• “Everyone seems to agree: Drug prices are too damn high.”

    So begins a post from Rachel Sachs, Darius Lakdawalla, and me at the Health Affairs Blog on the complicated interplay between value-based pricing and Medicaid’s best-price rule.

    What is the best-price rule? Does it really impede the adoption of value-based pricing? If so, what can be done about it?

    To keep federal spending in check, state Medicaid programs never pay full price for a drug. By statute, they receive rebates worth about one-quarter of a drug’s average manufacturer price. But if a manufacturer chooses to sell the drug to someone else for less than the rebated amount, Medicaid will only pay that “best price.” It’s a guarantee that Medicaid can buy the drug at the cheapest price that the manufacturer can afford to sell it.

    Now consider outcome-based pricing, in which manufacturers get paid less when their drugs perform poorly. A manufacturer, for example, might agree to pay a $75 rebate on a $100 drug that fails to work for a particular patient. If it did, however, $25 would now be the drug’s “best price.” Every Medicaid program would be legally entitled to that price, decimating the manufacturer’s revenue from Medicaid.

    That’s why the pharmaceutical industry complains that the best-price rule impedes outcome-based pricing. Its objection is accurate so far as it goes, but it ignores a technique that drug companies and insurers could use to contract around the best-price rule. Instead of granting a rebate if a drug fails to work for a particular patient, manufacturers can offer a rebate based on the performance of the drug across a patient population. To return to the earlier example, a drug manufacturer might sell a drug for $100 but offer a $75 rebate per patient for whom the drug doesn’t work, based on the drug’s performance across 1,000 patients. If the drug is 75 percent effective, the average price for the drugs sold to the 1,000 patients would be north of $80, high enough not to trigger the best-price rule. Indeed, the fact that drug companies have begun to enter into some of these contracts suggests that companies may already be doing some weighted average pricing.

    Even so, tremendous uncertainty remains. In a rule, the Centers for Medicare and Medicaid Services (CMS) has said that best price must be determined on a “unit basis.” Depending on what CMS understands the term to mean, the unit-basis rule may thwart efforts to contract around the best-price rule. At the same time, however, CMS has the authority to change its rule. The statute itself does not contain any unit-basis requirement, meaning that it could be amended to encourage outcome-based pricing arrangements.

    There’s more at the post, which builds off a paper, a draft of which is available here, that Rachel, Darius, and I will be publishing at the Journal of Health Politics, Policy and Law. Comments on the draft are welcome!


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  • Block grant funding of public health insurance: the Canadian example

    Speaker Paul Ryan wants to reform Medicaid by “block granting” the program, that is,

    by capping federal funding and turning control of the program over to states. The aim of such reforms is to reduce federal funding over the long term, while preserving a safety net for needy, low-income Americans. An additional valuable aim of this effort has been to advance federalism by reducing the federal government’s role and giving states and governors more freedom and flexibility in managing their Medicaid programs and helping people in their states.

    What are the likely consequences of block granting? Benjamin Sommers and David Naylor write in JAMA about how Canada’s joint federal/provincial funding of health care provides lessons about the likely consequences of block granting.

    Canada is a single payer health care system. However, there isn’t a Canadian single payer. Rather, there is a single payer for each province: I am covered by the Ontario Health Insurance Plan (OHIP). These plans are primarily funded by provincial taxes. However, provinces also receive a health transfer from the Canadian federal government, i. e., a block grant. The provincial health insurance plans are run by provincial health ministers, not the federal minister in Ottawa.

    So, does provincial autonomy facilitate experimentation and tailoring by the provinces? Sommers and Naylor think not.

    there is little evidence that the alleged advantages of block grants have materialized in Canada. Advocates argue that with greater flexibility and proper incentives, states can reduce costs by improving the efficiency of care. In Canada, however, the provinces’ primary means of coping with budget pressures under block grants has been to reduce funding to hospitals and bargain harder with provincial medical associations. Ironically, then, if this scenario plays out in the United States, it would exacerbate one of the chief Republican criticisms of Medicaid — that it pays clinicians such low rates that they have reduced incentives to care for low-income patients.

    Indeed, physician refusal to take Medicaid patients is one of Speaker Ryan’s central criticisms of Medicaid.

    What about the effects of a block grant system on federal funding of health care?

    Once block funding was initiated in 1977, health care funding became a line item in the federal budget that could be arbitrarily cut or capped for fiscal or political reasons, as opposed to a level of spending pegged to the needs and health care use of the population. Importantly, these cuts occurred under both conservative and liberal federal governments.

    When the Canadian health transfer began, the federal government paid 50% of provincial costs. However, the transfer has steadily declined, until it is now about 20%. Sommers and Naylor predict that US federal block grants would also decline, and this is clearly one of Speaker Ryan’s goals.

    However, Canadian health care spending per capita has not declined.

    Graph from the Fraser Institute.

    As the cost of providing care has risen, but the federal health transfer has stayed fixed or declined, the provinces have taxed more and the federal government has taxed less. The provincial governments hate this, because they would rather have the federal government make the unpopular choice to raise taxes. But it’s not clear whether block granting has made a big difference in the health care received by Canadians.

    American states could similarly increase taxes in response to a declining federal Medicaid block grant, but would they? The key difference between Canadian public health insurance and Medicaid is that the former is universal, while the latter is means-tested. Ontarians prefer lower taxes, but if Ontario decreases funding for OHIP, every Ontarian will experience longer waits for care. But American states can cut Medicaid — and reduce taxes — without affecting the health care of better off and able-bodied citizens.

    The affluent and able-bodied are also the citizens most likely to vote. American states determine their own voting procedures. Block granting gives states an incentive to manage voting so as to reduce the participation of the marginalized communities who are most in need of public health insurance. Block granting is likely to undermine the health care for the poor and disabled, and it could reinforce the post-Shelby County v. Holder efforts to restrict voting.


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  • Out of Sight, Out of Mind — Behavioral and Developmental Care for Rural Children

    Today in the NEJM, Kelly Kelleher (of Nationwide Children’s Hospital) and I discuss rural US kids with mental health and developmental disorders, and the obstacles to caring for them.

    We summarize new data from the Centers for Disease Control about the epidemiology of these problems among rural kids. We also discuss data from the US Department of Agriculture which show that poverty is higher among rural children than urban children and that rural child poverty is higher than it has been since 1993.

    Poverty is more common for rural children.

    Then we look at the many obstacles to getting services to kids in rural settings, particularly the lack of mental health specialists. It’s a problem in the US and Canada, both of which have large regions with low population densities.

    We conclude:

    A romantic and pastoral view of the countryside as a place of healing is ingrained in American culture. The increased burden of MBDDs among rural children belies this image, as does the failure of the traditional behavioral and developmental health care system to address rural children’s needs. These problems have received too little attention, because most behavioral and developmental health specialists, researchers, and health policymakers live in cities. The problems of rural children, their families’ crises, and the lack of services have been out of sight and out of mind.

    And of course I have to say: please read the whole thing!

    Our article was in press before the text of the AHCA was released. Sara Rosenbaum reports that the bill changes Medicaid in several ways.

    the House bill essentially eliminates the enhanced funding levels that made possible states’ expansion of Medicaid to their poorest working-age adult residents, something that 31 states and the District of Columbia now have done. Expansion states could face up to a 40-point difference between the federal funding enhancements they expected to receive in 2020 for the expansion population and what they actually would receive under the bill. What is at stake is continued coverage for some 11 million of the more than 16 million people who have gained eligibility since full implementation of the ACA Medicaid expansion.

    The proposed changes could harm rural America, and rural American kids specifically, in two ways.

    First, many rural families are covered by Medicaid. Losing this coverage will increase the stress on already highly-stressed families. Medicaid funding is also critical to the children’s hospitals that are among the primary places that kids get care for developmental and mental health disorders.

    Second, rural Americans are currently experiencing a significant public health crisis involving opiates, amphetamines, and suicide. Parental substance abuse can adversely affect children. The AHCA has a provision that may undermine efforts to address the substance abuse epidemic. Katie Zezima and Chris Ingraham report in the Washington Post that

    Beginning in 2020, the plan would eliminate an Affordable Care Act requirement that Medicaid cover basic mental-health and addiction services in states that expanded it, allowing them to decide whether to include those benefits in Medicaid plans.

    There are large areas in rural Americas where there are no addiction services. If Medicaid funding shrinks, state administrators will look for places to cut. Eliminating the requirement to fund mental health and addiction services means that funding shortfalls will disproportionately affect kids with mental health and developmental disorders.


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  • Medicaid expansion and reducing divorce rates

    Emma Sandoe is a PhD student in Health Policy, Political Analysis at Harvard and a former spokeswoman for Medicaid at the Centers for Medicare & Medicaid Services.

    This week David Slusky and Donna Ginther released an NBER working paper which suggested that Medicaid expansion reduced the prevalence of divorce by 5.6% among those aged 50-64.

    The thinking is this: Prior to the passage of the Affordable Care Act, the only way that many middle-income adults could qualify for Medicaid coverage was to spend down their assets to qualify for one of Medicaid’s eligibility groups. To avoid spending all of their assets on medical and long-term care services, many people engaged in what is known as “medical divorce.” When one spouse would become ill and need Medicaid services (particularly for long-term care services that Medicare does not cover), the couple would divorce so that the assets of the sick spouse would qualify them for the Medicaid asset test (often around $2,000 for an individual and $3,000 for a couple).

    Medicaid expansion changed things. It allows all people regardless of assets to apply for Medicaid coverage so long as their income is below 138% of the federal poverty level. Using a difference-in-difference approach comparing changes in divorce rates (pre to post ACA) in states that expanded Medicaid eligibility to 138% of the poverty level to states that did not expand, the authors found that divorce rates fell in expansion states.

    One problem is that Medicaid expansion did not entirely get rid of the asset test.

    Medicaid is not one program. There are many avenues that a person can take to get Medicaid. The benefits and structure of the program look different for each eligibility group. Broadly speaking we can break Medicaid eligibility into modified adjusted gross income (MAGI) and non-MAGI eligibility.

    The Affordable Care Act requires all states to use the MAGI to calculate the eligibility for certain types of applicants (pregnant women, children, and the newly eligible Medicaid expansion adult population). These populations receive benefits that are similar to private health insurance – hospital services, doctor services, and pharmaceutical drugs. They do not receive Medicaid long-term care services.

    There are certain groups that are exempt from MAGI eligibility (referred to as non-MAGI). These are Medicaid programs for the blind, disabled, and those over 65. These groups receive long-term care services and for those services they were (and still are) subject to asset tests. Despite some spousal impoverishment protections, this is the population that would likely engage in medical divorces because private insurance and Medicare does not cover long-term care and Medicaid is the primary payer for long-term care services. Without Medicaid, people often pay up to $60,000-$80,000 annually for long-term care services which could impoverish families.

    There could be some people that are early retirees or couples that might need cancer care or other expensive hospital procedures and would qualify for asset-test free Medicaid expansion, but these are likely rare cases linked to divorce.

    The paper may benefit from looking at divorce rates for populations over the age of 65 in states that have expanded versus those that did not expand. This might provide a more complete picture since the population over 65 is likely to include some people who would divorce because of Medicaid asset test eligibility. If divorce rates decreased by a similar amount for this group as for the under-65 group the authors studied, that would suggest that there are other factors other than Medicaid expansion causing rates to fall (because Medicaid expansion did not apply to the elderly population).

    Not only have (non-MAGI eligibility) asset tests not gone away, they’ve become more stringent. For example, in California, the asset test for a couple to qualify for Medicaid disability coverage was $3,000 in 2016. California has not increased that amount in nearly 30 years. The real value of that asset has halved since it was put into place in 1989. I wrote a longer explanation of this issue here.

    The financial security that Medicaid provides does have large scale effects. Financial insecurity is a leading cause of divorce in the US. It is conceivable that there are more financially secure couples who are less likely to divorce because of the safety net of Medicaid expansion. Alternatively, there are many other causal factors that could be reducing divorce as the authors note, but unfortunately asset limits remain a hurdle for many couples to overcome to receive Medicaid services.

    Update: David Slusky responded to this post in a tweet that includes a chart pertaining to the 65+ population.

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  • How Would Republican Plans for Medicaid Block Grants Actually Work?

    The following originally appeared on The Upshot (copyright 2017, The New York Times Company). 

    There are only so many ways to cut Medicaid spending.

    You can reduce the number of people covered. You can reduce the benefit coverage. You can also pay less for those benefits and get doctors and hospitals to accept less in reimbursement. Or you can ask beneficiaries to pay more.

    None of those are attractive options, which is why Medicaid reform is so hard. Medicaid already reimburses providers at lower rates than other insurance programs. How do you reduce the number of beneficiaries when the vast majority of people covered are poor children, poor pregnant women, the disabled, and poor older people? Which of those would you cut?

    Reducing benefit coverage has always been difficult because most of the spending has been on the disabled and poor older people, who need a lot of care. Beneficiaries don’t have much disposable income, so asking them to pick up more of the bill is almost impossible.

    That doesn’t mean that states haven’t tried. As I’ve discussed in past columns, a number are attempting to increase cost sharing. But this isn’t really a solution because it doesn’t change overall spending much at all.

    Part of the challenge lies in the way Medicaid was set up in the first place. The federal government picks up between 50 percent and 100 percent (depending on the population and the per-person income) of whatever it costs to provide health care to a state’s population. Many, if not most, Republican plans would like to change that.

    They are pushing for what many refer to as a block grant program. The federal government would give a set amount of money to each state for Medicaid; it would be up to the states to spend it however they like. These block grants could be set based on overall past state needs or based on the number of beneficiaries in the state, referred to as a “per capita” block grant. Some per-capita block grants function more like “ceilings” than outright grants, allowing the state to be paid at normal Medicaid rates, but with a maximum each state could get based on the per-capita calculation.

    The supporters of such plans have a point. Medicaid has all kinds of complicated rules, which can create perverse incentives throughout the system. It’s possible that the needs of one state are different from another, and that with more leeway in how Medicaid is administered on a local level, states could improve how they manage health care for the poor. It’s also true that the needs of the beneficiaries are widely different (children and the disabled, for example), and that treating them under one large program is inefficient.

    The fiscal magic behind a block-grants approach is that the federal government can then set how quickly the amount they’re responsible for will increase over time, regardless of how quickly medical spending grows. If a gap develops between how much a state needs to spend, and how much the block grant provides, it’s up to the state to make up the difference. Those who support such a plan argue it gives states greater flexibility to make their own Medicaid programs work better.

    A recent New England Journal of Medicine article provides some perspective on how this might work by looking at what happened before Medicaid was created in 1965. Care for the poor in the 1950s was done through direct reimbursements to providers. It was calculated on a per-capita basis — the average cash and medical needs of those the programs covered. Those amounts were capped, based on age and demographics. This is quite similar to how many Republican proposals might function.

    When these capped amounts weren’t enough to pay for the programs, states had to make cuts. They began to restrict who would be covered, what would be covered and how much care beneficiaries could use. Some states refused to cover children at all. Others didn’t cover doctors’ visits or drugs.

    In the early 1960s, the programs had only 3.4 million beneficiaries nationwide.

    The 1965 Medicaid law removed these caps, and today Medicaid covers about 81 million people, or about one in four Americans. By 1980, spending in the program had grown by a factor of 10, and many politicians began to panic about the cost. This rise appears to have come not as much from a rise in benefits or payments as a huge increase in enrollees.

    Andrew Goodman-Bacon, an economist at Vanderbilt University and one of the authors of the article, told me: “From the time Medicaid began until 1980, the amount spent per Medicaid recipient went up about 68 percent. The number of enrollees, however, went up almost 700 percent. Moreover, since 1980, the amount spent per Medicaid beneficiary has been almost flat, at just under about $5,800.”

    Given that the growth in Medicaid spending seems mostly because of increases in the number of people benefiting from the program, it seems logical that one of the few ways to cut spending is by reducing that number.

    The fact that so much of the discussion about Medicaid block grants centers on cuts points to most policy makers’ assumptions that cuts will need to be made. According to the Center on Budget and Policy Priorities, the House Republican budget plan for fiscal year 2017 (if it had passed) would have led to a reduction in Medicaid spending by $1 trillion over a decade. By 2026, federal funding for Medicaid would be one-third less than under current law.

    From states’ point of view, whether they are reimbursed by a block grant or a percentage of coverage doesn’t really matter as long as the amount is enough. Almost no block grant plan allows for this, though. Planned cuts are how block grants make future federal budget projections look so good.

    There’s no magic in how Congress reduces spending under a block grant mechanism. It just says it will do so, and leaves the hard decisions to others. It’s possible that some states will come up with solutions we haven’t been able to see before, and find a way to reduce spending without causing problems. If they can’t, though, they will have to make do with less, make the hard choices and face the brunt of the blame.

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  • Healthcare Triage News: Many with Employer Insurance Still Need CHIP to Insure Their Kids

    As employer-sponsored insurance becomes more expensive for children, public programs are picking up the slack. This is Healthcare Triage News.

    This episode was adapted from a post I wrote for the AcademyHealth blog. Links to further reading and sources can be found there.


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  • AcademyHealth: More families with employer-sponsored insurance are needing public assistance

    My middle son became a Bar Mitzvah this last weekend, so I’m in major catch-up mode. Sorry! I forgot to post when this appeared, so I’m making up for it now.

    Not long ago, an interesting study appeared that shows that as employer-sponsored insurance has become expensive, many more children are actually being covered by public programs. It’s not a great sign for the private insurance market, regardless of what you think of the ACA. Go read about it over at the AcademyHealth blog!


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  • Healthcare Triage News: Medicaid for Children Leads to Better Outcomes Later in Life

    The recent election has caused many to question whether significant changes are about to happen to Medicaid. Repeal of the Affordable Care Act would, of course, lead to the elimination of the Medicaid expansion, which could result in significant numbers of adults losing their coverage overnight.

    But even without repeal, many Republican replacement proposals also result in significant changes to Medicaid, whether it be through funding, eligibility, or benefits. So, again, let’s talk about what Medicaid does, and whether it’s long term benefits are worth it. This is Healthcare Triage News.

    This episode was adapted from a post I wrote for the AcademyHealth blog. Links to further reading and sources can be found there.


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  • JAMA Forum: Hospitals don’t shift costs from Medicaid to private insurers

    The Affordable Care Act (ACA) has allowed states to expand Medicaid. Medicaid pays hospitals prices that are lower than those paid by private insurers. Does this cause hospitals to charge private insurers even more to make up the difference, a cost shift?

    Nope. Read the details in my JAMA Forum post.


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  • AcademyHealth: The longest-term benefits from Medicaid are still worthwhile

    The recent election has caused many to question whether significant changes are about to happen to Medicaid. Repeal of the Affordable Care Act would, of course, lead to the elimination of the Medicaid expansion, which could result in significant numbers of adults losing their coverage overnight. But even without repeal, many Republican replacement proposals also result in significant changes to Medicaid, whether it be through funding, eligibility, or benefits.

    When discussing such changes, it’s worth examining the evidence on the effect of Medicaid on society. With respect to children, a new NBER working paper does just that.

    Go read about it, and my thoughts on it, in my latest post over at the AcademyHealth blog.


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