Paying for Healthcare Reform

February 27, 2009

Of the $634 billion Obama wants to put aside as a “down payment” on healthcare reform, about half ($316 billion) is expected to come from spending cuts and other savings, the rest from tax increases.  Here are the bullet points for Obama’s budget that lays out where the funding will come from over the next 10 years.

• “Reducing Medicare Overpayments to Private Insurers Through Competitive Payments. Under current law, Medicare overpays Medicare Advantage plans by 14 percent more on average than what Medicare spends for beneficiaries enrolled in the traditional fee-for-service program. The Administration believes it’s time to stop this waste and will replace the current mechanism to establish payments with a competitive system in which payments would be based upon an average of plans’ bids submitted to Medicare. This would allow the market, not Medicare, to set the reimbursement limits, and save taxpayers more than $175 billion over 10 years, as well as reduce Part B premiums.

• “Reducing Drug Prices. Prescription drug costs are high and rising, causing too many Americans to skip doses, split pills, or not take needed medication altogether. The Administration will accelerate access to make affordable generic biologic drugs available through the establishment of a workable regulatory, scientific, and legal pathway for generic versions of biologic drugs. In order to retain incentives for research and development for the innovation of breakthrough products, a period of exclusivity would be guaranteed for the original innovator product, which is generally consistent with the principles in the Hatch-Waxman law for traditional products. Additionally, brand biologic manufacturers would be prohibited from reformulating existing products into new products to restart the exclusivity process, a process known as “ever-greening.” The Administration will prevent drug companies from blocking generic drugs from consumers by prohibiting anticompetitive agreements and collusion between brand name and generic drug manufacturers intended to keep generic drugs off the market. Finally, the Budget will bring down the drug costs of Medicaid by increasing the Medicaid drug rebate for brand-name drugs from 15.1 percent to 22.1 percent of the Average Manufacturer Price, apply the additional rebate to new drug formulations, and allow States to collect rebates on drugs provided through Medicaid managed care organizations. All the savings would be devoted to the health care reserve fund.

• “Improving Medicare and Medicaid Payment Accuracy. The Government Accountability Office (GAO) has labeled Medicare as “highrisk” due to billions of dollars lost to overpayments and fraud each year. The Centers for Medicare and Medicaid Services (CMS) will address vulnerabilities presented by Medicare and Medicaid, including Medicare Advantage and the prescription drug benefit (Part D). CMS will be able to respond more rapidly to emerging program integrity vulnerabilities across these programs through an increased capacity to identify excessive payments and new processes for identifying and correcting problems.

• “Improving Care after Hospitalizations and Reduce Hospital Readmission Rates. Nearly 18 percent of hospitalization of Medicare beneficiaries resulted in the readmission of patients who had been discharged in the hospital within the last 30 days. Sometimes the readmission could not have been prevented, but many of these readmissions are avoidable. To improve this situation, hospitals will receive bundled payments that cover not just the hospitalization, but care from certain post-acute providers the 30 days after the hospitalization, and hospitals with high rates of readmission will be paid less if patients are re-admitted to the hospital within the same 30-day period. This combination of incentives and penalties should lead to better care after a hospital stay and result in fewer readmissions—saving roughly $26 billion of wasted money over 10 years. The money saved will also be contributed to the reserve fund for health care reform.

• “Expanding the Hospital Quality Improvement Program. The health care system tends to pay for quantity of services not quality. Experts have recommended that hospitals and doctors be paid based on delivering high quality care, or what is called “pay for performance.” The President’s Budget will link a portion of Medicare payments for acute in-patient hospital services to hospitals’ performance on specific quality measures. This program will improve the quality of care delivered to Medicare beneficiaries, and the higher quality will save over $12 billion over 10 years. Again, the money saved will be contributed to the reserve Fund for health care reform.

• “Reforming the Physician Payment System to Improve Quality and Efficiency. The Administration believes that the current physician payment system, while it has served to limit spending to a degree, needs to be reformed to give physicians incentives to improve quality and efficiency. Thus, while the baseline reflects our best estimate of what the Congress has done in recent years, we are not suggesting that should be the future policy. As part of health care reform, the Administration would support comprehensive, but fiscally responsible, reforms to the payment formula. The Administration believes Medicare and the country need to move toward a system in which doctors face better incentives for high-quality care rather than simply more care.

• “Reducing Itemized Deduction Rate for Families With Incomes Over $250,000. Lowering health care costs and expanding health insurance coverage will require additional revenue. In the health reform policy discussions that have taken place over the past few years, a wide range of revenue options have been discussed—and these options are all worthy of serious discussion as the Administration works with the Congress to enact health care reform. The Administration’s Budget includes a proposal to limit the tax rate at which high-income taxpayers can take itemized deductions to 28 percent—and the initial reserve fund would be funded in part through this provision. This provision would raise $318 billion over 10 years.”


Obama ‘Aiming for Universality’

February 27, 2009

For some healthcare reformers and industry observers, the key paragraph in Obama’s budget proposal was the following: “Aim for universality: The plan must put the United States on a clear path to cover all Americans.”  If you had any doubts that universal healthcare is what Obama always wanted (I didn’t), there it is in black and white.  Whether we will actually get there is another story, but we’re in the soup now.


Obama’s Budget: Universal Healthcare, Universal Pain for Medicare Plans

February 27, 2009

As expected, President Obama released a budget yesterday promising to put the nation on “on a clear path” toward universal healthcare, paid for in part through cuts in the Medicare Advantage program (along with tax increases on the wealthy and other spending cuts).

The budget sets aside a reserve fund of $630 billion over 10 years to pay for healthcare reform, less than half of what’s needed according to most estimates.   Obama called it a “down payment,” an unfortunate phrase given the number of Americans who put down payments on their homes and then went broke trying to pay the rest.

The cuts to health plans (i.e., the elimination of a 14% Medicare Advantage payment subsidy compared to traditional Medicare) are expected to save $175 million over 10 years, the Administration says. 

How?  By opening Medicare Advantage up to a competitive bidding process, which is how the Medicare drug program works.    Today, Medicare Advantage reimbursements are set by a complex formula relative to county-by-county benchmarks tied to the cost of traditional Medicare.

The competitive bid concept isn’t all bad.  But there are lots of questions, including whether health plans will exit the program because they can’t make the numbers work.  Wall Street’s reaction was to send managed care stocks into another tailspin, suggesting at least the belief that health plan margins will be hurt.

You can expect a lot of horse trading ahead before this budget is passed by Congress; it’s no done deal by any stretch of the imagination.  But the bottom line is Medicare Advantage plans are in for a fair amount of pain.  How much still remains to be seen.


Aetna’s Ron Williams on CNBC

February 26, 2009

Ron Williams, chairman and CEO of Aetna Inc., has been ahead of the curve on healthcare reform.  He’s right on point once again in this interview today on CNBC’s Squawk Box.  See video here.


Obama Says Healthcare Reform Can’t Wait

February 25, 2009

In his speech last night before a joint session of Congress (transcript here), President Obama said healthcare reform can’t wait but offered little that was new regarding his reform package.  But that’s all right.  He’s offered more than enough specifics on what he wants to do.  Hell, the guy he wanted to run the show wrote a book on the subject; if only Daschle had paid his taxes he’d probably have the job.  So I was surprised to hear Alexis Glick  on Fox Business (here) suggest Obama has been short on specifics and that “he sort of hinted at universal healthcare.” Actually, he’s specifically called for universal healthcare.  Anything short of that would be a failure for him and frankly for the nation.  I’d argue that for Obama, it’s a failure if he doesn’t push through his proposal of a new public health plan similar to what’s offered to federal employees.  As I’ve said before, his plan isn’t ideal, but it’s a step in the right direction.

Addition (Feb. 26, 2009): O.K., my apologies to Ms. Glick.  Obama’s call for “affordable, accessible health care for all Americans” may not actually be a call for universal coverage.  It just sounds like one to me.


MAPP Goes South

February 25, 2009

How sensitive is the stock market to bad news?  Map Pharmaceuticals Inc.(NasdaqGM: MAPP) announced on Feb. 23 (here) that a clinical trial of a children’s asthma drug didn’t perform any better than a placebo.  Shares have fallen 82% since.


Damn You, Excess Cost Growth in Healthcare!

February 25, 2009

Paul Krugman, one of my favorite economists, wrote on his blog the other day (here) that “if excess cost growth in health care can be brought under control, the entitlement problem is manageable.” 

Excess cost growth in healthcare refers to how much faster healthcare costs are increasing compared to the overall economy. 

According to projections released yesterday (here) by the U.S. Dept. of Health and Human Services, national healthcare expenditures are expected to increase an average of 6.2% annually through 2018, compared to 4.1% growth in gross domestic product (GDP).  That’s a 200 basis point spread, or two percentage points of excess cost growth in healthcare.

According to my own back-of-the-envelope analysis, healthcare costs have risen at a compounded annual rate of about 6.4% since 1970.  GDP, meanwhile, has risen about 3% annually over the same time frame.  That would be 300 basis points of excess cost growth in healthcare. 

I say all this not to imply that we can’t bring excess cost growth in healthcare under control.  Rather I’m suggesting that under the current system we never have, at least averaged out over the past 40 years.


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