Medicare & Baby Boomers

A key issue in this year’s upcoming presidential election is the future of Medicare. Nearly everywhere you turn (e.g., 2012 Medicare debate is all about the baby boomers- Yahoo! Finance) people are embracing different ideas to address the shortfalls in Medicare funding. These changes will have a significant effect on health care providers and manufacturers because it has the potential to change how these companies are paid. Impending changes to Medicare will decide whether providers will work with an increasing number of private insurance companies or if they continue to work with government payers to reimburse for the use of their products. As the number of baby boomers enrolling in Medicare continues to rapidly increase at a rate of over 1.5 million enrollees per year^1, the issue becomes more and more prominent. Although not a baby boomer myself, I am a potential future Medicare beneficiary, making the future of the program a concern for me as well.

The indicator of Medicare’s financial health that receives the most attention is the Hospital Insurance (HI) Trust Fund. Since 2008, the payments made from the HI Trust Fund have exceeded its total income². Any basic level of accounting knowledge will tell you, when expenses surpass income, there’s a problem. These deficits support the importance of implementing changes to Medicare, and unfortunately shortfalls like this are projected to continue and accumulate over the next several years.

Representatives of both major political parties agree on certain alterations to Medicare. Some examples of agreed upon alterations include limiting the future growth of federal spending on Medicare by maintaining the current percentage and limiting future growth of its percent of the federal budget, increasing the amount of money coming from upper and middle class retirees through higher out-of-pocket expenses for beneficiaries, and raising the age of eligibility from 65-67³ over time

As I touched upon before, the HI Trust Fund is an important indicator of Medicare’s financial stability. This fund is predicted to run out by approximately 2029⁴.  Although this would not be an instant end to Medicare, that money is clearly an important factor to its functionality considering Medicare’s continued consumption on a year to year basis. Congress will compare the budget impact from reducing reimbursement advantages to those of others strategies, such as increases in payroll taxes and changing Medicare from a guaranteed benefit to a subsidy toward the purchase of private health insurance.

One of the biggest divides between political parties in this debate is on privatization of payment for care. Many Republicans would prefer to see increased privatization. Wisconsin Republican Representative and chairman of the House Budget Committee, Paul Ryan, introduced a proposal in April 2011 providing more competition to traditional Medicare by private insurance companies, while still keeping government-run Medicare as an option. Individuals enrolled in Medicare would receive a monthly payment to put toward whatever option they want, while those over 55 would not need to make any changes. Ryan’s plan has been supported by many other political figures such as Republican presidential candidate Mitt Romney as well as Democratic Senator Ron Wyden.

President Obama responded to Ryan’s plan with ideas of his own that involve slightly less savings, $4 trillion over 12 years opposed to Ryan’s $6 trillion over 10⁵. However, these savings would be only partially achieved through cuts in spending, unlike Ryan’s proposal. About half of the savings in Obama’s plan would come from increases in taxes. President Obama has acknowledged privatization as a legitimate idea, but does not support it because he believes it will be too problematic⁶.

Increasing the number of private insurance companies assuming risk for Medicare beneficiaries, and the way in which they participate from a third-party administrator to covering the elderly as a subsidiary of the federal government changes where healthcare providers receive their payments from. Instead of the traditional government run fee-for-service program, private plans would make the payments, increasing their power in the Medicare system. This may also have an effect on MedSpan’s medical device clients and how their products are utilized. Certain drug therapies and procedures may not be covered or reimbursed in the same way or to the same extent under a private insurance plan as they are under Medicare’s government-run program, altering which devices are used. Privatization would help Medicare maintain a more consistent percentage of the federal government budget instead of continuing to grow. It would also increase the breadth of options beneficiaries would have, based on what different companies are willing to offer. Having more options will result in more personalized care to what each beneficiary wants and needs.

I believe Ryan’s proposal to be the best alternative that has been presented. The current system for Medicare has not proved to be sustainable, so I think making seemingly drastic changes to the structure will give the program the best shot of surviving. The federal government would have a simpler involvement in Medicare should Ryan’s plan be adopted. They will provide the necessary subsidies to beneficiaries, leaving those individuals to choose what is best for them from a broader pool of plans.

This is one of the most critical issues for our clients to keep an eye on, and they should analyze how different changes will affect their business. It is almost certain that some changes will be made, so beginning to prepare now will make for an easier adjustment in the near future.

Author: Jamie Notaro

Edited by: Robert Kaminsky & Ken Chiang

 

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^1,3Yahoo! Finance: http://finance.yahoo.com/news/2012-medicare-debate-baby-boomers-095929303.html

^2,4Kaiser Family Foundation: http://www.kff.org/medicare/upload/7731-03.pdf

⁵LA Times: http://articles.latimes.com/2011/apr/14/opinion/la-ed-budget-20110414

⁶Talking Points Memo: http://tpmdc.talkingpointsmemo.com/2011/04/flashback-obama-calls-medicare-privatization-legitimate-but-problematic-proposal-video.php

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Expansion towards Universal Coverage and Lifecycle Management

Healthcare reform is a 2000+-page legislation that could have a significant impact on the lifecycle management of pharmaceuticals, medical devices, and diagnostic imaging procedures.  Reading the legislation indicates that the following aspects of healthcare reform are of particular interest to healthcare manufacturers.

• Expansion towards universal coverage
• Funding expanded coverage
• Biosimilars
• Enhancing the quality of care
• Comparative effectiveness research
• Episodic and bundled payments
• Funding preventive care

Over the next few days, we’ll examine the various aspects of healthcare reform that fall into each category.  We’ll evaluate their impact on lifecycle management of pharmaceuticals, medical devices and diagnostic imaging procedures.  Our analysis will show that healthcare reform offers healthcare manufacturers many new levers to pull in their quest to maximize their return on investment.

Expansion towards Universal Coverage

In many ways, healthcare reform will move us towards universal coverage of all US citizens. 

• Medicaid expansion – Healthcare reform requires all states to expand coverage to everyone below 133% federal poverty limit (FPL).  This includes providing coverage for childless adults who meet the income limit.
• National insurance exchange – Healthcare reform will establish non-profit co-operatives where the uninsured and those who prefer to not use their employer-provided plans can purchase coverage.  Premiums will be set by the market.  The federal government will subsidize the cost of premiums for citizens who qualify based on income considerations.  Citizens with income up to four times the FPL will qualify.
• Elimination of preexisting condition exclusions – After 2013, health plans will not be able to deny coverage to applicants based on preexisting conditions.
• Coverage of all dependent children until 26 – All children, regardless of income or place of residency or marital status will qualify for coverage under their parent’s policy.
• Prohibit lifetime limits and annual limits on the dollar value of benefits for all beneficiaries – In today’s market, most health plans place an annual and lifetime limit on the benefits they will provide for medical and pharmacy coverage.  Healthcare reform will terminate those limits. 

These aspects of healthcare reform will have a significant impact on the lifecycle management of pharmaceuticals, medical devices, diagnostic imaging procedures and more.

• Increase in number of covered US citizens – The most obvious impact of healthcare reform is that almost all US citizens will have coverage for their healthcare costs.  Moving towards universal coverage leads to increased utilization of healthcare resources and a greater revenue opportunity for manufacturers. 

  However, on the flip side of the coin, the increase in the number of covered lives and healthcare resource utilization will drive health plans and the Centers for Medicare and Medicaid Services (CMS) to more closely manage costs.  For example, health plans will feel an increase in pressure to reduce the number of hospital admissions and emergency room visits, utilization of diagnostic imaging procedures and access to select drug therapies.

  The movement towards universal coverage, in conjunction with the wave of mergers and acquisitions among health plans, will increase the number of covered lives per health plan.  The increase in the number of covered lives per health plan increases each organization’s negotiation leverage with healthcare manufacturers.  That leads to downward pricing pressure for healthcare manufacturers.

  Moving towards universal coverage will increase the workload for physicians, hospitals and other providers.  Any pharmaceutical, medical device, diagnostic imaging procedure that saves time for the manufacturer will enable the provider to manage their workload.  This is a benefit that healthcare manufacturers can market to the extent that labor savings are documented by compelling data.

• Change in commercial plan demographics – Healthcare reform will lead to a change in the demographics of the lives that commercial plans cover.  For example, there will be an increase in the number of young adults who become covered by their parent’s policies.  Patients who previously were denied coverage due to a chronic disease will now have coverage.  Patients who suffer from diseases that are costly to treat, such as cancer, and exceed their annual or lifetime limits will now have continuous coverage.  These changes in demographics could affect the priorities that health plans assign to select disease states and how they manage the products and procedures used to diagnose and treat them. 

  This could enhance access to some healthcare procedures and products and, therefore, increase their utilization.  Conversely, changes in the demographics could reduce access to procedures and products and, therefore, increase their utilization.

• Change in Medicaid demographics – Raising the income limit to qualify for Medicaid coverage and allowing coverage of childless adults will change the demographics of Medicaid plans.  A significant number of new beneficiaries who previously were uninsured will be older and sicker than those currently covered by Medicaid.  Today’s Medicaid beneficiaries are primarily younger women and children. 

  For the same reason and with the same implications, some people currently covered by commercial plans will qualify for Medicaid coverage and convert.  Converting to Medicaid coverage will reduce the cost of coverage.

  Changing the demographics of Medicaid beneficiaries could lead to a change in priorities of for managing diseases and the emphasis on negotiating rebate contracts and managing access to products and procedures.  For example, after 2013, Medicaid plans could place a higher priority on managing cardiovascular and chronic diseases and a lower priority on managing schizophrenia.  Changing priorities for negotiating contracts could exert downward pricing pressure on some healthcare products and lessen pricing pressure for others.

  Covering older and sicker patients could improve the overall, historically-low Medicaid compliance rates.  This could enhance the utilization of products among Medicaid populations.

• Uninterrupted coverage – Upon implementation of healthcare reform in 2014, there will be uninterrupted coverage for patients receiving high-cost therapies due to elimination of lifetime and annual limits.  This is likely to increase the utilization of products and procedures associated with diseases that are very costly to treat.
• Elimination of the Medicare Part D coverage gap – Healthcare reform will gradually eliminate the Medicare Part D coverage gap by 2019.  This will enhance access to therapies for Medicare Advantage beneficiaries, which will drive their increased utilization.

In our next blog post, we’ll look at how healthcare reform will be funded and how that could affect lifecycle management of healthcare products and procedures.

Medicare Reductions — Real or Imaginary?

The Obama administration is expected to release a report today that indicates that healthcare reform will reduce Medicare spending by $575 billion over the next 10 years, starting with an $8 billion savings in 2011.  This could add 12 years of solvency to the program’s trust fund.

As with any partisan government report, we need to evaluate the accuracy of the numbers and the underlying assumptions.  Does it present a realistic and complete assessment?  Will the savings be used to solidify the Medicare trust fund, reduce premiums for our nation’s seniors or for another purpose?  The report indicates that Medicare spending cuts will help to lower seniors’ monthly premiums by nearly $200 annually by 2018.  For the moment, let’s assume and hope that the estimate is accurate and will be used to solidify the trust fund and reduce premiums for seniors.  These are all good outcomes and well worth pursuing.

One approach to generating the above savings is to implement price controls.  Medicare spending will keep increasing, only not as fast. Under the law, spending will rise by 5.3% a year on average over the next decade, compared to 6.8% without the cuts.  

The biggest portion of the Medicare cuts is from reductions in projected payment increases to hospitals and other providers over the next 10 years. The second biggest portion is reductions in payments to Medicare Advantage plans.  Cuts to Medicare Advantage plans start right away. The report says Medicare Advantage cuts account for $5.3 billion through 2011, more than 60% of the total estimated two-year savings of $7.8 billion.  An analysis by the Kaiser Family Foundation earlier in 2010 suggests that reductions in payments to Medicare Advantage would amount to $130 billion by 2019.  The reason for these reductions, per some analysts, is that the Medicare Advantage plans are overpaid when compared to the cost of care in traditional Medicare.  

As we’ve written before, price controls produce unintended effects.  How will hospitals and physicians react to a reduction in spending?  Will they sacrifice the quality of care?  Will they provide fewer services?  Will seniors realize $200 reductions in premiums but a greater reduction in services and quality?  Is that constructive? 

The insurance industry says the cuts will mean steep premium increases for millions of seniors in the plans. That could trigger an exodus, with seniors returning to traditional Medicare.  Is this the effect the government intended?

Unintended effects also is one of the reasons that a national health plan, so seductively attractive in many ways, was not implemented.  Monopolistic, or near monopolistic control, can yield arbitrary strategies and tactics that are not beneficial to Medicare beneficiaries and providers.

More effective than using the stick (ie, payment reductions) to force providers to become more efficient is to first provide incentives to drive quality and efficiency.  For example, a program to reduce hospital readmissions due to preventable infections and other problems is estimated to save $8 billion over 10 years. And projects involving the patient-centered medical home (ie, a new, team-based approach to providing medical care for seniors) is estimated to save $5 billion over the same period, by keeping patients with chronic health problems healthier and avoiding hospitalization.

The incentives in place in our healthcare delivery system often discourage cost-effective, high quality care.  Instead, these programs encourage more cost-effective care by removing wasteful care from the system.  These programs encourage higher-quality care.   

Revising incentives, gaining consensus and support and implementing new programs takes time and investment.  While better in the long run, the issues facing Medicare and the healthcare system overall are pressing.  Therefore, the carrot (ie, programs that drive higher-quality, lower cost care) cannot be the only approach that is used.  The stick also must be used to gain short-term improvements.  Unintended effects will need to be managed. 

My suggestion is that the proportion of stick to carrot needs to be constructive.  The current approach relies heavily on price controls (ie, the stick) and experiments to a limited degree with quality-improvement programs that drive lower cost.  The ratio needs to be changed to a more even balance between the two approaches.  That will yield longer-term benefits and reduce the impact of unintended effects.

Evidence-based radiology — a concept on the cusp

For some years now, payers, academics and clinical practitioners have had concerns about the justifications for clinical practice patterns.   The need for evidence-based practice ranges from formulary design to clinical care to radiology.

“Medical practice is largely based on clinical anecdotes, uncontrolled investigations and expert opinion. The demand for scientific evaluation to guide patient care is increasing because financial resources are limited and because practice based on such influences may be inappropriate. In radiology, the situation is especially problematic…. Few radiology programs address and encourage critical thinking skills.” (Source: Hillman BJ, Noninterpretive skills for radiology residents. Critical thinking: deciding whether to incorporate the recommendations of radiology publications and presentations into practice. AJR Am J Roentgenol 2000; 174 (4):943-946.)

For example,  when clinicians, such as radiologists, health plan administrators, and others try to decide between imaging and interventional options, they may find that textbooks are out of date, guidelines are not specific enough and there are conflicting or apparently unreliable reports in the literature. Expert opinions and policies vary and even the definition of ‘evidence’ is unclear.

Some experts recommend using the ‘consensus of experts’ approach.  However, the reliability and reproducibility of this type of evidence is questionable.  Others recommend the use of guidelines that are based on expert appraisal of the literature.  These are roughly equivalent to a consultation with experts but may not answer our specific question well, be based on strong evidence or take into account new developments and local circumstances.  However, when clinicians and health plan administrators go to the literature, the first problem encountered is the volume of literature being published and, perhaps, a lack of training in how to separate the good studies from the weak ones.  Another problem is determining whether specific clinical decisions and medical policies should be based on the general consensus illustrated by the evidence or following a minority opinion that better applies to a specific situation or sub-group of patients.

One of the issues facing healthcare manufacturers is how to best support clinicians and administrators as they address these challenges.  For healthcare manufacturers, the key questions are 1) What type of data will my customers find most compelling?  2) How will that data best support my marketing efforts and support appropriate adoption of my product? 3) How can I develop the data most cost effectively?  Is a retrospective study or an observational study sufficient?  Is a costly prospective study with a randomized design necessary?  4) What return will I realize from the data I develop?

The first step for healthcare manufactures is to realize the data are necessary.  As comparative effectiveness research becomes more prevalent and clinical decisions are increasingly scrutinized, data is all that clinicians and administrators will find relevant and compelling. 

The next step is to develop an evidence plan early in the product development process.  To the extent possible, the time to develop such data is when drugs are going through clinical trials or diagnostic assays and imaging equipment and applications are under development.   Developing data after FDA approval and product launch could burn the limited commercialization time available before a competitor arrives or patent protection expires.

The evidence plan should be based on the expected return on investment.  If less-costly retrospective and observational studies will drive adoption, though perhaps not optimally, they might optimize ROI.  Potential market blockbusters might warrant costly prospective, multi-center studies that support a lasting and profitable competitive advantage.

The design of specific studies within the evidence plan should be based on the intended audience.  Payers (eg, health plans and hospital administrators) are looking for value.  That is the expected improvement in quality of care, based on specific and measurable outcomes, divided by the impact on cost.  Cost includes that of the drug, device or imaging application as well as any cost offsets (eg, reduction in hospitalizations) directly due to the product.  Providers are more focused on improvements in clinical care and outcomes and, to a lesser degree, cost impact. 

As today’s discussion begins to illustrate, the development of an evidence plan is a complex undertaking that should be well thought out.  Today’s environment and its emphasis on comparative effectiveness, cost management and access to appropriate therapies and procedures makes the development of the evidence plan more critical than ever before.

Radiology Benefit Managers — My Path to Discovery

Yesterday, I was speaking with a potential client who manufactures diagnostic imaging equipment.  To my surprise, I learned about a new player in the healthcare system: diagnostic benefit managers.  Every day, I seem to learn about a new facet of healthcare delivery system that illustrates how large and complex it is.  While simplicity might be good, the healthcare industry has left that idea far behind.

Radiology benefit managers play a well-defined and important role.   Their goal is to lower radiology costs by enhancing physician knowledge.  They accomplish by making sure physicians they need to order the most appropriate diagnostic imaging exams and radiation oncology treatment plans.  Making sure patients get the right tests and treatments at the right time lowers cost, improves the quality of care and reduces the incidence of illness caused by unnecessary radiation exposure. 

A report from November 2008 in the Wall Street Journal documented how diagnostic imaging exams, such as MRIs and PET and CT scans have helped drive up health care costs .  CT and MRI scans increased by 43% in five years to a total of 96.2 million procedures in 2007, while PET scans more than tripled from 2001 to 2005, for an estimated total of 1.1 million.

A recent Government Accountability Office report found that Medicare spending on scans varied significantly by geographic region and suggested that not all procedures were “necessary or appropriate.”   Also, the new diagnostic imaging applications become available almost every day.  It can be challenging for physicians to stay abreast of all of the changes.  A radiology benefit manager can educate physicians about these advances by providing clinical evidence and diagnostic algorithms approved by leading medical societies.

Insurers can require physicians to obtain permission from a radiology benefit manager before ordering a costly imaging exam.  The effort and staff time required to gain authorization can in and of itself help reduce the conduct of unnecessary diagnostic exams. 

About 90 to 100 million consumers are enrolled in health plans that use radiology benefit managers.  This accounts for more than half of all U.S. residents with commercial insurance. The three largest radiology benefit managers are CareCore National; American Imaging Management, a WellPoint subsidiary; and National Imaging Associates, a unit of Magellan Health Services.   These organizations grant immediate approval to 70% or more of imaging requests and authorize even more after having in-depth conversations with doctors.  It is the education and sentinel effect they provide as well as the disapproval of a limited portion of the imaging requests that makes their mission cost-effective for insurers.

In the future we’ll explore these organizations in more depth.  We’ll also examine other relatively unknown but impactful  players in the healthcare system.  I sometimes wonder what portion of our healthcare costs, which total approximately 18% of gross domestic product, is due to the number of players in our complex and bureaucratic healthcare system.   Does the sheer number of players help more than it helps or vice versa?  Will healthcare reform add to the number of players and the bureaucracy of our system or will it streamline it?