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What Changes Can Your Health Plan Expect from the New Administration?

Interview with Dan Mendelson
February/March 2009, Vol 2, No 2 - Regulatory
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The new administration has already begun to introduce changes in some areas of government. To outline potential key changes to the US healthcare system and their impact on health plans, Robert Henry and Kip Piper of AHDB asked Dan Mendelson to draw on his experience as current president and founder of Avalere Health, as well as on his previous role as Associate Director for Health at the White House's Office of Management and Budget during the Clinton Administration. Mr Mendelson focuses on what he sees as key changes that will have direct implications for decision makers in healthcare, including (1) a greater emphasis on plan beneficiaries' protection, and (2) increased regulatory focus on plan operations. Plans can expect to have less government trust in actuarial submissions and probably more oversight and supervision of the daily operation of a plan. The triangle of quality, access, and cost will likely reflect the point of view of the beneficiary rather than that of plan administrators. Other topics discussed include the potential benefits of postmarketing surveillance, new opportunities for expediting drug approvals, and the new and increasing emphasis on comparative effectiveness research and health information technology.

Am Health Drug Benefits. 2009;2(2):55-60.

Robert Henry: Our editorial focus is on balancing the clinical, business, and regulatory criteria that guide the US healthcare system. As a new administration is taking over, we would like to ask you what you think those involved in healthcare, especially payers, can expect from this new environment.

Dan Mendelson: The new administration will look at the relationship between health plans and the government in a fundamentally different way from the previous administration.

First, the new group will be motivated by beneficiary protection, that is, their perception of what is best for Medicare patients. They will likely be less concerned with making a market for Medicare Part D and accommodating the operations of health plans. They will assess the ability of the beneficiary to access a consistently high-quality, low-cost product. This, I think, is the first fundamental change in mindset that will take place—a focus on the beneficiary.

The second likely result will be a higher degree of skepticism about plan operations. And that means there will be more scrutiny of the marketing guidelines. This will play out in the review of the bids. Plans can expect less trust of the actuarial submissions and probably more oversight and supervision of the day-to-day plan operations. These I think are the 2 major characteristics of the coming change for health plans.

Henry: Could this push plans from cost-minimization to cost-effectiveness?

Mendelson: The term cost-effectiveness has different implications for different people, so I am a little reluctant to use it here. The key is that there are going to be fundamental changes in the mindset that will shift the focus to the beneficiary perspective.

The pending changes in Medicare Part D are a good example. The Medicare Modernization Act gives very broad flexibility to the Medicare Administrator. For example, there is a very general medication therapy management (MTM) provision in the law; to date the Centers for Medicare & Medicaid Services (CMS) has not issued detailed regulations on requirements for this program, and plans have had broad flexibility in implementing their MTM programs. I would expect the new administration to consider what beneficiaries should be able to expect from health plans with respect to MTM; this again is a beneficiary focus. For example, beneficiaries with heart failure or diabetes or another chronic disease may expect a quality improvement program organized around medications in a Part D plan. The next step is that CMS may specify it expects to see such plans operationalized, especially if there is evidence on improved patient outcomes associated with certain types of plans.

Henry: One of the realities facing the new administration is the aging of the baby boomers and the massive increase in healthcare utilization. Part and parcel of this is the issue of biologics for cancer care. Biologics offer unprecedented advances in life expectancy for a number of cancers, but these medications are also exponentially more expensive than their predecessors. How are we going to fund this?

Mendelson: There's a short-term and a long-term perspective. In the short-term, the Congress is not overly concerned with cost control relative to stimulus of the economy. Much of the policy that is being discussed right now is about the stimulus (which is spending money), as opposed to cost control (which is saving money). So in the short-term I don't think we are going to see very aggressive cost containment along the lines of the Balanced Budget Act being pushed aggressively by the administration or by Congress.

There will be some exceptions to that, as the Congress will want to show that it cares about longterm Medicare spending growth. For the plans, this probably means that a modest reduction in managed care payments will be legislated within the next year. It also likely means a new law to establish a regulatory pathway for follow-up on biologics, and a budget proposal in the spring, with modest provider cuts. But I don't think there will be large rate reductions in the hospital, in the physician areas in legislation this year, or in the areas that really count with respect to getting costs under control.

In the long-term, of course the program costs are unsustainable. There is a demographic as well as a cost imperative that will play out, but I just don't see the policy over the next year being very motivated by fundamental demographic and social problems.

Kip Piper: There has been talk regarding the drug pipeline that connects to the discussion about the current risk-aversion environment and the need for balance. Is that real? And if so, have we swung the pendulum, or is it just too insufficiently nuanced of an approach that requires a look at the market and the regulations, especially regarding the US Food and Drug Administration (FDA)?

Mendelson: There are a number of issues embedded in your question. Whoever comes in to run the FDA will have the opportunity to shape a new paradigm for how drugs are approved. This will not necessarily hurt the ability to bring drugs to the market, but right now there is a lot of confusion and uncertainty around how the FDA is going to be looking at drugs in the future, especially with respect to the new requirement for postmarket or postlaunch data.

Strong postmarket evaluation programs focused on safety and efficacy might help the FDA get more comfortable with certain types of approvals and even enable the FDA during a period of time to move more quickly. With all the concerns about safety, the FDA has not set any "speed records" during the past 4 years, and there is an opportunity to help the FDA regain its footing as a science agency at this point.

In addition, there are other topics of real importance with respect to health reform. A topic of great importance and consistent focus from the Obama Administration is health information technology (HIT), which includes a variety of subtopics, such as e-prescribing, electronic medical records, and personal health records (PHRs). President Obama has made statements about the importance of this area, and he wants to do something about it. I think we are going to see a significant level of activity around electronic health records this year. And it will happen from within the government, the regulatory agencies (eg, the Agency for Healthcare Research and Quality, CMS, and the FDA) that will focus on what they can do to improve e-health, and through legislation that will be designed to promote some aspects of e-health.

Much of the policy to date—including what is presently included in the stimulus bill—is focused on helping providers to be able to pay for new technologies. But there is a great opportunity for health plans if they rise to the opportunity to help the government shape what types of investment should be made in that area. President Obama has specifically linked a $50-billion commitment to the economic stimulus, which is significant.

Henry: Are there any advantages to embarking on a HIT infrastructure initiative at this point that may be a cause for optimism?

Mendelson: There is going to be money funneled into this channel. The fundamental question is what that policy is going to be. Specifically, there are 3 ways that this could be done. One would be to give incentives to physicians and for hospitals to acquire better technology that operates in a clinical environment. A second would be to give incentives to individuals to invest in PHRs that could be brought into the clinical environment. A third is to work it through health plans. Many health plans have already started to invest significant amounts of money in PHRs that would distinguish themselves as commercial offerings.

The question becomes, how does this shape the operating environment for health plans that are reading the material they are producing, to say that they have an opportunity to be the leaders in this area or to see their materials commoditized.

Henry: Going back to something we mentioned earlier, are we moving toward a more sophisticated level of evidence as it pertains to health and drug benefits? Will we be able, with comparative effectiveness and HIT measures, to amass data and analyze the evidence on health and drug interventions better than before?

Mendelson: What is encouraging is the stronger level of interest from the plans in the concepts of evidence-based medicine, clinical effectiveness review, and the like. Several organizations, including the National Committee for Quality Assurance and the National Quality Forum, are starting to make some progress on defining clinical measures. There is certainly a greater level of discussion in government, and I do think that this year we will see the passage of a separate comparative effectiveness research entity that is charged with beginning to evaluate some of these issues on behalf of the government.

What is discouraging, though, and what I think will cause this concept to move slowly, is the relative lack of actionable evidence in most clinical areas, where we just don't have the right information. In addition, researchers can do all the literature reviews that they want, but this type of research and the quality guidelines produced will never completely substitute for physician judgment, nor can the research substitute for the interest of a patient to navigate her or his own solutions.

There is a thin line between applying a cost-effectiveness construct and a rationing of healthcare. I don't think that the US population is ready for a policy that will restrict access to care in a structured and organized way. Likewise, I don't expect to see the evolution of strict criteria around cost-effectiveness that would result in the denial of a product on the basis of how many lives it saves. I do think that the American public is ready for more availability of evidence, more scrutiny of the evidence, and more benefit to increase the visibility of evidence. And I expect to see that happen, including major progress this year in reform.

Henry: Quality of life has always been a measure used by the European healthcare systems, and it never quite made its way intact into the US healthcare system. Do you think that will be a prospect for the future?

Mendelson: I think we will evolve in a different direction. I don't think we're going to have a UK-type NICE (National Institute for Health and Clinical Excellence)-like entity in our healthcare system in the near future. The American vision of a pluralistic healthcare system will drive more availability of information, but it will not yet embrace a fully top-down approach, where the relevant government agency in essence makes binding decisions for regional health plans. Remember that we still have a ban on the practice of medicine contained in the Social Security Act.

Henry: Briefly, how do you see this translating into realworld action on the part of a medical director at one plan or a pharmacy director at another plan? What practical or tactical change will this bring in the way they do business?

Mendelson: Of course the plans are encouraging the government to get into this, as it helps them tactically. The more the government leads in the evaluation of cost-effectiveness and the dissemination of evidence, the easier it is for plans to help make decisions on behalf of their beneficiaries and to stick with those decisions, which is often a difficult thing to do. So the plans would very much like the government to take a more aggressive role in that direction. For example, if the government looked at cancer therapy A and found that it was not indicated, it would be easier for plans to deny cancer therapy A. But, as I've argued, I don't think we're quite ready for product-specific government judgments in most cases.

We will, however, see more government-sponsored therapy-related information being brought into the public domain. And plans are going to have to anticipate the information that is brought to consumers, what that means, and how that information should interact with their own decisions about what they should approve or deny. So in the short-term, comparative effectiveness research will impose more burden on plans to understand what the government is doing and to navigate the information that is being provided to consumers.

Henry: The Dartmouth Atlas Project and other reports have pointed out great variation in the US healthcare system. The system as a whole scores as number 22 in the world, but if we break the system into states, Minnesota is the number 2 healthcare system in the world. So how can we avoid throwing out the good practices in the interests of a nationwide system?

Mendelson: The issue of regional variation is complex and doesn't bring easy answers to those trying to limit increases in costs. Variations in physician practice patterns, prescription patterns, and hospitalization patterns are in part due to regional standards of practicing medicine and in part due to differences in disease burden and insurance rates. Also, if one geography has a lower utilization rate than another, we don't know whether this is efficiency or underuse, without further analytic work. It is fair to say that there is a lot to learn, and don't underestimate how difficult it will be to bring practical learnings from the presence of regional variation.

It is different, however, with temporal variation. For example, when we look at Caesarean (C)-section rates, we see actual temporal variations, and we learn more from temporal variation than we do from regional variation. If C-section rates are highest on Fridays, when the weekend calls, that becomes a justification for policy action. That's clearer than the observation that there are more percutaneous transluminal coronary angioplasty procedures being performed in Houston than in Boston, or vice versa. This is a more difficult pattern to act on. So although I am interested in regional variation, I'm skeptical that there are immediate learning points that could bring down the costs of healthcare in the short-term as a result of regional variation.

Henry: On a slightly different topic, elsewhere you discussed the recent move from a 4-tier formulary to a 5-tier design among prescription drug plans. Could you explain the implications of this move and what's causing it?

Figure 1
Figure 1
Figure 2
Figure 2

Mendelson: What has happened over time in Medicare Part D is that the 4-tier design has emerged as a de facto standard. At the beginning of the program, a plan could profitably operate a 3-tier design. However, that time is gone, because there was adverse selection into the 3-tier design, which forced most plans into a 4-tier design (Figure 1), or a 3-tier design with very high cost-sharing or prior authorization for specialty products on the third tier. That caused the 4-tier design to emerge as standard. The 5-tier design is happening for 2 reasons (Figure 2). First, many plans are beginning to split the biologic tier into 2 tiers, with a preferred and a nonpreferred biologics tier. This is an interesting trend, because some of these categories are becoming competitive, such as the therapies used to treat multiple sclerosis (MS). And some plans are choosing a preferred and nonpreferred MS agent, and the 5-tier design enables that.

The second reason for the 5-tier design is that some plans are splitting generics into 2 tiers—preferred and nonpreferred generic products. The new administration is going to very carefully scrutinize the design, and the question I think they'll raise is—Does a 4-tier or a 5-tier design discriminate against patients who have chronic illness? And we could make a case that asking a patient with MS to pay for 33% of the cost of whatever agent they choose is discriminatory against the patient with MS. This is the debate that is going to be playing out. And again, I am not saying what the correct answer is, but only that they will scrutinize benefit design relative to antidiscrimination concepts.

Henry: On average, it costs about $1.3 billion to develop a new drug, and the developers are looking for a return on investment. At a certain point their interest in the beneficiary waxes or wanes. It is difficult to find the balance that will keep private enterprise investing in new products.

Mendelson: The pharmaceutical industry is going to need to rethink some of its development plans with respect to changes in the market. There will also need to be a very strong push from the pharmaceutical industry around issues of compliance and adherence to ensure that some of the pending price reductions are met with increases in volume of drugs taken. It is not a time for complacency with respect to pharmaceutical industry strategy. I do see that there is a very strong demand for pharmaceutical products by the American consumer.

If anything, the pharmaceutical industry has weathered the present economic crisis really well, in terms of its share price as well as revenues; perhaps better than most other American industries, and this is a cause for optimism. So the pharmaceutical industry has to be thinking carefully about how these changes, both political and environmental, will affect it and if it can anticipate these changes appropriately, there is tremendous upside for new products to be developed and brought to the market.

Stakeholder Perspective
Health Policy in the New Administration

The confluence of severe recession and a oneparty government has overcome the usual procedural barriers that typically shove health legislation into the last few months of the year. On February 4, 2009, the State Children's Health Insurance Program (SCHIP) was reauthorized, and eligibility was expanded to include children in families with income up to 300% of the federal poverty level, or $66,000 for a family of 4. The economic stimulus bill, signed into law on February 17, 2009, included a plethora of provisions to expand health information technology (HIT), fund comparative effectiveness research, subsidize health insurance for people who become unemployed, and bail out states by increasing Medicaid matching rates.

In less than a month since he was sworn in, President Obama and the largely Democratic Congress have committed to spend $227 billion over the next decade in the health sector. No wonder we have been spared the usual blather about "the first 100 days." That would be a substantial sum for health policy in any other year. Could this early success lead to even more (and more expensive) health legislation later in the year? Or have the easy decisions already been made and future legislation will be slow to emerge from the political meat grinder?

Health reformers—at least those whose idea of reform consists of massive increases in government health programs—should not get their hopes up. Senator Tom Daschle's withdrawal from the Health and Human Services secretary's job has dealt a blow to the administration's plans that will be felt late this year, when the administration's health legislation needs help getting through the Senate.

But even if Daschle had been able to take the lead on health reform, he would not have been able to sell a proposal costing hundreds of billions in the nearterm and imposing an obligation on future generations of tens of trillions of dollars. If a provision was not in the stimulus package, some way will have to be found to "pay" for it—through offsetting costs in other parts of the health budget or higher taxes. The president has stated the need for fiscal prudence, and that means adherence to budget limits that so far have been swept away by the hope that massive deficit spending will restart the economy.

It will not be easy to find savings to offset the cost of new reform proposals. When he was director of the Congressional Budget Office, Peter Orszag initiated a study of over 100 policy options, mostly to cut federal health spending. The conclusion is clear: there is no pain-free way to save money in healthcare. Incentives to adopt HIT? Instead of saving money, that will cost an additional $800 billion to $1 trillion over 10 years. Fund comparative effectiveness research? Another $800 billion. Pay for a medical home in Medicare? Only about $5 billion in new spending but no savings over the next decade. Now that Orszag is President Obama's budget director, he will have to live with those judgments.

Proposals for universal coverage are expensive—likely to exceed $200 billion annually before savings offsets are identified—and complex: key ingredients in political stalemate. It is far more likely that smaller initiatives will be advanced, targeting particularly vulnerable populations rather than offering insurance to everyone. Even that is uncertain this year, given the huge new subsidies that have already been enacted to cover kids, unemployed workers, and lowincome individuals.

In addition, the new administration will have to manage existing programs, despite the distractions of more exciting policy development. Medicare's Sustainable Growth Rate calls for a 20% reduction in physician fees next year, and additional cuts as far as the eye can see. With the cost of a permanent "fix" now over $400 billion, count on Congress once again giving a 1-year reprieve. Medicare Advantage payment rates will again come under scrutiny, but cuts in those rates come at the risk of disrupting millions of seniors enrolled in such plans. Sharp increases in Medicare Part D premiums for 2009, coupled with ongoing concern about the cost of pharmaceuticals, are likely to trigger a renewed call for direct government price negotiation and tougher benefit standards for the plans. Medicaid drug rebates may be applied to drugs sold under Part D to low-income enrollees. The administration will push hard to expedite approval of biosimilars, and the shift at the US Food and Drug Administration toward greater evidence on the safety of new drugs in the approval process is likely to persist.

President Obama's first year in office is like a meal eaten in reverse order. We started with dessert, in the form of new subsidies for insurance. Whether we like it or not, we will have to eat our vegetables before the year is out.

Joseph R. Antos, PhD
Wilson H. Taylor Scholar in
Health Care and Retirement Policy
American Enterprise Institute

Mr Mendelson is President and Founder, Avalere Health LLC, Washington, DC. He is former Associate Director for Health, Office of Management and Budget, the White House.

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