As Congress pushes for Medicaid change, could a version of Reagan’s grand bargain simplify the program?

Health Care Current | July 11, 2017

This weekly series explores breaking news and developments in the US health care industry, examines key issues facing life sciences and health care companies and provides updates and insights on policy, regulatory, and legislative changes.

My Take

As Congress pushes for Medicaid change, could a version of Reagan’s grand bargain simplify the program?

By Jim Hardy, specialist executive, State Health Transformation Services, Deloitte Consulting LLP

Medicaid is in the eye of a political hurricane – encircled by swirling forces that could dramatically reshape the program. The Republican-led Congress is pushing to roll back the Affordable Care Act’s (ACA) Medicaid expansion and fundamentally change the nature of the program’s state/federal partnership by placing limits on the federal government’s contribution to the program. At the same time, many states are struggling to balance budgets, and are looking for ways to more effectively manage Medicaid costs through a variety of strategies.

Some states, for example, are placing more emphasis on value-based purchasing or are encouraging beneficiaries to be more involved in making decisions about the health care services they receive.

After initially planning to hold a vote on the Better Care Reconciliation Act of 2017 (BCRA) before the Fourth of July holiday, Senate leadership opted to pause while it modified the legislation in response to lawmakers who oppose it. The Senate bill aims to unravel key elements of the ACA – including Medicaid expansion.

As my colleague Anne Phelps recently noted, the Senate bill calls for continued funding for the Medicaid expansion population over the next two years (see the June 27, 2017 Health Care Current). It would then limit funding for future years by introducing caps on per capita spending for the broad Medicaid population and allowing the growth rate of those caps to rise with the Consumer Price Index (see the May 9, 2017 Health Care Current).

Medicaid is nation’s largest public insurance program

With an estimated 74.6 million beneficiaries,1 Medicaid is the nation’s largest public insurance program. Its enrollment dwarfs Medicare, which covers about 55 million people.2 While typically viewed by the general public and legislators as a program for low-income people and children, Medicaid also is the nation’s largest payer of long-term care for seniors and the disabled, including those dually enrolled in Medicare and Medicaid, “the dual eligibles.”

If Medicaid is truly going to be reformed, it may require digging into some of the underlying structural issues, including dual eligibles as a crucial structural component. Surprisingly, however, duals are generally not part of the conversation at either the state or federal level. Instead, most of the discussion revolves around the Medicaid expansion called for by the ACA. While the ACA certainly pushed Medicaid enrollment numbers higher in states that opted to expand, most of the program’s costs aren’t tied to those who gained coverage.

Newly eligible adults made up 13 percent of Medicaid enrollment and accounted for 11 percent of expenditures in 2015, according to data from the Medicaid and CHIP Payment and Access Commission (MACPAC). By contrast, the elderly and disabled who qualify for both Medicare and Medicaid make up less than a quarter of the Medicaid’s population, but consumed 55 percent of the program’s spending, according to 2015 MACPAC data. Moreover, these dual eligibles have to navigate two government-run health care programs to get their health care needs.

In some respects, Medicaid acts as a means-tested supplemental insurance program for Medicare because it covers copays and deductibles for low-income seniors. In addition, Medicare covers inpatient hospital and rehabilitative nursing home stays while Medicaid pays for institutional nursing home and home and community-based services (HCBS) for people who need long-term care.

It’s confusing for consumers, and it’s complicated for states because the difference in benefit packages can result in misaligned financial incentives between the two programs. Several states, along with the US Centers for Medicare and Medicaid Services (CMS), are involved in a Dual Eligible Financial Alignment Demonstration Project. While early results show promise, only 390,000 duals are enrolled, and CMS has no plans to expand the program.

Would a version of Reagan’s “Grand Bargain” work today?

Per capita caps and block grants are being discussed by lawmakers as they look to restructure Medicaid. One idea policy makers have discussed in the past, which might be interesting to examine again, would be to restructure Medicaid so that states take complete programmatic and financial control for certain populations, while Medicare assumes responsibility for the dual eligibles.

In this scenario, the states would gain more control over their Medicaid programs, and would no longer be financially responsible for one of the program’s most costly populations. The federal government would gain more predictability and an ability to drive cost reductions to meet their objectives without having to navigate state concerns. More specifically, doing this sort of a deal gets the federal government completely out of one part of the Medicaid program, and allows it to treat Medicare holistically without having to fight with the governors.

That concept goes back to the early ’80s, when President Ronald Reagan offered the states a deal sometimes referred to as “the Grand Bargain.” His idea was to have the federal government assume the financial responsibility for Medicaid, and have the states take full responsibility for a number of jointly funded social programs. At the time, Reagan’s proposal faced strong opposition from some of the nation’s governors because they didn’t think the “bargain” was balanced and thought it posed too much potential risk in the future.

Two decades later, Congress did take a step toward consolidating benefits for dual eligibles when it created the Medicare Prescription Drug Plan (Part D) as part of the Medicare Modernization Act of 2003. Under the law, if you’re enrolled in Medicare, regardless of whether you are also eligible for Medicaid, your drug costs are paid through Medicare. Prior to that law, Medicaid covered drug costs for dual eligibles.

Through Part D, the states reimburse the federal government for their share of the duals’ costs through a “clawback” process. In a block grant-style model, instead of making payments to reflect their historical share of costs for the duals, the states would ”trade” financial responsibility for the financial and programmatic responsibility of another population group. For example in fiscal year 2013 states spent $58 billion dollars on Medicaid for children and non-disabled adults, while spending $60 billion on dual eligibles.

This type of restructuring might simplify the lives of the dual eligibles by allowing them to access benefits from a single program. It might give states the programmatic control to effectively manage the financial risk of their Medicaid program and help alleviate the long-term risk tied to an aging population.

Though this type of arrangement could allow the federal government to holistically reform Medicare without having to balance in the financial needs of the states, there are still many considerations that would need to be addressed such as financing, oversight, and patient protection. But I think it’s an idea worth exploring.

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1 Total monthly Medicaid and CHIP enrollment, April 2017, Kaiser Family Foundation.
2 Total number of Medicare beneficiaries, 2015, Kaiser Family Foundation.


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In the News

CBO projects BCRA would reduce Medicaid outlays by 35 percent over 20 years

The Senate’s Better Care Reconciliation Act of 2017 (BCRA) would cut Medicaid spending by 35 percent by 2036 when compared to spending projections under the ACA, according to a report from the Congressional Budget Office (CBO). An earlier CBO score of the reconciliation bill (see the June 27, 2017 Health Care Current) projected that Medicaid spending would be cut by 26 percent by 2026.

While the agency typically publishes estimations within a 10-year budget window, Senator Ron Wyden (D-Ore.) requested the extended timeline projections because BCRA includes changes to the per-capita cap formula’s growth rate beginning in 2025, the ninth year of implementation.

According to the analysis, states would need to make major changes to their programs to maintain services to Medicaid beneficiaries. These changes could include:

  • Reducing payments to providers or health plans
  • Eliminating optional services
  • Restricting enrollment eligibility
  • Committing more state resources
  • Finding other ways to create efficiencies

Additionally, the report projects the cost of health care services will increase during the 20-year period due to new physician-practice patterns, innovative technologies, and medical inflation. According to the CBO, these factors will further pressure states to increase Medicaid reimbursement to maintain access to care for beneficiaries even as federal funding decreases.

The CBO estimates Medicaid funding would be reduced by $160 billion in 2026, compared with projections under existing law. CBO cites three provisions of BCRA that would contribute to reduced Medicaid funding:

  • Revoking the individual and employer mandates and the associated financial penalties, which are used to offset increased federal funding for the Medicaid program
  • Capping medical Medicaid benefits for non-disabled children and adults (i.e., limiting the amount of federal reimbursement provided to states)
  • Reducing the federal match rate (F-MAP) for Medicaid beneficiaries

Related: BCRA also includes several provisions nullifying tax penalties imposed by the ACA – including the individual and employer mandate penalties, penalties restricting health savings account contributions and flexible spending arrangements, and additional income taxes (see the Deloitte Reg Pulse Blog, Congressional legislative agenda dominated by the intermix of health care and tax issues).

FDA to review backlogged orphan drug designation requests by September 21

The US Food and Drug Administration (FDA) announced plans to modify the regulatory process for orphan drug designations and to review all backlogged designation requests by September 21, 2017. According to the agency’s announcement, while orphan drug designation requests have increased in recent years, the agency’s capacity to review these requests has been limited.

The FDA grants orphan drug designation if the drug treats a rare disease (a disease that affects fewer than 200,000 individuals in the US). The FDA estimates 30 million individuals in the US have a rare disease. The FDA Office of Orphan Products Development (OOPD) authorizes the designation requests.

The FDA plans to:

  1. Review all backlogged designation requests that are older than 120 days by September 21, 2017: To do this, the agency says it will create a Backlog SWAT team of OOPD reviewers to focus solely on backlogged designation requests. The team will collaborate with the FDA’s medical product centers (e.g., the Center for Drug Evaluation and Research, and the Center for Biologic Evaluation and Research) to conduct preliminary reviews of complex products.
  2. Respond to 100 percent of all new orphan drug designation requests within 90 days of receipt after September 21, 2017: The agency will create an Orphan Products Council within the OOPD to oversee any inconsistencies in science or regulatory policies, and identify any opportunities for improvement. The Council will also work to restructure the OOPD to prioritize regulatory review and collaboration efforts with other centers for inter-office consultations. Further, the FDA will provide guidance clarifying and updating exclusivity programs (e.g., supplemental marketing permissions for sub-classifications of orphan drugs) and grant programs (e.g., allowing the FDA to use more digital and virtual tools to supervise grant-funded activities).

Related: On June 27, the FDA announced two actions to improve generic drug competition, a cornerstone of the agency’s Drug Competition Action Plan (see the June 27, 2017 Health Care Current). First, the agency launched a database listing branded drugs that are off-patent and do not have an approved generic product. The agency states that this will help encourage generic drug development and increase competition. The FDA plans to periodically refine and update the list to ensure continued transparency on opportunities to increase competition.

The agency also implemented its plan to expedite the review process of generic drug applications for products where competition is limited. The plan prioritizes the review of abbreviated new drug applications for:

  1. Drugs that face shortages
  2. Public health emergencies
  3. Generic product applications associated with a reference product that does not have at least three approved generic alternatives.

Health care manufacturers paid $8.18 billion to doctors and hospitals

In 2016, health care manufacturing companies paid $8.18 billion to doctors and hospitals according to CMS open payments data. The payments made in 2016 is double the amount paid in 2013, but only slightly higher than the $8.09 billion paid in 2015.

More than half of the money ($4.36 billion) went toward research, and $2.80 billion was for general payments, which includes consulting, speaking, travel, meals, royalties, and licensing. Of the $4.36 billion in research payments, $95.2 million went toward research funding for physicians. Payments are considered for research when a drug or medical device manufacturer names a physician as the primary recipient or a physician is named as a principal investigator on a research project.

CMS’s open-payments data include payments from pharmaceutical and medical devices manufactures to physician and teaching hospitals. In 2016, 1,481 health care manufacturers made payments to 631,000 physicians and 1,146 teaching hospitals.

(Source: CMS, “The facts on open payments,” June 30, 2017)

New maternal care bundled payment model proposal at PTAC

The Minnesota Birth Center, a comprehensive, nurse-midwife women’s center, submitted a new bundled payment model to the Physician-focused payment model Technical Advisory Committee (PTAC). The model proposes a single payment for maternity and newborn care provided for low-risk births. According to the proposal, the model would be piloted at the birth center to care for 250–300 low-risk pregnant mothers per year, using a four to five member team including clinical, educational, and support services.

According to the proposal, Medicare pays for 15,000 births annually. The proposed payment model is designed to be available to all payers (including the Medicaid program, which serves almost 2 million births per year). According to the proposal, the maternity and newborn care period, or “perinatal episode,” is ideally suited to support a bundled payment model, which works best with episodes of care that have established standards of care and predictable timelines (e.g., joint replacement surgeries, type 2 diabetes care management). The proposal explains why perinatal episodes would work under a bundled payment policy:

  • Perinatal episodes (pregnancy, delivery, and newborn care) follow a well-defined clinical episode and 70 percent of all episodes proceed without complications
  • Both private health plans and public programs spend money on perinatal care. Perinatal care episodes account for nearly a quarter of all hospitalizations per year in the US and for 15 percent of private health plans costs. Additionally, seven of the 20 most expensive inpatient hospital conditions are related to perinatal episodes
  • Perinatal care quality and cost vary widely within and between states
  • Rising costs of perinatal care episodes are not correlated with significantly improved outcomes. According to the proposal, an episode-based payment framework for perinatal episodes would incentivize the use of lower-cost, higher-quality care instead of costly obstetrical interventions.

The model would use a payment methodology in a pilot program run by the Minnesota Birth Center and a contracted Medicaid managed care organization (MCO) in 2015. The program had 100 perinatal episodes and reduced payments for the entire episode by 60-65 percent (with a baseline of $16,000). The bundle includes pre-natal, intra-partum, and post-partum care, typically from 270 days prior to and up to 56 days after the delivery. However, the MCO lost its statewide contract, effectively ending the demonstration, though the Birth Center still offers the bundle to participating private health plans.

The Minnesota Birth Center proposal requests additional input from PTAC on the design of payment methodology, including determining the appropriate baseline payment for the episode (i.e., how to best utilize historical claims data from public and private payers) and the timing of the payment distribution (i.e., prospective payment, or retrospective reconciliation based on services provided with FFS payments). Public comment for this payment model is available until July 21, 2017.

CMS: 2016 reinsurance and risk adjustment programs payment details

On June 30, CMS released the 2016 benefit year payment details for the reinsurance and risk adjustment programs reporting that the agency will make an estimated $4 billion in reinsurance payments to 496 issuers nationwide.

The reinsurance program was a three-year transitional program, ending in 2016, that offered payments to issuers of individual market and small group plans under the ACA if claims costs exceed a certain amount. CMS will reimburse insurers at a 52.9 percent coinsurance rate for claims costs incurred by enrollees between $90,000 and $250,000.

The permanent risk adjustment program transfers funds from individual and small group insurance plans with below average risk scores to those plans with above average risk scores within each state. For the 2016 benefit year, risk adjustment transfers were similar to the 2014 and 2015 benefit years.

Risk adjustment transfers averaged 10 percent of premiums in the individual market and 6 percent of premiums in the small group market in benefit year 2014 and 2015. For 2016, risk adjustment transfers as a percent of premiums increased to 11 percent in the individual market and stayed at 6 percent in the small group market.

Medicaid expansion correlated with reduced incidence of cardiac arrest in Oregon

A new study published in the Journal of the American Heart Association (JAHA) found that Medicaid expansion in Oregon was associated with a significant reduction in out‐of‐hospital cardiac arrest (OHCA) incidence. Researchers looked at the effect of health insurance coverage on sudden cardiac arrest prevention.

The study examined OHCA incidence among adults before and after expansion in Oregon by age group. Middle‐aged adults, ages 45–64 years old, experienced a 17 percent reduction in OHCA incidence between 2011–2012 (pre‐expansion) and 2014–2015 (post-expansion). For middle-aged adults, Medicaid expansion was associated with the greatest reduction in the uninsured rate. Elderly adults, ≥65 years old, did not experience a significant change in OHCA incidence during the same time period.

Researchers used emergency medical system encounter data to record all perceived cases of cardiac arrest and exclude all cases with non-cardiac causes (e.g. trauma, accident, suicide and overdose events). However, there are several confounding factors around the effect of health insurance coverage and sudden cardiac arrest. Social determinants of health and cardiovascular prevention, for example, have shown to affect OHCA incidence.

(Source: Stecker et al, “Health insurance expansion and incidence of out‐of‐hospital cardiac arrest: A pilot study in a US metropolitan community,” JAHA, July 2017)

CMS offers states flexibility for certain Medicaid managed care requirements

CMS announced it will grant states flexibility for certain Medicaid managed care regulations slated to go into effect July 1, 2017. For states that are unable to implement the new rules, CMS is offering “targeted enforcement discretion” on a state-by-state basis and will offer leeway on certain provisions. However, the agency outlined limits on the flexibility, stating that it will not provide flexibility for the provisions on actuarial soundness, pass-through payments and medical loss ratio rules which went into effect July 1.

The updated guidance follows a letter from the Department of Health and Human Services (HHS) and CMS to governors on March 14 affirming the agencies’ commitment to partnership with states and improved collaboration towards “more effective program management.” The final rule for Medicaid managed care regulations was issued in May 2016. It sought to modernize the regulations to Medicaid managed care that reflect states increased reliance of managed care programs.

Breaking Boundaries

The race for drug companies to develop the next generation of opioid-free pain medications

With the opioid epidemic showing no signs of ceasing, drug manufacturers are working to get the next generation of safe painkillers on the market. Analysts estimate that the US spends $4 billion annually on opioids for pain relief. While many people who experience pain have reason to be on opioid medications at some point, health care industry and public health stakeholders are searching for alternative solutions to alleviate pain, since more than 17,000 Americans died from prescription opioid abuse in 2015, according to the Centers for Disease Control and Prevention (CDC).

Drugs such as morphine, fentanyl, and oxycodone have been shown to effectively block pain signals by acting directly on the brain. However, they can be highly addictive. Some patients may find relief in other ways. Some hospitals are encouraging use of non-narcotics and advanced pain management strategies when clinically appropriate. Other solutions include educating physicians about the extent of the problem, and providing data on how their prescribing patterns compare to their peers.

Some pharmaceutical companies are working to create medications that are more tailored for different types of pain. These new drugs are drawing from products like chili peppers and cannabis, which have pain-modifying characteristics.

Others are studying human genetic mutations that alter how people experience pain to design new treatments for the 100 million individuals across the country who experience chronic pain. Some potential therapies are nerve-growth factor inhibitors, which block pain signals in nerve cells beyond the brain, such as in the skin and muscle. Researchers are also studying rare genetic mutations that prevent people from feeling pain, to identify pathways in the body that may be triggered to ease pain.

One medication in development comes from a deadly toxin found in cone snails. While many conditions cause pain, many pharmaceutical companies are interested in targeting osteoarthritis pain, a growing market as the baby-boomer generation ages.

Opioids probably will not completely disappear from the market despite new medications being developed. Some are very effective at targeting unrelenting pain for patients who may not find relief otherwise. Some companies are working on opioids that are safer and less addictive. For example, a drug that crosses the blood-brain barrier more slowly than a typical opioid on the market now may result in a lower euphoric and less addictive effect. The downside is that the slower entry will not be adequate to treat acute pain, but it could be effective in treating chronic pain.

Related: In an analysis by STAT, the death toll from opioid addiction could spike from 100 to 250 deaths a day, if current use-trends continue and the wait time for treatment remains. However, STAT projects that fatal overdoses could fall below 22,000 a year by 2027 if doctors limit opioid prescriptions, states use prescription drug monitoring programs and insurers increase access to addiction treatment. This would require a major public investment in evidence-based treatment options.

Some potential good news: New CDC Data published last week shows that the number of opioid prescriptions in the US peaked in 2010 at 81.2 prescriptions per 100 people, and started to decrease by 13 percent in 2012. High-dose opioid prescriptions declined faster, more than 41 percent from 2010-2015. Though the trend is positive, the agency emphasizes that the data indicates too many opioids are being given out.

Last month, the HHS announced the availability of $195 million in a new funding opportunity for community health centers to expand access to mental health and substance abuse services focusing on the treatment, prevention and awareness of opioid abuse in all 50 states. Health centers that receive an award – to begin as early as September – will use the funds to increase resources dedicated to mental health and substance abuse services, including staff, health information technology, and training.

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