Health Care

Medicare's Slowdown: A Story About Part D

In a Health Affairs blog post, CRFB's Loren Adler and Adam Rosenberg find that most of the recent slowdown in Medicare's costs is attributable to the prescription drug benefit, Part D, and cautions that this might not bode well for the slowdown's permanence.

In looking at changes in CBO's Medicare projections since March 2011, and building on work we did previously, they note that 60 percent of the slowdown in Medicare benefits (excluding sequestration) has taken place in Part D. More specifically, Part D spending was revised down by $225 billion over ten years, while Parts A and B are $145 billion lower. The sequester accounts for another $75 billion, and increased recoveries of improper payments are another $85 billion.

Adler Figure 1

How CBO Accounts for Anti-Fraud Efforts

Fraud -- along with the closely related waste and abuse -- is too often cited as a big factor affecting our high deficits, even though  this is not the case. Nonetheless, rooting it out can be a non-controversial path to marginally reduce spending and to help assure Americans that their taxes are not being wasted. A new CBO report discusses anti-fraud efforts in federal health care programs and how they are accounted for in the agency's scoring of costs and savings in legislation.

There are a number of agencies and mechanisms tasked with reducing fraud in health care programs. The Center for Medicare and Medicaid Services (CMS), of course, is the main one. But there is also the Health and Human Services Inspector General, the Department of Justice, and the Health Care Fraud and Abuse Control (HCFAC) program, a dedicated fund for pursuing fraud that has both a mandatory and a discretionary appropriation.

Despite this anti-fraud efforts, significant improper payments (a broader category than fraud) of $65 billion in health care still exist, at least some of which is fraud. CBO discusses a number of different strategies to reduce it, including increasing anti-fraud funding, allowing new authority for agencies to pursue fraud, shifting funds to activities expected to provide higher returns, and increasing penalties.

In terms of the first strategy, based on previous efforts, CBO assumes that an additional dollar of HCFAC spending yields $1.50 of savings (see the table below for an example). The Budget Control Act allowed for adjustments to the discretionary spending caps for HCFAC totaling $3 billion in additional funding, providing estimated savings of $3.7 billion. (The ratio is less than 1.5 to 1 in this case since it takes time for the savings to materialize). Notably, however, these net savings cannot be used for budget enforcement like pay-as-you-go rules because of their uncertain nature.

Could Arbitration Help Control Medicare Part D Costs?

Medicare Part D costs have leveled off in recent years as pharmaceutical innovation has slowed and a number of blockbuster drugs lost patent protection, but a new wave of expensive specialty drugs threatens to revitalize cost growth. To help control the high prices of unique drugs paid for by Part D, Richard Frank and Joseph Newhouse recommend an innovative approach to apply binding arbitration as a fallback to price-setting negotiations.

The authors argue that policymakers overestimated the negotiating power that prescription drug plans (PDPs) would hold in setting prices when they created Part D through the Medicare Modernization Act (MMA) of 2003. Price negotiation in Part D proves most difficult for unique drugs, or those without any direct substitute. Setting prices too low for important, clinically unique drugs could harm future research and development as pharmaceutical companies could lose vital capital to continue incentivizing such research and development.

Frank and Newhouse offer a solution that incorporates binding arbitration into price setting for unique drugs. In their proposal, binding arbitration would take effect only after the government and manufacturer cannot come to an agreement, thereby encouraging the two parties to reach a negotiated settlement.

Is the 340B Program Living Up to Expectations?

The 340B Drug Pricing Program, enacted in 1992, gives hospitals and other providers serving disproportionately low-income populations the ability to buy outpatient prescription drugs at large discounts. It has come under increased scrutiny lately, though, as more and more people have questioned whether the program is actually fulfilling its purpose.

Criticism of the program has ramped up recently with charges that some hospitals are raking in large profits by taking the discounts from manufacturers and instead selling the drugs through hospital-affiliated clinics to higher-income/insured patients at the price the insurer pays. With eligibility for the 340B program determined based on a hospital's inpatient population, critics charge that this creates an incentive to serve more people in off-site outpatient settings located in wealthier areas. Hospitals deny this claim, saying that the program has served its intended purpose -- either the drugs are provided to vulnerable patients or the money is spent on expanding low-income access to care.

A new study published in Health Affairs by Rena Conti and Peter Bach examined characteristics of hospitals that participate in 340B and sided with the critics. They looked at those hospitals that also received Disproportionate Share Hospital (DSH) payments and saw how their communities changed over time. The number of 340B DSH hospitals has increased steadily since 340B's inception; however, the authors note a sizeable uptick in the growth rate of not only those hospitals but also of hospital-affiliated clinics starting in 2003. The number of clinics increased even more dramatically after 2010 when the Affordable Care Act expanded the types of providers that could qualify for 340B.

How Medicare Part D's Low-Income Subsidy Could Work Better

During the recent slowdown in Medicare spending, the prescription drug portion of the program, Part D, has been the lead actor in the story. The unexpectedly slow growth of prescription drug costs has made Part D cost much less than anticipated. But a new CBO working paper by Andrew Stocking, James Baumgardner, Melinda Buntin, and Anna Cook shows how Part D costs could be further controlled by improving the design of Medicare Part D's Low-Income Subsidy (LIS).

For background, the LIS helps people below 150 percent of the federal poverty line (FPL) afford the costs associated with Part D prescription drug plans. For those with income below 135 percent of the FPL, the LIS covers all premiums as long as the beneficiary chooses a plan that costs below the region's benchmark (ranging between about $20 and $40 per month in 2014), pays the entire deductible, and leaves minimal co-pays for drugs (for those between 135 and 150 percent of the FPL, the LIS covers a portion of each of these items). If LIS beneficiaries choose a plan with a premium above the benchmark, they pay the difference. If a plan that costs below the benchmark in one year moves above the benchmark in the next, Medicare automatically re-assigns beneficiaries to a plan below the benchmark unless they actively choose to stay with the plan or had proactively chosen their Part D plan originally.

The working paper looks at the difference in responses to competitive pressures from LIS and non-LIS beneficiaries and plans. Not surprisingly, LIS beneficiaries tend to be in less expensive plans because of the automatic assignment to plans at or below the benchmark; 87 percent of LIS beneficiaries are in a plan that is within 50 percent of the least expensive plan in the region, compared to two-thirds of non-LIS beneficiaries. But the authors note that plans catering to LIS beneficiaries tend to increase their premiums in the next year if they fall below the benchmark, since they have little incentive to have lower premiums once they are below; plans are estimated to raise monthly premiums by between $6.90 and $9.70 if they fell $10 below the benchmark in the previous year. Furthermore, the addition of a new plan sponsor into a region is estimated to lower plan bids by 0.5-0.8% for non-LIS plans, but only 0-0.2% for LIS plans.

Medicare Registers Fourth-Lowest Growth Rate in Program History in 2014

With today's release of the Congressional Budget Office's (CBO) final Monthly Budget Review for Fiscal Year (FY) 2014, many will be focused on the final 2014 deficit, but it also shows that Medicare clocked its fourth-lowest annual growth rate in history, at just 2.7 percent.

We have been closely following the unusually slow growth of Medicare throughout this year, and also documenting the program's "underlying" growth rate, or what growth would be with temporary or phased-in legislative cuts removed from the calculation*. Dechipering this underlying growth rate should provide a truer picture of the magnitude of Medicare's cost slowdown.

Interestingly (though not surprisingly), the three years with slower growth than this year -- 1998, 1999, and 2013 -- coincided with similar temporary or phased-in cuts.

For 2014, Medicare's underlying growth rate ended up at 4.9 percent, roughly one percentage point faster than both economic and beneficiary growth. Therefore, even removing these temporary effects, Medicare still grew slower than general inflation on a per beneficiary basis.

NCHC Gives 113th Congress A Failing Grade On Health Care Cost Control...So Far

It is no secret that the 113th Congress has had little success reaching agreement on major policy changes, so its lackluster results on a report card from The National Coalition on Health Care (NCHC), grading lawmakers in the health care arena, should come as little surprise.

NCHC even graded on a curve by looking only at three areas where it initially saw promising prospects for bipartisan cooperation: modernizing physician payments/repealing the Sustainable Growth Rate (SGR) formula, increasing price and quality transparency, and strengthening Medicare by making it more efficient. NCHC handed out a D+ for strengthening Medicare, failed Congress on transparency, and gave it an incomplete on SGR repeal and physician payment reform, subject to revision based on what happens in the lame duck session after the November elections.

SGR Repeal/Physician Payment Reform

Arguably the area with the most immediate prospects for action is permanent SGR repeal and replacement. As we discussed a few weeks ago, some lawmakers are targeting the lame duck session to repeal the SGR in order to capitalize on the progress they've made during this congressional session, even though the current "doc fix" does not expire until April. There is a bipartisan framework to replace the SGR with a system to encourage physicians to participate in alternative payment models, moving Medicare away from fee-for-service reimbursement. However, lawmakers have not agreed on offsets for the bill, which could cost between $150 billion and $200 billion over ten years. The partisan bills that saw the light of day were not encouraging.

NCHC gave lawmakers an incomplete on this category but said it would give them an F if there was no further action. We also will give them an F if they pass a permanent doc fix without legitimate offsets.

Quality and Price Transparency

How a Bipartisan Bill Could Improve ACOs

Two weeks ago, we discussed results from two different Accountable Care Organization (ACO) programs in Medicare, which showed an improvement in quality but only modest savings so far. But ACOs are still in their early stages, giving policymakers plenty of opportunities to learn lessons on how to fine-tune them to better serve Medicare beneficiaries and taxpayers. Last week, Reps. Diane Black (R-TN) and Peter Welch (D-VT) released a bill (H.R. 5558) to do just that, establishing greater incentives for high-quality, low-cost care from providers and more engagement with patients. Many of these goals are consistent with policy options that were discussed at the Dartmouth Medicare conference, co-sponsored by Fix the Debt, where experts emphasized ways to achieve more coordinated care and better patient engagement.

The bill would make a number of changes to give ACOs greater flexibility to accomplish their goals, specifically:

    • Providing regulatory relief for ACOs that use two-sided risk models and that make greater use of telehealth and remote patient monitoring;
    • Authorizing reduced cost-sharing for primary care services; and
    • Allowing ACOs to establish other incentive programs for patients to ensure their own wellness.

In addition, beneficiaries would be prospectively assigned an in-network primary care physician, who would be required to give beneficiaries information about the ACO at initial check-ups.

Congress Quietly Acts to Improve Medicare

Congress might not be too popular these days, but quietly a week and a half ago, they passed a small but important bill that could pave the way for Medicare delivery system reforms. Just before leaving town, the House and the Senate each passed the Improving Medicare Post-Acute Care Transformation, or IMPACT, Act of 2014 (H.R. 4994), by unanimous consent.

The National Law Review framed it appropriately:

The bill would enact data standardization across various post-acute care settings which could feed into various site-neutral and bundled payment initiatives. These initiatives could take a number of forms including independent legislation that targets the post-acute care sector, inclusion in broader payment reform efforts like the Medicare physician payment formula (SGR), and/or in efforts out of the Centers for Medicare and Medicaid Services (CMS) via demonstration authority. As we have noted in the past, post-acute care remains one of the top areas where health policy experts anticipate promising Congressional action this and next year. For example, post-acute care has been a priority for Senate Finance Committee Chairman Ron Wyden and is an area ripe for significant delivery and payment reforms.

The bill itself has little impact on the budget, increasing spending by $222 million to satisfy the new data requirements, offset by penalties for Skilled Nursing Facilities (SNFs) that don't satisfy the reporting requirements and reductions in caps on payments to beneficiaries in hospice care. The bill overall would save money but rather than use the net savings to reduce the debt, it adds $195 million to the "Medicare Improvement Fund," which hasn't actually funded Medicare improvements but serves as a sort of piggy bank to pay for doc fixes and other health policies.

MY VIEW: Judd Gregg

Judd Gregg, a former Republican senator from New Hampshire, served as chairman of the Senate Budget Committee from 2005 to 2007 and ranking member from 2007 to 2011. He recently wrote an op-ed featured in The Hill. It is reposted here.

At Dartmouth College in New Hampshire, there was recently a gathering of major healthcare public policy experts, senior staff of congressional health committees, and people concerned about both the health of Medicare and the health of the nation’s fiscal situation.

It was a small group with a specific goal: To come up with some doable proposals that are bipartisan in nature and can be used both to improve the delivery of Medicare to seniors and to reduce its unsustainable cost path, which is a large driver of the nation’s debt.

It was called “The Dartmouth Summit.”

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