Insight, analysis & opinion from Joe Paduda


Ban on specialty hospitals may be extended

Two reports on so-called “specialty hospitals” were released yesterday in hearings on Capitol Hill. The Medicare Payment Advisory Commission’s (MedPAC) report calls for an extension of the ban on construction of new specialty hospitals. For those who have not been keeping up on this rather esoteric (but critically important) issue, there has been a Federal ban in place preventing the construction of these facilities, which are typically for-profit and partially owned by the physicians practicing at the facilities.
The rationale behind the ban was a concern that these facilities were “skimming” the profitable patients, leaving tertiary and primary hospitals the indigent, Medicaid, and less-healthy patients. According to California HealthLine, the report addressed this concern directly, noting:
“The MedPAC report, presented to the Senate Finance Committee on Tuesday, states that physician-owned specialty facilities could “corrupt clinical decisions and lead to inappropriate care.” The report also said that, relative to full-service hospitals, specialty hospitals generally treat healthier patients, focus on higher-cost procedures, treat fewer Medicaid beneficiaries and do not have lower costs.
The report recommends that Congress recalculate Medicare prospective payments to acute care hospitals to more accurately reflect the cost of care and prevent financial incentives for hospitals to select healthier patients (CQ HealthBeat, 3/8).
MedPAC’s findings were not entirely echoed by a CMS report presented at the same hearing. (Source California HealthLine)
“CMS “unexpectedly released” its preliminary report on specialty hospitals. Thomas Gustafson, deputy director of the CMS Center for Medicare Management, said the CMS study shows “measures of quality at [physician-owned] cardiac hospitals were generally at least as good and in some cases better than the local community hospitals.”
In addition, “[c]omplication and mortality rates were lower at cardiac specialty hospitals even when adjusted” for patient-sickness levels, he testified. CMS conducted its study by examining six markets, which represent 11 of the 59 cardiac, surgery and orthopedic specialty hospitals approved in 2003 as Medicare providers.
The CMS report also found that doctors who have invested in specialty facilities do not refer patients exclusively to the specialty hospitals but they do refer a greater share of patients to specialty facilities than to full-service hospitals. ”
Out here in the real world, there is evidence that specialty facilities do skim the patient pool. A full-service, multi-hospital health care system (client of Health Strategy Associates) has been losing patients to a physician-owned ambulatory surgery center for over a year. Anecdotal information strongly indicates that the patients seen at the doc-owned ASC are more likely to be privately insured or covered by workers’ comp (a profitable payer in this state).


Kaiser profits increase

Kaiser Permanente, one of the oldest and largest HMOs, reported net income for last year increased by 59% to $1.6 billion on revenues of $28 billion. The HMO’s membership (registration required – free) was up slightly to 8.23 million as well.
According to California HealthLine,
“Kaiser officials said the gain in net income was boosted by rate increases, improved operating efficiencies and lower pharmaceutical costs. Unexpected adjustments to pension and post-retirement costs, workers’ compensation and liability expenses also contributed to Kaiser’s financial performance, company officials said.
Tom Meier, vice president and treasurer for Kaiser, said member rates increased by 10% to 11% in 2004, less than the 13% reported in recent years. ”
The message here is we may be approaching, if not already at, the top of the cycle. Stock prices for publicly traded health plans are way up over last year (see Coventry and United HealthGroup), PEs are up as well, and managed care stocks are once again “strong buys.”
A couple of other “take-aways”.
1. Kaiser’s (KP’s) rates were up 10-11% last year, well above overall medical trend rates. This is likely a key to the improved profits, especially when one considers their increased spending on capital expenditures (up 30% as KP tries once again to implement an electronic medical records system).
2. KP operates the tightest form of managed care; the large group model (all docs are members of the Permanente medical group). If their rates are up 10-11%, what does that mean for less-tightly managed models?


HMO enrollment drops in New England

A new study indicates HMO enrollment in New England has declined over the past year. HealthLeaders-Interstudy (here’s hoping the new company gets a new name shortly)’s just-released New England Health Plan Analysis indicates that all states save New Hampshire experienced a drop in HMO participation.
There is continuing migration to PPOs,” said Paula DeWitt, HealthLeaders- InterStudy analyst. “Massachusetts has strong regional plans and will likely continue to be an HMO stronghold, but even it isn’t immune to the migration into more open-access products. In addition, while all New England states reported net profits through the third quarter of 2004, profits were down in Massachusetts, New Hampshire, and Rhode Island compared to the same period in 2003.”
Insurance Journal noted “The firm also reported on other factors at play in the managed care fiel. Tufts Health Plan has formed an alliance with national player CIGNA HealthCare to offer an open-access PPO-type product to large- and medium-size businesses. Medicare HMOs in New England are adding options and some are enhancing benefits for 2005. For example, Fallon Community Health Plan is offering a new option called Fallon Senior Plan Saver with no premium.”


Medicare drug costs up…again

The latest projections from the Congressional Budget Office have the Medicare Drug Program’s costs over the next ten years at $849 billion. This is a rather substantial increase over the initial projections of some $400 billion, which were for the ten years ending 2014. Nonetheless, this does represent an increase of over $100 billion from the last CBO estimate, published less than a month ago.
According to California HealthLine,
“CBO’s projection does not include anticipated savings, which could make the actual cost lower than the Bush administration’s cost estimate of $724 billion over 10 years (Fram, AP/Detroit News, 3/5).
Analysts attributed the net spending increase to a higher estimated cost of basic benefits and a change in the cost of low-income subsidies under the original bill. About $36 billion of the $54 billion net spending increase would occur before 2013 — the period covered under the original cost projections (CQ HealthBeat, 3/4).”
There have been some rumors about possibility flexibility on the part of the Administration on the program, but any “flexibility’ in terms of cutting benefits and therefore costs may well be offset by the financial support CMS may have to provide to private insurers willing to participate in the Medicare Drug card program.
These private insurers are justifiably worried about the possibility of adverse selection. The program is voluntary, so logically, only those recipients that would actually gain financially from the program would sign up. This isn’t insurance, it is a guaranteed money loser.
That being the case, one wonders how and why private companies would sign up to lose money. My sense is they are being offered stop-loss assurances from CMS; or if not explicit protection, some other form of risk avoidance.


Medicaid round up

News in brief.
The Congressional Budget Office projects potential savings from Pres. Bush’s Medicaid cuts will be some $11 billion less (over the next five years) than the White House’s claims.
The National Governors’ meeting ended without an agreement from the governors on Medicaid program cuts, changes, or alterations. Here’s the news from California HealthLine on where the effort stands…
“We’ll now work to build on [common ground] and hopefully come up with a proposal that will be bipartisan and that we can take to Congress for the purpose of being able to substantially improve Medicaid and have it reach its promise,” Leavitt said (Smith, Salt Lake Tribune, 3/2).
Governors’ Concerns
Interviews with “numerous governors” indicate that the “consensus described by Leavitt does not exist,” according to the Times (New York Times, 3/2). “We are still far apart,” New Mexico Gov. Bill Richardson (D) said.
Ohio Gov. Bob Taft (R) said, “With the respect to the budget itself, we’ve made clear we oppose [the administration’s cuts], and we’ll see how that issue works out here in the next few weeks.”
Wisconsin Gov. Jim Doyle (D) said the administration’s proposed changes are “not acceptable,” adding, “What they are saying to states is, ‘We’re going to cut you and give you more flexibility,’ and the flexibility is you can cut people off.”
Indiana Gov. Mitch Daniels (R), Bush’s former budget director, said, “There’s a lot of substantive agreement but honest tactical disagreement” (Washington Post, 3/2).
Don’t expect this to happen any time soon…


The Federal budget, the deficit, and provider reimbursement

Fed Chairman Alan Greenspan’s recent gloomy pronouncements about the potential impact of the federal deficit have focused even more attention on entitlement programs. Interestingly, Greenspan specifically mentioned governmental health programs, such as Medicaid and Medicare, noting that their contribution to the deficit may well outstrip that of Social Security.
Pres. Bush’s efforts to rein in Federal expenditures on Medicaid has focused on cutting drug reimbursements; eliminating some of the ways seniors have shifted assets to qualify for governmental funding of long term care; and closing “accounting loopholes. As of today, these recommendations have run into a stone wall, as Republican and Democratic governors alike have strongly resisted any Federal cuts to Medicaid funding. Their resistance, combined with less-than-overwhelming support from Congressional Republicans, make it unlikely that Mr. Bush will get all, or much, of what he desires.
If Bush is unable to cut Medicaid significantly, today’s $300 billion in annual costs will continue to escalate at near-double-digit rates. Combine that bad news with the Administration’s refusal to consider any changes to the new Medicare Prescription Drug program (slated to start next year), and it is clear that any progress in reducing governmental expenditures on health insurance programs will have to come from other sources.
So, who’s going to feel the pain?
In a word, providers.
Doctors are slated to receive an automatic 5% fee cut in 2006. Historically, Congress has eliminated or reduced these cuts in the past


Prescription drug in Workers’ Comp

HSA has completed the second annual survey of prescription drug management in WC. Here are the (very brief) highlights…
–overall trend rate was 12% (2004 over 2003)
–WC Rx costs nationally estimated at $3.4 billion in 2004
–party “most responsible for prescription drug costs” – respondents overwhelmingly voted for the treating physician, a significant change over last year.
–Third Party Billers considered to be a problem by all but 2 respondents, and most payers want their PBMs to deal with the TPBs
–utilization considered to be much more significant issue than unit price
The full survey will be available this month.


Medicaid battle – White House v. State House, round 1

The White House is seeking a compromise with governors over Medicaid funding, and is rolling out the big guns in an effort to reach agreement this week. At issue is the Administration’s desire to reduce expenditures by some $60 billion while “closing accounting gimmick loopholes” that enable some states to get more than “their fair share” of federal dollars.
In this era of bitter partisanship, Pres. Bush has been able to accomplish what few others have; create agreement between members of both parties on a highly contentious issue.
“Gov. Bob Taft (R-Ohio) said, “I don’t think there are any divisions among governors” when it comes to losing federal funding, adding, “The real issue is it’s governors against the White House and Congress” (AP/Albany Times Union, 2/28). ”
In today’s New York Times, Taft said “Governors are very anxious about signing on to a $60 billion number if we don’t know how you will get there. We like ideas that save money for the federal government and the states through program efficiencies, but we do not support recommendations that would save the federal government money at the expense of the states.”
His comments were echoed by Romney, Republican governor of Massachusetts; “”Governors will argue en bloc that we want our Medicaid funding retained. We don’t want reductions.”
Without the support of Republican governors, and more than a few Democrats, the Adminstration’s version of Medicaid reform is going nowhere. We’ll be watching this for months to come…


Spitzer now investigating AIG CEO

According to Reuters, AIG Chairman and CEO Maurice “Hank” Greenberg is under investigation by NY Attorney General Eliot Spitzer. The story, to be published in the March 7 issue of Fortune, identifies the problem as Greenberg’s possible promotion of the “income smoothing” products that were the cause of a previously-assessed $126 million fine paid by AIG.
The Reuters article states:
“Insurers have offered products akin to business loans to a broad swath of corporations, catching the eye of regulators who worry that these products smooth earnings and mask the true value of the borrowers. Rather than turning to a bank for a traditional loan or selling securities to raise cash, a company borrows money from its insurer. The loan is repaid in the form of increased premiums for traditional insurance.”
There are a variety of other products that also provide the same type of benefit to public companies. If there is any investigation (neither AIG nor the AG’s office would comment) my sense is the investigation is looking into not just the “inflated premium” products but other financial chicanery as well.
Until now, no public company had survived an indictment. It appeared that AIG had weathered the storm, but once the investigators start digging, there is no telling what they can come up with.


Future health care costs

The article referenced in yesterday’s blog entry about health care cost trends is available at Health Affairs. Here’s the abstract…
“National health spending growth is anticipated to remain stable at just over 7.0 percent through 2006, the result of diverging public- and private-sector spending trends. The faster public-sector spending growth is exemplified by the introduction of the new Medicare drug benefit in 2006. While this benefit is anticipated to have only a minor impact on overall health spending, it will result in a significant shift in funding from private payers and Medicaid to Medicare. By 2014, total health spending is projected to constitute 18.7 percent of gross domestic product, from 15.3 percent in 2003.
The slowdown in national health spending growth is expected to continue into 2004, with growth edging downward to 7.5 percent from 7.7 percent in 2003 (Exhibits 1 and 2).1 Over the next ten years, growth is expected to slow to 6.7 percent between 2013 and 2014, well below the peak of 9.3 percent growth that occurred between 2001 and 2002. Despite the anticipated deceleration, these growth rates outpace the milder inflationary experience of the mid-1990s, when growth averaged 5.3 percent from 1993 through 1998. Over the 2003-14 period, national health spending is forecast to continue growing faster than gross domestic product (GDP). The consequence is a projected increase in health’s share of GDP from 15.3 percent in 2003 to 18.7 percent by 2014.”
And here’s the takeaways…
1. Prescription drug costs will be the largest single contributor to growth in public health care costs.
2. Private coverage for drugs will decrease among Medicare eligibles as the Medicare Prescription Drug coverage program goes into effect starting in 2006.
3. While overall medical inflation will remain 2-3 times the overall rate of inflation, private health care plans will very likely see signficantly highertrend rates . As public programs cut expenses, cost-shifting will undoubtedly follow.

Joe Paduda is the principal of Health Strategy Associates



A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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