Dr. Brent James and Continuous Quality Improvement at Intermountain Healthcare

There is an absolutely wonderful article on Intermountain Healthcare’s approach to healthcare delivery by David Leonhardt in yesterday’s New York Times Magazine, which you can read here. We have mentioned Intermountain Healthcare in this blog before, and my colleagues and I interviewed one of Intermountain’s leaders for our weekly publication earlier in the year, so the details of Intermountain’s approach were not new to us, but the author presents a thoughtful consideration of other points of view, highlighting the difficulties of convincing doctors to adopt Intermountain’s approach.

Spearheaded by Dr. Brent James, Intermountain approaches quality in healthcare delivery much the same way that Toyota approaches quality manufacturing. It seeks to reduce variation in the way that its doctors treat patients who present with the same medical condition and then continuously refines its treatment protocols in a drive to improve patient outcomes. One criticism of this approach is that, unlike automobiles, each patient is unique, so a one-size-fits-all approach may result in some patients receiving sub-optimal care. Intermountain, however, recognizes that some patients may require deviations from the standard protocol. In Intermountain’s view, it is in precisely the ability to identify those cases that a physician’s experience and training are the most valuable. As Dr. John Wennberg and his colleagues at Dartmouth have repeatedly shown, however, unwarranted variations in physician treatment practices go a long way in explaining the high cost and poor quality of healthcare delivered in much of the US healthcare system.

One of the keys to Intermountain’s approach is being able to measure results, which is made possible by its electronic medical record (EMR) system. That is one reason why the Obama administration has placed so much emphasis on initiatives to have hospitals and physicians adopt EMRs. Adopting EMRs without changing the way medicine is practiced will not improve quality, but being able to track outcomes through EMRs could be a very important step, providing the foundation of evidence to help convince doctors to adopt best practices.

House Passes Healthcare Reform Bill

The House of Representative on Saturday passed its version of the healthcare reform bill by a vote of 220-215, with 39 Democrats voting against the bill and one Republican, Representative Ahn “Joseph” Cao of Louisiana, voting for the bill.

While the House vote is an important milestone, what will be most important to shaping the final legislation is what the Senate is able to pass. This week Senate Majority Leader Harry Reid is expected to unveil the Senate’s version of the bill, which is likely to include less generous subsidiaries for uninsured middle-income Americans to purchase health insurance in the new insurance exchanges, similar to the previous version of the bill put forth by Max Baucus and passed by his Senate Finance Committee.

While the House version of the bill would be very unlikely to pass the Senate, the eventual Senate version of the bill would, in all likelihood, pass the House, particularly since a more fiscally-conservative version of the bill would appeal to the Blue Dog Coalition of Democrats in the House, many of whom voted against the House version of the bill this past Saturday.

Threading the Needle

We had been expecting Senate Majority Leader Harry Reid to unveil the full Senate’s version of the healthcare reform bill last week, but today there is word that it may not even be released this week. While the specific reasons for the delay have not been disclosed, we suspect he is having difficulty balancing the need to rein in the total cost of the bill against the need to keep health insurance premiums low enough to attract the participation of relatively healthy middle-income Americans who currently lack health insurance.

For example, one criticism of the Baucus bill was that it did not provide sufficiently generous subsidies for middle-income Americans to purchase health insurance, even though limiting the subsidies helped lower the overall cost of the bill. For single Americans with income of $40-50,000, for example, the annual cost of purchasing health insurance in the new exchanges to be established is estimated to be approximately $5,000. There is a concern that younger and healthier Americans in that income range who lack health insurance may decide not to purchase health insurance. In fact, because new regulations would prevent insurance plans from excluding pre-existing conditions, nothing would prevent these Americans from purchasing insurance after they realized that they were sick. Accordingly, they may feel that there is little incentive for them to purchase insurance.

While an individual mandate that imposed high penalties on individuals who did not purchase insurance might avoid this “free rider” problem, Democratic leaders in Congress are reluctant to impose high penalties on middle-income Americans who do not purchase health insurance, particularly if the health insurance policies are not perceived to be easily affordable. High penalties would be politically unpopular, as well. Low penalties, however, are not likely to provide a sufficient incentive to purchase insurance.

One possible result would be that relatively young and healthy Americans who currently lack health insurance would choose not to participate in the insurance exchange, so that the insurance pool would consist of relatively unhealthy Americans with higher healthcare costs, thereby driving up average premium costs. As average premium costs rise, even fewer healthier Americans would choose to participate

To avoid this outcome, Senator Reid will need to find the right mix of subsidies as well as penalties associated with the individual mandate, all while reining in the overall cost of the bill. That it is a difficult needle to thread.

Billy Tauzin’s $80 Billion Deal

The main objective of the healthcare reform bills being considered is to expand health insurance coverage, especially by reducing the number of uninsured Americans. That goal also benefits the pharmaceutical industry because, with better insurance coverage, people consume more healthcare products and services, including prescription drugs, thus expanding the market for pharmaceuticals. In return for the favor of expanding the healthcare market, the Obama administration has sought concessions from each group who stands to benefit, including insurance companies, hospitals, and pharmaceutical companies. Rather than fight the concessions, the Pharmaceutical Research and Manufacturers of America (PhRMA), under the leadership of president Billy Tauzin, reached an agreement with the Obama administration in June that the pharmaceutical industry would shoulder $80 billion in concessions over 10 years.

What is the composition of the $80 billion? While the precise breakdown has not been disclosed, we can make very rough estimates based on the main provisions in the Baucus bill that reduce pharmaceutical company revenues.

The first is the 50% pricing discount for the drugs Medicare beneficiaries purchase in the so-called “doughnut hole” in Medicare Part D, in which Medicare provides no subsidies for the cost of prescription drugs. The discount would not apply to prescription drug purchases by one of the costliest groups of beneficiaries, the dually eligible beneficiaries who are enrolled in both Medicare and Medicaid. Their drug purchases are always subsidized, so the doughnut hole does not apply to them. Nor would the discounts apply to high-income Medicare beneficiaries who must pay higher premiums in Part B. All other beneficiaries, however, would receive a 50% price discount on their drug purchases in the doughnut hole starting in July of 2010. A rough estimate of the cost of this provision to the pharmaceutical industry is $30 billion over 10 years.

The second is the increase in the statutory rebate rates for brand drug purchases in Medicaid from 15.1% to 23.1%. Rebates for blood clotting factors and for drugs approved for pediatric use only would increase from 15.1% to 17.1%. A rough estimate of the cost of this provision to the pharmaceutical industry is a minimum of $30 billion over 10 years.

A third component is the savings reaped through increased competition as a result of the introduction of follow-on biologics. While provisions relating to follow-on biologics currently are not part of the Baucus bill, provisions similar to those approved in the amended House Energy and Commerce Committee bill and the Senate HELP Committee bill, both of which allow for 12 years of marketing exclusivity, are expected to be included in any final bill. A rough estimate of the cost to the pharmaceutical industry of introducing follow-on biologics is $7 billion over 10 years.

The fourth component is a new fee of $2.3 billion per year that will be assessed on the pharmaceutical industry based upon each company’s market share in sales to public programs, including Medicare, Medicaid, the Veterans Administration program, and the TRICARE military program. Sales of orphan drugs would be exempt. Companies with annual sales of less than $400 million would receive discounted weights for calculating their sales for the purpose of determining market share, and companies with sales of less than $5 million would be exempt. Fees for 2010 will be based on calculated market share of sales in 2009. At $2.3 billion per year, the total cost to the pharmaceutical industry over 10 years is $23 billion. Moreover, by statute, these fees would not be deductible for US income tax purposes.

Adding these four components together results in a total burden to the pharmaceutical industry over 10 years of $90 billion, $10 billion more than the $80 billion pledged by PhRMA’s Billy Tauzin.

Cutting Benefits in Medicare: Truth or Fiction?

One of the flash points in the debate over healthcare reform legislation is whether the bills proposed in the House and the Senate would cut the benefits of Medicare beneficiaries. Of course, nothing can mobilize a group of senior citizens more quickly than a proposal to cut their benefits, and opponents of healthcare reform have claimed that the bills coming out of the House and Senate do just that. Are these claims valid?

The short answer is yes, at least for some beneficiaries who are enrolled in Medicare Advantage plans, which are private insurance company plans that receive Medicare dollars to deliver a package of benefits to replace Medicare Part A and Part B. One of the most signficant sources of savings in both the House and Senate bills is stems from changes in payments to Medicare Advantage plans.

Originally it was hoped that, by allowing private plans to participate in Medicare, beneficiaries might receive better coordinated care compared to fee-for-service Medicare and, if the private plans were more efficient than traditional Medicare, they might even save money for Medicare. For example, in a given region of the country, if Medicare beneficiaries on average consume medical services that cost the Medicare program $10,000 per year, there is the possibility that a private plan could deliver the same benefits for less than $10,000. If the Medicare program paid the plan $9,750 and the plan could deliver benefits for $9,500, the Medicare program would save $250 and the plan could make an extra profit of $250. To encourage plan participation, however, in recent years, for most areas (rates are actually set on a county-by-county basis), Congress has set the benchmark rates, which are the basis for payments to the Medicare Advantage plans well above the average per-beneficiary costs Medicare incurs in each area. The way the payment mechanism works is that plans bid against the benchmark rates for each county. If their bid is below the benchmark, they recieve their bid plus 75% of the difference between their bid and the benchmark, and the remaining 25% is retained by the Medicare program. So if the benchmark is $12,000 and the plan bids $11,000, the plan receives $11,750. According to the rules of Medicare Advantage, plans must use the extra $750 above the benchmark to provide extra benefits to beneficiaries. In this example, therefore, beneficiaries would receive an extra $750 in benefits. Compared to the regular fee-for-service Medicare program, however, the costs are much higher than the average per-beneficiary costs in each county. In this example, instead of incurring an average of $10,000 in costs, Medicare is paying the plan $11,750. And, while it is true that the beneficiaries in this case receive an extra $750 in benefits, Medicare is paying an extra $1,750 for those benefits. Because they can receive extra benefits, beneficiaries naturally like the Medicare Advantage program, and enrollment has soared in recent years. Now one in every four Medicare beneficiaries is enrolled in a Medicare Advantage plan.

Medicare program payments relative to FFS spending, 2009

In 2009, in comparison with traditional fee-for-service Medicare costs, Medicare is paying Medicare Advantage plans an extra 14%. It is these extra costs that Congress has taregeted for savings. The House bill sets the benchmark rates at 100% of the average per-beneficiary fee-for-service Medicare costs for each county. The Senate bill sets the bechmark rates at the weighted-average bids of each plan. In either case, the savings would be substantial. With lower benchmarks, however, plans will not be in a position to maintain the level of extra benefits they currently provide, so these extra benefits would be cut. Therefore, it is true that these extra benefits would be cut, but the traditional benefits of Medicare Part A and Part B would not be cut.

The Baucus Plan by the Numbers

The Congressional Budget Office on Tuesday released a preliminary analysis of the chairman’s mark of America’s Healthy Future Act of 2009, which was released earlier that day by Senate Finance Committee Chairman Max Baucus.

The good news is that, according to the CBO, the Baucus plan would reduce the federal deficit by $49 billion dollars during the 10-year period ending in 2019. In 2019 alone, the plan achieves $16 billion in deficit reduction. Moreover, in contrast to the bill produced by the House committees, in which net outlays increased in the out years, the CBO expects the Baucus plan to further reduce the federal budget deficit after 2019, “as added revenues and cost savings are projected to grow more rapidly than the cost of the coverage expansion.”

Most of the savings are generated from two sources: 1) transitioning Medicare Advantage plans to a competitive bidding system, thereby reducing the federal subsidies that are paid to private plans; and 2) reducing annual Medicare market basket updates (annual increases in Medicare payments to providers to compensate for higher office expenses and other input costs). Cuts to the Medicare Advantage program were fully expected, as private plans on average currently receive significantly more than the costs in fee-for-service Medicare, and the reductions in the market basket updates are not overly severe, even though their cumulative impact is significant.

Of more concern, however, is a provision relating to payment for physicians’ services under Medicare Part B. Starting in 1998, as a way of controlling overall spending growth in Medicare, Congress implemented the sustainable growth rate (SGR) formula for the annual adjustment in fees paid to physicians in Medicare. Adhering to this formula, however, would have resulted in cuts to the fees paid to physicians, so Congress repeatedly has overridden the formula since 2003 to allow payment increases. But the formula was never repealed, so if Congress does nothing to override it each year, payments to physicians would automatically be cut by the cumulative difference between current payment rates and payments under the original formula. The Baucus plan once again overrides the SGR for 2010, allowing another increase in payments to physicians, but does nothing to repeal the SGR, meaning that cuts—estimated by the CBO to be approximately 25%—would begin in 2011. Because the cuts are not a change in current law, they are not scored as savings by the CBO. The issue, however, is whether it is realistic to expect that Congress would allow a drastic cut of 25% to stand. Certainly physicians will not stand by and allow these cuts to be implemented. Without these cuts, however, the deficit reductions promised by the Baucus plan would likely prove to be illusory.

So far, at least, critics of the Baucus plan have focused on other issues. In particular, many Democrats object to the exclusion of a public plan option in the insurance exchanges. Republicans, on the other hand, are objecting to including in the exchanges non-profit health insurance cooperatives, saying, in the words of Senate Minority Leader Mitch McConnell, that they are “just another name for a government plan.” From the CBO’s perspective, however, the cooperatives are a non-issue. “The proposed co-ops had very little effect on the estimates of total enrollment in the exchanges or federal costs because…they seem unlikely to establish a significant market presence in many areas of the country or to noticeably affect federal subsidy payments,” according to CBO Director Douglas Elmendorf.

But it is only a matter of time before attention gets focused on the issue of cuts to physicians’ payments, and I assume Senator Baucus knows this. Perhaps, his real plan is to use the threat of drastic cuts as a stick to force physicians to move away from a reliance on fee-for-service payments and toward adoption of alternative payment mechanisms, such as bundled payments, or the capitated payments that may come with participation in an accountable care organization. In the end, it may require the stick of payment cuts to force providers to consider the potential carrots they may receive through alternatives to fee-for-service Medicare.

Obama Makes His Case

In his speech on healthcare reform before a joint session of Congress last night, President Obama presented the rationale for reform as well as an outline of a plan he favors, and he also tried to dispel many of the misconceptions that have surfaced regarding the bills that have circulated in Congress.

The outlines of his plan are very similar to the proposal released by Senator Baucus over the weekend, but there were two important differences. One is that he would impose a mandate on employers to provide health insurance to their employees, although there would be exemptions for small businesses. The second is that he would provide a public insurance option among the choices from which individuals and small businesses could choose in insurance exchanges established in each state. In explaining the rationale for a public option, he said his concern was that there be meaningful competition among insurance plans. He cited the example of Alabama, where he said that 90% of the insurance market is controlled by just one company. He downplayed the importance of a public option, however, and said that he would be open to exploring alternatives, such as having a public option only in states where insurance companies were not providing affordable coverage, or using non-profit health insurance cooperatives instead of a government-run plan.

In an effort to garner Republican support, President Obama also said that he was willing to consider medical malpractice liability reforms, an issue that Republicans have repeatedly cited as a way of reducing healthcare costs. It is also an issue that the American Medical Association would like to see addressed, but none of the bills or proposals coming out of Congress so far have addressed this issue.
Toward the closing of his speech, President Obama invoked the words of Senator Edward Kennedy and reminded everyone that Senator Kennedy had a history of working closely with key Republicans, including Senators Hatch, McCain, and Grassley, on healthcare issues. While he made a strong case for healthcare reform, whether President Obama succeeded in swaying any Republicans with his speech last night remains to be seen.