Health Cost Containment and Efficiencies NCSL Briefs for State Legislators

TABLE OF CONTENTS (Each individual brief in the series is numbered, #1-16 and includes page numbers specific to that brief, four to six page each)

Cover

Table of Contents

Introduction

Series I: Payment and Purchasing Reforms (Briefs No. 1-10)

1. Administrative Simplification in the Health System 2. Global Payments to Health Providers 3. Episode-of-Care Payments 4. Collecting Health Data: All-Payer Claims Databases 5. Accountable Care Organizations 6. Performance-Based Health Care Provider Payments 7. Equalizing Health Provider Rates: All-Payer Rate Setting 8. Use of Generic Prescription Drugs and Brand-Name Discounts 9. Prescription Drug Agreements and Volume Purchasing 10. Pooling Public Employee Health Care

Series II: Delivery System and Health Promotion Reforms (Briefs No. 11-16)

11. Combating Fraud and Abuse 12. Medical Homes 13. Employer-Sponsored Health Promotion Programs 14. Public Health and Cost Savings 15. Health Care Provider Patient Safety 16. Medical Malpractice Health Cost Containment and Efficiencies NCSL Briefs for State Legislators

May 2011

A series examining options for containing or reducing health costs and improving efficiency in health – expanded for 2011

he cost of health and health care in the United States 3. Episode-of-Care Payments for years has been a highly visible topic of discussion 4. Collecting Health Data: All-Payer Claims Databases Tfor consumers, employers, state and federal policymakers, and the media. 5. Accountable Care Organizations 6. Performance-Based Health Care Provider Payments Innovations and Experiments Policymakers, especially at the state level, have spent a 7. Equalizing Health Provider Rates: All-Payer Rate Setting good deal of time and energy considering—and some- 8. Use of Generic Prescription Drugs and Brand-Name Dis- times passing—laws and budgets aimed at controlling or counts even cutting selected health expenditures. In recent years, 9. Prescription Drug Agreements and Volume Purchasing a variety of health policy innovations and experiments have been put into place to improve quality, control cost 10. Pooling Public Employee Health Care and expand coverage. Many new approaches, already established in parts of the private, commercial market and in state and public sector programs, promise savings or im- The Topics for Series II: Delivery System and proved affordability. Health Promotion Reforms 11. Combating Fraud and Abuse Some health cost controls have medical consequences; 12. Medical Homes some are obvious and some are unintended. During bud- 13. Employer-Sponsored Health Promotion Programs get crises, for example, health programs may reduce coverage, shift costs to enrollees or phase out programs for 14. Public Health and Cost Savings special populations. 15. Health Care Provider Patient Safety Successes and Potential 16. Medical Malpractice This series of briefs takes a fresh approach by describing a number of health cost containment and cost efficiency ideas. Emphasis is on documented and fiscally calculated Federal Health Reform results, along with results that affect budgets, coverage, Several cost containment approaches are included in the fed- quality, prevention and wellness. Each brief describes 1) eral Patient Protection and Affordable Care Act, signed into cost containment strategy and logic; 2) the target; 3) rela- law in March 2010. Some federal provisions build upon pro- tion to the federal health reform law; 4) state and non-state grams already used by some states. Other sections of the law examples; 5) evidence of effectiveness; 6) challenges and provide new options, challenges and grant opportunities for complementary approaches and 7) best sources for more states that choose to create a new policy or program in future information. Where the results do not meet the intended years. These examples are described in each brief where ap- goals, these reports present an objective appraisal, say- plicable. ing, for example, “Limited evidence is available ... “ or “It is still too early to determine…” Future Updates and Forthcoming Briefs The latest information and published material for this project The Topics for Series I: Payment is available at www.ncsl.org/?tabid=19200. NCSL will continue and Purchasing Reforms intermittent publications of briefs in this series; new editions 1. Administrative Simplification in the Health System and recent developments will be posted online. 2. Global Payments to Health Providers NCSL takes no position for or against any state law or proposed legislation. Materials and descriptions included in these briefs do not constitute the opinion of NCSL, its members or staff.

National Conference of State Legislatures Health Cost Containment and Efficiency Strategies

Strategy Cost Containment Strategy Target of Cost Containment Evidence of Effect on Costs and Logic 1. Administrative Streamlining administra- • High health care system Studies are limited and indicate Simplification in the tive functions in the current administrative costs. that efforts to reduce administra- Health System health system (e.g., standard- • Administrative inefficien- tive expenses have resulted in ized forms and processes, cies associated with com- some efficiencies. streamlined claims processing, plex, uncoordinated, often reduced and/or coordinated duplicate regulatory and government regulations, etc.). administrative requirements. 2. Global Payments to A fixed prepayment made to • Lack of financial incentives Research indicates global pay- Health Providers a group of providers or health for providers to hold down ments can result in lower costs care system (as opposed to a total care costs for a popu- without affecting quality or ac- health care plan) for all care for lation of patients. cess where providers are orga- all conditions for a population • Inefficient, uncoordinated nized and have the data and sys- of patients. care. tems to manage such payments. • Not enough attention to management of chronic conditions. • Prevention and early diagnosis and treatment. 3. Episode-of-Care A single payment for all care to • Lack of financial incentives Research is limited and shows Payments treat a patient with a specific for providers to manage cost savings for some conditions. illness, condition or medial the total cost of care for an Payment mechanism is at an early event, as opposed to fee-for- episode of illness. stage of development. service. • Inefficient, uncoordinated care. 4. Collecting Health A statewide repository of • Inability to identify and It is too early to determine Data: All-Payer Claims health insurance claims infor- reward high-quality/low- whether all-payer claims databas- Databases mation from all health care cost providers. es can help states control costs. payers, including health insur- • Lack of data to enable ers, government programs and consumers to compare self-insured employer plans. provider prices and care quality. 5. Accountable Care A local entity comprised of a • Lack of a locus of account- Because it is a relatively new con- Organizations (ACOs) wide range of collaborating ability for overall health cept that has not been fully test- providers that is accountable care costs and quality for a ed, there is insufficient evidence to health care payers for the population of patients. to assess the effect on costs. Ex- overall cost and quality of care • Fragmented care. isting evidence is mixed. for a defined population.

6. Performance-Based Payments to providers for • Providers not financially Research is limited and indicates Health Care Provider meeting pre-established rewarded for providing ef- some improvements in quality of Payments (P4P) health status, efficiency and/ ficient, effective preventive care but little effect on costs. or quality benchmarks for a and chronic care. group of patients. • Unnecessary care.

2 National Conference of State Legislatures Strategy Cost Containment Strategy Target of Cost Containment Evidence of Effect on Costs and Logic 7. Equalizing Health Payment rates that are the • High health care prices. Evidence is mixed but indicates Provider Rates: All-Payer same for all patients receiving • Lack of price competition. that, properly structured, state Rate Setting the same service or treatment • Significant provider costs all-payer rate setting can slow from the same provider. Rates to negotiate, track and price increases but not necessar- can be set by a state authority process claims under many ily overall cost growth. or by providers themselves. reimbursement schedules. 8. Use of Generic Buying more generic prescrip- • State government-funded Expanded use of generic drugs Prescription Drugs and tion drugs instead of their pharmaceutical purchas- is documented to save states 30 Brand-Name Discounts brand-name equivalents and ing, including Medicaid, percent to 80 percent on certain purchasing brand-name drugs state-only programs and widely used medications, reduc- with discounts can significant- some private-market phar- ing expenditures by millions of ly reduce overall prescription maceutical purchasing. dollars annually. drug expenditures. 9. Prescription Drug States use combinations of ap- • Helps state government State Medicaid programs are us- Agreements and Volume proaches to control the costs public sector programs ing preferred drug lists, supple- Purchasing of prescription drugs includ- operate more efficiently mental rebates and multi-state ing: and cost effectively. purchasing arrangements to • Preferred drug lists, • Holds down overall state save between 8 percent and 12 • Extra manufacturer price pharmaceutical spending, percent on overall Medicaid drug rebates, but does not deny cover- purchases. • Multistate purchasing and age or services to individu- negotiations, and al patients. • Scientific studies on comparative effectiveness. 10. Pooling Public Programs that pool or combine • High administrative costs Evidence indicates arrangements Employee Health Care health insurance purchasers as a proportion of small may benefit small groups that across or beyond traditional and mid-sized employer join large state pools but have jurisdictions or associations, premiums. not slowed overall insurance pre- including public employee • Limited ability of small mium increases. health coverage pools and pri- and mid-sized groups to vate sector health purchasing negotiate lower health alliances. care prices or premiums or benefit. 11. Combating Fraud Evidence shows concerted Medicaid expenditures for It appears the more anti-fraud and Abuse state anti-fraud and abuse ef- fraudulent claims cost states tools a state has at its disposal, forts save states millions—and billions of dollars each year. the greater likelihood of fewer in some cases billions—of dol- unwarranted payments and larg- lars each year, and states po- er recoveries. tentially could double or even triple current collections. 12. Medical Homes Some studies show significant Medical homes are designed Most studies that support medi- medical home savings. Oth- to address several shortcom- cal homes’ potential to reduce ers have found minimal or no ings in the current health care overall spending have not as- overall savings but report oth- system, especially uncoordi- sessed a complete version of the er benefits, such as improved nated care. Poor care coordi- approach. quality of care, fewer medical nation is associated with du- errors and enhanced health plicate procedures, conflicting care access. treatment recommendations, unnecessary hospitalizations and nursing home placements, and adverse drug reactions.

National Conference of State Legislatures 3 Strategy Cost Containment Strategy Target of Cost Containment Evidence of Effect on Costs and Logic 13. Employer-Sponsored Evidence indicates that well- The main targets of work- Research for this brief did not Health Promotion designed worksite wellness site wellness programs are uncover any studies of the effec- Programs programs can reduce health chronic diseases, such as tiveness of state laws to encour- expenditures and reduce ab- diabetes, chronic obstructive age more employers to offer, or senteeism, at least for large pulmonary disease and heart more employees to participate in, employers, including state disease. worksite wellness programs. government. 14. Public Health and Evidence indicates public Public health programs pro- Extensive research documents Cost Savings health programs improve tect and improve the health the health benefits of more health, extend longevity and of communities by preventing Americans exercising, losing can reduce health care expen- disease and injury, reducing weight, not using tobacco, driv- ditures. health hazards, preparing ing safely and engaging in other for disasters, and promoting healthy habits. Less clear is the healthy lifestyles. effect on total health care costs. 15. Health Care Provider Medical errors are the eighth The estimated annual cost of Examples of patient safety ini- Patient Safety leading cause of death in the additional medical and short- tiatives that improve patient United States, higher than mo- term disability expenses as- care and reduce costs exist, but tor vehicle accidents, breast sociated with medical errors is evidence of overall savings is cancer or AIDS. Each year, be- $19.5 billion. Longer hospital limited. Recent strategies include tween 500,000 and 1.5 million stays and the cost of treating E-prescribing, non-payment for Americans admitted to hospi- medical error-related injuries “never events,” regulating medical tals are harmed by preventable and complications are the two work conditions and error report- medical errors. major expenditures associ- ing. ated with medical errors.

About this project

NCSL’s Health Cost Containment and Efficiency Series describes various alternative state policy approaches, with an emphasis on documented and fiscally calculated results. The project is housed at the NCSL Health Program in Denver, Colorado. It is led by Richard Cauchi (program director) and Martha King (group director); Barbara Yondorf is lead researcher. Katie Mason and Leann Stelzer provide editorial review and publication management.

NCSL gratefully acknowledges the financial support for this publication series from The Colorado Health Foundation and Rose Community Foundation of Denver, Colorado.

National Conference of State Legislatures William T. Pound, Executive Director 7700 East First Place 444 North Capitol Street, N.W., #515 Denver, Colorado 80230 Washington, D.C. 20001 (303) 364-7700 (202) 624-5400 www.ncsl.org © 2011 by the National Conference of State Legislatures. All rights reserved.

Health Cost Containment and Efficiencies Series 1: ISBN 978-1-58024-600-2 Item # 063010HEA Price: $45

4 National Conference of State Legislatures Health Cost Containment and Efficiencies NCSL Briefs for State Legislators

No. 1 May 2010

Administrative Simplification in the Health System

Cost Containment Strategy and Logic Target of Cost Evidence indicates that Administrative simplification refers to efforts to streamline Containment efforts to reduce admin- administrative functions in the current health system.1 The primary goal of adminis- istrative expenses have Administrative simplification includes programs that: trative simplification efforts n Promote or require use of standardized, common resulted in some efficien- is to lower costs by reduc- cies. electronic or paper forms (e.g., for billing and coding duplication and unnec- ing); essary complexity in health n Improve the efficiency of provider-insurer transac- care system operations. A 2009 report on improving health tions in claims processing and payment; care purchasing in Minnesota observed, “Because routine ad- n Institute a single process for verifying provider (for ministrative transactions such as checking patient eligibility for example doctors, specialists, nurses) experience and benefits, submitting bills for services, or making payments to education that is recognized by all parties, as op- providers occur every minute, every day, millions of times each posed to having separate processes for each health year, even small inefficiencies add up to be significant costs plan, hospital and practice that requires providers to and drags on health system productivity.”2 verify their credentials before hiring or paying them; n Give providers and patients instant access to a pa- Administrative simplification initiatives are aimed mainly at tient’s insurance coverage information (e.g., services how health providers and insurers conduct business, especially covered, required copayments and caps on benefits) with one another. using a magnetic swipe card; n Standardize medical management policies (e.g., pre- An example of administrative inefficiency concerns the way authorization procedures); and health care billings are processed. Studies suggest that paper n Streamline government regulations and compliance billing—the traditional and still most widely used method— requirements. costs nearly twice as much ($1.58 per claim) as electronic billing ($.85 per claim).3 Provider credential verification also typically By streamlining and standardizing routine business pro- is inefficient. One group has estimated that the average health cesses, administrative simplification can help to reduce plan spends approximately $500,000 annually on credentialing unnecessary and duplicative transaction costs and thus activities, and the average provider spends up to 6.5 hours an- reduce overall health care expenditures. nually.4 Processing bills is another source of unnecessarily high administrative expenses. According to the Figure 1. Total Annual Cost to U.S. Physician Practices for Interacting with American Medical Association, physician prac- Health Plans Is Estimated at $31 Billion* tices spend as much as 14 percent of their to- MDs tal collections to ensure accurate payment for $15,767 clerical services. This amounts to more than $68,000 Clerical staff $15,767 laperwy erphysician practice (Figure 1). Researchers estimate that provider and health plan admin- Total Annual per sristrative admin costs together account for 25 percent Practice Cost per or more of the cost of private health insurance Physician: $68,274 nursecoverage.5

mdFederal Health Reform Nursing staff The Patient Protection and Affordable Care Lawyer/accountant $21,796 $15,767 Act, signed March 23, 2010, contains several Senior administrative administrative streamlining provisions. Exam- $15,767 ples include adopting a single set of operat- *Based on an estimated 453,696 office-based physicians. ing rules for eligibility verification and claims Source: L.P. Casalino et al., “What Does it Cost Physician Practices to Interact with Health Insurance Plans?” Health Affairs Web Exclusive, May 14, 2009, w533-w543. status (effective Jan. 1, 2013); electronic funds transfer and health care payment and remit-

National Conference of State Legislatures tances (effective Jan. 1, 2014); and health claims processing, standard claims submissions. Maine, for example, requires pro- enrollment and disenrollment, premium payments, and refer- viders to submit their claims to insurers in a standardized elec- ral certification and authorization (effective Jan. 1, 2016). tronic format.

State Examples n A 2005 Maine law was designed not only to reduce admin- n Several states have conducted studies to estimate the po- istrative costs, but also to ensure that savings are passed to 7 tential savings from various administrative simplification initia- health care purchasers. The law establishes an administrative tives. For example, the Oregon Health Fund Board estimated streamlining work group to “…facilitate the creation and imple- that, over 10 years, developing and requiring all plans to use mentation of a single portal through which hospitals can ac- uniform forms and processes for administrative transactions cess and transmit member eligibility, benefit and claims infor- could save $350 million in health-plan-related transaction costs. mation from multiple insurers.” The work group is responsible Limiting the allowable increase in the administrative portion for investigating ways to ensure that savings from implementa- of insurance premiums to a measure of general inflation could tion of the portal are passed to purchasers in the form of rate save as much as $1.4 billion over 10 years in health insurance reductions by hospitals and other providers and by reductions premium costs. Minnesota’s Center for Health Care Purchasing in administrative costs by insurers and third-party administra- Improvement calculated that requiring providers and insurers tors. to conduct all administrative transactions electronically using standard data and content could reduce overall costs in Min- n Several states have either passed a series of bills to stream- nesota’s health care system (both public and private) by more line various administrative processes or have enacted compre- than $60 million per year by 2013. hensive administrative simplification bills. n At least 15 states require or encourage use of a standard pro- —A 2007 Minnesota law required all health care providers and vider application for credentialing—a nationally recognized payers to use a single electronic standard for the transmission, application and/or a state-specific one. West Virginia is among content and format of payment records, claims and eligibil- 8 the most recent states to enact legislation that sets up a process ity verifications, beginning in 2009. In 2009, the Legislature designed to lead to a standard credentialing system.6 In most passed technology standards legislation (HF 384B) that pre- cases, states have designated the standard provider applica- scribes a process for adopting rules to implement a standard- tion developed by the Council for Affordable Quality Health- ized electronic swipe card all health plans must use. care (CAQH) as their required or acceptable provider credentialing form. Louisiana, New Jersey and Tennessee, for example, —A 2008 Massachusetts law requires health insurers and pro- require or allow health plans to use either the standard CAQH viders to adopt statewide, uniform, consistent and standard- 9 application or a state-specific alternative. Vermont requires use ized billing and coding processes by 2012. The state is also of the CAQH application form. considering ways to reduce duplicative or conflicting state regulatory requirements. State agencies that regulate health n An increasing number of states are encouraging or requiring providers and plans are collaborating to consider the cost con- health plans to provide enrollees with health insurance swipe tainment potential and feasibility of creating a uniform sys- cards. Swipe cards, which would replace paper ID cards, have tem and format for similar reports required by multiple state magnetic strips that give patients and providers immediate ac- agencies. Examples of such filings include reports of injuries, cess to information about a patient’s health insurance benefits adverse medical events, frequency of filing claims information (e.g., deductibles and copayments). Most states are consider- and membership data. The Division of Insurance and the attor- ing the uniform standards recommended by the Workgroup ney general’s office are responsible for holding hearings for infor Electronic Data Interchange (WEDI), a broad-based, nation- surance companies that submit rate increases above 7 percent, al health care industry association. Utah enacted legislation paying particular attention to the companies’ administrative in 2009 (HB 165) that moves the state toward a standardized costs and executive compensation. The state also is consider- swipe card and changes how hospitals and health care providing moving health plan licensure from every year to every two ers send information and billing to patients. Colorado’s 2008 years. law (SB 08-135) requires health insurers to issue standardized, printed identification cards and authorizes the commissioner —Washington enacted comprehensive administrative stream- 10 of insurance to adopt rules requiring insurers to use standard lining legislation in 2009. The Health Care Efficiency Act re- swipe cards or other appropriate technology in the future. quires development and implementation of a uniform provider credentialing process; a uniform standard document and data n States are considering a standardized claims processing sys- set for electronic eligibility and coverage verification; code tem for all payers. The Oregon Health Policy Commission rec- standardization; and common and consistent time frames for ommended in its 2007 road map for health care reform that the reviewing requests for medical management protocols (e.g., state continue its efforts to create a statewide simplified and prior authorization and preadmission requirements). standardized claims processing system, using its influence as a purchaser and as a key regulator. Several states already require

2 National Conference of State Legislatures n Several states have established or are considering creating before a patient leaves the office. The company reported that a advisory groups or offices responsible for identifying ways to 10-physician Texas practice participating in the pilot program reduce administrative expenses. Maine established an Admin- saved $14,000 in billing costs in a year. Another practice re- istrative Streamlining Workgroup authorized by a 2005 law.11 In duced accounts receivable by 13 percent and decreased the a 2008 report, the Oregon Health Fund Board recommended average time to collect insurer and patient payments from 45 that the Division of Insurance convene a work group to develop days to six. For some practices, however, implementing real- uniform forms and processes for administrative transactions.12 time claims adjudication is complicated and can require a change in physician office billing and collections procedures.15 Non-State Examples Although administrative streamlining appears to have resulted n A national group, the Committee on Operating Rules for in some savings, for the most part it has not yet reduced costs Information Exchange, is working to build consensus among for purchasers. A comprehensive research report concluded, health care industry stakeholders on a set of operating rules “Evidence is lacking on whether improvements in the efficien- for administrative interoperability between health plans and cy of insurance companies will be translated into reductions in providers to streamline provider-plan transactions. It currently premiums for their customers.”16 The report continued: “Simi- is working to develop rules for immediate electronic verifica- larly, it is uncertain whether improvements in hospital efficien- tion of patients’ health plan coverage; determination of claims cy will be translated into reductions in charges for services.” status; processing prior authorizations; and standard medical It found no evidence to prove that any specific interventions identification cards. Among the government agencies partici- would reduce overall costs. pating in CORE are Louisiana Medicaid and the Minnesota Department of Human Resources. Several states have either Challenges n Significant cost savings from administrative n Humana Health launched a swipe card pilot passed a series of bills to reforms have not been realized or appeared in program in two Florida cities in 2007. Since streamline various administra- the form of lower costs for purchasers for sev- then, the project has spread statewide and to tive processes or have enacted eral possible reasons. seven other states. United Healthcare also has comprehensive administrative adopted swipe card technology; more than simplification bills. n Many efforts to streamline administrative 20 million of its members have electronic ID functions are relatively new and have not been cards. widely enough adopted to realize overall savings.

Evidence of Effectiveness n Programs designed to reduce overhead often have signifi- Limited evidence indicates that efforts to reduce administra- cant front-end costs (e.g., new computer systems and training tive expenses have resulted in some efficiencies. Unfortunate- personnel). As a result, a net benefit may not be realized for ly, most of the literature on administrative streamlining focuses several years. more on estimates of current administrative expenditures rather than on demonstrated savings from administrative simplifi- n It can be difficult for payers to capture the savings associated cation. Existing evidence comes mainly from the private sector; with efficiencies realized at the provider or plan level. Plans and no studies of the results of state administrative simplification providers may retain the savings rather than pass them along efforts were found. The results of three private sector initiatives to payers. are discussed below n Some targets of administrative simplification account for a n IBM assessed the results achieved by health plans that ad- relatively small part of health care costs. For example, a Wash- opted some initial CORE rules for administrative interoperabil- ington report on administrative simplification found that, while ity described previously. It found that electronic verification of “provider credentialing is a source of administrative variation patients’ benefit coverage (e.g., deductible and copayments) and waste that generates provider frustration, it does not ap- took about seven minutes less than telephone verification, sav- pear to be a major source of cost to providers, plans or hospi- ing about $2.10 per verification.13 tals.” 17 n Blue Cross and Blue Shield of South Carolina’s Web-based n Some health policy analysts have argued that a greater over- tool, My Insurance Manager Web Precert, allows providers to re- haul of the system beyond simply streamlining current admin- ceive immediate resolution of some pre-certification requests, istrative functions is needed to realize savings. This might in- verifying member eligibility for procedures, medications and clude substantially reforming the health care payment system, other services. In 2007, it reported that the system created ef- limiting the number of allowable benefit designs and prohibit- ficiencies credited with savings of $1.4 million.14 ing exclusion of preexisting conditions, or establishing a single payer system. n UnitedHealthcare is testing immediate claims adjudication, which allows a claim to be submitted to an insurer and settled

National Conference of State Legislatures 3 For More Information 5. Healthcare Administrative Simplification Coalition, Bringing Better Value: Recommendations to Address the Costs and Causes of Administrative Com- Eibner, Christine, et al. Controlling Health Care Spending in Mas- plexity in the Nation’s Healthcare System (Washington, D.C.: HASC, July 2009); sachusetts: An Analysis of Options, Option #13, “Reduce Ad- http://www.ahima.org/dc/documents/HASCReport20090717.pdf. ministrative Overhead.” Santa Monica: RAND Health, Au- 6. 2009 W.Va. Acts, Chap. #110. gust 2009; http://www.mass.gov/Eeohhs2/docs/dhcfp/r/ 7. Maine 2005 Me. Laws, Chap. 394 (Laws of Maine); http://www.legislature.maine.gov/legis/bills_122nd/LD.asp?LD=1673. pubs/09/control_health_care_spending_rand_08-07-09. 8. Minn. 2007 Minn. Laws, Chap. 147. pdf. 9. 2008 Mass. Acts, Chap. 305. Washington State Office of the Insurance Commissioner.Report 10. 2009 Wash. Laws, Chap. 298. to the Governor and Legislature: Top Five Health Care Admin- 11. 2005 Me. Laws, Chap. 394 (Laws of Maine). 12. Oregon Health Fund Board, Aim High: Building a Healthy Oregon, Final istrative Simplification Priorities and a Plan to Achieve Those Report (Salem, Ore.: OHFB, November 2008); http://www.oregon.gov/OHPPR/ Goals. Olympia: WSOIC, Dec. 1, 2008; http://www.insur- HFB/docs/Final_Report_12_2008.pdf. ance.wa.gov/legislative/reports/SimplificationRpt.pdf. 13. Council for Affordable Quality Healthcare, “Industry Collaboration: NCSL has posted supplemental materials and 2010 updates Simplifying Administrative Complexity,” PowerPoint presentation, Institute of Medicine Public Meeting 10: The Healthcare Imperative: Lowering Costs and on this topic online at http://www.ncsl.org/?tabid=19926. Improving Outcomes, Strategies that Work, Washington D.C., July 17, 2009; http://healthitextensionservice.igloocommunities.com/documents/institu- teofmedicinehealthreform/industrycollaborationsimplifyingadministrative- Notes comp. 1. Single payer systems, which involve a substantial restructuring of the 14. Blue Cross and Blue Shield of South Carolina website; http://www. health care payment and administrative systems, are the subject of another blueadvocacy.org/plans/view/blue_cross_and_blue_shield_of_south_caro- brief in this series. lina. 2. “Center for Health Care Purchasing Improvement, Annual Report: Janu- 15. Victoria Stagg Elliott, “Practices See Slow Progress in Instant Claims ary 2008 – December 2008, Minnesota (St. Paul, Minn.: CHCPI, May 2009); http:// Adjudication,” amednews, Aug. 17, 2009; http://www.ama-assn.org/amed- www.health.state.mn.us/divs/hpsc/chcpi/legrpt2009.pdf. news/2009/08/17/bil20817.htm. 3. AHIP Center for Policy and Research, An Updated Survey of Health Care 16. Christine Eibner et al., Controlling Health Care Spending in Massachu- Claims Receipt and Processing Times, May, 2006 (Washington D.C.: AHIP Center setts: An Analysis of Options (Santa Monica: RAND Health, August 2009),160; for Policy and Research, May 2006; http://www.ahipresearch.org/pdfs/Prompt- http://www.mass.gov/Eeohhs2/docs/dhcfp/r/pubs/09/control_health_care_ PayFinalDraft.pdf. spending_rand_08-07-09.pdf. 4. Washington State Office of the Insurance Commissioner, Report to the 17. Washington State Office of the Insurance Commissioner,Report to the Governor and Legislature: Top Five Health Care Administrative Simplification Pri- Governor and Legislature: Top Five Health Care Administrative Simplification Pri- orities and a Plan to Achieve Those Goals, (Olympia: WSOIC, Dec. 1, 2008); http:// orities and a Plan to Achieve Those Goals. www.insurance.wa.gov/legislative/reports/SimplificationRpt.pdf.

About this Project NCSL’s Health Cost Containment and Efficiency Series describes multiple alternative state policy approaches, with an emphasis on documented and fiscally calculated results. The project is housed at the NCSL Health Program in Denver, Colorado. It is led by Richard Cauchi, program director, and Martha King, group director, with Barbara Yondorf as lead researcher.

NCSL gratefully acknowledges the financial support for this publication series from The Colorado Health Foundation and Rose Community Foundation of Denver, Colorado.

National Conference of State Legislatures William T. Pound, Executive Director 7700 East First Place 444 North Capitol Street, N.W., #515 Denver, Colorado 80230 Washington, D.C. 20001 (303) 364-7700 (202) 624-5400 www.ncsl.org © 2010 by the National Conference of State Legislatures. All rights reserved.

4 National Conference of State Legislatures Health Cost Containment and Efficiencies NCSL Briefs for State Legislators

No. 2 May 2010

Global Payments to Health Providers

Some similarities exist be- Cost Containment Strategy and Logic Where providers are tween global and episode- A global payment—a fixed prepayment made to a group organized and have of-care payments (discussed of providers or a health care system (as opposed to a the data and systems in a separate brief). In both health care plan)—covers most or all of a patient’s care to manage global pay- cases, payment is bundled during a specified time period. Global payments are usu- ments, research indi- instead of made separately ally paid monthly per patient over a year, unlike fee-for cates such payments for each service. The major service, which pays separately for each service (Figure can lower costs without difference is that global pay- 1). In most cases, a global payment encompasses physi- affecting quality or ac- ments are made on behalf cian and hospital services, diagnostic tests, prescription cess. drugs and often other services, such as hospice and home of a group of patients (e.g., health care. Under a global fee arrangement, a large multi- enrollees in a health plan) and cover all care for all conditions specialty physician practice or hospital-physician system covered by the health plan. Episode-based payments cover an receives a global payment from a payer (e.g., health plan, episode of illness or medical condition, such as a heart attack, Medicare or Medicaid) for a group of enrollees. It is then hip replacement or diabetes. responsible for ensuring that enrollees receive all required health services. Global payments usually are adjusted to The term global payment includes capitation, most frequently reflect the health status of the group on whose behalf the used to pay health maintenance organizations (HMOs) on a payments are made. Entities that receive global payments per-member, per-month basis for all care covered by the HMO sometimes are known as accountable care organizations plan. Some important differences exist between the current (discussed in a separate brief) and can include both for- concept of global payments and traditional capitation, how- mally and loosely organized health care systems. Global ever. Today’s global payments include incentives for patient ac- payment provides an incentive for providers to coordinate cess and quality improvement. They also include better ways to and deliver care efficiently and effectively to hold down adjust payment for the overall health and specific chronic con- expenses. ditions (i.e., risk level) of patients covered by global payments. Further, they use more sophisticated, often electronic, systems to manage care.

Figure 1. Fee-for-Service versus Global Payment Incentives

Current Fee-for-Service Patient-Centered Global Payment System Payment System The Problem The Solution Care is fragmented instead of coordinated. Each pro- Global payments made to a group of providers for all vider is paid for doing work in isolation, and no one is care. Providers are not rewarded for delivering more responsible for coordinating care. Quality can suffer, care, but for delivering the right care to meet patient’s

costs rise and there is little accountability for either. needs. a $ $ $ $ $ a a a a a Primary Care Hospital

Specialist Hospital Specialist Primary Home Care Health Home Health

Source: Massachusetts Special Commission on the Health Care Payment System, “Recommendations of the Special Commission on the Health Care Payment System,” PowerPoint (Boston: SPHCP, July 16, 2009).

National Conference of State Legislatures Global payments also are known as risk-adjusted capitation Quality Council made a similar recommendation in October. In and bundled global payments. November, the Massachusetts Medicaid Policy Institute proposed testing global Medicaid payments “with a defined set of Health economists and others are increasingly promoting glob- providers that includes high-volume Medicaid providers and al payments as an important strategy to slow growth of health providers currently participating in a global fee initiative with a care expenditures. A 2008 New England Journal of Medicine commercial insurer.”3 article examining health care cost control options concluded, “The most potent version of payment reform is budget-based n In 2009, Maine passed “An Act to Protect Consumers and capitation, or a global payment to cover all health care needs Small Business Owners from Rising Health Care Costs.”4 The of a population of patients.”1 act directed the Advisory Council on Health Systems Develop- ment to recommend payment reforms. A November 2009 draft Target of Cost Containment of the council’s report to the Legislature recommends pursuing Global payments are designed to: several strategies, given the diversity of Maine’s delivery system n promote cost-effective prevention and early intervention; and needs, and highlights global payments as a key payment n eliminate services of questionable value; reform strategy.5 n reduce excess health care system capacity; and n reverse the current incentive providers have under fee-for- n Many states have Programs for All-Inclusive Care for the service to provide more services to earn a higher income. Elderly (PACE). These programs are paid a capitated rate to provide total care for frail patients who are eligible for both These goals are accomplished by holding multiple providers in Medicare and Medicaid. Patients must have a disability and be multiple settings jointly accountable for the total cost of care eligible for nursing home care. PACE provider organizations are through shared payments. In the current responsible for coordinating a wide range payment system, no incentive exists for of services, including comprehensive pri- Health economists and others are in- providers to hold down total costs. With mary medical care, prescription drugs, global payments, providers have greater creasingly promoting global payments adult day care, meals and nutritional net income when they hold down costs as an important strategy to slow growth counseling, home health care, and hos- for their shared fixed global payments. pital and nursing home care. According They also have an incentive to maintain or of health care expenditures. to the Centers for Medicare and Medicaid improve a patient’s health, prevent hos- Services, 30 states have one or more PACE pital admissions and coordinate care; their net income will be sites.6 higher if they can lower care costs for a fixed payment. Global payments encourage formation of organized provider systems n Several states require that, if a group of providers accepts that can accept global payments and provide comprehensive risk (i.e., global payments) to ensure that a population of pa- care. tients obtains all or most of their required care over a defined period of time, the group must be licensed. This is especially Federal Health Reform true for provider-sponsored organizations that accept capita- The Patient Protection and Affordable Care Act, signed March tion. A 1997 study found some states require HMO licensure if 23, 2010, requires the secretary of Health and Human Services the organization, rather than an insurance plan, is the ultimate to establish the Medical Global Payment System Demonstra- bearer of risk or assumes risk beyond that which its providers tion Project in up to five states, effective 2010 (section 2705). are themselves licensed to provide (e.g., California, Illinois and Under the project, participating states must use global capita- Pennsylvania).7 Others require a special license or certificate tion rather than fee-for-service to pay large safety net hospital (e.g., a limited service license in Colorado, a nonprofit health systems. The pilot program period is FY 2010 through FY 2012. corporation license in Texas, and a community integrated ser- The act also authorizes tests of innovative Medicare and Med- vice network license in Minnesota). icaid payment and service delivery models “to reduce program expenditures while preserving or enhancing patient quality of Non-State Examples care, effective Jan. 1, 2011” (section 3021). The secretary can n Patient Choice is a program for self-funded employers in select several models for testing, including direct contracting Minnesota, North Dakota and South Dakota. Created by Buy- with groups of providers using “risk-based comprehensive payers Health Care Action Group in 1988, it currently is operated ments” (i.e., global payments). by Medica, a large HMO. The Patient Choice Care System Pro- gram works with groups of providers (including both hospitals State Examples and physicians) called care systems. Care systems submit bids n A 2008 Massachusetts law required creation of a Special based on the expected total (global) cost of care for a defined Commission on the Health Care Payment System.2 In July 2009, population of patients with the same health plan benefits. the commission recommended that all payers—both public Reimbursement rates are driven by performance on quality and private—move to a system of global payments for provid- measures and total care costs—also called “virtual capitation” ers no later than 2014. The Massachusetts Health Care Cost and or “capitation in drag.”8 Care systems’ incentive to hold down

2 National Conference of State Legislatures costs is competition for consumers who select among compet- used a global capitation fee that covered physical but not being care systems based on total price and market share. Con- havioral or long-term care services. Programs often excluded sumers pay the difference in the bid price if they select a care special populations such as people with disabilities. Based on system in a higher cost tier. evidence from the states that included some or all special populations and other types of care in their capitated contracts, n Blue Cross Blue Shield of Massachusetts offers providers Lewin concluded, “Real opportunities exist for states to benefit an Alternative Quality Contract. Under this voluntary contract, from expanding the Medicaid managed care model to eligibil- providers can accept a condition-adjusted, fixed annual pay- ity categories and services heretofore largely excluded from ment for each Blue Cross Blue Shield patient. The payment, managed care.” which covers all care delivered by the provider, also includes incentives for quality, effectiveness and patient satisfaction. n Mathematica Inc., a policy research firm, conducted a comprehensive review of the evidence and found that “Payment n Some programs use partial capitation or partial global pay- approaches involving risk-sharing with providers—including ments, for instance for primary care. One example is a pilot pro- global payment or capitation—are associated with lower gram of the Massachusetts Coalition for Primary Care Reform, service use and cost, compared with fee-for-service arrange- a nonprofit organization comprised of health policy experts, ments.”12 A 2008 article in The New England Journal of Medicine leading primary care practices, payers, patient advocacy groups reported, “Experiments with capitation in commercially insured and government. Under the program, each participating pri- populations demonstrate reductions in cost.”13 mary care medical home practice9 receives a global fee for all primary care services for each patient. Although the fee does n Experience with Patient Choice (described previously) in- not include hospitalization, lab tests or other services, partici- dicates the program “... has encouraged patients to select more pating practices are eligible for performance-based incentives cost-effective providers and has spurred providers to reduce based in part on reduced use of those services. Cost targets their costs while maintaining or improving quality to attract for the incentives include less use of high-cost imaging pro- more consumers.”14 Reimbursement rates under Patient Choice, cedures; pharmacy use; and ambulatory-sensitive emergency which are driven in part by the total cost of care (although not room visits, admissions and readmissions. Thus, although they the only factor accounting for these findings), appear to be a receive a global payment for primary care services only, prac- significant contributor. tices have an incentive to hold down total patient care costs. n Not all researchers agree that the evidence shows clear Evidence of Effectiveness cost savings from capitation. Some find the evidence inconclu- Research indicates global payments can result in lower costs sive and have noted some problems provider-sponsored orga- without affecting quality or access. Existing evidence comes nizations have problems sufficiently integrating care among from experience with traditional capitation, which is a form of physicians, hospitals and other health professionals to control global payment. costs.15 Others have found that, although capitation may lower cost growth, it is difficult to maintain the effectiveness.16 n Several studies have shown that fully integrated health care systems that provide the full range of health care services and Challenges directly employ most or all their physicians have significantly A number of challenges are involved in implementing global lower spending and use through capitated managed care.10 Ex- payments on a broader scale than traditional managed care amples of integrated health care systems are Cleveland Clinic capitation arrangements. The types of care covered by a global in Ohio and Kaiser Permanente, based in California and operat- payment must be clearly defined. The patient population must ing in Colorado, Georgia, Hawaii, Maryland, Ohio, Oregon, Vir- be stable because, as one payment reform expert notes, “If ginia, Washington and the District of Columbia. you don’t have them long enough, you can’t effectively manage and hold down the cost of care.”17 Risk adjustment is an n A 2004 report prepared by The Lewin Group reviewed 14 important factor in ensuring global payments are high enough studies of savings achieved from Medicaid managed care pro- to manage the level of risk assumed by providers. However, grams using capitated payments.11 It found clear evidence of risk-adjustment methodologies are imperfect and must be cost savings, mainly from less use of inpatient services. Sav- continually refined. Most providers are not organized to accept ings ranged from 2 percent to 19 percent compared to fee-for- global fees. Where a global payment is made to loosely—rath- service. Michigan’s capitated, managed care program savings er than formally—integrated networks of providers, a system were 9 percent in 2001, 14 percent in 2002, 16 percent in 2003 must be developed to handle receipts and payments (e.g., the and 19 percent in 2004. Kentucky’s Region 3 Partnership pro- local independent practice association or the hospital). States gram savings were 2.8 percent in FY 1999, 5.4 percent in FY may want to regulate which entities can accept global pay- 2000, 9.5 percent in FY 2001, 9.5 percent in FY 2002 and 4.1 ments and the types of clinical and/or insurance risks global percent in FY 2003. In FY 2002, inpatient costs decreased by payments can include. 27 percent under Ohio’s Medicaid managed care program, Pre- mier Care. Many state Medicaid programs in the Lewin report

National Conference of State Legislatures 3 Complementary Strategies 4. 2009 Me, Laws, Chap. 350 (Laws of Maine). 5. Advisory Council on Health Systems Development, “Proposed Report Global payments often are used with other methods of payment to Legislature to Advance Payment Reform in Maine,” draft (Augusta, Maine: and health care programs. Examples include performance- Governor’s Office of Health Policy and Finance, Nov. 19, 2009); http://www. based pay, medical homes and accountable care organizations. mainemed.com/spotlight/2009/Advance_Payment_Reform_in_Maine_Pro- posed_Report.pdf. Using global payments in conjunction with these payment and 6. The states are Arkansas, California, Colorado, Florida, Hawaii, Iowa, Kan- program strategies (see other briefs in this series), may offer a sas, Louisiana, Maryland, Massachusetts, Michigan, Missouri, Montana, New greater level of cost containment than could be achieved by Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Ver- implementing a single strategy. mont, Virginia, Washington and Wisconsin. 7. The Lewin Group Inc., State Regulatory Experience with Provider-Spon- For More Information sored Organizations (Falls Church, Va.: TLG, June 27, 1997); http://aspe.hhs.gov/ health/pso-6.htm. Heit, Mark, and Kip Piper. Global Payments to Improve Qual- 8. Ann Robinow, “Patient Choice Health Care Payment Model,” PowerPoint ity and Efficiency in Medicaid: Concepts and Consideration. presentation, Network for Regional Healthcare Improvement Payment Reform Boston: Massachusetts Medicaid Policy Institute, Novem- Summit, July 31, 2008, slide 3; http://www.nrhi.org/downloads/RobinowPre- sentation2008NRHISummit.pdf. ber 2009; http://www.massmedicaid.org/~/media/MMPI/ 9. Medical homes are discussed in another brief in this series. Files/20091116_GlobalPayments.pdf. 10. F.J. Hellinger, “The Impact of Financial Incentives on Physician Behav- Massachusetts Special Commission on the Health Care Pay- ior in Managed Care Plans: A Review of the Evidence,” Medical Care Research and Review 53, no. 3 (1996). ment System. Recommendations of the Special Commission 11. The Lewin Group Inc., Medicaid Managed Care Cost Savings – A Synthe- on the Health Care Payment System. Boston: SPHCPS, July sis of Fourteen Studies (Falls Church, Va.: TLG, July 2004); http://www.ahipres- 16, 2009; http://www.mass.gov/Eeohhs2/docs/dhcfp/pc/ earch.org/pdfs/MedicaidCostSavings.pdf. 12. Mathematica Inc., Summary: Global Payments (Princeton, N.J.: Final_Report/Final_Report.pdf. Mathematica, May 2, 2009); http://www.mass.gov/Eeohhs2/docs/dhcfp/ Mathematica Inc. Summary: Global Payments. Princeton, N.J.: pc/2009_02_13_Global_Payment-C2.pdf. Mathematica, May 2, 2009; http://www.mass.gov/Eeohhs2/ 13. James J. Mongan, Timothy G. Ferris, and Thomas H. Lee, “Options for Slowing the Growth of Health Care Costs.” docs/dhcfp/pc/2009_02_13_Global_Payment-C2.pdf 14. Harold D. Miller, “From Volume to Value: Better Ways to Pay for Health NCSL has posted supplemental materials and 2010 updates on Care, Health Affairs 28, no. 5 (Sept. Oct. 2009); http://content.healthaffairs.org/ this topic online at http://www.ncsl.org/?tabid=19931. cgi/content/full/28/5/1418. 15. Massachusetts Special Commission on the Health Care Payment Sys- tem, “Overview of Global Payments: Presentation by Deborah Chollet” (Boston: SCHCPS minutes, March 13, 2009); http://www.mass.gov/Eeohhs2/docs/dh- Notes cfp/pc/2009_03_13_minutes.pdf. 1. James J. Mongan, Timothy G. Ferris, and Thomas H. Lee, “Options for 16. Michael Chernew, “Health Care Cost Containment Incentives and Slowing the Growth of Health Care Costs,” New England Journal of Medicine 358, Value-Based Insurance Design,” PowerPoint presentation, Cost Management no.14 (April 3, 2008); http://content.nejm.org/cgi/content/full/358/14/1509?ijk Meeting, The Heller School for Social Policy and Management, Jan. 18, 2008; ey=Vxj69c62UL9ec&keytype=ref&siteid=nejm. http://heller.brandeis.edu/costmanagement/meeting-material/011808/ 2. 2008 Mass. Acts, Chap. 305. Chernew_Presentation.pdf. 3. Mark Heit and Kip Piper, Global Payments to Improve Quality and Effi- 17. Personal email correspondence by Barbara Yondorf with Donna Mar- ciency in Medicaid: Concepts and Consideration (Boston: Massachusetts Med- shall, executive director, Colorado Business Group on Health, March 1, 2010. icaid Policy Institute, November 2009) 3; http://www.massmedicaid.org/~/ media/MMPI/Files/20091116_GlobalPayments.pdf.

NCSL gratefully acknowledges the financial support for this publication series from The Colorado Health Foundation and Rose Community Foundation of Denver, Colorado.

National Conference of State Legislatures William T. Pound, Executive Director 7700 East First Place 444 North Capitol Street, N.W., #515 Denver, Colorado 80230 Washington, D.C. 20001 (303) 364-7700 (202) 624-5400 www.ncsl.org © 2010 by the National Conference of State Legislatures. All rights reserved.

4 National Conference of State Legislatures Health Cost Containment and Efficiencies NCSL Briefs for State Legislators

No. 14 February 2011

Public Health and Cost Savings

Chronic disease is the larg- Cost Containment Strategy and Logic Evidence indicates public Public health programs —also known as population health— est and fastest growing health programs improve protect and improve the health of communities by preventing share of both public and health, extend longevity disease and injury, reducing health hazards, preparing for private health expenditures, and can reduce health disasters, and promoting healthy lifestyles—the focus of this accounting for more than 75 care expenditures. brief. Healthy lifestyles include good nutrition, regular physi- percent of U.S. health care cal activity, not smoking and other behaviors to improve or costs. Obesity—increasingly restore health that can be promoted through healthy commu- a focus of public health programs—is associated with such nity environments. costly conditions as diabetes, heart disease, arthritis and complications during pregnancy. Adult obesity costs the country Public health is concerned with prevention rather than treat- between $147 billion and $168 billion in increased medical ex- ment and with populations rather than individual health. penditures, half of which is financed by Medicare and Medicaid. Examples of public health initiatives include school nutrition standards, community education and screening programs, en- Although most chronic diseases can be prevented or delayed, hanced neighborhood recreational opportunities, breastfeed- prevention accounts for only 5 percent to 9 percent of health ing promotion, smoking cessation and prevention programs, care spending. The balance goes to treat disease and injuries and regulation of dangerous and potentially harmful activities after they occur. Surgeon General Regina Benjamin has called such as riding a bicycle without a helmet or drunk driving. for a move from a system of sick care to one based on wellness and prevention. To achieve this, the National Prevention and By preventing people from developing chronic diseases, pop- Health Promotion Council recommended in September 2010 ulation-based health programs can reduce Medicaid and state creating “community environments that make the healthy employee health care costs. They also can contain costs by choice the easy and affordable choice.” preventing people from developing disabilities or conditions that would make them Medicaid-eligible. Federal Health Reform The Patient Protection and Affordable Care Act of 2010 in- Trust for America’s Health, estimates that an additional includes several public health provisions. Among other things, vestment of $10 per person per year in proven programs to the act establishes a Prevention and Public Health Fund for increase physical activity, improve nutrition and prevent to- expanded national investment in public initiatives, health bacco use could save the country more than $16 billion annu- screenings and prevention research (section 4002). Public ally within five years. This includes an estimated $1.9 billion in health initiatives include competitive Community Transforma- Medicaid savings annually within five years.1 tion Grants, a preventive benefits education and outreach campaign, and immunization programs. States can apply for Target of Cost Containment Community Transformation Grants to reduce chronic disease The primary target of public health promotion programs are rates, prevent development of secondary conditions, address chronic and infectious diseases. Chronic diseases are among health disparities, and develop a stronger prevention program- the most prevalent, costly and preventable of all health prob- ming evidence base. The act appropriates $500 million to the lems. Changing behaviors associated with a higher incidence Prevention and Public Health Fund for FY 2010. Appropriations of chronic disease and disability–known as modifiable health increase by $250 million per year to $2 billion for FY 2015 and risk factors—can lead to improved health and longevity. Stud- each year thereafter.3 ies show that people with few health risks have one-fourth the disability of those with more risk factors, and the onset of The act authorizes a demonstration program to award grants disability is postponed from seven to 12 years.2 to states to improve immunization rates in high-risk populations (section 4204) and a five-year national oral health preven- Physical inactivity, poor diet and risky behaviors—along with tion and public education campaign (section 4102). It provides social and environmental factors such as low income, limited $50 million for five-year pilot program awards to state or local education, poor housing, lack of neighborhood safety and health departments and Indian tribes for public health com- toxic exposures—account for 60 percent to 70 percent of pre- munity interventions, screenings and, where necessary, clinical mature deaths. National Conference of State Legislatures referrals for people between the ages of 55 and 64 (section ka, New Mexico, New York, Utah and Washington required or 4202). gave incentives for use of ignition interlocks (e.g., allowed for installation in lieu of license revocation) by all convicted drunk State Examples4 drivers, even first-time offenders.6 n School programs to promote lifelong healthy habits. Arkansas passed landmark legislation in 2003 (2003 Ark. n Breastfeeding promotion. Studies show breast milk Acts, Act 1220) and 2007 (2007 Ark. Acts, Act 201) to combat protects infants from bacteria and viruses, and mothers who childhood and adolescent obesity. Students in kindergarten breastfeed reduce their risk of pre-menopausal breast cancer through grade 10 are required to have a body mass index and osteoporosis. Laws in 44 states, the District of Columbia screening every other year; results are reported to parents and the Virgin Islands specifically allow women to breastfeed confidentially. The legislation eliminated access to vending in any public or private location.7 Laws in 24 states, the District machines in public elementary schools and established a of Columbia and Puerto Rico are related to breastfeeding in statewide Child Health Advisory Committee to recommend the workplace.13 The Patient Protection and Affordable Care public school physical activity and nutrition standards. Texas Act requires, with some exceptions, employers to provide (SB 530, 2007) requires kindergarten through grade five public break time and a private place for a nursing mother to express school students to participate in moderate or vigorous physi- breast milk (section 4207). cal activity for at least 30 minutes daily throughout the school year. The Mississippi Healthy Students Act (SB 2369, 2007) Evidence requires local school wellness plans to promote increased Evidence indicates public health programs improve health physical activity, healthy eating habits, and abstinence from and extend longevity and can reduce health care spending. tobacco or illegal drug use. Oregon (HB 2650, 2007] prohibits Extensive research documents the health benefits of more trans fats and specifies minimum standards for food and bev- Americans exercising, losing weight, not using tobacco, driv- erages sold in public schools. ing safely and engaging in other healthy habits. Less clear is the effect on total health care costs. n Taxes and tax credits to discourage, promote or support certain behaviors. Examples of public health-related There are three measures of public health program success. tax policies that states have considered or enacted include tax Cost-savings measures net program savings (i.e., amount credits for fitness or wellness choices; enacting or increasing saved minus program expenses). An effective health promo- taxes on foods and beverages that have minimal nutritional tion program may not be cost-effective; a cost-effective pro- value; and directing tax revenues raised to fund health-related gram may not be cost-saving. Cost-effectiveness assesses services, such as tobacco cessation education programs. whether the additional benefit of a program (e.g., improved health or longevity) is worth the additional cost (i.e., good n Laws to encourage community designs that promote value for the dollar). Effectiveness measures the degree to physical activity. A 2009 Wisconsin law (2009 Wis. Laws, which a program has its intended effect (e.g., increases physi- Act 28) requires the Department of Transportation to ensure cal activity). all new highway construction and reconstruction projects include bikeways and pedestrian ways. It appropriated $5 Cost-Saving Initiatives million for the 2009-11 biennium for bicycle and pedestrian n Examples of public health initiatives that reduce total facilities. health care expenditures include:9 • childhood immunizations; n Strategies to discourage tobacco use. Examples include • screening and follow-up counseling for problem drinking; increasing tobacco taxes, restricting the sale and distribution • vision screening for seniors; of cigarettes, prohibiting smoking in certain places, funding • fluoridated community water systems; enhanced enforcement of tobacco control laws, requiring • tobacco use screening, advice and assistance, smoking health plans to cover tobacco cessation counseling, school cessation programs for women, and comprehensive to- health education, quit lines and media campaigns. As of Janu- bacco prevention programs; ary 2010, for example, 26 states and the District of Columbia • family planning; required most public places and workplaces to be smoke- • tuberculosis screening in high-risk populations; free.5 lead abatement in public housing; and • 10 • the Women, Infants and Children (WIC) program. n Initiatives to discourage alcohol abuse. Heavy drinking and binge drinking are associated with many chronic illnesses, n According to the Congressional Budget Office (CBO), such as cancers of the liver, mouth, throat, larynx and esopha- population-based strategies to reduce tobacco use reduce gus; liver cirrhosis; pancreatitis; and psychological disorders. Medicaid spending. Lower rates of tobacco use in the general One strategy states use to discourage excessive drinking and population result in fewer low birth-weight babies who have driving are ignition interlocks. As of November 2010, Alaska, higher health care costs at birth and afterward. Arizona, Arkansas, Colorado, Hawaii, Illinois, Louisiana, Nebras-

2 National Conference of State Legislatures n Several studies document net savings for certain types • school-based educational programs to reduce alcohol- of public health programs but do not report their effect on impaired driving; total health care costs. A 2007 California report on cost-saving • laws that create liability for establishments selling alcohol prevention programs, for example, noted that the Califor- to visibly intoxicated people who cause injury to others; nia Tobacco Control Program saved more than $3 billion in • mandated bicycle helmet use and primary seat belt en- smoking-caused health care costs between 1990 and 1998.11 forcement laws to prevent injury; California’s motorcycle helmet law saved $48 million in direct • smoke detector give-away programs; and medical costs during the first five years after implementation. • community-level individual and group HIV prevention behavioral interventions to reduce risky sexual behavior. n Studies show that multi-pronged strategies (e.g., comprehensive, multi-component tobacco cessation initiatives) hold n Other interventions may be effective, but evidence is not the greatest potential for cost savings. Health promotion ef- conclusive. Examples include modifying vending machine forts are more likely to be cost-saving when directed to high- options to increase and promote healthy beverage choices; risk populations rather than the general population, unless a increasing the availability of fruits, vegetables and other nutri- relatively large number of cases can be prevented. tious food options; restricting alcohol sales at public events; mass media campaigns to encourage breast, cervical and n Research indicates that over the life span, most health colorectal cancer screenings; and school-based programs to promotion and prevention programs, other than the ones control overweight and obesity. listed in this section, increase overall spending, even while improving health and longevity. Increased spending results n An assessment of the Arkansas act to combat childhood primarily from increased costs associated with diseases other obesity described earlier found that, six years after the law’s than those targeted by the efforts. According to the director implementation, school environments were healthier and of the CBO, “Even if a preventive service lowers a beneficiary’s family awareness of the serious health problems associated risk of illness, a longer lifespan allows for more time to incur with childhood obesity had increased.15 Adolescents reported other health care expenses associated with age.”12 In the case increased physical activity, fewer vending machine purchases of screening tests, additional spending may arise and reduced soda consumption. Preliminary evi- from treatment of newly diagnosed dence suggests adolescents may be eat- conditions as well as treatment ing less fast food. Since Arkansas stemming from tests yielding Population-based strategies passed its landmark legislation, false positive results, which to reduce tobacco use reduce steadily rising childhood obe- indicate a disease is present Medicaid spending, according to the sity rates, which are among the when it is not. Congressional Budget Office. highest in the country, leveled off. Some other states have seen a Cost-Effective Initiatives similar leveling of obesity rates since 2003- n Examples of public health prevention strategies that 2004.16 Still, 32 percent of U.S. children remain overweight improve health at a relatively low cost include:13 or obese. • immunization requirements for school entry; • mandatory motor vehicle occupant restraints; Beyond Costs: Improved Health, Longevity, • primary school education on reducing sun exposure to Productivity prevent skin cancer; Health promotion and prevention programs can improve • home visitation to prevent child abuse or neglect and health and extend longevity. According to a report by Trust avoid injuries; for America’s Health, the return on investment for community- • multi-component community-wide campaigns to encour- based programs not only defers high health care costs to the age people to be more physically active, including media end of life, but also ensures more people will be healthier for messages, counseling, education classes, community longer periods of their life. Although some initiatives may events and more opportunities for physical activity, such increase costs, most people consider improved health over as walking trails; a longer lifespan worth it. A 2009 poll found 72 percent of • influenza and pneumococcal vaccines for adults; and Americans agree that, “Investing in prevention is worth it even • screenings for high blood pressure, high cholesterol and if it doesn’t save us money because it will prevent disease and problem drinking. save lives.”17

Effective Initiatives Successful public health programs yield not only health and n Evidence exists for the effectiveness, but not necessarily longevity benefits but also non-medical benefits, such as pro- cost-effectiveness, of other public health initiatives to encour- ductivity gains from improved worker health and lower auto age healthy behaviors. Examples include:14 insurance premiums due to fewer drunk driving related acci- • enhanced school-based physical education to increase dents. Unfortunately, assessments of the economic benefits of physical activity; successful health prevention and promotion efforts rarely take into account non-medical savings.

National Conference of State Legislatures 3 Challenges 5. The states or jurisdictions are Arizona, California, Colorado, Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Michigan, Minnesota, A number of challenges exist to successful implementation Nebraska, New Jersey, New Mexico, New York, Ohio, Oregon, Rhode Island, of cost-saving public health programs. While some programs South Dakota, Utah, Vermont, Washington, Wisconsin and the District of yield savings in the near-term, others may take as long as 10 Columbia. (Source: American Lung Association, State of Tobacco Control website, http://www.stateoftobaccocontrol.org/2009/overview-key-findings/ to 25 years. Personal behaviors are difficult to change and, smokefree-air.html.) once modified, may not demonstrate health and economic 6. Drunk Driving Laws, Governors Highway Safety Association webpage, benefits for a long time. Savings from public health invest- http://www.ghsa.org/html/stateinfo/laws/impaired_laws.html. 7. States that specifically allow women to breastfeed in any public or ments often accrue mainly to other payers (e.g., insurance private location are Alabama, Alaska, Arizona, Arkansas, California, Colorado, companies, individuals, workers) rather than the state. Be- Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, cause the benefits of medical care sometimes are more im- Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New mediate than public health programs, winning public and York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, policymaker support for increased public health spending can Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Washington, be difficult. Although public health strategies that prohibit Wisconsin and Wyoming. 8. States with breastfeeding in the workplace laws are Arkansas, Califor- or increase the cost of engaging in unhealthy behaviors may nia, Colorado, Connecticut, Georgia, Hawaii, Illinois, Indiana, Maine, Minne- be some of the most cost-effective (e.g., passenger seat belt sota, Mississippi, Montana, New Mexico, New York, North Dakota, Oklahoma, mandates, higher tobacco sales taxes), they may meet opposi- Oregon, Rhode Island, Tennessee, Texas, Vermont, Virginia, Washington and Wyoming. tion from affected interest groups or those who see them as 9. Association of State and Territorial Health Officers, Public Health Yields government interference or limiting to personal freedom. Excellent Returns on Investment (Arlington, Va.: ASTHO, April 2009); http:// www.astho.org/Display/AssetDisplay.aspx?id=2819, and Stephen H. Woolf, “A Closer Look at the Economic Argument for Disease Prevention,” PowerPoint For More Information presentation, Congressional briefing (Feb. 24, 2009); http://prevent.org/data/ Booske, Bridget, et al. What Works? Policies and Programs for a Healthier Wis- files/initiatives/woolf2-4-09slides.pdf. consin. Madison, Wis.: University of Wisconsin Population Health Insti- 10. WIC provides supplemental foods, health care referrals and nutrition tute, July 2009; http://uwphi.pophealth.wisc.edu/pha/healthiestState/ education to low-income pregnant, postpartum women, and to infants and whatWorks.pdf. children up to age 5 who are at nutritional risk. Task Force on Community Prevention Services. “The Community Guide: What 11. Prevention Institute, The California Endowment, and The Urban Works to Promote Health,” website updated regularly, http://www.th- Institute, Reducing Health Care Costs through Prevention (Oakland, Calif.: Pre- ecommunityguide.org/about/task-force-members.html. vention Institute, August 2007); http://www.preventioninstitute.org/index. Winterfeld, Amy, Douglas Shinkle and Larry Morandi. Promoting Healthy Com- php?option=com_jlibrary&view=article&id=79&Itemid=127. munities and Preventing Childhood Obesity: Trends in Recent Legislation. 12. Letter from Douglas W. Elmendorf, director, Congressional Budget Denver: National Conference of State Legislatures, February 2010; http:// Office, to the Honorable Nathan Deal, Subcommittee on Health Committee www.rwjf.org/files/research/20100419promotinghealthycommunities. on Energy and Commerce (sic), U.S. House of Representatives, Aug. 7, 2009; pdf. http://www.cbo.gov/ftpdocs/104xx/doc10492/08-07-Prevention.pdf. The latest information on this topic is available in an online supplement at 13. Steven H. Woolf, The Economic Argument for Disease Prevention: www.ncsl.org/?tabid=19939. Distinguishing Between Value and Savings (Washington, D.C.: Partnership for Prevention, February 2009); http://www.prevent.org/data/files/initiatives/eco- Notes nomicargumentfordiseaseprevention.pdf. 1. Trust for America’s Health, Prevention for a Healthier America: Invest- 14. Bridget Booske et al., What Works? Policies and Programs for a ments in Disease Prevention Yield Significant Savings, Stronger Communities Healthier Wisconsin (Madison, Wis.: University of Wisconsin Population Health (Washington, D.C.: TAH, February 2009); http://healthyamericans.org/reports/ Institute, July 2009); http://uwphi.pophealth.wisc.edu/pha/healthiestState/ prevention08/Prevention08.pdf. whatWorks.pdf. 2. James Fries, “Measuring and Monitoring Success in Compressing Mor- 15. Arkansas Center for Health Improvement, Assessment of Childhood bidity,” Annals of Internal Medicine 139 no. 5, part 2 (Sept. 2, 2003); http://www. and Adolescent Obesity in Arkansas, Year Six (Fall 2008 - Spring 2009) (Little Rock, scribd.com/doc/41479853/Compresion-Morbilidad-Fries-Annals-2003. Ark.: ACHI, December 2009); http://www.achi.net/publications/091210%20 3. The secretary of Health and Human Services redirected $253 million of BMI%20State%20Report.pdf. the FY 2010 appropriation to primary care workforce expansion and improve- 16. Tara Parker-Pope, “Hint of Hope as Child Obesity Rate Hits Plateau, ment. The New York Times, May 28, 2008: http://www.nytimes.com/2008/05/28/ 4. Examples in this section are from Amy Winterfeld, Douglas Shinkle, health/research/28obesity.html. and Larry Morandi, Promoting Healthy Communities and Preventing Childhood 17. Greenberg Quinlan Rosner Research, Americans Overwhelmingly Sup- Obesity: Trends in Recent Legislation (Denver: National Conference of State port Investment in Prevention (Washington, D.C.: GQR, May 18, 2009); http:// Legislatures, March 2009 and February 2010). healthyamericans.org/assets/files/health-reform-poll-memo.pdf.

About this Project NCSL’s Health Cost Containment and Efficiency Series describes multiple alternative state policy approaches, with an emphasis on documented and fiscally calculated results. The project is housed at the NCSL Health Program in Den- National Conference of State Legislatures ver, Colorado. It is led by Richard Cauchi, program director, William T. Pound, Executive Director and Martha King, group director, with Barbara Yondorf as 7700 East First Place 444 North Capitol Street, N.W., #515 lead researcher. Denver, Colorado 80230 Washington, D.C. 20001 (303) 364-7700 (202) 624-5400 NCSL gratefully acknowledges the financial support for this www.ncsl.org publication series from The Colorado Health Foundation © 2011 by the National Conference of State Legislatures. All rights reserved. and Rose Community Foundation of Denver, Colorado.

4 National Conference of State Legislatures Health Cost Containment and Efficiencies NCSL Briefs for State Legislators

No. 13 October 2010

Employer-Sponsored Health Promotion Programs

Restrictions exist on the Cost Containment Strategy and Logic Evidence indicates that types of health promotion Employer-sponsored health promotion programs—also well-designed worksite incentives employers can known as worksite or workplace wellness programs—help wellness programs can re- offer. Employer-sponsored employees become healthier by encouraging regular physi- duce health expenditures programs must comply with cal activity, stress management, healthy eating and not and reduce absenteeism, the Americans with Disabili- smoking. Providing ways to change behaviors associated at least for large employ- ties Act and the Patient Pro- with a higher incidence of chronic disease and disability— ers, including state gov- tection and Affordable Care known as modifiable health risk factors—can lead to health- ernment. ier employees, lower health care and health insurance costs, Act, signed March 23, 2010 reduce absenteeism and increase productivity (Section 2705(j)). They cannot place conditions upon premium discounts, rebates, waiv- Components of worksite programs include risk identifica- ers of copayments, reduced deductibles or other rewards re- tion tools, behavior modification programs, educational lated to the presence or absence of a medical condition (e.g., programs and work environment changes (Table 1). Some diabetes or heart disease). An employer can, however, reward worksite wellness programs—such as free health club employees who satisfy a standard (e.g., not smoking) related memberships, onsite health education programs and nutri- to the incidence and severity of a medical condition (e.g., lung tion counseling—provide opportunities for employees to cancer). Where it is unreasonably difficult for an employee to improve their health. Others also reward employees who meet a standard, federal law requires employers to provide a actively engage in such activities or meet specific risk reduc- reasonable alternative standard for obtaining the reward. tion goals (e.g., lose a certain amount of weight). Examples of rewards include cash, lower prescription drug copay- State interest in worksite wellness programs has grown in re- ments, additional vacation days and health insurance pre- cent years. According to a 2009 report, “The enthusiasm for mium discounts. Some programs target those with several workplace programs stems in part from the fact that more than high risk factors, while others are open to all employees. 60 percent of Americans get their health insurance coverage through an employment based plan, as well Table 1. Types of Wellness Activities as from the recognition that many employees spend the majority of their waking hours in the Risk identification tools Educational programs workplace—which makes it a natural venue n Health risk assessments* n Health fairs and seminars for investments in health.”1 Among employers n Biometric screenings for such n Online health resources offering health benefits, 74 percent of those factors as blood-pressure and with between three and 199 workers and 92 cholesterol levels Changes to the work environment percent of those with 200 or more workers n Altering buildings and grounds to offer at least one worksite wellness program Behavior modification programs encourage walking (e.g., Web-based resources for healthy living, n Personal health coaching n Healthier foods in workplace gym memberships, smoking cessation pro- n Tobacco cessation cafeterias and vending machines grams, personal health coaching, etc.).2 n Weight management n Nutrition and diet Target of Cost Containment n Exercise The main targets of worksite wellness pro- n Workplace competitions/contests grams are chronic diseases, such as diabetes, ______chronic obstructive pulmonary disease and *A health risk assessment is an electronic or paper tool used to collect employee self-reported data (e.g., frequency of alcohol consumption, number of cigarettes smoked each day, heart disease. Nationally, at least 50 percent etc.) to assess an individual’s risk of developing a disease. of health care expenditures are lifestyle- related and therefore potentially avoidable. Source: Ha T. Tu and Ralph C. Mayrell, Employer Wellness Initiatives Grow, but Effectiveness Varies Widely (Washington, D.C.: National Institute for Health Care Reform, 2010); http:// According to the American Heart Association, www.nihcr.org/Employer-Wellness-Initiatives.html. “An estimated 25–30 percent of companies’

National Conference of State Legislatures 0 20001000 40003000 60005000 80007000 annual medical costs Figure 1. The Cost of Risk Factors* Per Employee Lifestyle Program (AHELP). In 2007, a Texas law (HB 1297) cre- 8000$8,000 are spent on employ- Annual Medical Cost (2004 dollars) $7,405 ated a state employee wellness program that allows employ- 7000$7,000 ees with excess [modi- $6,275 ees 30 minutes a day for exercise and encourages and provides fiable] health risk de- 6000$6,000 time to complete a health risk assessment. A 2009 Maine law $5,286 fined in large part by $5,000 (2009 Me. Laws, Chap. 78 (Laws of Maine)) requires the state to 5000 $4,415 their risk for cardiovas- 4000$4,000 provide employees access to fitness programs and calls for an 3 cular disease.” Obesity $3,094 assessment of the financial impact on group health plans $3,000 and smoking—two 3000 leading causes of pre- 2000$2,000 n Tax credits. Nine states and the District of Columbia have ventable death—are 1000$1,000 considered employer-sponsored health promotion program $0 the major focus of 0 0 Risk 1 Risk 2 Risks 3 Risks 4+ Risks tax credits, but only Indiana enacted legislation (2007 Ind. Acts, most worksite wellness *Risk factors include smoking, poor diet, high blood pressure and P.L. 2218). Indiana’s Small Employer Wellness Tax Credit Pro- obesity. programs. Depression Source: Adapted from Shirley Musich et al., American Journal of gram allows employers with two to 100 employees to receive a and alcohol consump- Health Promotion 18, no. 3 (2004): 264-268. tax credit for 50 percent of the cost incurred in a given year for tion also are common targets. People with more risk factors are providing state-certified employee wellness programs.5 likely to require more expensive care (Figure 1). n Studies. Several states have enacted laws or resolutions to Federal Health Reform study or make recommendations regarding worksite wellness The Patient Protection and Affordable Care Act of 2010 includes programs. New Mexico, for example, adopted a 2009 resolution several worksite wellness program provisions. It specifies al- calling for a study of the potential effects of business-based lowable wellness incentives and limits the size of health insur- wellness programs (New Mexico HJM 24, 2009, resolution). ance-related rewards for meeting a risk reduction standard to 30 percent of the cost of employee-only coverage (2705(j)). State Worksite Wellness Program Examples6 The act establishes a five-year grant program to encourage n The Arkansas employee health benefit program introduced and help small employers sponsor comprehensive wellness health risk assessments in 2004. Employees who complete an programs (section 10408). It directs the U.S. secretary of Health assessment receive a $10 discount on their monthly insurance and Human Services to report, by 2013, on the effectiveness premium; those found to be at low risk receive an additional of wellness programs in promoting health and preventing dis- $10 discount. The 2005 law (2005 Ark. Acts, Act 724), provides ease; the effects of wellness programs on access to care and that state employees who meet targets for eating fruits and affordability of coverage for participants and nonparticipants; vegetables, engage in regular physical activity, obtain age-ap- the effect of premium-based and cost sharing incentives on propriate health screenings, and avoid or quit use of all tobac- participant behavior; and the effectiveness of various rewards co products can earn up to three days’s annual leave. Between (section 2705(m)). inception of the Arkansas Healthy Employee Lifestyle Program (AHELP) in April 2005 and June 2008, 39 participants earned State Worksite Wellness Legislation one day of leave, 40 earned two, and 108 earned three. Between 2006 and June 2010, 28 states passed worksite wellness laws concerning health insurance incentives, state em- n Alabama law (2008, Ala. Acts, Act #2008-80) allows the State ployee programs, tax credits and studies.4 Employees’ Insurance Board to make adjustments or surcharg- es to an employee’s health insurance premium based on well- n Health insurance incentives. Several states (e.g., Alaska, ness and preventive care participation. The board established Colorado, Indiana, Georgia, Maryland, Michigan, Texas, Utah a Wellness Premium Discount Program that gave employees a and Washington) authorize in statute certain types of worksite $25 per month discount on their 2010 health insurance pre- wellness program rewards that otherwise would violate insur- miums for submitting, by Nov. 30, 2009, baseline readings for ance discrimination, rebate or rating laws. The laws include pro- blood pressure, cholesterol, glucose and body mass index. Ef- visions similar to those contained in the Patient Protection and fective Jan. 1, 2011, employees can receive the discount if the Affordable Care Act. Some state laws are narrowly construed board considers them not to be at risk based on screening re- (e.g., Indiana’s Public Law 136, HB 1420 applies to tobacco ces- sults and they participate and complete an approved wellness sation programs only). Most apply broadly to any employer program, report improvement in their risk factors, or have a health plan wellness reward, so long as the wellness program medical condition that prevents them from improving these has a reasonable chance to improve participants’ health or pre- factors.7 vent disease, is not overly burdensome, and is not a subterfuge for discriminating based on an existing medical condition. n Delaware’s DelaWELL program assesses employee health risks and provides confidential, personalized feedback and n State employee programs. States more often include coaching on lifestyle topics such as back care, blood pressure worksite wellness benefits in their employee health plans and management, exercise, nutrition and stress management. The offer on-site health promotion programs. Arkansas (2005 Ark. program is available to state, school district, charter school Acts, Act 724), for example, authorized leave incentives for state and higher education employees and pre-65 retirees currently employees who participate in the Arkansas Healthy Employee enrolled in group health insurance programs. Starting Oct. 1,

2 National Conference of State Legislatures 2010, eligible members earn Wellness Credits for participating or conditions in populations of workers.” 9 It also found that in program activities; credits can translate into DelaWELL Re- smoke-free policies and employer-sponsored incentives and wards of $100 to $200. competitions to stop smoking reduced worker tobacco use. The study did not examine the programs’ costs or savings. n South Dakota’s online wellness program helps employees set health risk reduction goals. Program enrollees can receive n Research on worksite wellness programs suggests that $100 per year in a Health Rewards and Wellness Account and untargeted health promotion campaigns have little long-term up to five gift incentive items per year for reaching at least one effects.10 Programs are more likely to produce a positive return individual wellness goal. on investment if they target those at high-risk and tailor the program to individual employees. Non-State Worksite Wellness Program Examples n The University of Miami spent $40 million to build and n Vermont began a state employee worksite wellness pro- maintain two on-campus wellness centers. It offers employees gram more than a decade ago. According to a 2008 Govern- a 20 percent rebate for wellness center membership and a $150 ing article, “Vermont’s health care spending for state employ- health insurance premium credit if they participate in an online ees still has increased, but generally at a lower rate than other health risk assessment. states.”11 Regarding program savings, the article quotes David Herlihy, commissioner of the Vermont Department of Human n In 2010, Whole Foods announced that employees could Resources: “It’s hard to say exactly where the savings have come receive an enhanced discount on purchases at Whole Foods from. There are very complex questions of trying to quantify stores based on their body mass index, cholesterol level, blood what the return on investment is.” The article also notes that pressure and nicotine use. While all employees receive a 20 Vermont’s returns have been inconsistent from year to year. percent store discount, those who have low test results for all four health risk factors will receive a 30 percent discount. n With respect to worksite wellness program tax credits, a 2010 brief on wellness initiatives reported, “The evidence to n Kellogg Company, Humana Companies, Johnson & John- date suggests gains from wellness programs are too uncertain son, Safeway and Dell Corporation link discounts on employee to justify broad taxpayer supported subsidies.”12 Data on the insurance payments to a range of health indicators to create Indiana Small Employer Wellness Tax Credit Program indicate incentives for healthy behaviors. that relatively few employers have claimed the credit. Accord- ing to the Indiana Department of Revenue, in 2007 (the first Evidence of Effectiveness year of the program), 50 employers claimed $107,960 in small Studies of worksite wellness programs demonstrate that well- employer wellness tax credits; in 2008, 184 employers claimed designed programs can reduce employer and employee health $219,782; and in 2009, 186 employers claimed $225,085. expenditures and absenteeism, at least for large employers, including state government. Research for this brief did not un- n Some question the long-term beneficial effects of work- cover any studies of the effectiveness of state laws to encour- site wellness programs. According to Kevin Volpp, director of age more employers to offer, or more employees to participate the University of Pennsylvania’s Center for Health Incentives, in, worksite wellness programs. changing behavior in the long-term, particularly with weight loss, is difficult, tricky to measure, and often does not pay off n A systematic review of worksite wellness program studies for employers.13 A July 2010 study cautioned, “The long-term published in 2010 concluded the programs produce net sav- results of behavior modification programs are mixed, with par- ings for large employers.8 The average size of wellness program ticipants losing weight only to gain it back or quitting smoking groups in the studies was more than 3,000 workers. Large em- only to start again.”14 ployer wellness programs saved an average of $358 in reduced health care costs per employee per year at a cost to the em- Challenges ployer of $144 per employee per year. The report also found n Determining the return on investment for wellness pro- savings from reduced absenteeism. The average savings was grams can be difficult. Several years of data analysis are neces- $294 (1.8 days) per employee per year, assuming an average sary to assess the effects of wellness programs on cost savings hourly wage of $20.49; the average program cost was $132 and sustainable changes in modifiable health risk factors. per employee per year. The literature review could not determine which interventions (e.g., on-site fitness programs, cash n Building a successful program requires staff, time and awards, reduced copayments, free smoking cessation classes, money. A Texas worksite wellness publication notes, “Some health risk assessments, etc.) were most effective. larger organizations may spend 20 hours per week for three to six months preparing for all the steps prior to launching a n The independent, nonfederal Task Force on Community worksite wellness program.”15 Preventive Services examined evidence of the effectiveness of n Although some comprehensive worksite wellness pro- several worksite health promotion interventions. It found that, grams have yielded as much as a $3 to $6 return on each $1 “Health risk assessments combined with feedback to change invested, it usually takes three to five years to realize these sav- employees’ health improved one or more health behaviors ings.

National Conference of State Legislatures 3 n Researchers report no evidence exists to determine the National Conference of State Legislatures. State Wellness Legis- size of incentive required to change various health habits. For lation Web page www.ncsl.org/default.aspx?tabid=13826. example, it is not known whether smoking cessation requires The latest information on this topic is available in an NCSL on- a higher financial incentive than weight loss or blood pressure line supplement at www.ncsl.org/?tabid=19938. control. Notes n Small employers may not have the resources to mount a 1. Katherine Baicker, David Cutler and Zirui Song, “Workplace Wellness Pro- grams Can Generate Savings,” Health Affairs 29, no. 2 (February 2010); www. cost-effective wellness program. Several experts have noted it wellsteps.com/blog/ROIcopy.pdf. is more difficult for small employers to shoulder the added cost 2. The Kaiser Family Foundation and Health Research and Educational Trust, of worksite programs, particularly staffing expenses. Employer Health Benefits 2010 Annual Survey (Washington, D.C.: KFF and HRET, September 2010); ehbs.kff.org/pdf/2010/8085.pdf. 3. American Heart Association, Worksite Wellness Programs Lower Healthcare n Several major national consumer advocacy organizations Costs, Make Employees Healthier, news release, Sept. 30, 2009; www.newsroom. oppose programs that provide discounts on health insurance heart.org/index.php?s=43&item=832. 4. For a complete list of state worksite wellness bills and laws, see National premiums, deductibles or copayments to reward employees Conference of State Legislatures, State Wellness Legislation Web page, www. who meet risk reduction targets. A joint policy statement from ncsl.org/default.aspx?tabid=13826. the American Cancer Society Cancer Action Network, Ameri- 5. For more information, see the Indiana State Health Department Certified Wellness Program Web page, www.in.gov/isdh/19944.htm. can Diabetes Association and American Heart Association 6. For more examples of state employee worksite wellness programs, see noted, “The evidence that insurance-based incentives change National Conference of State Legislatures, “Wellness Programs for State em- behavior is lacking, and the risk that these plans could be used ployees Becoming More Widespread,” State Employee Health Plan Benefits, www.ncsl.org/?tabid=14345. to discriminate against persons who are less healthy than their 7. State of Alabama Wellness Premium Discount Program Web page, www. counterparts is not insignificant.”16 alseib.org/PDF/SEHIP/SEHIPWellnessPremiumDiscount.pdf. 8. Katherine Baicker, David Cutler and Zirui Song, “Workplace Wellness Pro- grams Can Generate Savings.” Complementary Strategies 9. Task Force on Community Preventive Services, “Recommendations for Worksite wellness programs can be used with other cost con- Worksite-Based Interventions to Improve Workers’ Health,” American Journal of tainment strategies. Examples include public health and pre- Preventive Medicine 38, no. 2S (2010); www.thecommunityguide.org/worksite/ Worksite2010Recommendations_TaskForce.pdf. ventive care programs, and health insurance benefit plan rede- 10. Texas Department of State Health Services, Choosing the Right Type of sign. Using employer-sponsored health promotion programs Worksite Wellness Program Web page, www.dshs.state.tx.us/wellness/PDF/ht- in conjunction with these strategies (which are the subject page4.pdf. 11. Josh Goodman, “The Price of Prevention,” Governing (April 2008); www. of other briefs in this series) may offer a greater level of cost governing.com/topics/health-human-services/The-Price-of-Prevention.html. containment than could be achieved by implementing a single 12. Ha T. Tu and Ralph C. Mayrell, Employer Wellness Initiatives Grow, but strategy. Effectiveness Varies Widely (Washington, D.C.: National Institute for Health Care Reform, 2010); www.nihcr.org/Employer-Wellness-Initiatives.html. 13. Cindy Krischer Goodman, “Health Care Reform May Spur More Office For More Information Wellness Programs, Kansascity.com, July 6, 2010. Baicker, Katherine, David Cutler and Zirui Song. “Workplace 14. Ha T. Tu and Ralph C. Mayrell, Employer Wellness Initiatives Grow, but Ef- fectiveness Varies Widely. Wellness Programs Can Generate Savings.” Health Affairs 15. Texas Department of State Health Services, Choosing the Right Type of 29, no. 2 (February 2010); www.wellsteps.com/blog/ROI- Worksite Wellness Program Web page, www.dshs.state.tx.us/wellness/PDF/ht- copy.pdf. page4.pdf. 16. American Cancer Society, American Diabetes Association and American Council of State Governments. Promoting Workplace Health: Heart Association, Financial Incentives to Encourage Health Behaviors, a joint is- Legislator Policy Brief. Lexington, Ky.: CSG, January 2008; sue brief (Washington D.C: ACA, November 2009); http://pulse.ncpolicywatch. www.healthystates.csg.org/NR/rdonlyres/B6FC0AB2- org/wp-content/uploads/2009/11/PolicyStatement-AHA-ACS-ADA2.pdf. A14A-4321-AAF8-778E57AA9752/0/LPBWorkplace- Health_screen.pdf.

About this Project NCSL’s Health Cost Containment and Efficiency Series describes multiple alternative state policy approaches, with an emphasis on documented and fiscally calculated results. The project is housed at the NCSL Health Program in Den- National Conference of State Legislatures ver, Colorado. It is led by Richard Cauchi, program director, William T. Pound, Executive Director and Martha King, group director, with Barbara Yondorf as 7700 East First Place 444 North Capitol Street, N.W., #515 lead researcher. Ashley DePaulis provided research and Denver, Colorado 80230 Washington, D.C. 20001 drafts for this brief. (303) 364-7700 (202) 624-5400 www.ncsl.org NCSL gratefully acknowledges the financial support for this © 2010 by the National Conference of State Legislatures. All rights reserved. publication series from The Colorado Health Foundation and Rose Community Foundation of Denver, Colorado.

4 National Conference of State Legislatures Health Cost Containment and Efficiencies NCSL Briefs for State Legislators

No. 12 September 2010

Medical Homes

Cost Containment Strategy and Logic to improve self-management Some studies show sig- “Medical home” describes a way of organizing and deliv- skills, unlike traditional prac- nificant medical home sav- ering health care that is coordinated, comprehensive, effi- tices that focus on physician- ings. Others have found cient and personalized (Table 1). Health care practices and delivered treatment. minimal or no overall clinics that meet medical home criteria manage all aspects savings but report other of a patient’s care, not just treatment. The main purpose of Medical homes are also known benefits, such as improved 1 medical homes is to improve quality of care, especially for as health homes, primary care quality of care, fewer med- people with high medical needs, and potentially reduce medical homes, patient-cen- ical errors and enhanced health care costs. tered medical homes and ad- health care access. vanced primary care. The premise of the medical home model is that, by providing coordinated, comprehensive, efficient personal care, Depending on the initiative, medical homes operate in several medical homes will improve patient health and satisfaction, ways. Some provide care for certain target populations only reduce emergency room use, decrease hospital admissions (e.g., patients with chronic conditions, people with disabilities, and readmissions, shorten the average length of a hospital children); others serve a broader population (e.g., all Medic- stay, and eliminate unnecessary tests and procedures, all of aid patients or all private plan enrollees). Some medical home which contribute to overall cost savings. initiatives involve only one payer (e.g., Medicaid or a private health plan); others involve several payers. Others include all Medical home practices differ from traditional primary care medical home components of a fully developed model, or only practices in several ways. In a medical home, a physician- a few. led team—not the patient—coordinates care (e.g., finds specialists, arranges for services after hospital discharge). Target of Cost Containment Medical home physicians use evidence-based care stan- Medical homes are designed to address several shortcomings dards in addition to their knowledge and experience. in the current health care system, especially uncoordinated Medical homes use various means to ensure easy patient care (Figure 1 on next page). Poor care coordination is associ- access to care (e.g., 24/7 access to care and advice) instead ated with duplicate procedures, conflicting treatment recom- of waiting for the next available appointment. In a medical mendations, unnecessary hospitalizations and nursing home home, provider teams emphasize and work with patients placements, and adverse drug reactions. In addition to uncoordinated care, medical homes are designed to address lack of Table 1. Medical Home Model patient access to a primary care doctor, inadequate physician n Each patient has a personal physician who is responsible payment for primary care services, use of more expensive ser- for coordinating and providing or arranging all of his/her vices where less expensive care would be as effective, and poor care. care management for patients with chronic conditions. n Care is coordinated across all settings and practitioners (e.g., specialists, mental health professionals, nutritionists, Federal Health Reform hospitals, home health agencies, nursing homes) by a physician-led team of health care professionals. The Patient Protection and Affordable Care Act, signed March n Patients have expanded health care access (e.g., e-mail 23, 2010, includes several medical home provisions. The act access to their physician, after-hours care, 24-hour nurse defines patient-centered medical homes (section 3502) and advice line). authorizes tests of innovative Medicaid and Medicare service n Quality and safety are priorities, care is evidence-based, delivery models in federal fiscal years 2010 to 2019, “to reduce physicians rate themselves on efficiency and quality measures, and patients are involved in all care decisions. program expenditures while preserving or enhancing patient n Physicians are paid a care coordination fee in addition quality of care” (section 3021). Innovative models include pa- to their regular office visit fee and may receive bonus tient-centered medical homes for high-need patients and med- payments for meeting or exceeding specified quality ical homes that address women’s unique health care needs. The and efficiency targets. Care coordination fees may be act also makes available state grants to establish community- adjusted based a patient’s health (e.g., higher fees for patients with several chronic conditions or children with based interdisciplinary teams to support medical homes (sec- special needs). tion 3502) and help primary care providers implement them in federal fiscal years 2011 and 2012 (section 5405). National Conference of State Legislatures Figure 1. Percent of U.S. Adults Reporting Care Coordination Failures in Past Two Years, 2007-2008 grated health service model that has three key com-

My specialist did not receive basic medical ponents: patient-centered medical homes; commu- information from my primary care doctor nity health teams that support the medical homes My primary care doctor did not receive a report back from a specialist in each community; and health information and Test results/medical records were not evaluation systems. Vermont’s three major health available at time of appointment insurers (Blue Cross-Blue Shield, MVP Health Care Doctors didn’t give other providers important medical information I think should have it and Cigna), Vermont Medicaid and the state budget I was not contacted or had to share the cost of the community health care teams, call repeatedly to get test results as required by Act 204 of 2008. Any of the above

0%01 5% 10%02 15% 20%03 25% 30%04 35% 40%05 45% 50%0 n Minnesota’s 2008 health care reform act in- 4 Source: Commonwealth Fund Survey of Public Views in the U.S. Health Care System, 2008. cluded a number of health care home provisions. The act called for development and implementation State Examples of health care home certification standards for the n As of July 2010, at least 29 states had enacted medical state’s publicly supported health plans. It authorized per-per- home legislation2 and 22 had one or more public, private or son care coordination payments to certified health care homes public-private medical home pilot programs.3 Some Medicaid based on care complexity. It also required small employers and and state children’s health insurance plan (CHIP) programs have individual health plans to include health care homes in their implemented medical home programs without specific legisla- provider networks and pay care coordination fees for mem- tive authorization, relying on existing statutory authority to es- bers using certified health care homes. An unusual provision tablish provider participation and reimbursement rules. of the law requires that, in developing the criteria for setting care coordination payments, the commissioner of human ser- n Several Medicaid and CHIP programs participate with pri- vices take into consideration the feasibility of including the vate payers (e.g., health insurers and employers with self-in- additional time and resources needed by patients with limited sured health plans) in multi-payer medical home initiatives. As English-language skills, cultural differences or other barriers to of December 2009, they included Colorado, Iowa, Maine, Mas- health care. sachusetts, Minnesota, New Hampshire, New York, Pennsylva- nia, Rhode Island, Vermont and West Virginia. Pennsylvania, n In recent years, Washington expanded its medical home for example, is working with 16 separate payers. Several multi- efforts from an initial focus on improving care for publicly in- payer medical home initiatives include state employee health sured children with special health care needs to improving care benefit plans (e.g., Colorado, Minnesota and West Virginia). for people of all ages and abilities, including public and private health plan enrollees. The 2007 Child Health Care Act (SB 5093) n Community Care of North Carolina (CCNC) is one of the authorized targeted provider rate increases to coordinate care oldest coordinated-care primary practice medical home pro- for children enrolled in public health plans through medical grams in the nation. It began as a Medicaid managed care pilot homes. Other 2007 legislation (E2SSB 5930) called for design program in 1998. Since then, the legislature has expanded it and implementation of medical homes for the state’s aged, to a statewide program that includes more Medicaid enrollees. blind and disabled clients. Pursuant to 2009 legislation (ESSB Today, CCNC consists of 14 local nonprofit community net- 5491), the Washington Health Care Authority and Depart- works across the state. The networks, which serve more than ment of Social and Health Services are working with interested 950,000 Medicaid enrollees, are comprised of hospitals, health stakeholders to develop, implement and evaluate one or more and social service departments, and 1,380 practices and clin- multi-payer medical home provider reimbursement models. At ics. Medicaid pays networks $3 per member per month ($8 least eight health insurers have committed to help the state for populations with complex medical conditions, such as the test the models.5 aged, blind and disabled) to coordinate care and hire local case managers. Medical home providers receive $2.50 per member n Several states have estimated potential medical home sav- per month ($5 for those with complex medical conditions) to ings. West Virginia, for example, engaged an actuarial consult- implement evidence-based patient treatment plans and pro- ing firm in 2009 to estimate the cost of and potential savings vide 24/7 access. from a statewide medical home initiative.6 The firm estimated that, by 2014, a statewide initiative could involve as many as n Vermont enacted legislation in 2007 (Act 71) and 2008 1,800 physicians and produce annual savings of $57.3 million (Act 209) that established three integrated care pilot programs for the state, $173.2 million for insurers, $170.6 million for poli- and required commercial insurers, and public medical care cyholders, $199.3 million for the federal government and $42.1 programs to participate in the pilots. The acts also required million in charity care. A report prepared for Massachusetts es- the director of Blueprint for Health, the state’s comprehensive timated widespread adoption of medical homes could reduce health reform initiative, to establish a medical home project for cumulative spending in the state by as much as $5.7 billion or Medicaid beneficiaries, state employees health plan enrollees increase it by as much as $2.8 billion between 2010 and 2020.7 and those covered by the state’s health care plan for the uninsured (Catamount Health). Blueprint for Health uses an inte-

2 National Conference of State Legislatures Non-State Examples more) but reduced costs for emergency department and ur- n Several health insurers have medical home pilot projects. gent care visits ($4 less) and inpatient admissions ($14.18 less). UnitedHealth Group, for example, is collaborating with IBM to Adjusting for the severity of the health conditions of patients in test the medical home model at seven medical group practices the pilot and control groups, this produced overall net savings in Arizona. of $10.30 per member per month—a result Group Health said “approached statistical significance.” n Large, fully integrated health care delivery systems8 increasingly use the medical home model to deliver primary n Some evidence indicates a highly developed medical care. Examples include Group Health Cooperative, serving home focused on select conditions can produce savings.11 Oregon and Washington; Geisinger Health System, located in Long-running, randomized trials demonstrate that care coor- central rural Pennsylvania; and Intermountain Healthcare, serv- dination programs targeting high-risk, high-severity patients ing Utah and southeastern Idaho. with chronic illnesses generate savings. n Bridges to Excellence (BTE), a national nonprofit health n Although most medical home programs report reductions care qualify improvement organization, has mounted a multi- in emergency room use and hospital admissions, several stud- state, multiple employer Medical Home Program. Several large ies have found little or no evidence of overall reductions in employers participate, including Ford, GE, Humana, P&G, UPS health care expenditures. A 2008 report by Deloitte Center for and Verizon. Several health plans also participate. Health Solutions, for example, found no documented evidence of a return on investment from medical home programs.12 An- n In September 2009, the U.S. Secretary of Health and Hu- other study reported evidence of downstream savings from man Services announced Medicare will join selected state- the few existing rigorous evaluations that have been conduct- based, multi-payer medical home initiatives in a three-year Ad- ed “are not encouraging.”13 vanced Primary Care Demonstration. The states had not been selected as of April 2010. n Some caution that the medical home model “has not yet proven scalable, lacks a universally accepted definition, and Evidence of Effectiveness lacks sufficient evidence of its ability to yield significant cost Some studies show significant medical home savings; others savings.”14 According to one researcher, “Most proponents ad- have found minimal or no overall savings but report other ben- mit the [medical home] model is, most likely at best, aspiration- efits (e.g., improved care quality, reduced medical errors, high- al.”15 er patient satisfaction, enhanced health care access and fewer health disparities). Most studies that support medical homes’ n Researchers have suggested several reasons for the lim- potential to reduce overall spending have not assessed a com- ited evidence of medical home savings. Full-fledged medical plete version of the approach. Instead, they have looked at homes have not been implemented on a large enough scale or selected components, such as ensuring all patients have a pri- for long enough to demonstrate savings. Significant time, staff- mary care doctor or establishing care coordination programs ing, coordinated community support and up-to-date health for patients with diabetes or heart disease. information technology are needed to implement a medical home; experts estimate it takes two to five years to fully trans- n Several studies have examined the cost-effectiveness of form from a traditional practice to a medical home. The prima- the Community Care of North Carolina program described ear- ry focus of medical homes is quality of care improvement, not lier. Mercer Human Resources Consulting Group, for example, cost containment. In most medical homes, the initial focus is on found that, in every year examined (SFY 2003 to SFY 2007), getting recommended care for people who have not had it. CCNC achieved savings relative to an estimate of what the state would have spent under its previous primary care case man- n Experience with the medical home model suggests that agement program. In SFY 2007, for example, estimated savings those most likely to generate savings are full-fledged programs were between $135 million and $149 million.9 This savings esti- that are part of an integrated delivery system, implemented on mate did not, however, take into account enhanced payments a large scale, and supported by strong health information tech- to participating providers and network fees. nology, community and health professionals support systems. n Several large, integrated health care delivery systems Challenges have reported medical home pilot program savings. Geisigner Establishing a medical home program that can reduce or slow Health System, for example, calculated its medical home pi- overall health care spending growth presents a number of lot practices reduced overall health care costs by 4 percent in challenges. 2006 (the first year of the pilot) and 7 percent in 2008. Group Health Cooperative compared the quality and costs of care for n Financial incentives must be sufficient both to encourage patients enrolled in a medical home pilot to a control group.10 primary care doctors to transform their practices into medical After 21 months, it reported increased costs for specialty care homes and to secure the collaboration of other providers (e.g., ($5.80 more per member per month) and primary care ($1.60 hospitals and specialists). Many consider adequate financial re-

National Conference of State Legislatures 3 muneration to be one of the most important design features of National Academy for State Health Policy, Medical Home & a successful medical home program. Patient-Centered Care web site, http://www.nashp.org/ medical-home/28. n To make it cost-effective for physicians to meet medical National Conference of State Legislatures Medical Home Model home standards, payers need to share savings with medical of Care web page, http://www.ncsl.org/?tabid=17723. home practices from such things as reductions in hospital ad- Patient-Centered Primary Care Collaborative website, http:// missions and emergency room visits, and practices must have www.pcpcc.net/. enough patients covered by health plans that support the The latest information on this topic is available in an NCSL on- medical home model. line supplement at www.ncsl.org/?tabid=19936 n States may initially find their overall costs actually increase Notes as a result of enhanced payments, new care coordination costs, 1. Quality of care measures the degree to which various inputs, processes and standards of care meet patient needs and increase the likelihood of im- and more services delivered to patients who were previously proved patient health. underserved (e.g., immunizations were not up-to-date). It may 2. National Conference of State Legislatures, Medical Home Model of Care take several years to realize cost savings, if any. Web page, http://www.ncsl.org/?tabid=17723. 3. Patient-Centered Primary Care Collaborative, Pilots and Demonstra- tions Web page, http://www.pcpcc.net/pcpcc-pilot-projects. n States may need to establish a state action exemption un- 4. 2008 Minn. Laws, Chap. 358. der anti-trust law that will permit payers and providers to col- 5. Washington State Medical Home website, http://www.medicalhome. org/about/medhomeplan.cfm. laborate to develop payment and performance measurement 6. CCRC Actuaries, Health Care Financing in the State of West Virginia: An in medical homes. Maryland, for instance, included a medical Analysis and Projection of the Current System and Potential Transformations home anti-trust exemption in 2010 legislation (SB 855). (Charleston, W.V.: West Virginia Health Care Authority, August 2009); http:// www.hcawv.org/Support/Health%20Care%20Financing%20in%20the%20 State%20of%20West%20Virginia%20DRAFT%20v3.pdf. n Estimating potential medical home savings is difficult. The 7. Christine Eibner et al. Controlling Health Care Spending in Massachusetts: cost of setting up a medical home ranges from $60 to $1,800 An Analysis of Options, Option #6, “Create Medical Homes to Enhance Primary Care” (Santa Monica: RAND Health, August 2009); http://www.mass.gov/Ee- per person per year, while gross savings have been estimated ohhs2/docs/dhcfp/r/pubs/09/control_health_care_spending_rand_08-07-09. at $250 per person per year. pdf. 8. A fully integrated health care delivery system includes the full range of providers (e.g., primary care physicians, specialists and hospitals) needed to Complementary Strategies care for a population of patients; the providers are part of a single organization The medical home model incorporates several strategies that that has a common bottom line. offer the promise of a greater level of cost containment than 9. Mercer Government Human Services Consulting, CCNC/ACCESS Cost Savings—State Fiscal Year 2007 Analysis (Atlanta: Mercer, February 26, 2009); could be achieved by implementing a single strategy (e.g., pro- http://www.communitycarenc.com/PDFDocs/Mercer%20SFY07.pdf. vider performance-based pay, care coordination, etc.). Other 10. Robert J. Reid et al., “The Group Health Medical Home at Year Two: complementary strategies include accountable care organiza- Cost Savings, Higher Patient Satisfaction, and Less Burnout for Providers,” Health Affairs 29, no. 5 (2010); http://content.healthaffairs.org/cgi/content/ tions, expanded scope of practice laws and value-based ben- full/29/5/835. efit design, which are discussed in other briefs in this series. 11. Congressional Budget Office, “Option 39: Pay for a Medical Home for Chronically Ill Beneficiaries in Fee-for-Service Medicare,” Budget Options, Vol- ume 1: Health Care (Washington, D.C.: CBO, December 2008);http://www.cbo. gov/ftpdocs/99xx/doc9925/12-18-HealthOptions.pdf. For More Information 12. Paul H. Keckley and Howard R. Underwood, The Medical Home: Disrup- Florida Agency for Health Care Administration, Medicaid Medi- tive Innovation for a New Primary Care Model (Washington, D.C.: Deloitte Center for Health Solutions, 2008); http://www.dhcs.ca.gov/provgovpart/Documents/ cal Home Task Force Report, Recommendations for Design- Deloitte%20-%20Financial%20Model%20for%20Medical%20Home.pdf. ing and Implementing a Medical Home Pilot Project for 13. Arnold Milstein and Elizabeth Gilbertson, “American Medical Home Florida Medicaid (Tallahassee, Fla.: FAHCA, February 2010); Runs,” Health Affairs, 28, no. 5 (2009); http://content.healthaffairs.org/cgi/content/abstract/28/5/1317. http://ahca.myflorida.com/Medicaid/deputy_secretary/ 14. Elena Conis, “The Geisinger Medical Home Initiative,” Health Policy recent_presentations/medical_home_tf/medicaid_medi- Monitor (April 2009); http://www.hpm.org/survey/us/a13/1. cal_home_task_force_report_020110.pdf. 15. Gary Scott Davis and Julie Brillman, “Innovative Approaches to Health Care,” (Washington, D.C.: American Health Lawyers Association, 2009); http:// www.healthlawyers.org/Events/Programs/Materials/Documents/PPMC09/da- About this Project vis.pdf. NCSL’s Health Cost Containment and Efficiency Series describes multiple alternative state policy approaches, with an emphasis on documented and fiscally calculated results. The project is housed at the NCSL Health Program in Denver, Colorado. It is led by Richard National Conference of State Legislatures Cauchi, program director, and Martha King, group direc- William T. Pound, Executive Director tor, with Barbara Yondorf as lead researcher. 7700 East First Place 444 North Capitol Street, N.W., #515 Denver, Colorado 80230 Washington, D.C. 20001 NCSL gratefully acknowledges the financial support for (303) 364-7700 (202) 624-5400 this publication series from The Colorado Health Foun- www.ncsl.org dation and Rose Community Foundation of Denver, © 2010 by the National Conference of State Legislatures. All rights reserved. Colorado.

4 National Conference of State Legislatures Health Cost Containment and Efficiencies NCSL Briefs for State Legislators

No. 11 September 2010

Combating Health Care Fraud and Abuse

yet the average state recov- Cost Containment Strategy and Logic Evidence shows concerted ery rate is only 0.09 percent; Health care fraud and abuse control programs are designed state anti-fraud and abuse the range among states is to prevent, identify and prosecute unlawful billings by efforts save states mil- from less than 0.01 percent health care providers, patients and insurers. A fraudulent lions—and in some cases to a little more than 1 per- health care claim involves an intentional false representation billions—of dollars each cent.3 that causes the government to pay more than is allowable. year, and states poten- Abuse involves substandard, negligent or medically unnec- tially could double or even Health care fraud and abuse essary practices that increase the cost of health care. Abusive triple current collections. practices often indicate fraud. Among 28 federal programs take many forms, ranging examined by the U.S. General Accountability Office in 2007, from billing for services not Medicaid had the highest number of improper payments. performed (medical service providers) to medical identity theft (patients and providers) to systematic denial and underpay- State Medicaid fraud control offices have seen a rapid in- ment of claims (insurance companies). Table 1 lists some major crease in recent years in both the number of fraudulent types of fraud. schemes targeting Medicaid dollars and the degree of so- phistication with which they are perpetrated. According to Approximately 72 percent of health care fraud is committed by one report, “Increasing enrollment, expanded services and medical providers (i.e., health professionals; facilities; and ser- growing numbers of providers have created a system that is vice, equipment and prescription drug suppliers), 10 percent ripe for fraud and abuse.” 1 by consumers and the balance by others, including insurers and their employees. Through prevention, detection and prosecution, the goal of Medicaid fraud control programs is to reduce opportunities Federal Health Reform to defraud Medicaid, recoup payments that were based on The Patient Protection and Affordable Care Act, signed March false representations, and encourage strict compliance with 2010, includes several anti-fraud and -abuse provisions that ap- fraud and abuse laws to hold down health care expendi- ply to Medicaid and Medicare (sections 6001-6003, 6401, 6409 tures. and 1304 (enhanced fraud and abuse program funding)). The act strengthens the federal False Claims Act (e.g., by allowing Target of Cost Containment broader sources of information to bring a whistleblower suit) Medicaid expenditures for fraudulent claims cost states bil- and the Anti-Kickback Statute (e.g., by making it easier to es- lions of dollars each year. In Florida, for example, Medicaid tablish that a provider violated the statute). It includes new re- fraud accounts for between 5 percent and 20 percent of the quirements regarding return of overpayments, additional fed- Medicaid budget.2 Fraud and abuse account for between 3 eral funding and enforcement powers to fight fraud and abuse, percent and 10 percent of Medicaid payments nationwide, and increased criminal and civil penalties.

Table 1. Major Types of Fraud Provider Fraud Patient Fraud Insurer Fraud • Billing for services not performed • Filing a claim for services or products not • Undervaluing the amount owed by the • Billing duplicate times for one service received insurer to a health care provider under the terms of its contract • Falsifying a diagnosis • Forging or altering receipts • Denying valid claims • Billing for a more costly service than • Obtaining medications or products that performed are not needed and selling them on the • Overstating the insurer’s cost in paying black market claims • Accepting kickbacks for patient referrals • Providing false information to apply for • Misleading enrollees about health plan • Billing for a covered service when a non- services benefits covered service was provided • Doctor shopping to get multiple • Ordering excessive or inappropriate tests prescriptions • Prescribing medicines that are not • Using someone else’s insurance coverage medically indicated or for use by people for services other than the patient

National Conference of State Legislatures State Examples federal law. A state’s law may apply to public employees only Laws and Actions Targeting Public Program Fraud and or to all employers and their employees.6 As of June 2010, 27 Abuse states and the District of Columbia had state false claims acts n State False Claims Acts. State false claims acts enable (described above) that, with regard to publicly funded health states to recover money by giving them jurisdiction over fraud- care, allow citizens with evidence of fraud to sue on behalf of ulent activities that affect publicly funded state programs, in the government to recover fraudulently obtained health care most cases including but not limited to Medicaid. The acts payments and receive a portion of the recovered funds. Several usually mirror the federal False Claims Act, which applies only states also reward people who report cases of fraud against pri- to federally funded programs. Federal law provides states a fi- vate insurers. nancial incentive to enact false claims acts that include specific provisions.4 States can retain up to 10 percent of amounts that n State Anti-Kickback Laws. Anti-kickback laws make it a otherwise would be repaid to the federal government in the criminal offense to knowingly and willingly offer, pay, solicit event of a fraud recovery from a false or fraudulent health care or receive a kickback, bribe or rebate or to induce or reward claim. As of June 2010, 35 states and the District of Columbia referrals or items or services reimbursable to a government had false claims acts; of these, 14 qualified for the federal in- health care program. As of July 2009, the federal government, centive (Table 2). California, Illinois and Florida give insurers the 36 states and the District of Columbia had anti-kickback laws same right as the state to bring a false claims action against (Table 2). State anti-kickback laws usually apply to all payers; those that defrauded the private insurer. the federal law applies only to federal health care program payments. Some state laws are broader than the federal law (e.g., n Electronic Fraud and Abuse Detection Systems. Data cover more types of self-referrals).7 It should be noted that, in mining software exists to prevent and investigate fraudulent at least one state—Florida—the courts have ruled federal anti- claims before payment. The federal government and some kickback law preempts state Medicaid anti-kickback laws. states contract with “cybersleuths” who use sophisticated computer programs to scan Medicaid billing records for patterns n State Self-Referral Laws. As of July 2009, the federal gov- of bogus claims. South Carolina, for example, uses advanced ernment and 34 states had laws regarding referrals by health anti-fraud software to identify beneficiaries who show a pat- care providers to entities in which they have a financial inter- tern of doctor-shopping to obtain narcotic prescriptions and est (e.g., a physician referring a patient to a surgical center in other controlled substances. An audit of the Utah Department which he or she is an investor; see Table 2). Some state laws of Health’s Program Integrity program issued in 2009 estimated mirror federal law, which prohibits most self-referrals. Others an improved recovery system, including better detection sys- prohibit all self-referrals and ban physicians from any owner- tems, could help the state recoup $5.8 million annually. ship interest in hospitals or other facilities to which they refer patients. Several simply require disclosure of financial interests n Medicaid Inspector General Offices. Inspector general to patients. offices consolidate responsibilities and staff from state agencies that are involved in anti-fraud activities to more effectively n Prescription Drug Monitoring Programs. Prescription combat fraud and establish clear accountability for fraud con- drug monitoring programs are statewide electronic databases trol efforts. At the end of 2009, Florida, Georgia, Illinois, Kansas, that collect data on substances dispensed. They are an impor- Kentucky, New Jersey, New Mexico, New York and Texas had tant tool to combat abuse and illegal acquisition and resale of some type of independent Medicaid inspector general. prescription drugs on the black market, known as drug diversion. According to the Coalition Against Insurance Fraud, insur- n Prosecutorial Authority. Every state has a Medicaid Fraud ance fraud drains public and private health insurers of up to Control Unit, but the units’ ability to prosecute cases differ. In $72.5 billion a year. Prescription drug monitoring data can re- some states (e.g., New York), fraud control units are authorized veal patterns of illegal use and distribution and help prosecute not only to develop but also to prosecute fraud cases.5 In other false and fraudulent prescription drug insurance claims. As of states (e.g., Florida, Texas and Virginia), fraud cases developed January 2010, 34 states had prescription drug monitoring pro- by the units must be turned over to district attorneys or state- grams, and five states and Guam had enacted laws to establish, wide prosecutors. but did not yet have, fully operational programs.8

Laws and Actions Targeting Both Public and Private Fraud n Larger Anti-Fraud Units. Most state anti-fraud units have and Abuse a backlog of cases due mainly to limited staff. To increase re- n State Whistleblower Laws. Whistleblower laws encour- covery rates, some states have provided additional funding for age people to report fraudulent activities, including, but not Medicaid fraud units, attorney general offices and departments limited to, health insurance fraud. These laws generally pro- of insurance. New York’s SFY 2007-08 budget, for example, in- tect an employee from employer retaliation for disclosing increased by 30 percent the number of positions in the Medic- formation to a government or law enforcement agency if the aid Inspector General Office. This included 100 new auditors to employee reasonably believes the information violates state or identify, prevent and combat Medicaid fraud.

2 National Conference of State Legislatures Table 2. State False Claims, Anti-Kickback and Self-Referral Laws and Actions Targeting Private Insurance Fraud and Abuse Laws, 2009 State/ False Claims Acts Anti- Self- n Mandatory Insurer Fraud Detection Programs. As of July 2010, 19 Jurisdiction (FCA)1 Kickback Referral states and the District of Columbia required health and other insurance com- Laws Laws panies to meet certain fraud detection, investigation and referral standards Alabama -  - to maintain their licenses.9 Alaska - - - Arizona -   Arkansas • +   n Comprehensive Legislation. Pennsylvania is considering a compre- California 6 *   hensive package of laws that include anti-fraud and abuse provisions. Bills Colorado 6 +  - introduced in Pennsylvania’s 2010 session and pending as of July 1, 2010, Connecticut 6 +   would expand the definition of insurance fraud, fraud plans and fraud warn- Delaware 6  - District of Columbia 6  - ings (H.1750); require health facilities to have posters offering a reward for re- Florida 6   porting fraud (H.1737); allow asset forfeiture by those convicted of insurance Georgia 6 + * -  fraud (H.1740); expand the state immunity law to allow greater exchange of Hawaii 6 * -  information among enforcement agencies about an insurance fraud (H.2154 Idaho - - - and S.1181); and create a state false claims act (H.1679). Illinois 6 *   Indiana 6 *  - Iowa 6 - - Evidence of Effectiveness Kansas •   Evidence shows concerted state anti-fraud and abuse efforts save states mil- Kentucky -   lions—and in some cases billions—of dollars each year, and states potential- Louisiana 6 +   ly could double or even triple their collections. It appears the more anti-fraud Maine - -  Maryland 6 + -  tools a state has at its disposal, the greater likelihood of fewer unwarranted Massachusetts 6 *   payments and larger recoveries. Experts generally agree the following weap- Michigan 6 + *   ons are among the most effective for combating fraud: state false claims acts Minnesota 6 -  that include whistleblower protections, electronic data mining systems, and Mississippi -  - enhanced staffing of state anti-fraud agencies. Missouri •   Montana 6   Nebraska • - - Several caveats regarding assessments of the effectiveness of anti-fraud laws Nevada 6 *   should be noted. Because the number and magnitude of fraudulent activi- New Hampshire 6   ties continue to grow, it is sometimes difficult to determine whether larger New Jersey 6   recoveries are the result of new anti-fraud laws and additional funding or New Mexico 6  - New York 6 *   simply reflect growth in the average size of fraud cases. In most cases, in- North Carolina •   formation about the effectiveness of state anti-fraud efforts comes not from North Dakota - - - an independent source but from the anti-fraud units themselves. Research Ohio -   for this brief did not uncover any comparative assessments of fraud control Oklahoma 6   tools. Oregon • - - Pennsylvania -   Rhode Island 6 *  - n The addition in 2009 of 10 staff to Ohio’s Medicaid Fraud Control Unit South Carolina -   helped the state increase its recoveries from $65 million in 2008 to $91 mil- South Dakota -   lion in 2009.10 Tennessee 6 * -  Texas 6 + *  - Utah •   n Between state fiscal year 2004 and 2009, the Texas Legislature increased Vermont - - - funding for Medicaid fraud enforcement by 550 percent, from $2.2 million to Virginia 6 *   $14.5 million a year. Recoveries grew from $162 million in SFY 2007 to $338.5 Washington •   million in FY 2009.11 West Virginia -   Wisconsin 6 + *   Wyoming - - - n New York saved $132 million in 2007 from a health department anti- Total 37 34 fraud data mining initiative.12  State has law ? - No state law ? 6 FCA with whistleblower provisions 28 n Medicare cybersleuth pilot programs in California, New York and Texas • FCA without whistleblower provisions 8 + Act applies to Medicaid only, not all recaptured $900 million in fraudulent Medicare claims between 2005 and state programs 8 13 * Meets DRA requirements 14 2008. 1. Includes laws enacted in the first half of 2010. Sources: 1) Sara Rosenbaum, Nancy Lopez and Scott Stifler,Health Care n Officials at the federal Centers for Medicare and Medicaid Services es- Fraud (Washington, D.C.: George Washington University, Oct. 27, 2009); http://www.rwjf.org/files/research/50654.pdf, and 2) Phillips & Cohen LLP, timate the return on each $1 invested in health care fraud prosecutions is State False Claims Act Web page, http://www.phillipsandcohen.com/CM/ 14 StateFalseClaimsLaws/StateFalseClaimsLaws152.asp. between $2 and $7.

n Using their false claims act authority, states and the federal government recovered more than $20 billion between 1986 and 2010.

National Conference of State Legislatures 3 Challenges Notes n Enhanced staffing to identify and prosecute fraud is critical 1. Senate Republican Task Force on Medicaid Fraud, Combating Medicaid Fraud in New York State, Preliminary Report (Albany: New York Senate, March to successful anti-fraud efforts. This usually requires an upfront 2010); http://www.nysenate.gov/files/pdfs/0317.Combating%20Medicaid%20 investment, however, that may be difficult for states that are Fraud%20in%20NYS.pdf. facing large deficits. Some states are dealing with this- chal 2. Doug Trapp, “Medicaid Fraud in Florida Highest for Home Health Services,” amednews.com, Jan. 27, 2010; http://www.ama-assn.org/amed- lenge by contracting with private firms to analyze Medicaid news/2010/01/25/gvse0127.htm. data for fraud and paying them a percentage of actual or pro- 3. For a state-by-state list of Medicaid recovery rates, see: Jim Sheehan, jected recoveries rather than making an upfront investment. New York Medicaid Inspector General, PowerPoint testimony presentation to the New York Senate Committee on Investigations and Government Opera- tions, (Jan. 7, 2010); http://www.omig.state.ny.us/data/images/stories//testi- n Up-to-date, advanced electronic fraud detection systems mony_presentation_1_7_10_lb.pdf. can reap significant benefits but also require an upfront invest- 4. For a list of the provisions a state false claims act must include for a state to qualify for the incentive, go to the U.S. Department of Health Human ment. Services, State False Claims Act Reviews Web page, http://oig.hhs.gov/fraud/ falseclaimsact.asp. n Broader definitions of fraud and tougher Medicaid fraud 5. John Buntin, “A Medicaid Fraud-Stopping Mold,” Governing (June 2010); http://www.governing.com/topics/health-human-services/A-Medicaid-Fraud- penalties have been opposed by some medical groups that ar- Stopping-Mold.html. gue physicians will stop seeing Medicaid patients if they fear a 6. For a list of state laws that protect whistleblowers from employer minor mistake could lead to a felony prosecution. Fraud control retaliation and statutory citations, see National Conference of State Legis- latures, State Whistleblower Laws Web page, http://www.ncsl.org/default. laws and actions should distinguish between payment errors aspx?tabid=13390. and intentional fraud to avoid penalizing honest mistakes. 7. Kaiser Family Foundation, State Health Care Fraud Laws Web page, http://www.statehealthfacts.org/comparemaptable.jsp?ind=790&cat=4. 8. States with operational prescription drug monitoring programs as of n Increasingly sophisticated fraud schemes mean states January 2010 were Alabama, Arizona, California, Colorado, Connecticut, Ha- must continually update and enhance their fraud control laws waii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Massachusetts, and tools. Michigan, Minnesota, Mississippi, Nevada, New Mexico, New York, North Caro- lina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Caro- lina, Tennessee, Texas, Utah, Virginia, Vermont, West Virginia and Wyoming. For More Information Alaska, Florida, Kansas, Oregon, New Jersey and Guam had enacted legislation Coalition Against Insurance Fraud Web site, http://www.insur- to establish programs, but they were not fully operational. Source: U.S. Depart- ment of Justice, Drug Enforcement Administration, “State Prescription Drug ancefraud.org. Monitoring Programs: Questions and Answers,” Web site, http://www.deadiver- Health Management Associates. “Compliance: Myths and Facts sion.usdoj.gov/faq/rx_monitor.htm#4. About Medicaid Fraud and Abuse,” Issues in Missouri Health 9. The states are Arkansas, California, Colorado, Florida, Kansas, Kentucky, Louisiana, Maine, Maryland, Minnesota, New Hampshire, New Mexico, New Care 2008. St. Louis: Missouri Foundation for Health, Oc- York, New Jersey, Ohio, Pennsylvania, Tennessee, Vermont and Washington. tober 2008; www.healthcare4kc.org/.../Compliance%20 10. John Buntin, “A Medicaid Fraud-Stopping Mold.” Myths%20and%20Facts%20About%20Medicaid%2. 11. Office of Inspector General Annual Report, State Fiscal Year 2009 (Austin: Texas Health and Human Services Commission, 2009); https://oig.hhsc.state. National Association of Medicaid Fraud Control Units Web tx.us/Reports/OIG_Annual_Report_SFY_2009.pdf. site, http://www.namfcu.net/about-us/what-is-medicaid- 12. Valerie Bauman, Associated Press, “Medicaid Fraud Collections Rise,” fraud. LegislativeGazette.com (Dec. 31, 2007); http://www.legislativegazette.com/ Articles-c-2007-12-31-62146.113122_Medicaid_fraud_collections_rise.html. Rosenbaum, Sara, et al. Health Care Fraud. Washington, D.C.: 13. Neil Verse, “CMS to fight Medicare, Medicaid fraud with high-tech George Washington University, Oct. 27, 2009; http://www. ‘bounty hunters’,” FierceHealthIT e-newsletter (March 29, 2010); http://www. rwjf.org/files/research/50654.pdf. fiercehealthit.com/story/cms-fight-medicare-medicaid-fraud-high-tech-bounty-hunters/2010-03-29. The latest information on this topic is available in an NCSL on- 14. John Buntin, “A Medicaid Fraud-Stopping Mold.” line supplement at www.ncsl.org/?tabid=19935. 15. Charles Doyle, Qui Tam: The False Claims Act and Related Federal Stat- utes (Washington, D.C.: Congressional Research Service, Aug. 6, 2009); http:// www.fas.org/sgp/crs/misc/R40785.pdf. Acknowledgment Thanks go to Howard Goldblatt, director of government affairs, Coalition Against Insurance Fraud, who reviewed an early draft of this brief.

About this Project NCSL’s Health Cost Containment and Efficiency Series describes multiple alternative state policy approaches, with an emphasis on documented and fiscally calculated results. National Conference of State Legislatures The project is housed at the NCSL Health Program in Den- William T. Pound, Executive Director ver, Colorado. It is led by Richard Cauchi, program director, 7700 East First Place 444 North Capitol Street, N.W., #515 and Martha King, group director, with Barbara Yondorf as Denver, Colorado 80230 Washington, D.C. 20001 lead researcher. (303) 364-7700 (202) 624-5400 www.ncsl.org NCSL gratefully acknowledges the financial support for this © 2010 by the National Conference of State Legislatures. All rights reserved. publication series from The Colorado Health Foundation and Rose Community Foundation of Denver, Colorado.

4 National Conference of State Legislatures Health Cost Containment and Efficiencies NCSL Briefs for State Legislators

No. 10 June 2010

Pooling Public Employee Health Care

In the past three years, for Cost Containment Strategy and Logic Combining small employer example, policy leaders in Pooled public employee health benefit programs refer to ef- groups into large state Connecticut, Michigan, New forts to merge or combine state employee health insurance employee pools can save Jersey and Washington have with that of other public agencies and programs. About half up to 15 percent in admin- sought to create large-scale the states have opened participation in their state employee istrative costs for small health insurance employee health benefit plans to other public-sector employers, such as employers that join. Direct pools as a major element of school districts or cities and counties. Two states have piloted savings by states is not health cost containment. programs to allow private sector employers to join their state widely documented. employee pools. State employee health ben- Some public purchasers regularly try to lower overall admin- efit programs already command a significant and relatively istrative costs and negotiate lower prices from providers and stable segment of the health insurance market; several benefit insurers using their large numbers of enrollees as a bargaining programs are the largest employers in their states. The pro- tool. Health costs are controlled by using size, volume purchas- grams have high-level, qualified personnel managers and ne- es and professional expertise to: gotiators and can take advantage of their size and expertise to n Minimize and combine administrative and marketing negotiate rates and work with multiple insurers. The combined costs; state-plus-local pooled programs can also use their large en- n Facilitate negotiations with health insurers for more favor- rolled population to negotiate establishing innovative health able premium rates and broader benefit packages; and programs such as wellness and prevention, tobacco cessation n Relieve individual employers of the burden of choosing plans, electronic health records and provider incentive copay- plans and negotiating coverage and payment details. ments. These prevention and modernization programs also aim to contain health costs, leading to an ideal of dual or multiple In addition to cost containment and simplification, multi-agen- savings within the pooled programs. cy purchasing arrangements also can give employees more choices of health benefit plans. This option often is not avail- Federal Health Reform able if each smaller agency were to obtain coverage indepen- The Patient Protection and Affordable Care Act, signed March dently.1 2010, includes several new federal insurance rules that take effect starting in October 2010 or later, at the start of an ex- Small public employer groups often benefit the most from purchasing pools and alliances. As Figure 1 illustrates, the larger Figure 1. Insurance Is More Costly 40 to Administer for Small Groups the employer group, the lower the percentage of the health 37.2% Marketing premium devoted to administrative costs versus medical care Marketing 35 payments. 8.4% CostsClaim 30 Claims Target of Cost Containment AdministrationGen Small and medium-sized employers are at a decided disadvan- 25 9.3% 22.5% tage compared to the much larger state governments. Smaller General 3.3% Risk groups that join existing state pools or join to form a purchas- 20 Administration ing alliance may be able to obtain coverage at a lower cost than 6.3% 15 11.0% 13.7% Risk/ if they purchased it through the open market. Proponents of 4.1% Profit public employer health purchasing pools note that small local 10 6.1% 4.1% governments and local public entities (fire districts or school 2.5% 5.5% 0.1% districts, for example) often lack the volume and personnel ex- 5 8.5% 3.0% 6.8% 5.5% 1.3% pertise to obtain favorable rates. 1.1% 0 1-4 Employees 20-49 Employees 100-499 Employees 10,000 or More 1-4 20-49 100-499 10,000Employees Source: Lewin presentation on “Cost and Coverage Impacts” to Colorado Commission, Aug. 23, 2007.

National Conference of State Legislatures isting insurance plan year. The rules include prohibiting insur- California attributes $40 million in annual ers from imposing lifetime limits on benefits and restrictions premium savings for the overall plan to on the use of annual limits. Unmarried children will be able to local participation. remain on their parents’ health plan until they reach age 26. Ex- isting public employer plans can seek “grandfathered” plan status, which locks in certain benefits and out-of-pocket charges. n California: The California Public Employees’ Retirement Creation of health exchanges by 2014 also may affect public System (CalPERS) provides both health and retiree benefit employee health plans. Because states have special status as services and manages health benefits for nearly 1.3 mil- employers, there are legal issues that affect which federal re- lion members. Thirty-one percent of enrollees are state form provisions apply to state government. Future information employees, 38 percent are school employees and 31 per- and guidance will be posted online by NCSL (http://www.ncsl. cent are local public agency employees. CalPERS reported org/?tabid=19932). that “local participation greatly increases the state’s buying power.”2 State Examples At least 24 states currently authorize other public employees n New Jersey: Although local participation is optional, about to combine with state employees and retirees to create a larger 50 percent of the state plan’s 780,000 enrolled members insurance pool (Table 1). Of these, 11 states pool all members work for municipal employers. for health status or “rating” to spread premium costs among all or most employers and employees. Local public employer n West Virginia: West Virginia’s Public Employees Insurance participation is optional in all but two states. In practice, some Agency (PEIA), which covers both local jurisdictions and 3 municipalities or local agencies join, while others choose to state employees, has a public/private partnership with in- find their own coverage. California, Louisiana, New Jersey, New surance companies that choose to offer the plan. Results Mexico, North Carolina, South Carolina, Utah, Washington and are described below under “Evidence of Effectiveness.” West Virginia have substantial combined enrollment, adding 20 percent or more of local workers to the pooled total. State Proposals not Enacted n In 2009-10, Michigan House leaders proposed a comprehensive multi-agency pooled plan aimed at covering all Table 1. State Employee Health Plans that Include Local Governments local and school public employees. The Michigan House State Local Government Employees R published An In-Depth Look at the Michigan Health Benefits Covered by State Employee Plan Program in September 2009 as part of an evaluation of the Arkansas (since 2003) School employees benefits and cost savings of pooling all public employ- California (since 1967) Municipal employees R ees into a single program. The report indicated an estimat- Delaware Municipal employees R ed potential annual savings of $200 million due to pooling Florida School employees and further savings from quality initiatives. Georgia Municipal; all school employees R n Connecticut’s Health Partnership Act (House Bill 5536), Hawaii Municipal and school employees Illinois Municipal employees passed in 2008 and 2009 but vetoed twice by the gov- Kentucky School employees R ernor, would have allowed municipalities, certain mu- Louisiana (since 1980) School employees R nicipal service contractors, nonprofit organizations and Maryland Municipal employees small businesses to provide coverage for their employees Massachusetts (since Municipal employees R and retirees by joining the state employee health insur- 2007) ance plan. With consent of the State Employees’ Bargain- Mississippi School employees ing Agent Coalition, all new employees would have been Missouri Municipal and school employees pooled with state employees in the state insurance. The Nevada Municipal and school employees act would have required the agency to provide insurance New Jersey (since 1964) Municipal and school employees for employers that seek to cover all their employees or re- New Mexico Municipal employees. R tirees.4 Program features would have been similar to those New York (since 1958) Municipal and school employees R for Medicaid and children’s health “HUSKY” enrollees. North Carolina All school employees R South Carolina Municipal and school employees R Evidence of Effectiveness Tennessee Municipal and school employees It is not clear whether purchasing pools have slowed the growth Utah (since 1977) Municipal and school employees in premium costs overall; the evidence is mixed. It appears that Washington Municipal and school employees R including small employer groups in large state employee pools West Virginia (since 1988) Municipal and school employees may benefit the small employers that join. Wisconsin Municipal employees R = State and local government employees are pooled for insurance premium rating purposes. Sources: NCSL research (2007-2010); Connecticut Office of Legal Research (2008). A 2008 study by the Lewin Group noted, “Given that state governments are typically the largest employer group in any given state, state employee health plans (SEHPs) are responsible for a

2 National Conference of State Legislatures large volume of health care purchasing. This can yield consid- fact that they joined voluntarily indicates favorable terms erable influence in negotiations with participating health plans and savings.6 and provider groups, in terms of encouraging their participation in quality improvement, cost containment, and related n Massachusetts enacted legislation in 2007 that allowed all initiatives. In addition, SEHPs may be in a position to combine municipalities to combine with state workers to purchase their quality improvement activities and strategies with other insurance. Statewide savings of $225 million were estimat- large public and private sector purchasers, including Medicaid, ed by FY 2010 and of $750 million by FY 2013. As of August other public programs, and private health plans and employer 2009, however, only 17 of 351 towns were participating. groups. The combined market leverage of such coalitions can Savings statewide have not yet been documented. enhance SEHPs’ purchasing advantage and help to coordinate state-level quality promotion activities.”5 n South Carolina law requires state employees and retirees plus public school districts and public colleges and univer- n Some documented evidence shows modest and, in at least sities to obtain coverage through the state health plan; as one case, substantial cost savings to small and medium a result nearly 10 percent of the state’s population is cov- employers by combining a large number of in-state agen- ered by the plan. cies and entities into a single administrative and insurance purchasing pool covering from 100,000 to 1.6 million en- n North Carolina is the largest example of mandatory com- rollees. bined local and state participation, covering 667,000 state and local employees and retirees. n In 42 states, the state pool is “self-insured,” which can save between 5 percent and 6 percent in administrative costs, Complementary Strategies compared to benefits that are fully insured through out- n Several states have created a combined health care pur- side companies. A better negotiating position sometimes chasing agency that includes Medicaid, state employees can result in modestly better benefits (such as a lower of- and other agencies. Examples include the Kansas Health fice visit copayment), although most states have not seen Policy Authority in 2005, the Oklahoma Health Care Au- lower premium costs. thority in 1993 and the Georgia Department of Commu- nity Health. Although state and local employees are not n California evaluated how local government membership “pooled” with Medicaid, the joint administration under one in the state program affects costs. California Public Em- management structure results in “combining the state’s ployees Retirement System (CalPERS) officials indicate that purchasing power.”7 adding 490,000 local government employees reduced the state plan’s annual premium costs by approximately $40 n Some state employee programs have become leaders in million per year. demanding quality and efficiency in purchasing insurance. Examples of state plan innovations include promoting pro- n The West Virginia Public Employee Insurance Agency (PEIA) vider adherence to clinical guidelines and best practices, sets its own provider reimbursement rates, which are ap- publicly disseminating provider performance information, proximately 20 percent to 25 percent lower than private implementing performance-based incentives, developing market rates. The program’s total administrative expenses coordinated care interventions, and participating in multi- were 5 percent for FY 2008; medical and pharmaceutical payer quality coalitions.8 expenses represented 95 percent of total expense. A non- pooled town or district with 200 employees would expect n Louisiana, South Carolina and Washington review the to pay administrative costs of 12 percent to13 percent. The claims history of local entities that seek to join with state savings apply to 602 local and regional public agencies employee programs and, if the risk history is higher than with a total of 52,000 employees plus other dependents. the existing pool, the new local member is charged a higher rate (usually for a limited period) to cover the risk. n West Virginia also created a Small Business Plan. Accord- Although this approach is a cost shift, not savings, it illus- ing to its 2010 website, “Participating insurance carriers trates how states can protect against higher charges.9 use PEIA payment rates for doctors and other health care providers; this is the key to making Small Business Plan Challenges premium rates lower than standard rates, typically rang- n Lower-than-expected participation rates by local governing between 17 percent and 22 percent less than regular ments were examined in a nationwide analysis in 2008. small business rates;” however, they caution, “rates and dis- The results pointed to a number of reasons, including: counts will depend on the profile of each small business.” • Local governments had other affordable coverage options; n Utah’s Public Employee Health Plan (PEHP) includes ap- • State plan requirements made it difficult for some lo- proximately 52 percent of eligible local governments, in- cal governments to join; cluding service districts, counties and public schools; the

National Conference of State Legislatures 3 • Some municipalities would rather have a less compre- Notes 1. Another type of multi-employer purchasing arrangement is the hensive (and less expensive) plan than that offered by state purchasing alliances for small business employers. These are discussed the state; in another NCSL publication: Richard Cauchi, Purchasing Alliances and • Some local governments prefer keeping local control Cooperatives for State Health Insurance (Denver: National Conference of State Legislatures, Nov. 12, 2009); http://www.ncsl.org/default.aspx?tabid=18905. of their health plans; and 2. Connecticut Office of Legislative Research, Impact of Pooling State 10 • One state placed a moratorium on new members. and Local Employee Health Insurance in Other States (Hartford: Connecticut Office of Legislative Research, Aug. 29, 2008); http://www.cga.ct.gov/2008/ n rpt/2008-R-0463.htm. Existing state employer programs may be concerned that 3. As of mid- June 2008, West Virginia PEIA provided health coverage having local agencies as members could result in “adverse to 119 state agency divisions with approximately 21,000 primary selection” that could lead to higher premiums if employ- participants (not including dependents), 55 county school boards with approximately 32,000 primary participants, 524 local government entities ees are older or sicker than original pool members. with approximately 10,000 primary participants, and 23 college and university entities with approximately 10,000 primary participants. Approximately n Traditions of local autonomy and collective bargaining can 88,000 dependents also participated in PEIA health plans. West Virginia Public Employee Insurance Agency, Comprehensive Annual Financial Report 2008 mean less willingness to change or opposition to forma- (Charleston, W.V.: West Virginia Public Employee Insurance Agency, 2008); 11 tion of multi-employer pools. http://www.peia.wv.gov/forms-and-downloads/Documents/financial%20 reports/cafr/Comprehensive_Annual_Financial_Report_2008.pdf. 4. An earlier Connecticut law (Public Act 03-149 of 2003) authorized the For More Information agency “To allow small employers and all nonprofit corporations to obtain Cauchi, Richard. State Employee Health Benefits. Denver: NCSL, coverage under the state employee health plan and to provide that such 2010. coverage be exempt from the state insurance premium tax.” S 353 was signed into law in June 2003. Commonwealth Fund. “What Public Employee Health Plans 5. Commonwealth Fund, What Public Employee Health Plans Can Can Do to Improve Health Care Quality: Examples from Do to Improve Health Care Quality: Examples from the States (New York: the States.” Washington, D.C.: Commonwealth Fund, Commonwealth Fund, 2008); http://www.commonwealthfund.org/usr_doc/ McKethan_whatpublicemployeehltplanscando_1097.pdf?section=4039. 2008; http://www.commonwealthfund.org/usr_doc/ 6. Connecticut Office of Legislative Research, Impact of Pooling State and McKethan_whatpublicemployeehltplanscando_1097. Local Employee Health Insurance in Other States. pdf?section=4039. 7. State Coverage Initiatives, “Value-Based Purchasing and Consumer Engagement Strategies in State Employee Health Plans – A Purchaser Guide Connecticut Office of Legislative Research. “Impact of Pool- (Washington, D.C.: State Coverage Initiatives, May 13, 2010); http://www. ing State and Local Employee Health Insurance In Other statecoverage.org/node/2335. States.” Hartford: Connecticut Office of Legislative 8. Commonwealth Fund, What Public Employee Health Plans Can Do to Improve Health Care Quality: Examples from the States. Research, Aug. 29, 2008; http://www.cga.ct.gov/2008/ 9. Ibid. rpt/2008-R-0463.htm. 10. Ibid. NCSL will post supplemental materials and 2010 updates on 11. For example, the Michigan multi-agency pooled plan was formally this topic online at http://www.ncsl.org/?tabid=19932. opposed by local school employees and associations.

NCSL gratefully acknowledges the financial support for this publication series from The Colorado Health Foundation and Rose Community Foundation of Denver, Colorado.

National Conference of State Legislatures William T. Pound, Executive Director 7700 East First Place 444 North Capitol Street, N.W., #515 Denver, Colorado 80230 Washington, D.C. 20001 (303) 364-7700 (202) 624-5400 www.ncsl.org © 2010 by the National Conference of State Legislatures. All rights reserved.

4 National Conference of State Legislatures Health Cost Containment and Efficiencies NCSL Briefs for State Legislators

No. 9 June 2010

Prescription Drug Agreements and Volume Purchasing Preferred Lists, Rebates, Multi-State Purchasing and Effectiveness Review of Medicine

dollars. In 2005, for example, Cost Containment Strategy and Logic State Medicaid programs Medicaid programs spent at least $24 billion to purchase 30 states reported collecting are using preferred drug prescription drugs in 2009. Many states now use a combina- a total additional $1.3 bil- lists, supplemental rebates tion of approaches to control the cost of prescription drugs. lion in state supplemental and multi-state purchas- States typically draw from a menu of four purchasing options rebates. ing arrangements to save that feature negotiation, evaluation and volume buying: between 8 percent and 12 Expanded use of preferred drug lists, Multi-state purchasing and 1. percent on overall Medic- Expanded use of manufacturer price rebates, negotiations. Twenty-seven 2. aid drug purchases (sav- Multistate purchasing and negotiations, and state Medicaid programs 3. ings to states nationwide Use of scientific studies on comparative effectiveness of have voluntarily joined a 4. average $1.8 billion annu- products.1 multi-state “buying pool,” ally). primarily as a cost contain- Expanded use of preferred drug lists (PDLs). Preferred ment and efficiency strategy drug lists provide a consistent method for public programs— that influences buying and bargaining power with manufac- such as Medicaid, public employee benefits or state-only turers. In Louisiana, New York and Washington, Medicaid has subsidy programs—to define which prescription products pooled administrative efforts with other in-state agencies such are covered automatically by insurance or benefit programs as public employee and workers’ compensation programs. as “preferred” and which other products for the same medical conditions are “non-preferred.” The non-preferred drugs of- Use of scientific-based comparative effectiveness evalua- ten require an extra approval step or a higher patient copay- tion for product selection. Several states have formally com- ment. In the public sector, the lists are developed by publicly bined resources as members of the Drug Effectiveness Review designated committees, using medical research to judge the Project (DERP), housed in Oregon.2 Reviewers comb through effectiveness of drugs and, in some cases, their cost effective- drug studies to help policymakers purchase the most effec- ness. One goal is to encourage physicians to increase the use tive—sometimes less expensive—medicines. Member states of preferred drugs. While 45 states already use PDLs, about pay approximately $75,000 per year for three years to fund the half have “carved out” or protected, from PDLs, entire classes research and access project findings. The project’s published of medical conditions such as mental health, HIV/AIDS and “head-to-head comparisons” of medicines are based on sci- cancer. Because many of these drugs have high per-patient ence, not spending; however, states use the results to manage costs, several states have recently expanded PDL require- parts of their annual drug budgets. Non-member states can ex- ments to allow evaluation of products to treat these diseases amine or apply the research results without paying to become and conditions. partners.3,4

Expanded use of manufacturer price “supplemental re- Target of Cost Containment bates.” All Medicaid programs receive a basic, standardized All four purchasing approaches are designed to help state rebate from drug manufacturers for both brand-name and government public-sector programs operate more efficiently generic products. As of 2003, however, states can directly ne- and cost effectively. They aim to reduce overall state spending, gotiate with pharmaceutical manufacturers and companies but not deny coverage or services to individual patients. Some classified as drug relabelers for additional or “supplemental” approaches, such as multi-agency buying or multi-state PDLs, Medicaid rebates. These extra state rebates often are applied can be shared with other large purchasers such as local gov- to brand-name “preferred products” because of their gener- ernments or private employers. In some cases, savings can be ally higher sales volume. Although the state supplemental passed indirectly to individual patients in the form of reduced and federal unit rebate amounts are confidential and cannot copayments or coinsurance ( Table 1). be disclosed, they can be as high as 25 percent above the basic federal rebate, reducing state costs by tens of millions of

National Conference of State Legislatures Table 1. Percentage of Total National Prescription Drug Expenditures findings from CER cannot, by themselves, deter- by Type of Payer, 2002-2010 mine Medicare coverage policy. Controversy still Type of Payer 2002 2004 2006 2008 2010 exists about the role of federally-funded research Public funds 25% 28% 34% 37% 40.2% findings and expert conclusions in narrowing Private health 50 48 44 42 40.2 patient care options. These future federal efforts Insurance are beyond the scope of the information in this Consumer out-of- 26 25 22 21 19.6 report. pocket Source: CMS Office of the Actuary, National Health Expenditures, January 2010; 2010 figures are projections. State Examples n At least 45 states have implemented one or more of these strategies. Table 2 (page 4) indicates Federal Health Reform combinations of strategies that are applicable to The Patient Protection and Affordable Care Act, signed March Medicaid and other state purchasing programs. 2010, includes significant financial changes to Medicaid prescription drug rebate policy. As a result, every state will need n As of mid-2010, three multi-state Medicaid bulk buying to recalculate costs, savings and purchasing arrangements for pools and one state-based pool were operating (see be- current and upcoming fiscal years. The new law: low). Each uses common preferred drug lists and obtains n Increases by 8 percent (to a total of 23.1 percent of aver- supplemental rebates from manufacturers. All lists include age manufacturer price [AMP]) only the federal portion of selected brand-name products. Use of generics is empha- manufacturer rebates for brand-name covered outpatient sized but not required for some conditions. Patient treat- drugs in Medicaid. ment decisions remain in the hands of physicians and state agency pharmacy officials. n For brand drugs approved exclusively for pediatric use or for clotting factors, minimum rebates increase to 17.1 per- n Nationwide, Medicaid buying pools included states with cent of AMP. about 32 percent of enrolled beneficiaries (18 million) and 38 percent of the nation’s Medicaid pharmaceuticals n Manufacturers of generic drugs used by outpatients are spending.6 The pools include: subject to a 2 percent increase (to a total of 13.1 percent of • The “National Medicaid Pooling Initiative” (NMPI) start- AMP) in required rebates. ed in 2003 and serves 11 states. • Top Dollar Program (TOP$)SM was started by Provider n Also, for the first time, the federal law extends the prescrip- Synergies and serves seven states. tion drug rebates to outpatient drugs dispensed to enroll- • The Sovereign States Drug Consortium (SSDC) is a ees of Medicaid managed care organizations (Sections seven-state nonprofit structure; 100 percent of all 1206 and 2501). supplemental rebate revenues are returned to member states. Vermont currently hosts program adminis- The changes, retroactive to Jan. 1, 2010, will generate more tration. revenue for Medicaid nationwide. The Congressional Budget Office calculated that requiring rebates on drugs used in man- n The Northwest Prescription Drug Consortium (NPDC), aged care settings would save a total of $420 million in 2011, started in 2007, combines non-Medicaid state pharmaceu- $710 million in 2012 and $790 million in 20135 With about 33 tical programs in Oregon and Washington. million (or 71 percent) of the overall Medicaid population enrolled in managed care arrangements, the new application of n Medicaid directors report that a “significant majority of manufacturer rebates required to be paid to each Medicaid states impose prior authorization on certain drugs. Only program for their managed care population will be a signifi- 3.4 percent of Medicaid prescription drug claims required cant net savings or cost reduction for most states. However, the prior authorization.” This means 96.6 percent of patient state Medicaid share of revenue from existing state-negotiated prescriptions did not require such authorization. Those supplemental rebates will be reduced; exact amounts have not that do account “for 7.5 percent of total Medicaid prescrip- yet been determined and are subject to future negotiations tion drug spending.”7 with manufacturers. Non-State Examples Comparative Effectiveness Review (CER). While the Drug Ef- Several peer-reviewed studies that consider the effectiveness fectiveness Review Project (DERP) has operated under state ju- of formularies focus on incentives such as prior authorization risdiction since 2003, federal health reform included a new pro- or charging a higher or “tiered” copayment for brand-name vision titled “Patient-Centered Outcomes Research.” It includes drugs “used to steer utilization to drugs” on the lists. For ex- are variety of medical practices beyond pharmaceuticals and ample, Medco Health claimed an 11 percent savings in a 2005 emphasizes that informing patients and clinicians is an impor- Health Affairs article.8 tant focus of CER. Furthermore the legislation stipulates that

2 National Conference of State Legislatures Evidence of Effectiveness n Vermont reported that, for FY 2008, the state received an The combined use of preferred drug lists, supplemental re- additional 4.7 percent ($5.3 million) in state-negotiated bates, selected prior authorization for non-preferred drugs and supplemental rebates, using the Sovereign States Drug multi-state purchasing arrangements is saving some states an Consortium and the Vermont PDL. That amount was in estimated 8 percent to 12 percent on overall Medicaid drug addition to the standard federal Medicaid formula rebate, purchases. States also report savings in state-only non-Medic- based on an $112.4 million pharmaceutical budget. aid programs. In most cases, the savings represent only state money and are ongoing over several years. Specific examples n Utah’s Medicaid PDL, in its first year (2008), reduced spend- include the following. ing by $546,000. Savings fell short of original estimates, however, because the initial law allowed physicians to n Iowa Medicaid reported saving “nearly $100 million in state write “dispense as written” on prescriptions without au- dollars over four years after implementing a PDL in 2005; thorization, thereby eliminating a pharmacist’s discre- an average of 21 percent of the drug budget.” The use of tion to substitute generic products. In 2009, the law was supplemental rebates has yielded more than $37 million expanded to include all drug classes; this is expected to annually (Figure 1).9 reduce Medicaid drug spending by more than $1 million by 2010.13 Figure 1. Iowa Medicaid Prescription Drug Savings n New York documented Medicaid savings on prescription as Percent of Total Spending Better drugs of $82.5 million for 2007. Of the savings, $80.5 mil- 50 45.0% lion were the result of multi-state negotiated supplemental rebates. The remaining savings, $1.95 million, were 40 38.0% due to a shift in use from more expensive non-preferred drugs to less expensive preferred drugs for a given medical 31.3% 30 treatment. Use of preferred ACE Inhibitors (for controlling blood pressure), for example, increased from 72 percent to 98 percent, and the market share for preferred beta block- 20 18.0% ers increased from 54 percent to 84 percent. 14,15 13.0% 10 9.0% n Indiana saved approximately $29.81 million through Sept. 30, 2007, based on cumulative estimated savings from the

ntroduction of Federal Medicaid D Part of Federal ntroduction Medicaid PDL. Supplemental rebate savings after five years I 0 16 2005- 2006 2007 2008 2009 2010 of operation totaled an additional $31.54 million. 6 mo. YTD State Fiscal Year n Source: Iowa Department of Human Services, Medicaid (quarters are In 2006, Washington launched a “joint purchasing project” cumulative, April 8, 2010. for three agencies: the Medicaid, workers’ compensation and state employee health plan programs. All three agen- n For FY 2009, the seven states in the Sovereign States Drug cies agreed that, “on average each one percent increase Consortium represented 1.2 million eligible Medicaid pain generic fill rate can decrease pharmacy spending by an tients and more than $1.3 billion in state expenditures. equivalent one percent.” Within the first two years of PDL Iowa’s share of savings was “nearly $35 million.”10 program implementation, state officials reported savings of $20 million to $24 million annually in fiscal years 2005 n Texas Medicaid estimated that its PDL resulted in savings of through 2007. The results represent savings of about 5 6.6 percent ($116 million) in FY 2007, up from $108 million percent of prescription drugs costs. The Medicaid fee-for- in FY 2006. The 59 drug classes on the Medicaid PDL rep- service program alone saved $13.7 million in 2006.17 resent approximately 68 percent of all Medicaid pharmacy expenditures, which totaled $1.76 billion in FY 2007.11 n The federal Centers for Medicare and Medicaid Services have supported state-created PDLs and multi-state pool- n Georgia’s Department of Community Health in 2008 cal- ing, stating that “these pooling plans will help lower drug culated it saved at least $20 million a year because doctors costs for the states involved.”18 gave patients a different, lower-cost drug after seeking prior approval.12 n Officials at the Veteran’s Administration “use Drug Effec- tiveness Review Project reviews to inform decisions about drug coverage.” The federal Agency for Healthcare Re- search and Quality (AHRQ) funds DERP’s parent organization to assist in “stakeholder outreach.”19

National Conference of State Legislatures 3 Table 2. State Prescription Drug Cost and Efficiency Strategies State/ PDL-Medicaid Examples PDL-State-Only State-Negotiated Multi-State Comparative Jurisdiction Date Started of Exempt Programs Supplemental Pool Effectiveness Conditions Rebate Reviews

Alabama  ‘03 MH/HIV  ‘03  MED Alaska  ‘04  ‘04  NMPI  DER #, MED Arkansas  ‘04  ‘04  NMPI##  DER, MED Arizona  (i) California  ‘88 HIV/CAN  ‘88  DER # Colorado  ‘07 MH/HIV/CAN  ‘08  DER KEY: Multi-State Connecticut  ‘02 MH/HIV   ‘04 Definitions Delaware  ‘05  ‘05  TOP$ DER = Drug Effectiveness Florida  ‘01 MH/HIV/CAN  ‘01 Review Project Georgia  MH/   ‘09  NMPI## DER# = Former member in Hawaii  ‘04 MH/ HIV/ Hep-C/  ‘04  NMPI## ‘06 to ‘09 MED = Medicaid Evidence- IMM based Decisions Project Idaho  ‘05  ‘03  TOP$  NMPI = National Medicaid Illinois  ‘02 MH/HIV   ‘02 Pooling ##= Former member of Indiana  ‘02 MH/  CHIP  ‘04 pool Iowa  ‘03 MH/HIV/CAN  ‘04  SSDC NWDC = Northwest Rx    # Consortium Kansas ‘02 MH/CAN ‘02 DER SSDC = Sovereign States Kentucky  ‘02  ‘04  NMPI Drug Con. Louisiana  ‘00 MH/HIV/CAN  agencies  ‘02  TOP$ TOP$ = Top Dollar Rx Purchasing Maine  ‘00 MH   ‘03  SSDC Maryland  ‘03  ‘03  TOP$  DER Exempt Conditions Massachusetts  ‘02 MH  ‘04 CAN = Cancer treatment Michigan  ‘01 MH   ‘03  NMPI  DER # drugs Minnesota  ‘02  ‘04  NMPI  DER #, MED Hep-C = Hepatitis drugs IMM = Immunosuppressive Mississippi  ‘04 MH  ‘06 drugs (v) Missouri  ‘02  ‘04  DER, MED HIV = HIV and AIDS drugs Montana  ‘06  ‘04  NMPI  DER MH = Mental health treatment drugs Nebraska   ‘09  TOP$ Nevada  ‘03 MH/HIV  ‘04  NMPI New Hampshire  ‘02  ‘04  NMPI New Jersey Notes: New Mexico  Y ‘02  ‘02 Not all features may be in operation in individual states New York  Y ‘05 MH/HIV  agencies  ‘06  NMPI (ii)  DER, MED (i) Arizona uses a capitated North Carolina  ‘10 (iii)  ‘10  NMPI DER # managed care payment structure for almost all Med- North Dakota icaid enrollees and therefore Ohio MH/HIV  ‘03 does not pay for individual Oklahoma   prescription drugs. Virtually ‘03 MED all the Medicaid managed Oregon  ‘01 MH/HIV/CAN   ‘09  SSDC,  DER, MED care companies use a pre- NWDC ferred drug list. Pennsylvania    (ii) New York’s FY’10 budget ‘06 ‘05 TOP$ discontinues participation Rhode Island  ‘07  NMPI in the National Medicaid South Carolina  ‘04  ‘05  ‘07  NMPI Pooling Initiative, “allowing the state to negotiate supple- South Dakota  mental rebates directly with Tennessee  ‘03   ‘03  NMPI## manufacturers.” Texas    (iii) North Carolina launched a ‘03 ‘03 PDL and joined NMPI in April Utah  ‘07 MH, IMM   ‘07  SSDC 2010. Vermont  ‘01 MH case-by-case  [all]  ‘06  SSDC (iv) Wisconsin’s PDL includes Senior Care pharmaceuti- Virginia  ‘04   ‘04 cal assistance program and Washington  ‘01 MH/HIV/CAN  ‘03  ‘02  NWDC  DER, MED Badger Care children’s health West Virginia  ‘02 MH   ‘02  SSDC  MED program. Wisconsin      (v) Immunosuppresives are ‘03 (iv) ‘05 TOP$ DER, MED used to inhibit or prevent ac- Wyoming  ‘03  ‘08  SSDC  DER tivity of the immune system District of    NMPI to treat conditions including arthritis, MS, lupus and organ Columbia transplants. Sources: NCSL research, 2009, 2010; NASMD; National Association of Chain Drug Stores; CMS Medicaid Pharmacy Supplemental Rebate Agreements, March 2010.

4 National Conference of State Legislatures Complementary Strategies n A study by the National Pharmaceutical Council of pre- n Prescriber Education Programs. At least six states have ferred-drug lists in 47 Medicaid programs concluded, “Sav- established prescriber education programs or “academic ings in the drug budget appear to be completely offset detailing” initiatives to distribute scientific and clinical by increased expenditures elsewhere in the system.”23 An- data about the effectiveness and costs of pharmaceuticals other industry-funded study concluded, “A comprehensive and medical devices. Programs operate in Maine, Massa- review of the research found that the preponderance of chusetts, New York, Pennsylvania, South Carolina, Vermont studies showed an actual increase in overall health-care and the District of Columbia; pilot programs are under costs.”24 way in Idaho and Oregon. Pennsylvania’s Independent Drug Information Services program is the largest, operat- n State supplemental rebates on brand-name drugs can ing as a partnership between the state and Harvard Medi- have the unintended effect of lowering rates of generic cal School. Under the program, state-employed pharmacy use in many Medicaid programs below that of private in- experts visit prescribers to explain the range of products, surers. comparative patient results and pricing. Medicaid, public employee health benefits and the state-subsidized phar- n Supplemental rebates can be available from and negoti- maceuticals program (PACE) for seniors and people with ated with generic drug manufacturers, but are less com- disabilities use the program. Studies of existing state pro- monly used by some states. grams indicate that every $1 invested in these programs results in a $2 return on investment.20 A 2010 analysis of For More Information the programs notes that states with a preferred drug list Cauchi, Richard. Pharmaceutical Preferred Drug Lists (PDLs) - and a prescriber education program should coordinate State Medicaid and Beyond. Denver: National Conference of to ensure that their preferred drug list and the evidence- State Legislatures, Nov. 1, 2009. based recommendations of the prescriber education pro- Clancy, Carolyn. AHRQ Outcomes and Effectiveness Reports. gram are in line.21 Agency for Healthcare Research and Quality (AHRQ), U.S. Department of Health and Human Services, Maryland, July n Step Therapy. Some major purchasers, including commer- 2009. cial insurers and Medicaid programs, have imposed a strat- The Commonwealth Fund, Stretching State Health Care Dollars: egy to shift patients to alternative prescription drugs, re- Pooled and Evidence-Based Pharmaceutical Purchasing, quiring an enrollee to try one drug before the plan will pay New York: The Commonwealth Fund, October 2004; for another drug. Step therapy (and Fail First requirements) http://www.commonwealthfund.org/usr_doc/782_Silow- aims to control costs by requiring that enrollees use more Carroll_stretching_pooledRx.pdf. common drugs that usually are less expensive. Progression Kaiser Family Foundation. Cost Containment Strategies For to a new medication is based upon failure of the former Prescription Drugs: Assessing The Evidence In The Literature. medication to provide symptomatic relief or cure—hence Washington, D.C.: KFF, March 2005. “fail first.” Step therapy currently is used in approximately National Association of State Medicaid Directors. “State 28 percent of employer programs, in all 50 state Medicaid Perspectives on Emerging Medicaid Pharmacy Policies and programs and in many Medicare Part D programs. Cost Practices.” Washington, D.C.: NAMSD, November 2006. containment results depend upon the individual products NCSL Health Committee, “Comparative Effectiveness: Better and treatment categories subject to step therapy. Care or Rationing,” convened July 21 at the 2009 NCSL Legislative Summit held in Philadelphia, Pa. Slide Challenges to Cost Containment presentations are available at http://www.ncsl.org/default. n Medicaid programs generally are required to cover the aspx?tabid=18174. costs of “all medically necessary” prescription drugs; treat- Reck, Jennifer, A., Template For Establishing And Administering ing physicians have the final say more than 90 percent of Prescriber Support And Education Programs. Hallowell, the time. Maine: Prescription Policy Choices, 2008; http://www. policychoices.org/reports.shtml. n One national consumer advocacy organization concludes that “many PDLs are ineffective. PDL committees may be Future Updates biased by inaccurate information, or prescribing rules may The latest information on this topic, including major changes in not be properly enforced.”22 Medicaid manufacturer rebates for 2010 and beyond, is available in an NCSL online supplement at www.ncsl.org/?tabid=19934.

National Conference of State Legislatures 5 Notes prescriber awareness of the Medicaid PDP. The remaining 2.3 percent (105,286 claims) were for non-preferred drugs that required prior authorization. These 1. A companion brief, Use of Generic Prescription Drugs and Brand Name claim counts include both the initial prescription and refills, which do not Discounts, addresses the related strategies of brand-name and generic require another prior authorization so the number of claims is greater than prescription drug use. the number of PA requests. Of the total PA requests, 20.3 percent were for 2. The Drug Effectiveness Review Project (DERP) members as of June beta blockers used primarily for cardiovascular indications, 17.7 percent 2010 include Arkansas, Colorado, Idaho, Maryland, Missouri, Montana, New were for antihistamines used to treat allergies and 16.7 percent were for York, Oregon, Washington, Wisconsin and Wyoming. Other recent members long acting narcotics used to treat moderate to severe pain. All other classes were Kansas (’09), Maryland (‘09), Michigan (‘08), Minnesota (‘08) and North comprised 14percent or less of the total number of PA requests. When Carolina (‘08). prescribers were asked why they were ordering a non-preferred drug, they 3. DERP is a nonprofit multi-state project of the Oregon Evidence-Based most often cited contraindications preventing transition of a patient to a Practice Center Project headed by former Oregon governor John Kitzhaber. It preferred drug, patient specific adverse reactions to the preferred drug and provides reports but does not purchase prescription drugs. prescriber preference. In 2.8 percent of calls, the prescriber agreed to change 4. In 2006, 38 states reported that drug comparative effectiveness the prescription to the preferred drug after consultation with CCC staff. reviews (CERs) are useful when developing Medicaid pharmacy policy. This 15. New York Department of Health, Medicaid: Letter to Pharmacy includes 12 of the 15 states participating in the Drug Effectiveness Review Providers (New York: NYDH, Aug. 1, 2008); http://www.emedny.org/info/ Project. newsletter/Pharmacy_Provider_Letter_Signed.pdf. 5. Congressional Budget Office, Budget Options: Volume 1: Health Care 16. Savings do not count federal rebates and are calculated before (Washington, D.C.: CBO, December 2008): 141. administrative costs are deducted. Felice R. Slaughter and Mark Sutcliffe, 6. Not every product is purchased through the multi-state pools— “Evaluation of the Indiana Medicaid Preferred Drug List (PDL) Program,” no.8 certain specialty and rarely used drugs may be exempt. Managed care (Indianapolis: ACS Health Management Solutions, July 18, 2008). contracts may also include drugs purchased through large or multi-state 17. Ray Hanley, interview with author, Jan. 8, 2009, and C. Silow- private insurance contracts. Carroll, et al., States in Action: A Quarterly Look at Innovations in Health 7. Jeffrey S. Crowley and Deb Ashner, State Medicaid Outpatient Policy (New York: The Commonwealth Fund, Spring 2006); http://www. Prescription Drug Policies: Findings from a National Survey, 2005 Update commonwealthfund.org/publications/publications_show.htm?doc_ (Washington, D.C.: Kaiser Family Foundation, October 2005). id=362631&#washington. 8. Kaiser Family Foundation, Cost Containment Strategies For Prescription 18. U.S. Department of Health and Human Services, “HHS News Release,” Drugs: Assessing The Evidence In The Literature (Washington, D.C.: KFF, March May 27, 2005. 2005). 19. Daniel Fox, The Convergence of Science and Governance (Berkeley, 9. Department of Human Services, Iowa Medicaid Enterprise, “Results Calif.: University of California Press, 2010). Iowa: Accountability for Iowa,” State of Iowa, updated August 2009; http:// 20. Rachel Brand, Marketing Drugs: Debating the Real Cost (National www.resultsiowa.org/humansvs.html. Conference of State Legislatures, State Legislatures, September 2008); http:// 10. Seven states currently are in the group representing 1.2 million www.ncsl.org/?tabid=13788. eligibles and more than $1.3 billion in drug expenditures. Nearly $35 million 21. Jennifer Reck, A Template For Establishing And Administering Prescriber was saved in SFY 2009 through the prescription drug list and the rebate Support And Education Programs (Hallowell, Maine: Prescription Policy program. Choices, 2008); http://www.policychoices.org/reports.shtml. 11. Texas Health and Human Services Commission, Texas 22. Christine Barber and Robert W. Seifert, Saving Money by Improving Medicaid Preferred Drug List Annual Report, FY 2007 (Austin, Texas: Medicaid (Boston, Mass.: Community Catalyst, January 2009); http://www. THHSC, March 2008); http://www.hhsc.state.tx.us/hcf/vdp/0308_ communitycatalyst.org/doc_store/publications/medicaid_cost_containment_ PreferredDrugListAnnualReport2007.pdf. Jan2009.pdf. 12. “Augusta News,” The Augusta Chronicle, Sept. 5, 2008; http://chronicle. 23. W.J. Moore and R.J. Newman, “Drug Formulary Restrictions as a Cost- augusta.com/stories/090508/met_472033.shtml. Containment Policy in Medicaid Programs,” Journal of Law and Economics 36 13. Advisory Board Company and Kaiser Family Foundation, “Utah (1993): 72. Preferred Prescription Drug List Savings Less Than Projected,“ Medical News 24. Richard A. Levy and David Cocks, “Component Management Fails Today; www.medicalnewstoday.com/articles/122282.php. to Save Health Care System Costs: The Case of Restrictive Formularies” (Reston, 14. According to the 2007 New York Medicaid Annual Report of the Va.: National Pharmaceutical Council, 1999, 2nd ed.); http://npcnow.org/ drugs subject to the PDP, 97.7 percent of claims were for preferred drugs App_Themes/Public/pdf/Issues/pub_related_research/pub_component/ that did not require prior authorization (Appendix 9). This extremely high component/20Management%20Fails%20to%20Save%202nd%20Ed.pdf. percentage is attributable to the wide selection of preferred drugs within a class, prescriber familiarity with PDLs used by other insurance programs and

NCSL gratefully acknowledges the financial support for this publication series from The Colorado Health Foundation and Rose Community Foundation of Denver, Colorado.

National Conference of State Legislatures William T. Pound, Executive Director 7700 East First Place 444 North Capitol Street, N.W., #515 Denver, Colorado 80230 Washington, D.C. 20001 (303) 364-7700 (202) 624-5400 www.ncsl.org © 2010 by the National Conference of State Legislatures. All rights reserved.

6 National Conference of State Legislatures Health Cost Containment and Efficiencies NCSL Briefs for State Legislators

No. 8 June 2010

Use of Generic Prescription Drugs and Brand-Name Discounts Prescription Drugs: Pharmaceuticals, an integral per 30 day supply, keeps part of medical treatment, the heart rate slow or Pharmaceutical use is docu- An Overview keep patients healthier and well-controlled in most mented to save money by extend or save lives. More than situations.1 avoiding costly hospitaliza- half of Americans take prescription drugs regularly. In many tion, emergency room use situations, proper pharmaceutical use is documented to save n A leading brand prod- or nursing home place- money by avoiding costly hospitalization, emergency room uct for depression and ment. use, moving to a nursing home or repeat visits to specialists. obsessive-compulsive Millions of patients with high blood pressure, high cholester- disorder costs $100 per 30 pills, or about $1,200 per year.2 ol, chronic pain, arthritis, sleep disorders or mild depression This compares with $4,500 to $8,100 for a typical one-ep- depend on one or two daily pills, for example. isode stay in a psychiatric hospital.3 The “return on investment” varies, but combined with the medical and societal Drugs, both brands and generics, can be the cost-effec- benefits, particular drugs are a widely accepted treatment tive choice. The math sometimes may be complex, but sav- choice for certain patients. ings through use of pharmaceuticals can be irrefutable when compared to other treatments: n About 76 million Americans take Lisinopril, to lower blood pressure. It costs $4 to $5 per month, but is rarely adver- n A simple aspirin, costing less than 1 cent, can ward off a tised or promoted. first or a second heart attack. After warning symptoms occur, aspirin prevents further damage from small blood Total annual U.S. pharmaceutical purchases were $244 billion clots that have formed. For the long-term, it acts as an in 2008.4 Although this figure is huge, it represents just over anti-inflammatory. 10 percent of the overall national health expenditure of $2.4 trillion. n Heart failure will cost the United States $39.2 billion in 2010, according to the Centers for Disease Control and Prescription drug policies remain contentious, with strong Prevention. One example of a widely used medication for economic competition between brand-name companies and mild-to-moderate heart attack, Lanoxin® (digoxin), at $20 generic manufacturers. Experts and interest groups also seek

120 Figure 1. Prescription Drug Sales and Market Shares Unbrand Gen % Dollars % Total prescriptions dispensed 100100% 100 8.8% 10.0% 10.7% Unbrand Gen Brand Gen 10.1% 10.7% 12.4% 80%80 80 Brand Gen Brand 50.3% 58.0% 65.9% Brand 60%60 60

81.1% 79.2% 76.9% 9.8% 40%40 40 9.3% 8.6% 39.9% % MARKET SHARE 20% 32.6% 20 20 25.6%

0%0 0 20052005 20072007 Dec.2009 2009 20052005 2007'2007 Dec.'2009' 2009

Branded Branded generics Unbranded generics

Sources: IMS Health, National Sales Perspectives, December 2009; National Prescription Audit, December 2009.

National Conference of State Legislatures market advantage, including those employed by government highest-priced medica- agencies, insurers, employer benefit managers, medical societ- tions are brand-names, Expanded use of generic drugs ies, consumer advocates, professional associations represent- which means generic is documented to save states 30 ing pharmacies, pharmacy benefit managers (PBMs), and the drugs are not available percent to 80 percent on certain manufacturers and distributors of brand-name, generic, over- for some key medical widely-used medications, reducing the-counter and herbal or vitamin supplements. conditions and catego- expenditures by millions of dollars ries of patients unless annually. Cost Containment Strategy and Logic a doctor decides a dif- Buying more generic prescription drugs instead of their brand- ferent form of medication is appropriate. Potentially life-saving name equivalents and purchasing brand-name drugs with drugs—such as the latest anti-depressants, anti-psychotics, discounts can significantly reduce overall prescription drug and cardiovascular products—often remain predominantly expenditures. brand-name; their sales total approximately $127 billion annually. Each dose of a leading colon cancer drug, for example, costs $10,000 a month and a lung cancer drug about $8,800 11 Brand-name products include the unique patent- per month. If a physician feels that a brand-name product is protected products that usually are available only from a beneficial for a patient, he or she may request “brand medically single manufacturer.5 Generic drugs, typically no longer necessary” on the prescription especially prevalent for condi- protected by patents, are produced and sold by multiple, tions such as HIV/AIDS, organ transplants and mental illness. competing manufacturers at much lower costs. Target of Cost Containment States already are one of the largest purchasers of prescription Generics. The federal Food and Drug Administration (FDA), drugs, making decisions and signing agreements worth billions which approves all drug products sold legally in the United each year. Their buying decisions, set by law, contracts and ne- States certifies the “safety and suitability of generic drugs and gotiations, are aimed primarily at cost-effective purchasing encourages their use.” All generic drugs must meet the same based on the needs of the patient populations, not on individ- strict quality guidelines and have exactly the same active in- ual patients’ benefits or treatment. Large national corporations, gredients as brand-name drug equivalents.6 including health insurers and pharmaceutical benefit management companies, already vie for the least expensive prices. Pa- n In 2007, the average retail price for a generic prescription tients’ access to treatment usually is addressed by separate re- was $34.34, while the average retail price for a brand-name quirements, such as Medicaid guidelines that require no “medi- prescription was $119.51, a 71 percent difference.7 cally necessary” prescription drugs be excluded from coverage and through use of simplified prior authorization steps that n The generic substitution rate in the United States in 2009 allow use of “non-preferred” as well as “preferred” drugs. was 75 percent; generic medicines accounted for more than 2.6 billion of the approximately 3.9 billion prescrip- n Between 2000 and 2005, the annual increase for drug tions dispensed. The total number of generic prescrip- spending was the highest of any health service or prod- tions dispensed increased 5.9 percent in 2009, while the uct—11.6 percent in 2000 and 10.6 percent in 2005. This number of brand-name prescriptions dispensed declined annual increase slowed dramatically by 2008 to 3.2 percent. 7.6 percent.8 This compares to approximately 1.2 billion Medicaid prescription drug spending actually decreased brand-name prescriptions dispensed annually in the Unit- by 1.8 percent in 2007; 31 states reported spending less in ed States. 2007 than in 2006. The slowdown in costs does not mean the prescription drug market is shrinking or unimportant. n Generic drugs represented 22 cents of every $1 spent on It does demonstrate the clearest numerical examples of prescription drugs. cost containment within the American health system. n Fifty-two percent of FDA-approved prescription products n In late 2009, prescription drug prices were reported to be are available in a generic form.9 increasing. For example, Anthem Blue Cross in California claimed it was experiencing 13 percent annual increases n According to the PhRMA, “The volume of generic drugs for key drug products.12 AARP reported 9.3 percent in- dispensed affirms that formularies and generic substitu- creases on several widely used brand products. tion are the major forces in determining whether a patient receives a newer brand medicine or an older generic medi- n A report by the National Association of Chain Drug Stores cine.”10 states, “Medicaid programs generally have a good generic dispensing rate, but greater savings could be achieved by Brand-Name Drugs. Approximately 48 percent of prescription encouraging or mandating more aggressive prescribing of products are available only in a brand-name product, most generics. Most states spend between 7 percent and 8 per- of which are available only from a single manufacturer. The cent of their Medicaid drug budget on higher-cost brand-

2 National Conference of State Legislatures name drugs that have lower-cost generic equivalents.”13 in 2011, $710 million in 2012 and $790 million in 2013.17 Brand However, states generally provide a good balance of drug manufacturers will be responsible for $2.8 billion in add- brand-name and generic drug access. ed federal excise taxes annually for the 10-year period between 2010 and 2019.18 n A 2009 U.S. Government Accountability Office report examining price changes from 2008 to 2009 reported that “lack State Examples of therapeutically equivalent drugs and limited competi- n Thirteen states—Florida, Hawaii, Kentucky, Massachusetts, tion may contribute to extraordinary price increases.”14 Minnesota, Mississippi, Nevada, New Jersey, New York, Pennsylvania, Rhode Island, Washington and West n A 2010 report released by Express Scripts, one of the larg- Virginia19—and Puerto Rico require licensed pharmacists est pharmaceutical benefit management companies, cal- to dispense the FDA-approved generic equivalent when culated that “potential savings of $18 billion were missed available. All other states permit, but do not require, li- in the commercially insured market alone from use of censed pharmacists to dispense the generic equivalent. brand-name drugs instead of chemically or therapeutically These state laws generally apply to all patients and all pay- equivalent lower cost generics.” “Extrapolating to the U.S. ers. population, including those enrolled in Medicare, Medic- aid and other public insurance programs, Express Scripts n In every state, physicians and other licensed prescrib- estimated that ‘missed saving opportunities’ amounted to ers can specifically order the use of a brand by name and over $42 billion.”15 block a generic substitution. A group payer—either a public agency or private sector company—can control the re- n States also can provide incentive payments to pharmacies imbursement rules. South Dakota’s state employee health and to physicians who promote generic drug use.16 plan, for example, pays only the generic price if enrollees choose a brand-name drug that is not “medically neces- The complex U.S. pharmaceutical market includes more than sary” when a generic could be used. The employee will pay 10,000 distinct FDA-approved medicines. Therefore, large pur- the $9 generic copayment plus the difference in cost be- chasers need systematic programs that are constantly updated tween the generic drug and brand-name drug.20 to ensure both maximum appropriate savings and the best medical effectiveness. n In 2006, Washington launched a three-agency joint purchasing project. The three agencies reported “that on aver- Federal Health Reform age each one percent increase in generic use can decrease The Patient Protection and Affordable Care Act, signed March pharmacy spending by an equivalent one percent.”21 23, 2010, significantly increases the federal Medicaid drug rebate on brand-name drugs by 8 percent, from 15.1 percent to n An analysis of annual generic, brand-name and total an- 23.1 percent and the generic drug rebate by 2 percent, from nual spending in state Medicaid programs showed the 11 percent to 13 percent. The new rebates apply only to the following examples of spending and projected savings for federally paid portion of Medicaid, not the state portion. The the period from July 2008 to June 2009 (Table 1). law also extends the prescription drug rebate to Medicaid managed care plans, payable to Medicaid programs retroac- n West Virginia law requires substitution of generic drugs tively, effective Jan. 1, 2010. The Congressional Budget Office when appropriate and further requires that pharmacies calculated that this change would save a total of $420 million pass on to purchasers the entire savings realized from use of generic drugs. In August Table 1. State Medicaid Prescription Drug Use, Cost and Projected Savings* 2009, the state sued major pharmacies in the state for State Total Rx Total Rx Brand Brand Generic Generic Use overcharging retail consum- Medicaid Scripts Spending Average % Total % Total Savings if 1% ers.22 (million) ($ in Cost Dollars Dollars Change millions) (state share) n Under Medicaid, nine states Arkansas 4.5 $359 $172 79% 20% $1.8 mil. pay a tiered reimbursement to Connecticut 3.4 $313 $194 79% 20% $2.8 mil. pharmacies as an incentive to Kentucky 9.9 $533 $147 76% 23% $3.8 mil. dispense generics. Illinois, for Maine 2.4 $168. $149 89% 11% $1.2 mil. example, pays a $4.60 pharma- New Jersey 5.4 $547 $203 79% 20% $4.5 mil. cist dispensing fee for gener- National 289 $23,040 $191 82% 17% ics and a $3.40 fee for branded Total *Savings figures are a projection based on an assumption of a 1 percent change, not actual savings. products. North Carolina pays A 50-state version of this information is available online. The column headed “Generic utilization if 1% change (state share)” calculates only the state portion of Medicaid payment, ranging from 50 percent to 24 percent of total costs, and excludes the federal share of savings (FMAP share). Source: National Association of Chain Drug Stores, National Brand and Generic Prescription (Rx) Medicaid Drug Utilization and Expenditures by State in 2008Q3 - 2009Q2.

National Conference of State Legislatures 3 $5.60 for generics and $4.60 for branded products.23 tal rebates) make some products competitive by price, es- Non-State Examples pecially in the Medicaid pricing structure. n The U.S. Food and Drug Administration described the fi- n The federal 340B Drug pricing program allows 14,500 ap- nancial result of using generics as follows. proved clinics, hospitals and other entities located in all 50 states and the territories to purchase and provide many • An IMS National Prescription Audit shows that a typi- costly brand-name products at deep discounts, frequently cal formulary now charges $6 for generic medications, below the established Medicaid price. Regular outpatients $29 for preferred branded drugs and $40 or more for of the approved clinics and hospitals are eligible for the non-preferred branded drugs.24 340B prices, including the uninsured and Medicaid or Medicare patients. A leading brand-name cancer drug, for • National chains—including Wal-Mart, Walgreen’s, example retails at $6,000 per month (100 percent), while Target, Kroger Supermarkets and others—have es- a 340B community health clinic or hospital pharmacy tablished $4 generic pricing for a 30-day supply and can purchase the same product for $3,060 (51 percent) or $10 for a 90-day supply of several hundred popu- less.25 Some states achieve savings by having some Med- lar drugs. Wal-Mart, for example, reports that it “has icaid enrollees obtain their drugs from the 340B-eligible provided customers in 10 states with nearly $997 clinics and pharmacies. (Find more information about million in savings, if compared to purchasing the using the 340B pricing program online at “States and the brand-name equivalent drugs.” When compared to 340B Drug Pricing Program,” http://www.ncsl.org/default. regular pharmacy generic pricing, the savings are aspx?tabid=14469.) far more modest ($2 to $10 per refill) but are significant for some patients. (A complete state-by-state n The major brand-name pharmaceutical manufacturers of- breakdown is available at www.livebetterindex.com.) fer free and reduced-cost pharmaceutical assistance programs nationwide, some with state-identified branches. Complementary Strategies The Partnership for Prescription Assistance (PPA Rx), for ex- For medicines that have no generic equivalent, several other ample, helps qualifying patients who do not have prescrip- purchasing options exist to reduce overall costs and expand tion drug coverage obtain free or low-cost medications, in- access. cluding 2,500 products offered by 200 brand-name manufacturers and 275 other assistance sources. Started in April Many states already use a combination of cost containment 2005, PPA and its Help Is Here Express bus tour had helped approaches to control the costs of prescription drugs. Under 6 million patients as of October 2009.26 Together RX pro- some global payment programs, pharmaceutical costs are vides a similar nationwide service free or at a discount.27 bundled into the payment, creating an incentive for providers Evidence of Effectiveness Purchasing generic pharmaceuticals instead of their brand- When it comes to price, there is a big difference between name equivalent drugs can provide substantial savings, not generic and brand-name drugs. On average, the cost of only for state and local governments and Medicaid programs, a generic drug is 80 percent to 85 percent lower than the but also for health insurers, employers, employees, and direct- brand-name product (before rebates are deducted). pay patients and consumers.

—Source: US FDA, Oct. 13, 2009. n Among all purchasers, the total cost of using generic pharmaceuticals nationwide was $121 billion less com- to prescribe the more cost effective medicines. pared to the purchase price of brand-name equivalents.28 In 2008, for all drugs except specialty products, overall use Selecting Brand-Name Products. of brand-name drugs decreased by 10.9 percent, and ge- n Some brand-name drugs cost less than generics. With neric drug use increased by 7.5 percent. As a result, the cost discounts and marketing a particular brand product can was lowered by 2.3 percent to $12.70 per prescription for be obtained for the same or less than a generic. Acknowl- these drugs, according to the annual survey conducted by edging this, several state required generic substitution Express Scripts. Decreased brand-name drug use also was laws have a blanket exception for products sold at a lower influenced by the slowing economy, over-the-counter sales, price. drug safety concerns and expiring patent protections.29 n Some brand-name drugs have proven to be more effec- n Massachusetts adopted a mandatory Medicaid generic tive, causing fewer side effects or requiring fewer doses substitution process in 2002, when its generic use rate per week. Thus, state-sponsored preferred drug lists al- was 47 percent. By 2007, it had increased generic use to 70 most always include selected brand-name products for percent. Total prescription drug spending was $464.9 mil- “preferred” status. lion, of which approximately 20 percent was spent on generic drugs ($92.8 million). The average cost of the generic n Extra discounts agreed to by manufacturers (supplemen-

4 National Conference of State Legislatures drugs dispensed was $17, compared to an average cost of communication problems among enrollees, providers, and $167 for a prescription filled with a brand-name product in pharmaceutical benefit management firms under contract 2007, the latest data reported. Each 1 percent increase in to the state, which in turn can lead to delays and other generic drug use generated state savings of $7.4 million.30 problems with prescription drug access.”35, 36 n Arizona’s Medicaid managed care health plans require ge- n Brand-name pharmaceutical manufacturers make a high- neric drug use when available. According to Director An- visibility, frequently presented case that continued use thony Rogers, the overall state agency dispensing rate av- of brand-name products is good both for patients and erage for generic drugs is 70 percent. When generic drugs the overall economy. They state, “Brand medicines bear are available, health plans average a 98 percent generic the cost of research and development needed to achieve dispensing rate. Arizona has found it is more cost effective treatment advances and to prove that a new medicine is to use generic drugs than to use brand-name drugs and safe and effective. Over time, these innovative medicines receive a rebate.31 transition to cheaper generics, which piggyback on the brand’s research and development.”37 n New York’s Medicaid Mandatory Generic Drug Program, enacted in 2002, requires doctors to prescribe the generic n People may react differently to medications. A published version of a drug unless they obtain prior approval for a story of one very ill patient who is denied a particular treat- brand-name drug. For FY 2008-2009, the state program ment can lead to reversal of otherwise well-established or showed a decrease in use and spending on most products scientific-based prescription drug programs. requiring drug review and a 50 percent reduction in total payments for switched drugs. Annual cost reduction was n People’s perceptions of generic drugs can present a chal- estimated to be $22,918,665.32 lenge. A national survey of a random sample of commercially insured patients with prescription drug coverage n Washington’s drug discount card program for uninsured found that patient perception of generic drugs generally is residents reported that the average percentage of generic positive, When asked whether they “prefer” generics, how- prescriptions was 86 percent as of January 2010, an in- ever, only 38 percent agreed. Few patients reported con- crease from 81 percent in 2008. The program filled 483,000 cern about the safety or side effects of generic drugs, only prescriptions in its three years of operation, saving card a minority believe that brand-name drugs are more effec- members $19 per prescription—39 percent—and a total tive than generics, and most believe that generics are a of $10,396,000 among 133,000 enrolled residents (as of better “value” than brand-name drugs. As a result, respon- Jan. 31, 2010).33 dents overwhelmingly agreed with the statement, “More Americans should use generics.”38 n Fifty-seven percent of the total nationwide cost reduction from use of generic drugs between 1999 and 2008—to- For More Information taling some $420 billion—were realized in cardiovascular, U.S. Food and Drug Administration. Facts and Myths about psychiatric and neurological disease medications. Generic Generic Drugs. Washington, D.C.: U.S. FDA, Oct. 13, metabolism and anti-infective drugs combined accounted 2009; http://www.fda.gov/Drugs/ResourcesForYou/ for an additional 19 percent of the savings. Nationwide, Consumers/BuyingUsingMedicineSafely/Understanding overall reduced cost from use of generic drugs in these five GenericDrugs/ucm167991.htm. major therapeutic categories totaled approximately $561 National Association of Chain Drug Stores. National Brand billion (an average of $56 billion annually).34 and Generic Prescription (Rx) Medicaid Drug Utilization and Expenditures by State in 2008Q3 - 2009Q2. Arlington, Va.: Challenges NACDS, December 2009. n Treatment for some of the most serious and costly medi- National Conference of State Legislatures. Pharmaceuticals: cal conditions—including life-threatening and chronic Brand and Generic Drugs. Denver, Colo.: NCSL, June 2010; diseases—may require prescribing brand-name products http://www.ncsl.org/?TabID=19934. because no generic drugs are available for a particular Pharmaceutical Research and Manufacturers of America. condition. Pharmaceutical Industry Profile: 2009. Washington, D.C.: PhRMA, 2009; http://www.phrma.org/files/attachments/ n With thousands of FDA-approved brand-name and ge- PhRMA%202009%20Profile%20FINALpdf. neric drugs available, it is difficult for legislators and other elected policymakers to understand, monitor or play a Future Updates direct role in an arena where physicians and pharmacists traditionally make all decisions. n At least two case studies of state prior authorization programs found the programs “can lead to bureaucratic and

National Conference of State Legislatures 5 The latest information on this topic is available in an NCSL Law (Illinois: NABP, January 2009). 20. South Dakota Bureau of Personnel, “Prescription Drug Plan” (Pierre, online supplement at www.ncsl.org/?tabid=19934. S.D.: SDBP, 2008); https://www.bopweb.com/SiteNavTemplateA.asp?id=23. Notes 21. Washington State Health Care Authority, Linking Payment to Performance: A Joint Health Purchasing Project (Olympia: Washington State 1. University of Iowa Hospitals and Clinics, Cardiac Arrest: Frequently Health Care Authority, Dec. 20, 2006); http://www.hca.wa.gov/documents/ Asked Questions (Iowa City, Iowa: UI, Oct. 19, 2006); http://www.uihealthcare. legreports/ESSB-6090-HcA.pdf. com/topics/medicaldepartments/internalmedicine/cardiacarrest/index.html. 22. West Virginia Code §5 30-5-23 and 46A-7-108. 2. Center for Studying Health System Change, State Prescription Drug 23. Twelve states also have a Medicaid tiered patient copayment, Price Web Sites: How Useful to Consumers? (Washington, D.C: CSHSC, February charging less to beneficiaries as an incentive to use generics. Colorado, for 2008; http://www.hschange.com/CONTENT/966/966.pdf. example, charges $1 for a generic and $3 for a brand drug. Illinois has no 3. Healthcare Cost and Utilization Project, Agency for Healthcare copayment for generics and $3 for brands. Centers for Medicaid and Medicare Research and Quality, Hospital Stays Related to Depression, 2005 (Rockville, Services, CMS Medicaid Reimbursement Chart, March 2010 (Baltimore, Md.: Md.: AHRQ, 2007); http://www.hcup-us.ahrq.gov/reports/statbriefs/sb40.pdf. CMS, March 31, 2010); http://www.cms.gov/Reimbursement/Downloads/ 4. Office of the Actuary in the Centers for Medicare and Medicaid reimbursementchart1q2010.pdf. Services, National Health Expenditure Projections 2009-2019 (Baltimore, Md.: 24. T. Aitken et al., “Prescription Drug Spending Trends in the United CMS, Jan. 20, 2010); http://www.cms.gov/NationalHealthExpendData/03_ States: Looking Beyond the Turning Point,” Health Affairs 28, no.1: 151-60. NationalHealthAccountsProjected.asp. 25. Pharmacy Services Support Center - Health Resources and Service 5. Brand-name products also include some “off-patent” and so-called Administration (HRSA), What Is the 340B Program? (Bethesda, Md.: HRSA, “me-too” drugs, which are similar copies of other products. January 2010); http://pssc.aphanet.org/about/whatisthe340b.htm. 6. U.S. Food and Drug Administration, Facts and Myths about 26. Partnership for Prescription Assistance, “Partnership for Prescription Generic Drugs (Washington, D.C.: USDA, Oct. 13, 2009); http://www.fda. Assistance Celebrates Milestone” (Washington, D.C.: PPA, Oct. 22, 2009); www. gov/Drugs/ResourcesForYou/Consumers/BuyingUsingMedicineSafely/ pparx.org. UnderstandingGenericDrugs/ucm167991.htm. 27. TogetherRx Access Program, Press Release (Washington, D.C.: 7. National Association of Chain Drug Stores, Medicaid Cost Savings TogetherRx, Feb. 23, 2010); http://www.togetherrxaccess.com/Tx/ Alternatives (Alexandria, Va.: NACDS, February 2009). pdf/2MM%20-%20100%20MM%20Milestones%20Press%20Release%202%20 8. IMS statistics, IMS Health Reports U.S. Prescription Sales Grew 5.1 Percent 23%2010.doc. in 2009, to $300.3 Billion (Norwalk, Conn.: IMS, April 1, 2010); http://www. 28. Generic Pharmaceutical Association, Generics – Providing imshealth.com. Extraordinary Savings for Americans (Washington, D.C.: GPhA, May 11, 2010.) 9. Generic Pharmaceutical Association, Economic Analysis of Generic http://www.gphaonline.org/about-gpha/about-generics/case/generics- Pharmaceuticals 1999-2008: $734 Billion in Health Care Savings (Washington, providing-savings-americans D.C.: GPA, May 2009.) 29. Express Scripts, 2008 Drug Trend Report (St. Louis, Mo.: Express 10. PhRMA. PhRMA Statement: Vermont Hearing on Advisability of Scripts Inc., 2009); http://www.express-scripts.com/research/studies/ Requiring Disclosure of Free Samples (Washington, D.C.: PhRMA, Oct. 27, 2009); drugtrendreport/2008/dtrFinal.pdf. www.atg.state.vt.us/assets/files/Testimony%20PHRMA.pdf. 30.Commonwealth of Massachusetts, MassHealth Annual Report (Boston, 11. The referenced drug for colon cancer is Erbitux and for lung cancer is Mass.: MassHealth, 2008); http://www.mass.gov/?pageID=eohhs2agencyland Avastin. Andrew Pollack, “Questioning a $30,000-a-Month Cancer Drug,” New ing&L=4&L0=Home&L1=Government&L2=Departments+and+Divisions&L3= York Times, Dec. 4, 2009; http://www.nytimes.com/2009/12/05/health/05drug. MassHealth&sid=Eeohhs2. html?_r=1. 31. Arizona Medicaid, Testimony of Director Rogers (Phoenix, Ariz.: 12. T. Reinke, “Generics Offer Pharmacy Plans Specific Benefits,” Managed Arizona Medicaid, June 22, 2005); http://archives.energycommerce.house. Care Magazine (February 2010). gov/reparchives/108/Hearings/06222005hearing1554/Rodgers.pdf. 13. NACDS, Medicaid Cost Savings. 32. New York Medicaid, Preferred Drug Program Annual Report to the 14. U.S. Government Accountability Office, Brand Name Prescription Drug Governor and Legislature State Fiscal Year 4/1/08 to 3/31/09 (Albany, N.Y.: New Pricing (Washington, D.C.:GAO, Dec. 2009); www.gao.gov/products/GAO-10- York Medicaid, September 2009); http://www.health.state.ny.us/health_care/ 201. medicaid/program/docs/annual_report_preferred_drugs_2008-09.pdf. 15. Express Scripts, 2009 Drug Trend Report (St. Louis, Mo.: Express 33. Ray Hanley, administrator, Washington Prescription Drug Program, Scripts, April 2010); http://www.express-scripts.com/research/studies/ interview with author, Feb. 10, 2010. drugtrendreport/2009/dtrFinal.pdf. The calculation includes use of both 34. Generic Pharmaceutical Association, Economic Analysis (Washington, chemically or therapeutically equivalent generic drugs. D.C.: GPhA, 2008). 16. NACDS, Medicaid Cost Savings. 35. Peter J. Cunningham, “Medicaid Cost Containment and Access To 17. Congressional Budget Office, Budget Options, Volume 1: Health Care Prescription Drugs,” Health Affairs 24, no.3 (May/June 2005): 780-789. (Washington, D.C.: CBO, December 2008): 141. 36. J. Tilly and L. Elam, Prior Authorization for Medicaid Prescription Drugs 18. National Conference of State Legislatures, Patient Protection and in Five States: Lessons for Policy Makers (Washington, D.C.: Kaiser Commission, Affordable Care Act as Amended By HR 4872, The Reconciliation Act Of 2010: April 2003). Summary – Medicaid And Chip Provisions (Preliminary Draft), Section 2501 37. PhRMA, PhRMA Statement on AARP Report (Washington, D.C.: PhRMA, (Denver, Colo.: NCSL, March 26, 2010). April 2009); http://www.phrma.org/news_room/press_releases/phrma_ 19. National Association of Boards of Pharmacy, 2009 Survey of Pharmacy statement_on_new_aarp_report. 38. William H. Shrank et al., “Patients’ Perceptions of Generic Medications,” Health Affairs 28, no. 2 (March/April 2009): 546-556.

NCSL gratefully acknowledges the financial support for this publication series from The Colorado Health Foundation and Rose Community Foundation of Denver, Colorado.

National Conference of State Legislatures William T. Pound, Executive Director 7700 East First Place 444 North Capitol Street, N.W., #515 Denver, Colorado 80230 Washington, D.C. 20001 (303) 364-7700 (202) 624-5400 www.ncsl.org © 2010 by the National Conference of State Legislatures. All rights reserved.

6 National Conference of State Legislatures Health Cost Containment and Efficiencies NCSL Briefs for State Legislators

No. 7 June 2010 Equalizing Health Provider Rates All-Payer Rate Setting

Cost Containment Strategy and Logic necessary to cover a provid- Evidence is mixed, but indi- All-payer rates are payment rates that are the same for all pa- er’s operating expenses. cates that, properly struc- tients who receive the same service or treatment from the tured, state all-payer rate set- same provider. “All payers” include patients, private health in- Interest in all-payer rates ting can slow price increases surance plans, large employer self-insured plans and people as a cost containment tool but not necessarily curb without insurance; it also may include Medicaid and Medi- declined significantly since overall cost growth. care (under an approved waiver from the federal govern- its heyday in the 1970s, but ment). Rates may be set per service or per case (e.g., hospital all-payer rate setting and care for a heart attack). Rate setting has mainly been used for uniform pricing have received renewed attention for several hospital inpatient and outpatient services. reasons.

Under a system of all-payer rates, the reimbursement a pro- n In recent years, mergers and acquisitions have led to in- vider receives for a given service is the same regardless of creased hospital and health care system market concen- who pays. Different payers would not pay different rates for tration. According to one health policy expert, the dispro- the same service, as is the case today. Currently, although portionate bargaining power providers have in markets virtually all patients are charged the same amount on paper where they are dominant makes cost control extremely (i.e., list price), actual payments vary widely based on nego- difficult.2 All-payer rate setting addresses this problem. tiated discounts. A hospital, for example, may receive reim- bursements from more than a dozen different health insur- n Health care costs continue to increase much faster than ers and health plans, each with its own payment schedule. general inflation. Frustrated by the apparent inability of In addition, Medicare and Medicaid have their own rules for the market (including managed care) to control spiraling paying hospitals. Minnesota has described all-payer rates as health care costs, policymakers want to improve market a pricing system in which “charge = price = reimbursement.”1 competition by making it easier for health care purchasers to compare prices. They also want to reduce administrative The two types of all-payer rate programs are: costs associated with multiple, complicated reimburse- n State-determined rates. This is the traditional approach ment schedules. to rate setting under which a state authority sets rates, most often for hospital services. It is similar to public util- n More sophisticated data systems, advances in health infor- ity regulation. mation technology and improvements in risk-adjustment methodologies make it easier to set rates that accurately n Provider-set rates. This approach, which is sometimes reflect provider costs and include incentives for cost con- called “uniform pricing,” allows providers to set their own tainment. rates but requires rates to be the same for all payers. A state can establish rate setting parameters but does not In addition to cost containment, other reasons exist for re- set the actual rates. A variation of this approach applies newed interest in all-payer rates. only to uninsured patients who are not eligible for charity care. In this case, providers are prohibited from billing n Advocacy groups are concerned about “discriminatory uninsured patients more than Medicare or health plans pricing”—the practice of billing full charges (“list price”) that have negotiated discounted rates. to uninsured patients who are not eligible for charity care. These charges often may be at least twice those of com- Both approaches are designed to contain health care costs by mercially insured or Medicare patients. fostering price competition and reducing or eliminating the cost to negotiate and administer multiple reimbursement n Providers are concerned about the disproportionate bar- schedules with multiple payers. State rate setting programs gaining power large health insurers have in some states, also reduce costs by limiting payment rates to the minimum particularly where one or two insurers dominate the market.

National Conference of State Legislatures Target of Cost Containment uniform pricing in practice” that includes three elements, The primary target of all-payer rates are uneven and high cited in its report as: health care prices, especially for inpatient and outpatient hos- 1. Services (individual and bundled) are defined. pital care. Numerous studies show the main reason per capita 2. Providers set an accepted reimbursement payment health care expenditures are so much higher in the United price. There is no requirement about how prices are States than in other countries is higher medical prices.3 Be- set; each provider could offer a different price. tween January 1988 and January 2009, the consumer price in- 3. Price = payment = what insurance plan pays + what dex (CPI) rose 82 percent, while the medical component of CPI the consumer pays.8 rose 175 percent. n Oregon does not have an all-payer rate system but is con- All-payer rates are intended to promote provider price compe- sidering limits on provider rate increases that would apply tition, reduce health plan and administrative costs and, when to all payers. The Oregon Health Fund Board, established combined with quality incentives, reward high quality/low cost by the Oregon legislature in 2007,9 issued a November providers. All-payer rates also are designed to address signifi- 2009 report that examined a number of health care reform cant mark-ups in provider charges that, in the current system, strategies, including “authorization of an appropriate state are needed to cover deeply discounted rates for some payers. agency to establish annual maximum limits (“ceilings”) on Hospital mark-ups average 187 percent of costs and range as price increases charged by health care providers in a simi- high as 400 percent of costs.4 lar class (e.g., licensed health care facilities).”10 It suggested two ways to establish ceilings: limit increases to a fixed Federal Health Reform multiplier of the Medicare reimbursement rate (e.g., 130 The Patient Protection and Affordable Care Act, signed March percent) or limit them to no more than a fixed percentage 23, 2010, creates a Center for Medicare and Medicaid Innova- from a base year (e.g., consumer price index + 1 percent). tion (CMI).5 The act directs CMI to test innovative payment and service delivery models to reduce program expenditures while n Massachusetts examined potential savings from of a vari- preserving or enhancing quality of care. It allows states to test ety of cost containment strategies, including a rate setting and evaluate systems of all-payer payment reform for the med- program similar to Maryland’s. An independent report es- ical care of residents of the state, including individuals who are timated hospital all-payer rate setting could reduce health eligible for both Medicare and Medicaid. In selecting models spending in Massachusetts by between 0.1 percent and to test, the Secretary of Health and Human Services must give 3.9 percent between 2010 and 2020.11 Rate setting ranked preference to models that improve the coordination, quality, second, behind global payments, in its predicted ability to and efficiency of health services. save costs. (A global payment is a fixed prepayment made to a group of providers or a health care system that cov- State Examples ers most or all of a patient’s care during a specified time n Maryland established an all-payer hospital rate setting period; global payments are discussed in another brief in program in 1971 that still operates today.6 The program’s this series.) goals include constraining hospital costs; providing financial stability for hospitals; providing efficient and effective n To bring them more in line with other payers’ rates and care; and financing growing levels of hospital uncompen- make care for the uninsured more affordable, several states sated care. The program is administered by the Health Ser- have capped the rates hospitals can charge uninsured in- vices Cost Review Commission, a government agency with dividuals. Although the caps do not establish all-payer broad authority to set hospital rates. The rates take into rates, they move a step closer to rate equalization. A 2008 account each hospital’s reasonable costs, level of charity New Jersey law, for example, limits to 115 percent of Medi- care and severity of patient illness. They also include qual- care rates the amount hospitals can bill certain uninsured ity and efficiency incentives. The commission sets only patients.12 The cap in Illinois is 135 percent of Medicare hospital rates, not physician fees. Maryland’s rate-setting rates.13 Massachusetts now requires hospitals to charge program applies to fully insured and employer self-funded self-payers the same rates as third-party payers.14 Under a health plans, Medicaid and, under a federal waiver, Medi- 2005 agreement with Minnesota’s attorney general, hos- care. Rates are set per-diagnosis (e.g., all hospital care for pitals give the same discounts as insurance companies to a pancreas transplant, as opposed to per-service, separate uninsured Minnesota patients with annual family incomes charges for sutures, ultrasound, etc.) to encourage hospi- under $125,000. According to a Families USA brief, “This tals to control the cost of each episode of care. can mean a 40 – 60 percent price reduction in services.”15 n A Minnesota provision in comprehensive 2008 health re- n States are looking not only at the rates uninsured patients form legislation calls for creation of a work group to make pay, but also at the rates they pay for their own programs. recommendations on “the potential impact of establishing uniform prices that would replace current prices ne- • Colorado legislation enacted in 2010 (SB 10-020) au- gotiated individually by providers with separate payers.”7 thorized CoverColorado—the state’s high-risk pool for The work group has developed an “evolving concept of the uninsured—to set its own health provider reim-

2 National Conference of State Legislatures bursement rates instead of paying commercial rates. Review Commission is instituting pay-for-performance A 2008 report to the Colorado General Assembly incentives and episode-based hospital rates (discussed in noted that the program could save millions of dollars other briefs in this series) to encourage reductions in both by moving to a fee schedule based on a multiplier of hospital use and costs. Medicare rates.16 n Evidence exists that rate setting can “temper excessive use • A February 2010 North Carolina state audit found that, of cost-increasing technologies” but does not reduce their on average, providers of inmate hospital services bill availability.20 the Department of Correction 4.5 times the applicable Medicare/Medicaid reimbursement rates.17 n At one time, more than 30 states had hospital rate setting or budget review programs. By 1990, most had been dis- Evidence of Effectiveness continued, and Maryland is the only state that still has a Evidence is mixed but indicates that, properly structured, state program. Several factors contributed to the dismantling all-payer rate setting can slow price increases but not necessar- of rate setting programs. Among them were the increased ily curb overall cost growth. It also suggests state rate-setting use of managed care to control costs; growing hospi- can be administratively complicated, difficult to sustain and, in tal dissatisfaction with the rate-setting process; a public some cases, politically unpopular. Uniform pricing strategies policy shift from a regulatory to a more market-oriented that allow providers to set all-payer rates are too new to assess approach to cost control; mixed cost containment results; their effect on costs. and the inability to sustain reductions in cost growth over the long term, even in states where efforts were initially n Evidence shows Maryland’s rate setting program has con- successful.21 sistently held hospital cost growth per admission to below the national average (Figure 1). Between 1976 and 2007, n A 2009 RAND Health report examined the literature on Maryland had the second lowest rate of increase in costs states’ experiences with hospital rate setting programs per admission in the country. According to the executive during the 1970s and 1980s.22 It found mixed evidence of director of the Maryland Health Services Cost Review Com- cost savings. Some studies reported as much as a 2 per- mission, “Had Maryland costs grown at the national rate cent annual reduction in hospital spending growth in from 1976 to 2007, hospital spending would have been certain states; most studies found no effect. At least one cumulatively $40 billion higher than what resulted under study suggested rate setting may actually have increased rate setting.”18 per capita spending in some states. Where cost growth reductions occurred, evidence suggests that, in most cases, Figure 1. Indexed Growth Rates in Hospital Cost Per it may not have been sustainable. Adjusted Admission, Maryland and United States, 1976–2007 Challenges Establishing an effective program of state-determined or provider-set all-payer rates presents a number of challenges.

n Medicaid and Medicare may resist participating. Medicaid programs may be concerned that an all-payer rate program will increase their reimbursement rates. Medicare will not participate unless a state can demonstrate that Medicare’s costs will not increase more rapidly under all-payer rates than they would if Medicare did not participate.

Source: Robert Murray. “Setting Hospital Rates to Control Costs and Boost Qual- n To slow overall cost growth, states need to control not only ity: The Maryland Experience.” Health Affairs, 28, no. 5 (2009); http://content. healthaffairs.org/cgi/content/full/28/5/1395. health care prices but also health care use (i.e., the volume and intensity of health services). Maryland attributes its success controlling per admission costs to several factors. They include the Health Services n Where all-payer rates apply to one type of health care Review Commission’s broad statutory authority that al- provider only (e.g., hospitals), care—and thus the costs of lows flexibility in its approach to cost control; the state’s care—may simply be shifted to other providers (e.g., free- Medicare waiver; and the commission’s political, legal standing surgery centers). and budgetary independence.19 Although Maryland has slowed per admission cost growth, the same cannot be n Provider-set all-payer rates will not spur price competition said for the growth in admissions, outpatient visits or over- unless there is a place (e.g., a website) where purchasers all spending per capita. In large part this is because, as with can compare providers’ rates not only for individual ser- other hospital rate setting programs, Maryland does not vices but also for the total cost of care for a condition (e.g., control admission rates. To address this problem, the Cost knee replacement surgery).

National Conference of State Legislatures 3 n 2. Joseph White, Cost Control and Health Care Reform: The Case for All-Payer State all-payer rate setting programs present additional Regulation (Cleveland: Case Western Reserve University, May 12, 2009), http:// challenges. Some major challenges are listed below. www.ourfuture.org/files/JWhiteAllPayerCostControl.pdf. 3. See, for example, G.F. Anderson et al., “It’s the Prices, Stupid: Why the United States Is So Different from Other Countries,” Health Affairs 22, no. 3 (May/ • Setting appropriate rates is difficult. They must be set June 2003), http://content.healthaffairs.org/cgi/reprint/22/3/89.pdf. to avoid incentives for providers to provide too many 4. Elena Conis, “Impact of a State-Level All-payer System,” Health Policy or too few services and ensure financial viability with- Monitor (October 2009), http://www.hpm.org/survey/us/a14/5. 5. U.S. P.L. 111-148. Part III—Encouraging Development of New Patient Care out paying for inefficient care. Models, Section 1115A. 6. Md. Health Code Ann. §19-200 (1971). • Presently, there appears to be little support for a 7. 2008 Minn. Laws, Chap. 358. 23 8. Uniform Claims Review Process Study, “Uniform Pricing Discussion.” highly regulated rate-setting structure. Instead, the 9. 2007 Or. Laws, Chap. 697. focus is on payment incentives to improve quality and 10. Oregon Health Fund Board, Aim High: Building a Healthy Oregon—Final efficiency and on organized systems of care that can Report (Salem, Ore.: Oregon Health Fund Board, November 2008), http://www. oregon.gov/OHPPR/HFB/docs/Final_Report_12_2008.pdf. manage total patient care costs. 11. Christine Eibner et al., Controlling Health Care Spending in Massachusetts: An Analysis of Options (Washington, D.C.: RAND Health; August 2009), http:// • The cost to operate a rate-setting system can be sub- www.mass.gov/Eeohhs2/docs/dhcfp/r/pubs/09/control_health_care_spending_ rand_08-07-09.pdf. stantial. Maryland’s hospital rate setting program has 12. N.J. Rev. Stat. § 26:2H-12.52 (2008). 30 staff and a $4.9 million annual operating budget. 13. 2008 Ill. Laws, P.A. 95-0965. 14. 2006 Mass. Acts, Chap. 324. 15. Families USA, “A Pound of Flesh: Hospital Billing, Debt Collection, and For More Information Patients’ Rights,” Issue Brief (Washington, D.C.: Families USA, March 2007). http:// Eibner, Christine, et al. Controlling Health Care Spending in Mas- www.familiesusa.org/assets/pdfs/medical-debt.PDF. sachusetts: An Analysis of Options. Washington, D.C.: RAND 16. CoverColorado Long-Term Funding Task Force, Final Report to the Colorado General Assembly (Denver: CoverColorado, March 31, 2009), https://www. Health, August 2009. http://www.mass.gov/Eeohhs2/ covercolorado.org/downloads/CoverColorado-Task-Force-Final-Report.pdf. docs/dhcfp/r/pubs/09/control_health_care_spending_ 17. North Carolina Office of the State Auditor, Department of Correction Fiscal rand_08-07-09.pdf. Control Audit (Raleigh: Feb. 11, 2010), http://www.ncauditor.net/EPSWeb/Reports/ FiscalControl/FCA-2009-4500.pdf. McDonough, John E. “Tracking the Demise of State Hospital Rate 18. Robert Murray, “Setting Hospital Rates to Control Costs and Boost Setting.” Health Affairs 16, no. 1 (January/February 1997). Quality: The Maryland Experience,” Health Affairs 28, no. 5 (2009), http://content. http://content.healthaffairs.org/cgi/reprint/16/1/142.pdf. healthaffairs.org/cgi/content/full/28/5/1395. 19. Robert Murray, “Setting Hospital Rates To Control Costs and Boost Murray, Robert. “Setting Hospital Rates to Control Costs and Quality.” Boost Quality: The Maryland Experience.” Health Affairs 28, 20. Kim Sutherland and Sheila Leatherman, Regulation and Quality no. 5 (2009). http://content.healthaffairs.org/cgi/content/ Improvement: A Review of the Evidence (London: Health Foundation, October 2006), http://www.health.org.uk/publications/research_reports/regulation.html. full/28/5/1395. 21. John E. McDonough, “Tracking the Demise of State Hospital Rate Setting, Health Affairs 16, no. 1 (January/February 1997), http://content.healthaffairs.org/ Future Updates cgi/reprint/16/1/142.pdf. The latest information on this topic is available in an NCSL on- 22. Christine Eibner et al., Controlling Health Care Spending in Massachusetts: An Analysis of Options, 50-53. line supplement at www.ncsl.org/?tabid=19928. 23. The Heller School for Social Policy, “Health Care Cost Management in Massachusetts: A Discussion of Options, Meeting #7: State Regulatory Strategies,” Notes Conference Report (Waltham, Mass.: Brandeis University, Sept. 5, 2009), http:// 1. Uniform Claims Review Process Study, “Uniform Pricing Discussion,” heller.brandeis.edu/costmanagement/meeting-material/090508/conference_ Meeting Notes (St. Paul: Minnesota Department of Health, June 29, 2009), http:// report.pdf. www.health.state.mn.us/healthreform/claims/MeetingNotes_090629.pdf.

NCSL gratefully acknowledges the financial support for this publication series from The Colorado Health Foundation and Rose Community Foundation of Denver, Colorado.

National Conference of State Legislatures William T. Pound, Executive Director 7700 East First Place 444 North Capitol Street, N.W., #515 Denver, Colorado 80230 Washington, D.C. 20001 (303) 364-7700 (202) 624-5400 www.ncsl.org © 2010 by the National Conference of State Legislatures. All rights reserved. 4 National Conference of State Legislatures Health Cost Containment and Efficiencies NCSL Briefs for State Legislators

No. 6 May 2010

Performance-Based Health Care Provider Payments

Cost Containment Strategy and Logic Target of Research indicates that, Pay-for-performance is a system of payment that rewards Cost Containment for some conditions, health care plans and providers for achieving or exceeding Pay-for-performance is de- preestablished benchmarks for quality of care, health results signed to address health care pay-for-performance and/or efficiency. Pay-for-performance is most often used underuse (e.g., inadequate can lead to higher-qual- to encourage providers to follow recommended guidelines preventive care) and over- ity, lower-cost care but, or meet treatment goals for high-cost conditions (e.g., heart use (e.g., unnecessary medi- by itself, may not slow disease) or preventive care (e.g., immunizations). A physician cal tests). It pays for value— overall cost growth. might, for example, receive a year-end $25 bonus for every efficient and effective care. 2-year-old on the physician’s panel if at least 80 percent have Studies have shown that, in many cases, providers fail to pro- received recommended immunizations. A hospital may re- vide care or follow guidelines that could both avoid the need ceive a performance payment for reducing the rate of avoid- for future more expensive care and save lives (Table 1). This is able hospital readmissions or ensuring that patients receive due in part to the fact that the current fee-for-service system appropriate discharge medications. Performance awards can does not reward quality or efficiency. With fee-for-service— take many forms, including bonuses, enhanced fee sched- where each completed test, treatment or product is billed and ules and directing more enrollees to high-performing pro- reimbursed as a coded line-item—providers may actually earn viders and health plans. less by delivering cost-effective care if it means fewer services for which they can bill. Pay-for-performance is designed to ad- Pay-for-performance is sometimes called value-based pur- dress this negative incentive. chasing, quality-based purchasing or performance-based contracting. It usually is abbreviated “P4P.” Federal Health Reform The Patient Protection and Affordable Care Act, signed March The main goal of pay-for-performance systems is to improve 23, 2010, directs the secretary of Health and Human Services to health care results by ensuring that patients receive timely, develop a “payment modifier” to allow for differential Medicare cost-effective care—especially preventive and chronic care. fee-for-service payments based on quality and efficiency mea- Pay-for-performance also is intended to reduce costs. With sures (section 3007). It also establishes pay-for-performance improved quality of care, patients should remain healthier pilot programs for psychiatric, rehabilitation, long-term care, longer, the incidence of complications of care should de- and cancer hospitals and hospice programs that treat Medicare cline, and the use of less-expensive but equally effective enrollees (section 10326). treatments should increase.

Table 1. Performance Shortcomings in Treating Certain Medical Conditions Condition Shortfall in Care Avoidable Toll if Recommended Care Guidelines Were Followed by All Providers in the U.S. Diabetes Average blood sugar not 2,600 blind; 29,000 kidney failures measured for 24% of patients Hypertension Less than 65% received indicated 68,000 deaths care Heart Attack 39% to 55% did not receive 37,000 deaths needed medications Pneumonia 36% of elderly didn’t receive 10,000 deaths vaccine Colorectal Cancer 62% not screened 9,600 deaths

Source: S.H. Woolf, “The Need for Perspective in Evidence-Based Medicine,” Journal of the American Medical Association 282 (1999): 2358-2365.

National Conference of State Legislatures State Examples based programs that can reduce the cost of care for Med- n In 2009, more than 250 pay-for-performance programs ex- icaid enrollees. isted nationwide; almost half targeted hospital care. State Medicaid departments sponsored 18 percent of these, n Several states have estimated likely savings from imple- health insurers 66 percent, employers 11 percent and 1 menting pay-for-performance programs. The Arizona Medicare 5 percent. Estimates are that, by 2011, 85 per- Health Care Cost Containment System (AHCCCS), the state’s cent of state Medicaid programs will operate some type 2 Medicaid program, estimated the cost of and projected of pay-for-performance program. Seventy percent of savings from implementing a physician incentive program current Medicaid performance-based payment programs to provide optimal care to patients and ensure full immuni- operate in managed care or primary care case manage- zation of all 2-year-olds. It estimated that, over three years, ment environments. Some involve nursing homes or be- the program would cost $4.6 million but would save the havioral health providers. Most focus on preventive health state $10.1 million.7 Despite these projections, the Arizona services and children’s, adolescents’ and women’s health Legislature did not approve a 2008 request to fund the issues. Several states participate in multi-payer, pay-for- program, due to budget shortfalls and the need to make a performance programs (e.g., the regional, multi-payer, significant up-front investment before any savings would pay-for-performance and quality reporting program op- be realized. In 2009, Massachusetts estimated erated by the Indiana Health Information that implementation of pay-for-performance Several states have either Exchange). standards called for in the state’s FY 2010 bud- passed a series of bills to get would save the state $62 million.8 n Several states link pay-for-performance to streamline various administra- hospital reimbursement rates. The Mary- tive processes or have enacted Non-State Examples land Health Services Cost Review Commis- comprehensive administrative n Under Medicare’s Physician Group Prac- sion, which sets hospital reimbursement simplification bills. tice Demonstration Project, physician groups rates for all payers, rewards hospitals that are eligible for performance payments if the score well on specified quality-of-care growth in Medicare spending for the popu- measures (e.g., surgical infection prevention, following lation assigned to the physician group is less than the evidence-based heart attack treatment guidelines) as part growth rate of Medicare spending in their local market by of its Quality-Based Reimbursement Initiative. The author- more than two percentage points. Performance payments ity for this program comes from state law that allows the are based on meeting efficiency and quality targets. commission, in determining if rates are reasonable, to con- 3 sider objective standards of efficiency and effectiveness. n A number of large employers and health plans use pay-for- A 2006 Massachusetts law provides that Medicaid hospital performance systems. rate increases be contingent upon quality measures.4 — More than half of commercial HMOs include perfor- n In 2008, Minnesota passed comprehensive health reform mance-based incentives in their provider contracts. legislation that, among other provisions, requires the com- Collectively, these HMOs manage 81.3 percent of the missioner of human services to implement quality incen- nation’s commercial HMO enrollees.9 tive payments for enrollees in state health care programs.5 The law requires development of a payment system that — Bridges to Excellence is an employer-led, national ini- rewards high-quality, low-cost providers. Minnesota’s tiative to improve health care quality and hold down Medicaid and state employee health benefits programs costs. Participants include large employers (e.g., Gen- also are partnering with nine private sector employers in eral Electric, Proctor and Gamble, and UPS), health a statewide pay-for-performance program. plans (e.g., Aetna, Humana and several Blue Cross Blue Shield plans) and physician groups. Bridges to Excel- n Maine’s Medicaid program includes a Physician Incentive lence focuses on improving diabetes and cardiovas- Program that ties 30 percent of a performance bonus to 6 cular disease care and patient care management sys- appropriate reductions in emergency department use. tems. n A 2007 Texas law directed the Health and Human Services — The California Integrated Healthcare Association Commission to investigate outcome-based performance launched a pay-for-performance initiative in 2003. It measures and incentives in all Medicaid contracts with includes seven major health plans and 225 physician health maintenance organizations (HMOs). If the commis- groups that care for 46.2 million people. sion determines that performance incentives are feasible and cost-effective, it is authorized to develop and imple- Evidence of Effectiveness ment a pilot project in at least one health care service re- Little research exists on the effect of performance-based pay gion. Legislation is intended to improve access to care and on health care costs. Most research focuses on improvements strengthen the link between reimbursement and hospital- in quality of care rather than on cost savings. Research for this

2 National Conference of State Legislatures brief did not uncover any assessments of cost savings from n The various ways different payers structure and target their state pay-for-performance programs. Existing evidence, main- performance incentives may dampen the effect as provid- ly from the private sector, has produced mixed results. Some ers attempt to respond to incentives. have found that, for certain conditions, pay-for-performance can lead to higher-quality, lower-cost care. Others have found n Incentive payments may account for only a fraction of a that, for the most part, performance-based pay does not yield provider’s patients. net savings but can improve care quality. n Programs have not been implemented on a large enough n Bridges to Excellence reports that physicians who are rec- scale or for long enough to demonstrate net savings. ognized by the program for providing high-quality and more efficient care deliver it at 10 percent to 15 percent n Performance pay programs tend to focus on rewarding lower cost than nonparticipating physicians. The average improvements in quality-of-care measures but not on im- annual cost of care for diabetes patients, for example, is proved efficiency or cost of care. $1,400 with recognized physicians versus $1,600 with others. Challenges Several challenges exist to implementing a performance-based n A 2007 study examined the results of a pay-for-perfor- payment system that can both control costs and improve qual- mance program in Rochester, N.Y.—the Excellus/Rochester ity. One is determining how large a performance incentive is Individual Practice Association Rewarding Results Initia- necessary to affect physician behavior. Another is deciding how tive. It reported a 5-to-1 return on investment for the ini- savings will be measured—will they be based on costs under tiative’s diabetes and coronary artery disease programs.10 the program compared to a control group, trend or a baseline measure of cost? Also, will the effect on overall costs be mea- n A 2008 report to the Texas Legislature found that, “Despite sured (e.g., annual expenditures for children on Medicaid) or the broad application of P4P programs across commercial only the effect on costs associated with the targeted, perfor- insurance, Medicaid and Medicare in programs across the mance-based incentive (e.g., reduction in emergency room use country, there is limited evidence of clinical effectiveness by asthmatic children)? Other challenges include 1) consolidat- and no evidence of cost effectiveness.”11 ing enough payers that use the same pay-for-performance incentives to ensure program impact and 2) securing sufficient n A 2008 study of health care quality and value published front-end funding to implement a pay-for-performance pro- by The Bipartisan Policy Center reported, “Most pay-for- gram (e.g., establishing a system for reporting, collecting and performance experiments to date have shown some evi- analyzing performance data and appropriating funds to pay dence of small improvements in measured quality of care, performance bonuses). but little evidence of cost savings.”12 Complementary Strategies n A study published in 2009 concluded that pay-for-perfor- Performance-based pay often is used in conjunction with other mance is good for rewarding improved use of underused payment methods and health care programs. Examples include services (e.g., colonoscopy screenings and mammograms) global payments (i.e., risk-adjusted capitation programs), dis- but does not reduce overused services.13 ease management programs, medical homes and care coordination programs. Combining pay-for-performance with these n With respect to quality, several studies have found that strategies, which are the subject of other briefs in this series, pay-for performance programs can improve health care may result in a greater level of cost containment than could be quality, as measured by such things as cervical cancer achieved by implementing any one by itself. screening and mammogram rates, frequency of well-baby visits, percent of women receiving appropriate postpartum care and childhood immunization rates.14 Others have For more information found little evidence to support the effectiveness of pay- Bailit Purchasing LLC. The Feasibility and Cost-Effectiveness of ing for quality.15 Making Pay-for-Performance Opportunities Available to Tex- as Medicaid Providers. Needham, Mass.: Bailit, December Researchers have suggested several reasons for the apparently 2008, http://www.hhsc.state.tx.us/reports/Pay-for-Perfor- limited effect of performance payments on overall costs. mance_0209.pdf. Hasselman, Diane. Provider Incentive Programs: An Opportunity n The cost of, and administrative expenses associated with, for Medicaid to Improve Quality at the Point of Care. Hamil- incentive payments may offset any savings from reduc- ton, N.J.: Center for Health Care Strategies Inc., March 2009, tions in preventable complications and unnecessary ser- http://www.chcs.org/usr_doc/P4P_Resource_Paper.pdf. vices. See list of pay-for-performance papers published by The Com- monwealth Fund, http://www.commonwealthfund.org/ Search.aspx?search=pay+for+performance.

National Conference of State Legislatures 3 Notes 10. Karen Llanos and Joanie Rothstein, Pay-for-Performance in Medicaid: 1. Suzanne Felt-Lisk, Pay for Performance: Lessons from Experience, Pow- A Guide for States (Hamilton, N.J.: Center for Healthcare Strategies Inc., March erPoint presentation to the Massachusetts Special Commission on the Health 2007); http://www.chcs.org/publications3960/publications_show.htm?doc_ Care Payment System, Feb. 13, 2009; http://www.mathematica-mpr.com/pub- id=471272. lications/PDFs/Health/p4p_Overview_Felt-Lisk.pdf. 11. Bailit Purchasing LLC, The Feasibility and Cost-Effectiveness of Making 2. Kathryn Kuhmerker, Pay-for-Performance in State Medicaid Programs: Pay-for-Performance Opportunities Available to Texas Medicaid Providers (Need- A Survey of State Medicaid Directors and Programs (publication no. 1018) (New ham, Mass.: Bailit, December 2008); http://www.hhsc.state.tx.us/reports/Pay- York, N.Y.: The Commonwealth Fund, April 2007); http://www.commonwealth- for-Performance_0209.pdf. fund.org/publications/publications_show.htm?doc_id=472891. 12. Aaron McKethan et al., Improving Quality and Value in the U.S. Health 3. Md. Health-General Code Ann. §219. System (Washington, D.C.: Bipartisan Policy Center, August 2009); http://www. 4. 2006 Mass. Acts, Chap. 58. brookings.edu/reports/2009/0821_bpc_qualityreport.aspx. 5. 2008 Minn. Laws, Chap. 208. 13. R.E. Mechanic and Stuart H. Altman, “Payment Reform Options: 6. Kathryn Kuhmerker, Pay-for-Performance in State Medicaid Programs. Episode Payment Is a Good Place to Start,” Health Affairs 28, no. 2, (March-April 7. The Commonwealth Fund, Arizona Uses ROI Calculator for P4P Design, 2009); http://content.healthaffairs.org/cgi/content/abstract/28/2/w262. June 30, 2008, The Commonwealth Fund All State Profiles website: http:// 14. Gary Young et al., Pay-for-Performance in Safety Net Settings: New www.commonwealthfund.org/Content/Innovations/State-Profiles/2008/Jun/ Evidence from the Agency for Healthcare Research and Quality, PowerPoint pre- Arizona-Uses-ROI-Calculator-for-P4P-Design.aspx. sentation to the AHRQ 2008 Annual Conference, Sept. 9, 2008, www.ahrq.gov/ 8. Massachusetts Budget and Policy Center, Budget Monitor: The Leg- about/annualmtg08/090908slides/Young.htm. islature’s Fiscal Year 2010 Budget with the Governor’s Vetoes and Amendments 15. Meredith B. Rosenthal and Richard G. Frank, “What Is the Empirical (Boston: MBPC, July 9, 2009); http://www.massbudget.org/documentsearch/ Basis for Paying for Quality in Health Care?” Medical Care Research and Review findDocument?doc_id=681&dse_id=922. 53, no. 2 (2006); http://mcr.sagepub.com/cgi/content/abstract/63/2/135. 9. Meredith B. Rosenthal et al., “Pay for Performance in Commercial HMOs,” The New England Journal of Medicine 355, no. 18 (Nov. 2, 2006); http:// content.nejm.org/cgi/content/full/355/18/1895.

NCSL gratefully acknowledges the financial support for this publication series from The Colorado Health Foundation and Rose Community Foundation of Denver, Colorado.

National Conference of State Legislatures William T. Pound, Executive Director 7700 East First Place 444 North Capitol Street, N.W., #515 Denver, Colorado 80230 Washington, D.C. 20001 (303) 364-7700 (202) 624-5400 www.ncsl.org © 2010 by the National Conference of State Legislatures. All rights reserved.

4 National Conference of State Legislatures Health Cost Containment and Efficiencies NCSL Briefs for State Legislators

No. 5 May 2010

Accountable Care Organizations

Cost Containment Strategy and Logic come from better chronic Accountable care organi- care management, compli- An accountable care organization (ACO) is a local, provid- zations, a relatively new er-led entity comprised of a wide range of collaborating ance with preventive care concept, have not been providers. ACOs monitor care across multiple or all care guidelines and better care settings (e.g., physician practices, clinics and hospitals) coordination among ACO. fully tested. Existing evi- and are accountable to health care payers (e.g., Medicaid, providers. dence indicates that fully Medicare or private insurers) for the overall cost and qual- integrated ACOs can pro- ity of care for a defined population. They provide an over- ACOs are a relatively new, vide higher-quality, more arching structure for coupling health care delivery system largely untested concept. As efficient care than smaller, reforms (e.g., medical homes and electronic medical re- a result, the exact definition more loosely organized cords) and new forms of provider payment (e.g., global of what constitutes an ac- ones. and episode-of-care payments) (Figure 1). The ACO con- countable care organization cept envisions direct contracting by payers with provider varies. Common elements organizations without reliance on a health plan interme- and variations in an ACO definition are described below. diary such as a managed care plan. n According to the Medicare Payment Advisory Commission, In and of themselves, ACOs are not a cost containment “The defining characteristic of ACOs is that a set of physicians strategy. Rather, they are a vehicle for implementing com- and hospitals accept joint responsibility for the quality and cost prehensive payment reform and health care system rede- of care received by the ACO’s panel of patients.”1 sign in order to control the growth in health care costs and obtain better value for each health care dollar. n ACOs serve a patient population (e.g., Medicaid recipients or health plan enrollees) in a defined medical service area. A The following example illustrates how an ACO might work medical service area (sometimes called a hospital referral area) to control health care costs, developed by health policy includes most or all the health care services needed by patients expert, Steven Shortell. Health care providers sign an living in the area. The ACO concept may allow for only one or agreement to participate with the ACO. Spending targets for several competing ACOs in a medical service area. are set based on past years’ data. If total spending comes in under target, providers share the savings. Savings n ACOs receive financial incentives to contain costs and improve quality through the collaborative efforts of the providers in their networks. Incentives are based, Figure 1. The ACO is the overarching structure in part, on the extent to which provid- within which other reforms can thrive ers in the ACO meet or fail to meet ef- Accountability, Performance ficiency and quality goals. Goals are set Measurement, Shared Savings by, or negotiated with, payers.

n ACOs provide support services to Accountable Care Organization Medical Home providers to help them achieve quality and efficiency goals. Support services Bundled Partial include care coordination, health in- Payments Capitation formation technology support, performance feedback and assistance with HIT practice redesign.

n ACOs can include a wide continu- Source: John Bertko, “Delivery System Reform: Developing Accountable Care Organizations,” PowerPoint um of providers and services in their presentation to the State Quality Improvement Institute meeting, Denver: May 27, 2009; www. networks, but usually include at least academyhealth.org/files/SQII/Bertko.pdf. physicians, specialists and one or more hospitals. National Conference of State Legislatures n The ACO itself can be an independent nonprofit organization State Examples formed specifically to serve as an ACO, an independent prac- n Vermont enacted legislation in 2009 that included ACO provi- tice association, a multi-specialty group, a hospital-medical sions.3 The state’s Commission on Health Reform is to convene staff organization or a physician-hospital organization. It also a work group to support an application by at least one Vermont could be a fully integrated health care system that provides the provider network to participate in a national ACO state learn- full range of health care services and employs most or all the ing collaborative. The intent is to implement at least one ACO physicians in the system. Examples include the Cleveland Clinic project in Vermont by July 1, 2010. The legislation addresses in Ohio, the Mayo Clinic based in Rochester, Minn., and Denver possible federal anti-trust issues that may arise when provid- Health in Colorado. ers join to deal with cost and shared savings issues. The law states the General Assembly’s intent to ensure sufficient state n Under some models, ACOs receive a per-member, per-month involvement in design and implementation of ACOs to com- fee for overseeing and supporting the care delivered by net- ply with federal anti-trust provisions “by replacing competition work providers. In this case, providers often are paid a fee for between payers and others with state regulation and super- each service minus an amount withheld that is paid out based vision.” The law envisions that the state’s Medicaid program, on attainment of benchmark goals. Under other models, the Children’s Health Insurance Program (CHIP) and Health Access ACO may receive a global per-member, per-month payment Program could contract with the ACO and recapture a portion that it distributes to participating providers to yield the most of anticipated savings from the state participation. efficient care overall. Funds are distributed based in part on the costs incurred by each provider and in part on the success of n Oregon passed the Healthy Oregon Act in 2007,4 which es- the entire organization in meeting quality and cost goals. In tablished the Oregon Health Fund Program and directed it to either case, providers in the ACO share some develop a comprehensive health reform plan. financial risk for meeting or exceeding perfor- The primary target of ACOs is lack The law also established a set of committees mance goals across all providers and patients of accountability for the to develop recommendations on specific as- and may earn less if benchmark goals are not overall cost and quality of care. pects of the plan. The Delivery Systems Com- met. mittee has developed recommendations concerning accountable care districts. Rec- Target of Cost Containment ommendations call for the state to define The primary target of ACOs is lack of accountability for the accountable care districts “that will allow for meaningful com- overall cost and quality of care. ACOs are designed to address parisons of quality, utilization and costs between districts” and fragmentation of care, current financial incentives that encour- test new payment models in the accountable districts. age clinically unwarranted higher volumes of care and intensity of services, unnecessary growth (e.g., more hospital beds and n A 2008 Massachusetts law required creation of a Special diagnostic equipment than needed), lack of care coordination, Commission on the Health Care Payment System.5 A July 2009 use of higher-cost providers where lower-cost ones (e.g., nurse commission report recommended that the state make the practitioners) would be as effective, and insufficient attention transition from the current fee-for-service payment system to ensuring that patients receive timely primary and preven- to global payments6 over a period of five years. It also recom- tive care. ACOs address these problems by organizing, support- mended creating an entity to guide implementation of the ing and paying providers so they have financial incentives and new payment system. Among other things, the entity would a mutual interest in holding down costs and improving care be responsible for defining and establishing risk parameters for quality across all providers, for all patients. ACOs, which will receive and distribute global payments. ACOs will assume risk for clinical and cost performance. The Congressional Budget Office has estimated that potential savings to Medicare from promoting ACOs could amount n Programs in at least two states—Colorado and North Caro- to $5.3 billion between 2010 and 2019, although net savings lina—use networks of providers that, while not true ACOs, have would not begin to be realized until 2013.2 The savings would the potential to develop. The programs in both states focus on be realized as providers reduce the volume and intensity of ser- primary care for Medicaid enrollees and rely on provider-led vices delivered to their patients. local networks that are responsible for improving care, quality and efficiency for the patients served by the networks. Federal Health Reform The Patient Protection and Affordable Care Act, signed March • Community Care of North Carolina consists of 14 indepen- 23, 2010, authorizes Medicaid and Medicare ACO pilot pro- dent, nonprofit, care-coordination networks.7 The regionally grams. The Medicaid program allows pediatric medical provid- organized networks consist of participating physicians that ers organized as ACOs to share in cost savings, effective Jan. 1, receive per-member, per-month fees for serving as a medical 2012, through Dec. 31, 2016 (section 2706). The Medicare pilot home for Medicaid patients. The networks receive a $2.50 per- program authorizes Medicare providers organized as qualify- member, per-month fee to coordinate patient care and help ing ACOs that voluntarily meet quality goals to share the cost primary care providers improve care using local nurses and savings they achieve with the program, beginning Jan. 1, 2012 other case managers. (section 3022).

2 National Conference of State Legislatures • The Colorado Accountable Care Collaborative, set to launch n Health systems in five states will be part of an ACO pilot pro- in 2010, is designed to be a “primary care-based health care re- gram sponsored by two health policy groups, the Engelberg form for full body, mind and mouth.”8 Regional Care Coordina- Center for Health Care Reform at the Brookings Institution and tion Organizations (RCCOs) will develop and organize the pro- the Dartmouth Institute for Health Policy and Clinical Practice. vider network in their regions. They will provide technical as- The systems, in Arizona, Iowa, Kentucky, Vermont and Virginia, sistance on such things as medical home practice redesign and are scheduled to begin in 2010. implementation of new health information technologies. They also will help coordinate care and care transitions between Evidence of Effectiveness health care settings and be accountable for specific population Because it is a relatively new concept that has not been fully health measures within each region. Each RCCO will be paid tested, there is insufficient evidence to determine the effec- a per-member, per-month case management fee. Primary care tiveness of true ACOs in containing costs. According to a recent medical providers that meet medical home standards also will report to Congress on Medicare, “…any projections of savings be paid a per-member, per month fee. A portion of total fund- from the formation of ACOs are subject to a high degree of un- ing will be withheld from the RCCOs and the primary care med- certainty.” 12 What evidence exists is mixed. ical providers to support a potential incentive payment.9 n Evaluations of the early results of several Medicare ACO-like n Several states regulate ACO-like entities called provider- pilot programs have led researchers to different conclusions. sponsored organizations, which accept risk for ensuring that Some have reported that the Medicare Physician Group Prac- a population of patients receives necessary care. A 1997 study tice Demonstration described previously has resulted in lower examined how nine states regulate provider-sponsored orga- costs and improved quality.13 They note that four of 10 dem- nizations.10 It found that some states require HMO licensure onstration sites had low enough growth in their risk-adjusted if the organization, rather than an insurance plan, is the ulti- costs to qualify for bonuses. In contrast, the Medicare Payment mate bearer of risk or assumes risk beyond that which its pro- Commission reports that, “It is questionable whether the PGP viders are licensed to offer themselves (e.g., California, Illinois demonstration has saved money.”14 The commission notes and Pennsylvania), especially where the organizations receive that, after two years, five of the PGP sites had absolute (non capitated or global payments. Others require a special license risk-adjusted) cost growth that was materially higher than their or certificate (e.g., a limited service license in Colorado, a non- comparison groups, four had roughly equal cost growth and profit health corporation license in Texas, and a community in- only one had lower cost growth. tegrated service network license in Minnesota). n During the 1990s, a number of provider-sponsored organiza- Non-State Examples tions assumed responsibility from managed care plans for co- n Patient Choice is a program for self-funded employers in ordinating the care and managing the costs of care for groups Minnesota, North Dakota and South Dakota. Created by the of patients. Examples of such organizations included indepen- Buyers Health Care Action Group in 1997, it is operated today dent practice associations and physician-hospital organiza- by Medica, a large HMO. The Patient Choice Care System Pro- tions. Although these arrangements do not exactly match the gram works with groups of providers (including both hospitals ACO definition, they bear many similarities. A 2001 study of and physicians) called care systems that function like ACOs. 64 risk-bearing, provider-sponsored organizations found that Care systems submit bids based on their expected total cost some experienced serious financial problems, some were deal- of care for a defined population of patients who have the same ing with tension between themselves and hospital partners benefits. Reimbursement rates are driven by performance on due to concern about payment adequacy and fairness, and quality measures and the total cost of care, or what has been some were simply unable to manage costs.15 Proponents of called “virtual capitation” or “capitation in drag.”11 ACOs note that many of these problems are being addressed in current models. ACOs receive payments that are risk-adjusted, n In the Physician Group Practice (PGP) Demonstration, a Medi- and they are better equipped to track quality-of-care and costs. care pilot program started in 2005, 10 large, multi-specialty They have better data support, their risk assumption is limited physician groups receive a share of the savings they achieve in to that they directly control, and quality and efficiency incen- caring for Medicare patients and meeting documented quality tives are more fine-tuned. improvement targets. Physician groups that are able to meet quality benchmarks and reduce their total expected Medicare n Experience with the Minnesota Patient Choice system indi- spending by more than 2 percent can share in the savings they cates that the program “…has encouraged patients to select generate for Medicare. Although the demonstration does not more cost-effective providers and has spurred providers to meet all the criteria of a true ACO—for instance, there is no reduce their costs while maintaining or improving quality to penalty for failure to meet efficiency and quality benchmarks— attract more consumers.”16 Although the competing, ACO-like Medicare plans to expand the PGP model to more closely re- care systems that participate in Patient Choice are not the only semble an ACO pilot program. factor that accounts for these findings, they appear to contribute significantly.

National Conference of State Legislatures 3 n Several studies have found that more fully integrated ACOs ment Reform, Sept. 7, 2009; http://www.chqpr.org/down- provide higher-quality, more efficient care than smaller, more loads/HowtoCreateAccountableCareOrganizations.pdf. loosely organized ones.17 NCSL has posted supplemental materials and 2010 updates on this topic online at http://www.ncsl.org/?tabid=19927. Challenges A number of challenges exist to successful implementation of Notes 1. Medicare Payment Advisory Commission, Report to Congress: Improv- ACOs. Formation of ACOs may raise anti-trust issues when an ing Incentives in the Medicare Program, Chapter 2, “Accountable Care Organiza- ACO dominates the market. The ACO and participating provid- tions,” (Washington, D.C.: MedPAC, June 2009); www.medpac.gov/documents/ Jun09_EntireReport.pdf. ers must resolve organizational and professional liability ar- 2. Randall Brown, Strategies for Reining in Medicare Spending through rangements. ACOs must have systems in place to capture, ana- Delivery System Reforms: Assessing the Evidence and Opportunities (Menlo Park, Calif.: The Henry J. Kaiser Family Foundation, September 2009); http://www.kff. lyze and share clinical information with providers across care org/medicare/upload/7984.pdf. settings and to track costs. Payers and ACOs will need to agree 3. Vt. 2009 Vt. Acts, Act 49. 4. Ore. 2007 Or. Laws, Chap. 697. on how patients will be assigned to a particular ACO and what 5. Mass. 2008 Mass. Acts, Chap. 305. happens when patients use a non-ACO provider—is the ACO 6. A global payment is a fixed prepayment made to a group of providers or health care system (as opposed to a health care plan) covering most or all still accountable for the total costs of that patient’s care? Ex- the care a patient may need during a specified time period. Global payments perience suggests it takes many years to establish a successful usually are made monthly over a year and are paid on a per-patient basis, unlike fee-for service which pays separately for each service. For more informa- ACO, particularly where formal arrangements among providers tion, see the brief in this series on global payments. do not already exist. Finally, states will want to decide whether 7. Community Care of North Carolina website, www.communitycarenc. com. and how to regulate ACOs—at what point do ACOs accept so 8. Colorado Department of Health Care Policy and Financing, Account- much risk that they should be regulated as insurers? able Care Collaborative website, http://www.colorado.gov/cs/Satellite/HCPF/H CPF/1233759745246?rendermode=preview. Click on “Questions and Answers about the Accountable Care Collaborative.” Complementary Strategies 9. Personal phone conversation by Barbara Yondorf with Jerry Small- wood, Colorado Department of Health Care Policy and Financing, Jan. 5, 2010, ACOs provide an organizational framework for implementing, and “Department of Health Care Policy and Financing FY 2010-11 Joint Budget coordinating and enhancing payment and delivery system Committee Healring, Dec. 21, 2009. 10. The Lewin Group Inc., State Regulatory Experience with Provider-Spon- reforms. Examples of such reforms include medical homes, sored Organizations (a report prepared for the U.S. Department of Health and episode-of-care and global payments, partial capitation, care Human Services) (Washington, D.C.: USDHHS, June 27, 1997); http://aspe.hhs.gov/health/pso-6.htm. coordination, chronic disease management and broad-scale 11. Ann Robinow, “Patient Choice Health Care Payment Model,” Power- health information technology projects. These are discussed in Point presentation to the Network for Regional Healthcare Improvement Pay- ment Reform Summit, Pittsburgh, July 31, 2008, slide 3; http://www.nrhi.org/ separate papers in this NCSL cost containment series. downloads/RobinowPresentation2008NRHISummit.pdf. 12. Medicare Payment Advisory Commission, Report to Congress: Improv- ing Incentives in the Medicare Program. For More Information 13. U.S. Senate Finance Committee, Transforming the Health Care Delivery Bertko, John. “Delivery System Reform: Developing Account- System: Proposals to Improve Patient Care and Reduce Health Care Costs, (Wash- ington, D.C.: USSFC, April 29, 2009), 17; http://finance.senate.gov/sitepages/ able Care Organizations.” PowerPoint presentation to the leg/LEG%202009/042809%20Health%20Care%20Description%20of%20Poli- State Quality Improvement Institute meeting, Denver, May cy%20Option.pdf. 14. Medicare Payment Advisory Commission, Report to Congress: Improv- 27, 2009; www.academyhealth.org/files/SQII/Bertko.pdf. ing Incentives in the Medicare Program, 49. Devers, Kelly, and Robert Berenson. “Can Accountable Care Or- 15. Marsha R. Gold, Robert Hurley and Timothy Lake. “Provider Orga- nizations at Risk: A Profile of Major Risk-Bearing Intermediaries,1999,” Health ganizations Improve the Value of Health Care by Solving Affairs 20, no. 2 (March/April 2001); http://content.healthaffairs.org/cgi/re- the Cost and Quality Quandaries?” Princeton, N.J.: Robert print/20/2/175.pdf. 16. Harold D. Miller, “From Volume to Value: Better Ways to Pay for Health Wood Johnson Foundation, October 2009; http://www. Care, Health Affairs 28, no. 5 (2009); http://content.healthaffairs.org/cgi/con- rwjf.org/files/research/acobrieffinal.pdf. tent/full/28/5/1418. 17. Laura Tollen, Physician Organization in Relation to Quality and Effi- Miller, Harold D. “How to Create Accountable Care Organiza- ciency of Care: A Synthesis of Recent Literature (New York: The Commonwealth tions.” Pittsburgh: Center for Healthcare Quality and Pay- Fund, April 2008); http://www.commonwealthfund.org/Content/Publications/ Fund-Reports/2008/Apr/Physician-Organization-in-Relation-to-Quality-and- Efficiency-of-Care--A-Synthesis-of-Recent-Literatu.aspx.

About this Project NCSL’s Health Cost Containment and Efficiency Series describes multiple alternative state policy approaches, with an emphasis on documented and fiscally calculated results. The project is housed National Conference of State Legislatures at the NCSL Health Program in Denver, Colorado. It is led by Rich- William T. Pound, Executive Director ard Cauchi, program director, and Martha King, group director, 7700 East First Place with Barbara Yondorf as lead researcher. 444 North Capitol Street, N.W., #515 Denver, Colorado 80230 Washington, D.C. 20001 (303) 364-7700 NCSL gratefully acknowledges the financial support for this (202) 624-5400 publication series from The Colorado Health Foundation and Rose www.ncsl.org Community Foundation of Denver, Colorado. © 2010 by the National Conference of State Legislatures. All rights reserved.

4 National Conference of State Legislatures Health Cost Containment and Efficiencies NCSL Briefs for State Legislators

No. 4 May 2010

Collecting Health Data: All-Payer Claims Databases

Cost Containment Strategy and Logic Medicare (where it is avail- Some states are using able to a state). The databases In recent years, several states have established databases all-payer claims data- that collect health insurance claims information from all contain eligibility and claims bases to identify poten- health care payers into a statewide information reposito- data (medical, pharmacy and ry. Known as “all-payer claims databases” or “all-payer, all- dental) and are used to report tial areas for cost sav- claims databases,” they are designed to inform cost contain- cost, use and quality informa- ings. It is still too early, ment and quality improvement efforts. Payers include pri- tion. The data consist of “ser- however, to determine vate health insurers, Medicaid, children’s health insurance vice-level” information based how effective databases and state employee health benefit programs, prescription on valid claims processed by are in helping states drug plans, dental insurers, self-insured employer plans and health payers. Service-level shape successful cost information includes charges containment efforts. and payments, the provider(s) Table 1. Benefits of All-Payer, receiving payment, clinical All-Claims Data Collection Programs diagnosis and procedure codes, and patient demographics. To Businesses mask the identity of patients and ensure privacy, states usually n Helps businesses know where they stand with encrypt, aggregate and suppress patient identifiers. respect to their coverage’s costs and included services. All-payer claims databases alone are not a means of controlling n Provides access to information that gives busi- costs. Rather, they provide detailed information to help design nesses a better negotiating position. and assess various cost containment and quality improvement n Allows businesses to choose insurance products efforts. By collecting all claims into one data system, states gain for employees based on price and quality. a complete picture of what care costs, how much providers receive from different payers for the same or similar services, Consumers the resources used to treat patients, and variations across the n Provides consumers with access to information state and among providers in the total cost to treat an illness to help them make informed decisions with their or medical event (e.g., a heart attack or knee surgery). In turn, health care providers so they can determine businesses, consumers, providers and policymakers can use which providers and treatments are most effec- the information to make better-informed decisions about cost- tive and efficient. effective care (Table 1). All-payer claims databases also are an Providers important source of information for designing and implement- n Supports provider efforts to design targeted ing payment and delivery system reforms, such as pay-for-per- quality improvement initiatives. formance, episode-of-care payments, global payments, medi- n Enables providers to compare their performance cal homes and accountable care organizations (all of which are with that of their peers. discussed in other briefs in this series).

Policymakers Target of Cost Containment n Enables [the state] to identify communities that Studies confirm the United States spends significantly more on provide cost-effective care and learn from their health care than other countries but, on the whole, does not successes. produce better results for patients; it does not receive equiva- n Allows targeted population health initiatives. lent value for each health care dollar. Researchers estimate that n Allows reform efforts to be evaluated so success- up to 30 percent of spending on health care is wasted.1 ful initiatives can be identified and replicated. n Allows identification of opportunities for further Without comprehensive data on costs, components, results reform. and demographics of care, it is difficult to identify and elimi- Source: Oregon Health Fund Board, “Aim High: Building a Healthy nate waste. Without reliable information about how and where Oregon—Final Report,” November 2008, http://www.oregon.gov/ health care dollars are spent and how patients move through OHPPR/HFB/docs/Final_Report_12_2008.pdf. the system, states cannot design effective programs to address both unnecessary and inadequate care to realize health care National Conference of State Legislatures system savings. In some cases, all-payer claims databases can be reduced by 11.5 percent, and Medicaid spending could be be used to identify the most cost-effective providers and meth- reduced by 5.7 percent. A second study showed Maine uses 30 ods of care. They also can provide valuable information to as- percent more emergency services than the national average.5 sess the relationship between total care costs, prices, use and Researchers estimated health care payers in Maine could save service intensity, on the one hand, and quality and results of $115 million annually by reducing avoidable emergency de- care for different providers, treatments and populations, on the partment use. Maine plans to use its claims database “to iden- other. Due to data limitations, not all these applications may be tify specific inefficiencies to start working with stakeholders on possible. levers to reduce waste.”6

State Examples n A 2003 New Hampshire law created the New Hampshire n As of December 2009, all-payer claims databases were Comprehensive Health Information System (CHIS),7 which con- operating or under development in Kansas, Maine, Maryland, sists of claims and eligibility data from Medicaid and commer- Massachusetts, Minnesota, New Hampshire, Oregon, Tennes- cial payers. A website, New Hampshire HealthCost, uses CHIS see, Utah and Vermont. The all-payer claims databases in Maine, data to provide comparative information to consumers and Maryland and New Hampshire were established partially in re- employers about the estimated amount a hospital, surgery sponse to escalating health care costs and premiums. center, physician or other health care professional receives for its services. HealthCost provides information specific to an in- n Most state all-payer claims databases have a governing sured person’s health benefits coverage and also shows health board or advisory committee that administers or provides rec- costs for uninsured patients. Employers can use the website’s ommendations on the operation of, and re- Benefit Index Tool to compare carriers’ ports to be generated from, the databases. health plan premiums and benefits. CHIS The committees usually include directors of As of December 2009, all-payer claims data are used to produce health care cost, state health agencies and representatives databases were operating or under quality and use reports. One report, for ex- of key stakeholder groups, such as health development in Kansas, Maine, Mary- ample, found that Medicaid members who insurers, hospitals, physicians, employers received primary care in 2006 incurred $4.1 and consumers. Some states out-source land, Massachusetts, Minnesota, New million for outpatient emergency depart- data management and analytics. Others Hampshire, Oregon, Tennessee, Utah ment visits for conditions more appropri- 8 conduct all or some of the activities in- and Vermont. ately treated in a primary care setting. A house. Efforts are under way to standardize second, related report found that Medic- data collection processes to make it easier aid patients who were frequently treated for insurers that operate in more than one state to participate in the emergency department often were seen for conditions and allow for cross-state data applications and analyses. that probably could have been treated in a primary care office or clinic.9 An estimated $2.1 million could have been saved if n States that require payers to submit claims data often have each frequent emergency department user had made just one statutory penalties for failure to do so in a timely manner (e.g., less outpatient emergency room visit during 2006. $1,000 for each week of delay in Massachusetts, $500 per day in Oregon and $100 per day in Tennessee). n A 1993 Maryland law created the Maryland Medical Care Data Base,10 which includes health care practitioner claims n Legislation enacted in 1995 established the Maine Health (e.g., physician, podiatrist, nurse practitioner) and pharmacy Data Organization (MHDO).2 Maine is one of 30 states where services. Payers that collect more than $1 million in health in- health data organizations collect and disseminate health care surance premiums annually must submit claims data. Medicare data for policy and market uses. As with other state data or- claims also are part of the database. Although the program has ganizations, Maine’s reporting systems consist of hospital access to Medicaid claims, they are not part of the database. financial and organizational data (including inpatient, outpa- The Maryland Health Care Commission uses claims data to re- tient and emergency department data); non-hospital ambu- port costs and use of professional health services, including latory service data; and quality data. In 2003, Maine became variations in charges. A November 2009 report, for example, the first state to require all payers to report claims3 data. analyzed expenditures for professional services by privately insured patients between 2006 and 2007.11 The report found Today, MHDO has nine full-time-equivalent employees and average professional services expenditures grew 3 percent in an annual budget of about $1.8 million. Several studies have 2007, mainly as a result of increases in the number of services used MHDO data to identify areas of the health care system per user as opposed to increases in health care prices. that could benefit from specific cost containment efforts. One study, for example, used MHDO data to identify significant un- n Several states are using their all-payer claims databases for warranted variation in use and costs of care across the state.4 specific cost containment-related initiatives. Utah plans to use It concluded that, if potentially avoidable inpatient use and claims data to compare the cost of caring for newborns whose high-cost, high-variation outpatient use were reduced by 50 mothers had limited or no prenatal care to mothers who had percent, medical spending by commercial health payers could the recommended number of prenatal visits. Kansas intends

2 National Conference of State Legislatures to use data from its all-payer claims system to develop cost- n Evidence exists that analyses of claims data can help evalu- saving initiatives in its Medicaid or state employee health plan ate programs that are designed to control costs. A private sec- by the summer of 2011. tor study published in 1989 used claims data to assess the effect on costs of using primary care physicians as gatekeepers in Non-State Examples managed care programs.14 Although researchers did not have n The Wisconsin Health Information Organization (WHIO), a access to an all-payer claims database, they used four years of private nonprofit organization, is comprised of multiple payers claims data from a large insurer to conduct their study. They that voluntarily submit claims data to the WHIO Health Analyt- found gatekeeping resulted in lower costs during the first year, ics Exchange. The organization was incorporated in late 2006 primarily due to reduced use of specialists, but costs rose dur- by insurers, employers and providers (e.g., Anthem Blue Cross ing the second year to just below indemnity (i.e., fee-for-ser- Blue Shield of Wisconsin, Humana, Greater Milwaukee Business vice) plan levels. Foundation on Health, Wisconsin Medical Society and Wiscon- sin Hospital Association). In 2007, the Wisconsin Department Challenges of Health and Family Services and Wisconsin Department of Several challenges exist to setting up all-payer claims data- Employee Trust Funds became members. Currently, WHIO re- bases. ceives data from 29 percent of health care claims in the state n Providers may object to payers reporting data about their and has commitments from Medicaid and other health plans practices. They may be concerned about how the data will be for submission of claims data that will bring the total to more used, whether it will accurately reflect prices and quality, and if than 50 percent of the population in 2010. WHIO’s goal is to use it will account for variations in the complexity of their cases. data to improve the quality, affordability, safety and efficiency n Consumers may be concerned about the privacy and se- of health care delivered to patients in Wisconsin. curity of their information, although this often is explicitly addressed in state authorizing legislation and regulations. n The U.S. Department of Health and Human Services plans n Large, multi-state insurers, concerned about administrative to build a nationwide all-payer claims database consisting of costs of complying with various state database requirements, a representative sample of the population. The data will be may lobby for states to harmonize rules and procedures. used to analyze and compare the effectiveness of medical n A state may not be able to obtain data from employers that treatments for various conditions. The department posted a have self-insured health plans unless the information is avail- pre-solicitation in December 2009 for “a targeted design study able from the third-party administrators of such plans. Some to inform the creation of such a database and supporting ser- employers, however, may voluntarily submit claims data, since vices, methods, and skills.”12 it is in their interest to compare the prices they pay with what others pay. Information about all users of the health system Effectiveness of Cost Containment Approach should be—but often is not—in the database to provide a It is still too early to assess how effectively state all-payer claims complete picture of health care use and cost. For the most part, databases can help states control costs. Most programs have states do not have access to claims data for Medicare patients not been in use long enough to determine their effectiveness and have either no or limited data about uninsured patients. in shaping successful cost containment efforts. To date, all-pay- n The cost of establishing and maintaining an all-payer er claims database programs have not focused on cost contain- claims database and publishing and analyzing database infor- ment per se. Rather, the focal point has been using claims information can be significant. Vermont estimated start-up costs mation to investigate statewide variations in costs and health for its database would be approximately $500,000 for FY 2009. care use and publishing data that allow the public to compare The Utah Legislature appropriated $625,000 in 2008 to launch health care prices and quality. Some states (e.g., Massachusetts its all-payer claims database; annual costs are projected to be and New Hampshire) have used claims data to identify poten- $1 million, paid for primarily with state and Medicaid match- tial areas for cost savings. ing funds. In 2008, the Oregon Health Fund Board suggested

investing $400,000 in state funds and $300,000 in federal funds n At least one state—New Hampshire—has used its all- to establish a database. payer claims database to assess the effect on prices over time of publishing comparative health service prices. The analysis Complementary Strategies was intended to determine the effect of the state’s Health- All-payer claims databases provide valuable information for Cost website on prices for health care procedures shown on structuring and evaluating a number of cost containment strat- the website. Before HealthCost was launched, some suggested egies. Strategies include payment reforms, such as episode-of- it could encourage price competition and help slow price in- care and global payments; and delivery system reforms, such creases for procedures listed on the website. Others said higher as medical homes, care coordination, chronic disease manage- prices could result due to provider access to their competitors’ ment and broad-scale health information technology projects rates. Still others said prices could become more consistent as (which are the subject of other briefs in this series). providers with high rates lowered them and providers with low rates moved to the mean. In fact, the analysis found no demon- strable effect on providers’ prices over time.13

National Conference of State Legislatures 3 For More Information 4. Advisory Council on Health Systems Development, Health Care Cost Drivers in Maine: Report and Recommendations (Augusta, Maine: Di- Love, Denise. “All Payer Claims Database: Implementation in the rigoHealth, April 2009); http://www.maine.gov/tools/whatsnew/attach. States,” PowerPoint presentation, Oregon Senate Health php?id=70889&an=1. and Veterans Affairs Committee, March 10, 2009; http:// 5. E. Kilbreth et al., Analysis of 2006 Maine Emergency Department Use: A Study Conducted on Behalf of the Emergency Department Use Work Group www.oregon.gov/OHPPR/HFB/docs/2009_Legislature_ of the Maine Advisory Council on Health System Development, Project Final Presentations/3.10.09/oregon_slides_apcd_PRINT.pdf. Report (Portland, Maine: Muskie School of Public Service, February 2009); Miller, Patrick. “Overview of All-Payer Claims Databases,” Pow- http://www.mehaf.org/pictures/reportsandbriefs/ME_ED_%20Use_FINAL_RE- PORT_2.24.09.pdf. erPoint presentation, National Association of Health Data 6. Peter Kraut, “Dirigo Health Reform: Financing Access Expansion Organizations Annual Conference, October 2009; www. Through Cost Containment Initiatives,” PowerPoint presentation, State Cov- statecoverage.org/files/Miller%20Overview.ppt. erage Initiatives Summer Workshop for State Officials, San Francisco, July 31, 2008. Regional All-Payer Healthcare Information Council website, 7. 2005 N.H. Laws, Chap. 248-19. http://raphic.org/. 8. New Hampshire Comprehensive Health Care Information System, NCSL has posted supplemental materials and 2010 updates on “Comparison of Primary Care Received by NH Medicaid Members at Different Practice Settings,” Issue Brief (Concord, N.H.; New Hampshire Department of this topic online at http://www.ncsl.org/?tabid=19929. Health and Human Services, May 2009); http://www.dhhs.state.nh.us/DHHS/ OMBP/LIBRARY/Data-Statistical+Report/primarycare.htm 9. New Hampshire Comprehensive Health Care Information System, “Fre- quent Outpatient Emergency Department Use by NH Medicaid Members,” Is- Acknowledgment sue Brief (Concord, N.H.; New Hampshire Department of Health and Human Thanks go to Josephine Porter, co-chair, Regional All-Payer Services, October 2008); http://www.dhhs.state.nh.us/DHHS/OMBP/LIBRARY/ Healthcare Information Council and deputy director, New Data-Statistical+Report/emergencyroom.htm 10. Md. 1993 Md. Laws, Chap. 9. Hampshire Institute for Health Policy and Practice, and Denise 11. Maryland Health Care Commission Center for Analysis and Informa- Love, executive director, National Association of HealthData tion Services, Practitioner Utilization: Trends Among Privately Insured Patients, Organizations, who reviewed an early draft of this brief. 2006-2007 (Baltimore: MHCC, November 2009); http://classic.netaddress.com/ tpl/Info/123WHIAJT/Popup?hidden___url=http%3A%2F%2Fmhcc.maryland. gov%2Fhealth_care_expenditures%2Fexputil2009%2Freport.pdf. 12. U.S. Department of Health and Human Services, Strategic Design for Notes an All-Payor, All-Claims Database to Support Comparative Effectiveness Re- 1. “Frequently Asked Questions,” The Dartmouth Atlas of Care website, search, Solicitation No. 10-233-SOL-00039 (Washington, D.C.; USDHHS, Dec. http://www.dartmouthatlas.org/faq.shtm. 15, 2009). 2. 1995 Me. Laws, Chap. 1683 (Laws of Maine). 13. New Hampshire Insurance Department, The Impact of Price Transpar- 3. Alan M. Prysunka, “Maine Health Data Organization,” PowerPoint pre- ency on HealthCost Services in New Hampshire (Concord, N.H., NHID, Aug. 11, sentation, Health Data Colloquium: Models for Public-Private Partnerships, 2009; http://www.nh.gov/insurance/lah/documents/impact-hcinnh.pdf. University of Wisconsin-Madison, Feb. 2, 2005; http://uwphi.pophealth.wisc. 14. D.P. Martin et al., “Effect of a Gatekeeper Plan on Health Services Use edu/healthpolicy/eHealth.htm. and Charges: A Randomized Trial,” American Journal of Public Health 79, no. 12 (1989); http://ajph.aphapublications.org/cgi/content/abstract/79/12/1628.

NCSL gratefully acknowledges the financial support for this publication series from The Colorado Health Foundation and Rose Community Foundation of Denver, Colorado.

National Conference of State Legislatures William T. Pound, Executive Director 7700 East First Place 444 North Capitol Street, N.W., #515 Denver, Colorado 80230 Washington, D.C. 20001 (303) 364-7700 (202) 624-5400 www.ncsl.org © 2010 by the National Conference of State Legislatures. All rights reserved.

4 National Conference of State Legislatures Health Cost Containment and Efficiencies NCSL Briefs for State Legislators

No. 3 May 2010

Episode-of-Care Payments

Cost Containment Strategy and Logic improve patient care related Episode-based payments are at an early stage of develop- to an episode of illness or a Research indicates cost ment and use, but interest in them is growing. In contrast chronic condition; providers savings for some condi- to traditional fee-for-service reimbursement where pro- do better financially when tions using episode-of- viders are paid separately for each service, an episode-of- patient care is cost effective. care payments, which care payment covers all the care a patient receives in the Under episode-of-care re- are at an early stage of course of treatment for a specific illness, condition or med- imbursement, for example, development. ical event. Examples of episodes of care for which a single, providers will have higher bundled payment can be made include all physician, in- net income if they avoid unnecessary tests, reduce complica- patient and outpatient care for a knee or hip replacement, tions related to care, and shorten patients’ hospital stay using pregnancy and delivery, or heart attack. Savings can be better hospital discharge planning. realized in three ways: 1) by negotiating a payment so the total cost will be less than fee-for-service; 2) by agreeing Target of Cost Containment with providers that any savings that arise because total ex- Episode-of-care payments target unnecessary or duplicative penditures under episode-of-care payment are less than care, avoidable hospitalizations, complications of care and in- they would have been under fee-for-service will be shared efficient care (e.g., providing high-cost care where less expen- between the payer and providers; and/or 3) from savings sive care would be as effective). According to the Center for that arise because no additional payments will be made Healthcare Quality and Payment Reform, “An episode payment for the cost of treating complications of care, as would system reduces the incentive to overuse unnecessary services normally be the case under fee-for-service. within the episode, and gives healthcare providers the flexibility to decide what services should be delivered, rather than Episode-of-care payments also are known as case rates, being constrained by fee codes and amounts.”1 Episode-based evidence-based case rates, condition-specific capitation payments are intended to strengthen incentives for providers and episode-based bundled payments. to work together to offer more cost-effective care. Under the current fee-for-service system, no provider or group of provid- Episode-based payment creates an incentive for physi- ers is accountable for managing the quality and costs of a pa- cians, hospitals and other providers to work together to tient’s care throughout the course of treatment for a condition or illness. Figure 1. Massachusetts Annual Costs of Care for Medicare Beneficiaries with Three Chronic Conditions (Diabetes, Heart Failure and COPD), 2006 Figure 1 uses Massachusetts data to illustrate the wide variation among the states in the $60,000 $58,161 annual cost to Medicare of providing care 60000 $55,379 $53,283 for three chronic conditions, reflecting vari- 50000 ous care practices and intensity of service. $41,148 Episode-of-care payments are designed to $40,000 40000 reduce the average cost of these and other conditions and to reduce unwarranted varia- 30000 $26,246 tions in the cost of care. 20000$20,000 Federal Health Reform 10000 The Patient Protection and Affordable Care $0 Act, signed March 23, 2010, authorizes new 0 U.S. Lowest Massa- Highest Highest average cost 10th chusetts cost 10th cost state Medicaid demonstration projects to test ep- percentile percentile isode-of-care payments in up to eight states (section 2704). The payments are for inte- Source: Cathy Schoen, “Path to a High-Performance Health System: Improving Value and Achieving Savings,” grated care for an episode of illness and must PowerPoint Presentation, Health Care Quality and Cost Council Annual Meeting, Boston, June 25, 2009; www. mass.gov/lhqcc/docs/meetings/2009_06_shoen_presentation.ppt. include a hospitalization. The effective date

National Conference of State Legislatures for the demonstration projects is Jan. 1, 2012, through Dec. 31, ing a payment system designed to cover all care delivered by 2016. The new legislation also establishes a national Medicare a provider for a specific condition (e.g., heart failure, chronic pilot program to develop and evaluate bundled payments for obstructive pulmonary disease, hypertension). Called an ev- an episode of care that begins three days prior to a hospitaliza- idence-informed case rate, this payment approach is being tion and spans 30 days following discharge (section 3023). The tested in Minneapolis, Philadelphia and Rockford, Ill. Medicare pilot program will be effective Jan. 1, 2013. Evidence of Effectiveness State Examples Limited evidence is available concerning the effect of episode- n A Minnesota provision in comprehensive 2008 health re- of-care payments on overall health expenditures. Existing form legislation called for development of uniform definitions evidence indicates that, for some conditions, episode-of-care of at least seven “baskets of care” (e.g., asthma, low-back pain, payments can improve efficiency and generate cost savings.6 obstetric care and total knee replacement).2 These definitions Mathematica Inc. reviewed the available evidence on episode- are to form the basis for episode-based pay- of-care payments. It showed scant evi- ments. Hospitals and providers will set a price A Minnesota provision in compre- dence of the effects of episode-based pay- for a package of care, allowing patients and ment approaches on cost and quality, al- payers to compare prices for bundles of care. hensive 2008 health reform legis- though some programs indicate decreased lation called for development of costs of care.7 n Massachusetts enacted legislation in 2008 concerning cost containment, transparency uniform definitions of at least seven Most evidence concerning the effect of ep- and efficiency in delivery of health care.3 Af- “baskets of care” (e.g., asthma, low- isode-based payments comes from federal ter the legislation was enacted, the Massa- back pain, obstetric care and total and private sector pilot programs. (Several chusetts Division of Health Care Finance and examples are included below.) Research for Policy contracted with the RAND Corporation knee replacement) that will form the this brief did not uncover any assessments to assess a comprehensive menu of cost con- basis for episode-based payments. of cost savings from state programs that tainment options. RAND estimated that cu- use episode-of-care payments. mulative savings from the widespread adoption of episode-of-care payments would be $685 million to $39 n Coronary artery bypass graft surgery (CABG). In the early billion (0.1 percent to 5.9 percent of total health expenditures) 1990s, Medicare sponsored the Participating Heart Bypass Cen- for the period from 2010 to 2020.4 Savings would result from ter Demonstration. Under this program, Medicare paid a single, using episode-of-care payments for four hospital conditions negotiated, risk-adjusted amount for inpatient CABG patients. (e.g., knee and hip replacements) and six chronic conditions The payment covered both inpatient hospital and physician (e.g., diabetes and asthma). charges and any related readmissions. Medicare spending through 90 days post-discharge was found to be 10 percent n The Maryland hospital rate-setting commission uses case lower than for patients who were not in the demonstration. rates (i.e., episode-of-care rates) for hospital services, ambula- The average length of stay in pilot program hospitals declined tory surgery, and clinic and emergency room services. by between 14 percent and 32 percent.8 In the private sector, the Geisinger Health Plan, a Pennsylvania-based, integrated n Many Medicaid programs pay for prenatal care and delivery health care delivery system, currently accepts risk-adjusted ep- using a single, risk-adjusted, bundled payment. isode-of-care payment for all care related to CABGs. The single payment includes hospital care, hospital readmissions within Non-State Examples 72 hours and care for the following 90 days. Geisinger reports n The Centers for Medicare and Medicaid Services (CMS) that its average hospital length of stay for CABGs is down 16 launched the Acute Care Episode (ACE) Demonstration in 2009. percent, and mean costs have been reduced by 5.2 percent.9 Under the demonstration, hospitals are paid a single fixed rate for all hospital, physician and ancillary services provided dur- n Bundled payment for hospital care based on diagnosis. ing an inpatient stay for orthopedic or cardiovascular proce- Since 1983, Medicare has paid hospitals a fixed-rate-per-hos- dures. The demonstration sites are in Albuquerque, Denver, pitalization based on diagnosis at the time of discharge. This Oklahoma City, San Antonio and Tulsa.5 diagnosis-related group reimbursement covers only the hospital’s expenses; it does not cover physician care. Researchers n UnitedHealth is testing use of episode-based payments to have found this type of episode-based payment has resulted pay oncologists for several months of cancer care. in a “substantial and sustained reduction in Medicare hospital spending”10 and “significant overall reduction in the rate of n PROMETHEUS Payment Inc., a nonprofit corporation with Medicare spending growth.”11 Several Medicaid programs use board members from several national employers, is develop- a similar system for paying hospitals.

2 National Conference of State Legislatures n Arthroscopic surgery. A two-year study of a program that Notes used a bundled payment for knee and shoulder arthroscopic 1. Center for Healthcare Quality and Payment Reform, Transitioning to Ep- isode-Based Payment (Pittsburgh: CHQPR, n.d.); http://www.chqpr.org/down- surgery indicated that the health maintenance organization loads/TransitioningtoEpisodes.pdf. 12 that made the bundled payment saved in excess of $125,000. 2. “Provider Pricing for Baskets of Care,” Minn. 2008 Minn. Laws, Chap. 358, Savings came from less radiography and physical therapy, https://www.revisor.mn.gov/laws/?id=358&year=2008&type=0. shorter hospital stays, and fewer complications and hospital 3. 2008 Mass. Acts, Chap. 305. 4. Christine E. Eibner et al., Controlling Health Care Spending in Massa- readmissions. chusetts: An Analysis of Options, Executive Summary, A report submitted to the Division of Health Care Finance and Policy, Commonwealth of Massachusetts Challenges (Santa Monica: RAND Health, August 2009), 15; http://www.mass.gov/Ee- ohhs2/docs/dhcfp/r/pubs/09/control_health_spending_exec_sum_rand_08- While episode-based payments can help control costs for cer- 07-09.pdf tain acute illnesses and chronic conditions, several caveats 5. CMS Office of Public Affairs, “CMS Announces Sites for a Demonstra- should be noted. Some have suggested that, unless they are tion to Encourage Greater Collaboration and Improve Quality Using Bundled Hospital Payment,” press release (Washington D.C.: Centers for Medicare and properly structured, episode-of-care payments may create Medicaid Services, Jan. 7, 2009); http://www.cms.hhs.gov/apps/media/press/ an incentive for providers to provide more episodes or avoid release.asp?Counter=3394. patients with complicated diagnoses in order to maximize in- 6. RAND Compare, “Analysis of Bundled Payment” (Santa Monica: RAND Compare, n.d.); http://www.randcompare.org/analysis-of-options/analysis-of- come. Defining the boundaries of an episode can be difficult. bundled-payment. The effect of episode-based payments may be dampened if 7. Mathematica Inc., “Episode-Based Payment,” (Princeton, N.J.: Math- payers use different definitions of an episode of care. Episode- ematica Inc., Feb. 24, 2009); http://www.mass.gov/Eeohhs2/docs/dhcfp/ pc/2009_02_24_Episode-based_Payment-C1.pdf. of-care payments may require providers to set up new care ar- 8. Jerry L. Cromwell, Debra A. Dayhoff, and Armen H. Thoumaian, “Cost rangements. Providers may encounter administrative compli- Savings and Physician Responses to Global Bundled Payments for Medicare cations as they develop joint arrangements for accepting and Heart Bypass Surgery,” Health Care Financing Review 19, no. 1 (Fall 1997); http:// findarticles.com/p/articles/mi_m0795/is_n1_v19/ai_20750869/. dividing episode-of-care payment among themselves. Despite 9. Steven M. Shortell, “Healthcare Payments and Incentives.” PowerPoint these difficulties, the trend among payers is toward increased presentation, Aug. 7, 2009; www.dmhc.ca.gov/library/reports/news/SHORT- use of episode-based payments. ELLRCI-%20PaymentIncentivesPresentation%20080709-2.ppt. 10. Chapin White, “Why Did Medicare Spending Growth Slow Down?” Health Affairs 27, no. 3 (2008): 793-802; http://content.healthaffairs.org/cgi/ Complementary Strategies content/abstract/27/3/793. Episode-of-care payments can be used with other cost con- 11. R.F. Coulam and G.L. Gaumer, “Medicare’s Prospective Payment System: A Critical Appraisal,” Health Care Financing Review, annual supplement(1991). tainment strategies. Examples include disease management 12. .L.L. Johnson and R.L. Becker, “An Alternative Health-Care Reimburse- programs, medical homes and care coordination programs. ment System—Application of Arthroscopy and Financial Warranty: Results of Using episode-based pay in conjunction with these strategies a 2-Year Pilot Study,” Arthroscopy 10, no. 4 (August 1994):462-70; http://www. ncbi.nlm.nih.gov/pubmed/7945644. (which are the subject of other briefs in this series), may offer a greater level of cost containment than could be achieved by implementing a single strategy.

For More Information “Analysis of Bundled Payment.” Santa Monica, RAND Compare, n.d.; http://www.randcompare.org/analysis-of-options/ analysis-of-bundled-payment. McKethan, Aaron, et al. “Improving Quality and Value in the U.S. Health Care System.” Washington, D.C.: Bipartisan Policy Center, August 2009; http://www.brookings.edu/ reports/2009/0821_bpc_qualityreport.aspx. Miller, Harold D. “From Volume to Value: Better Ways to Pay for Health Care. Health Affairs 28, no. 5 (2009); http://content. healthaffairs.org/cgi/content/full/28/5/1418. NCSL has posted supplemental materials and 2010 updates on this topic online at http://www.ncsl.org/?tabid=19930.

National Conference of State Legislatures 3 About this Project NCSL’s Health Cost Containment and Efficiency Series describes multiple alternative state policy approaches, with an emphasis on documented and fiscally calculated results. The project is housed at the NCSL Health Program in Denver, Colorado. It is led by Richard Cauchi, program director, and Martha King, group director, with Barbara Yondorf as lead researcher.

NCSL gratefully acknowledges the financial support for this publication series from The Colorado Health Foundation and Rose Community Foundation of Denver, Colorado.

National Conference of State Legislatures William T. Pound, Executive Director 7700 East First Place 444 North Capitol Street, N.W., #515 Denver, Colorado 80230 Washington, D.C. 20001 (303) 364-7700 (202) 624-5400 www.ncsl.org © 2010 by the National Conference of State Legislatures. All rights reserved. Health Cost Containment and Efficiencies NCSL Briefs for State Legislators

No. 15 March 2011

Health Care Provider Patient Safety

nationwide and cost more Cost Containment Strategy and Logic Examples of patient safety than $8 billion to treat. Patient safety refers to rules, practices and systems to pre- initiatives that improve pa- vent patient harm or injury, including efforts to prevent tient care and reduce costs Hospital-acquired condi- medical errors. These errors, also known as adverse events, exist, but evidence of over- are occurrences of unintended harm from medical care. tions cost states millions all savings is limited. The main categories of medical errors are treatment errors, of dollars annually. A 2008 failure to complete indicated tests, and avoidable delays study estimated Massachu- in treatment. Patient safety also includes efforts to reduce setts could save between $446 million and $718 million in health care-associated infections that result from treat- Medicaid expenditures over 10 years (2010–2020) by reducing ment in a hospital or other medical care setting.1 The goal or eliminating payments for serious medical errors.2 of patient safety initiatives is to reduce pain, suffering and deaths associated with preventable, unintended harm to a Federal Health Reform patient. The Patient Protection and Affordable Care Act, signed March 23, 2010, includes several patient safety provisions. It autho- Medical errors are the eighth leading cause of death in the rizes state demonstration project grants to develop, imple- United States. More people die from medical errors than ment and evaluate alternatives to tort litigation over injuries from motor vehicle accidents, breast cancer or AIDS. Each allegedly caused by health providers, including mediation and year, between 500,000 and 1.5 million Americans admitted arbitration (section 10607). Demonstration projects must en- to hospitals are harmed by preventable medical errors. courage disclosure of health care errors and enhance patient safety by detecting, analyzing and helping reduce medical Nationwide, the estimated annual cost of additional medi- errors. States are eligible for demonstration planning grants cal and short-term disability expenses associated with of up to $500,000 per state. The act also establishes a Patient medical errors is $19.5 billion (Table 1). Longer hospital Safety Research Center and a Physician Compare Internet Web stays and the cost of treating medical error-related injuries site to provide physician performance information, including and complications are the two major expenditures associ- assessments of patient safety and effectiveness and timeliness ated with medical errors. of care (section 10331). A similar Hospital Compare Web site (http://www.hospitalcompare.hhs.gov) already exists. Target of Cost Containment Cumulatively, the most expensive, preventable hospital Examples care-related problems are pressure ulcers; postoperative States use an array of strategies to promote health provider infection; mechanical complications related to a device, systems and practices that foster patient safety. Highlighted implant or graft; chronic pain after failed back surgery; and below are electronic prescribing and penalties for illegible excessive and unintended bleeding complicating a proce- prescriptions; regulation of nurse-patient ratios and nurse dure. They account for more than 55 percent of the esti- work hours; non-payment for costs associated with serious mated total cost of medical errors. In 2006, just two condi- preventable events; and medical error and infection reporting. tions caused by hospital-acquired infections—sepsis and pneumonia—were responsible for nearly 50,000 deaths n Electronic prescribing and penalties for illegible prescriptions. Difficulties deciphering hand-written prescriptions often lead to medication errors, including wrong dosages and Table 1. The High Cost of Inpatient and Outpatient Medical Errors, 2008 U.S. Estimates incorrect substitution of one drug for another with a similar name (e.g., Cerebyx for seizures and Celebrex for pain). To

n Total medical, mortality and short-term disability costs $19.5 billion reduce errors, some states require or authorize expanded n Average cost per medical error $13,000 use of electronic prescribing (e-prescribing), also known as n Missed days of work 10 million computerized physician order entry. A 2009 Minnesota law n Excess deaths 2,500 (Minn. Stat. §62J.497 (2009)), for example, requires “all providers, group purchasers, prescribers, and dispensers to establish, Source: Jon Shreve et al., The Economic Measurement of Medical Errors (Schaumburg, Ill.: Society of Actuaries, June 2010); http://www.soa.org/files/pdf/research-econ-measurement.pdf. maintain, and use an electronic prescription program.” Few states expressly authorize—and some expressly prohibit—e- National Conference of State Legislatures prescriptions for controlled substances (e.g., hallucinogens, Nevada, Ohio, Oregon, Texas and Washington must develop cocaine, opium, barbiturates) due to concerns about illegal nurse staffing plans with input from direct care nurses and drug diversion. In light of federal regulations that took effect based on patient need. Illinois, New Jersey, New York, Rhode June 1, 2010, however, states are moving to authorize con- Island and Vermont require disclosure of staffing to the public trolled substance e-prescriptions if they are transmitted with and/or a regulatory entity. software that meets federal e-prescribing requirements. States also combat medication errors by penalizing physicians who Studies also have demonstrated a correlation between the write illegible prescriptions. In Montana (Mont. Code Ann. §3- number of hours nurses work and patient safety.6 As of July 2-17 (2005)), for example, writing an unreadable prescription 2010, laws in 14 states—Alaska, Connecticut, Illinois, Mary- is a civil offense. land, Minnesota, New Jersey, New Hampshire, New York, Oregon, Pennsylvania, Rhode Island, Texas, Washington and n Non-payment for “never events.” Medical errors that West Virginia—restrict mandatory overtime for nurses. Laws result in unambiguous, serious and preventable harm are may set or require a process for determining the maximum known as serious reportable or never events. The National number of hours a nurse is required to work, except in special Quality Forum has identified 28 such events. Examples include circumstances (e.g., declared disaster). Some also specify the surgery performed on the wrong body part or wrong patient; minimum amount of time between shifts or set a ceiling on accidentally leaving a foreign object in a patient during sur- allowable voluntary overtime. Laws may apply to registered gery or other procedure; patient death or serious disability nurses only, all types of nurses, hospitals only or all health care associated with a burn, fall or use of restraints or bed rails; and facilities. suicide or attempted suicide during care in a health care facil- ity. In recent years, states have enacted laws restricting or pro- n Error and infection reporting. Many states require or hibiting payment for never events and care that arises from encourage hospitals and other providers to report serious them. Medicare, several state Medicaid programs and many preventable adverse events. In most cases, reports are submit- commercial insurers also have adopted non-payment policies. ted to patient safety organizations (PSOs)—public or private entities that collect and analyze data to identify and reduce Some states prohibit payers from reimbursing providers for risks and hazards associated with patient care. At the end of never events (e.g., Iowa), while others prohibit providers 2009, 27 states required hospitals to report never events.7 Fig- from billing insurers and patients for them (e.g., New Jersey).3 ure 1 shows the distribution of 305 never events reported to Some laws apply to a few serious reportable events, and oth- the Minnesota Figure 1. Adverse Health Events Reported by Minnesota ers to as many as 50 (e.g., Maryland, which adjusts hospital Hospitals and Ambulatory Surgical Centers, Department of payments for potentially preventable complications). Never- October 2009 – October 2010 Health in 2010. event payment provisions may apply to some providers (e.g., As of March Other (9) hospitals or hospitals and ambulatory surgery centers) or all Suicide (3) 2010, 27 states providers (e.g., Pennsylvania’s Medicaid program). The list of Medication Errors (13) required pub- never events may be specified in statute (e.g., Maine) or set by Criminal (1) lic reporting Wrong Procedure (16) a state health department (e.g., Massachusetts). Maine’s never Wrong Site Surgery/ of hospital- event law applies broadly. It prohibits health facilities from Procedures (31) acquired infec- Retained Objects (34) charging a patient or the patient’s insurer (including public Pressure Ulcers (118) tion rates; two and private payers) for 28 never events and requires facilities allowed confi- to inform patients of the policy. As of December 2009, Med- dential report- icaid programs in Colorado, Kansas, Maine, Maryland, Massa- ing to state chusetts, Minnesota, Missouri, New Jersey, New York, Pennsyl- Falls (80) agencies, and vania and Washington had never event non-payment policies. three provided for voluntary

On Feb. 17, 2011, the Centers for Medicare and Medicaid Source: Minnesota Department of Health, Adverse Health Events in Minnesota public report- (St. Paul: MDH, January 2011); http://www.health.state.mn.us/patientsafety/ 8 Services issued a proposed rule requiring state Medicaid ae/2011ahereport.pdf. ing. programs to adopt non-payment policies for, at a minimum, Medicare’s list of hospital-acquired conditions. n Private sector. Hospitals, physicians, provider associations, quality management organizations, health insurance n Nurse-patient staff hours and nurse work hours. A plans and other private sector groups are actively engaged series of studies for the Agency for Healthcare Research and in patient safety initiatives. The National Business Group on Quality (AHRQ) found significant associations between lower Health, for example, has developed specific recommenda- levels of nurse staffing and higher rates of patient pneumonia, tions for employers and other purchasers to include in con- upper gastrointestinal bleeding, shock/cardiac arrest, uri- tracts with health plans to improve hospital patient safety. In nary tract infections, and failure to rescue.4 States use several December 2009, the National Association of Public Hospitals approaches to ensure nurse staffing is adequate to ensure and Health Systems, the Patient Safety Foundation and Kaiser hospital patient safety.5 California requires hospitals to meet Permanente launched a program to enhance patient safety specific nurse-patient ratios. Hospitals in Connecticut, Illinois, programs at public hospitals. Blue Cross Blue Shield’s 39 inde-

2 National Conference of State Legislatures pendent companies withhold reimbursement to contracted cording to the Centers for Medicare and Medicaid Services, acute care hospitals for never events. HealthPartners, a Min- in 2009 this policy resulted in 3,416 payment adjustments nesota-based nonprofit HMO, began refusing payment for 27 (.04 percent) from a total of 9.3 million Medicare hospital never events in early 2005. discharges, yielding $18.8 million (.01 percent) in savings out of $133 billion in total hospital expenditures.13 The Wisconsin Evidence of Effectiveness Department of Health Services estimated that implementing Examples of patient safety initiatives that improve patient a hospital never events policy in state FY 2010 would save care and reduce costs exist, but evidence of overall savings is $100,000 in state and federal Medicaid expenditures in 2011.14 limited. Two cost-saving initiative examples come from Michi- Researchers have attributed low overall savings from non- gan and Ohio. According to the Michigan Health and Hospital payment policies to the fact that never events are rare. Association, its efforts to reduce intensive care unit-acquired conditions have led to dramatic declines in bloodstream in- n Nurse-to-patient ratios and work hours. In 2001, AHRQ fections and ventilator-associated pneumonia, saving more rated various patient safety practices by strength of evidence than 1,800 lives and $271 million over five years. Solutions for of impact and effectiveness.15 Strength of evidence was rated Patient Safety is an initiative of the Ohio Business Roundtable, as greatest, high, medium, lower and lowest. AHRQ found several Ohio hospital associations and Cardinal Health Foun- high strength of evidence for changes in nurse staffing on dation. They report that efforts have resulted in 900 fewer morbidity and mortality. Studies of California’s 1999 law re- hospital days over 12 months and $12.8 million in savings by quiring specific hospital nurse-to-patient ratios, however, avoiding unnecessary health care. have not documented patient safety improvement or cost savings. According to a 2009 California HealthCare Foundation Despite examples of successful patient safety initiatives, evi- report: “Most of the quality measures do not appear to have dence for overall cost savings and improved patient care is been directly affected by the increase in nurse staffing.”16 With mixed. A May 2009 Consumers Union report, To Err is Human— respect to regulation of nurse work hours, the AHRQ study To Delay is Deadly, observed: “Ten years ago, the Institute of found lower strength of evidence for the effect of providers’ Medicine declared as many as 98,000 people die each year hours of service on adverse events related to fatigue in health needlessly because of preventable medical harm, including workers. healthcare-acquired infections. Ten years later, we don’t know if we’ve made any real progress.” A study of patient safety n Reporting. A 2005 Congressional Research Service report incidents among hospitalized Medicare patients found that, found that: “Overall the research on the impact of [collect- between 2006 and 2008, six patient safety indicators showed ing and] publicizing performance measures shows mixed improvement, while eight worsened.9 Health care expendi- results.”17 Some findings show patient mortality decreased tures are growing at more than 7 percent annually, but patient after hospital performance data were released, while oth- safety is improving by only 1 percent. Experts have described ers showed no effect. A 2003 study comparing the effect of patient safety improvements over the past 10 years as frustrat- publicizing performance data for some hospitals but not ingly slow. others found some evidence for the value of publicizing performance data to encourage quality improvement activities.18 Findings from studies of specific, legislated patient safety A 2009 Vermont Department of Health report looked at state strategies are presented below. patient safety and event reporting systems in other states.19 It concluded: “Empirical data from these states provides evi- n Electronic prescribing. Evidence exists for the patient dence that implementation of patient safety and event report- safety benefit of e-prescribing, but research for this brief did ing programs effectively improve patient care by decreasing not uncover any studies of the overall effect on health care medical errors and strengthening hospital systems of care.” expenditures. A study published in 2010 compared the safety The report did not, however, find any state reporting systems of e-prescribing to paper-based prescribing.10 It found that that report cost savings or have a proposed methodology for nearly two of every five paper prescriptions contained an conducting a cost analysis. It noted: “Quantifying the resulting error. After introduction of e-prescribing in 15 community- cost savings [from patient safety and event reporting systems] based office practices, error percentages dropped from 43 remains an elusive goal.” percent to 7 percent. An older study documented a more than 50 percent drop in serious medical error rates when comput- Challenges erized prescribing systems were used.11 A systematic review Several challenges exist to implementing patient safety pro- of e-prescribing studies published in January 2011 found grams that can both control overall costs and improve patient weak-to-moderate evidence for improved practitioner perfor- health. mance (e.g., fewer medication errors), but far less evidence for improvements in patient health.12 • It can be difficult for payers, including states, to capture savings associated with patient safety improvements realized n Non-payment for never events. Medicare no longer at the provider level. Providers may retain the savings or reimburses hospitals for 12 hospital-acquired conditions. Ac- undertake other activities to offset lost revenues.

National Conference of State Legislatures 3 • Determining and assigning accountability for an adverse 3. For information on state never event nonpayment policies, see Jill Rosenthal and Carrie Hanlon, Nonpayment for Preventable Events and Condi- event can be difficult. Hospital-acquired conditions, for tions: Aligning State and Federal Policies to Drive Health System Improvement example, may be caused by medical devices that became (Washington, D.C.: National Academy for State Health Policy, December 2009); contaminated before they reached the hospital. http://www.nashp.org/sites/default/files/PatientSafety.pdf. 4. Mark W. Stanton, “Hospital Nurse Staffing and Quality of Care,” Re- • Establishing, maintaining and analyzing data from state search in Action 14], Agency for Healthcare Research and Quality, http://www. medical error reporting systems requires up-front and on- ahrq.gov/research/nursestaffing/nursestaff.htm. going funding that may be difficult for states that are facing 5. American Nurses Association, “Nurse Staffing Plans and Ratios,” Nurs- ing World Web page: http://nursingworld.org/MainMenuCategories/ANAPo- budget deficits. liticalPower/State/StateLegislativeAgenda/StaffingPlansandRatios_1.aspx. • Measuring savings and improved health from patient safety 6. Anne E. Rogers et al., “The Working Hours of Hospital Staff Nurses and efforts is difficult, in part due to insufficient and inconsistent Patient Safety,” Health Affairs 23, no. 4 (2004); http://content.healthaffairs.org/ content/23/4/202.abstract?ijkey=7f33d45a7b24738d308bba0f23b8f7c195acd reporting and reporting standards. 870&keytype2=tf_ipsecsha. 7. Kevin B. O’Reilly, “Patient Safety Improving Slightly, 10 years After IOM Complementary Strategies Report on Errors,” amednews (Dec. 28, 2009); http://www.ama-assn.org/amednews/2009/12/28/prsb1228.htm. The cost savings potential of patient safety initiatives may be 8. Committee to Reduce Infection Deaths, State Legislation and Initia- enhanced when offered with complementary cost contain- tives on Healthcare-Associated Infections Web page (updated March 2010); ment strategies, which are the subject of other briefs in this http://www.hospitalinfection.org/legislation.shtml. 9. “Patient Safety Incidents at U.S. Hospitals Show No Decline, Cost $9 B,” series. Examples include medical malpractice reform; all-payer Healthcare Intelligence Network 6, no. 74 (April 16, 2010); hin.com. claims databases; and global, episode-of-care and perfor- 10. Rainu Kaushal, “Electronic Prescribing Improves Medication Safety mance-based health care provider payments. in Community-based Office Practices, Journal of General Internal Medicine” 25, no. 6 (2010); http://www.mendeley.com/research/electronic-prescribing- improves-medication-safety-communitybased-office-practices/. For More Information 11. D.W. Bates et al., “Effect of Computerized Physician Order Entry and a The Commonwealth Fund. “State Patient Safety Initiatives Team Intervention on Prevention of Serious Medication Errors,” Journal of the American Medical Association (Oct. 21, 1998). and Nonpayment for Preventable Events and Conditions.” 12. Ashly D. Black et al., “The Impact of eHealth on the Quality and Safety States in Action (January/February 2010); http://www. of Health Care: A Systematic Overview,” PLoS Med 8, no. 1 (January 2011); commonwealthfund.org/Content/Newsletters/States-in- http://www.plosmedicine.org/article/info%3Adoi%2F10.1371%2Fjournal. pmed.1000387. Action/2010/Jan/January-February-2010/Feature/Feature. 13. U.S. Department of Health and Human Services, Centers for Medicare aspx. and Medicaid Services, “New Provisions to Strengthen Tie Between Medicare Fernandez, Bernadette, and Fran Larkins. Medical Malpractice: Payment and Quality for Inpatient Stays in Acute Care Hospitals in Fiscal Year 2011 and Beyond,” Medicare Fact Sheet (July 30, 2010); http://op.bna.com/ The Role of Patient Safety Initiatives. Washington, D.C.: Con- hl.nsf/id/bbrk-87ut56/$File/fact730qualitycms.pdf. gressional Research Service, Jan. 24, 2005; http://www. 14. Wisconsin Department of Health Services, “ForwardHealth Rate Re- law.umaryland.edu/marshall/crsreports/crsdocuments/ form Project,” PowerPoint, July 2009; http://www.dhs.wisconsin.gov/em/imac/ minutes/2009/8/forwardhealth-rate-reform-project.pdf. RL3209201242005.pdf. 15. Agency for Healthcare Quality and Research, “Addendum to Summa- Spencer, Anna, et al. Lessons from the Pioneers: Reporting ry: Patient Safety Practices Rated by Strength of Evidence,” Making Health Care Healthcare-Associated Infections. Denver, Colo.: National Safer: A Critical Analysis of Patient Safety Practices (Washington, D.C.: AHRQ, July 2001); http://archive.ahrq.gov/clinic/ptsafety/TabA-1tv.htm. Conference of State Legislatures, May 2010; www.ncsl.org. 16. Matthew Gever, “Improving the Quality of Care: The Continuing The latest information on this topic is available in an NCSL on- Debate Over Nurse-Patient Ratios,” State Health Notes 30, no.535 (March 16, line supplement at 19940. 2009); http://www.ncsl.org/default.aspx?tabid=13817. 17. Bernadette Fernandez and Fran Larkins, Medical Malpractice: The Role of Patient Safety Initiatives (Washington, D.C.; Congressional Research Service, Notes Jan. 24, 2005); http://www.law.umaryland.edu/marshall/crsreports/crsdocu- 1. Umbrella terms to describe unintended harm or injury arising from ments/RL3209201242005.pdf. medical care include health care-acquired conditions and provider-prevent- 18. J.H. Hibbard, J. Stockard, and M. Tusler, “Does Publicizing Hospital able conditions. Performance 2. Christine Eibner et al., Controlling Health Care Spending in Massa- Stimulate Quality Improvement Efforts?” Health Affairs 22, no. 2 (March-April chusetts: An Analysis of Options, Option #10, “Eliminate Payment for Adverse 2003). Hospital Events” (Santa Monica: RAND Health, August 2009); http://www. 19. Vermont Department of Health, Vermont 2008: Patient Safety, Surveil- mass.gov/Eeohhs2/docs/dhcfp/r/pubs/09/control_health_care_spending_ lance and Improvement System (Burlington, Vt.: VDH, Jan. 15, 2008); http:// rand_08-07-09.pdf. healthvermont.gov/admin/legislature/documents/PatientSafetySurveillan- ceImprovement_legrpt011509.pdf.

About this Project NCSL’s Health Cost Containment and Efficiency Series describes multiple alternative state policy approaches, with an emphasis on documented and fiscally calculated results. National Conference of State Legislatures The project is housed at the NCSL Health Program in Den- William T. Pound, Executive Director ver, Colorado. It is led by Richard Cauchi, program director, and Martha King, group director, with Barbara Yondorf as 7700 East First Place 444 North Capitol Street, N.W., #515 lead researcher and author of most of the briefs. Denver, Colorado 80230 Washington, D.C. 20001 (303) 364-7700 (202) 624-5400 NCSL gratefully acknowledges the financial support for this www.ncsl.org publication series from The Colorado Health Foundation © 2011 by the National Conference of State Legislatures. All rights reserved. and Rose Community Foundation of Denver, Colorado.

4 National Conference of State Legislatures Health Cost Containment and Efficiencies NCSL Briefs for State Legislators

No. 16 October 2011

Medical Malpractice Reform

35 percent of damage awards Cost Containment Strategy and Logic Some tort reforms have been (Table 1). Medical malpractice reform, also known as tort reform, shown to reduce medical mal- includes strategies to limit medical malpractice costs, practice premiums and may According to the Physicians In- deter medical errors and ensure that patients who are reduce overall health care 1 surance Association of America, injured by medical negligence are fairly compensated. expenditures. Tort reform2 has the potential to reduce health care ex- the median claim payment in penditures by reducing the number of malpractice claims, 2008 was $200,000, and the av- the average size of malpractice awards and tort liability erage was $350,000. system administrative costs. It also may lead to fewer instances of defensive medicine where physicians order Federal Health Reform tests and procedures not primarily to ensure the health The Patient Protection and Affordable Care Act, signed March of the patient but as a safeguard against possible medical 23, 2010, authorizes state demonstration projects to explore malpractice liability. alternatives to current tort litigation to resolve malpractice claims (section 10607). The act authorizes $50 million (up to There is general agreement that the medical malpractice $500,000 per state) to be appropriated over five years, begin- system is costly and inefficient. National estimates of med- ning in FY 2011, for state demonstration grants to develop, ical liability system costs—including settlements, legal implement and evaluate alternatives. The president’s 2012 and administrative costs and defensive medicine—range budget proposal included $250 million for the U.S. Justice from $55.6 billion annually (2.4 percent of total health Department to help states overhaul their medical malpractice spending) to $200 billion annually (10 percent of health laws. It should be noted, however, that as of Oct. 1, 2011, the care spending). Evidence indicates the system does not final 2012 budget had not been enacted. compensate all patients equitably, rapidly or efficiently; delivers compensation to a small share of injured people; Examples6 does not appear to reduce medical errors; may hamper States use an array of strategies to control medical malprac- efforts to improve patient safety; and, in some cases, leads tice costs. The following section describes the major strate- to unnecessary tests and procedures.3 gies, gives examples and includes opposing arguments. All data are current as of September 2010. Although medical malpractice premium rates nationwide began moderating in 2005 and fell an average of 4 per- n Damage award limits. Thirty-seven states and territories cent in 2008 and 10 percent in 2009, this occurred after an limit awards for non-economic damages, punitive damages or extended period of sharply rising rates. Rates vary widely all damages. Non-economic damage caps typically range from from state to state and by specialty; obstetricians and $250,000 to $500,000 and may be adjusted for inflation. Sev- neurosurgeons pay among the highest rates—as much as eral states with non-economic damage limits allow for higher $200,000 per year or more. payments under certain circumstances (e.g., substantial disfig-

Medical malpractice reform proponents argue that tort Table 1. Medical Malpractice Payments reforms—such as limiting malpractice awards, tightening and Plaintiff Legal Expenses statutes of limitations for filing claims and screening cases Estimated National Costs, 2008 before they go to trial—not only reduce overall medical Damage payments, including care spending but also increase access to care. Opponents plaintiff legal expenses $5.72 billion 100% dispute these claims, arguing that “a nationwide crack- Economic damages $3.15 billion 55% Noneconomic damages $2.40 billion 42% down on malpractice, not a campaign to roll back the Punitive damages $0.17 billion 3% rights of patients who are injured”4 is needed instead. Plaintiff legal expenses— total and as a percent of Target of Cost Containment damage payments $2.0 billion 35% Major medical malpractice reform targets include damage Source: Michelle M. Mello et al., “National Costs of the Medical Liability System,“ awards,5 legal and administrative expenses and defensive Health Affairs 29, no. 9 (September 2010); http://content.healthaffairs.org/ content/29/9/1569.abstract. medicine. Plaintiffs’ attorney contingency fees average

National Conference of State Legislatures urement). A few states limit total damages—Colorado has a status as defendants, legislatures should not regulate what $1 million cap, Nebraska has a $1.75 million cap and Virginia plaintiffs present to a jury without an overwhelming public has a $1.5 million cap. Some states (e.g., Illinois, Nebraska) policy necessity, and strict standards may discourage innova- and the U.S. Virgin Islands prohibit or cap punitive damage tive science and diminish medical care. awards. Courts in several states (e.g., Alabama, Georgia, Illi- nois, New Hampshire, Oregon and Washington) have declared n Modified collateral source rules. The collateral source certain types of damage caps to be unconstitutional. Arizona, rule allows an injured party to recover damages from the de- Kentucky and Wyoming specifically prohibit enactment of fendant even if the plaintiff is also entitled to receive damages laws that limit medical malpractice damages. Opponents of from a third party (e.g., auto or workers’ compensation insur- non-economic damage limits argue they “punish the worst af- ance). Modified collateral source rules allow some or all of an flicted because the more pain and suffering that a plaintiff has award to be offset by the amount the plaintiff receives from endured, the more a cap deprives him of damages to which collateral sources. At least 26 states have modified collateral he would otherwise have been entitled.”7 source rules. The rules may apply to medical malpractice actions only (e.g., Illinois, Utah), all personal injury actions (e.g., n More restrictive statutes of limitation place stricter Indiana, Montana) or all tort actions (e.g., Alaska, Minnesota). limits than historically has been the case on how long a plain- Illinois’ modified collateral source rule allows an award to be tiff has to file a claim after an injury has been discovered or reduced by 50 percent of the lost wages or disability income occurred. All states have statutes of limitation for medical paid or payable to the claimant by a third party and 100 malpractice claims. A state typically requires a claim to be filed percent of the health care charges paid or payable by a third within two to three years after the injury or one to three years party. There are, however, limits to the offsets (e.g., the judg- after discovery, but in no event more than four to seven years ment cannot be reduced by more than 50 percent). Modified after the injury. South Dakota has among the most restric- collateral source rule opponents argue that injured people are tive provisions; it requires a claim to be filed within two years entitled to the full value of the injury from those who perpe- of the act or omission. States usually allow a longer period trated the wrong. for cases filed on behalf of a child or for fraudulent conceal- ment of information regarding malpractice. Opponents of n Attorney contingent fee limits cap the amount at- statutes of limitation based on the date of injury argue the torneys can receive as a percentage of an award to pay for clock should start ticking only when the injury is discovered legal services. In most malpractice cases, a lawyer agrees, in because it may take additional time after symptoms appear to return for representing a plaintiff, to accept a percentage of discover that an injury was caused by medical malpractice. the award but to receive nothing if the plaintiff loses. Nearly half the states limit attorneys’ fees. Thirteen states, Guam and n Joint and several liability limits. Joint and several liabil- Puerto Rico have sliding fee schedules. Delaware has among ity is a common-law doctrine that holds that, if more than one the lowest limits; attorney fees may not exceed 35 percent of defendant is found liable for the plaintiff’s injuries or losses, the first $100,000 in damages, 25 percent of the next $100,000 then each defendant may be held 100 percent liable. Eighteen and 10 percent of all damages exceeding $200,000. At least six states provide for several liability, which requires damages to states authorize courts or an arbitration panel to review the be apportioned according to each defendant’s percentage of reasonableness of attorney fees but do not set specific limits. fault. Seven states apply several liability to non-economic or Courts in Pennsylvania have ruled attorney fee limits uncon- punitive damages only. Fourteen states have modified joint stitutional. Opponents of attorney fee limits say they limit the and several liability laws. In Missouri, for example, a defendant ability of injured people, particularly those faced with medical who bears 51 percent or more of fault is joint and severally bills and lost wages, to finance lawsuits they otherwise could liable, but defendants who are less than 50 percent at fault are not afford. only severally liable. Opponents of joint and several liability limits argue that, if the individual actions of multiple defen- n Periodic payment provisions allow or require insurers dants are together necessary for the injury to occur, then all to pay damage awards over time, rather than in a lump sum. defendants are jointly and fully responsible and should face Thirty jurisdictions have periodic payment laws. Among states the full value of the plaintiff’s losses. that set a specific threshold above which damages must be paid in whole or in part periodically rather than as a lump n Expert witness standards establish minimum qualifica- sum, $100,000 is the most frequent threshold. The threshold tions for expert witnesses in tort actions. At least 29 states in California and Nevada is $50,000. Periodic payment laws have standards specific to medical liability cases. Expert wit- in Alabama, Arizona, Arkansas and Georgia have been held nesses may be required to be licensed or board certified in unconstitutional. Opponents of periodic payment require- the same field as the defendant; practice or teach in the same ments argue this decision should be the plaintiff’s, some of field; and be knowledgeable about accepted standards of care whom may prefer to invest the awards themselves or may be that are the subject of the case. Expert witness standards are concerned about the solvency of the entity that provides the unconstitutional under New Hampshire’s constitution. Oppo- annuity coverage. nents of strict medical malpractice expert witness standards argue that physicians and hospitals should not have special

2 National Conference of State Legislatures n Other medical liability-related reforms.8 States have A study of a 1975 California law that capped pain and suffer- considered —and a few have adopted—other laws to contain ing awards at $250,000 and limited attorney fees found the medical malpractice litigation costs. Examples include patient law led to a 30 percent reduction in damage awards.16 Com- compensation and injury funds, pre-trial alternative dispute pensation to injured patients declined by 15 percent, while resolution and screening panels, affidavits or certificates of the fees for plaintiffs’ attorneys fell by 60 percent. Plaintiffs merit, frivolous lawsuit penalties, and non-economic dam- with the highest percentage loss as a result of non-economic age award schedules. States also have considered safe harbor caps were often those with injuries that caused relatively little rules, which make adherence to evidence-based medical economic loss but a significantly lower quality of life. One of practice guidelines a presumptive defense; and health courts, the law’s major effects was to make plaintiffs’ lawyers bear where cases are decided by specially trained judges, assisted more of the cost of the litigation. by neutral expert advisers, instead of a jury. n Expert witness standards. A comprehensive analysis of Evidence of Effectiveness state tort reforms reported the “striking finding” that expert Some tort reforms have been shown to reduce medical witness standards are strongly correlated with reductions in malpractice premiums and may reduce overall health care the average medical malpractice claim size, total number of expenditures. The following sections review evidence of the paid claims, and the number and average size of paid claims combined effect of multiple reforms and the effect of specific per physician.17 reforms that have been in place long enough and adopted widely enough to be evaluated. n Joint and several liability limits. Some researchers have found that limits on joint and several liability constrain n Effect of multiple reforms. A study published in 2010 the growth of premiums and reduce the number of annual found that the 15 states with the lowest levels of malpractice payments, but do not significantly affect average awards or payments and claims between 1999 and 2003 had low dam- physician supply.18 Others have found that restrictions do not age caps, restrictive statutes of limitation and stringent expert lead to lower claims frequency, claims costs, overhead cost, witness requirements.9 malpractice premiums or defensive Most studies have found that caps on non- medicine.19 An analysis of Medicare expenditures economic damages are associated with and medical liability costs between n More restrictive statutes of limi- 1993 and 2001 found an association fewer and lower awards. tation. Evidence indicates shortening between increased average malprac- the period for filing a malpractice tice payments per physician and higher total physician ser- claim reduces the frequency of claims and may help constrain vices expenditures, most notably for imaging services.10 Other malpractice premium growth.20 studies have reported weak or no evidence of a relationship between malpractice premiums and health care costs or mal- n Modified collateral source rules. Evidence of an asso- practice reforms and health care costs. ciation between changes in collateral source rules and lower malpractice costs is mixed. One study reported the “counter- According to the Congressional Budget Office, evidence of the intuitive” finding that states with more restrictive collateral effect of tort reform on patient health is mixed.11 Some studies source rules had slightly higher average payments and num- have found an association between caps on non-economic ber of claims payments per physician.21 damages and poorer health and between lower malpractice costs and increased mortality. Others have found no signifi- Challenges cant association between malpractice costs and adverse out- n A slower growth or actual reduction in malpractice insur- comes for patients. ance premiums may not translate to overall health care savings. This occurs only if providers pass along their savings to n Damage award limits. Most studies have found that patients, insurers and other payers in the form of lower medi- caps on non-economic damages are associated with fewer cal care prices or if their practice included fewer instances of and lower awards.12 Research indicates that limits on pain and defensive medicine. suffering awards reduce the average payment per claim, modestly constrain liability premium growth and reduce defensive n Malpractice reforms should be designed not only to medicine for some services. One study documented a $15,000 control medical liability system costs but also to ensure that average claim payment reduction from capping non-econom- patients injured by medical negligence are fairly compen- ic damage awards.13 A 2011 article in The New England Journal sated. As noted above, however, evidence suggests that some of Medicine reported some evidence that caps on damages reforms may constrain the ability of plaintiffs with legitimate modestly increase the supply of physicians in a state, although claims to be fairly compensated. Medical record reviews indi- other study findings have been mixed.”14 Another study found cate that only between 1.5 and 10 lawsuits are filed for every that caps on noneconomic damages “disproportionately affect 100 cases of negligent injury. compensation for the most severely injured patients, which raises equity issues.”15

3 National Conference of State Legislatures n Some reforms may face constitutional challenges. Exam- 4. Bob Herbert, “Malpractice Myths,” The New York Times, June 21, 2004; ples of medical malpractice laws that have been found to be http://www.nytimes.com/2004/06/21/opinion/21HERB.html. 5. There are three types of damage awards. Economic damage awards unconstitutional in some states include damage award caps, compensate plaintiffs for direct costs incurred because of medical negligence, attorney contingent fee limits and periodic payment provi- including medical expenses and loss of income. Non-economic damage sions. awards provide compensation for non-monetary damages such as pain and suffering or loss of consortium. Punitive damage awards are intended to punish a defendant for willful and wanton conduct. Complementary Strategies 6. Most of the information presented in this section is from National The cost savings potential of medical malpractice liability re- Conference of State Legislatures, Medical Liability/Malpractice Laws Web page, Aug. 15, 2011, www.ncsl.org/?tabid=18516. See the Web page for up- forms may be enhanced when offered with complementary dates. cost containment strategies. Examples include patient safety 7. Henry Cohen, Medical Malpractice Liability Reform: Legal Issues and initiatives and global payments to providers, which are the Fifty-State Survey of Caps on Punitive Damages and Noneconomic Damages (Washington, D.C.: Congressional Research Service, April 11, 2005); http://open- subject of other briefs in this series. Other complementary crs.com/document/RL31692/2005-04-11/. Also see Peter Perlman, “Don’t Pun- strategies include providing adequate or enhanced funding ish the Injured,” American Bar Association Journal, May 1, 1986. for state medical boards to expeditiously investigate com- 8. For more information on these approaches, see U.S. Senate Commit- tee on Health, Education, Labor and Pensions, Medical Liability: New Ideas for plaints about and discipline doctors; developing robust data- Making the System Work Better for Patients, Senate Hearing 109-710, June 22, collection efforts to track and analyze medical errors and in- 2006 (Washington, D.C.: U.S. Government Printing Office, 2007); http://www. stances of malpractice; and supporting efforts to make clinical gpo.gov/fdsys/pkg/CHRG-109shrg28417/html/CHRG-109shrg28417.htm. 9. Teresa M. Waters et al., “Impact of State Tort Reforms on Physician Mal- best practice guidelines widely available to, and a safe harbor practice Payments,” Health Affairs 26, no. 2 (2007); http://content.healthaffairs. in malpractice cases for, clinicians. org/content/26/2/500.full. 10. Katherine Baicker, Elliott S. Fisher, and Amitabh Chandra, “Mal- practice Liability Costs and the Practice of Medicine in the Medicare Pro- NCSL’s Medical Liability/Medical Malpractice Laws gram,” Health Affairs 26, no. 3 (2007); http://content.healthaffairs.org/content/26/3/841.full. website is the nation’s in-depth public resource on 11. Letter from Douglas M. Elmendorf, director, Congressional Budget this topic. Visit www.ncsl.org/?tabid=18516. Office, to the Honorable Bruce L. Braley, U.S. House of Representatives, Dec. 29, 2009; http://www.cbo.gov/ftpdocs/108xx/doc10872/12-29-Tort_Reform- Braley.pdf. For More Information 12. Ronen Avraham, “An Empirical Study of the Impact of Tort Reforms Fernandez, Bernadette; Baird Webel; and Vivian S. Chu. Medical Mal- on Medical Malpractice Settlement Payments,” Journal of Legal Studies 36, no. 2 (2007); http://ideas.repec.org/a/ucp/jlstud/v36y2007is2ps183-s229.html. practice Reform. Washington, D.C.: Congressional Research Ser- 13. Teresa M. Waters et al., “Impact of State Tort Reforms on Physician vice, April 15, 2010; http://healthcarereform.procon.org/source- Malpractice Payments.” files/medical-malpractice-insurance-health-reform-crs-2010.pdf. 14. Allen Kachalia and Michelle M. Mello, “New Directions in Medical Mello, Michelle M.; Allen Kachalid; and Sarah Goodell. Medical Liability Reform,” The New England Journal of Medicine 364, no. 16 (April 21, Malpractice—Update. Princeton, N.J.: The Robert Wood John- 2011); http://www.nejm.org/doi/full/10.1056/NEJMhpr1012821. son Foundation, April 2010; http://www.rwjf.org/files/re- 15. Michelle M. Mello, Allen Kachalid and Sarah Goodell, Medical Mal- search/042011.72097.synthesis.medmal.update.pdf. practice—Update (Princeton, N.J.: The Robert Wood Johnson Foundation, April Waters, Teresa M. et al. “Impact of State Tort Reforms on Physician 2010); http://www.rwjf.org/files/research/042011.72097.synthesis.medmal. Malpractice Payments.” Health Affairs 26, no. 2; http://content. update.pdf. 16. Nicolas M. Pace et al., Capping Non-Economic Awards in Medical healthaffairs.org/content/26/2/500.full. Malpractice Trials: California Jury Verdicts under MICRA (Santa Monica, Calif.: The latest information on this topic is available in an online supple- RAND Corporation, 2004); http://www.rand.org/pubs/monographs/2004/ ment at www.ncsl.org/?tabid=19941. RAND_MG234.pdf. 17. Teresa M. Waters et al., “Impact of State Tort Reforms on Physician Notes Malpractice Payments.” 1. This brief focuses on reforms designed to reduce medical malpractice 18. Claudia H. Williams and Michelle M. Mello, Medical Malpractice: litigation costs. Other types of reforms are primarily intended to reduce the Impact of the Crisis and the Effect of State Tort Reforms, Synthesis Project Policy incidence of medical negligence (e.g., by improving hospital patient safety or Brief No. 10 (Princeton, N.J.: The Robert Wood Johnson Foundation, May 2006); giving patients access to reports of hospitals’ and doctors’ adverse incidents). http://www.rwjf.org/pr/synthesis/reports_and_briefs/pdf/no10_policybrief. 2. A “tort” is defined as a wrongful act other than a breach of contract pdf. that injures another and for which the law imposes civil liability. 19. Michelle M. Mello, Allen Kachalid and Sarah Goodell, Medical Mal- 3. Ariel Winter,The Medical Malpractice System: Review of the Evidence, practice—Update. PowerPoint presentation to MedPAC meeting, Washington, D.C., April 1, 2010, 20. Ibid. http://www.medpac.gov/transcripts/medical%20malpractice%20April%20 21. Teresa M. Waters et al., “Impact of State Tort Reforms on Physician 2010_public.pdf. Malpractice Payments.”

About this Project NCSL’s Health Cost Containment and Efficiency Series describes multiple alternative state policy approaches, with an emphasis on documented and fiscally calculated results. The project is housed at the NCSL Health Program in Denver, Colorado. It is led by Richard National Conference of State Legislatures Cauchi, program director, and Martha King, group director, with William T. Pound, Executive Director Barbara Yondorf as lead researcher and author of most of the briefs. 7700 East First Place 444 North Capitol Street, N.W., #515 Thanks go to Heather Morton for her contributions to this brief. Denver, Colorado 80230 Washington, D.C. 20001 (303) 364-7700 (202) 624-5400 NCSL gratefully acknowledges the financial support for this publica- www.ncsl.org tion series from The Colorado Health Foundation and Rose Commu- © 2011 by the National Conference of State Legislatures. nity Foundation of Denver, Colorado. All rights reserved.

4 National Conference of State Legislatures