable Care Act (ACA) and the American Rescue Plan (ARP) Act of 2021. This report will be useful for journalists who may not fully understand how the tax credits work under the ACA and how they were amended under the ARP.

In the report, “Health Insurance Premium Tax Credit and Cost-Sharing Reductions,” research service experts describe current law (including the ARPA’s temporary changes) and applicable regulations and guidance, specifically how the premium tax credits (PTCs) and the consumer cost-sharing reduction (CSR) requirements apply in 2021.

Individuals who do not have health insurance coverage may be eligible for a PTC under the ACA and amended under the ARP to include some temporary provisions. The dollar amount of the tax credit varies among individuals and is based on a formula specified under the two laws.

Taxpayers who are eligible for a PTC can choose to get the an advanced premium tax credit (APTC), which the government pays each month automatically to the insured’s health insurer, thus reducing the consumer’s health insurance costs. Individuals also can choose to get the PTC as a tax refund when filing their taxes, even if they have little or no federal income tax liability, the report explained.

To be eligible to receive a tax credit in 2021, individuals must have annual household income of at least 100% of the federal poverty level and not be eligible for health insurance coverage from other sources, such as an employer. Also, these individuals must file federal income tax returns and enroll in a health insurance plan through one of the ACA marketplaces that operate in every state and the District of Columbia.

Individuals who get a PTC also may be eligible for subsidies (called cost-sharing reductions or CSRs) that reduce copayments, coinsurance and deductibles. There are two types of CSRs. One type reduces annual cost-sharing limits, and the other reduces cost-sharing requirements, by reducing a deductible, for example. Individuals eligible for CSRs may receive both types.

Under the ARP, Congress made temporary changes to the PTCs and the CSRs so that the amount of the PTC is applicable to certain exchange plans for tax years 2021 and 2022, and it expanded eligibility for the calculation of the PTCs and CSRs for individuals who receive unemployment compensation during 2021.

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.

Private equity investors are driving up health care costs

Private equity investors have been buying up physician practices and putting money into other health care companies at a rapid rate over the past decade, according to a report in the Harvard Business Review. In the report, executives with the Commonwealth Fund said investors from private equity and venture capital firms typically invest in fast-growing, recession-proof companies that offer high returns on their investments such as physician practices, addiction treatment centers and health technology startups,

Over the past 10 years, private equity investors were involved either as buyers or sellers in 325 health care deals in 2008, and last year there were 788 such deals totaling more than $100 billion in value, according to an article an article by Samantha Liss in HealthcareDive.

In April 2019, Bloomberg Law reported that in the first quarter of the year private equity companies had announced or closed 45 deals for physician groups and 20 deals for dental practices, a pace that would exceed such levels from the year earlier. Investors were seeking dermatology, gastroenterology, obstetrics and gynecology, ophthalmology, orthopedics, radiology and urology practices, the law publication explained.

Such investments allow physicians to remain independent rather than sell out to a hospital or health system. “But, at least in some cases, the investors’ strategy appears to be to increase revenues by price-gouging patients when they are most vulnerable,” the HBR authors wrote.

Typically these investors will take on a management role in the companies they acquire because they want to maximize their return on investment. Therefore, they will seek to improve operational efficiency, add health information technology systems and raise prices. “Their common business model of buying, growing through acquisition or ‘roll-ups,’ and selling for above-average returns is cause for concern,” the HBR authors warned.

Last year, Axios’ Bob Herman reported for Axios that private equity investors were a leading source of surprise medical bills because they tend to invest in physician groups, companies that run air and ground ambulance services and in emergency room staffing companies, all of which are highly profitable because consumers need them regardless of prices, he explained. “Emergency rooms and ambulances aren't real marketplaces — consumers can't stop and shop for the best price in the middle of an emergency,” he wrote.

What’s more if the ER physicians and ambulance companies are not making enough money, they can go out of network with many or all health insurers and charge inflated prices unstrained by agreements that in-network provides must charge.

Herman quoted Zack Cooper, PhD, an economist at Yale who is an expert in price variation in health care. “If you're willing to engage in some fairly unsavory billing practices, (these services) could be quite lucrative,” Cooper said.

It’s no surprise then, that investor-backed companies are behind much of the pushback against efforts in Congress to regulate surprise medical bills, the HBR authors explained.

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.)

Report shows incentive payments for renal disease program exceeded savings

In a report in September 2019 from the CMS Innovation Center, researchers from the Lewin Group reported that the federal Centers for Medicare and Medicaid Services paid the organizations participating in a program to improve care for patients with end-stage renal disease (ESRD) much more in shared savings ($114.3 million) than the organizations saved ($68 million). The result was a net loss over two years of more than $46 million, the report showed.

In 2015, CMS started an alternative payment program to provide better care for beneficiaries with ESRD called the Comprehensive ESRD Care (CEC) Model. The CEC program is an Advanced Alternative Payment Model in which CMS provides financial incentives to dialysis facilities, nephrologists, and other providers to improve clinical outcomes and coordinate care for beneficiaries with ESRD and to cut costs.

As the report explains, these patients need complex care that requires significantly more resources than the general Medicare population needs. Fewer than 1% of the Medicare population covered under fee-for-service (FFS) payment in 2016 had ESRD, but they accounted for about 7% of Medicare’s FFS spending, the report showed. “Beneficiaries with ESRD have more and longer hospitalizations than other beneficiaries, and their readmission rates are more than twice the rate of the general Medicare population,” the researchers wrote.

The participating organizations can form specialty-focused accountable care organizations (ACOs) that CMS calls ESRD Seamless Care Organizations (ESCOs). The ESCOs then assume financial responsibility for the quality of care they deliver to ESRD patient and for the costs of care for these patients under Medicare parts A and B.

For the report, researchers explained the financial and quality results from the CEC program during the first two years of the program: Oct. 1, 2015, through Dec. 31, 2016 (called the first program year or PY1) and Jan. 1, 2017, through Dec. 31, 2017 (PY2). The results from the CEC model over the first two program years showed improvements on some quality and health care utilization measures and a decrease in total spending of $68 million. “However, after accounting for the $114.3 million in shared savings that ESCOs received across PY1 and PY2, Medicare experienced aggregate net losses of $46.1 million,” the report said.

In other words, CMS paid the participating organization much more in shared savings ($114.3 million) than the provider organizations participating in the ESCOs saved ($68 million).

The savings resulted primarily by reducing hospitalizations and by cutting ED visits or readmissions. The ESCOs reported improved adherence to dialysis, resulting in an increase in the number of dialysis treatments and dialysis spending, but a decrease in spending for hospitalizations associated with dialysis complications, the report said. Beneficiaries reported that their quality of life was largely nchanged.

Reversing auctions for pharmacy benefit management contracts

As the name implies, pharmacy benefit managers (PBMs) oversee prescription drug benefits for health insurers, self-insured employers, union health plans, government purchasers, Medicare Part D drug plans and other payers. Under complex contracts, these intermediaries act as brokers between drug manufacturers and insurers (who represent patients), and they pay pharmacies for dispensing drugs to workers and their family members.

Given the complexity of PBM arrangements, some states have changed how they assess PBM costs and practices when their contracts come up for renewal. To get a better view into how PBMs operate, three states—Colorado, Louisiana and Minnesota—passed laws in 2021 allowing their state purchasing agents to conduct reverse auctions with PBMs for their state employee health plans. States and large cities and towns frequently use reverse auctions when seeking to cut cost under large public contracts. Purchasers in the waste-hauling and fuel-buying industries also use reverse auctions to force contractors to compete by offering lower prices over multiple rounds of bidding.

Reverse auctions allow states and other large purchasers to assess PBMs on what they charge, which is difficult to do otherwise because, as middlemen, PBMs influence which drugs consumers can purchase, how much insurers and other purchasers pay for drugs and how much pharmacies are paid, according to this report on PBMs from Health Affairs. Also, most of the nation’s largest health insurers own their own PBMs. Cigna owns Express Scripts, for example, and UnitedHealthcare owns OptumRx. CVS, a former chain of pharmacies, is now CVS Health, which owns Aetna, a health insurer, and CVS Caremark, a PBM.

Behind the scenes, PBMs have a significant and controversial role in how much consumers pay for medications They use their leverage as volume purchasers to negotiate rebates from drug companies and share a portion of those rebates with their insurance company customers and retain a portion as revenue. The rebates are based on a percentage of a drug’s list price, leading critics to charge that PBMs have an incentive to place high-priced drugs on their formularies over drugs that may be more cost-effective.

Using a reverse auction, states design their own drug formularies for state employees and require the PBMs to agree to the terms of the state’s drug benefit plan, according to a report from the National Academy for State Health Policy (NASHP). “This eliminates the need for states to compare bids based on specific services provided and instead allows states to focus solely on price,” NASHP explained.

In 2017, New Jersey became the first state to use a reverse auction to choose a PBM to manage benefits for 800,000 state workers. The reverse auction cut pharmacy costs for state and local governments by over 25%, and school employees saw their premiums drop in 2019 by 1.1%, versus an increase of 13% in 2018, state officials said.

In its report, NASHP noted that New Jersey expects to save $2 billion over five years without cutting drug benefits for enrollees. In 2019, Maryland officials asked the state’s Prescription Drug Affordability Board to evaluate using a reverse auction for pharmacy benefits, and New Hampshire also is considering this approach, NASHP reported.

Rising cost of specialty drugs

Patients, physicians, health insurers, hospitals and health systems have all seen the cost of specialty drugs rise in recent years. Physicians prescribe these medications for the treatment of chronic, complex, or rare conditions.

For a recent report, “Prices for and Spending on Specialty Drugs in Medicare Part D and Medicaid,” the Congressional Budget Office adopted a definition for the term “specialty drugs” from IQVIA, a data analysis and research organization for life-science companies. IQVIA defines specialty drugs as thoses used to treat chronic, complex or rare diseases and that meet at least four of the following characteristics:

Cost at least $6,000 per year in 2015,
Must be initiated or maintained by a specialist,
Must be administered by a health care professional,
Require special handling,
Is associated with a patient payment-assistance program,
Is distributed through nontraditional channels (such as a specialty pharmacy), or
Require monitoring or counseling either because of significant side effects or because of the type of disease being treated.

Using this definition, orphan drugs, biologic products, and drugs for patients with cancer, multiple sclerosis, and human immunodeficiency virus are often considered to be specialty drugs, the CBO report said.

From 2010 through 2015, specialty drugs accounted for a growing share of new drugs, and pharmaceutical companies launched these medications at much higher prices than the prices for nonspecialty drugs, the CBO reported. The result was increased spending on prescription drugs in Medicare Part D (Medicare’s prescription drug benefit program) and Medicaid.

When CBO calculated spending by all parties, it found that net spending on specialty drugs in Medicare Part D rose from $8.7 billion in 2010 to $32.8 billion in 2015, and net spending on specialty drugs in Medicaid roughly doubled from 2010 to 2015, rising from $4.8 billion to $9.9 billion. In both Medicaid and Medicare Part D, net spending reflects the total of net prices for the drugs. The net price is lower than the retail price, which is the amount paid to pharmacies, because the net price reflects manufacturers’ rebates and other discounts, the CBO explained.

In 2015, brand-name specialty drugs accounted for about 30 percent of net spending on prescription drugs under Medicare Part D and Medicaid, but they represented only about 1 percent of all prescriptions dispensed in each program.

One of the key findings in the report is that for beneficiaries in the Medicare Part D program who were prescribed brand-name specialty drugs, average annual net spending on such drugs per person (in 2015 dollars) roughly tripled in the six years from 2010 to 2015, rising from $11,330 in 2010 to $33,460 in 2015.

A second key finding showed that the net prices for brand-name specialty drugs are much higher in Medicare Part D than they are in Medicaid. In 2015, the weighted average net price for 50 of the top-selling brand-name specialty drugs in Medicare Part D was $3,600 for what’s called a “standardized” prescription but the weighted average net price for the same set of drugs in Medicaid was $1,920. That difference was attributable to much larger rebates in Medicaid than in Medicare Part D. A standardized prescription roughly corresponds to a 30-day supply of medication, the report said.

In a third key finding, the report showed that specialty drugs accounted for a growing share of total net drug spending from 2010 to 2015 in both programs, rising from 13 percent to 31 percent of such spending in Medicare Part D and from 25 percent to 35 percent in Medicaid.

A more detailed analysis is available in a report, “Prices for and Spending on Specialty Drugs in Medicare Part D and Medicaid: An In-Depth Analysis, Working Paper 2019-02,” by CBO researchers Anna Anderson-Cook, Jared Maeda and Lyle Nelson.

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.

The effects on health care access and financial performance after rural hospitals affiliate with health systems

After examining the effects on health care access and financial performance after rural hospitals affiliated with health systems, researchers from RAND Corporation found that joining health systems may improve rural hospitals’ financial performance. They also found, however, that such affiliations may reduce access to services for patients in rural areas.

This research is significant because since 2010, more than 100 rural hospitals have closed.

The rural facilities that affiliated with larger health systems did so to improve their financial performance and potentially avoid closure. But the effects of such affiliation on rural hospitals and their patients were unclear, the researchers wrote in an article in Health Affairs, “Access, Quality, And Financial Performance of Rural Hospitals Following Health System Affiliation.”

For the study, the researchers examined the relationship between affiliation and performance and compared rural hospitals that affiliated with a health system in the period 2008 to 2017 and non-affiliating rural hospitals.

For the comparison, the researchers evaluated the hospitals on 12 measures of structure, health care utilization, financial performance, and quality. Based on their work, the researchers found that after affiliating with a health system, the rural hospitals experienced a significant reduction in on-site diagnostic imaging technologies, the availability of obstetric and primary care services, and outpatient nonemergency visits.

Also, the researchers wrote, the affiliating hospitals had a significant increase in operating margins of 1.6 to 3.6 percentage points when compared with a baseline. Changes in patient experience scores, readmissions, and emergency department visits were similar for affiliating and non-affiliating hospitals.

Report shows rural hospitals face a financial crisis due to inadequate insurance payments

A January 2021 report, The Crisis in Rural Health Care, showed that more than 500 rural hospitals, representing over 25% of the nation’s hospitals in rural settings, were at immediate risk of closure before the coronavirus pandemic and that the leading cause of such closures was inadequate health insurance payments. The report from the Center for Healthcare Quality and Payment Reform (CHQPR) and Saving Rural Hospitals showed that rural hospitals have had persistent financial losses and low or non-existent financial reserves to sustain operations. Over the past 10 years, more than 130 rural hospitals have closed, and more than 800 other rural hospitals are at risk of closing in the near future.

The report is useful for journalists because it shows the number of rural hospitals in each state at high and immediate risk of closing. Kansas, which has the most rural hospitals (105), has 76 at risk of closing, 47 at immediate risk of closing and 29 at high risk of closing, the report added.

Not only do rural hospitals need adequate payments, but they also need a better payment system, the report explained. “Current fee-for-service and cost-based payment systems don’t provide the support rural hospitals need, nor will the ‘global payments’ Medicare and others have proposed,” according to the report. Instead, Medicare, Medicaid, and commercial health insurers should include standby-capacity payments in addition to service-based fees to ensure that hospitals have adequate funds to sustain emergency care and other essential services regardless of how many services patients receive. Rural areas also need payment for primary care based on patients’ needs rather than the number of clinic visits they make, CHQPR added.

Unlike large urban hospitals, small rural hospitals don’t make large profits on patients who have commercial insurance that can be used to offset losses on uninsured and Medicaid patients, the report said. Also, a proposal from the federal Centers for Medicare and Medicaid Services called the Community Health Access and Rural Transformation (CHART) model would increase financial losses at rural hospitals by cutting their Medicare payments, CHQPR noted.

When rural hospitals close, residents in those service areas may lack easy or prompt access to emergency care. In addition, rural hospitals are often the principal or sole providers of all health care services in their communities, including clinical laboratory testing, maternity care, rehabilitation and primary care, the report said. When these hospitals close, all health care services in the community can disappear, the report noted.

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.”

Selling insurance across state lines

Some observers of the nation’s health insurance system frequently claim that allowing health insurers to sell policies across state lines would lower costs because doing so would increase competition among insurers and would reduce the burden on health insurers that need to comply with mandates in various states. Also, selling insurance across state lines would give consumers more choice and thus make coverage more affordable, say the proponents of this idea.

According to proponents of selling insurance across state lines, insurers should be allowed to sell health insurance according to the rules of a state of their choosing, regardless of where their customers live. That would promote “regulatory competition” among the states, who would have an incentive to attract insurers by reducing unnecessary regulation. Insurance costs would decline as plans become tailored to the demands of consumers, rather than continuing to provide a list of benefits that increase costs but do not provide value for major segments of the market. Currently, health insurers do not operate in a national market. Instead, health insurance is sold in 51 state markets (including D.C.) each of which has different regulations.

Those who are critical of selling insurance across state lines, however, disagree. Those critics include researchers at the National Association of Insurance Commissioners. Members of the NAIC regulate health insurance in each state. Researchers at the NAIC point out that interstate sales would create what’s called a race to the bottom by allowing insurers to choose which regulators they prefer, thus making insurance riskier financially and insurers less accountable. Selling health insurance across state lines also would weaken consumer protections from NAIC’s members and from other officials in the states, such as consumer protection agencies and attorneys general. Without regulators in each state, insurers would be able to target the healthiest consumers, allowing those healthy individuals to find cheaper policies while others who are sicker, such as those with chronic conditions, would face steep premium hikes if they could find any coverage at all, the NACI said.

The large national health insurers might benefit because they may have fairly extensive networks of hospitals, physicians and other providers that would stretch across state lines. But smaller health insurers that serve only certain regions of states would then be at a disadvantage, thus limiting competition, critics say. For more on this topic, see this Tip sheet, Selling insurance across state lines, what reporters need to know.

Shared savings arrangements

Shared savings arrangements are negotiated payment plans that a health insurer establishes with a physician group, hospital, accountable care organization or other provider entity. In these arrangements, the amount paid to the provider for health care services is related in some way to how much the payer spends in aggregate on those services or on a broader set of services and how that aggregate spending compares to a benchmark. Among the different ways shared savings are defined, there are two broad categories:

The first category is the most common form of shared savings program and this one includes programs being implemented in Medicare’s Shared Savings program. In this form, a payer determines the actual amount it spent during a set period of time (such as a month or a year) on health services for a group of patients and compares that amount to an estimate of what the payer expected to spend. If the actual spending is lower than the expected amount, meaning the payer had a savings, then, the payer would make a supplemental payment to the provider proportional to the amount of savings. In other words, the insurer would share its savings with the provider.

The second broad category is similar but works somewhat differently. In this second category, a provider would qualify for a shared savings payment if the payer’s spending on its patients is lower than the payer’s spending on other providers’ patients, even if the provider in question did not actually reduce spending below the level that would have been expected based on that provider’s past performance. These programs are sometimes described as “pay for performance based on spending,” since the provider is being paid based on the fact that its spending was lower than what was achieved with other providers and is not based on achieving savings beyond the current or expected level of spending.

Shared savings programs have three basic components. The first component involves defining which services for which patients are included in the spending being analyzed. In many cases, spending is based on services for patients attributed or assigned to a particular provider.

The second component involves calculating a comparison spending level (the benchmark) for determining whether the amount of actual spending qualifies for an additional shared savings payment. The formula for setting a benchmark may involve trending a baseline spending level for the same provider, comparing the provider’s spending to other providers or communities, or a combination of both.

The third component involves setting the amount of the shared savings payment to the provider. The payment formula may include a minimum savings rate, for example. Or it may include a quality target or other elements.

Silver-loading plans

In the fall of 2017, when the Trump administration halted the cost-sharing reduction (CSR) payments to health insurers that congress included in the Affordable Care Act. Also called CSR subsidies, these payments were intended to lower copayments and deductibles for exchange enrollees with annual incomes below 250 percent of the federal poverty level. In response to losing this income, some health insurers passed on those costs to consumers in the form of higher premiums. That’s one reason — among many — that health insurance premiums rose in 2018 for those buying insurance on the ACA’s Marketplaces and one of the reasons they will rise in 2019. People buying insurance without subsidies may have still paid more in 2018 than they did in 2017, but that increase came for reasons unrelated to the CSR payments.

Another way health insurers could have responded to the loss of the CSR payments was to raise the cost of all ACA health plans, meaning all plans regardless of whether they are in the bronze, silver, gold, or platinum tiers. Under the ACA, health insurers can offer bronze silver, gold, and platinum plans. Bronze plans have the lowest-level of coverage and the lowest premiums and platinum offer the highest level of coverage and carry the highest premiums. Instead, most health insurers put the CSR-related premium increases into their silver-level plan offerings, which are among the most popular plans that insurers offer. This practice is called “silver-loading" and it takes advantage of the fact that the ACA uses the premiums for silver-level plans to determine the amount of federal subsidies available to individuals with annual incomes below 400 percent of FPL. As a result, when premiums for silver plans rose sharply, federal subsidies rose along with them.

According to reporting in Modern Healthcare, about 83 percent of individuals who signed up on a Marketplace exchange for coverage in 2018 qualified for federal subsidies and thus were protected from the premium rate hikes. Further, the higher subsidies made higher-value gold plans more affordable, and in some cases, made it possible for individuals to purchase lower-value bronze plans at no out-of-pocket premium costs, according to reporting by the Advisory Board.

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.

Star ratings

The federal Centers for Medicare and Medicaid Services uses a five-star rating system to help consumers choose among Medicare Advantage plans nationwide. CMS also uses the five-star system to provide financial rewards to health plans in the MA program. Any plan that earns four or five stars gets a 5 percent bonus payment, and any plan that earns three or fewer stars gets no reward. For plans that consistently get three or fewer stars can be eliminated from the MA program, CMS has said.

Using the star ratings system each year, CMS evaluates care delivery in five categories:

Outcomes
Intermediate outcomes
Patient experience
Access
Process

Plans that offer prescription drug coverage only are called prescription drug plans (or PDPs) and are rated on 15 quality and performance measures. Medicare Advantage plans without prescription drug coverage are evaluated on 32 measures, and MA-PD contracts are rated on 44 quality and performance measures. In 2017, the star ratings included an adjustment to account for the socioeconomic status of enrollees. Also in 2017, CMS weighed outcomes and intermediate outcomes as three times more important than process measures, and patient experience and access to care measures were weighted 1.5 times as much as process measures.

Almost half of MA-PD plans in 2017 had an overall rating of four stars or higher and almost 70 percent of enrollees in Medicare Advantage were in health plans that received at least four stars.

But for health plans that had poor ratings, the consequences were severe. In the fall of 2016, the stock prices of Cigna and Humana fell after CMS released its most star ratings report. The lower ratings followed a CMS audit that resulted in sanctions for Cigna, according to Modern Healthcare. The proportion of MA members in Humana plans with four stars dropped from 78 percent in 2016 to 37 percent in 2016, Modern Healthcare reported. After CMS reported this news, share prices for Humana stock dropped 5 percent and Humana said it would appeal the ratings.

For Cigna, only 20 percent of its MA members were in plans with four stars or higher, even after the health insurer spent a year trying to resolve problems in its MA offerings, the news magazine reported. Cigna shares fell 2.4 percent. Cigna said it did not believe the ratings accurately reflected the quality of care that its MA plans provide.

Stark Law or Physician Self-Referral Law

Enacted in 1989, the Physician Self-Referral Law (commonly called the Stark law) prohibits physicians from referring patients for care that the federal Department of Health and Human Services calls "designated health services" if Medicare or Medicaid would pay for those services and if the physicians or immediate family members of physicians who provide those services have a financial relationship with the referring physician. Financial relationships include ownership and investment interests and compensation arrangements. Strictly speaking, the Stark law prohibits the submission, or causing the submission of, claims in violation of the law's restrictions on referrals.

In other words, under the Stark Law, a physician cannot refer a patient to an entity the physician or an immediate family member owns or has a financial interest in if the entity will deliver health care services to the patient and submit claims for those services to Medicare, Medicaid or other federal health care programs. A physician could not refer a patient, for example, to a clinical laboratory or rehabilitation facility or nursing home if he or she or an immediate family member has a financial interest in the entity.

Under the Stark Law, which is named for former California Congressman Fortney (Pete) Stark, certain exceptions apply. A physician could invest in an imaging or surgery center but would not be allowed under the Stark law to refer his or her patients to these facilities or the facilities may not be able to file claims for the imaging or surgery services without an exception. The HHS secretary can establish exceptions for financial relationships that do not pose a risk of abuse to patients or the federal health care programs.

Under the Stark law, designated health services are those that would be delivered by a clinical laboratory; a physical or occupational therapy center; an outpatient speech and language pathology provider; radiology and other imaging services; radiation therapy services and supplies; durable medical equipment and supplies (such as wheelchairs and hospital beds); parenteral and enteral nutrients or equipment and supplies; prosthetics, orthotics, and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services.

The Stark law is considered a strict liability statute, meaning prosecutors would not need to prove a specific intent to violate the law. For violations of the Stark law, physicians and other providers can face fines and be excluded from participating in federal health care programs.

In June 2018, the federal Centers for Medicare and Medicaid Services requested comments on a plan to revise the Stark law to allow for better care coordination and new alternative payment models or other financial arrangements such as accountable care organizations and bundled payment.

For more information, see the CMS page on Physician Self Referral and the request for information.

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.

Do consumers benefit from value-based care?

The Health Care Transformation Task Force has developed seven principles designed to ensure that health care providers and health insurers adopt value-based approaches to care that support consumers seeking care under value-based care (VBC) models. Established in 2014, the task force says it represents patients, health insurers, health care providers and employers and other purchasers seeking to transform the health care system to value-based models of care and payment that support better health, better care and lower costs.

Even though there is no standard definition of VBC, almost all health systems and health insurers have expressed support for the concept in part because it has become a term of art that health care providers and health insurers use when marketing their products and services. After all, who would oppose value-based care?

While many health systems or health insurers say they have adopted consumer-focused approaches to VBC, most often these approaches are built on models of care deliver that use value-based payment. While the two terms are often used interchangeably, value-based payment is not synonymous with value-based care, as explained in this tip sheet. Therefore, journalists should be skeptical whenever health insurers and health care providers use either terms, value-based care and value-based payment.

A definition of value-based care that seems most appropriate is one that defines VBC as being, “the improvement in the health outcomes that matter most to patients for the cost of achieving those outcomes.” That means that if care does not improve a patient’s health, then no value is created, as professors Elizabeth Teisberg, Ph.D., executive director of the Value Institute for Health and Care at the University of Texas Dell Medical School, and Scott Wallace, J.D., M.B.A., the institute’s managing director, explained during a webcast on the subject.

HCTTF’s Patient-Centered Priorities Work Group developed its seven principles of consumerism in VBC as a benchmark or checklist for health insurers and providers to assess whether their approaches to care empower patients as partners in care delivery, HCTTF said.

Teisberg and Wallace’s definition of value-based care is similar to HCTTF’s seven principles because HCTTF defines health care consumerism as an approach that puts economic purchasing power—and decision-making—in the hands of participants. Also, the work group said it developed the principles to promote patients’ goals and preferences.

The first principle states that the primary goal of health care consumerism should be to support a person's ability to receive high-quality health care that best aligns with the person’s goals, expectations and preferences for services in a culturally relevant way. Unfortunately, the work group added, “Reductions in cost, while important, should be secondary benefits.”

Second, health insurers, health care providers and health care purchasers (such as employers, states, the federal government and others that buy health care services) should directly engage consumers in designing consumer-oriented health plans.

Third, all approaches to consumerism should consider health equity and avoid implementing any incentive or policy that could exacerbate disparities, the work group said.

Fourth, consumerism approaches should allow consumers to make meaningful choices by designing systems that work well for all individuals, including those with limited resources or abilities to use the health care system.

Fifth, clear and transparent information is essential to support each patient’s ability to make decisions based on personal preferences and financial considerations.

Sixth, financial risk (meaning consumers’ costs) should be manageable and apply only to areas in which consumers can make choices.

Seventh, incentives for individuals should align with and complement the incentives created for providers under VBP models. The work group did not provide an example of how incentives might be aligned among consumers and providers.

Value-based drug contracts

As the health care system shifts from payment based on volume to payment based on value, health insurers are developing value-based contracts with pharmaceutical companies. Under these contracts, health insurers are rewarding successful outcomes of medication use in patients, rather than pay based on the volume of drugs sold. These value-based contracts represent one approach to managing drug costs and obtaining better value for money spent, according to a report, Rewarding Results: Moving Forward on Value-Based Contracting for Biopharmaceuticals from the Network for Excellence in Health Innovation.

The term ‘value-based pricing’ encompasses several different payment arrangements. In one of those arrangements, a pharmaceutical company would link the price it charges for a given drug to an assessment of how well it works, according to an article in Health Affairs, “Value-Based Pricing For Pharmaceuticals In The Trump Administration.” In this article, the authors wrote, “More sophisticated versions of value-based pricing in the marketplace would allow insurers and patients to receive rebates from drug manufacturers if a drug failed to work, an arrangement known as ‘outcome-based pricing.’ Another variant would involve ‘indication-based pricing,’ in which drug companies charge different prices for the same drug when it is used to treat different conditions.

Among the first value-based contracts that health insurers have signed is one that Harvard Pilgrim Health Care negotiated with Amgen for its PCSK9 inhibitor, a cholesterol-lowering drug called Repatha. Under this contract, Amgen will pay HPHC and its members a full refund if a member requires hospitalization for a heart attack or stroke after taking Repatha for at least six months and achieving an appropriate level of compliance.

HPHC has 12 value-based contracts with pharmaceutical companies, including Eli Lilly and Co. In one contract, HPHC will pay Eli Lilly a lower price for its Type 2 diabetes drug Trulicity if patients do better on competing diabetes drugs, according to Modern Healthcare.

Health insurers also have developed an innovative payment model for Spinraza, a drug for spinal muscular atrophy from Biogen and Ionis, which set the price or Sprinraza at $750,000. Anthem and Humana said they would cover the medication after the first six months only if Biogen and Ionis could prove that patients were responding to treatment positively. UnitedHealthcare said it would cover the drug for patients with spinal muscular atrophy but added seven conditions that patients must meet.

While these examples show insurers and pharmaceutical companies are making progress in value-based contracting, experts say government regulations prevent more widespread use of such arrangements. One of those regulations is Medicaid’s so-called best-price rule in which state Medicaid programs get. Under this rule, Medicaid is guaranteed to pay the lowest price that the manufacturer offers, according to Health Affairs.

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 pharmaceutical contracts

Value-based contracts for pharmaceuticals are becoming more common as health insurers aim to hold drug manufacturers accountable for the results of their products. This new approach is designed to control the rising cost of drugs while requiring pharmaceutical manufacturers to prove that their medications produce positive medical outcomes for patients. Health insurers want guarantees that medications will keep patients out of the hospital, reduce hospital length of stay or avoid surgery, as pharmaceutical companies have long promised.

In May 2017, Optum, a unit of health insurer UnitedHealth Group, and Merck, a pharmaceutical company, announced an agreement to develop reimbursement models in which payment for prescription drugs would be aligned with patient outcomes. The companies will explore value-based and pay-for-performance models, which they called outcomes-based risk sharing agreements.

One goal of such contracts is to reflect the actual performance of new medicines given that what pharmaceutical companies report about how their drugs perform during well-controlled clinical trials frequently differs from what happens when health insurer’s members take these medications, Harvard Pilgrim Health Care (HPHC) said when it announced a new value-based contract early in 2017. Under value-based contracts, pharmaceutical companies may pay refunds if drugs don’t work or health insurers will pay less if patients take the drugs as prescribed. By agreeing to accept lower payments for drugs, the pharmaceutical companies would exchange increased sales for lower unit prices.

Early in 2017, HPHC had 12 outcomes-based contracts with pharmaceutical companies, one of which was a contract with Amgen for an LDL cholesterol lowering drug called Repatha, a PCSK9 inhibitor. Amgen agreed to pay HPHC and its members a full refund if a member needed to be hospitalized after suffering a heart attack or stroke after taking Repatha for at least six months and achieving an appropriate level of compliance.

HPHC also has an outcomes-based contract for Amgen’s Enbrel for patients with autoimmune diseases, such as rheumatoid arthritis. Under a two-year contract, HPHC said its payment would depend on patient compliance with a physician’s dosage requirements, the need for steroid interventions and dose escalation, among other conditions. If patient scores are below a certain level, HPHC would pay less because the drug would be less effective than expected, the health insurer said.

In another outcomes-based contract, Eli Lilly agreed to cut the cost of Forteo, a medication for patients with osteoporosis if HPHC members reach a certain level of adherence to physicians’ prescribing recommendations. Eli Lily says that patients need to take Forteo by self-injection every day for 24 months, and that inconsistent dosing can reduce its effectiveness. Under the HPHC contract, the health insurer has a baseline level of use among its members and tracks improvement against the baseline. If members reach a certain level of adherence, then Eli Lilly would cut the unit cost of the drug in exchange for regular use of the medication among HPHC members. In essence, Eli Lilly would give HPHC a discount for increased sales volume.

Other insurers have developed outcomes-based contracts as well. Anthem and Humana agreed to cover Spinraza, a drug for spinal muscular atrophy that Biogen and Ionis sell for $750,000, but only if the companies could prove that patients were responding to treatment positively after the first six months on the medication. In 2016, Aetna and Cigna announced outcomes-based contracts with Novartis AG for Entresto, a drug for patients with heart failure. Cigna ties payments to how well the drug reduces the number of Cigna’s members who are hospitalized for heart failure. Under Aetna’s agreement with Novartis, Aetna’s payment will be tied to how well the drug matches the results produced during clinical trials.

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

Wrong patient errors

Failing to associate the right patient with the appropriate action is called a wrong-patient error. The risk of such errors is significant, according to a recent report from ECRI. An executive summary of the ECRI PSO Deep Dive: Patient Identification is free.

Such risk increases as a result of increasing patient volume, frequent handoffs among providers, and increasing interoperability and data sharing among IT systems, the report shows. Two of the most important findings from the report are that, first, about 9 percent of the events led to temporary or permanent harm or death, and, second, most, if not all, wrong-patient errors are preventable.

The National Quality Forum lists wrong-patient mistakes as serious reportable events and considers patient identification to be a high-priority area for measuring health information technology (IT) safety. Since 2003, the Joint Commission has made accurate patient identification one of its national patient safety goals.

Most patient-identification mistakes are caught before care is provided and many health care providers do not believe they will make such mistakes, the researchers found. But, the ECRI researchers also found that any member of a patient's health care team can make an identification error, including physicians, nurses, lab technicians, pharmacists, and others.

In their analysis of reported wrong patient errors, the researchers show that patient identification mistakes occur in every health care setting, including hospitals, nursing homes, pharmacies, and physicians’ offices. Also, they show that incorrect patient identification can occur during multiple procedures and processes, including patient registration, electronic data entry and transfer, medication administration, medical and surgical interventions, blood transfusions, diagnostic testing, patient monitoring, and emergency care. Interestingly, many patient identification errors affect at least two people. When a patient gets a medication intended for another patient, for example, two patients can be harmed: the one who received the wrong medication and the one whose medication was not delivered.

For the report, ECRI reviewed more than 7,600 wrong-patient events occurring over 32 months and reported submitted by 181 health care organizations. Since the reports on these events were submitted voluntarily, they may represent only a small percentage of all wrong-patient events that occurred at these organizations, ECRI said.

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