It’s Easier to Measure the Cost of Health Care than Its Value

via Harvard Business Review

How can there be no licensed treatment or vaccine for Ebola, a disease with a very high death rate that has caused a global public health emergency?

The answer is painful but clear: The profit potential from Ebola treatments was too small to interest large manufacturers. Ebola historically has threatened West African countries that have low standards of living. The small Canadian laboratory that produced an experimental vaccine was funded by the Canadian government, and Ebola was chosen as a research target because it is a good model for other infectious diseases.

Ebola may seem remote, but the economics of innovation are the same in Africa and the United States: Innovation subsists entirely on the prospect of substantial rewards earned from the discovery of a new drug.

This brings us to hepatitis C, a chronic infectious disease affecting perhaps 3.2 million Americans. Hepatitis C virus, or HCV, infection is often asymptomatic — but its severity fluctuates, and it can progress after many years. Eventual complications include cirrhosis of the liver in 20% to 30% of patients, with grave consequences in terms of health and costs.

Until recently, standard treatment for chronic HCV was a course of combination drug therapy — with relatively poor effectiveness and serious side effects. However, several innovators have worked hard to identify breakthrough antiviral treatments. Sofosbuvir — sold under the brand name Sovaldi and taken in combination with another drug — can eliminate the virus in more than 94% of cases. However, Sovaldi’s manufacturer has received much criticism for the price, both in the media and Congress. Many stories highlight the $1,000 cost per pill.

While this may make for good theater, focusing solely on the cost of therapy — or, worse, the price per pill — misses four crucial points about the value of treatment, and the reward to innovation. We now discuss these four points and, subsequently, offer three solutions for the short and the long term.

1. The illusions of accounting. First, consider the case of a man who is diagnosed with diabetes at age 50. He would pay, each and every year, for oral medications and various health care services, with a lifetime cost in the hundreds of thousands of dollars. Thus, if someone came along with a diabetes cure that cost upwards of $100,000, society should welcome it, even though the one-time price tag seems high.

Now consider hepatitis C. Treating HCV infection costs about $85,000, but it is all paid in a matter of weeks. Using treatments available before the introduction of sofosbuvir, the present lifetime medical costs are about $175,000 to $200,000. If HCV infection progresses, there is often cirrhosis of the liver and, in some cases, the need for a liver transplant. Taking into account the upfront cost of treatment — but also the lifetime benefits — researchers have found that sofosbuvir regimens are highly cost-effective, even at current prices.

2. The benefits beyond the treated patient. None of these calculations takes into account additional benefits to others. The hepatitis C virus is bloodborne and can be transmitted by inadequately sterilized needles during intravenous drug use, acupuncture, tattooing, and even public shaving. Health care workers are also at risk. Therefore, each successfully treated patient functionally “cures” the disease in others (at a cost of zero for those people) — a social benefit not captured by traditional cost-effectiveness analyses.

3. The ephemeral nature of high prices. In 10 to 12 years, generics for Sovaldi will enter the market, thereby increasing competition, reducing prices, and expanding access to treatment. A similar downward trend in price occurred with highly active antiretroviral therapy (HAART) for HIV infection. Generic antiretrovirals are now a cornerstone of the emergency plan for AIDS relief, put in place by President George W. Bush, and have done much to combat HIV in the developing world.

4. Long-term health improvements. HAART, introduced as HIV treatment in the 1990s, dramatically increased survival from HIV infection, although at significant financial cost. Before HAART, an HIV-positive patient could not buy a longer life at any price. HAART thus lowered the price of a longer life, even though the cost of treating HIV-infected patients appeared to rise dramatically.

With regard to Sovaldi, the United Kingdom (which uses a relatively stingy decision rule to cover treatments) has agreed to cover sofosbuvir for the subset of HCV-infected patients who have advanced liver disease, albeit at a lower price than the one typically cited in the United States. The lesson here: Do a “true calculation” whereby we decide, given the drug’s cost, which patients it makes sense to treat. Of course, the higher the price, the less access to new drugs for patients in need, particularly those belonging to vulnerable and disadvantaged groups. It is precisely for this reason that sofosbuvir has caused so much uproar. So what can be done?

Solutions for the Short and the Long Run

Many observers want the U.S. government to mandate lower drug prices — for example, by allowing re-importation of drugs or by having Medicare negotiate drug prices. It is tempting to believe that price reductions reduce company’s profits without affecting innovation. However, the absence of R&D into unprofitable third-world diseases, like Ebola, and the increase in drug approvals for rare diseases under the U.S. Orphan Drug Act belie this point. Indeed, economists estimate that a 10% increase in market size increases the number of new drugs by 40%. Price regulation has been shown to delay the launch of new drugs, limit their availability, and reduce the pace of innovation.

Furthermore, placing the vast bargaining power of the entire U.S. Medicare population in the hands of a public agency invites an overreaction. There are few tangible incentives to prevent cash-strapped public agencies (which often focus primarily on the present) from driving down pharmaceutical prices so much that future generations suffer from the depletion in innovation.

Protecting the vulnerable could take three forms:

  • We could simply bite the bullet and agree to cover treatment, especially in indigent populations such as Medicaid recipients. Although it may be infeasible to provide access for all hepatitis C patients immediately, a targeted approach could maximize the reach of limited public dollars. The patients at greatest risk for developing expensive complications like end-stage liver disease — or for transmitting the disease to others — may be the best cases to start with. In time, the disease can be cured in less pressing cases, with the rate of treatment expanding, especially when a low-priced generic enters the market.
  • Public payers could negotiate longer-term arrangements in which manufacturers are rewarded as the evidence of effectiveness mounts. We are starting to see such arrangements in other areas of health care under the guise of “pay for performance” — even in Medicare, where hospitals are reimbursed extra if patients avoid readmission.
  • We could consider innovative, financing mechanisms (both public and private) that allow cash-strapped programs to spread out the substantial upfront cost of treatment into a more manageable stream of payments, perhaps tied to the treatment’s effectiveness. The federal government could set up an Access to Breakthroughs Fund to loan states the money to pay for highly effective treatments like sofosbuvir. To be eligible, the treatment would need to have the FDA’s “breakthrough” designation. States would gradually repay the loan, perhaps through their Medicaid or corrections budgets. Companies with breakthrough therapies might also have access to capital to support trials, in return for pricing agreements with states.

These are only some of the practical ideas that are feasible. The bottom-line principle is that if we reimburse care on the basis of value — rather than price — and preserve access to that care, everyone wins in the end.

Posted in Health, Health & Welfare, News & Updates

Congress & ObamaCare: What to Expect Next

via Fox News

The resounding rejection of President Obama and his administration’s policies seems like the obvious interpretation of the midterm election. And polling indicates that ObamaCare ranked near the top of the issues serving as the object of that widespread repudiation. Voters ranked health care second only behind the economy as “the one issue most important in deciding their vote”, according to the final pre-election CBS News Poll of October 23-27.

Even the president’s hard core supporters are now strongly opposed to his health reforms. Harvard’s Institute of Politics survey of Americans between ages 18 and 29 just one month before the voting revealed that they disapproved of the Affordable Care Act by 57% to 39%, and similarly disapproved of “the way the president is handling health care” by 59% to 37% who approved. This is the same group who voted for President Obama over Governor Romney in 2012 by 53% to 33%, a group of whom only 22% call themselves Republicans.

Election results notwithstanding, we can surmise that this president will steadfastly block reversal of the major components of the ACA, let alone allow its repeal. But the breadth and magnitude of the Republican victory is likely to sway some Democrats in Congress to support changes in areas of common ground, and force the president to sign or veto passed legislation.

Although less than bold to most observers, we will quickly see two low-hanging fruit proposals to ObamaCare that will likely pass with bipartisan support.

One will eliminate the harsh excise tax on medical devices, the innovative tools that streamline diagnosis, ensure safer treatment and save lives in an era where Americans rely more than ever on specialist care and advanced technology.

Even more immediately, this tax has already pushed companies to expand offshore and with that take up to 45,000 new medical technology jobs outside the country, high paying jobs desired by America’s newly educated, technology-focused young people.

A second proposal will dissolve the IPAB, an unaccountable, government-appointed 15-member Board, which has the unprecedented power to unilaterally reduce payments to doctors that the Secretary of Health and Human Services is required to implement and that will result in de facto rationing, as widely decried by long time Democrats like Howard Dean, former chairman of the Democratic National Committee and former governor of Vermont.

But now is also the time for Congress to directly help individuals, especially middle class and poor Americans who ultimately are the most harmed by ObamaCare, with two fundamental fixes that will improve and maintain choices and health care access for the short and long term.

Let’s start with health insurance exchanges. We know that exchanges can offer access to a wider array of insurance choices at competitive prices and are working well in the private sector. However, the anti-competitive regulations and edicts of ObamaCare exchanges escalate prices, reduce choices for insurance, and eliminate access to many of America’s top doctors and hospitals for all but the rich and connected. Congress should decentralize the federal government’s control over the exchanges by allowing individual states to not only set their own rules, but also go further – encourage states to form multi-state exchanges.

New reforms should also aggressively ease mandates and strip back unwanted special-interest coverage requirements, since current mandates (climbing to 2,271 in the 2012 Council for Affordable Health Insurance report) represent the biggest controllable factor driving up insurance costs.

Congress should also allow everyone, regardless of age, the option of high deductible plans with more liberalized rules on health savings accounts.

ObamaCare has regrettably doubled down on policies requiring bloated coverage with near-zero copayments that subsidize the consumption of ordinary, expected medical services, rather than insure against the risk of financial loss from catastrophic illness. This not only substantially raises prices, but it hides the true cost of care from consumers.

By raising health savings account limits, consumers would also seek value as they would pay directly for most care. Additionally, spending accounts remove some of the small claims burden, now exceeding 31 percent of all US health expenditures and causing each physician to spend an estimated $72,036 of his or her time interacting with insurance plans. Needless to say, those costs are passed on to patients.

The next important step for this Congress is to liberate the poor from Medicaid, a program that has failed to improve health or provide access to care, yet whose expansion is key to ObamaCare.

Reminiscent of the blind belief in the UK’s socialized NHS with its egregious waiting lists and its rationed care despite “universal insurance,” Medicaid has been only a façade for years.

Beneficiaries cannot find doctors and their health outcomes are worse than private insurance and sometimes worse than no insurance at all. More than one-third of primary care doctors and one-fourth of specialists already refused new Medicaid patients five years ago. And from a 2012 survey of 15 large metropolitan areas, more than half of doctors in the most commonly-used fields already refuse Medicaid patients.

Instead of cynically labelling people as “insured” by expanding a failed government program and wasting another $700 billion of taxpayer money, Medicaid beneficiaries should receive money to purchase insurance and fund health savings accounts of their own. Imroving access to medical care as well as the dignity of personal choice of doctor, regardless of income, is the principled approach to American health reform.

Important remedies to the Affordable Care Act are readily available, changes that would represent a significant step forward toward increasing the insured population and improving access to medical care.

When the young voters in the recent Harvard survey were asked “How important is health care in determining which (presidential) candidate you support in November?”, 76% said “important” – virtually tied with the economy as the most important issue, higher than foreign policy, immigration, and race relations. The clock for 2016 is already ticking.

Posted in Health, Health & Welfare, Health Reform, News & Updates

What the 2014 Election Results Really Mean for Health Care

via Brookings

There have already been numerous descriptions for last night’s election results- everything from “worst news ever for democrats” to “greatest opportunity for the GOP to gain control of Washington.” When it comes to health care, there are mainly three important areas to watch that really matter, despite the headlines.

Dismantling the Affordable Care Act
It’s clear that while John Boehner picked up seats in the House, he still struggles with having a true governing majority. However, it is absolutely expected that a call for more bills that repeal the ACA will be a major messaging point. The Senate has a much more difficult time. Mitch McConnell is working with a slim majority and a need to balance expectations, since there are a number of reasons to not repeal the ACA in its entirety. The most important of which is that a number of private sector companies are reaping the rewards of the ACA. For example, Tenet Healthcare just posted record revenues of $4.8 billion, attributed in large part to a reduction in uninsured visits at its hospitals (according to investor calls).

McConnell will also have to be careful about which parts of the law can be repealed (e.g., individual mandate, Medicaid expansion), since they could trigger a Presidential veto. Plus, 2016 brings even more Republican Senate seats under scrutiny. If the Senate can’t make good on promises now, it could come back to haunt them in 2016 when voter turnout will be much higher. Expect bipartisan issues such as the medical device tax and the independent payment advisory board (IPAB) to be more vulnerable, but insurance subsidies, the individual mandate, and Medicaid expansion will be much more difficult to amend.

Also, expect a version of dismantling through increased scrutiny of programs or entities established by the ACA (this is very necessary and I would encourage this need for balanced oversight). These include the Center for Medicare and Medicaid Innovation (CMMI) and the Patient-Centered Outcomes Research Institute (PCORI). Both CMMI and PCORI have been criticized, and the oversight process will allow for opportunities to better understand and improve existing activities.

Medicaid Expansion
The NY Times reported today that the Election will leave policies largely unchanged; for those who follow health care closely, this is partly true. The news that Colorado’s Governor Hickenlooper will remain is an important step in their ambitious plans to change the delivery of the state’s Medicaid services through the federal waiver process (this remains a very poorly understood process, yet possibly the most influential one in Medicaid). Critcal components such as integration of behavioral health services and incorporation of training programs like Project ECHO, would have been on the chopping block had the Governor not remained in office. In addition, Pennsylvania’s election of Democratic Governor Tom Wolf will likely undo some troubling aspects of Republican Governor Corbett’s deal on Medicaid expansion, including premiums for low-income beneficiaries. Finally, the continuing lack of expansion in certain states is actually much more problematic than the nation realizes- heterogeneous coverage might be appropriate for a randomized trial, but tends to not work well for our nation’s health.

Improving Our Health Care System/New Ideas
While it is completely reasonable to obsess about the ACA, a smart GOP majority should concentrate on ways to improve our current system beyond the law. This will be smart for several reasons: 1) it can set up an important platform for 2016 national and local elections that go beyond “repeal Obamacare;” i.e. an election based on ideas and not fear; 2) the ACA certainly did not fix health care and there are many areas that need further work including how to change our payment system. These include fixing graduate medical education, improving the end of life care (as we still are scared to do this), and addressing long-term care needs (since we now realize class isn’t really the route to follow). The Democrats should also think about how to address these issues, as gaining back the majority should remain a priority for 2016.

The potential Presidential nominees will likely weigh in on the above, or I hope they will. As expected, discussions of a Clinton vs Bush scenario emerged last night—any Democratic presidential nominee will want to discuss how they can improve the ACA, and any Republican nominee must be careful about how much they promise on health care. After all, by 2016 the Affordable Care Act will have been much more integrated into the fabric of American culture.

Posted in Health, Health & Welfare, Health Reform, News & Updates

Latinos Lag Under Health Law

via Wall Street Journal

One quarter of Hispanics in the U.S. lack health insurance, the highest rate for any racial or ethnic group, according to census data. Reducing that number will be one of the Obama administration’s biggest challenges when it reopens health-insurance exchanges for a second year on Saturday.

During the first year’s sign-up period, just 2.6 million of an estimated 10.2 million uninsured Hispanics eligible for coverage enrolled in health plans, according to an October report by the Department of Health and Human Services. The Latino uninsured rate among those ages 18 to 64 declined 18%, but that was a smaller percentage decrease than for other groups.

“Providing insurance to 2.6 million is a huge accomplishment,” said Mayra Alvarez, director of the state exchange group at HHS. But “we have more work to do.”

The experience of Brígida Hernández illustrates the obstacles ahead. She completed her application for health insurance under the Affordable Care Act on the final day of enrollment during its first year. But she said she never heard back on what she was told would be a request for additional information, and she let the matter drop. Despite having diabetes and arthritis, she’s not sure she’ll try again.

“The monthly payment was high for me,” said Ms. Hernandez, 50 years old, as she sat in a waiting room recently at the Borinquen Health Care Center, a community clinic here.

Latinos and other Americans who lack insurance typically turn to community health centers that cater to the uninsured and emergency rooms, or they forego treatment altogether. Government funding and hospital charity care programs absorb those costs.

Numerous factors hampered sign-ups. The Spanish version of the federal health-insurance website,, didn’t launch until December, and various glitches made it difficult to use. A shortage of Spanish-speaking enrollment aides, known as navigators, resulted in hourslong waits.

Uninsured Hispanics, who often knew little about copays, deductibles and provider networks, required more education than many advocates anticipated.

“It takes a heck of a lot longer to go through an application than any of us thought,” said Sinsi Hernández-Cancio, director of health equity at Families USA, an enrollment advocacy group.

Many Latinos legally qualified to secure coverage worried that applying would jeopardize family members who were in the country illegally, despite administration assurances that it wouldn’t. “The hostile atmosphere around immigration and deportations has had a chilling effect on enrollment,” said Daniel Zingale, senior vice president at the California Endowment, which invested in outreach efforts.

“It’s a real concern,” said the HHS’s Ms. Alvarez. “That’s why we are continuing to work to inform the Latino community that they do not need to be fearful to submit this information.”

A Pew Research Center survey in March found that support for the law dropped to 47% among Hispanics, down from 61% six months earlier. And the Obama administration said Monday it had instructed insurers to terminate 112,000 people’s plans because enrollees failed to provide additional documents to prove they were legal U.S. residents.

Enrollment for 2015 presents additional challenges. Enrollment groups will be advising those with existing coverage on how to renew or change plans while simultaneously luring new enrollees. Latinos “will probably need a wider range of assistance,” said Jodi Ray, project director at Florida Covering Kids & Families.

In response to complaints from consumers and advocacy groups, HHS made an array of fixes to It enabled the site to better handle hyphenated names and smoothed the identity-verification process, Ms. Alvarez said. It also ensured that half the navigators it is funding this round speak Spanish.

Outreach organizations have tweaked their approach with Hispanics as well. Enroll America, a national coalition of the law’s supporters, is emphasizing large-scale community events that entice families with food, music and free health screenings, said Jose Plaza, national director of Latino engagement. Those proved more effective in the first enrollment period than door-to-door canvassing and lecture-style presentations, he said.

Health insurers are taking a similar tack. “We’ll be doing a lot of face-to-face meetings,” in settings including community centers, markets and churches, said Alec Hoffman, sales manager at Blue Cross and Blue Shield of North Carolina.

In Florida’s Miami-Dade County—where 66% of the population is Hispanic and 33% is uninsured, the highest rate in the state—groups like the Epilepsy Foundation of Florida are training navigators and teaming up with hospitals and Spanish-language outlets to reach Latinos. The Borinquen clinic is hosting its annual health-care festival, which typically draws more than 2,000 people, a week into the new enrollment period.

Among those hoping to gain coverage this time around are Paulo and Ligia Coelho, who visited the clinic recently for a doctor’s appointment. If Mr. Coelho, 64, gets insurance, he said he plans to have a cataract removed from his eye. Mrs. Coelho, 60, is in good health, she said, but “you never know when there could be an emergency.”

Posted in Health, Health & Welfare, News & Updates

Supreme Court to Hear Case on Health-Care Law Subsidies

via The Wall Street Journal

The Supreme Court said it would review a centerpiece of the Affordable Care Act, agreeing to decide whether the Obama administration is improperly providing tax credits to consumers who purchase insurance through federal exchanges serving more than 30 states.

The case granted Friday marks the law’s third trip to the high court and sets the stage for another major health-care ruling next summer.

The appeal threatens a principal aim of President Barack Obama ’s signature law—extending private health insurance to lower-income Americans who don’t receive coverage from their employers or qualify for Medicaid—and could cripple the law if the challengers prevail.

The court’s decision to hear the appeal, coming while the issue is still pending before another federal appeals court, also casts a cloud over the tax subsidies as the second round of open enrollment for insurance through the exchanges is set to begin in mid-November. Nonprofit groups have been pushing the tax credits to get more people to sign up.

Ron Pollack of Families USA, a group that advocates for the Affordable Care Act, said the latest case represented “the most serious existential threat” of the moment to the 2010 law.

Conservative groups contend the health law’s text permits tax credits only for people who buy insurance from state-run exchanges. Eliminating the tax subsidy, which totals billions of dollars, could further sour the public on the health-care overhaul. The law has struggled to gain acceptance amid Republican opposition, technical problems and legal challenges.

In 2012, Chief Justice John Roberts joined four more liberal justices to uphold most of the law, over a sharp dissent by four conservatives.

Earlier this year, Chief Justice Roberts joined other conservatives in a 5-4 ruling that carved out an exception to providing contraceptive coverage for employers who object on religious grounds. Friday’s order suggests the justices are eager to renew their scrutiny of the law.

In July, the Fourth U.S. Circuit Court of Appeals in Richmond, Va., upheld the subsidies for the federally run exchanges on the same day a panel of the U.S. Court of Appeals for the District of Columbia Circuit struck them down. The full D.C. Circuit decided to rehear its decision, setting aside the panel ruling, and scheduled arguments for December. Those could be canceled in light of the Supreme Court’s move.

Arguments at the high court are likely in March, with a decision before July.

“The need for a quick and final resolution of this question is undeniable,” said Sam Kazman, general counsel of the Competitive Enterprise Institute, a conservative advocacy group that is coordinating lawsuits against the tax credits. “This subsidies-for-everyone rule affects nearly every person across the country,” he said.

White House spokesman Josh Earnest said, “These lawsuits won’t stand in the way of the Affordable Care Act. We are confident that the financial help afforded millions of Americans was the intent of the law.”

The health law provides tax credits to lower-income Americans who purchase insurance “through an exchange established by the state.”

At issue is whether those same credits are available to consumers who buy insurance through the federal exchanges, which the law established as a backup if states didn’t set up their own marketplaces. The Internal Revenue Service has issued regulations authorizing the tax credits for both state and federal exchanges.

The administration and several of the law’s authors say it would be senseless to deny tax credits to Americans who have no choice but to use the federal exchanges. The challengers argue the language serves to encourage states to run their own exchanges by providing financial benefits to their residents.

The 2010 health-care overhaul was conceived as a federal-state partnership that, like Medicaid and other programs, would principally be funded through Washington but managed by states. Many Republican-controlled states and some Democratic-led ones were unwilling or unable to fully set up their own exchanges, leaving the federal government to run them.

The decision to hear the case comes eight days before the second round of enrollment begins. The website, which will serve as the main platform for people in 37 states to get coverage this year, goes live Nov. 15.

At least a dozen states are fully running their own exchanges. A number of other states are in a gray area because they have turned over at least some responsibilities to the federal government. Officials in some of those states have already indicated they are willing to take further steps to guarantee their residents access to the tax credits if necessary.

The Affordable Care Act requires most Americans to carry health insurance, regardless of their home state. The exchanges were designed to extend coverage to the uninsured—for the most part, individuals who didn’t get health care through their employer, Medicaid or Medicare—by providing a competitive marketplace for policies. Tax credits for lower-income consumers were considered essential in delivering the promise of the law’s name.

Posted in Health & Welfare, Health Reform

IRS Offers First Proposed Regulations on “Play or Pay”

The IRS has released its first set of formal, proposed regulations, and a parallel set of questions and answers, on the health reform law’s “play or pay” mandate on employers. Lockton is preparing two separate Alerts to address the 144 pages of regulations, but here’s a sneak preview:

Some Non-Calendar Year Plans Get a Reprieve

Health reform’s “play or pay” mandate on employers applies January 1, 2014, but after pressure from many employer groups the IRS proposes to permit some employers with non-calendar year plans to delay coverage offers to their full-time employees until the first day of the plan year beginning in 2014. But many large retail, hospitality, staffing and seasonal employers will not be able to take advantage of this special accommodation unless they’re offering employees at least some coverage today. See our impending Alert (Part I) for the details.

Penalty Calculations Apply on an EIN-by-EIN Basis

In determining whether an employer is subject to the play or pay rules in the first instance, all full-time equivalent employees in the controlled group are counted.

But once it’s determined that a controlled group of employers is subject to the play or pay mandate, the mandate’s obligations and penalties would be applied–under the proposed regulations–not on a controlled group basis, but on an employer-by-employer (EIN-by-EIN) basis. This means that if one employer in a controlled group decides not to offer coverage to its full-time employees, only that employer–not every employer in the controlled group–would be penalized.

“All Full-Time Employees” Means 95 Percent…and “Dependents” Do Not Include Spouses

The health reform law requires an employer subject to the play or pay mandate to offer minimum essential coverage to all its full-time employees and dependents, or pay a penalty. The proposed regulations would deem an employer in compliance if it offered coverage to at least 95 percent of its full-time employees, and the employees’ children under age 26. The proposed rules would not require the employer to offer coverage to spouses.

Three Affordability Safe Harbors

When determining whether an offer of coverage to a full-time employee is “affordable” under the health reform law, an employer would be permitted to use one of three “affordability safe harbors,” one based on W-2 pay, one based on the employee’s rate of pay as of the beginning of the plan year, or one based on the federal poverty level.

Updated Rules on Measurement Periods

The guidance makes important changes to the “measurement period” and “stability period” concepts described by the IRS in late August, and summarized by our Alert on September 10, 2012.

Changes include guidance relating to breaks in employment, crediting hours for gaps in service by employees of school districts and other educational institutions, shrinking the measurement period to ignore gaps in coverage due to some unpaid leaves, special rules and restrictions on staffing companies, adjusting measurement periods to embrace payroll periods that extend outside a measurement period’s boundaries, and much more.

Cafeteria Plan “Change in Status” Rules

The guidance permits certain employees to change their cafeteria plan elections to take advantage of certain entitlements under the health reform law in 2014.

Effective Date and Reliance

Generally, the proposed regulations–when finalized–will apply for 2014 except where they deal with matters already addressed in earlier guidance (such as the IRS’s important Notice in late August, addressing how to determine “full-time employees” for 2014). However, employers may rely on the proposed regulations before they are finalized, if they find it helpful to do so. Generally, earlier guidance continues to apply for 2014.

via Lockton

Posted in Executive Benefits, Health & Welfare

Proposed Regulations Charge Wellness Programs

Proposed Regulations TurbochargeHealth-Related Wellness Programs
*   Federal authorities have issued proposed regulations that would, when finalized, implement the federal health reform law’s welcome changes to wellness programs.

*   The proposed rules would increase by 50 percent the maximum wellness-related incentive or penalty a health plan may impose due to one’s health condition…and would increase by a whopping 150 percent the maximum incentive for such a program targeting tobacco users.

Federal authorities recently issued proposed regulations on several important issues related to the Patient Protection and Affordable Care Act (PPACA), the federal health reform law. One set of proposed rules would turbocharge employment-based wellness programs. This Alert describes the proposed regulations relating to wellness programs; another Alert–scheduled to follow shortly after this one–will deal with the other recent guidance.

The newly proposed regulations largely mirror regulations finalized in 2006 governing workplace wellness initiatives that condition health plan-related incentives on enrollees’ health conditions. But the newly proposed rules would do two important things, if finalized: First, they would dramatically increase the amount of the permissible incentive a health plan may offer based on someone’s health condition, particularly tobacco use. Secondly, they clarify several issues not resolved by the 2006 regulations, in some cases by imposing additional requirements upon wellness programs.


The Health Insurance Portability and Accountability Act (HIPAA) generally prohibits a health plan from discriminating as to eligibility, benefits or premiums based on the enrollee’s health condition or claims history.

But HIPAA carves out an exception for certain wellness programs, and permits a health plan to grant a reward or impose a penalty in an amount up to 20 percent of the total cost of an employee’s coverage. Note that the total cost means the employee- and employer-paid portions of the premium. For example, if it costs a plan $500 per month to supply employee-only coverage, the plan may make unhealthy employees pay an additional $100 more ($500 x .20) per month for their coverage than healthy employees pay for theirs. The reward or penalty may impact premiums, cost sharing (e.g., deductibles), benefits, etc.

Upping the Ante

The PPACA expressly permits non-grandfathered health plans to increase the incentive or penalty amount from 20 percent to 30 percent of the total cost of the individual’s coverage (an increase of 50 percent), for plan years beginning after 2013. The proposed regulations allow for the same increase.

But PPACA also allows federal regulators to increase the incentive amount to a whopping 50 percent of the total cost of coverage, via regulations (a 150 percent increase). The newly proposed regulations take advantage of this authorization to push the maximum incentive amount to 50 percent of the total cost of coverage, where the wellness program targets tobacco users. In the example above, the plan would be able to require tobacco users to pay $250 per month more for their coverage (i.e., total employee contribution of $400) than non-smokers are asked to pay for theirs (i.e., $150).

Where a wellness initiative combines incentives or penalties related to tobacco use with incentives or penalties related to other health conditions, the aggregate maximum reward or penalty can’t exceed 50 percent of the total cost of the employee’s coverage, and the non-tobacco-related incentive or penalty–considered alone–can’t exceed 30 percent of that cost.

As we have long expected, the regulations would also extend the new, larger limits to grandfathered plans, for the sake of consistency.

Participation-Based Wellness Programs

The regulations acknowledge that health plan-related rewards or penalties that are based simply on participation, for example, completing a health risk assessment or biometric screening, without regard to results, are not limited to the 30 or 50 percent maximums. Thus, a wellness initiative may stack a participation-based reward or penalty atop the maximum health condition-related reward or penalty.

In the example immediately above, the plan imposes a $250 per month surcharge on tobacco users. The plan could levy an additional surcharge, such as $20 or $50 per pay period, upon those who decline to participate in a health risk assessment or biometric screening, even though the two surcharges combined exceed 50 percent of the total cost of coverage.

Where dependents are allowed to participate in the health plan’s outcomes-based wellness program, the maximum reward or penalty is based on the total cost of the coverage tier, for example, employee-plus-one, employee-plus-family, etc., in which the employee is enrolled.1

Other Financial Incentives

One interesting clarification contained in the newly proposed regulations deals with financial incentives that might be something other than a premium differential, cost-sharing adjustment, or a different benefit. Lawyers have debated whether HIPAA’s general prohibition on health plan discrimination due to health status even applies if the wellness incentive is unrelated to the health plan. For example, what if an employer simply gives additional cash to healthy employees?

The proposed regulations might be read to imply that cash or any other financial reward is just the other side of the incentive coin. That is, the regulations might imply there’s no difference between a premium discount that puts more cash in the enrollee’s pocked by reducing his or her required contribution, and putting more cash in the employee’s pocket directly.We hope the authorities will clarify this when they finalize the regulations.

Reiterating Old Conditions, and Adding a Few New

Under the current HIPAA regulations governing outcomes-based wellness programs, a health plan looking to grant rewards or impose penalties must jump through five hoops, including the limitation on the size of the reward or penalty. Other important requirements include:

*   The wellness program must be reasonably designed to promote good health;
*   Individuals who can’t attain the plan’s desired goal (or shouldn’t try) due to a health condition must be given an alternative standard to attain the reward or avoid the penalty;
*   The plan must notify individuals about the availability of alternative standards; and
*   Individuals must have the chance to qualify for the reward–or avoid the penalty–at least once per year; this doesn’t mean the plan must keep the wellness program in place year after year.

The recently proposed regulations would tinker with all but the last of these requirements.

Reasonably Designed to Promote Good Health

Many wellness initiatives include a health screening like a biometric exam or a health risk assessment. Under the newly proposed rules, a wellness initiative would not be considered “reasonably designed to promote good health” unless it meets a new condition. If a surcharge is imposed, or reward denied, based on a screening result (e.g., the individual’s cholesterol level, blood pressure or weight is outside normal limits, etc.), the initiative would have to make available a reasonable, alternative method for the individual to get the reward or avoid the penalty.

In other words, it appears that where the award or penalty depends on the results of a screening, it would not be enough for the plan to say to the individual, “Go out and try to lose a few pounds and circle back to us later…we’ll re-evaluate you.” It appears the wellness initiative would have to be more formal, and actually offer a method, such as coaching, intervention, education, etc., for the individual to qualify for the reward or avoid the penalty. Federal authorities have invited comments on the need for this new condition.

Alternative Standard or Goal for Those Unable to Meet the Wellness Initiative’s Goal, Due to a Health Condition

Current HIPAA wellness program regulations say that if an individual cannot meet the initiative’s desired goal, such as keeping one’s weight within normal limits, or it would be medically inadvisable for the individual to even try, the wellness initiative must make an alternative standard or goal available to the individual. Often, the wellness initiative will simply rely upon the individual’s physician for a recommendation.

For example, assume a wellness initiative targets workplace obesity. Employees whose weight exceeds normal limits by at least 20 pounds are told that they will pay extra, within the 20 or 30 percent maximum differential, for their health insurance. But if they lose 20 pounds over the ensuing three months the plan will lift its premium surcharge.

Joe is substantially overweight, but due to a thyroid condition Joe cannot reasonably lose 20 pounds over the three months. Joe’s physician suggests that 10 pounds is a reasonable goal. Mary is also substantially overweight, but due to knee, hip and heart ailments, Mary’s doctor believes it would be dangerous for Mary to try to lose 20 pounds in three months. The doctor recommends to the plan or its wellness vendor that 10 pounds over three months is a reasonable goal. The plan accepts these alternative standards for Joe and Mary.

The proposed regulations would require a few additional things of the wellness initiative:

*   If the initiative’s alternative standard is completion of an educational program, the plan must pay for the program. For example, if instead of accepting the recommendation from Joe’s doctor, the plan were to tell Joe, “We understand you can’t lose 20 pounds in three months, so your alternative standard is to attend an educational program on healthy eating habits,” the plan would have to make the educational program available to Joe, and pay for it.
*   If the alternative standard is participation in a diet program, the plan must pay the program’s membership or participation fee, but would not have to pay for cost of food.
*   If the alternative standard is to comply with recommendations of a medical professional who is an employee or agent of the health plan, and the employee’s own physician disagrees with the alternative standard, the alternative standard offered to the employee must include the recommendations of his or her own physician.

In short, the proposed regulations would often require the plan to actually offer or make available some kind of formal program consistent with the wellness goal, such as a formal smoking cessation or weight loss program in which employees may participate to avoid a surcharge, and in some cases may have to pay for the formal program.

Note that in some cases–where the program is not supplying medical care–the cost of a program paid by the employer or plan will be imputed taxable income to the employee.

The parameters around or limitations on these requirements are not entirely clear, but we suspect federal authorities will clarify them when the regulations are finalized.

Notification of the Availability of an Alternative Standard

Existing HIPAA regulations dealing with outcomes-based wellness initiatives require that health plan enrollees be informed, in materials describing the initiative, about the availability of an alternative standard or goal. The regulations include model language for this purpose, but it’s vague.

The newly proposed regulations give wellness initiatives much more leeway in describing the availability of an alternative standard or goal. Now, the text of this notice may be tailored nicely to the actual nature of the program. For example, the proposed regulations offer this sample, relating to a wellness initiative aimed at obesity:

Fitness is Easy! Start Walking! Your health plan cares about your health. If you are overweight, our Start Walking program will help you lose weight and feel better. We will help you enroll. (** If your doctor says that walking isn’t right for you, that’s okay too. We will develop a wellness program that is.)

The plan may craft its notice differently, but it should be substantially as plain and unambiguous.

Next Steps…and Why Wellness Programs Matter

Federal authorities will take some time to receive and consider comments on the proposed regulations before finalizing them, but we don’t anticipate significant changes. If the regulations are not finalized in 2013, we believe non-grandfathered health plans may nevertheless increase incentives to the 30 percent level, for the plan year beginning in 2014, because that increase is authorized by the literal text of PPACA itself. Implementation of other changes described in the proposed regulations probably must wait until the regulations are finalized.

Nevertheless, the additional leverage placed in the hands of employers, to drive behavioral change, is certainly welcome. And it comes at an interesting time.

Wellness Programs and PPACA’s “Play or Pay” Mandate on Employers

A little more than a year from now, most employers will have to offer health insurance to full-time employees and dependents, or risk penalties. If the employer offers coverage, but the coverage is not adequately robust or affordable, the employer risks alternative penalties if the employee obtains federally-subsidized insurance in an insurance exchange.

It might be possible for employers to use wellness-related surcharges to deliberately make health insurance “unaffordable” to employees in poor health, thus inviting those employees to drop the employer’s coverage and obtain exchange-based coverage. That, in turn, may  trigger penalties against the employer, but the penalties will almost certainly be less–in many cases, a lot less–than the risk that employee poses to the health plan, particularly where the plan is self-insured.

Wellness Programs and PPACA’s Cadillac Tax

Five years from now PPACA’s “Cadillac tax” takes effect, imposing large excise taxes where a plan’s premium cost exceeds certain thresholds. Most plans in place today will trigger the excise tax, and it’ll be difficult to avoid it by tinkering with deductibles and other cost-sharing features. To avoid the tax, employers will need to reduce the risk in their health plans, and that means enhancing the health profile of their employees. Wellness programs are the catalysts for that enhancement, but they need time to work.

Wellness Programs and Other Federal Laws

Unfortunately, some ambiguity continues to linger at the intersection of HIPAA’s (and now PPACA’s) wellness program rules, and disability discrimination laws such as the Americans with Disabilities Act and the Genetic Health Information Act. That is, is there a point at which a wellness program permissible under HIPAA and PPACA may violate the ADA? Federal authorities who regulate the ADA have said too little on this point, but most employers who install wellness programs aren’t waiting for their permission. In any event, it’s rare for one federal law to be construed in a way that conflicts with another.

Your Lockton Account Service Team can connect you with one of Lockton’s Health Risk Solutions Directors if you’d like more information about wellness programs, and about the programs offered by many employers today.

by Ed Fensholt, J.D.
Health Reform Advisory Practice
1The proposed regulations solicit comments from employers and others, regarding whether to prorate the maximum penalty where it is based on the cost of family coverage. That is, authorities are wondering about the fairness of assessing against an employee a penalty equal to 30 percent or 50 percent of the total cost of his or her coverage tier, where just one family member fails to meet the plan’s wellness standards.
Not Legal Advice: Nothing in this Alert should be construed as legal advice. Lockton may not be considered your legal counsel and communications with Lockton’s Compliance Services group are not privileged under the attorney-client privilege.

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