Senate Democrats announced a compromise budget framework to fund President Biden’s social spending plans to the tune of $3.5T, including substantial money for some of the administration’s key healthcare priorities. The framework sends instructions to several Senate committees, including the Budget and Finance panels, to craft legislative language around the central components of the deal, with the goal of passing a spending package before next month’s recess.
Many specifics remain to be ironed out in negotiations among the party’s progressive and moderate camps, but some of the main elements of the deal became clear this week. The plan includes extending theenhanced subsidies for purchasing individual coverage on the healthcare marketplaces, which were implemented earlier this year as part of the American Rescue Plan Act. It would also seek to close the so-called “Medicaid coverage gap”, by providing new coverage options for low-income adults in states that did not expand Medicaid under the Affordable Care Act (ACA).
New investments would be made in home- and community-based services for long-term care, along the lines of the $400B proposed in President Biden’s American Families Plan. And the budget deal envisions expanding benefits in the Medicare program to include dental, vision, and hearing services. Given the budgetary concerns of moderate Democratic lawmakers like Sen. Joe Manchin (WV), one critical question will be how the $3.5T deal will be paid for. One likely source of funding for the deal will be reforming the way Medicare purchases prescription drugs, making that long-time Democratic policy objective a probable part of any final package.
Notably absent from the healthcare spending proposals: lowering the eligibility age for Medicare from 65 to 60. No final decision has been reached on whether to incorporate such a move; rather, the question will be sent to the Senate Finance Committee for consideration. Given the urgency of passing as much of the Biden administration’s legislative agenda as possible before the midterm campaign season begins in earnest, we think it’s unlikely that Democrats will be willing to cross the Rubicon of Medicare expansion at this point.
The prospect of having to gain support from all 50 Democratic senators—as zero Republicans are expected to support the package—will likely temper any appetite for picking a fight with the influential hospital and physician industries, which have strongly opposed Medicare expansion.
One longer-term implication of the apparent decision to favor expansion of Medicare benefits over lowering the Medicare eligibility age now:a richer package of services in traditional Medicare might make Medicare Advantage (MA) a less attractive alternative for potential enrollees and could undermine any future efforts to create an “MA buy-in” for coverage expansion.
Expect lobbying and negotiations to reach a furious pace over the next several weeks, as lawmakers work out the final details of the $3.5T spending plan.
Medicare Advantage (MA) focused companies, like Oak Street Health (14x revenues), Cano Health (11x revenues), and Iora Health (announced sale to One Medical at 7x revenues), reflect valuation multiples that appear irrational to many market observers. Multiples may be exuberant, but they are not necessarily irrational.
One reason for high valuations across the healthcare sector is the large pools of capital from institutional public investors, retail investors and private equity that are seeking returns higher than the low single digit bond yields currently available. Private equity alone has hundreds of billions in investable funds seeking opportunities in healthcare. As a result of this abundance of capital chasing deals, there is a premium attached to the scarcity of available companies with proven business models and strong growth prospects.
Valuations of companies that rely on Medicare and Medicaid reimbursement have traditionally been discounted for the risk associated with a change in government reimbursement policy. This “bop the mole” risk reflects the market’s assessment that when a particular healthcare sector becomes “too profitable,” the risk increases that CMS will adjust policy and reimbursement rates in that sector to drive down profitability.
However, there appears to be consensus among both political parties that MA is the right policy to help manage the rise in overall Medicare costs and, thus, incentives for MA growth can be expected to continue. This factor combined with strong demographic growth in the overall senior population means investors apply premiums to companies in the MA space compared to traditional providers.
Large pools of available capital, scarcity value, lower perceived sector risk and overall growth in the senior population are all factors that drive higher valuations for the MA disrupters.However, these factors pale in comparison the underlying economic driver for these companies. Taking full risk for MA enrollees and dramatically reducing hospital utilization, while improving health status, is core to their business model. These companies target and often achieve reduced hospital utilization by 30% or more for their assigned MA enrollees.
In 2019, the average Medicare days per 1,000 in the U.S. was 1,190. With about $14,700 per Medicare discharge and a 4.5 ALOS, the average cost per Medicare day is approximately $3,200. At the U.S. average 1,190 Medicare hospital days per thousand, if MA hospital utilization is decreased by 25%, the net hospital revenue per 1,000 MA
enrollees is reduced by about $960,000. If one of the MA disrupters has, for example, 50,000 MA lives in a market, the decrease in hospital revenues for that MA population would be about $48 million. This does not include the associated physician fees and other costs in the care continuum. That same $48 million + in the coffers of the risk-taking MA disrupters allows them deliver comprehensive array of supportive services including addressing social determinants of health. These services then further reduce utilization and improves overall health status, creating a virtuous circle. This is very profitable.
MA is only the beginning. When successful MA businesses expand beyond MA, and they will, disruption across the healthcare economy will be profound and painful for the incumbents. The market is rationally exuberant about that prospect.
Two influential advisory groups sent recommendations to Congress calling for a revamp of how health plans are paid in the lucrative Medicare Advantage program, culling how many models CMS tests and curbing high-cost drug approvals.
By many measures, the MA program has been thriving. Enrollment and participation has continued to grow, and in 2021, MA plans’ bids to provide the Medicare benefit declined to a record low: Just 87% of comparable fee-for-service spending in their markets.
But despite that relative efficiency, MA contracting isn’t saving Medicare money — actually, in the 35 years Medicare managed care has been active, it’s never resulted in net savings for the cash-strapped program, James Mathews, executive director of the Medicare Payment Advisory Commission, told reporters in a Tuesday briefing.
MedPAC estimates Medicare actually spends 4% more per capita for beneficiaries in MA plans than those in FFS under the existing benchmark policy.
To save money, Medicare could change how the benchmark, the maximum payment amount for plans, is adjusted for geographic variation, MedPAC said.
Under current policy, Medicare pays MA plans more if they cover an area with lower FFS spending, despite most plans bidding below FFS in these areas. At the same time, plans in areas where FFS spending is higher bid at a lower level relative to their benchmark, and wind up getting higher rebates — the difference between the bid and the benchmark — as a result.
“Because the rebate dollars must be used to provide extra benefits, large rebates result in plans offering a disproportionate level of extra benefits,” MedPAC wrote in its annual report to Congress. “Moreover, as MA rebates increase, a smaller share of those rebates is used for cost-sharing and premium reductions — benefits that have more transparent value and provide an affordable alternative to Medigap coverage.”
The group recommended rebalancing the MA benchmark policy to use a relatively equal blend of per-capita FFS spending in a local area and standardized national FFS spending, which would reduce variation in local benchmarks, and use a rebate of at least 75%. Currently, a plan’s rebate depends on its star rating, and ranges from 65% to 70%.
MedPAC also suggested a discount rate of at least 2% to reduce local and national blended spending amounts.
The group’s simulations suggest the changes would have minimal impact on plan participation or MA enrollees, but could lead to savings in Medicare of about 2 percentage points, relative to current policy.
Finding savings in Medicare, even small ones, is integral for the program’s future, policy experts say. The Congressional Budget Office expects the trust fund that finances Medicare’s hospital benefit will become insolvent by 2024, as — despite perennial warnings from watchdogs and budget hawks — lawmakers have kicked the can on the insurance program’s snowballing deficit for years.
Fewer and more targeted alternative payment models
MedPAC also recommended CMS streamline its portfolio of alternative payment models, implementing a smaller and more targeted suite of the temporary demonstrations designed to work together.
CMS is already undergoing a review of the models, meant to inject more value into healthcare payments, following calls from legislators for more oversight in the program. The agency doesn’t have the most stellar track record: Of the 54 models its Center for Medicare and Medicaid Innovation has trialed since it was launched a decade ago, just four have been permanently encoded in Medicare.
New CMMI head Elizabeth Fowler said earlier this month the agency will likely enact more mandatory models to force the shift toward value, as the ongoing review has resulted in more conscious choices about where it should invest.
In its report, MedPAC pointed out many of CMMI’s models generated gross savings for Medicare, before performance bonuses to providers were shelled out. That suggests the models have the power to change provider practice patterns, but their effects are tricky to measure. Many providers are in multiple models at once, and the same beneficiaries can be shared across models, too.
Additionally, some models set up conflicting incentives. Mathews gave the example of accountable care organizations participating in one model to reduce spending on behalf of an assigned population relative to a benchmark, but its provider participants could also be in certain bundled models with incentives to keep the cost of care per episode low — but not reduce the overall number of episodes themselves.
“The risk of these kinds of inconsistent incentives would be minimized again if the models were developed in a manner where they would work together at the outset,” Mathews said. MedPAC doesn’t have guidance on a specific target number of alternative models, but said it should be a smaller and more strategic number.
Curbing high-cost drugs in Medicaid
Another advisory board, on the Medicaid safety-net insurance program, also released its annual report on Tuesday, recommending Congress mitigate the effect of pricey specialty drugs on state Medicaid programs.
High-cost specialty drugs are increasingly driving Medicaid spending and creating financial pressure on states. The Medicaid and CHIP Payment and Access Commission (MACPAC) didn’t recommend Congress change the requirement that Medicaid cover the drugs, but recommended legislators look into increasing the minimum rebate percentage on drugs approved by the Food and Drug Administration through the accelerated approval pathway, until the clinical benefit of the drugs is verified.
The accelerated approval pathway, which can be used for a drug for a serious or life-threatening illness that provides a therapeutic advantage over existing treatments, allows drugs to come to market more quickly. States have aired concerns about paying high list prices for such drugs when they don’t have a verified clinical benefit.
Several advisors to the FDA have resigned over the decision, as it’s unclear if aducanumab actually has a clinical benefit. What aducanumab does have is an estimated price tag of $56,000 a year, which could place severe stress on taxpayer-funded insurance programs like Medicare and Medicaid if widely prescribed.
MEDPAC also recommended an increase in the additional inflationary rebate on drugs that receive approval from the FDA under the accelerated approval pathway if the manufacturer hasn’t completed the postmarketing confirmatory trial after a specified number of years. Once a drug receives traditional approval, the inflationary rebate would revert back to the standard amounts.
The recommendations would only apply to the price Medicaid pays for the drug and doesn’t change the program’s obligation to cover it.
A number of the regional health systems we work with have either launched or are planning to launch their own Medicare Advantage (MA) plans. The good news is the breathless enthusiasm among hospitals for getting into the insurance business that followed the advent of risk-based contracting has been tempered in recent years.
Early strategies, circa 2012-15, involved health systems rushing into the commercial group and individual markets, only to run up against fierce competition from incumbent Blues plans, and an employer sales channel characterized by complicated relationships with insurance brokers.
Slowly, a lightbulb has gone off among system strategists that MA is where the focus should be, given demographic and enrollment trends, and the fact that MA plans can be profitable with a smaller number of lives than commercial plans. It’s also a space that rewards investments in care management, as MA enrollees tend to be “sticky”, remaining with one plan for several years, which gives population health interventions a chance to reap benefits.
But as systems “skate to where the puck is going” with Medicare risk, they’re confronting a new challenge: slow growth.Selling a Medicare insurance plan is a “kitchen-table sale”, involving individual consumer purchase decisions, rather than a “wholesale sale” to a group market purchaser. That means that consumer marketing matters more—and the large national carriers are able to deploy huge advertising budgets to drive seniors toward their offerings.
Regional systems are often outmatched in this battle for MA lives, and we’re beginning to hear real frustration with the slow pace of growth among provider systems that have invested here. Patience will pay off, but so will scale, most likely—the bigger the system, the bigger the investment in marketing can be. (Although even large, national health systems are still dwarfed by the likes of UnitedHealthcare, CVS Health, and Humana.)
Look for the pursuit of MA lives to further accelerate the trend toward consolidation among regional health systems.
When it planned to go public through a SPAC merger, insurance startup Clover Health told investors that it already had 200,000 direct contracting lives under contract for 2021. But in new guidance shared on Monday, the company now plans to end the year just 70,000 to 100,000 covered lives from direct contracting.
After telling investors that it would more than quadruple its membership base in a year, insurance startup Clover Health is cutting its projections in half.
The insurance startup now plans to end the year with between 70,000 and 100,000 covered lives from direct contracting, a new payment program launched last by the Centers for Medicare and Medicaid (CMS) services last year, according to its most recent earnings report.
But its projections call into question the veracity of those shared when the company was looking to go public. In fact, Kevin Fischbeck, an analyst with Bank of America, called out the discrepancy when he asked the company about estimates that it would have nearly half-a-million members covered through direct contracting by 2023.
Clover could only manage a feeble response, with CFO Joe Wagner saying it was “too early to say in future years exactly where we’re going to end up.”
When asked about the current status of the investigation, co-founder and CEO Vivek Garipalli said it was the company’s policy not to comment on pending inquiries.
In an unusual move, the company fielded questions from Reddit during the investor call, alongside those from analysts.
Clover is one of 53 companies selected to participate in CMS’ direct contracting programs in 2021. The value-based payment models were created under the previous administration, which would allow the startup to strike contracts with doctors who are caring for patients under the traditional Medicare program and manage their care.
In the meantime, most of Clover’s business still comes from its Medicare Advantage plans, where it has 66,300 members, an 18% increase year-over-year. It brought in $200.3 million in revenue in the first quarter, up 21%, but its net loss jumped more than 70% to $48.4 million.
The company also decreased its revenue projections from what it originally told investors last year. The startup said it expects to bring in revenue of $810 million to $830 million by the end of 2021, a decrease from its previous projections of $880 million. A small portion of that, just $20 million to $30 million, would come from direct contracting.
Late last week, retail giant Walmart announced its plan to acquire national telemedicine provider MeMD, for an undisclosed sum. According to Dr. Cheryl Pegus, Walmart’s executive vice president for health, the acquisition “complements our brick-and-mortar Walmart Health locations”, allowing the company to “expand access and reach consumers where they are”.
MeMD, founded in 2010, provides primary care and mental health services to five million patients nationally. The acquisition extends Walmart’s health delivery capabilities beyond the handful of in-store and store-adjacent clinics it runs, and follows the launch of its own Medicare Advantage-focused broker business, and partnership with Medicare Advantage start-up Clover Health to offer a co-branded insurance product.
Walmart has been climbing the healthcare learning curve for several years, building on its sizeable retail pharmacy business, and seems to have hit on a successful formula in its latest in-person clinic model, which includes primary care, behavioral health, vision, and dental services. The retailer plans to add 22 new clinic locations by the end of this year, and its new telemedicine offering will allow it to expand its virtual reach even further.
The MeMD acquisition alsorepresents a new front in Walmart’s head-to-head competition with Amazon, which launched its own national telemedicine service earlier this year. That service, Amazon Care, is targeted at the employer market, and right on cue, Amazon announced its first customer sale last week—to Precor, a fitness equipment company.
Both retail giants are slowly circling the $3.6T healthcare industry, targeting inefficiencies by deploying their expertise in convenience and consumer engagement.Incumbents beware.
This week Mayo Clinic and Kaiser Permanente announced a $100M joint investment in Boston-based Medically Home, a provider of virtual hospital solutions. Founded in 2016, Medically Home is one of a handful of companies that coordinate with hospitals and doctors to provide in-home clinician visits, round-the-clock communications and monitoring, and access to support services to enable hospital-level care in the home. While interest has surged during the pandemic, the first hospital at home programs launched in the 1990s, and the model has a proven track record of delivering care that is lower cost and clinically equivalent (or better), when compared to a traditional hospital admission.
A confluence of market forces has driven rapid expansion in the model across the past year. Health systems are increasingly looking to hospital at home to address emerging consumer demand for care outside the hospital,and achieve the longer-term goals of providing flexible, lower-cost acute care capacity. And payers are looking to add hospital at home capabilities to their growing virtual and home-based care platforms to manage acutely ill Medicare Advantage beneficiariesin a lower-cost care setting.
Early adopters estimate that as many as 30 percent of patients admitted to hospitals today could be candidates for treatment at home. The large infusion of funding from Kaiser and Mayo will enable Medically Home to scale across the US, and also provides an endorsement of, and commitment to, the care modelfrom these respected systems, which may help convince physicians who remain skeptical.
Coupled with the Centers for Medicare & Medicaid Services’ waiver program, allowing payment for home-hospital care, this investment should drive a new wave of growth in the model—and will likely make hospital at home a routine part of the care options available to patients.
The Centers for Medicare & Medicaid Services (CMS) released its 2022 Inpatient Prospective Payment System (IPPS) proposed rule this week. Overall, the rule brings good news for hospitals: Medicare reimbursement rates are slated to increase by 2.8 percent,resulting in a $2.5B payment boost to the industry.
In another win, hospitals will no longer be required to disclose their contract terms with Medicare Advantage (MA) insurers. Hospitals had previously been mandated by the 2021 rule to report median, payer-specific, negotiated charges for MA insurers on their Medicare cost reports. Medicare’s goal was to use this data to create a new, market-based, inpatient reimbursement methodology—an effort which has also been tabled, at least for now.
Led by the American Hospital Association, hospitals have been embroiled in lengthy legal challenges over a variety of CMS price transparency requirements, maintaining they are neither beneficial for consumers, nor helpful in lowering healthcare costs.
It’s too early to tell whether this step back from price transparency, which was a key goal of the Trump administration, signals anything about the Biden administration’s priorities; it’s possible CMS may just be slowing down the effort in the wake of the pandemic.
Other highlights of the proposed rule includefunding 1,000 more residency slots over the next five years, and extending payments for COVID-19 treatments to the end of 2022, as CMS expects COVID patients will need care beyond the duration of public health emergency. The agency also proposed several changes to its readmissions and other value-based purchasing programs, to ensure hospitals aren’t penalized by COVID-related impacts on quality measures.
Comments on the proposed rule are due by June 28th.
The complexity of Medicare Advantage (MA) physician networks has been well-documented, but the payment regulations that underlie these plans remain opaque, even to experts. If an MA plan enrollee sees an out-of-network doctor, how much should she expect to pay?
The answer, like much of the American healthcare system, is complicated. We’ve consulted experts and scoured nearly inscrutable government documents to try to find it. In this post we try to explain what we’ve learned in a much more accessible way.
Medicare Advantage Basics
Medicare Advantage is the private insurance alternative to traditional Medicare (TM), comprised largely of HMO and PPO options. One-third of the 60+ million Americans covered by Medicare are enrolled in MA plans. These plans, subsidized by the government, are governed by Medicare rules, but, within certain limits, are able to set their own premiums, deductibles, and service payment schedules each year.
Critically, they also determine their own network extent, choosing which physicians are in- or out-of-network. Apart from cost sharing or deductibles, the cost of care from providers that are in-network is covered by the plan. However, if an enrollee seeks care from a provider who is outside of their plan’s network, what the cost is and who bears it is much more complex.
To understand the MA (and enrollee) payment-to-provider pipeline, we first need to understand the types of providers that exist within the Medicare system.
Participating providers, which constitute about 97% of all physicians in the U.S., accept Medicare Fee-For-Service (FFS) rates for full payment of their services. These are the rates paid by TM. These doctors are subject to the fee schedules and regulations established by Medicare and MA plans.
Non-participating providers (about 2% of practicing physicians) can accept FFS Medicare rates for full payment if they wish (a.k.a., “take assignment”), but they generally don’t do so. When they don’t take assignment on a particular case, these providers are not limited to charging FFS rates.
Opt-out providersdon’t accept Medicare FFS payment under any circumstances. These providers, constituting only 1% of practicing physicians, can set their own charges for services and require payment directly from the patient. (Many psychiatrists fall into this category: they make up 42% of all opt-out providers. This is particularly concerning in light of studies suggesting increased rates of anxiety and depression among adults as a result of the COVID-19 pandemic).
How Out-of-Network Doctors are Paid
So, if an MA beneficiary goes to see an out-of-network doctor, by whom does the doctor get paid and how much? At the most basic level, when a Medicare Advantage HMO member willingly seeks care from an out-of-network provider, the member assumes full liability for payment.That is, neither the HMO plan nor TM will pay for services when an MA member goes out-of-network.
The price that the provider can charge for these services, though, varies, and must be disclosed to the patient before any services are administered. If the provider is participating with Medicare (in the sense defined above), they charge the patient no more than the standard Medicare FFS rate for their services. Non-participating providers that do not take assignment on the claim are limited to charging the beneficiary 115% of the Medicare FFS amount, the “limiting charge.” (Some states further restrict this. In New York State, for instance, the maximum is 105% of Medicare FFS payment.) In these cases, the provider charges the patient directly, and they are responsible for the entire amount (See Figure 1.)
Alternatively, if the provider has opted-out of Medicare, there are no limits to what they can charge for their services. The provider and patient enter into a private contract; the patient agrees to pay the full amount, out of pocket, for all services.
MA PPO plans operate slightly differently. By nature of the PPO plan, there are built-in benefits covering visits to out-of-network physicians (usually at the expense of higher annual deductibles and co-insurance compared to HMO plans). Like with HMO enrollees, an out-of-network Medicare-participating physician will charge the PPO enrollee no more than the standard FFS rate for their services. The PPO plan will then reimburse the enrollee 100% of this rate, less coinsurance. (See Figure 2.)
In contrast, a non-participating physician that does not take assignment is limited to charging a PPO enrollee 115% of the Medicare FFS amount, which can be further limited by state regulations. In this case, the PPO enrollee is also reimbursed by their plan up to 100% (less coinsurance) of the FFS amount for their visit. Again, opt-out physicians are exempt from these regulations and must enter private contracts with patients.
There are two major caveats to these payment schemes (with many more nuanced and less-frequent exceptions detailed here). First, if a beneficiary seeks urgent or emergent care (as defined by Medicare) and the provider happens to be out-of-network for the MA plan (regardless of HMO/PPO status), the plan must cover the services at their established in-network emergency services rates.
The second caveat is in regard to the declared public health emergency due to COVID-19 (set to expire in April 2021, but likely to be extended). MA plans are currently required to cover all out-of-network services from providers that contract with Medicare (i.e., all but opt-out providers) and charge beneficiaries no more than the plan-established in-network rates for these services. This is being mandated by CMS to compensate for practice closures and other difficulties of finding in-network care as a result of the pandemic.
Outside of the pandemic and emergency situations, knowing how much you’ll need to pay for out-of-network services as a MA enrollee depends on a multitude of factors. Though the vast majority of American physicians contract with Medicare, the intersection of insurer-engineered physician networks and the complex MA payment system could lead to significant unexpected costs to the patient.
Doctors and health systems with a significant portion of risk-based contracts weathered the pandemic better than their peers still fully tethered to fee-for-service payment. Lower healthcare utilization translated into record profits, just as it did for insurers.
We’re now seeing an increasing number of health systems asking again whether they should enter the health plan business—levels of interest we haven’t seen since the “rush to risk” in the immediate aftermath of the passage of the Affordable Care Act a decade ago.
The discussions feel appreciably different this time around (which is a good thing, since many systems who launched plans in the prior wave had trouble growing and sustaining them). First, systems are approaching the market this time with a focus on Medicare Advantage, having seen that growing a base of covered lives with their networks is much easier than starting with the commercial market, where large insurers, particularly incumbent Blues plans, dominate the market, and many employers are still reticent to limit choice.
But foremost, there is new appreciation for the scale needed for a health plan to compete. In 2010, many executives set a goal of 100K covered lives as a target for sustainability; today, a plan with three times that number is considered small. Now many leaders posit that regional insurers need a plan to get to half a million lives, or more. (Somehow this doesn’t seem to hold for insurance startups: see the recent public offerings of Clover Health and Alignment Health, who have just 57K and 82K lives, respectively, nationwide.)
We’re watching for a coming wave of health system consolidation to gain the financial footing and geographic footprint needed to compete in the Medicare Advantage market, and would expect traditional payers to respond with regional consolidation of their own.