Perspectives

Health Care Current: March 24, 2015

What does value mean in health care?

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

What does value mean in health care?

This weekend I bought a new pair of running shoes at my local running store. While they were not especially cheap, I think I will get a lot of use out of them – they were custom fitted to my foot and should get me through the spring and summer running season. I have a mental calculation that if I buy an article of clothing or footwear and wear it enough times, it will have been a good value buy. But as a health care consumer, it is not as easy to make the same calculation. What does good value mean in an industry where the stakes are much higher (life or death) and more uncertain (whether the therapy will work for me or whether I’ll get better on my own) and insurance shields me from much of the costs?

The question of value in health care was on the agenda at the recent America’s Health Insurance Plans’ (AHIP) Policy Conference, which I was fortunate enough to attend. While the entire agenda was very interesting, the sessions I found most engaging took on the question of how to consider and assess value in the U.S. health care system, especially as it relates to spending on high cost specialty drugs.

Recent reports have found that spending for prescription drugs is picking up, even after a slowdown in spending on other areas. Altarum reported that spending for prescription drugs makes up 10 percent of the total spend, and reported spending growth in January 2015 reached almost 12 percent.

Whether this is good news or not depends on where you sit. Certainly from the perspective of the life sciences industry, this is good news. Measuring the return from pharmaceutical innovation 2014, published by the Deloitte U.K. Centre for Health Solutions with support from Deloitte Consulting LLP, also revealed a positive trend: the return on investment from drugs is improving. On the other hand, AHIP represents health plans and thus a payer perspective. From a consumer perspective, the Deloitte Center for Health Solutions' 2013 Survey of U.S. Health Care Consumers showed that as consumers take on more health care costs and choice-based health markets develop, value will likely become a driving force that shapes their perceptions, decisions, and long-term relationships with health care providers, payers, and other stakeholders. Value, for consumers, increasingly extends beyond price to include the quality of the patient-family experience and interpersonal interactions.

The main topic taken on by the panel at the conference was whether the additional cost of these high cost drugs is “worth it.” This speaks to a key issue of how to think about value. Each of the panelists approached the notion of value in a different way:

Quality-adjusted life years: The first speaker, a physician in academic medicine, focused on cost-per-quality-adjusted life year. This metric considers value in terms of additional years (or months) gained, taking into account disability and other issues that affect quality of life. He made the observation that the economic incentives in drug development have been to develop products for which high prices can be charged in niche areas.

What the government can afford: The second speaker, from a pharmaceutical benefit management (PBM) firm, defined value in terms of public spending through federal and state budgets. To him and many others, higher spending in health care means that government has less money available for other valued services, like education. He also presented a framework for assessing value called the incremental cost-effectiveness ratio, which maps individual products based on their clinical effectiveness and price. For many PBMs, the value proposition is negotiating hard on price and shifting patients to products with lower prices.

What an individual can afford: The third speaker came from a consumer organization. To him, value represents the amount that Medicare beneficiaries spend on drugs and how that compares with their income (one report shows that half of Medicare beneficiaries have an income of $22,000, and cost sharing for some of the new specialty drugs can range from $7,000-12,000). His organization offers a number of recommendations, many of which focus on lowering drug prices.

Survival rates: A fourth speaker from a pharmaceutical manufacturer articulated value in terms of the longevity we all enjoy because of drug therapies. To her, drug therapies can prevent higher spending on care in other settings like hospitals. The Congressional Budget Office (CBO), which tends to be more conservative in its predictions on savings, acknowledges this point in its estimate that a 1 percent increase in use of prescription drugs in Part D can cause Medicare spending on medical services to fall by roughly 0.20 percent. She urged the audience not to single out drugs and to consider all sources of cost and value in the health care system.

Return on research and development (R&D): Later that day in a different session, one more speaker addressed the question of spending for drugs, proposing that policymakers could consider tying biopharmaceutical companies’ potential revenues for a drug to the amount of money invested in R&D. In his proposal, manufacturers that changed lower prices relative to R&D costs would gain a longer period of exclusivity.

What I find so interesting about these diverse perspectives is that each has validity. Stakeholders agree that health care spending in general, not just on drugs, is an impending crisis. Society is looking for better value for the money spent on health care. As an individual, I want drugs available to take care of my health care conditions, and I don’t want to pay too much for them out of pocket.

But I also understand that if we want investors to put their money into biopharmaceutical companies, they need to see opportunities for profit. A flexible regulatory environment may stimulate more investment.

Finally, from a political perspective, this Congress has signaled strong interest in bringing new cures to the market through the 21st Century Cures initiative (see the March 3, 2015 Health Care Current).

The sessions and discussion around some of these issues during the breaks and other networking opportunities at the conference allowed me to tune into a multitude of different perspectives on value and how to define it. In a health care environment that is increasingly focused on value-based care, stakeholders should continue to articulate what value means to them. These continued discussions will likely influence evolving payment models, future funding and priorities for federal agencies and future strategies for advancing biomedical innovation.

Stakeholders will come to the issue of defining value and measuring it with different vantage points. I think a lot can be gained by articulating those perspectives and having an open dialogue. All aspects of value are important – just as I considered my budget, color, taste and utility in valuing a pair of shoes.

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(Sources: Altarum Institute, “Health Sector Economic Indicators,” March 6, 2015; Kaiser Family Foundation, “Medicare Policy,” June 2011; Congressional Budget Office, Offsetting Effects of Prescription Drug Use on Medicare’s Spending for Medical Services, November 2012)

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My Take

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

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Lawmakers introduce legislation to reform the Sustainable Growth Rate

Last week, the House and Senate both introduced bipartisan legislation to replace the formula to set overall increases to physician payments in Medicare, called the Sustainable Growth Rate (SGR). The SGR formula cuts physician payments if the volume of physician services grows faster than the overall economic growth. Congress has made short-term fixes to the system over the last 17 years. The latest fix runs out on March 31, triggering a 21.2 percent cut to Medicare payment rates unless Congress acts to prevent this policy from going into effect again.

The bill aims to:

Analysis: The legislation is almost the same as the package that had bipartisan support in the House and Senate last year. The legislation would not fundamentally overturn the basic fee-for-service nature of Medicare payment. However, it would create more predictability around the update, eliminating what has become an annual imperative for Congress to act to prevent cuts. It also has the potential to improve the administration of the various incentive programs and encourage participation in alternative payment models, a goal that is shared by the administration, states and many private payers.

The bill has several health information technology implications as well. The merit-based incentive payment system included in the legislation proposes changes to the meaningful use program. Under the current program, failure to meet meaningful use requirements will mean penalties beginning this year. Under the SGR bill, meeting the standards would yield a bonus. The legislation calls for the U.S. Department of Health and Human Services (HHS) to work with stakeholders to develop measures to quantify electronic health record interoperability by July 2016, with a report to Congress by the end of 2019 on the barriers to achieving the objectives and related recommendations.

One of the challenges ahead lies in the specific policies Congress will identify to fund the budget costs of repealing the SGR formula, estimated at a total of approximately $210 billion. Early discussion of the legislation suggested that the bill might not need to be fully paid for, but some legislators are objecting to this tactic. Whether the bill is fully or partially paid for through policies that reduce spending, those policies will likely be controversial among the stakeholders affected, including Medicare beneficiaries, hospitals and post-acute care providers.

(Source: SGR Repeal and Medicare Provider Payment Modernization Act, H.R. 1470, March 18, 2015)

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Implementation & Adoption

Premiums for less expensive ACA plans increased an average of 2.9 percent nationwide

A joint report from the Robert Wood Johnson Foundation and the Urban Institute examines marketplace premium changes across the country between 2014 and 2015. The researchers analyzed data on silver plans from every state over the last year based on the experience of a 40-year-old enrollee who does not use tobacco, and found that the price increased an average of 2.9 percent nationally. The change in the population-weighted average premium in the lowest-cost, silver-tier plan offered each year was:

  • 1.4 percent in the West
  • 1.8 percent in the Northeast
  • 3.5 percent in the Midwest
  • 5.4 percent in the South

About 65 percent of individuals who selected a plan are in silver plans. The lowest–cost and second-lowest-cost silver plans are the most popular. The report found that the lowest-priced plans in 2014 and 2015 have frequently been offered by different insurers. This means to be in the lowest-cost silver plan, consumers will have had to change carriers and potentially provider networks.

The authors concluded that it is uncertain whether marketplaces will continue to see aggressive pricing and small premium increases in the future, noting that the temporary risk corridors and reinsurance provisions in the law will end after 2016. If underlying health care costs begin to grow at historical rates vs. the lower rates seen in recent years, insurers will likely have to raise premiums.

Related: Deloitte’s recent paper, The 10 percent problem: Future health insurance marketplace premium increases likely to reach double digits, outlines potential scenarios that show premium increases of 10 percent or more could be likely as health plans prepare for the end of risk corridors and reinsurance programs after 2016, and respond to other factors – including higher medical spending trends – that may lead to rising costs.

(Source: Holahan, John, Blumberg, Linda J., and Wengle, Erik, “Marketplace premium changes throughout the United States,” 2014-2015, 2015)

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Congressional Republicans release budget plans

House and Senate Republicans released budget proposals last week that aim to balance the budget within 10 years with no tax increases. The House plan was passed by the Budget Committee and is headed to the floor this week for consideration by the full House. Both proposals call for repealing the ACA, which would require separate legislation.

Both plans call for repeal of the Independent Payment Advisory Board (IPAB) charged with making coverage decisions on Medicare. The Senate plan calls for a repeal of the 2.3 percent excise tax on medical device manufacturers.

Republicans in both chambers now must work on a plan that will set overall spending levels next year and set the tone for the direction Congress will take on issues including Medicare, defense spending and tax reform.

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On the Hill & In the Courts

MedPAC and MACPAC release March report to Congress

The Medicare Payment Advisory Commission (MedPAC) and the Medicaid and CHIP Payment and Access Commission (MACPAC), which both serve as independent advisors to federal lawmakers on their respective health programs, provided recommendations to Congress in their annual reports released on March 13. Recommendations include:

While these recommendations among the others MACPAC and MedPAC put forth are not binding, Congress and CMS often take into account these committees’ assessments when deciding policy on these issues.

(Source: Medicare Payment Advisory Commission, “Report to the Congress: Medicare Payment Policy,” March 13, 2015; Medicaid and CHIP Payment and Access Commission, “Report to Congress on Medicaid and CHIP,” March 13, 2015)

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Report examines impact of SCOTUS ruling on CHIP and Medicaid

The Urban Institute examined the future of children’s health care coverage in light of the uncertain future of CHIP and the pending decision from the Supreme Court on King v. Burwell regarding advance premium tax subsidies to consumers in 34 states. The study examined several possible scenarios for coverage and eligibility, including the possibility of CHIP ending and a ruling for the plaintiffs in King v. Burwell. The study’s authors based their estimates on the Urban Institute’s Health Insurance Policy Simulation Model–American Community Survey, built on data from the U.S. Census Bureau’s American Community Survey, and on the Institute’s earlier work analyzing the impact of rulings in King v. Burwell.

The study notes that the risks these two health coverage programs face this year compound each other and could potentially erase the gains in insurance coverage for children that the ACA has made. Families earning between 138 to 200 percent of the federal poverty line (FPL) (equal to yearly income of approximately $27,694 to $40,180 for a family of three) would be most affected by these potential changes.

Background: The Supreme Court is expected to rule on King v. Burwell in June. For coverage of oral arguments before the court and implications of judicial action, please see the March 10, 2015 Health Care Current. Without Congressional reauthorization, CHIP funding to the states will lapse at the end of the current fiscal year. “Maintenance of Effort” is a provision in the ACA that requires states to maintain eligibility thresholds for children in Medicaid at 2010 levels through 2019. Terminating this policy would mean that some states would only cover children in Medicaid up to the same income thresholds of adults—138 percent of the FPL in most states.

(Source: Buettgens, Matthew, Dubay, Lisa, et al., “King v. Burwell, CHIP, and Medicaid:” What Lies Ahead for Children’s Health Coverage?” Urban Institute, March 2015)

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Families face financial difficulty paying for cost-sharing expenses

Many households lack the financial ability to cover the cost-sharing expenses associated with health plans, according to a report released by the Kaiser Family Foundation. Unsurprisingly, lower-earning families face greater difficulty paying their deductibles and out-of-pocket limits. Higher earners also face financing hardship, however, especially when a member of the family is also uninsured. Among households earning over 400 percent of the FPL ($97,000 for a family of four) with an uninsured member, only 50 percent have the ability to meet the lower out-of-pocket limit with their liquid financial assets.

Researchers used data from the Federal Reserve Board to measure how individuals of varying financial and insurance statuses were capable of financing their portion of cost-sharing. The study measured a household’s ability to cover cost-sharing expenses by calculating liquid assets (e.g. checking and savings accounts, stocks, and bonds), net assets (all financial assets including retirement funds), and the ability to obtain $3,000 from family or friends in the event of a medical emergency. Key findings are highlighted below:

  • 32 percent of lower-earning families (between 100 percent and 250 percent of FPL, or $24,250 - $60,625 for a family of four) can meet the mid-range deductible of $2,400
  • 20 percent of similar-earning families can meet the high-range deductible of $5,000
  • 47 percent of families that could not meet the mid-range deductible could obtain $3,000 from family or friends in an emergency

Background: The slowed growth in health care spending has been attributed in part to the growing popularity of health plans with higher rates of cost-sharing (e.g. high deductible plans). Many plans offered in the marketplace or sponsored by an employer have substantial rates of cost-sharing. If individuals lack the ability to afford the cost-sharing responsibilities associated with coverage, they may be discouraged from seeking the care insurance coverage provides them.

(Source: Claxton, Gary, Rae, Matthew, Panchal, Nirmita, The Henry J. Kaiser Family Foundation, “Consumer Assets and Patient Cost Sharing”, February 2015)

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Around the Country

RAND: Alternative payment models and effects on provider practices

Last week, RAND published a qualitative study which found that alternative payment models will be more effective in improving patient care if physicians have proper support and guidance around operational details, data management and analysis. Eighty-one physician participants from six market regions were interviewed to determine how alternative payment models (e.g. capitation, episode-based and bundled payments, pay for performance, shared savings; as well as accountable care organizations (ACOs) and medical homes) affected their practices and perceptions of care. Thirty-one leaders from health systems, hospitals and health plans were also interviewed for market-context purposes.

Several of the leaders from the health care organizations noted organizational changes, such as mergers and new affiliations, that they made to transition to an alternative payment model. Smaller physician practices that merged with a larger practice or hospital to participate in new payment models cited that having greater access to capital gains to invest in the necessary tools to support new payment models was a motivator in implementing the models.

The study’s authors concluded that physicians responded well to cost-containment strategies that stressed professionalism more than financial incentives. Physicians responded positively to nonfinancial incentives such as receiving feedback for their work. While no participating practice experienced financial hardship as a result of adopting a new payment model, many cited increased stress and time constraints due to increases in clinical and nonclinical work.

Related: In early February, HHS announced that it will accelerate the shift toward payments based on value over volume (see the February 3, 2015 Health Care Current). HHS aims to have 90 percent of all payments in the traditional program tied to quality and value and 50 percent of all Medicare payments tied to quality or value through alternative payment models such as ACOs by 2018.

What many organizations at varying stages of value-based payment model adoption have struggled with to this point is how to make the transition to value while still operating in the volume-driven world. The stakes and penalties for not aggressively pursuing a value-based strategy could be high. As the RAND study indicates, challenges and questions persist: “Where can we start?” “Who will be the winners and losers?” “What are the winning strategies?” “How can I best lead our organization through this transformational change?” These will likely be frequently asked questions in c-suites, board rooms and physician practices around the country as the inevitable drive toward value-based care continues.

(Source: Friedberg, Mark W., Chen, Peggy G., White, Chapin, Jung, Olivia, Raaen, Laura, Hirshman, Samuel, Hoch, Emily, Stevens, Clare, Ginsburg, Paul B., Casalino, Lawrence P., Tutty, Michael, Vargo, Carol, Lipinski, Lisa, RAND Corporation, “Effects of Health Care Payment Models on Physician Practice in the United States”, March 19, 2015)

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How a used shipping container may play a critical role in the fight against Ebola

The U.S. Agency for International Development (USAID) recently hosted a competition to spur innovative ideas to combat the Ebola outbreak. Last month, a team from Baylor College of Medicine was one of the teams awarded a grant for its innovative idea: an Emergency Smart Pod (ESP)—a mobile, eight-bed clinic built out of a used shipping container. Each ESP medical unit comes with eight beds, an air filtration system, air conditioning and a contained waste management system. The team also equipped the pod with clinical training apps that show how to properly use the ESP.

The ESP can be quickly built and deployed to any disease-stricken area in the world. A stand-alone hospital may take nine to 12 months to build, and may cost 10 to 20 times more than the ESP. The pod is also designed so that an eight-bed unit can become a 16-bed unit quickly, and individual units can be attached for waste management. The team estimates that at full scale, it would take a month to get a 100-bed unit up and running. The creators of the pod noted that it could be designed to run on solar panels, enabling them to operate off the electric grid.

USAID will provide funds to create a prototype, which the Baylor team is aiming to complete in the next couple of months. Though they were developed to fight the Ebola outbreak, ESPs will be able to deal with other epidemics, natural disasters or any situation that requires rapid medical capacity in areas that lack power and infrastructure.

Analysis: While the Ebola outbreak in West Africa is no longer dominating headlines in the U.S., the CDC reports 24,778 total cases (suspected, probable and confirmed) as of March 17, 2015. At the time of this update, more than 10,000 deaths have been reported. Both developing and developed countries need acute care and intensive care unit surge capacity. The ESPs have great potential for natural and man-made disasters. They may be cost effective, sterile and disposable, and should be considered for the U.S. emergency preparedness stockpile and beyond.

The ESPs are an example of a technology or strategy that is a “disrupter” in the health care system. The use of crowdsourcing or using an open innovation model to discover and build out ideas is a trend that many in the health care sector are using to identify innovative solutions to some of health care’s most pressing problems.

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Breaking Boundaries

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