Health Care Current: June 23, 2015

State Medicaid programs: A tale of two Commonwealths

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.

A tale of two Commonwealths

I have had the chance to work in state government twice in my career. In fact, I have worked in two Commonwealths: Massachusetts and Virginia. Anyone that has spent time in both knows that the two states are very different. Massachusetts has the Red Sox, while, when I was living in Virginia, I spent a lot of nights going to AAA baseball games. Bostonians celebrate Patriots Day, while Virginia is now known as the Oyster Capital of the East Coast. They also opted into Medicaid at different times—Massachusetts in 1966 and Virginia in 1969.1

Historically, US Centers for Medicare and Medicaid Services (CMS) has given states latitude to tailor their Medicaid programs to the individual populations they serve. CMS set policies like mandatory benefits and minimum standards on what populations need to be covered and the Federal Medical Assistance Percentage, which determines how much federal funding states receive for their program. But, outside of these federal policies, state programs vary along many dimensions. Some states have been innovative, taking advantage of flexibility in the law to “waive” various provisions to run the programs their own way. Others have taken a highly regulatory approach. Some states have relatively generous payment rates for managed care plans, and in other states, many managed care plans struggle to stay above water.

Just a few weeks ago, CMS proposed a rule that would make updates to policies for Medicaid managed care for the first time in more than a decade (see the June 2, 2015 Health Care Current). The proposed rule aims to create more national standards for the Medicaid programs using managed care and to align them with standards for exchange plans. It includes access, quality, managed long-term services and supports and rate-setting provisions and also proposes to cap how much of health plans’ premium dollars should be spent on administrative costs.

When I worked in Virginia, many states were just beginning to develop managed care programs for mothers and children. But today, Medicaid managed care is no longer an experiment. Now, 39 states and the District of Columbia have managed care programs, paying $115 billion to plans which earned $2.4 billion in operating profits last year. Nearly three in four Medicaid beneficiaries are in managed care plans.2 In these states, private plans provide coverage and access with state oversight. Arizona and Tennessee have been pioneers in transitioning their entire Medicaid programs into managed care.

As states show more interest in moving their Medicaid populations into managed care and health plans become more engrained into Medicaid programs, the medical loss ratio (MLR) and network adequacy requirements proposals in the rule are likely to be in focus for these stakeholders. At a high level, these provisions have constructive goals: to make managed care plans more efficient and give enrollees better access to care.

But, two questions come to light around these policies and may get attention over the next several months.

Could setting an MLR for Medicaid managed care penalize health plans that use administrative dollars for programs that aim to reduce health care spending, including fraud and abuse? The proposed regulation would set a standard MLR of 85 percent. This would require managed care plans to spend no more than 15 percent of the premium dollars that they receive on administration and profit. The rest would need to go to medical care. A few years ago, the National Association of Insurance Commissioners, managed care plans, regulators and consumer advocacy groups debated a similar policy for commercial plans and a compromise was reached for these stakeholders. CMS is considering a policy that would differ from that framework a bit. For example, it would create an allowance for fraud and abuse spending.

Should network adequacy requirements be based on time and distance requirements that typically start from current care patterns and get set into regulation? States should continue to have oversight over Medicaid managed care plans to make sure that enrollees have access to care. But, access is more than how far away a provider is. Quality and availability also matter. Policies that allow managed care plans to negotiate with providers may help drive down costs even more. Narrow networks are one tool that plans have to negotiate with increasingly concentrated providers. Non-face-to-face visits (e.g., telephone and video appointments) also have enormous potential to help reduce costs. These visits often leverage care teams that do not always include physicians.

Health plans that can work with providers to drive better health outcomes may see opportunities to expand and increase their market share. Flexible administrative solutions may help organizations to more effectively respond to future changes and opportunities. Health plans can take steps to improve care delivery by creating incentives for providers that reward medical cost containment and improve health outcomes at the same time. States that respond to changes in regulations by maintaining a policy of openness and transparency with health plans may find more opportunities for collaboration in their Medicaid program. Ultimately, flexibility and creativity may be a key to managing this transition.

As stakeholders mobilize around this regulation, I hope they will keep in mind that while a core set of standard measures to evaluate quality can bring out opportunities for improvement and highlight innovations that are bearing fruit, states and managed care plans may need flexibility to continue innovating. Excessively rigid regulation can work against innovation. CMS should consider whether these standards align well with its goal (and states’ goals) to get plans to manage risk effectively and develop innovative ways to do this.

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1 Kaiser Family Foundation, “A Historical Review of How States Have Responded to the Availability of Federal Funds for Health Coverage,” August, 2012,
2 Virgil Dickson and Bob Herman, Modern Healthcare, “New CMS rule could reshape Medicaid managed care,” May 30, 2015,

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My Take

By Sarah Thomas, Research Director, Deloitte Center for Health Solutions, Deloitte Services LP


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CCIIO increases reinsurance payments to 100 percent for 2014

Last week, the Center for Consumer Information and Insurance Oversight (CCIIO) announced that it was increasing payments to health plans through the reinsurance program from 80 percent to 100 percent for 2014 claims.

The Affordable Care Act (ACA) established the reinsurance program as one of three premium stabilization programs that aim to protect health plans from losses and consumers from high premiums during the first three years of the health insurance exchanges. The reinsurance program protects health plans from unexpected high costs of individuals. If an individual has more than $45,000 in medical claims for the year, HHS will pay 100 percent of the claims above that amount but below $250,000. In its announcement, HHS said that it collected $8.7 billion for the reinsurance program in 2014 from health plans. HHS expects to collect approximately $1 billion more from health plans through November. For 2014, reinsurance collections exceeded health plans’ requests for payments, so HHS increased the amount paid out.

Analysis: As outlined in Deloitte’s recent report, 10 percent problem: Future health insurance marketplace premium increases likely to reach double digits, previous market reforms have shown the importance of premium stabilization programs in protecting the market during times of uncertainty and in reducing the risk of adverse selection when unexpectedly higher numbers of sick people who use more services enroll in plans. The ACA created three premium stabilization programs to aide in this transition: the risk adjustment, reinsurance and risk corridors programs.

Several states have seen firsthand the impact that these programs can have during market reforms. In 1993, California created a state-based exchange for small groups to purchase health insurance through the Health Insurance Plan of California (HIPC). HIPC was accompanied by market reforms such as guaranteed issue and limits on pre-existing condition exclusions. Although the HIPC was initially successful, the lack of risk adjustment within the exchange led to adverse selection and “cherry picking” among participating health plans. Ultimately, the HIPC failed to obtain the desired market reforms and closed in 2006.

During the 1990s, states began to move their Medicaid populations into managed care organizations (MCO). Because many health plans had no experience with pricing and managing the new populations, many states required MCOs to have reinsurance, sometimes referred to as stop-loss arrangements, in order to protect them. Other states used part of the capitated monthly payments to finance a public reinsurance program for their Medicaid programs.

For the reinsurance program in the individual exchange market, all insurers pay a per-member-per-month (PMPM) contribution to the reinsurance pool. The pool is distributed through reinsurers to plans on the individual market based on their claims as of April following the end of the plan year.

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Implementation & Adoption

Independence at Home demonstration saves more than $3,000 per person

Last week, CMS announced that the Independence at Home program saved more than $25 million in its first year. Independence at Home is a demonstration created through the ACA. In 2014, the participating organizations saved more than $3,000 per Medicare beneficiary. In total, nine organizations that participated in the program in 2014 qualified for $11.7 million in incentive payments because they met the program’s savings and quality goals.

All 17 organizations that participated in the program in 2014 improved on at least three of the six quality measures, and four of the organizations improved on all six quality measures. The 17 organizations served more than 8,400 Medicare beneficiaries during the first year of the demonstration.

Background: The ACA created Independence at Home to test a new model of payment and health care delivery to the sickest and frailest of Medicare patients. This population makes up 5 percent of the Medicare beneficiary population, but accounts for 43 percent of spending in the program. In 2012, the organizations began providing primary home care services to this fragile and expensive population to determine what cost savings and benefits in quality of care could be seen through this new model.

All care in the program has to be provided either by physician or nurse practitioner organizations. Care must also be available 24 hours a day, seven days a week. Only practices that use electronic health records systems, remote monitoring and mobile diagnostic technology were selected for the program. Eligible individuals had to have at least two chronic diseases from a defined list of conditions such as heart failure, diabetes, dementia, Alzheimer’s disease or stroke and had to require assistance with at least two activities of daily living, such as bathing, dressing or toileting.

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AHRQ: Care coordination improves

The Agency for Healthcare Research and Quality (AHRQ) released its 2014 report on Quality and Disparities last month. The report summarized trends in care coordination across health care. AHRQ found that care quality has not declined, but disparities in care coordination still persist. However, these gaps did not widen.

Care coordination can be hard to track over time. AHRQ monitored more than 250 measures of quality and disparities through 2012 to track improvements or declines in access to and quality of care. Key findings include:

(Source: Agency for Healthcare Research and Quality, “2014 National Healthcare Quality and Disparities Report: Chartbook on Care Coordination,” May 2015)

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Study: Improved quality may reduce medical liability claims

A study published in the American Journal of Medical Quality found that both tort reform and improved quality may reduce medical liability claims. This is the first study to show a link between increased quality performance and a decline in medical liability claims.

The researchers looked at outcomes for hospitals located in Texas and Louisiana. All of the hospitals were members of one multi-hospital organization. Texas adopted tort reform in 2003 when it placed caps on noneconomic damages (e.g. pain, suffering and emotional distress) for individuals seeking compensation for medical negligence. Louisiana did not adopt tort reform.

Researchers analyzed medical liability claims, CMS quality measures and the hospitals’ financial reports to measure the effects of tort reform before and after implementation (2000 to 2006). Hospitals located in both states saw increases in quality performance, which resulted in better patient outcomes. Based on their findings, the researchers believe that Texas hospitals would have seen fewer medical liability claims whether or not the state reformed its tort laws.

(Source: Illingworth, Kenneth D., Shaha, Steven H., Tzeng, Tony H., Sinha Michael S., Saleh, Khaled J., American Journal of Medical Quality, “The Impact of Tort Reform and Quality Improvements on Medical Liability Claims: A Tale of 2 States,” May 2015)

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HHS proposes to penalize drug manufacturers for overcharging 340B hospitals

Last week, the Health Resources and Services Administration (HRSA) issued a proposed rule that would establish financial penalties for drug manufacturers that charge too much in the 340B Drug Pricing Program.

The 340B program allows hospitals to purchase prescription drugs at a discount. Pharmaceutical manufacturers sign an agreement with HRSA as a condition of participation in Medicaid. In this agreement, HRSA calculates ceiling prices; manufacturers may not charge hospitals in the 340B program more than those ceiling prices.

The proposed rule would fine drug manufacturers up to $5,000 if they intentionally charge these hospitals more than the ceiling price. The penalty would be in addition to the refund or credit the manufacturer would owe the provider entity for overcharging. HRSA believes that use of these penalties likely will be rare. Manufacturers and provider entities typically resolve overcharge issues without getting HRSA involved.

(Source: Health Resources and Services Administration, HHS, “340B Drug Pricing Program Ceiling Price and Manufacturer Civil Monetary Penalties Regulation,” June 16, 2015)

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IOM identifies four cross-sector responses to obesity in the US

Last week, the Institute of Medicine (IOM) published a report that summarizes suggestions and priorities that came out of a September 2014 Roundtable on Obesity Solutions workshop. During the workshop, representatives from public health, health care, government, the food industry, academia and more convened to discuss the state of obesity in the US.

The workshop took up four issues, and the report outlines outcomes from the discussion about each of them:

Background: Obesity affects more than one-third of US adults and nearly one-fifth of children and adolescents. Experts estimate that spending on obesity accounts for 20 percent of health care spending in the US. The IOM convened the workshop to explore cross-sector models that may reduce obesity, identify case studies that engage partners from diverse fields to tackle obesity issues, pinpoint barriers cross-sector initiatives face and engage participants to share their success stories and lessons from obesity initiatives.

(Source: IOM, “Cross-Sector Responses to Obesity: Models for Change,” 2015)

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House HHS Appropriations subcommittee approved $153 billion spending bill

Last Wednesday, a House Appropriations subcommittee approved a bill that would fund HHS, the US Department of Labor, and the US Department of Education for the 2016 fiscal year. Notably, the National Institutes of Health (NIH) and the US Centers for Disease Control and Prevention (CDC) would receive higher funding than in 2015, and AHRQ would lose all of its funding.

The bill would also cut $344 million from the CMS budget and would prohibit additional funding for CCIIO and navigators programs. In addition to rescinding funding for the Patient-Centered Outcomes Research trust fund, it would also prohibit any discretionary funds from going to support patient-centered outcomes research.

House Democrats offered amendments during the mark up of the bill to increase funds for several agencies, including AHRQ and NIH. None of the amendments passed, however, and the bill passed the subcommittee 30-20. From here, it will go to the full Appropriations committee for a markup and vote.

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On the Hill & In the Courts

Lawmakers ask for an update on the Medicare fraud prevention program

Last week, House lawmakers from the Energy and Commerce and Ways and Means committees sent a letter to the Comptroller General at the US Government Accountability Office (GAO) requesting information about the performance of the Fraud Prevention System (FPS).

The lawmakers say that it is unclear to them whether CMS is using the findings from the FPS to identify and address vulnerabilities in Medicare. It requested that GAO review several aspects of the FPS program:

  • Prepayment denials: What types of payments that could be fraudulent have been denied by the system’s prepayment edits?
  • Administrative actions: How many actions has CMS taken against providers since 2010, what actions were taken and which of those directly resulted from the FPS?
  • Program vulnerabilities: Has the FPS helped CMS identify program vulnerabilities and if so, has CMS taken any steps to address those areas?
  • Program savings: How much of the savings that FPS has generated came from prepayment denials and how much came from post-payment recoveries?
  • Program expansion potential: Does CMS have plans to use the FPS with Medicaid and/or CHIP?
  • Costs and savings: How do outlays compare with actual and projected savings for the FPS program?

CMS implemented the FPS in 2011 to help prevent fraudulent payments in Medicare. The system uses predictive analysis to identify incorrect and suspicious billing patterns to investigate.

Related: Last week, the Department of Justice (DOJ), in partnership with HHS, announced that it had charged 243 individuals, including 46 providers, for false billings of $712 million. This marks the largest criminal health care fraud case in history. The individuals were charged with identity theft, anti-kickback violations and more. HHS Secretary Sylvia Burwell credited the success in this case to access to tools like advanced predictive modeling technology.

Analysis: The FPS is one of many tools the federal government has for preventing and addressing fraud and abuse in the health care system. Other examples include HHS’s Health Care Fraud and Abuse Control Program and Medicaid Fraud Control Units. Applying analytics to encounter data has helped federal regulators discover many patterns, including very high billing or prescribing rates, upcoding and duplicative billing. Health care organizations also can use analytics to anchor a fraud and abuse mitigation program by identifying patterns, associations and anomalies within their own data that may warrant further attention. As explained in Deloitte’s recent report, Health care fraud and abuse enforcement: Relationship scrutiny, health care organizations should consider having in place a responsive analytics-based program to address potential fraud and abuse. An effective program will likely enable organizations to identify risks in real time, adjust to mitigate them, communicate their importance and learn from the regulatory and legislative landscape.

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MedPAC highlights Medicare issues and makes recommendations in latest report to Congress

Last Monday, the Medicare Payment Advisory Committee (MedPAC) released the June 2015 Report to Congress. The report covers issues facing the Medicare program and broader health care system issues. Highlights include:

In 2013, CMS began targeting audits toward hospitals’ use of short inpatient stays. This policy is commonly referred to as the two-midnight rule (see the October 1, 2013 Health Care Current). In response and in an effort to avoid costly audits and appeals, hospitals began placing more patients into outpatient observation status. Because of this, fewer beneficiaries may qualify for post-acute care at a SNF and some beneficiaries may have to pay for more of their care. MedPAC recommends that CMS should reform the auditing process and remove the two-midnight rule. The Commission suggests that two outpatient observation days should count as one day for purposes of the three-inpatient-day SNF requirement.

MedPAC recommends aligning the payment rules and quality incentives in the three different payment models: fee-for-service (FFS) Medicare, Medicare Advantage (MA), and accountable care organizations (ACOs). The Commission found that no one model is the least costly in every market. Therefore, the Commission recommends providing beneficiaries with the incentives to choose the most efficient model in each market. MedPAC also recommends reducing the total number quality measures to reduce provider burden. Recent analysis found that current quality measurement programs focus on processes that do not tie to better health outcomes. MedPAC suggests using measures to assess health outcomes, including a “healthy days at home” measure that would compare health status across populations.

CMS pays for drugs that are administered in physician offices or outpatient hospital departments through Part B. Medicare pays providers for these drugs by adding 6 percent to the average sales price. The Commission explains that this formula gives providers the incentive to use higher priced drugs. MedPAC recommends creating a fixed, add-on payment that does not vary with average sales price. The report also lays out potential reforms to the 340B drug discount program. While 340B hospitals receive drugs at discounted prices, Medicare still pays them the normal rate. MedPAC recommends reducing Medicare payments for discounted drugs, reducing beneficiary cost sharing or both. The Commission also recommends ways to link Part B drug payments with clinical effectiveness evidence.

MedPAC also recommends changing Part D plans’ share of spending in Medicare Part D. When Part D beneficiaries reach an out-of-pocket threshold or “catastrophic cap” (set at about $7,000 in 2015), Medicare pays plans for 80 percent of the beneficiary’s drug costs over that amount. MedPAC says that health plans become less diligent in managing beneficiary spending after they reach this cap. To address this, the Commission recommends that health plans pay a larger share of beneficiaries’ costs once they reach the catastrophic threshold.

Background: MedPAC is an independent board of health care experts tasked with providing policy recommendation to lawmakers. According to MedPAC, the number of Medicare-eligible individuals is expected to increase from 54 million to 80 million by 2030. More important than sheer numbers, the report explains that the Baby Boomer generation differs greatly from previous older adult generations. They have longer life expectancies, reduced smoking rates and high rates of chronic conditions. The health care system may need to improve value and increase efficiency to properly care for this generation of individuals and reduce economic strain.

(Source: MedPAC, “Report to the Congress: Medicare and the health care delivery system,” June 2015)

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MACPAC report looks at early state experiences with Medicaid delivery system reform

The Medicaid and Children’s Health Insurance Program Payment Advisory Commission (MACPAC) commissioned the National Academy for State Health Policy (NASHP) to report on state experimentation with Medicaid delivery system reform. Since 2010, eight states have used Medicaid waivers offered under the Delivery System Reform Incentive Payment (DSRIP) to test new models of care delivery in Medicaid.

California, Kansas, Massachusetts, New Jersey, New Mexico, New York, Oregon and Texas are working to improve health care through the DSRIP program by enhancing quality of care and reducing overall costs. DSRIP and similar programs address a range of issues including expanding access to primary care, integrating physical and behavioral health, improving care transitions from the hospital to ambulatory care settings, managing chronic disease and using telemedicine.

Through the program, CMS gives states supplemental incentive payments for improvements in care. The paper acknowledges that by their nature, each DSRIP program is unique. However, there were overarching trends that appeared throughout the eight programs:

(Source: MACPAC, “State Experiences Designing and Implementing Medicaid Delivery System Reform Incentive Payment (DSRIP) Pools,” June 2015)

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Around the Country

CMS conditionally approves state-based exchanges in Pennsylvania, Delaware and Arkansas

Last week, CMS announced that it had approved proposals from Pennsylvania, Delaware and Arkansas to establish state-based insurance exchanges. CMS conditionally approved Delaware’s and Pennsylvania’s requests to implement supported state-based exchanges in the individual and small group markets. With the conditional approval, the states must meet several additional requirements. Also last week, CMS conditionally approved Arkansas’s request to establish an exchange for the small group market in 2016 and individual market exchange in 2017. Arkansas was approved for a federal-state partnership exchange in 2013 and would transition to a fully state-based exchange.

Analysis: States interested in establishing state-based exchanges were expected to apply by June 1, 2015. Pennsylvania and Delaware governors met the deadline in preparation for the Supreme Court decision on King vs. Burwell this month. As Anne Phelps, Principal, US Health Care Regulatory Leader, Deloitte & Touche LLP, explained in a recent Reg Pulse Blog post, King vs. Burwell will decide the availability of advance premium tax credits in states with federally-facilitated exchanges. Some have speculated that if the court rules against the administration, HHS could extend the June 1 application deadline and allow the remaining states with federally-facilitated exchanges apply to establish state-based exchanges.

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A powerful new approach for studying interactions between viruses and the immune system

Researchers at Howard Hughes Medical Institute have developed a test that can detect every virus a person has ever had by analyzing a single drop of blood. The test is called VirScan (systematic viral epitope scanning), and it works by screening blood samples for antibodies that fight against any of the 206 virus species that infect humans. After a person gets exposed to a virus, the body produces antibodies for many years, making it possible to detect both current and future infections. To date, methods to detect a virus are predominantly limited to testing one virus at a time and are therefore only used to address specific clinical hypotheses. With its capacity to detect any virus the patient’s immune system has come in contact with, the VirScan technique could help provide significant understanding of how the immune system functions.

The research team synthesized more than 93,000 short pieces of viral protein-encoded DNA and introduced them to bacteria-infection viruses known as bacteriophage. When a person encounters a pathogen such as a virus, our bodies produce antibodies that search for epitopes, or features in peptides on the surface of the virus. Once the bacteriophage and the blood sample mix, the VirScan method lures all present antibodies into binding with epitope-displaying peptides. The researchers then stripped away everything but the antibody and bacteriophage pairs, sequencing the DNA of the bacteriophage to identify which antibodies the patient’s immune system had produced antibodies for based on exposure to certain viruses.

To date, VirScan has screened the blood of 569 people in the US, South Africa, Peru and Thailand. Results show that on average, each patient had antibodies for around 10 different species of virus. US residents have fewer than those in the other countries. They also found that blood samples from patients infected with HIV showed a larger number of antibodies for different viruses than those without HIV. The results showed that different people’s immune systems had very similar responses to specific viruses, recognizing the same amino acids in viral peptides. VirScan can process 100 blood samples in about three days, but the team is optimistic those numbers will improve with further development. The cost of an individual test is estimated at $25. The research team suggested that this technique could be expanded to include new viruses yet to be discovered as well as bacteria, fungi and other pathogens.

Analysis: This research has several implications. VirScan is able to identify the epitopes, the specific parts of the surface of a virus or other organism with which antibodies bind. An interesting finding from the studies to date is that most people seem to respond to the same epitopes on a particular virus. Based on this finding, future vaccines may contain only the part of the virus to which the body responds, and not other parts of the virus that are not targets of antibodies. This could make vaccines more effective while decreasing side effects.

Because VirScan can test the blood of many people for reactions against multiple viruses at the same time, it could help answer questions about whether virus infections trigger certain diseases like inflammatory bowel disease, Type 1 diabetes, Multiple Sclerosis and ALS (Lou Gehrig's disease). If VirScan could detect bacteria and protozoa as well as viruses, in the future it potentially could be used to screen patients who are undergoing immunosuppressive treatments for transplants to determine whether they have been infected and therefore are at risk for recurrence of certain infections when their immune systems have been weakened.

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Breaking Boundaries

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