IRS Issues Final Regulations on Comparability of HSA Contributions

On Friday July 28, the Treasury Department and the Internal Revenue Service (IRS) issued final rules governing the required comparability of employer contributions to employees' health savings accounts. The proposed rule was published in August 2005.

The Treaury Department's press release explains that

Comparability rules provide that an employer contributing to one employee's HSA must contribute comparable amounts to all employees who have HSAs.

The final regulations expand the flexibility of the proposed rules issued in August 2005.In particular, the final regulations include the following features:

• An exception from the comparability requirement for groups of collectively bargained employees;
• The ability to make different comparable contributions based on different variations of family coverage;
• Further clarification of the exclusion from the comparability requirement for employer contributions made through a cafeteria plan.Generally, under the final rules if employees are allowed to contribute to an HSA by salary reduction through a cafeteria plan, all employer contributions to the employee's HSA will be treated as being made through a cafeteria plan (and thus excluded from the comparability rules).

The new rules apply to employer contributions made on or after January 1, 2007.

California Wellbeing Institute

The Wall Street Journal yesterday featured an article about the 83 year old philanthropist David Murdock who owns Dole Foods, among other companies. Mr. Murdock is building the California Wellbeing Institute outside Los Angeles. The Journal describes the Institute as " a combination Four Seasons luxury resort, conference center and nutrition-counseling school."

It was most interesting to me that the health insurer Wellpoint has assumed a 15% ownership interest in the Institute. The Jurnal article further explains that in 2004, "Mr. Murdock convinced [then Wellpoint CEO Leonard] Schaeffer that WellPoint should team up with him. Mr. Schaeffer saw wellness as a promising business area, with good boomer demographics and the potential to attract cash-paying customers, free from the constraints of medical insurance." The Institute is scheduled to open in November 2006.

House Passes HR 4157 -- Next stop Conference Committee

Last month, as noted in the FEHBlog, the House Ways and Means Committee and the House Energy and Commerce Committee passed their own versions of HR 4157, the Health Information Technology Improvement Act. Yesterday, the House Rules Committee passed a resolution (H. Res. 952) reconciling the two measures and permitting various amendments to be considered on the floor of the House. This afternoon, the House considered and passed the bill by a 270-138 vote. The White House issued a statement of support for the House bill.

Of greatest importance to health plans, the House bill would require implementation of the ICD-10 diagnosis and inpatient procedure codes in October 2010 (rather than October 2009 as provided in the Ways and Means Committee report and October 2012 as urged by AHIP).

The House and the Senate now will hold a conference committee to reconcile HR 4157 and S. 1418 which the Senate passed last November.

Health Systems Provide Backing for Walk-in Clinics

Recently, I noted in the FEHBlog that the CVS pharmacy chain had purchased MinuteClinic, a much smaller chain of walk-in clinics staffed by nurse practitioners and physician's assistants. Laura Landro reports in yesterday's Wall Street Journal that CVS plans to incorporate MinuteClinics in 1000 of its pharmacies over the next three years.

Even more interestingly, Ms. Landro reports that regional healthcare systems such as Atlanticare in New Jersey are establishing their own walk-in clinics on a divide and conquer theory. The walk-in clinics will treat the mildly ill at low prices but feed the more seriously ill to the system's doctor network.

In a similar arrangement, the TakeCare chain of walk-in clinics has arranged for support and cross-referrals from Advocate Health Partners in Chicagoland. She cites to several other examples.

According to Ms. Landro, Blue Cross and Blue Shield of Minnesota "which analyzed 22,956 visits by its members to MinuteClinics from June 2004 to June 2005, found the clinics cost about half an office visit -- or $43 versus $87 -- and less than half for other related costs such as lab services."

A "Pay for Quality" Pilot that Doctors Like

The AMA News in its July 24/31 issue reports on a "pay for quality" pilot conducted by Healthspring's Medicare Advantage plan and the Sumner Medical Group, a 15 doctor group in Tennessee. (I was in Nashville this week and greatly enjoyed a Tuesday performance of the Grand Ole Opry.)

In this program, Healthspring retained Healthways, a local disease management company, to provide Sumner Medical with free nursing support to track patients with chronic illnesses between visits, among other services. Healthspring also offered the Sumner Group doctors a 20% pay bonus for hitting quality targets.

Sumner Medical informed the AMA News that the program resulted in an improvement in their patients' health outcomes. The doctors appreciated that the health plan assumed the cost of the disease management nurses and did not impose a financial penalty on the doctors. The health plan enjoyed the medical underwriting gain from the program. Healthspring is planning to extend the program to 12 other markets. Other health plans are evaluating Healthspring's model.

CMS Announces Medicare's PHR Feasibility Pilot

The Centers for Medicare and Medicaid Services (CMS) announced last Friday its six month long project to determine the feasibility of integrating Medicare claims information into a personal health record for Medicare beneficiaries. “'By using emerging technologies and tools, people with Medicare will be better able to manage their health care, resulting in improved quality in the care they receive and ensuring that care is provided more efficiently,'” said CMS Administrator Mark B. McClellan, M.D., Ph.D. 'The steps we are taking today will test whether Medicare’s current data will help to populate useful personal health records for Medicare beneficiaries.'” The work will be performed by ViPS and Capstone Government Solutions under CMS contracts, and the total cost of the project is $500,000.

Initial Federal Supplemental Dental and Vision Benefits Open Season

OPM has posted information about the upcoming initial Supplemental Dental and Vision Benefits Open Season on its web site.

Medical debts not the leading cause of bankruptcy

In 2001, Harvard Professor David Himmelstein created a stir with a paper concluding that unpaid medical bills are leading cause of bankruptcy filings. Since then several academics have debunked that conclusion. The latest is Aparna Mathur, a reseach fellow with the American Enterprise Institute, who released a paper on Medical Bills and Bankruptcy Filings last week.

The report explains that

Studies based on surveys of bankruptcy filers, such as Himmelstein et al. (2005) using data from the Consumer Bankruptcy Project, claim that families with medical problems and medical debts account for nearly half of all bankruptcy filings.4 However, their classification of a medical bankruptcy is too broad.5 A big drawback of the study is that it does not include non-filers in the sample. This is a problem because there may be non-filers who experienced similar problems but did not
file for bankruptcy. Thus the sample lacks an effective control group.

The AEI study "finds that while medical debts are significantly related to bankruptcy filings, the magnitude is not as high as is claimed by other authors" such as Professor Himmelstein.

Senate Aging Committee Hearing on Generic Drugs

Last Thursday July 20, the Senate Special Committee on Aging held a hearing on "The Generic Drug Maze: Speeding Access to Affordable, Life Saving Drugs." One of the witnesses, the FDA's Director of Generic Drugs explained that

Prior to the passage of the Drug Price Competition and Patent Term Restoration Act (Hatch-Waxman Amendments) of 1984, FDA’s primary statute, the Federal Food, Drug, and Cosmetic (FD&C) Act, did not provide for the approval of generic drugs. The Hatch-Waxman Amendments established the ANDA approval process, which permits FDA to approve generic versions of previously approved innovator drugs without the submission of clinical studies and other kinds of data that are required in a full new drug application (NDA). An ANDA refers to the previously approved NDA of the innovator drug and relies upon the Agency’s finding of safety and effectiveness for that drug. Also, with respect to each unexpired patent submitted to FDA by the owner of the innovator drug and published by FDA in the Orange Book1, an ANDA contains a certification that the ANDA applicant either will wait for the patent to expire before marketing the drug or that the applicant challenges thepatent as invalid or not infringed.

The first company to obtain such FDA receives the exclusive right to offer the generic product for 180 days after patent expiration subject to one exception.

The FDA representative urged Congress to provide more funding for his office which has a backlog of ANDAs. Sen. Herb Kohl (D Wisc.) reportedly has arranged for an additional $10 million of funding.

A brand name drug manufacturer with the expiring patent can offer its own "authorized generic" during this otherwise exclusive sales period. At the hearing, a generic drug manufacturer representative opposed this practice as undercutting the Hatch Waxman amendments, and the Pharmaceutical Research and Manufacturers of America's (PhRMA) president supported the practice's conttibution to a competitive market. Following the hearing, Sen. Jay Rockefeller (D Ark) introduced a bill (S. 3695) that would prohibit the marketing of "authorized generics."

Also at the hearing a Federal Trade Commission representative explained to lawmakers that

there have been, and continue to be, competitive problems in pharmaceutical markets. Although many drug manufacturers – including both brand-name and generic companies – have settled their patent suits in a manner that does not harm competition, others have entered anticompetitive settlements without providing a corresponding benefit to consumers. Responding to some of these abuses, in 2003 Congress included provisions in the Medicare Modernization Act (“MMA”) that amended the Hatch-Waxman Act to require notice of settlement between brand and generic firms to the FTC and Department of Justice.

However, according to the FTC testimony, two federal courts of appeals rulings (Schering-Plough Corp. v. F.T.C., 403 F.3d 1056 (11th Cir. 2005); In re Tamoxifen Citrate Antitrust Litig., 429 F.3d 370 (2d Cir. 2005))have rejected FTC objections to patent litigation settlements in favor of "a lenient view of exclusion payment settlements, essentially holding that such settlements are legal unless the patent was obtained by fraud or that the infringement suit itself was a sham." The Supreme Court declined to review the 11th Circuit ruling last month.

According to the FTC representative, "The economic implications of the courts of appeals’ rulings, which seem to invite collusive arrangements between brand-name drug companies and generic challengers, are staggering." The FTC representative expressed the Commission's "strong support [for] the intent behind S. 3582, the 'Preserve Access to Affordable
Generics Act' – bipartisan legislation introduced by Senators Kohl, Leahy, Grassley, and Schumer" on June 27, 2006.

Congress is only scheduled to be in session for one more week before its August recess begins on July 31.

New Troubling Institute of Medicine Report

In 1999, NIH's Institute of Medicine (IOM) issued a report titled "To Err is Human" that rocked the medical community with its conclusion that medical errors cause 44,000 to 98,000 deaths annually in American hospitals. The report sparked a significant patient safety movement that the U.S. Office of Personnel Management has endorsed in connection with the Federal Employees Health Benefits Program.

Yesterday, the IOM issued a report concluding that at least 1.5 million Americans are sickened, injured or killed each year by errors in prescribing, dispensing and taking medications. The IOM report encourages the use of electronic prescribing to reduce the number of errors. IOM also released a fact sheet on how medication errors can be prevented. This would be a good publication to widely circulate.

Price Transparency Hearing -- A Healthcare SEC??

Rep. Nancy Johnson (R-Conn.) chaired a House Ways and Means health subcommittee hearing on the topic of price transparency, a leading Administration initiative to control health care spending. The witnesses included

Regina E. Herzlinger, Ph.D., Nancy R. McPherson Professor of Business Administration, Harvard Business School, Boston, MA (whose work impresses me),
Robin Downey, Product Development Head, Aetna, Middletown, CT,
Daniel F. Evans, Jr., President and CEO, Clarian Health Partners, Indianapolis, IN,
Stephen Brenton, President, Wisconsin Hospital Association, Madison, WI, and
Ha T. Tu, Senior Health Researcher, Center for Studying Health System Change.

In her testimony, Prof. Herzlinger proposed the creation of an SEC for healthcare:

A Health Care SEC

Societal Consequence of SEC-like Health Care Regulation

The U.S. securities markets contain the characteristics desired for the health care:

• Prices are fair in the sense that they reflect all publicly available information, despite the inability or unwillingness of many buyers to avail themselves of this information.
• Buyers use this information to redirect capital so that it rewards productive firms and penalizes unproductive ones.
• Information and competition continually reduce transaction costs.

The presence of these characteristics in health care would achieve two important social goals:

First, they would help the uninsured and the underinsured.

Second, they would divert money from health providers that offer a bad buy to those that offer a good one. The bad buy providers would shrink or improve. The good buy providers would flourish.

How to Make it Happen

The key to achieving these desirable characteristics in health care is legislation for a health care SEC that replicates these essential elements of the SEC model.

1. An Independent Agency with Singular Focus. The SEC is an independent agency charged solely with overseeing the integrity of securities and the markets in which they are purchased. Because of these organizational characteristics, the SEC’s mission is not muddied--it is squarely lined up with the consumer--and it can be held clearly accountable for is performance.
2. Penalties. The SEC is armed with powerful penalties for undercapitalized and unethical market participants, including imprisonment, civil money penalties, and the disgorgement of illegal profits. A corresponding health care agency would oversee the integrity and require public disclosure of information for health care.
3. Private Sector Disclosure and Auditing. The SEC relies heavily on private sector organizations, which contain no governmental representation. The new health care agency should similarly delegate the powers to derive the principles used to measure health care performance to an independent, private, nonprofit organization that, like the FASB, represents a broad nongovernmental constituency. The agency would require auditing of the information by independent professionals, who would render an opinion of the information and bear legal liability for failure to disclose fairly and fully.
4. Private Sector Analysis. The evaluation process is primarily conducted by private sector analysts, who disseminate their frequently divergent ratings. To encourage similar private sector health care analysts, the new agency should require public dissemination of all outcomes for providers, including clinical measures of quality, and related transaction costs.
5. Focus on Outcomes, Not Processes. The SEC and FASB focus on measuring the financial performance of organizations. FDR firmly rejected dictating business processes or rating businesses as appropriate roles for the SEC.

The SEC is essentially a profit center, generating a substantial surplus from its filing and penalty fees, which offset its billion dollar budget.

CCHIT Announces First Ambulatory EHR Certified Products

Another electronic health records (EHR) implementation milestone was reached today. The Certification Commission for Healthcare Information Technology (CCHIT) made its first announcement of twenty ambulatory electronic health record (EHR) products that have attained CCHIT Certified status.

CCHIT certifies EHR products under a U.S. Department of Health and Human Services (HHS) contract for functionality (setting features and functions to meet a basic set of requirements), interoperability (enabling standards-based data exchange with other sources of healthcare information), and security (ensuring data privacy and robustness to prevent data loss). According to HHS, "CCHIT will certify health IT products in three initial phases:
First, outpatient or ambulatory EHRs; Second, inpatient, or hospital EHRs; and
Third, architectures, or systems that enable the exchange of information between and among health care providers and institutions."

HHS Secretary Leavitt said that “This seal of certification removes a significant barrier to wide-spread adoption of electronic health records. It gives health care providers peace of mind to know they are purchasing a product that is functional, and interoperable and will bring higher quality, safer care to patients.”

Impact of health "insurance" on health care spending

A Massachusetts Institute of Technology economics professor, Amy Finkelstein, is publishing an interesting paper in the always scintillating Quarterly Journal of Economics titled "The Aggregate Effects of Health Insurance: Evidence from the Introduction of Medicare."

The abstract for the paper reads as follows:

Abstract: This paper investigates the effects of market-wide changes in health insurance by examining the single largest change in health insurance coverage in American history: the introduction of Medicare in 1965. I estimate that the impact of Medicare on hospital spending is over six times larger than what the evidence from individual-level changes in health insurance would have predicted. This disproportionately larger effect may arise if market-wide changes in demand alter the incentives of hospitals to incur the fixed costs of entering the market or of adopting new practice styles. I present some evidence of these types of effects. A back of the envelope calculation based on the estimated impact of Medicare suggests that the overall spread of health insurance between 1950 and 1990 may be able to explain about half of the increase in real per capita health spending over this time period.

Eureka! This is what I always have suspected.

Will Electronic Health Records Produce Savings??

The health information technology (HIT) bills now pending in Congress presume that the widespread introduction of electronic medical records will reduce health care spending. At a party Saturday night, I asked an emergency medicine doctor for his opinion. He told me that while electronic prescribing is a vast improvement over paper based prescriptions, electronic medical records will simply slow down the practice of medicine, e.g., doctors will see fewer patients per hour, and thereby increase costs.

I therefore was very interested to learn that the upcoming issue of the Health Affairs journal includes an article by Jann Sidorov, MD, the medical director of Geisinger Health Plan’s Care Coordination Department and a practicing primary care internist titled "It Ain’t Necessarily So: The Electronic Health Record And The Unlikely Prospect Of Reducing Health Care Costs."

The Health Affairs website provides the following summary of Dr. Sidorov's article, which is in line with my friend's opinion:

Electronic health record (EHR) advocates argue that EHRs lead to reduced errors and reduced costs. Many reports suggest otherwise. The EHR often leads to higher billings and declines in provider productivity with no change in provider-to-patient ratios. Error reduction is inconsistent and has yet to be linked to savings or malpractice premiums. As interest in patient-centeredness, shared decision making, teaming, group visits, open access,and accountability grows, the EHR is better viewed as an insufficient yet necessary ingredient. Absent other fundamental interventions that alter medical practice, it is unlikely that the U.S. health care bill will decline as a result of the EHR alone.

Medicare Cuts in the News

As recently blogged, the latest Centers for Medicare and Medicaid Services semi-annual update on Medicare costs indicates that Medicare Part A (inpatient hospital) expenses remain on the rise. Medicare Part A reimburses for inpatient care based on a prospective payment system that uses diagnositic related groups ("DRGs"). In April, 2006, CMS proposed major changes to this reimbursement system:

CMS is considering a two-step process of transformation. The first step,
set out in the proposed rule, would assign weights to DRGs based on hospital
costs, rather than hospital charges. This would eliminate biases in the
current DRG system arising from the differential markup hospitals assign for
ancillary services among the DRGs. The new DRG weights would go into
effect October 1, 2006.

A second step, currently scheduled for FY 2008, would replace the current 526 DRGs with either the proposed 861 consolidated severity-adjusted DRGs or an alternative severity adjusted DRG system developed in response to the public comments CMS is soliciting on this issue. CMS is also considering ways of improving recognition of severity in the current DRG system by FY 2007. When the two steps are fully implemented, hospitals can expect more accurate payment for their services.

In today's New York Times, Robert Pear reports that the proposed DRG changes will whack 20 to 30% off current hospital reimbursement for frequently performed procedures, such as the drug coated artery stent, and shift costs onto private payers. The article also reports that Congress is questioning why CMS gave 3M a sole source contract to develop the DRG reforms.

Senator Charles Grassley (R Iowa), Senate Finance Committee Chairman, and Sen. Max Baucus (D Mont.), the Committee's ranking minority member, have asked CMS to delay the payment reforms for a year. However, House Ways and Means Committee Chairman Bill Thomas (R Calif) has supported the reforms -- at least before today's report.

Senate Aging Committee Hearing on Health Care Costs

The Senate Special Committee on Aging held a hearing yesterday on health care spending. General Motors' Chairman Richard Wagoner recommended in his testimony

[S]everal key public and private initiatives that deserve attention:

A vigorous and robust competitive prescription drug market in which everyone has access to affordable pharmaceuticals, including generic biopharmaceuticals.

Policies that give consumers and physicians information on the relative effectiveness of different drugs and treatments so that they can compare and distinguish treatment options. Armed with this information, physicians and onsumers can ensure that only the most effective drugs and treatments are provided, and help reduce inappropriate, ineffective, and costly care.

Implementation of National Health IT legislation. S.1472, the Health Care Wired
Act [actually S. 1418], sponsored by Senators Enzi and Kennedy, should be enacted into law this year.

Release of the complete Medicare Claims Database. I have joined my colleagues
at the Business Roundtable asking that the Federal government disclose all
Medicare data on the cost and quality of physicians and hospitals across the
country. By getting price and quality information about physicians, hospitals, and
other providers available to the public, consumers can make better choices about
the health care they receive. This is increasingly important as consumers spend
more of their own money on health care. This information will enhance quality
and efficiency in the delivery of Medicare services as well as health care services
overall.

Finally, a stronger focus on high-cost cases. Just one percent of the population
with chronic and serious illnesses accounts for about 30% of total health care
expenditures. These cases pose a significant burden on both private and public
payers. We need a better public/private effort to address these high-cost cases to
improve their care and reduce overall costs, and to create a more competitive health care market/

The Congressional Budget Office provided more enlightening information on the Medicaid Program costs and its opinion on the factors driving health care spending:

In calendar year 2004, the United States spent about $1.9 trillion for health care, an amount nearly five times as great in real terms as was spent in calendar year 1975. Real spending per capita increased from about $1,700 in 1975 to about $6,300 in 2004, an average annual rate of real growth of 4.5 percent. The economy as a whole grew over that period as well but not as quickly, with the result that health care spending as a percentage of GDP doubled--rising from about 8 percent in 1975 to about 16 percent in 2004. The mid-1990s saw a brief slowdown in real spending growth per capita, but higher rates of growth have returned in more recent years: from 2000 to 2004, real health care spending per capita grew at an average annual rate of 5 percent, which is similar to its long-term historical average.

Although the diffusion of new medical technologies is generally considered the primary impetus for the long-term increase in overall spending for medical care, other factors certainly contribute to it as well. One source of cost growth has been the aging of the population. Among adults, average medical spending generally increases with age, so as the share of the population that is elderly grows, health care spending per capita will rise. Over the past half century, however, aging has played a relatively minor role in the very large increases in overall spending that have occurred--accounting for only 2 percent of that growth, by some estimates. The coming retirement of the baby boomers will further increase the elderly's population share and thus have a larger impact than past aging trends have had. Even so, the growth of medical costs per person is likely to remain the predominant reason that health care spending for the country as a whole continues to climb.

In some cases, advances in medical technology may lead to reductions in spend-
ing. Vaccinations, for example, offer the potential for savings on subsequent treat-
ment costs, and certain types of preventive medical care may help some patients avoid costly hospitalizations. Overall, however, examples of new therapies for
which long-term savings have been clearly demonstrated are few. As with preventive care, new prescription drugs may help some patients avoid more expensive treatments--but they may also generate new spending for previously untreated cases that would not have become more serious. Improvements in medical care that decrease mortality by helping patients avoid or survive acute health problems may ultimately increase overall spending for health care as those (surviving) patients live to use additional health care services throughout their old age.

Other factors that are contributing to the growth of overall health care spending include real increases in personal income over time and the deepening of health insurance coverage over recent decades. Because medical care is a desirable service demand for it tends to rise as real incomes move upward. At the same time, from the consumer's perspective, health insurance coverage reduces the cost of care, which leads consumers to demand increasing quantities of services. Although the estimated fraction of Americans who have health insurance has not changed dramatically during the past 20 years, private health insurance has covered an expanding share of all private health care costs; such coverage has thus deepened rather than broadened. Even so, the best estimates of the effects of income and insurance coverage on health care costs indicate that those factors, too, fail to explain much of the surge in spending in recent decades.

Not encouraging.

Lexapro patent validated

Forest Laboratories won the latest round in the legal fight to preserve its Lexapro anti-depressant drug patent into 2012 (and the stock market responded today with a 16% increase in the company's stock price). Forest Labs has good reason to be pleased as the Wall Street Journal reports today that

Generic competitors to [Merck's statin] Zocor [whose patent protection expired on June 23, 2006] are grabbing a big share of new prescriptions for cholesterol-lowering drugs and already putting pressure on Pfizer Inc.'s Lipitor, recent data show.

After copycat versions of Zocor became available during the last week of June, they captured 49% of new prescriptions in the U.S. for the medicine known generically as simvastatin. Despite price cuts taken by Merck & Co. to keep Zocor competitive, the brand-name drug's market share slipped to 51% of new prescriptions during the week that ended June 30, according to data from WoltersKluwerHealth. Patent protection for Zocor in the U.S. ended June 23.

Interesting Pharmacy Development

CVS, which is the largest pharmacy chain in the Washington, D.C., area and has 5,400 pharmacies in 37 states, has bought MinuteClinic. There are 83 MinuteClinics in ten states, including 66 located inside CVS pharmacies, including one in my hometown, Bethesda, MD. According to the CVS press release, "MinuteClinic locations, which are staffed by certified nurse practitioners and physician assistants, offer treatment for common family illnesses, such as strep throat, ear infections, poison ivy and pink eye. They also provide some common vaccinations." Clearly CVS has room for expanding this convenient service. Will other pharmacies follow CVS's lead?

More on the VA Security Breach

Steve Barr reports in today's Washington Post about an Inspector General report on the massive Veterans' Administration security breach. What a dysfunctional agency!

Senate Approves Canadian Drug Imports

The U.S. Senate today amended by a 68-32 vote the Homeland Security appropriations bill to prohibit Customs and Border Protection officers from from preventing an individual not in the business of importing a prescription drug from importing an FDA-approved prescription drug from Canada into the United States.

CMS Fact Sheets

The Centers for Medicare and Medicaid Services released two fact sheets today on Medicare and Medicaid spending. Medicaid spending is below budget projections, but Medicare spending is above those projections:

Medicare Part D expenditures are now projected to be $34 billion lower over 5 years (2006-2010) than in the President’s Budget, and $110 billion lower than in the Mid-Session Review one year ago. The average Part D premium is almost 40 percent lower than had been projected a year ago as a result of strong competition, and 90 percent of Medicare beneficiaries are receiving prescription drug coverage.

Medicare Part A and Part B expenditures are higher, primarily because of continuing rapid growth in the use of Medicare services. Part A projected expenditures over 5 years (2006-2010) are $17 billion higher and Part B projected expenditures over 5 years are $30 billion higher than in the President’s Budget. Rapid growth in physician-related services and hospital outpatient services are the main factors responsible for a projected increase in the Medicare Part B premium of 11 percent for next year.

The continued rising costs in Medicare Part A and Part B highlight the need for reform of the original Medicare program to pay more accurately and especially to pay more for better care, not simply more services. The President’s Budget proposed building on MedPAC’s recommendations for more accurate payments to health care providers, and the adoption of performance-based payment systems.

On June 20, CMS released another fact sheet which provides more details on why CMS finds Part D prescription drug program spending is substantially below projections.

HSA Hearing

On June 28, the House Ways and Means Committee held a hearing on health savings accounts / high deductible health plans (HDHPs). Karen Ignani, AHIP's President, gave interesting testimony on consumer acceptance of HSA/HDHPs. A recent GAO report on first year FEHBP experience with HSA/HDHPs concluded that "FEHBP HDHP enrollees were younger and earned higher federal salaries than other FEHBP enrollees." Ms Ignani reported about

Two other studies – one by the Employee Benefit Research Institute (EBRI), another by the Blue Cross Blue Shield Association (BCBSA) – have demonstrated that the health status of individuals with HSAs is comparable to the health status of those with other types of coverage. The EBRI study[4] found that 86 percent of individuals with HDHPs and 87 percent of individuals with non-HDHP coverage reported their own health status as very good or good. The BCBSA study[5] yielded similar results, with 77 percent of individuals in both categories – those with HDHP coverage and those with non-HDHP coverage – describing their health status as very good or good.

The EBRI study also found that the income distribution is fairly similar for persons with HDHP coverage and with other types of coverage. According to EBRI, 31 percent of HDHP enrollees and 27 percent of non-HDHP enrollees have annual household incomes below $50,000. Similarly, Assurant Health found that 29 percent of enrollees in its HDHPs have annual household incomes below $50,000. Other data[6] from Assurant indicate that 43 percent of HDHP applicants did not have prior health coverage and, additionally, that 69 percent of HDHP purchasers are families with children and 62 percent are over the age of 40.

In connection with this hearing, the Joint Committee on Taxation staff issued an illuminating report on the tax benefits of various health benefit arrangements that are available to federal employees and other citizens.

HIT Update

Ben Butler of Crowell & Moring call my attention to this excellent overview of PHR initiatives from Modern Healthcare. I was interested in learning that

On June 30, the CMS awarded contracts to perform feasibility studies on creating PHRs using claims data from existing Medicare fee-for-service programs. One of the winners was Capstone Government Solutions, Nashville, a for-profit consortium formed in 2004 by Blue Cross and Blue Shield of Tennessee and Cigna Government Services, an arm of publicly traded Cigna Corp. ViPS, a business unit of Elmwood Park, N.J.-based Emdeon Corp., formerly WebMD Corp., was awarded the second PHR pilot contract.

There's not much news, however, about the status of the major House health information technology bill, HR 4157, which probably means that there's a lot going on in the proverbial smoke filled rooms on Capitol Hill. The current AMA News does report that the medical community joins the insurance community in opposing to Rep Nancy Johnson's 10/09 ICD-10 mandate in the Ways and Means version of HR 4157.

Prescription Drug Trends

The Kaiser Family Foundation has posted its June 2006 report on prescription drug trends. "The updated fact sheet shows that while spending on prescription drugs had been rising more rapidly than for other types of health care, its rate of growth has slowed somewhat recently and now is rising at about the same pace as spending for hospital and physician services." Presumably that trend will continue due to the recent spate of expiring patents on iconic brand name drugs such as Zocor and Zoloft.

Fun facts to know and tell from that report:

• In 2005, about three-quarters (74%) of workers with employer-sponsored coverage had a cost-sharing arrangement with 3 or 4 tiers, over 2½ times the proportion in 2000 27%).
• Co-payments for nonpreferred drugs (those not included on a formulary or preferred drug list) have doubled from an average of $17 in 2000 to $35 in 2005.
• Copayments for preferred drugs (those included on a formulary or preferred drug list, such as a brand name drug without a generic substitute) increased by 69%, from $13 in 2000 to $22 in 2005.

OCR releases Emergency Preparedness Guidance

The HHS Office for Civil Rights, which enforces HIPAA's Privacy Rule, has released guidance for covered entities and business associates to describe information flows in the event of an emergency, such as Hurricane Katrina. Covered entities should consider incorporating this guidance in their Privacy Policies and Procedures.

NHIN Forum

Last week, HHS sponsored a Nationwide Health Information Network (NHIN) Forum. The NHIN will be the backbone of the Nation's developing electronic medical records system. 500 people attended (the admission charge was only $50). Government HIT magazine reports that the attendees had a lot of questions and comments. The National Committee on Vital and Health Statistics will be considering these comments as it develops a privacy and security oriented requirements document for the NHIN over the summer. In addition, four HHS-contracted consortia -- are developing and assessing different NHIN models. For what it's worth, I have been most impressed by the Connecting for Health Common Framework model developed in partnership with CSC. For more details, Oracle has created a NHIN Watch.

CMS Proposes Major RBRVS Changes

Since 1992, Medicare has reimbursed physicians services pursuant to a resource based relative value schedule. The American Medical Association explains that

In the RBRVS system, payments for services are determined by the resource costs needed to provide them. The cost of providing each service is divided into three components: physician work, practice expense and professional liability insurance. Payments are calculated by multiplying the combined costs of a service by a conversion factor (a monetary amount that is determined by the Centers for Medicare and Medicaid Services). Payments are also adjusted for geographical differences in resource costs.

Many health plans utilize the RBRVS to establish the basis for compensating network providers.

At least every five years, CMS must reevaluate the RBRVS. The most recent re-evaluation was published in the Federal Register on June 29. CMS's press release explains that

The proposed notice includes substantial increases for “evaluation and management” services, that is, time and effort that physicians spend with patients in evaluating their condition, and advising and assisting them in managing their health. The changes reflect the recommendations of the Relative Value Update Committee (RUC) of the American Medical Association.

"It’s time to increase Medicare’s payment rates for physicians to spend time with their patients,” said CMS Administrator Mark McClellan, M.D., Ph.D. “We expect that improved payments for evaluation and management services will result in better outcomes, because physicians will get financial support for giving patients the help they need to manage illnesses more effectively.”

These are the largest revisions ever proposed for services related to patient evaluation and management. For example, the work component for RVUs associated with an intermediate office visit, the most commonly billed physician’s service, will increase by 37 percent. The work component for RVUs for an office visit requiring moderately complex decision-making and for a hospital visit also requiring moderately complex decision-making will increase by 29 percent and 31 percent respectively. Both of these services rank in the top 10 most frequently billed physicians’ services out of more than 7,000 types of services paid under the physician fee schedule.

Medicare law requires that CMS impose a budget neutrality adjustment if changes in RVUs will cause an increase or decrease in overall fee schedule outlays of more than $20 million, compared with what they would have been in the absence of the changes. CMS estimates that the proposed work RVU changes would increase expenditures by approximately $4.0 billion. CMS is proposing to create a separate budget neutrality adjuster that can be applied just to the work RVUs for Medicare purposes, without changing the number of work RVUs assigned to a particular service. This would preserve the integrity of the existing work RVU structure, which is often adopted by other payers.

CMS will be accepting comments until August 21 and it plans to announce the final policy changes in November and implement the revised RBRVS on January 1, 2007, subject to a phase in period.

Surprising survey

OPM has an FAQ page on prescription drug coverage which states that

Q. Are generic drugs likely to cause more side effects than brand name drugs?

A. There is no evidence of this. The FDA monitors reports of adverse drug reactions and has found no difference in the rates between generic and brand name drugs.

However, the Washington Post reports today in its health section about a Medco survey finding that 27% of physicians are of the opinion that generic drugs are more likely to produce unwanted side effects than brand name drugs (in contrast to 5% of pharmacists and 10% of consumers).

Pfizer to market its own generic Zoloft

Pfizer's iconic anti-depressant drug Zoloft just lost its patent protection. Pfizer announced that its Greenstone Ltd subsidiary would manufacture an "authorized generic" version of Zoloft. If an independent generic drug manufacturer brings a successful patent challenge against a brand name drug, then that manufacturer (and the brand name manufacturer) share an exclusive right to market the generic drug for the first 180 days after the patent expires under the Hatch Waxman amendments to the federal Food and Drug Act.

If the brand name manufacturer does not license or manufacture its own authorized generic, then it's clear sailing for the independent company, such as Teva, to gain market share. But if the independent must compete with an authorized generic, then the generic price drops even lower (50% of the brand name price according to the Wall Street Journal as compared to a 35% to 40% average dip when the independent generic manufacturer has no competition. The U.S. stock price of Teva, which now will be competing with Pfizer for sale of generic Zoloft, dropped 3% on Friday on the news. (Pfizer was up 1% on Friday.)

Cancer Drug Pricing

On Thursday, the Food and Drug Administration approved the use of Celgene's drug Revlimid to treat patients with relapsed or recurring multiple myeloma. Trial data has shown the Revlimid, which is a pill, combined with a steroid boosts the survival rate of these patients by a year or more.

According to Reuters, the manufacturer will price the drug at more than $6,000 a month for the highest, 25 milligram, dose. Today's Wall Street Journal (subscription wall) observes an industry trend of aggressively pricing cancer drugs while creating a safety net for the uninsured. The Journal quotes a Morgan Stanley analyst Sapna Srivastava, "Every time a [cancer] drug is priced, it's higher." Other examples are Genentech's Avastin and Bristol Myers Squibb/Imclone's Erbitux. Recently Bristol Myers declined to market Eribitux in Canada because of pricing concerns. This strategy has been noted for over two years with no no end apparently in sight.

Domestic Partner Coverage Study

On June 29, The Human Rights Campaign, a gay advocacy organization, released a report showing that 51% of Fortune 500 companies now extend health benefits to the domestic partners of their employees -- double the number since 2000. Under the Federal Employees Health Benefits Act, self and family coverage is limited to the "spouses" of employees, and pursuant to the Defense of Marriage Act, a spouse is "a person of the opposite sex who is a husband or a wife."