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Medicare Part D Proposed Rule: Where Did Things Go Wrong?

March 6th, 2014
by Ian Spatz

It’s worth sitting up and taking notice when everyone seems to hate what you are doing. Last week, 20 of the 24 members of the sometimes fractious Senate Finance Committee wrote Centers for Medicare and Medicaid Services Administrator Marilyn Tavenner about a Medicare Part D proposed rule CMS published on January 10. They told her that they were “perplexed as to why CMS would propose to fundamentally restructure Part D …” and urged her to scrap the plan.

The House Energy and Commerce Committee held a hearing, also last week, with the hardly neutral title of “Messing with Success: How CMS’ Attack on the Part D Program Will Increase Costs and Reduce Choices for Seniors.” At the hearing, Medicare Chief Jon Blum, one of the most well-liked federal health officials there is, was subjected to a bipartisan, first class, grilling.

These Congressional complaints followed on the heels of Feb. 28 letter slamming the proposed rule from 277 organizations (with more organizations continuing to sign on) including patient advocates, insurance companies, health plans, pharmacists, employers, and both brand and generic drug companies.

In fairness to CMS, this is only a proposed rule and comment is what they are seeking. Well, it is comment that they are getting. What has led to this firestorm of criticism?

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Financial Orphan Therapies Looking For Adoption

March 6th, 2014

There exist scientifically promising treatments not being tested further because of insufficient financial incentives. Many of these therapies involve off-label uses of drugs approved by the Food and Drug Administration that are readily available and often inexpensive. Pharmaceutical companies—largely responsible for clinical drug development—cannot justify investing in such clinical trials because they cannot recoup the costs of these studies.  However, without prospective data demonstrating efficacy, such treatments will never be adopted as standard of care.

In an era of increasing health care costs and the need for effective therapies in many diseases, it is essential that society finds ways to adopt these “financial orphans.” We propose several potential solutions for the non-profit sector, pharmaceutical companies, health insurers, patient driven research and others to accomplish this goal.

Drug Development Today

Under today’s drug development model, the vast majority of clinical trials are sponsored by pharmaceutical companies, and the process is lengthy, expensive, and, some have argued, inefficient. The cost of developing a new FDA approved drug is estimated to exceed $1.2 billion, the average time from lead to market is typically over 10 years, and only 1 in 10 drugs entering a phase I study is finally approved. Thus pharmaceutical companies, seeking to recoup this investment, conduct a return on investment (ROI) calculation with attention to both scientific and financial considerations such as the chances of success and whether the therapy will be sufficiently profitable to justify the high cost of clinical development.

These considerations sometimes lead to inefficient outcomes from society’s perspective in which promising and potentially transformative therapies are not pursued because of improperly designed financial incentives. We call such therapies “financial orphans.”

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Assessing A CMS Proposal To Improve Competition Among Medicare Part D Drug Plans

March 4th, 2014
by Jack Hoadley

In one provision of its January Notice of Proposed Rulemaking (NPRM), for Medicare Part D and Medicare Advantage, CMS proposed that it will accept no more than two stand-alone prescription drug plan (PDP) bids from each Part D plan sponsor, starting in coverage year 2016. The agency stated two reasons for this proposal. First, it would reduce beneficiary confusion in the Part D market by both lowering the number of choices that they face and ensuring that differences between competing options are clear and meaningful to them. Second, it would address the impact of one source of favorable selection that leads to higher costs for the government and the taxpayer. This note looks at evidence from Part D to help understand the context for this proposal.

Reducing the Number of Plan Offerings

The competitive market design of Part D requires that plan enrollees regularly evaluate their options. Our recent study shows that most Part D enrollees have not changed their plan selection from one year to the next, and seven of ten enrollees in stand-alone PDPs did not switch plans over a five-year period. Both the current CMS guidance and the new CMS proposal stem from the principle that available PDPs offered by a given plan sponsor should have “meaningful differences” to help ensure that beneficiaries are presented with a clear and understandable array of choices. The Part D program in 2014 offers the average beneficiary a choice of about 35 PDPs and 20 Medicare Advantage drug plans.

Currently, a plan sponsor may offer up to one plan with the basic Part D benefit as described in statute (or actuarially equivalent to the basic benefit) and two enhanced plans. If two enhanced plans are offered, a sponsor may enhance the benefit through lowering the deductible, cost sharing, or both. The second plan must add substantial coverage in the coverage gap (“doughnut hole”). Current CMS guidance further encourages plan sponsors to eliminate plans attracting few enrollees. Nevertheless, 330 of the 1,169 PDPs in 2014 have fewer than 1,000 enrollees (239 of them with fewer than 500 enrollees) – the level at which CMS encourages sponsors to consolidate smaller plans with another of the sponsor’s plan options.

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Recent Health Policy Brief Updates: CO-OP Insurance and SHOP Exchanges

February 26th, 2014
by Tracy Gnadinger

The latest Health Policy Brief update from Health Affairs and the Robert Wood Johnson Foundation, published February 6, describes the new marketplaces created for small businesses to buy cheaper coverage more easily. These exchanges were created under the Affordable Care Act (ACA)’s Small Business Health Options Program (SHOP). Employers with fewer than 25 employees must purchase coverage through a SHOP if they want the small-business tax credit. This policy brief discusses the potential impact of the problems with the online exchange systems on health benefits offered by small employers.

The preceding Health Policy Brief update, published January 23, describes the current status of the Consumer Operated and Oriented Plan (CO-OP) program especially now that ACA implementation has begun. Because of funding cuts, one CO-OP was disbanded, and now 23 remain in 23 states. An updated partial list of approved CO-OPs and their sponsoring organizations is included. This policy brief discusses CO-OP funding, competency, competitive premium rates, and provision of care. Despite its early success, the next steps will be to see how many people the CO-OPs are able to enroll, whether their premium rates are sustainable, and their plans offer the same quality and care as the commercial market.

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Payors In Care Delivery: When Does Vertical Integration Make Sense?

February 5th, 2014
by Shubham Singhal

Editor’s note: In addition to Shubham Singhal (linked bio above) this post is authored by Rohit Kumar and Jeris Stueland. Rohit Kumar is a consultant in McKinsey’s Chicago office. Jeris Stueland, an expert in McKinsey’s Healthcare Systems and Services Practice, is also in the Chicago office.

This is the third in a periodic series of posts by McKinsey analysts on the landscape facing payors in the post-reform world. Read the first and second post in the series.

In recent years, much of the payor industry has transitioned away from a medically-underwritten to a guaranteed-issue, community-rated, risk-adjusted model. As a result, managing the total cost of care has become the dominant imperative for achieving competitive advantage.

As payors have sought ways to develop effective managed-care approaches for this new environment, interest in vertical integration has increased considerably. In the four years between 2005 and 2008, payors announced just 12 vertical integration M&A deals. In the subsequent four years, the number jumped to 26, and recent targets have largely been physician groups and integrated care organizations. These deals have not just been attempts to create competitive advantage—they have also been defensive plays to counteract potential challenges from provider consolidation and the acquisition of physician practices by hospital systems interested in vertical integration of their own.

Our research suggests that the economics of vertical integration makes sense for payors in only a minority of markets. For example, when we identified the markets in which the acquisition of physician groups appears to create economic value for payors, the total population included only about 80 million Americans. Furthermore, the significant execution challenges involved in integrating payors and physician practices at scale suggests that the markets we identified likely represent the outer limit of the feasible set.

We describe below the economic drivers of net value creation (or destruction) through vertical integration, the market conditions that indicate a given area may be fertile ground for positive value creation, and the execution challenges that must be overcome to capture the value.

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Health Affairs Web First: Comparing Quality And Prices Among Hospitals

January 29th, 2014
by Tracy Gnadinger

With the development of tools such as Hospital Compare, consumers have more ways to contrast the costs and quality of different hospitals. A new study, released today as a Web First by Health Affairs, explores why some hospitals are more successful at negotiating higher prices than nearby competitors and links hospital-specific negotiated private prices with detailed information on hospital characteristics.

Chapin White, James Reschovsky and Amelia Bond found that high-price hospitals averaged 474 staffed beds—more than double the average number of beds in the low-price hospitals—and had market shares about three times as large as those of low-price hospitals. White is affiliated with RAND; Reschovsky is with Mathematica Policy Institute; and Bond is a PhD candidate at the Wharton School of the University of Pennsylvania.

The high-price hospitals were almost three times as likely to be teaching hospitals, were much more likely to offer specialized facilities and services, and received significantly higher revenues from sources other than patient care. In national rankings of hospitals’ reputations, high-price hospitals scored higher, but clinical outcomes measures were mixed. High-price hospitals performed better on one measure of mortality (for patients with heart failure), but performed worse than the low-price hospitals on measures of excess readmissions and on patient-safety indicators, including postsurgical deaths and complications.

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The Untold Story Of 2013: Governors Lead In Health Care Transformation

December 17th, 2013
by Dan Crippen and Frederick Isasi

As 2013 winds to a close, it is a good time for the health policy community to reflect on a historic year for our nation. The most talked about health care issues have centered on the rollout of new health insurance and Medicaid coverage as part of the Affordable Care Act. However, another watershed reform of our health care system has been taking root across the country, relatively unnoticed and with many governors at the helm.

These efforts are focused on broad, statewide reforms designed to dramatically alter the way we think about, deliver and pay for health care. The reforms move away from a siloed and fractured delivery system and are focused on two key objectives: improving the health of the nation, and reducing the financial burden of health care on the government, employers and individuals.

The drive for these reforms results from several key pressures. Perhaps most urgent is the fiscal pressure bearing down on states. Governors have acutely experienced the effect of decades of rapidly escalating health care costs, and almost all states are under a requirement to balance their budgets. Governors must, therefore, account for growth in spending in Medicaid and CHIP, state employee and retiree health insurance, and indigent health care. Often these increases must be funded by increased tax revenue or reductions in other areas of state spending, for example education or transportation.

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Why Are Cancer Drugs Commonly The Target Of Schemes To Extend Patent Exclusivity?

December 4th, 2013
by Rena Conti

The makers of branded pharmaceuticals have devised numerous ways to extend patent exclusivity for lucrative products in the United States. In June, the Supreme Court gave the Federal Trade Commission (FTC) clear authority to investigate and prosecute one of them, “pay-for-delay” agreements, but stopped short of making such deals presumptively unlawful restraints of trade. In the case the court decided, a manufacturer of a branded drug, a testosterone replacement patch, paid the maker of the generic to refrain from entering the domestic market with its product.

The more dramatic battles over the timing of a drug’s transition from branded to generic form are being fought in cancer. Cancer is the second-leading cause of death in the United States. Americans spent $157 Billion (B) on cancer care in 2010; $23B or 18 percent of total spending was devoted to oncologics, a 41 percent increase since 2006 and largely paid for by Medicare. Between 2006 and 2011, cancer drugs were the second most commonly litigated generic drug treatment class (70 unique cases), following cholesterol-lowering agents (123 unique cases).

Here, I argue that outsized potential profits, limited competition, and strong demand makes cancer drugs attractive for patent disputes. Several oncologics due for upcoming patent expiration illustrate important opportunities and caveats under current law. The outcomes of these and other cases will have significant consequences for cancer patients and their insurers.

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Price Transparency Tools: The Good News, The Challenges, And The Way Forward

November 20th, 2013
by Suzanne Delbanco

With health care costs continuing to rise and employees taking on an ever-growing share of costs, it’s no wonder the market for price transparency and consumer-oriented tools and solutions continued to grow in 2013. Well over a dozen independent vendors and all the major health plans now offer some type of price transparency tool or “solution” for employers and purchasers, and more join their ranks each year, aided by venture capitalists’ investments.

Policymakers are jumping on the price transparency bandwagon too; on the heels of the release of the HCI3/CPR 2013 Report Card on State Price Transparency Laws, many state legislatures took up the issue of price transparency in 2013 and attempted to pass better laws to empower consumers. But do today’s products help consumers find comprehensive and comprehensible information on health care costs and quality? Are employers finding them they useful—and usable—when trying to educate and empower consumers with the hope of reining in health care spending?

Last November, Catalyst for Payment Reform—a nationwide nonprofit coalition of large employers and other health care purchasers–issued a call to action to health plans, providers, and policymakers. The ask? Help support greater price transparency! Our Statement outlined steps plans and providers could take, including sharing claims data and removing gag clauses. In addition, we issued Comprehensive Specifications for the Evaluation of Transparency Tools, thereby offering employers and purchasers general guidance on features tools should have if they’re to be useful for consumers.

This fall, CPR took a closer look at the more established products in an attempt to answer the question: Are these tools and solutions evolving to become more useful for consumers and employers? We examined fee-based online tools and telephonic solutions available from independent vendors for purchasers and employers, as well as the tools the major national health plans offer freely to their members. We summarize our findings in a new report.

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Bigger May Not Be Better: Does Scale Matter For Payors?

November 15th, 2013
by Shubham Singhal

Editor’s note: In addition to Shubham Singhal (photo and linked bio above), this post is authored by Rohit Kumar and Jeris Stueland. Rohit Kumar is a consultant in McKinsey’s Chicago office. Jeris Stueland, an expert in McKinsey’s Healthcare Systems and Services Practice, is also in the Chicago office. The authors would like to thank Ellen Rosen, Jim Oatman, and Michael K. Park for their contributions to this article.

This is the second in a periodic series of posts by McKinsey analysts on the landscape facing payors in the post-reform world. You can read the first post in the series here.

Whether scale brings competitive advantage to payors is a topic of hot debate. Many believe that consolidation is likely as the industry goes through the disruptive changes set in motion by reform. Some contend that anticipated margin compression and medical-loss-ratio floors will make scale efficiencies critical for achieving sustainable economics in the future. Others, however, note that managing the total cost of care is becoming central to a payor’s success, and question what advantages scale provides in such a world. If most health care is locally delivered, they argue, how much of the value created by cost-of-care management can scale drive?

Our research and experience suggest that for payors, the minimum threshold for efficient and effective scale is low. The primary rationale for scale emerges from the large fixed investments payors must make to develop the new capabilities needed to compete effectively in a rapidly changing regulatory and market environment (and to comply with evolving regulations). This rationale holds particularly true for payors that choose to build these capabilities themselves rather than through partnerships with external vendors, noncompeting plans, or other stakeholders in the value chain.

Yet, once the minimum level of scale is achieved, performance variability on administrative costs continues to be quite high. This suggests that for many payors the bigger opportunity to achieve administrative efficiencies is through operating model and organizational redesign, productivity enhancements, and application of design-to-value principles to core processes.

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Payment Reform: Flat Facility Fees & ACOs Aren’t Enough

October 23rd, 2013
by Yevgeniy Feyman

American hospitals are expensive. Reams of data show that hospital-based services are more expensive than the same services provided in other settings. Moreover, the cost of hospital services has grown faster than costs in other parts of our health care system; from 1997 to 2012, for instance, the cost of hospital services grew a spectacular 149 percent, while the cost of physician services grew only 55 percent.

The explosive growth of hospital costs is one of the key culprits in the nation’s high health care spending. Nonetheless, attempts to reform hospital payment methodologies are usually greeted with fierce criticism from the industry. The latest clash, which stems from a CMS proposal to consolidate facility fees, offers an opportunity to review why hospitals are so expensive, to detail some of the larger issues with hospital billing practices and how they contribute to increasing health care costs, and to explore some ideas for reform.

The Facility Fee Conundrum

When you buy anything — a watch, a car, even groceries — you pay a single price for the goods. The Walgreens down the street doesn’t add a separate charge to cover its rent, utilities, or the cost of refrigeration units. Basic microeconomics teaches us that companies accept these as “sunk costs” and continue operating as any profit-maximizing firm is supposed to. In the long-run, of course, this changes somewhat; all costs are variable and companies go out of business if they can’t cover their rent or employees’ salaries.

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Health Policy Brief: Biosimilars

October 10th, 2013
by Chris Fleming

A new Health Policy Brief from Health Affairs and the Robert Wood Johnson Foundation explains key elements of the Biologics Price Competition and Innovation Act (BPCIA), a provision of the Affordable Care Act. The BPCIA authorizes the Food and Drug Administration (FDA) to develop an accelerated approval process for biosimilars. Biosimilars are follow-on versions of original therapies derived from a biological source, including vaccines, antitoxins, and blood products—commonly referred to as biologics.

The FDA released draft guidelines for an accelerated approval process for biosimilars in February 2012, but the widespread introduction of biosimilar drugs is likely several years away. This policy brief discusses the opportunities and challenges of producing and introducing biosimilars into the US marketplace.

Topics covered in this brief include:

What’s the background? The brief explains the evolution of the 1984 Hatch-Waxman Act, which provides the regulatory foundation for modern generic drugs. However, Hatch-Waxman does not apply to biosimilars, and, with demand for biologics expanding rapidly in the global marketplace, the Obama administration needed to establish a new regulatory review process in the United States for this type of drug. The United States can look to the work of the European Medicines Agency, which has an approval process in place. An article in the October 2013 issue of Health Affairs, by Francis Megerlin and colleagues, describes the European experience.

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Facilitated Quality Competition As A Driver Of Health Care Value

September 30th, 2013
by Dan Krupka and Warren Sandberg

A front-page article in the April 16, 2013 issue of the New York Times announced that “[h]ospitals make money from their own mistakes because insurers pay them for the longer stays and extra care that patients need to treat surgical complications that could have been prevented.” That conclusion came from a study by Sunil Eappen and his co-authors, published in the April 17 issue of The Journal of the American Medical Association. Eappen and his colleagues were not alone in reporting this finding. Last year, we along with William Weeks came to the same conclusion. The two studies demonstrate that hospitals that set out to compete by reducing complication rates face a negative financial impact, and thus raise a policy challenge: how to create effective incentives to improve hospital quality.

Well before the two articles appeared, hospitals appeared to act as though they lacked incentives to compete on low complication and mortality rates. Consider the following evidence. (1) Fewer than 10 percent of the nation’s hospitals participate in the American College of Surgeons’ National Surgical Quality Program (NSQIP). Yet, the program allows them to compare their risk-adjusted results to their peers’ and to learn from the best practitioners in the program. (2) Fewer than 45 percent of programs that received three stars – statistically above average in a rating scheme based largely on outcomes – for performing coronary artery bypass grafting (CABG) from the Society of Thoracic Surgeons mention the rating on their web sites; even fewer emphasize its significance. (3) Arguably the best known effort to reduce central line associated blood stream infections (CLABSIs) in acute care settings is the development of a standardized protocol for inserting central venous catheters. The protocol, developed and pioneered at Johns Hopkins University in 2001, was subsequently introduced with great success to Michigan statewide at the invitation of its hospitals. Yet, fewer than 5 percent of Michigan hospitals mention their CLABSI rates on their web sites.

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Where To Compete In A Post-Reform World

September 30th, 2013
by Shubham Singhal

Editor’s note: In addition to Shubham Singhal (photo and linked bio above) this post, the first in a periodic series of posts on the business of health care by McKinsey analysts, is authored by Rohit Kumar, Susan Nolen Foushee, and Jeris Stueland. Rohit Kumar is a consultant in McKinsey’s Chicago office. Susan Nolen Foushee is an expert in the Corporate Finance Practice in its New York office. Jeris Stueland, an expert in McKinsey’s Healthcare Systems and Services Practice, is also in the Chicago office.

The power of “where-to-compete” decisions, particularly in an industry in as much flux as US health insurance, is enormous. Our analyses suggest that the bottom-line performance differential between a payor who selects a market-average portfolio across businesses and geographies and an identical payor who instead selects a top-quartile portfolio is likely to be almost twofold (Exhibit 1). Across industries, McKinsey research (summarized in The Granularity of Growth by Patrick Viguerie et al) shows that the majority of the performance differential among corporations results from their alignment with “rising tide” markets rather than from share gain within less attractive markets.

Furthermore, we have found that there are three “macro” approaches that can enable companies to thrive during major industry disruptions: refocus their portfolio on more attractive businesses, build one or two large new businesses, or radically transform their business model. The first two rely squarely on where-to-compete decisions. The last approach is not for the faint of heart.

Thus, today’s payors must carefully choose which markets they want to concentrate their resources on to win. The choices made will be critical not only within the payors’ core health-plan business but also in adjacent areas within the healthcare value chain.

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Implementing Health Reform: Plan Choices And Premiums

September 25th, 2013
by Timothy Jost

On September 26, 2013, the Department of Health and Human Services released an Issue Brief disclosing premium rates that will be available through the exchanges in 2014. The brief contains data from 36 states including 34 with federal exchanges and 2 states (Idaho and New Mexico) where state exchanges that will use the federal system to display plans. The brief also includes some information on 11 of the states with state exchanges (Massachusetts, Hawaii, and Kentucky are missing).

The tone of the brief is celebratory — 95 percent of consumers in the 36 states will have a choice of 2 or more health insurance issuers. In the 36 states with federal data, from 1 to 13 insurers will be available offering from 6 to 160 plans. On average, individuals and families will have 53 plans to choose from; young adults will have 57 plans including catastrophic plans. Only West Virginia and some counties in other states will have only one insurer.

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Premium Rate Variation In Exchanges Is An Eye Opener

August 7th, 2013

Like a burlesque strip tease for health policy wonks, the slow motion unveiling of premiums for state health insurance exchanges has generated a lot of attention, unease, and, yes, excitement. The 2014 premiums, the first for Obamacare’s centerpiece feature of health insurance marketplaces, represent nothing short of a referendum on the “affordable” in the Affordable Care Act.

In just the past few weeks, Maryland and New York have joined the show. Putting aside the “rates are too high” vs. “rates are well below expectation” arguments, one fact seems obvious from looking at the rates. With the very big exception of California, the variance among plan rates is startling.

We took a look at the rates for silver plans, the ones most closely watched as they form the basis for computing the premium subsidies. We also looked at the variation between the second-highest and second-lowest cost silver-level plans. This is a simple way to eliminate outliers at the high end and the low end of the premium range. It also allows us to include the cost of the second-lowest-cost silver plan, the premium from which the subsidies are determined.

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The BPC Health Care Reform Plan: A Response To Coulam, Feldman, and Dowd

July 30th, 2013

We commend Robert Coulam, Roger Feldman, and Bryan Dowd for bringing attention to competitive bidding in Medicare, a meaningful strategy to constrain health care costs through reducing inefficiencies in the health care system. The authors have made valuable contributions to research in this area for many years, and we welcome vigorous discussion on both the merits and strategy for implementing such a reform.

However, we believe the authors missed the mark in their recent Health Affairs Blog analysis of the Bipartisan Policy Center’s (BPC) proposal. Most notably, they failed to consider the political realities surrounding competitive bidding. In addition, they overlooked BPC’s other Medicare recommendations that are integral to the strategy for introducing competitive bidding in Medicare Advantage (MA).

In April, BPC released A Bipartisan Rx for Patient-Centered Care and System-wide Cost Containment. This was the culmination of a nearly year-long effort led by former Senate Majority Leaders Tom Daschle and Bill Frist, former Senate Budget Committee Chairman Pete Domenici, and former Director of CBO and OMB Dr. Alice Rivlin to produce a package of comprehensive, systemic reforms to achieve a higher quality, more sustainable health care system. The initiative reflected their recognition that attempts to address our nation’s health and budget challenges are too often fragmented and unproductive.

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Countdown To The Health Insurance Marketplaces: Four Actions Essential To Success

July 8th, 2013
by Barbara Markham Smith and Jack Meyer

As the launch of health insurance marketplaces under the Affordable Care Act nears, some predict that the enterprise will collapse of its own weight, unable to sustain the moving parts required for states, the federal government, insurance companies, and consumers to interact. We recommend four actions that policy makers should take to promote the success of the marketplaces, the structured exchanges where consumers will shop for health coverage under the ACA. Some of these actions can be implemented before the October 1 launch date, while others will need to be initiated now to bring about changes needed by 2015 and 2016.

  1. The marketplaces must disallow unreasonable prices from insurers.
  2. A unified national campaign should be launched to attract a broad pool of marketplace enrollees.
  3. Consumers receiving advanced premium tax credits to purchase insurance should be protected from unanticipated tax liability for the first two years of operation, so that the marketplaces attract as many people as possible.
  4. New non-profit consumer-run insurance plans (CO-OPs) sponsored by the ACA should have funding restored. This would enable more CO-OPs to enter the market in 2015 and 2016 to help hold down prices in the 26 states where they do not yet exist. In addition, the Office of Personnel Management (OPM), responsible for contracting with at least two “national plans” to enter each state to spur competition, should focus on developing networks of smaller plans to serve as national plans in 2015; this would avoid giving greater market share to dominant insurers.
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Competitive Bidding In Medicare: A Response To The Bipartisan Policy Center’s Proposal

July 2nd, 2013

Competitive bidding underlies a growing body of proposals to control costs and increase the efficiency of the Medicare program. One of the most recent proposals for competitive bidding was released by the Bipartisan Policy Center, a distinguished group that includes two former Senate Majority Leaders (Tom Daschle and Bill Frist), a former Chair of the Senate Budget Committee (Peter Dominici), and a former Director of the Congressional Budget Office (Alice Rivlin).

The interest in competitive bidding is a good sign. In a review of competitive bidding efforts for Medicare, we found that competitive bidding was relatively straightforward to implement for many different parts of Medicare. We also found that all of the competitive bidding demonstrations that reached the point of bid evaluation — even those using bidding models that were watered down under provider pressure — demonstrated that they would save substantial amounts of money.

Competitive bidding thus is a proven method for bringing efficient prices to Medicare. Unfortunately, the BPC’s proposals for competitive bidding are critically flawed. Most important, the BPC proposal proposes a limited form of competitive bidding, restricted to Medicare Advantage plans only — the traditional Medicare fee-for-service (FFS) plan is not one of the bidders. For reasons detailed below, that is a serious flaw. There are other important flaws as well in the BPC proposal.

We propose a bidding arrangement for all Medicare plans, MA plans and the traditional FFS Plan. In this post, we explain why. We first review the BPC proposals and then describe the problems that would result from the particular form of competitive bidding BPC has proposed, and why a more comprehensive bidding arrangement would be a far more important reform for Medicare.

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Unpacking The Meaning Of ‘Rationing’: A Response To Dowd And Allison

June 27th, 2013
by Uwe E. Reinhardt

Bryan Dowd and Kirk Allison are to be thanked for their lengthy treatise on the word “rationing.” It is a term whose interpretation economists have left to politicians — not invariably models of erudition. Check the subject index of introductory textbooks or even intermediary textbooks in economics and rarely will you see there the term “rationing.”

Part of the lack of clarity on the term can be laid at the doorsteps of the profession that claims to know all about resource allocation but rarely ever takes up the subject of rationing in its teaching. Sadly, modern textbooks in economics are, by and large, just copies of one another — worse than me too drugs in which at least one molecule is changed. At some point, someone forgot to cover the term, so all other texts followed.

But another reason for the lack of clarity on the term reflects the fact that even economists cannot seem to agree on its meaning.

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