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

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

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

In today’s New York Times, Robert Pear reports that the proposed DRG changes will whack 20 to 30% off current hospital reimbursement for frequently performed procedures, such as the drug coated artery stent, and shift costs onto private payers. The article also reports that Congress is questioning why CMS gave 3M a sole source contract to develop the DRG reforms. Senator Charles Grassley (R Iowa), Senate Finance Committee Chairman, and Sen. Max Baucus (D Mont.), the Committee’s ranking minority member, have asked CMS to delay the payment reforms for a year. However, House Ways and Means Committee Chairman Bill Thomas (R Calif) has supported the reforms — at least before today’s report.

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

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

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

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

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

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

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

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

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

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

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

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

Not encouraging.

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

Generic competitors to [Merck’s statin] Zocor [whose patent protection expired on June 23, 2006] are grabbing a big share of new prescriptions for cholesterol-lowering drugs and already putting pressure on Pfizer Inc.’s Lipitor, recent data show. After copycat versions of Zocor became available during the last week of June, they captured 49% of new prescriptions in the U.S. for the medicine known generically as simvastatin. Despite price cuts taken by Merck & Co. to keep Zocor competitive, the brand-name drug’s market share slipped to 51% of new prescriptions during the week that ended June 30, according to data from WoltersKluwerHealth. Patent protection for Zocor in the U.S. ended June 23.

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

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

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

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

Medicare Part D expenditures are now projected to be $34 billion lower over 5 years (2006-2010) than in the President’s Budget, and $110 billion lower than in the Mid-Session Review one year ago. The average Part D premium is almost 40 percent lower than had been projected a year ago as a result of strong competition, and 90 percent of Medicare beneficiaries are receiving prescription drug coverage. Medicare Part A and Part B expenditures are higher, primarily because of continuing rapid growth in the use of Medicare services. Part A projected expenditures over 5 years (2006-2010) are $17 billion higher and Part B projected expenditures over 5 years are $30 billion higher than in the President’s Budget. Rapid growth in physician-related services and hospital outpatient services are the main factors responsible for a projected increase in the Medicare Part B premium of 11 percent for next year. The continued rising costs in Medicare Part A and Part B highlight the need for reform of the original Medicare program to pay more accurately and especially to pay more for better care, not simply more services. The President’s Budget proposed building on MedPAC’s recommendations for more accurate payments to health care providers, and the adoption of performance-based payment systems.

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

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

Two other studies – one by the Employee Benefit Research Institute (EBRI), another by the Blue Cross Blue Shield Association (BCBSA) – have demonstrated that the health status of individuals with HSAs is comparable to the health status of those with other types of coverage. The EBRI study[4] found that 86 percent of individuals with HDHPs and 87 percent of individuals with non-HDHP coverage reported their own health status as very good or good. The BCBSA study[5] yielded similar results, with 77 percent of individuals in both categories – those with HDHP coverage and those with non-HDHP coverage – describing their health status as very good or good. The EBRI study also found that the income distribution is fairly similar for persons with HDHP coverage and with other types of coverage. According to EBRI, 31 percent of HDHP enrollees and 27 percent of non-HDHP enrollees have annual household incomes below $50,000. Similarly, Assurant Health found that 29 percent of enrollees in its HDHPs have annual household incomes below $50,000. Other data[6] from Assurant indicate that 43 percent of HDHP applicants did not have prior health coverage and, additionally, that 69 percent of HDHP purchasers are families with children and 62 percent are over the age of 40.

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

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

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

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

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

Fun facts to know and tell from that report:

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