It’s not hard to see why many want to believe this.

Health systems are bloated, bureaucratic entities where physicians are beholden to shareholders, board members, and payers more so than patients. Clinical and patient advocates must always fight claw their way into budget meetings. Independent practices are being driven out of the market by stagnant reimbursement rates and cut-throat competition with consolidated provider systems.

Things are not exactly rosy on the payer side. The public’s sympathy for Luigi Mangione across the political spectrum sent a clear message to payers that they are seen as appropriate targets of violence.

I see the promise of a consumer health renaissance among the tech community to be an innocent optimism — as in I will not assume you’re a bad person for believing it. However, these ideals are not informed by the realities of the majority (or rather a combination of pluralities of) Americans and their interactions with the healthcare system, which itself is just one aspect of each person’s life.

A revolution in Americans utilizing personalized medicine driven by direct-to-consumer apps, generative AI, and decoupling from payers and health systems is likely impossible, at least in terms of reaching more than 10% of the country under the best of conditions.

This article is my take on why this promised consumer health renaissance is not likely to happen, informed largely from my learnings traveling to rural communities, speaking with providers, administrators, and patient advocates for the past several years.

The Last Consumer Health Wave

There have been pushes for the creation and adoption of consumer health technologies before the current generative AI rush. The most recent was the 2010s when “interoperability” was the great buzzword.

The Health Information Technology for Economic and Clinical Health (HITECH) Act of 2009 and 21st Century Cures Act of 2016 were signs of federal support for digitization of medical records and adoption of standards for exchanging health information. This was accompanied by the widespread adoption of the electronic health record (EHR), standardized clinical quality measures, statewide health information exchanges, and with them, a collection of modernized data standards from HL7 and C-CDA to FHIR.

Interoperability came about as a buzz word in the industry. Patient records fragmented and often not shared between healthcare providers made for obvious concerns about patient safety and care coordination. Mandates for developer-friendly interfaces to EHRs were supposed to introduce space for health tech products to address niche clinical concerns of different patient populations and financial objectives for payers and providers.

The access to patient-level FHIR data, ubiquity of smartphones, and a consensus that interoperability is key to better medical and financial outcomes created this energy of enthusiasm. More specifically, there was a promise of digital health startups being able to leverage medical records of patients to create truly personalized experiences navigating chronic conditions, projecting future health risks, and juggling multiple providers.

Americans’ relationship with the healthcare system has not dramatically changed. A lot of that is because the adoption of such technologies by the masses are fully blocked by some harsh realities.

For one, there will always be a “digitally illiterate” subset of patients which must always be tended to. While that is around, we will not see health systems and payers fully commit to digital and consumer health paradigms of care delivery, because juggling both digital and brick-and-mortar care delivery requires more buy-in and alignment than most tech startup teams are willing to push through.

The more notable concern is that digital and consumer health adoption has a solid socioeconomic boundary. Conventional wisdom about technology adoption models a bell curve where the majority of users adopt technology at an inflection point after which there’s enough momentum to reach late adopters.

In healthcare go-to-market plans trying to reach the true mainstream (not just the tech elite), “laggards” and even much of the “late majority” do not have the capacity to take on such technology.

These are Socioeconomic Concerns

When I speak with providers in rural health clinics (RHCs), critical access hospitals (CAHs), federally qualified health centers (FQHCs), and free and charitable clinics, we must focus a great deal on what provider staff can do.

Many people in distressed communities do not have the time, energy, or education to do much more than go to follow ups and take medication.

Consider one example of patient portals connected to EHRs. Patient portal usage is rarely a focus of discussions, and expecting patients to prepare forms ahead of time is not something we can count on.

At best, there’s 20-30% of patients using patient portals, and it’s far from integrated into the patient journey. Poor access to smartphones/broadband and poor digital literacy are the primary barriers here. If you take a step back, another common challenge is patients struggling with basic literacy when completing paper intake forms in the lobby.

These problems are not exclusive to rural and safety net providers. Look at providers in urban and suburban areas. A small share of patients engage in fully digital experiences. The digital literacy and health literacy necessary to use these tools limits implementation to particularly high-income and young populations.

Personalized medicine may help patients skip expensive gatekeepers in primary care or access lower-cost drugs and alternative treatments. However, these tools are restricted to the most tech-savvy parts of American society who statistically have better educational attainment and disposable income.

Healthcare system effectiveness and efficiency is not a technology problem — it is a socioeconomic problem.

Patients with lower incomes and educational attainment across the board have less available time to learn how to engage with these types of digital health tools, have less ability to comprehend how to use these tools in the first place, and often do not have the economic means to access high-speed internet. Even without digital health tools, the poorest members of American society tend to be the sickest.

These groups of Americans may face challenges with transportation to follow-up appointments, inability to afford long-term treatment options, and may not have the know-how of engaging with health insurance programs like Medicaid. Housing instability, food insecurity, poor education, and other socioeconomic factors float to the top in personal concerns and often prevent patients from being able to pursue practices that should yield long-term positive health outcomes.

Encouraging personal responsibility is not a serious policy fix.

Expecting patients to follow best-practices simply because it is the responsible thing to do is not a practical solution. Someone’s decision to adhere to treatment plans or learn to use digital health tools will be a function of their health literacy and other personal priorities for well-being.

Health literacy is built through strong social support systems and educational institutions. Against the backdrop of public education systems being gutted and the vilification of public health education programs, broader economic trends can help illustrate why even Americans growing up in middle-class lifestyles are less likely to prioritize health-related activities to an extent required to make personalized digital health tools useful.

The cost burdens of education, housing, and health have far outpaced growth in wages adjusted for inflation. This is a trend unfolding for decades. More Americans of the bottom three quintiles are barely hanging on.

In what little time remains after meeting career and family obligations, it’s only logical to assume a person would rather prioritize recreation (or doing nothing to prevent incurring additional costs) than learning or updating a digital health tool.

To most Americans, the long-term benefits of most consumer health tools are marginal at best, especially if at the end of the day, you still need to engage with a physician to get a physical treatment or prescription.
In other words, to the average American, digital health tools are cool in theory but not useful enough to integrate into daily life.

What would make personalized medicine work

This is not to say that mass adoption in personalized medicine that legitimately improves health outcomes is impossible. However, it does require serious economic realignment that bucks the trend of the past 50 years.

The following requirements are deeply interconnected with each other. Yes, this is quite a laundry list, especially one to push through state legislatures and federal policy. But this illustrates the scope of problems which technology alone will not fix in an effort to consumerize healthcare.

Health System Simplification

In the context of developing systems for patient referrals, health information exchange, and facilitating addressing of social needs, complexity is driven by market and regulatory fragmentation.

Some concerns which have to be addressed in no particular order through policy (no, overpriced SaaS won’t fix this):

• Consistency in licensing and credentialing processes across state lines — ideally allowing clinicians to more easily practice across state lines

• Standardized utilization management protocols and enforceable rules for timeliness and preciseness of payer responses

• Technical assistance to train staff at understaffed state-level public health agencies and greater funding accompanied by stronger mandates for ending healthcare deserts

• Expansion of the clinical workforce through grants to pursue education and pressure on educational institutions to stop coast bloat (consumer health will still require physicians for hand off and signing orders)

• Strong reimbursement for social work and efforts to connect patients to housing, food, and education as part of the continuity of care

Reinvesting in Education:

There is a core belief in the American psyche that government services are inherently inferior to those of the private markets. This is a stance which I strongly disagree with — it is a self-fulfilling prophecy and policy choice to throw hands up and say public education cannot be salvaged. This does not have to be a liberal stance. Notably, rural Republican Texas legislators recognize the reliable economic anchor that robust public education is.

Just like healthcare, educational attainment exists among a person’s other socioeconomic needs. Weak household wage growth, poor nutrition, and lack of access to reliable housing will make someone less able to make advances in education.

However, well-supported educational systems pay for themselves multiple times over. As it relates to personal medicine, strong public education institutions particularly help low and middle-income students in literacy (general, digital, and health) and development of social support systems. They also greatly improve social mobility by opening opportunities to higher-skill and better paying jobs.

The long-term economic benefits as well as immediate improvements to literacy would enable more patients to meaningfully engage with consumer health apps and know the value of consistent efforts to improve long-term personal health through lifestyle choices.

True Interoperability

There will always need to be a handoff between personalized and traditional delivery of medicine. This means the bidirectional exchange of health information so that personalized apps can have the context necessary to operate while also having the means to share data back to a referred provider.

One of the great challenges with interoperability is the need for health IT systems to be robust. Each EHR vendor must do its best to ensure that excessive data is not shared outside of its network with untrusted entities while also making sure that data ingested from outside partners is valid. Every provider having different instances of EHR products using a variety of tools faces a similarly dizzying number of custom integrations to pay for.

As long as there are different provider entities using an array of potential EHRs, this challenge of the consistency of data integration approaches and costs will persist. We can talk about solutions like TEFCA, but even that’s limited when considering that each EHR has its own feature set and that a truly universal data exchange framework may not be easy to integrate with EHRs lacking certain features.

Creating an extensive minimum set of requirements for national-level interoperability is a beast in and of itself. Not only does this greatly expand the scope of work required by EHR developers, but it would likely create a prohibitive barrier to entry for smaller EHR vendors to build their presence in niche provider specialties and use cases.

The key here is striking that balance wherein new entrants to the EHR market are not blocked from competing with incumbents while ensuring there is enough nationwide consistency for consumer health developers to facilitate the patient data handoff securely and effortlessly across the country.

Robust Social Mobility

There is a great expectation of patients in consumer health models to be proactive to their health. The assumption is that with the promise of better health in the future, patients are more likely to comply with treatment plans and regularly engage with digital health tools.

One of the pitfalls of this assumption is that demonstrated outcomes are not enough to motivate a person to pursue what may be the “best practice”. The personal locus of control, a person’s belief of how much individual decisions impact outcomes compared to external influences, is a key aspect of whether someone will adhere to a self-managed and personalized plan. This is true of chronic disease management, fitness and diet, education, career growth, and personal finance. (Some reading)

Someone with an external locus of control will feel as though their own actions will not overcome the power of institutions, macro trends, and even other personal authority figures in determining the outcome of life events. Much of the literature around locus of control suggests that those with an internal locus of control have greater social mobility and health outcomes (driven by higher incomes, better education, and healthy lifestyles).

However, an internal locus of control, which is necessary for someone to believe personal health activities should be pursued regularly, is largely conditioned. Stagnant wage growth relative to productivity, ballooning costs of living, and the erosion of affordable public services have led to a collapse in social mobility.

It is no wonder that (especially among younger generations), Americans are growing more apathetic or outright pessimistic, not only about the state of the country as a whole, but also personal future outcomes. The despair about affording the cost of health insurance (which doesn’t even cover many services), being able to retire, or have time to enjoy even personal hobbies is likely to not bode well for the adoption of consumer health apps by startups claiming to have the singular answer to peoples’ problems with a monthly subscription.

Fixing social mobility would be quite an array of policy implementations. It would mean the revitalization of entire cities, improvements in public health and education, revival of small business, anti-trust and enforcement of corporate abuse, and a politics of abundance which control the cost of living.

There are a variety of approaches to integrate with a health IT system — from directly connecting to the database systems of software to leveraging system interfaces that utilize protocols like FHIR and HL7 messages. Brendan Keeler has written extensively on the various strategies to integrate health IT software, but the focus of this discussion about Real Time Medical Systems, Inc. vs PointClickCare Technologies, Inc. focuses on robotic process automation (RPA).

PointClickCare (abbreviated PCC by many) is a leading provider of EHR software, largely for long-term care (LTC) settings such as skilled nursing facilities (SNFs).

On the other end is Real Time Medical Systems, an analytics firm much smaller than PCC and which relies on RPA to deliver its service to SNFs. In the case heard by Maryland Federal District Court Judge Paula Xinis, Real Time called for an injunction (requirement to stop) on impossible CAPTCHAs which PCC had deployed to prevent Real Time’s bots from operating.

Important Concepts

Understanding this case has some important bits of rapid-fire background knowledge.

Interoperability in healthcare means that different healthcare systems and software can "talk" to each other, sharing data and patient information seamlessly. This is important for providing coordinated care across different providers, hospitals, and clinics, ensuring that healthcare professionals have access to up-to-date and accurate information no matter which system they use.

The Information Blocking Rule is part of the 21st Century Cures Act, aiming to prevent healthcare organizations from purposely restricting access to or sharing electronic health information. It's crucial for promoting competition because if health systems can't block information, patients can more easily switch between providers, and new entrants to the market can offer services without being locked out of important patient data. This rule enforced by the federal government Department of Health and Human Services (HHS) intends to encourage innovation and lower barriers to entry.

Robotic Process Automation (RPA) involves using software robots to automate routine tasks in EHRs, such as data entry, scheduling, or claims processing. It's used in EHR integrations due to the flexibilities it has to emulate manual human data entry as opposed to vendor-sanctioned interfaces and database integrations which may not allow as much granular data access.

Case Events

Initial Business Relation

Real Time’s service offerings for its 1,700 SNF customers (out of an estimated 15k+ nationally) revolve around diagnostic analytics to improve clinical quality of care. The type of read-only data it requires includes “daily food and liquid consumption, temperature, vital signs, and other standard measures that the facility obtains on a regular basis” (source).

Real Time’s CTO Christopher Miller asserted that the company depended on using RPA bots to navigate PCC and extracting this information from generated reports since the company was founded 12 years ago.

The company estimates that it would take 450 people working 24/7 to pull all of its required data from customers manually.

Citing the need to address security and software performance concerns related to non-human access to its platform, PCC has historically employed CAPTCHAs to require human verification. Historically, Real Time would have humans intervene and complete these CAPTCHAs so that the bots could continue pulling data.

PCC is a vendor for almost 80% of Real Time’s customers, many of which are in the state of Maryland, and in late 2020, PCC launched a new analytics offering. Since then it has acquired two of Real Time’s competitors and even won against Real Time’s bid for a multi-million dollar contract with the state of Maryland in 2022.

Weaponized Acquisition Talks

PCC considered an acquisition of Real Time and entered an NDA in early 2023. Real Time shared its proprietary business records including software design and use of RPA.

Notably, despite PCC's loud protestation against “bots” today, PCC never raised with Real Time any concerns about its exclusive reliance on automated software. After Real Time shared with PCC that it maintained the highest level of security certification in the industry, that “was the end of the discussion" regarding the security of Real Time's automated environment.

Later in the year, user accounts used by Real Time bots began to encounter indecipherable CAPTCHAs. See the following examples which were presented as court evidence.

PCC went silent and walked away from continued talks of acquisition.

Real Time attempted to pursue alternative choices. The first approach was to pay for PCC’s APIs and a supplemental data extract to be provided regularly to fulfill Real Time’s data needs. Both companies’ technical teams worked on this solution for around a month and the CAPTCHAs disappeared.

By November, cooperation broke down after Real Time was told that it was no longer going to get the data they required, and the CAPTCHAs reappeared. Here are some fun examples of the torrent of impossible images to decipher.

Real Time attempted to negotiate with PCC to export necessary patient data but was met with onerous terms in PCC's marketplace agreement, which would have severely impacted Real Time's business.

it prohibited Real Time from competing with PCC; allowed PCC to cancel the agreement for convenience at any time; and required Real Time to market its product through PCC. Real Time would also have to pay PCC a substantial per-facility monthly fee to receive only 30% of the data that it needed

After failed renegotiations, Real Time filed suit in January 2024, citing further business disruption caused by indecipherable CAPTCHAs implemented by PCC, which hindered Real Time's ability to serve hundreds of nursing facilities.

Arguments and Decision

Real Time sought a preliminary injunction under which the court would order PCC to stop these indecipherable CAPTCHAs from appearing. These types of injunctions are granted when there’s “a clear showing that the plaintiff is entitled to relief”. Real Time pressed three primary claims:

• that the CAPTCHAs constituted unfair competition concerns

• PCC’s actions were wrongfully interfering with Real Time’s contractual obligation to its customers

• and that PCC was in breach of its contract with EHR customers wherein Real Time is a third-party beneficiary

Citing previous case law, Judge Xinis noted only one of the claims needed to hold in order for an injunction to be deemed appropriate. She ruled that the first two had merit.

Regarding the “tortious interference” with Real Time’s obligations, the court noted that PCC clearly knew of Real Time’s obligations to SNFs and that such indecipherable CAPTCHAs would prevent Real Time from providing its services. PCC’s other defense was that Real Time’s claim didn’t actually demonstrate a full breach of contract, just a hinderance. On that item, Judge Xinis cited Maryland law which notes that hindering contract performance makes a party liable even if such actions do not fully cause a breach of contract.

The court’s assessment of the unfair competition claim is more relevant to the world of healthcare policy. The court ended up ruling that PCC’s actions constituted violations of HHS’ information blocking rule and provided sufficient demonstration that there were no valid reasons for preventing Real Time’s bots from operating other than to deliver a specific negative impact to Real Time’s competitiveness.

HHS has outlined a few exceptions to information blocking, but the court ended up deciding that PCC did not meet the requirements of those exceptions.

• Actors may use the Health IT Performance Exception to say that information blocking is necessary to uphold performance of IT systems. The court disagreed with PCC citing this exception due to a lack of any data to corroborate that Real Time bots caused system outages. The court also noted that the CAPTCHAs were applied longer than necessary to protect performance, and it highlighted that PCC was discriminatory and inconsistent in applying these CAPTCHAs.

• The Security Exception allows blocking to protect electronic health information security. Here, as with performance exception, the court noted that PCC did not employ CAPTCHAs for security consistently across all users. More notable is the following quote:

  • “It also stands to reason that automated software used by a company with the highest security certification remains more secure than if the same company had to employ 450 individuals to perform the same task.”

• The Manner Exception allows blocking information if there are sufficient alternative methods of accessing data. PCC, in the court’s eye, did not provide sufficient evidence to suggest its APIs and other approaches were giving the full extent of data required by Real Time. Further, citing PCC’s firmness on the marketplace agreement, Xinis’ opinion notes “PCC appears more unwilling than unable to reach a mutually agreeable solution”.

This court opinion is rather intense. Here are some other notable quotes from Xinis’ opinion which highlight frustrations shared by many others seeking to achieve interoperability.

At best, the record suggests that on one day, PCC's retrieval system was slow for one facility while Real Time was pulling down reports.

Keeping in mind the size of PCC's own operations one that pushes out prescriptions for over one million patients in a day the Court cannot simply take Fourati's word for it that automated software use akin to, that of Real Time makes a material difference in PCC's performance.

No evidence supports that PCC had any legitimate good faith use for wholly inscrutable CAPTCHAs which, by definition, blocked Real Time from getting the very records it needs to exist

Real Time would face unpredictable, unplanned widespread business outages akin to that which it has withstood before. PCC, on the other hand, has given the Court no reason to believe that eliminating the use of such unsolvable CAPTCHAs would visit any harm to it.

Law and Interoperability

The legal conflict between Real Time and PCC echoes the broader struggle for interoperability in healthcare, similar to Epic's ongoing battle with Particle Health over data exchange. These cases highlight the tension between protecting proprietary systems and promoting data accessibility, a central issue in the evolving landscape of healthcare IT.

Although Real Time won an initial ruling, the fact that PCC filed for an appeal in August 2024 means this case could be heard again. The appeal centers around the fact that the Information Blocking Rule is a federal regulation wherein Congress did not authorize parties to use state law to enforce violations and that it was state law which was used to pursue the injunction.

Something to note is that demonstrating violation of Information Blocking was simply a standard way to assess unfair competition in health IT — that there are state regulations against unfair competition and the federal regulations provide a framework for the court to make its judgement. Nonetheless, I’m not the lawyers nor the appellate court.

Looking beyond, this case is going to be crucial to keep an eye on. This is a landmark case in that a court ruled that measures against RPA bots were not really meaningfully addressing EHR vendor concerns about performance or security and that they’re instead likely driven by interests around competitiveness.

Many Terms of Service documents for health IT products prohibit screen scrapers, crawlers, and other bots — but if used as a data integration approach, could this be a suitable legal defense to prevent EHR vendors from imposing technical restrictions on bots?

Every summer brings a new slate of Supreme Court decisions which each have cascading impacts through the country. Judicial review allows laws and legal doctrines to be entirely overturned — leaving room for challenges to other laws in lower courts, causing realignment of legislative priorities or strategy, and reinterpretation of long-standing legislation and Constitutional law.

Healthcare is no where near immune. With the massive involvement of the state and federal governments in programs like Medicare, Medicaid, CHIP, and a never ending alphabet soup of agencies, changes to SCOTUS’ interpretations drive the direction of health policy and the multi-trillion dollar business of healthcare delivery.

Lower Bright Enterprises v. Raimondo initially concerned the regulation of fisheries. Its decision — which included the court ruling to overturn the so-called Chevron doctrine — has monumental impact on healthcare regulation. The ruling leaves much of the federal administrative agencies’ regulations up for court challenge which in effect defangs the federal government extensively.

Laws and Regulations

Although they seemingly get used interchangeably, there is a significant distinction between the terms law and regulation.

Laws are passed by Congress and signed into law by the President. These include the national mandate which raised the drinking age to 21 and the Affordable Care Act (ACA), which expanded the Medicaid program and established regulated insurance marketplaces, and among other items in a lengthy list of reforms to insurance policy.

The executive branch under the President needs resourcing and staff to enforce the laws created by Congress. Agencies and administrations like the Centers for Medicare and Medicaid Services (CMS) and the Federal Trade Commission (FTC) are funded by Congress and typically under the direction of the President to enable the execution of laws in areas such as health coverage and antitrust, respectively. These agencies, as long as they work within the constraints imposed by laws (also called statue), have broad authority to make rules and issue formal interpretations of law.

It’s important to note that typically, Congress does not have the time or expertise to get into the weeds of complex areas of policy like environmental or public health. Coupled with political gridlock, a system where every federal policy requires passage as law by Congress could make the federal government too slow to respond to complex issues or fast-emerging topics — from the safety of clinical use-cases for AI to extending billing flexibilities that can allow rural providers to stay afloat.

In fact, a host of laws feature Congress delegating its authority to regulate certain areas of policy to the executive branch with an understanding that Congress simply cannot move as fast as agencies and bodies staffed by policy experts under the direction of the Presidency. 

The War Powers Act, for example, gives the President the permission to temporarily initiate military action without Congressional approval. The President must then go before Congress to explain the use of force and ask for extensions to the temporary delegation of power to command undeclared wars — unless Congress is so hawkish that it outright declares war.

As a delegating body, in many of these same laws, Congress can revoke those powers through new legislation. Congress further exercises influence via political appointments for these administrative agencies, which the Senate must confirm.

The rules and policy enacted by these agencies are all regulations. When reading the fine print of laws and regulation, this distinction is clear. Whereas legislation cites the powers Congress derives from the Constitution, regulations typically cite laws indicating where an agency derives its authority. 

The Administrative State

The Great Depression and Franklin Roosevelt’s landslide election victories transformed the trajectory of the US federal government. FDR’s New Deal and the war economy which fully pulled the country out of the Depression was Keynesianism on full display — a school of economic thought which concerns how government interventions can mitigate volatility in the economy.

To execute these new programs and regulations spanning labor, banking, and agriculture (to name a few areas), the powers of administrative agencies grew significantly. Through tough battles with the Supreme Court and Congress, many of these programs and their agencies lasted through the Second World War. However, the growth of these agencies required some legislative response to establish guidelines preventing the overreach the powers of these agencies’ Constitutional authority (and to appease opponents from the aforementioned political fights). The Administrative Procedure Act (APA) was this response.

The APA was the compromise between the New Deal coalition and skeptics of growing federal involvement in industry. It set rules about how administrative agencies must allow for public input (for example CMS public comment periods), required agencies to inform the public about policies, and established standard rulemaking processes for these agencies.

Most important to Loper Bright Enterprises v Raimondo is the APA’s assertion that the court system is to to review matters of legal dispute.

Chevron

The Chevron deference comes from the 1984 Supreme Court ruling in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. This case was sparked by the Environmental Protection Agency (EPA) redefining the regulatory interpretation of a “source” of pollution under the Clean Air Act. The Natural Resources Defense Council, an environmentalist group concerned that the redefinition paved a way for polluters to skirt EPA environmental review processes on plant upgrades, sued that Congress did not authorize the EPA such discretion over the definition of a “source”.

NRDC was successful when it filed a petition for review in a lower district court. Future SCOTUS justice Ruth Bader Ginsburg authored an opinion that the EPA’s new definition conflicted with other definitions of “source” established in previous cases.

Chevron, which stood to benefit from the new definition appealed the lower court’s decision. Ultimately, SCOTUS sided with the EPA and Chevron, saying that courts should defer the ambiguity of the definition of “source” to the EPA.

“If Congress has explicitly left a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation.”

Chevron, 467 U.S. at 843–44

The Chevron deference, as it would be named, became a two-step legal test for whether to defer to agency interpretations of law. These steps were to verify that Congressional text specifically addressed an issue at hand and whether the agency’s answer was made on a “permissible construction” of law. The purpose of this two-step test was to address a concern that arose in three related cases from lower district courts.

The three cases arrived at different conclusions, not through review of the explicit law, “but on their own views of whether each program’s policy was to enhance or merely to maintain air quality”, according to a review of case law submitted by NRDC during the proceedings of Loper. This summary further notes that this the EPA’s intents were being replaced by judges’ personal policy preferences — violating the independent role of the court system and as with this case, causing conflicting rulings.

It’s not surprising that the Chevron deference, created to prevent policy preferences from overriding agency authority, would be weakened (West Virginia v EPA, 2022) and eventually overturned (Loper) by an increasingly partisan court.

Some observations in rural healthcare

By taking the administrative agencies’ power to interpret and clarify ambiguity in laws, the Supreme Court has opened the floodgates for overturning dozens of healthcare cases in recent memory, while opening up other policies to lawsuit.

From the libertarian perspective, this is the Supreme Court reigning in an administrative state which has made itself obstructive and potentially abusive to providers, payers, and patients. The point of this post is not to refute that statement by providing the laundry list of abuses perpetuated by bad-faith actors in every corner of healthcare. Rather, it may be more convincing to tie this into two areas of observation I have made working with providers of rural and underserved populations.

The fundamental issue from the perspective of rural healthcare is the pure confusion that this decision can drive. These organizations, operating on slim margins and even slimmer staffing, generally work to stay clear of legal ambiguity. One audit or court ruling gone wrong can derail an entire line of service and jeopardize survival.

There’s also the fact that this may drive an unprecedented amount of flip-flopping in policy. The rules under a presidential administration will tend to remain uniform — at least until someone else comes into office and has their political appointments change agency priorities. Lawyers of various companies, on the other hand, can file lawsuits each and every year.

This decision, which allows a great deal of healthcare regulation to come under fire, means that organizations which are already fairly conservative in interpretations of regulation must work within tighter guardrails that they may be unable to quickly adapt to — let alone have legal help to stay on top of these changes to policy intricacies.

Making Telehealth a Sustainable Operation for Providers

Rural providers understand that telehealth can be the best way to maximize patient engagement in settings where travel distances are long and exacerbate existing impediments to access to care. In other settings, telehealth can enable access to much-need specialty care such as through North Carolina’s Statewide Telepyschiatry Program (NC STeP), which connects patients in rural emergency rooms to psychiatrists. Engaging patients and letting them easily access care ensures that providers can meet community needs while ensuring they have sufficient volume of billable services to stay open.

However, the financial side of this equation remains the greatest obstacle to expansion of independent providers’ ability to provide this care.

Rural Health Clinics (RHCs) through the end of 2024 have the permission to bill for these telehealth services, but only under a CMS waiver. These waivers, which allow even Federally Qualified Health Centers (FQHCs) to bill for telehealth temporarily, can entirely come under fire by other types of providers, because RHCs and FQHCs are not explicitly mentioned in telehealth laws.

For providers of rural and underserved areas, as most RHCs and FQHCs are, CMS has also provided flexibilities to the definition of “telehealth services”. For example, it allows providers to occasionally conduct audio-only services and for other providers has listed communication technology-based service codes (CTBS). All are fair game for review, and ultimately, could discourage continued adoption of telehealth by these providers.

Access to Prescription Drugs for Patients with Financial Hardship

Recently, a South Carolina FQHC by the name of Genesis Healthcare became the talk of 340B operations. The 340B drug pricing program is named after section 340B of the Public Health Service Act, which requires that pharmaceutical companies covered by Medicaid must provided discounted outpatient prescription drugs to providers serving largely disadvantaged populations — including Critical Access Hospitals (CAHs), FQHCs, and Sole Community Hospitals (SCHs).

Genesis in 2017 had failed an audit by the Health Resources and Services Administration (HRSA), which had alleged that the FQHC used the 340B program to obtain drugs for patients that did not fall under HRSA’s interpretation of a 340B “patient”. The federal district court struck down HRSA’s specific language, and the broadened definition opened the floodgates to health systems and 340B vendors reaching more patients and expanding this profitable service line.

Is it so difficult to see how a health system losing patients to a small CAH capturing market share with its own discounted drug access may fight for a redefinition of “patient” in the courts?

There’s also matters of eligibility. I’ve worked with a rural hospital which was in the midst of implementing 340B, only to find after a CMS cost report submission that it was suddenly ineligible for the program. The opportunity for criteria to change because lawyers can sway some judges may lead to some providers holding off on 340B — which inevitably means low-income patients cannot get access to discounted prescription drugs.

Clearly, there are more areas of concern. Some include but are not limited to….

• definitions of allowable family planning services (including abortion care)

• safe access to care for LGBTQ+ patients

• scope of care for different types of providers like Registered Nurses

• staffing requirements for hospice and nursing facility care

• rules to prevent information blocking and support interoperability

• price transparency rules for hospitals and payers

All that can be said for sure is that the road will probably be quite bumpy in the coming years as the overturning of Chevron ripples through the Federal Register.

Inability to complete the prior auth process has disastrous effects. Patients face delays to care (or may be denied it altogether) while clinicians face yet another administrative task that adds to burnout inducing workloads they face.

It’s a problem well-known to clinicians and simple to understand from a high-level — hence venture capital has jumped on the opportunity to pour millions into startups promising to solve problems of prior authorization. The list of companies raising capital to solve this problem goes on and on — Cohere, Basys.ai, PriorAuthNow, Rhyme — and robotic process automation (RPA) firms have leveraged their technology to try automate prior auth workflows.

Prominent venture capital firm a16z boasted the capability of AI technology to potentially address this prevalent obstacle to care.

Potential for 10x performance with AI

Relatedly, areas in which humans are prone to error or are generally slow and inefficient (even when supported by software products) are most likely to benefit from AI approaches. For instance, in prior authorizations, a recent AMA survey found physicians and their staff spend approximately 14 hours per week completing PAs

Source: a16z

Can automated workflows and integrated health IT help alleviate the pains of prior auth and improve a provider’s cash flow? Yes. Getting clinicians off administrative tasks to cross reference necessity criteria, pull medical records, log into payer portals, upload documents frees up time to see patients and ensures that procedures can be scheduled faster with fewer patients losing interest.

The assumption tech companies take on prior auth is that it is a painful yet non-negotiable process. To the hospitals and practices that cannot justify prioritizing automation technology over meeting payroll, there is no luck. It also creates perverse incentives to keep prior authorization instead of revamping the way payers control cost, because all of a sudden you have large tech companies whose bread-and-butter is selling a service to a problem that does not need to exist. Buy the technology or die.

UM and the Business of Health Insurance

Prior authorization is part of the process of utilization management (UM). The premise of UM is that with healthcare costs on the rise throughout the system, medical procedures must be evaluated for whether it is medically necessary for a patient to receive a treatment. This process is supposed to consider whether the patient’s medical history correlates to a diagnosis being severe enough to justify certain tests and procedures or ensuring that a physician has pursued other treatment options before choosing more expensive ones.

This process is often encouraged and enforced by payers. One example of a UM strategy is high-cost case management wherein the payer may assign case managers and navigators to members with particularly complex or severe healthcare conditions. Through supporting care coordination, review of social needs, and engagement with the patient, the premise is to control the costs that may be associated with these members. This is not without merit. In 2019, 5% of patients accounted for nearly 50% of spend in the United States.

In the context of prior authorization, the clinician must submit a request to authorize a procedure for a member of the insurance plan. As the payer, they can simply deny reimbursement for the healthcare service if that member never got such an authorization. This is a process which has gotten payers into hot water over denying care to patients clearly in need of treatments ranging in purpose from diagnostic and preventive to therapeutic and surgical. Assessing a subset of Medicaid enrollees , 1 in 5 patients mentioned running into challenges accessing care because of utilization management.

One interesting factor to note is that Traditional Medicare does not use prior authorization as a part of UM. Prior authorization is largely perpetuated by private payers including those that administer benefits for government programs. Prior authorization by Medicare Advantage (MA) plans is considered the most egregious given that they have older, sicker populations requiring more healthcare services which end up getting delayed or denied. Even with Medicaid, a program intended to serve the low-income populations of states, private payers administer coverage through managed care. An interesting note — five Fortune 500 publicly-traded firms have managed care agreements in more than 12 states.

Going a step further, UM has even been applied to admission of patients to inpatient hospitalization. As a general rule of thumb, inpatient hospitalization refers to stays lasting 48 or more hours whereas observation stays (classified as outpatient and lower cost) are anything less. Typically, sicker patients need to be in the hospital longer, but many private payers have a dedicated UM process for hospital admissions. In 2017, an evaluation of patients across 9 California hospitals found that 8.4% of patients were denied coverage for hospitalization.

In fact, when talking about the exorbitant hospital bills many patients face, part of these surprise multi-thousand dollar bills can be attributed to payers refusing to cover several days of a patient’s stay on the grounds that it was not “medically necessary”.

Of course, this has fantastic financial implication for payers who can simply deny care, do not have to reimburse clinicians and get to retain a greater share of revenue from premiums. Aggressive utilization management practices compounded by untested predictive algorithms continue to deny access to care — especially for seniors.

The Process

The UM process for providers is atrocious, to say the least. As a provider, one must know what procedures for which payers require prior authorization. In the context of hospitalists, there must be an awareness of admission criteria by payers for patients who may need inpatient hospitalization. The options are to read dense handbooks provided by the payers with medical necessity criteria or to pay for software like Milliman Care Guidelines (MCG) and InterQual (owned by UnitedHealth Group ;) ) which provide checklists for medical necessity criteria.

Of course, the determination of where these guidelines come from are not made available to the public — because for some reason evidence based clinical best practices are considered proprietary and Aetna members supposedly have different anatomies than Cigna patients.

The process of evaluating these criteria is usually not even happening at the point of care. To approve outpatient procedures with prior authorization, what typically happens is that someone must receive a referral and go back-and-forth with the payer to submit the appropriate documentation for the approval. In one hospital I visited, there was an entire role in Patient Financial Services reviewing an inbox of faxed/scanned prior authorization letters from payers to determine whether patients had approval for lab tests. Without an approval, the patient could not be scheduled and it was evident that several patients had been waiting weeks for approval.

The situation is more dire for those seeking hospitalization. The same hospital had two utilization review nurses who spent all day reviewing patients with pending inpatient hospitalization approval. Payers often do not respond for 48-72 hours to requests for hospitalization — which is quite concerning considering that the patient needs care now.

While waiting, patients are by default admitted to observation status. Even if the approval comes in, the patient must be inpatient for 48 hours to be fully covered for the inpatient services. If a patient only needed 50 hours of inpatient hospitalization and had to wait 48 hours before getting the approval, there are only 2 hours left. Despite giving care for inpatient severity of care, the hospital can only be paid for 50 hours of observation services which is often a fraction of inpatient reimbursement rates.

In the event of a denial of medical necessity for inpatient hospitalization, the patient has likely gotten better than when they first came to the ER/direct admission. Vitals and other objective measures would not line up with criteria and the visit would still go entirely under observation reimbursement.

When I spoke to one of the UR nurses at the hospital, she also mentioned that despite meeting all listed criteria, patients will sometimes still be denied care for services. The case managers on the payers’ UM teams will sometimes cite criteria that are not listed in the guidelines. Clinicians working UM for payers don’t even always line up with the specialty of care for procedures they review. Nothing stops a gastroenterologist working for UnitedHealth from denying care for a lung collapse and citing their own clinical expertise.

The industry response as expected makes plenty of room for consultant work in this space. Another hospital I visited had hired consultants to train physicians on how to improve medical documentation to improve inpatient admission rates. It’s like hiring tutors for a standardized test — spending time and money to learn the rules of a system that does not even truly evaluate performance (in this case, the clinician choosing the most appropriate level of care).

Tech

So where does tech fit into all of this?

Undoubtedly, this is a manual process wherein technology can be used to achieve efficiency in submitting requests for authorization and quickly appealing approvals. It can pull medical documentation from a patient’s history, automate the process of navigating through the variety of payer web portals, use natural language processing to attempt to match criteria against data, and help prioritization of complex cases.

But the technology does nothing to stop the entrenched interest of the payer to deny care. Process automation can help overcome today’s hurdles in prior authorization and admission medical necessity, but nothing stops payers from adding news processes and guidelines in the future. Nothing stops UnitedHealth from telling UM case managers to consider extra unlisted criteria because their algorithm suggests a patient already got too many claims reimbursed for the year.

What is this supposed to achieve in a state of homeostasis? Providers and payers pouring billions into bots that are fighting each other on a process designed to prevent people from accessing healthcare services?

There exists a place for companies to automate the process of prior authorization today, but they will never solve the root issue. Tech influencers and venture capital need to back off of this problem space because the reality is that most of these people have never actually spoken to hospital case managers let alone understand what “managed care” is.

The worst part of this is hype cycle that many health tech companies end up taking significant venture funding or acquisition offers from health payers once they reach a critical mass of relevance. So then what? The payers control the UM process and the companies promising to alleviate the pain it causes providers? Unless there’s substantial advocacy for change in regulation surrounding UM, they’re just creating a niche industry of middlemen perpetuating a fundamentally unfair system.

Early last month, the US Senate Finance Committee had a hearing on Corporatization and Consolidation in Health Care. As one may expect, the big lobbyists and dominant players pointed fingers at each other while drowning out the concerns of small, independent operators and advocates.

Despite parading policy which is undeniably harmful to Americans, the American Hospital Association (AHA)’s statement regarding the hearing offers great structure to explain how consolidation shreds competition, drives up healthcare costs, and kills Americans. The AHA also is an excellent proxy for the desires of Big Health — of around 6,100 hospitals, over 3,500 are in a health system. Only 1,800 of the total 6,100 figure are in rural America, and with membership fees determined by the number of hospital beds, it becomes clear that well-resourced and larger hospitals have a greater say in the policy position of the AHA.

What the AHA Says

The AHA, in defending consolidation of rural healthcare provider organizations, cites lower costs, better quality of care, and improved access to care in rural communities.

Acquisitions and mergers can help reduce health care costs and create a fiscally sustainable environment for health care delivery for patients and communities. Mergers with larger hospital systems can provide community hospitals the scale and resources needed to decrease costs by increasing administrative efficiencies and reducing redundant or duplicative services

The AHA seems to take advantage of Americans’ concerns about ballooning healthcare costs. Most hospital-related healthcare spending across the country comes from the cost of provider labor and equipment. Cutting the number of administrators by shifting a local hospital to a health system’s billing solution does nothing to substantially contribute to the supposed noble goal of reducing the country’s healthcare costs.

For situations when the hospital gets its provider labor and equipment spending reduced, it’s through the health system cutting services altogether, not making care delivery more efficient.

One study of recent rural hospital mergers found the percentage of facilities providing any maternal/neonatal care dropped 7.2% in two years after a merger. That study built on another analysis that documented a decrease in outpatient diagnostic, obstetric, and primary care. Considering rural hospitals are often the sole source of care in their communities, one must ask what the AHA means by “redundant” care.

Not only do these “reduced costs” leave communities with their needs unmet, but they also take away much-needed economic activity. When a hospital cuts services and staff, it is reducing the amount of money which flows back into local communities in the form of salaries. Further, when a hospital cuts services and has to send patients off to other health system locations, the economic impact of treating that patient suddenly leaves the community to be harvested by the health system.

Emerging research has demonstrated a clear association between consolidation and quality improvement.

The AHA cites research which indicates the introduction of best practices used at health systems can reduce complications during certain procedures while reducing mortality for conditions like pneumonia and stroke. However, such empirical evidence is not so consistent — one 2020 study indicated the opposite that mergers generally lead to a decline in mortality, higher readmission, and poorer patient satisfaction.

Even with potential increased quality, a JAMA article from earlier this year highlights that marginal improvements in quality measures between independent and health system providers are also accompanied with disproportionately higher costs.

The AHA goes on to argue that consolidation of rural hospitals can lead to the introduction of new specialty care. However, in reality, the introduction of a few specialty care providers is not enough to offset the impact of losing an intensive care unit, delivery ward, or surgical facilities. To access the true extent of services a health system can offer, rural patients must travel far to receive the new healthcare services they supposedly have access to as a result of merger and acquisition.

Even if such a consolidated system does not entirely cut services, it continues to move the care of patients out of local communities. Consider the challenge of rural bypass wherein patients are moved to receive care at urban hospitals when a rural hospital would have sufficed. A Centers for Medicare and Medicaid Services (CMS) report on bypass noted:

…specialty providers may be affiliated with larger health systems, and those providers will admit patients to the affiliated hospital. The purchase of a small rural hospital by a larger system drove patients to receive inpatient care at the larger hospital.

The purchase of these rural hospitals effectively drives us total cost of care by sending more patients to more expensive facilities further from home while also ensuring that the economic impact of treating a patient (clinical labor wages, overhead expenses, etc.) are extracted out of rural communities and into cities.

Price Discrimination and Bargaining

Most transactions in healthcare happen under the terms of negotiation between organizations. For a hospital, this means that everything from the price it pays for medical equipment from manufacturers to the insurance reimbursement rates for healthcare services. With these one-on-one agreements, there’s a lot of price discrimination at play — wherein a seller provides the same good or service at different prices depending on the willingness to pay of these different buyers.

Many factors can impact the buyer’s willingness to pay. The presence of alternative sellers can induce a downward pressure on prices in a market whereas information on what others are paying can introduce more uniform pricing across the board. Bargaining power also impacts negotiated prices — such as when the size of a hospital’s patient population means that the volume of their medical equipment purchasing can be leveraged to get lower unit prices from sellers.

This is also the underlying premise of the group purchasing organization (GPO), which is supposed to amalgamate demand across many buyers to get better pricing.

One of the implications of price discrimination is the idea of cross-subsidization. The lost potential profit of lower prices for a subset of customers is offset by another set of customers paying more. When one party wins favorable terms, it’s likely someone else is paying the price of that. Then there are the impacts of the access to talent and other resources — those organizations with deeper pockets will have the ability to reach, employ, and leverage people better skilled at negotiating and having institutional knowledge crucial to effective bargaining.

In the relatively simple case of equipment purchasing, increased consolidation of healthcare providers means fewer firms competing for the same goods that allows sellers to raise prices. Even if some independent providers amalgamate their demand for greater bargaining power with sellers, one economic model of consolidated markets found that only those above the 70th percentile of provider groups with bargaining power can ensure savings from bargaining collectively. The cheaper prices that the most powerful players in such a market are effectively subsidized by the smaller groups in the same market.

The imbalance of bargaining power impacts independent providers more seriously with setting reimbursement rates with payers. When providers get consolidated under a singular health system, the reimbursement rates for the services of those providers can be renegotiated. These consolidated providers, as one of few options for healthcare services, can demand higher reimbursements from payers who themselves have to maintain some minimum amount of covered providers for a geography. When the tradeoff becomes pay higher rates to a health system or not be allowed to sell health insurance in a region, it becomes clear why payers eat the higher cost of care or leave rural communities.

Of course, these higher demanded rates are cross-subsidized by local independent providers. Payers, seeking to reduce the amount they spend on covering care, set lower reimbursement rates for independent providers. These independent providers do not have the volume or associated bargaining power to negotiate better payments.

It is a demonstrated phenomenon — one which Chris Thomas, CEO of Community Hospital in Grand Junction, CO, voiced concerns about during the Senate Finance Committee’s hearing.

“In our region, a larger health system acquired the largest hospital and is now bringing their health insurance products into our market,” Thomas said. “If they are successful at growing the number of lives covered by their health insurance products, we fear they will block access to our hospitals through tier products, driving more covered lives into their hospital.”

“I’m not implying the system hospitals do not care for their communities,” Thomas said. “What I’m simply saying is that we have one priority as a community hospital and that’s the patients in Grand Junction, Colorado. One of the main reasons that I’m so committed to our organization and our mission is that our board of directors has not once asked me to make more money.”

As part of a larger health system with established and higher-paying private payer contracts, rural hospitals swallowed by health systems can offset losses covering a larger Medicare/Medicaid mix of patients. In a market-distorting effect, these consolidated hospitals can operate at a margin where local/independent hospitals must continue to claw its way to sustainability off a structurally poorer patient population with public payers that often do not reimburse enough for break-even.

The entry and expansion of consolidated health systems into rural communities creates a vicious cycle that makes independent delivery of healthcare services financially unsustainable. In the name of efficiency, as independent providers get absorbed or close down, these consolidated systems reduce staff counts, hours, and total care delivered without concern for how to maintain access to care and how to retain healthcare-related economic value for the local community.

What’s particularly interesting is seeing how today’s strategy of expansion mirrors Kaiser's past when it pursued similar explosive growth to dominate the HMO market during the 70’s and 80’s.

This is the first in a multi-part series on Kaiser Permanente and its place in today’s complex healthcare provider and payer industry.

“Integrated” and “Value-Based Care”

Kaiser Permanente is most known for its model of “integrated care delivery” which has been grown alongside an American healthcare sensationalism around “value based care”. The premise is that healthcare costs have been driven up by providers being paid based on the amount of services they provide to patients. Reimbursing based on “value” as opposed to “volume” has been pushed as a way to deliver better care for patients with less “unnecessary” care.

Reimbursing on value means many things. Some providers may be given bonuses for clinical quality measures related to hospital readmissions or biometrics like HbA1c scores for diabetic patients. Other systems pay doctors fixed salaries to decouple physician incentives from the higher reimbursement of giving many services. I’m bundled payment models, physicians may be given a fixed payment for a medical treatment and long-term monitoring of the patient afterward as a way to incentive better care up front to reduce complications later.

Bundled payments and quality bonuses are likely to come from health plans, but one quirk of the integrated care model is the health plan’s ownership of the healthcare providers. On paper, this incentive of the health plan to reduce medical costs can be tied to the management of provider labor who can be better aligned to high quality care now to prevent costs later on.

Kaiser’s Story

Kaiser Permanente’s story predates the gradual shift to “managing care” and “value based care” that emerged from the 1980’s.

During the construction of the Colorado River Aqueduct in the Mojave Desert, Henry J Kaiser and a handful of other contractors established an insurance consortium to cover worker’s compensation needs of 5000 workers. Having recently finished his residency, in 1933, Sidney Garfield secured a contract to offer healthcare services out of a tiny hospital in Desert City, CA.

In trying to equip the hospital with enough resources to care for patients awaiting transport to Los Angeles and a desire to treat all patients regardless of an ability to pay, Garfield struggled to keep the hospital in healthy financial state. After winning over two executives of the insurance consortium, Garfield secured a contract wherein care for the workers was prepaid. His hospital earned $1.50 per worker per day, and soon he was able to pay off the hospital’s debts and grow a financial reserve.

In 1938, the Kaiser Company went on to acquire a new contract for the Grant Coulee Dam, in which it led another insurance consortium. Garfield was then brought on to replicate the Desert City model, this time covering care for workers and their families and transitioning from just industrial medicine to family practice.

To support the needs of 30,000 workers in Kaiser shipyards during the Second World War, Garfield continued building out and operating on this prepaid health delivery model. At the end of the war, Henry Kaiser and Garfield opened the Permanente Health Plan to members of the public, with membership quickly swelling to 300,000 across northern California driven by adoption by labor unions. This new integrated delivery organization was constituted of three parts — the health plan, the hospitals, and the physician group.

In an effort to capitalize on the name recognition of Kaiser Industries, the health plan and hospital group rebranded to Kaiser Foundation Health Plan and Kaiser Foundation Hospitals, respectively. Physicians resented the implication of being employed by Kaiser, thus the medical group remained the Permanente Medical Group. In combination, these three organizations manage care for members of Kaiser plans to this day.

Kaiser was a leading health maintenance organization (HMO) following the passage of the Health Maintenance Organization Act of 1973. As an HMO, members of Kaiser plans must receive referrals from primary care physicians to receive specialty care. Through reliance on primary care and a built-in control on the patients’ utilization of specialty care, the HMO can keep overall medical expenditures lower and offer lower out-of-pocket costs and premiums to plan members.

Interestingly, the American Medical Association (AMA) proved a bitter rival to the growth of Kaiser. The AMA, a national professional organization and lobbying group of physicians, promoted the expansion of preferred provider organizations (PPO’s) in opposition to HMO’s. PPO’s do not require primary care physicians for members and allow specialty care without referrals. These PPO plans also allow members to receive care outside of their network, even if at higher cost to health plan members overall.

Part of the reason Kaiser had to operate its own hospitals was actually because of this opposition to prepaid health plans and the HMO’s they eventually turned into. The state board of medical examiners had Garfield’s license revoked for “unprofessional conduct” before courts overturned this measure. In many cases, physicians in prepaid plans were barred by local medical societies and hospitals from practicing. Some academics argue this intense opposition to the spread of HMO-like plans was because prepaid health plans with fixed payments to physicians threatened to remove the power of practitioners to adjust charges to the income of their patients.

Rising Competition and Risant Health

Kaiser expanded its footprint beyond the Pacific coast rapidly through the 1970’s and 1980’s — states like Hawaii, Colorado, Ohio, Texas, Georgia, Connecticut, North Carolina, and the Washington D.C. saw a new presence. It is believed that this strategy of expanding across the country was to establish large-enough corporate accounts and national presence to have a seat at the table in the event health reform legislation made its way through the federal government.

Many of these efforts were unprofitable and eventually closed or sold off. Texas was sold off in 1998 followed by the sale of the Northeast division in 2000. Catholic Health Partners bought the Ohio division in 2013. More violently, the North Carolina operations out of Raleigh-Durham had to be closed altogether.

Unlike California and cities in the Pacific Northwest, many of these other geographies did not have sufficient population density to make a highly coordinated and managed network of care very suitable. Residents of these areas were also not very familiar with (or accepting of) the lack of an ability to receive care out of what was considered a very small network by the standards of other local PPO’s.

The past several years have seen other health systems like HCA, Trinity, and Ascension pursue aggressive acquisition of hospitals across the country. A smaller number of these systems have adopted a similar model of integrated care as Kaiser, but some notable examples include Intermountain Health headquartered in Salt Lake City, UT and Geisinger Health, the most recent acquisition of Kaiser.

As we continue to look into the future of Kaiser Permanente and how it wants to define its place in the space of interstate health systems, it’s critical to consider at what point it would constitute a repeat of the missteps of the 1970’s when growth-at-all-costs was pursued only to fall apart when facing the realities of a business model incompatible with local healthcare delivery needs and norms.

Much of the expansions today focus on how value-based care may change the underlying economics of care delivery. Making a bundled payment profitable requires delivering less services overall but with high enough quality that it prevents complications later on, and the bet players like Kaiser are making is that integrated and large consolidated players like themselves have the best resources to coordinate care and control costs. Whether local providers are willing to join such networks and play by the rules of a more controlling health system is a question to be answered.

The amendment would have applied the $35 limit to any “group health plan or health insurance issuer offering group health insurance”.

This short-lived bill is not the only appearance of ERISA. Landmark laws like the Health Insurance Portability and Accountability Act (HIPAA) and Affordable Care Act (ACA) mention and amend ERISA. Through the subtleties of complex federal regulation oriented at large employers, ERISA has not only become a key policy tool to regulate private insurance but has also shaped the structure of these private companies themselves and debates around how to regulate them.

Constitutional Law and the Power to Regulate

Before diving into the significance of ERISA, it’s important to understand that the federal government’s ability to regulate the economy is restricted to powers that is has under the Constitution. Unlike the state governments, federal legislation cannot do things like impose rent controls on all landlords, set education curriculum standards, or directly impose rules on what every health plan must administer. The federal bureaucracy gets most of its powers from Congress delegating its powers to the executive branch of government.

When you look into the language of an executive order, you’ll notice that it almost always specifically cites some piece of legislation from Congress that was signed into law. If the Department of Commerce imposes tariffs on steel, it’s probably doing so under the authority of the Trade Act of 1974. When the President authorizes air strikes on a country for which there is no authorization of force from Congress, it’s probably under the guidelines of the War Powers Act. This is also where we see the distinction between federal legislation and regulation.

Whereas legislation is written and passed by Congress, it often leaves many specifics up to the executive branch to detail through regulation. The idea is that the executive branch, under the control of the President, can move much faster than Congress to enact changes in rules. Delegating the fine details of trade policy and national security, for example, lets Congress delegate this work to the federal bureaucracy which theoretically does not need to get involved in politics to move quickly on new developments. It also means that members of Congress don’t need to be experts on everything, because someone in some federal agency can take responsibility.

For example, when the Centers for Medicare and Medicaid Services (CMS) updates rules, it’s updating existing regulations that apply to laws like the Affordable Care Act (ACA), Health Insurance Portability and Accountability Act (HIPAA), or Social Security Act (SSA).

One of the primary ways that the federal government gets around constitutional limits to regulate industries is with the Commerce Clause, which gives Congress the authority to regulate business across state lines. In combination with the Power of the Purse, to set tax policy and spend that revenue, we see the legal justification for what would become ERISA. However, the efforts of federal legislation to regulate certain industries against a singular standard often conflict with intentions to regulate at the state-level.

Pensions and Welfare Plans

Triggered by price controls during World War II, many employers started offering health insurance benefits to employees. Through the 1960’s, most government regulation on these plans’ structure came from state governments. Such health insurance mandates from the state could require insurers to cover certain groups of people or certain types of healthcare services. At this time, large employers with employees in multiple states had to manage the different sets of state-level insurance mandates. The collective power of these large actors were successful in stonewalling many proposed state-level insurance mandates before 1974.

A pension reform law would radically change that.

In 1963, automotive manufacturer Studebaker shuttered a manufacturing plant in South Bend, Indiana. Due to mismanagement of funds, the thousands of retirees and workers of the plan found that their former employer could not fulfill promises of the pension plan. The 3,600 workers past retirement age received their full pension benefits, but 4,000 workers received only 15% of their promised pension, and another 2,900 received no pension at all. It fueled growing calls for pension reform and spurred a Congressional investigation into management of pension funds by employers and unions. Later in the decade, Senator Jacob Javitz introduced a bill for pension reform in 1967.

The final law enacted in 1974 imposed significant rules on pension plans under private employers to report financial information and standards of conduct. To help provide benefits to members of pensions with insufficient assets, the Pension Benefit Guaranty Corporation (PBGC) acts as an insurance fund. Today it covers 26,000 pension plans in the country.

More relevant to health insurance, ERISA also regulated “welfare plans” including health insurance that were self-funded, meaning that the employer covered the cost of health claims of employees in the plan. Employers spanning multiple states with self-funded health plans could now only be subject to ERISA, which preempted local state regulations and allowed employers to avoid state-level restrictions and taxes. By giving these large employers a means to avoid 2-4% taxes on health insurance premiums paid by employees and a way to enjoy the more consistent rules of federal health insurance regulation, many employers adopted self-funded plans.

New Rules, New Players

Before, many employers were paying premiums to a large health insurer to manage the health plan, but ERISA gave new incentives to bring administration of health insurance in-house as a way to cut costs.

A new niche of health insurance called the third-party administrator (TPA) exploded. These TPAs handled management of medical claims for self-funded health plans. Large insurers, seeking to capitalize on the growth of self-funded plans, launched a similar set of businesses including administrative services only (ASOs).

By 2017, almost 60% of insured employees were under self-funded plans regulated by ERISA. With large employers no longer impacted as significantly by state-level health insurance regulations, the number of such mandates increased after the passage of ERISA, imposing rules on how in-state health plans had to operate.

Because of how ERISA is fundamentally tied into the regulation of large employer-sponsored insurance, a number of landmark healthcare laws amended ERISA. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) created rules which allowed employees to continue health coverage for some time after events like loss of employment while the Health Insurance Portability and Accountability Act (HIPAA) imposed limits on how health plans could discriminate on certain health status information.

Tug of War

We come back to the issue of constitutional law, because current debates about ERISA revolve around how much the federal law can preempt state regulation. Through preemption, federal rules essentially overrule any local laws concerning these self-funded health plans.

Originally, the legal “test” for whether state laws were preempted by federal law considered whether the state law had “a connection with, or reference to, covered employee benefit plans.” This was broad language that essentially prevented any sort of state regulation remotely related to self-funded plans under ERISA until three notable cases made their way to the Supreme Court.

New York State Conference of Blue Cross & Blue Shield v. Travelers Insurance Co (1995), California Div. of Labor Standards Enforcement v. Dillingham Constr., N.A. (1997) and De Buono v. NYSA-ILA Medical and Clinical Services Fund (1997) changed that test so that only state laws mandating changes to the health plan structure or administration would be preempted.

The Travelers Court noted that nothing about the ERISA or its legislative history “indicates that Congress chose to displace general health care regulations, which historically has been a matter of local concern.”

“The Preemption Clause That Swallowed Health Care: How ERISA Litigation Threatens State Health Policy Efforts” - Health Affairs

An all-payer claims database (APCD) is a state-run database of health insurance claims intended to support research and transparency concerning utilization, quality, and pricing of healthcare services. Many health insurers are reluctant to hand over this type of data, so many states passed regulations to mandate that payers send this data to state-run APCDs.

In 2016, the Supreme Court saw Gobeille v. Liberty Mutual Insurance wherein Liberty Mutual was disputing a Vermont law which required all health plans to send claims data to the APCD. As it turns out, the opinion of a court changes with new justices, and the court seemingly changed its stance, arguing that the Vermont law prevented ERISA from imposing its “single uniform national scheme for the administration of ERISA plans without interference from laws of the several States even when those laws, to a large extent, impose parallel requirements.”

The case allowed many employer self-funded plans to hide behind ERISA to fight a variety of state health regulations. Some APCDs lost almost 30% of their claims data because of the ruling while employers fought states on other policy like healthcare pricing transparency.

However, in 2020, the Supreme Court upheld the status of Arkansas Act 900 in Rutledge v. Pharmaceutical Care Management Association. The Arkansas law regulated pharmacy benefit managers (PBMs) which work closely with health plans to manage coverage of drugs in pharmacies. Under the regulation, PBMs had to pay pharmacies a minimum cost for generic drugs to ensure that rural and independent pharmacies could justify keeping generic drugs in stock. The PCMA, a PBM trade group with members losing money on supplying these pharmacies with generic drugs, sought to argue that the state law was preempted by ERISA.

Despite ruling in favor of PBMs at the district courts, the Supreme Court argued that PBMs were not covered under ERISA and that this cost regulation did not impact the choices made by self-funded health plans.

These legal uncertainties have raised questions about how to amend ERISA’s preemption clause to draw a clearer line in the sand on how the states can regulate health plans. The current preemption law does not even allow the Department of Labor to make waivers to remove preemption for certain state-level reforms. The stakes for preemption go beyond just APCDs and reporting on prices of healthcare services.

Such restrictions on state authority to regulate health plans means that the states cannot create stronger laws to mediate the disputes between health plans and hospitals that leave patients to suffer with hefty surprise bills. Reforms on prior authorization are also limited, because large health plans can simply skirt requirements to be more transparent to providers about reasons for denials and make the process easier to complete. That’s of course not to mention regulations that could require inclusion of certain preventative/diagnostic services, dental or vision benefits, and mental health services.

The story of how the prospective payment system (PPS) came about is crucial to understand incentive structures hospitals navigate around and how tricky it can be to change these systems.

Before PPS

The 1965 Social Security Amendments created Medicare, which covers healthcare for most Americans over the age of 65. As an interesting sidenote, check out the following chart on poverty across different age groups from 1965 through 1998. It’s not enough to say that Medicare caused a drop in senior poverty, but the correlation is quite strong.

The law mandated that healthcare providers would be paid with cost-based reimbursement, such that Medicare pays the cost of a treatment plus 2%. This generous model was inspired by the system developed by Blue Cross/Blue Shield and was favorable enough to gain the widespread acceptance of Medicare insurance by providers across the country.

Older Americans, suddenly with a way to afford healthcare services, started seeing the doctor more, and healthcare service utilization ticked up as part of this induced demand. However, doctors could also charge the federal government what they considered necessary to reimburse the cost of delivering care.

Costs ballooned.

The new payer in the market could be charged to pay for higher reported costs which gave hospitals greater revenues, and these hospitals pursued aggressive investments to grow and compete with other facilities.

One result of the SSA’s [Social Security Administration’s] desire to have the medical community embrace Medicare was that doctors’ “customary, prevailing and reasonable” fees — the criteria on which the program based its reimbursement — rose precipitously. Young doctors began billing at unprecedented levels, and the SSA paid them. When older doctors saw the behavior of their younger associates, they too raised their fees.

Source: The Origins, Development, and Passage of Medicare’s Revolutionary Prospective Payment System

There were limited means to control these rising costs. After all, many patients do not truly understand what care is necessary and what is not. When Medicare is paying a large share of these services, it is not shocking that initial cost projections severely underestimated the increase in the cost of healthcare.

Attempts at Cost Control

By the 1970’s, the public’s focus on healthcare went from concerns about longstanding shortages of healthcare services and coverage to an anxiety about the solvency of the Medicare system and reining in rising costs.

The 1972 Social Security Amendments expanded what Medicare covered for — end stage renal disease, nursing homes, and so on — but it also was one of the first attempts by the federal government to curtail costs with Section 223.

The amendment section defined what constituted a “reasonable cost” for reimbursement. Costs from that point were differentiated between routine and ancillary costs, the first of which would be limited. The idea was that ancillary services and costs depended on the sickness of the patient, and a doctor was more likely to charge more if there was actually more resources required to treat for that. Routine costs associated with maintaining the facility and treating any patient, on the other hand, were considered costs that Medicare could limit how much it reimbursed for.

“We understood that people might be sicker and have different ancillary costs, but by God the routine or ‘hotel’ costs ought to bear some similarity to all other hospitals.”
John Mongan, Senior health policy advisor to President Jimmy Carter

After Nixon’s Economist Stabilization Program ended in 1975, these limits took hold and led to some reductions in cost inflation, but hospital administrators learned to take advantage of the definition of “reasonable” costs.

Essentially, the hospitals kept redefiningwhat was ‘routine’ and what was ‘ancillary,’” explains Altman. “Forexample, they would take nurses and change them into ‘respiratorynurses,’ which made them a fully reimbursed ancillary cost.
Stuart Altman, Health policy advisor to President Richard Nixon

The Carter administration came to the White House in 1977 with unrelenting pressure to find out new strategies to curb costs.

“From 1974 to 1977, hospital costs increased at an annual rate of approximately 15%, more than double the economy’s overall rate of inflation.”

Source

Carter proposed the imposition of a nationwide 9% cap on hospital price growth, citing challenges to balance the federal budget to justify the otherwise aggressive approach. The American Hospital Association (AHA) backfired and got key Democrats in Congress to oppose the proposal in Congress, promising instead to voluntarily reduce cost inflation. There was a short-lived success, with cost inflation stepping down to 12.8% in 1978.

The AHA and American Medical Association (AMA) banded together to kill future proposals by Carter to rein in costs. Some interesting dynamics about the politics of these proposals are important to note.

Virtually all Republicans opposed Carter’s plan as excessively complex and an overly intrusive violation of the private sector by the government at a time when deregulation was rapidly gaining popularity. Democrats were split. Urban Democrats generally favored the president’s plan, but Sun Belt and southern Democrats from areas with growing populations were less enthusiastic. Many of them thought that Carter’s plan would restrain the growth of hospital revenues in an inequitable manner that would lock southern hospitals into an inferior quality level relative to their northern counterparts (the “fat will get fatter,” critics charged).

Instead of passing proposals, Congress relied on promises from hospitals to abide by voluntary cost containment. When Republicans took over Congress and the White House in the early 1980’s, pressure continued to mount to contain costs, and the Reagan' administration’s Secretary of Health and Human Services Richard Schweiker paradoxically pursued government activism as the best way to control healthcare costs.

The 1982 Tax Equity and Fiscal Responsibility Act (TEFRA) closed a number of tax loopholes unrelated to Medicare payroll taxes, but it also capped Medicare payments growth for hospital discharges for three years. It also created a new paradigm for federal regulation of providers — instead of limiting cost growth for all payers (Medicare, Medicaid, and private insurance), TEFRA only set rules for Medicare.

TEFRA also called for the Secretary of HHS (Schweiker) to come up with a new proposal for prospective reimbursement, which would reimburse hospitals according to certain diagnoses of patients instead of with a cost-based model. The AHA, fearing the intense price growth caps of TEFRA, cooperated in new negotiations.

1983 saw Social Security fail a bankruptcy crisis, and as part of a bailout bill came the new PPS system.

Where Are We Now

The introduction of PPS curtailed hospital price inflation significantly. Instead of being able to bill for what the provider deemed a reasonable cost, hospitals were being paid fixed amounts for certain diagnoses. That means that a hospital’s profit margin is tied to how quickly and cheaply it can discharge a patient, and it could be argued that maybe this PPS system limits the quality a hospital is incentivized to give its hospitalized patients.

Because the introduction and subsequent reforms to PPS focused only on what Medicare pays for medical services (while aiming to pay less), hospitals with enough local market control can now afford to charge private insurers much higher amounts. This means exorbitantly higher costs for private payers that just pass those along to health plan members through higher premiums, deductibles, and co-pays.

On the other hand, PPS in rural America makes no sense. Rural patients simply cannot drive enough volume to make a per-discharge reimbursement model sustainable without significant reductions in available services compared to what an urban hospital can afford. The critical access hospital (CAH) model was designed to reintroduce a modified version of cost-based reimbursement to some rural hospitals, but even this newer model is not always sustainable.

However, there are a handful of other spending laws that accompanied these three stimulus packages, and underneath the layers of them is a provision that led to historically low rates of Americans without health insurance. That’s about to end, with millions of Americans at risk of losing coverage in the coming months.

Let’s dive into the unwinding of Medicaid across the country and what lessons it offers for the delivery of health policy, addressing of social determinants of health, and structural disadvantages faced by the uninsured.

The Families First Coronavirus Response Act

By March of 2020, cases numbers for COVID-19 were on the rise across the world, and Congress was anxious to provide the funding necessary for the Trump administration to ward off the pandemic. In late February, the administration had asked for $2.5 billion, which many lawmakers found to be too low of a number to adequately address the crisis. The first legislative package signed into law on March 6, the Coronavirus Preparedness and Response Supplemental Appropriations Act, provided $8.3 billion in funding to fight the outbreak abroad, prepare state and federal agencies, and begin investments into private sector vaccines.

By March 12, Speaker of the House Nancy Pelosi and Treasury Secretary Steve Mnuchin had already started negotiations on what would become the Families First Coronavirus Response Act (FFCRA), which increased funding to the food stamps program, paid for free COVID-19 tests, and covered the cost of two weeks of paid leave for workers in affected industries. The bill became law on March 18.

In late January 2020, the Trump administration had already started a public health emergency for COVID-19. The emergency allowed the Department of Health and Human Services (HHS) tap extra sources of funding, but with the language of the FFCRA, Congress also passed a provision requiring state Medicaid programs to keep members enrolled until the end of the public health emergency in something called the Medicaid Maintenance of Eligibility (MOE) requirement.

Typically, Medicaid members must re-enroll each year, and this serves as an opportunity that states use to make sure it only covers those eligible for the program. Although Medicaid is intended to cover low-income Americans, each state has its own nuances to eligibility requirements that give them great control over how many Americans are on these programs.

Medicaid, although operated by the states, is funded jointly by the federal and state government. To offset the cost of keeping people continuously enrolled in Medicaid, even if they did not specifically re-enroll or if they became ineligible according to state law, the FFCRA requirement also increased the federal government’s sharing of Medicaid program expenses by 6% of a state’s total Medicaid program cost.

It has been noted that this increase in federal contribution to the cost of Medicaid programs by a share of 6.2% more than offset the cost of more enrollees.

The continuation of enrollment combined with other stimulus packages which offered extra support for states to expand their Medicaid programs led to a record low percentage of Americans without health insurance in 2022.

However, in 2022, a spending bill named the Consolidated Appropriations Act, 2023 modified the MOE by setting an end date for the requirement on March 31, 2023, instead of at the end of May when the public health emergency for COVID-19 is slated to end.

Dropping Members

Over the next 12-14 months, dozens of states will be conducting widespread checks on Medicaid members’ eligibility and require millions to re-enroll for Medicaid to keep it. This entails mailing out millions of informational documents which many may not be able to access if they moved to new addresses or lost their housing.

A lack of awareness of the unwinding of Medicaid is likely to spell trouble for millions on the program, and getting the word out on Medicaid unwinding is not so simple. Once again, if someone does not receive mail notifications at the correct address or if there’s an inability of someone to take the time to reach back out to the state to re-enroll or verify eligibility, that can be grounds for losing health coverage.

Low-income Americans struggling to make ends meet juggling work, family, and education are likely to slip through these large cracks. Those with limited fluency in English are also likely to miss out on catching critical information, and health centers and community organizations that work with low-income Americans across the country are perpetually under financial and manpower constraints that can limit the extent of their outreach to keep Americans from losing coverage.

It’s also likely that states with politicians bent on cutting the cost of Medicaid or those which have not expanded Medicaid to the standards of the Affordable Care Act (ACA) will not invest as much in administrative staff and state/local partnerships to conduct outreach. If there are no resources to verify eligibility, the blame for millions losing Medicaid suddenly becomes harder to tie directly to politicians responsible for underfunding crucial bodies.

The Secret Life of Administrators

The administrative nightmares of the Medicaid unwinding and its associated monstrous task of verifying eligibility for millions of Americans highlights a key challenge that anyone concerned with health equity and policy must deeply consider.

When someone moves or becomes homeless, reconciling a record of that information with Medicaid enrollment data would be quite useful, but the resources are simply not present to coordinate these local, state, and federal agencies to quickly exchange such data. Many government technology services are stuck in legacy software with insufficient funds available to upgrade these systems to enable such integrated communication between agencies.

The primary method of notifying Americans of the need to re-enroll for Medicaid is mail, and there is simply not enough manpower to call, email, or go in-person to each person who may need to be notified. Partnerships with local health centers and community-based organizations offer an opportunity to expand the scope of advertising, but there’s also the challenge of health literacy.

Healthcare coverage is notoriously complex, and when the average American is at a middle-school reading level, it’s no wonder that filling out paperwork to re-enroll is a challenge in and of itself. For many, this requires access to a social worker, and even then, there’s no guarantee that people can find time to make such appointments or even grasp the true financial weight of having no insurance. After all, health insurance premiums seem like an unnecessary expense that can make or break someone living paycheck-to-paycheck.

This year, the Biden administration and the Democrats have been haggling with Republicans in Congress to push along a measure to raise the debt ceiling once again. With control of the House, Republicans are in a unique position to stall a bill from passing both houses of Congress unless they get certain concessions.

One of the top demands of Republican lawmakers is to impose measures to curb the cost of Medicare, and it’s a policy platform that many other Republicans have pushed for. Such cuts to Medicare would likely reduce the quality of healthcare coverage for millions of Americans on Medicare and would likely also hit the incomes of healthcare professionals across the country. These lawmakers cite the looming insolvency of the Medicare program as the need for such measures.

So what exactly is the trust fund for Medicare that Republicans are so concerned about? What happens if it goes “insolvent”, and what are ways to address this crisis?

Medicare’s Trusts

Medicare, which covers most Americans over the age of 65, consists of four parts — A, B, C, and D. Part of Traditional Medicare, Part A and Part B cover inpatient and outpatient care, respectively. Part D is a supplemental health plan that covers prescription drugs. Part C is more commonly known as Medicare Advantage (MA), wherein the federal government pays private health insurers to give Medicare benefits. It can be thought of as privatized Medicare.

In Traditional Medicare, Part A is funded through the Hospital Insurance (HI) trust, which is funded by a 1.45% payroll tax imposed each on employees and employers. High-income Americans pay an extra Additional Medicare Tax. While most seniors on Traditional Medicare do not pay a premium for Part A, some who have not paid payroll taxes for at least 10 years before aging into the system must pay a small premium. These revenues also go into the HI trust.

For MA plans, the Centers for Medicare and Medicaid Services (CMS) pay private insurers a fixed amount per member on the MA plan. Some of that money comes from the HI trust fund, and the rest of MA plan financing comes from premiums the member pays directly to the MA plan.

The separate Supplementary Medical Insurance (SMI) trust funds Part B and Part D, funded mostly by premiums that members of these programs must pay.

Insolvency is not Bankruptcy

The SMI trust is largely self-sustaining with its premiums, but many have raised alarm about the HI trust’s solvency. One recent report projects that the trust fund will run out of cash in 2028. Some have been quick to use these projections to claim that Medicare is going “bankrupt”, but that’s not really the story.

Insolvency means that the HI trust will not be able to pay off the full cost of Part A medical expenses on its own. Bankruptcy is a legal process for organizations that cannot pay a mountain of debt, but the Medicare Part A program would simply need Congress to allocate spending to cover Part A alongside the HI trust, which would continue to cover most of the program for many years after insolvency.

Of course, just because Congress can offset the fiscal shortfall of a future insolvent HI trust doesn’t mean that the trust shouldn’t be stabilized. The rising cost of Medicare’s programs can be attributed to the large number of baby boomers aging into the system (growing older than 65). With more seniors and less working-age Americans to pay payroll taxes, it becomes clear why changes are necessary to keep the HI trust running with new sources of revenues or cost reductions.

Pulling Congressional spending to offset shortfalls of the HI trust also mean less to go around for other social and defense programs at the federal level.

Fixing the Root

Wide-ranging cuts to the program could be a quick fix, but it will certainly have wide-ranging negative effects on members of Medicare and healthcare professionals.

Increasing the age to get Medicare from 65 to a higher threshold like 67 could cut costs by excluding millions of Americans from the program. The clear drawback is that millions of Americans would be left to pay for more expensive private health plans or without any coverage to receive healthcare.

Even without raising the age for eligibility to get Medicare, should lawmakers impose heavy cost reduction requirements, that means seniors would face even higher denials of coverage for preventative and diagnostic services through the pre-authorization process, as that is one of the easiest ways for an insurer to cut costs.

Cutting the payment rates for healthcare organizations could mean lower overall revenues to pay professionals. Generally, private insurance pays more than Medicare for the same services. If Medicare payment rates are cut, that leaves healthcare organizations no choice but to raise prices on privately-insured patients to make up the lost revenue. In areas like rural America and poorer urban neighborhoods where privately-insured individuals are not as abundant, that can mean facility closures and a worsening healthcare professional shortage.

Then let’s not forget how health is a life-long good. An inability to access affordable care at younger ages means lost opportunities to identify and control chronic conditions which prove to cost Medicare significantly in the long-run, and interestingly, producing the opposite intended result of cost cutting.

There are a handful of alternative strategies to stabilize the HI trust.

One notable tax loophole lets high-income Americans skirt the Medicare payroll tax. Closing this has the potential to bring in an extra $200 billion in revenue over the course of 10 years.

Another concern is payments made from CMS to MA plans. These private plans have proven to be more expensive than Traditional Medicare while offerings similar levels of quality of care. Curbing these payments to MA plans or pursuing more aggressive audits of not just MA claims but also other contractors of the Medicare program offer opportunities for controlling ballooning costs.

The state of Maryland is trying to save the federal Medicare program $1 billion over 2019 through 2023 through its implementation of one proposal to curb costs. Today, we dive into the all-payer rates, global budgets, and Maryland’s Total Cost of Care Model.

What’s the All Payer Rate Model?

Most healthcare providers in the United States have to deal with a handful of health insurers, also known as payers. The biggest and most universally accepted of these payers is Medicare, which is administered by the federal government and designed to cover most Americans over the age of 65. Other government health programs like Medicaid (for low-income Americans) and CHIP (for children under certain income levels) are run by the state, and of course, there are the plethora of private health plans. Each of these payers typically pay different amounts for services to a healthcare provider.

Medicare uses the prospective payment system (PPS) which pays providers a fixed amount for specific services that are billed for by the provider. Most other plans and payers will pay an amount for services that is determined based on various negotiations. Typically, Medicaid pays less than Medicare, which usually pays less than private insurers. The higher payment rates of private insurance theoretically can offset any losses incurred by treating Medicaid and Medicare beneficiaries.

Managing these different payment rates is a challenge, and the difference between Medicaid and private insurance reimbursement can create adverse effects that incentivize care of higher-income individuals on private insurance over those with Medicaid.

During the 1960’s and 1970’s, almost 30 states had programs to review and regulate hospital pricing and budgets. Some of these states imposed price controls that dictated the rate which hospitals could charge for some services. A wave of deregulation and favoring of managed care organizations led to many of the states abandoning such programs under the promise that managed care (most private insurance today) could negotiate with hospitals and manage provider networks that reduce healthcare expenditures. Maryland was an exception.

Under the state all-payer model (APM), all payers had to pay the same amount for hospital services. Theoretically, this prevents hospitals from overcharging private insurance and gives providers equal financial reward for treating Medicaid, Medicare, and private plans’ patients.

In Maryland, APM started with just regulating prices for private insurers in 1974, but in 1977, the state got permission from the federal government to do the same for Medicare and Medicaid. These two programs, although they pay less than private in many cases, account for a large share of Americans.

It cannot be understated that policy effectiveness of rate setting depends on cooperation from the feds to let the state set prices paid by Medicare and Medicaid.

Global Budgets

The Affordable Care Act (ACA) became law in 2010, and many of its provisions took hold in 2014. At the time, Maryland’s APM was demonstrated to keep the cost per hospital visit low, but overall hospital care expenditures were still climbing due to readmissions and chronic illnesses.

In an agreement with the Centers for Medicare and Medicaid Services (CMS), Maryland modified its modeled by introducing global budgets for hospitals for an experimentation period of 5 years. With the global budget model, the state determines a budget and maximum revenue for each hospital based on prior budgets. The idea is to cap increases in hospital revenues (and thus Medicare’s spending on hospitals) to under 3.58%.

With a maximum revenue, the hospital’s profitability comes from its ability to drive down costs — ideally by reducing readmission and preventable hospital-acquired conditions.

Maryland, with this program, aimed to save Medicare at least $330 million from 2014-2018. By the end, the state claimed to save almost $1.2 billion, by comparing the state’s growth in Medicare spending versus the cost of Medicare across the rest of the US.

Now, Maryland is trying to save Medicare $2 billion for the 8-yearlong period from 2019 through 2026 through the Total Cost of Care Model (TCoCM). One milestone is at the end of 2023, by which the state needs to have saved Medicare $1 billion in expenditures.

The TCoCM consists of three large components, building upon the past APM experiment’s structure. First is the familiar hospital payment program which gives each hospital a payment to cover the cost of all healthcare services for a population of people. The idea is that with a flat payment in exchange for taking care of a population of people in the state, the hospital must ensure that people are not unnecessarily getting readmitted or contracting preventable illnesses that would increase cost and eat away profitability.

Another aspect is the care redesign program (CRP). If a hospital is able to save on its global budget allotment under the hospital payment program, the hospital can give incentive payments to other healthcare providers it collaborates with to improve coordination of a patient’s medical care. The idea here is to allow hospitals to partner with other providers and give other providers an incentive to figure out ways to catch expensive conditions early and treat them.

The Maryland Primary Care Program (MDPCP) is the third aspect, which gives primary care providers incentive payments for high measures of clinical quality and effective care management as a way to make primary care a key component of preventing hospitalizations

Conflicts of Interest

APM and the global budget model has been part of other proposals for healthcare reform across the country. APM, notably, has been used in health systems abroad like in Germany and Japan to counter rising costs for healthcare providers’ medical services. As opposed to PPS cuts proposed by some trying to curb the cost of Medicare, an all-payer rate setting model offers providers another way to keep revenues healthy without prices exploding for payers and patients.

Some proposals for a single-payer system in the US, notably Medicare 4 All, cite the use of global budgets to control costs.

There are notable drawbacks, however. Health insurers already block members from certain treatments and services in the prior-authorization process and utilize deductibles and co-pays to limit use of medical services to keep spending low relative to premium revenue. It’s not hard to believe providers engaging in similar under-provision of care to keep profit margins higher under the context of an all-payer rate with global budgets.

In a world without a global budget, providers could simply lobby the government to allow higher yearly increases in revenues, which would not offer the extent of the healthcare cost controls that this was all intended to create. Regulatory capture by providers will surely drain the taxpayer and lead to higher premiums for insurers to offset higher healthcare service prices.

The work done in Maryland will be crucial to seeing not only how much the taxpayer can save, but also how regulatory authorities could fend off lobbying and align stakeholders to improve access and affordability of care.

This direct and confusing financial pressure likely explains political pressure to parties throughout state and federal constituencies. However, the phenomenon of surprise billing is indicative of deeper misalignment in the incentives between health insurers and doctors, which ends up affecting patients in the crossfire.

Billing and Networks

Healthcare providers tend to get reimbursed by health insurers, hence insurers are often called payers in policy contexts. After treating a patient, the provider usually bills the insurer with the services provided, and the insurer pays back the provider accordingly. The price of these services are set by negotiations between the payer and the healthcare provider.

Typically, an insurer will target their negotiations to cover a variety of specialties across a geographic region. For services that many patients will be using, the payer can negotiate lower charges from providers, but for low-volume services, providers tend to have the upper hand.

The providers with which the insurer has negotiated prices with make up the provider network that a health plan member can receive healthcare in. To encourage patients to take advantage of the lower cost of medical services within the network, insurers have lower deductibles, co-pays, and co-insurance for medical services from providers in network. Some plans may help cover some out-of-network costs, but the member is usually left with a higher out-of-pocket balance.

Market Failures

Surprise billing is often discussed in the context of a market failure caused by local monopolies of providers. It’s very unlikely that in the event of an emergency, a patient can take the time to choose a provider who is in-network. Once admitted to a hospital, there may be several out-of-network doctors providing care for a patient such as anesthesiologists and radiologists.

The market failure comes from the inability of a patient to choose whether to get care from these out-of-network providers. Even if the patient knows that these doctors are out-of-network, the potential loss of physical well-being can be too steep to say no.

This lack of an ability to control whether a patient sees an out-of-network provider makes emergency care particularly expensive for health insurers. That’s why a key metric for many health plans is how much a member gets hospitalized unnecessarily — the small cost of diagnostic and preventative services saves a great deal of pain down the road.

Many healthcare organizations are also aware of this lack of options and may jack up the amount billed to the insurer. The insurer, already trying to reduce medical costs on out-of-network providers, often does not cover as much of the bill which is passed onto the patient in a surprise bill.

The NSA (not the national security one)

The No Surprises Act (NSA) passed Congress as part of a spending bill in 2021. A similar bill nearly passed in 2019, but opposition from providers and private equity firms owning them killed the effort.

There are two primary means that state governments have previously sought to control surprise billing. At the core of surprise billing reform is a need to pay for out-of-network providers who have been known to overcharge insurers who themselves are offloading a larger share of that cost to the health plan member. As it turns out, capping the amount a patient may have to pay or outright banning any extra balance to the patient is the easy part.

Almost half of all states already had their own laws attempting to resolve these disputes which end up causing surprise billing, following two main strategies.

The first approach sets the prices that out-of-network prices such as by tying them to what Medicare would pay. This prevents overcharging by the provider and makes the bill more manageable for the patient. However, price-setting is a politically risky policy to take and for many could face intense lobbyist pressure.

The alternative which many states adopted was defining a process for insurers and providers to work out the payment disputes with the intent of resolving the difference and avoiding the need of the patient to pay what the insurer refuses to.

There were multiple limitations of these laws at the state level. In some states, only a portion of emergency medical services’ bills fell under these restrictions. A federal law ERISA, which has defined the nature of health plans for employer self-funded health plans, also made many employer-sponsored plans exempt from these state-level rules on resolving disputes with providers.

The NSA takes a slightly more aggressive approach than many states and fills many of the gaps in which providers and plans are required to comply.

Instead of directly billing the patient for applicable surprise medical services, providers must identify the patient’s insurer and send a the bill to the insurer. The insurer must then let the provider know of the amount a patient would normally pay if they were in-network. After being paid by the insurer, the provider cannot charge the patient directly more than what they otherwise would pay if the emergency care was received in-network.

Not Quite There

This is still more complicated than is ideal. At the end of the day, the NSA is a law arguably more complex than the original cause of surprise bills. It relies heavily on a coordination of state and federal-level enforcement, and the procedure laid out for providers and insurers to handle their dispute requires back-and-forth communication. In healthcare, that means days or weeks before a patient even hears about an incoming bill.

Most people already struggle to understand their health plan, so even the insurer’s explanation of benefits is likely to still cause confusion. To put a cherry on top of that, enforcement depends on patient complaints, which requires the patient to know the law and what bills are unallowed.

It’s clear that the work is not yet finished. Regulators have a daunting challenge of crafting a long-term solution to ensuring that people can get emergency care anywhere in the country. Providers, in the face of threats to cutting Medicare’s reimbursements for medical services, are eager to fight tooth and nail against measures to set maximum prices for patients getting care out-of-network. On the other hand, payers are going to keep fighting for ways to curb medical costs by limiting patient usage of medical services.

Yet, when assessing the geographies that were most affected by the opioid crisis, it becomes clear that some states were hit harder than others, and that’s by no mistake. Through prescription drug monitoring programs, a handful of states managed to avoid facing the worst of the national crisis, and it’s a valuable story to review when thinking about the implications of variation in state-level health policy and how businesses may take advantage of them.

A Quick Intro to Opioids

Opioids are a class of drug that are known for their ability to reduce sensations of pain. These drugs share chemical properties to the naturally-occurring drug opium and includes naturally occurring products like morphine and codeine, with more artificial forms like methadone and fentanyl.

These drugs bind to receptors that are largely located in the nervous system (brain and spinal cord) and digestive system (including stomach and intestines). When bound to receptors in the spinal cord, the opioid can block the transmission of sensations of pain from nerves through the body to the brain. Receptors in the digestive system can explain why many may experience indigestion when on opioids, and in the event of an overdose, opioids bind to receptors in certain parts of the brain in a way that can trigger seizures, spasms, and even stop breathing.

Some individuals may also experience euphoria when on opioids, because it can trigger neurons which produce the “feel-good” chemical dopamine. Through prolonged use, opioids can build a physical dependence with the user, which is typically how individuals experience substance abuse.

OxyContin and Purdue

Following the ban of heroin in the 1920’s and through the 1980’s, there was a hesitance from physicians to prescribe opioids due to concerns of addiction, despite the entry of drugs like Vicodin and Percocet had entered the market during the 70’s.

Attitudes began to shift, fueled by a notable letter to the New England Journal of Medicine which stated that opioids administered to hospitalized patients were not associated with high rates of addiction and a large push in the early 1990’s to make pain management a priority of physicians.

In 1996, the infamous Purdue Pharma entered the market with OxyContin, a variant of the compound oxycodone with an extended period of time for it’s release into the body. The company’s sales strategy was aggressive, conducting 40 pain management training conferences for physicians across the American southeast and southwest between 1996-2001. Salespeople, who were compensated handsomely, told physicians that OxyContin was unlikely to cause addiction — a message conveyed across videotapes, brochures, and the Partners Against Pain campaign it ran.

“…by 2001 it had become the most frequently prescribed brand-name opioid in the United States for treating moderate to severe pain”

”The Promotion and Marketing of OxyContin: Commercial Triumph, Public Health Tragedy”

Over-prescription of the drug, and as a result similar opioids, spiraled into the wider opioid crisis over the next ten years. It wasn’t long until the company started facing lawsuits over aggressive marketing for a product which was causing an uncontrollable number of overdoses. The story of the next stages are extensive — from the first lawsuits from West Virginia and Kentucky, to the 2007 indictment of several executives, and the eventual filing for bankruptcy.

Purdue, was of course, not the only company selling opioids, and it couldn’t have been done without the help of distributors — once again, there are countless stories of lobbying, marketing, and lawsuits.

Triplicate Drug Programs

A working paper from the National Bureau of Economic Research (NBER) highlights one particular piece of public policy which stemmed the effects of the crisis in its early days.

The NBER paper highlights the so-called triplicate prescription program, an early type of prescription drug monitoring program (PDMP). Under this program, which largely happened before the advent of electronic monitoring systems, physicians had to write three copies of each prescription of a Schedule II drug.

One copy would be kept by the physician, one kept by the pharmacy dispensing the drug, and the third copy going to the state monitoring agency. The first of these programs came about in California during 1939. The state would shutter the program in 2004 following a transition to electronic recordkeeping.

From 1961-1988, Idaho, Illinois, Indiana, Michigan, New York, and Texas followed suit in setting up similar programs. Of them, Indiana and Michigan ended their programs before OxyContin’s launch.

Interestingly, internal Purdue Pharma documents repeated that physicians in “triplicate states” were less likely to be willing to prescribe OxyContin, because it was a Schedule II drug that would require triplicate prescriptions. The combination of scrutiny from the government and a higher administrative burden was simply not worth it for many of these physicians.

The company deemed these regulations a barrier to market entry and focused efforts on “non-triplicate” states with such programs. The results are staggering.

It serves as a clear reminder that state-level policy has very real impacts on the business strategy of various companies. For healthcare companies harvesting user data, it becomes clear why they may stray away from states like California which has the California Consumer Privacy Act (CCPA). On the other hand, companies focused on increasing access to rural healthcare face higher barriers to entry in states which haven’t expanded Medicaid in accordance with the Affordable Care Act (ACA), which by proxy gives many rural hospitals a life-saving boost in revenues to keep their doors open.

These policy positions have the potential to shape the future of the healthcare industry, because it includes policy on areas from telehealth and pre-authorization to Medicare. Let’s dive into what exactly the AMA is and what is so special about its recovery plan.

Some Background

The AMA came about in the mid 19th-century amid pushes to standardize education for medical professionals and efforts to address ethical concerns. Through the rest of the century, the organization expanded its programs to advance scientific discovery and application of medicine, improve safety for patients, and overall improve public health. The organization created the notable peer-reviewed Journal of the American Medical Association (JAMA) which publishes research on specialty medicine.

In the early 1900s, the AMA helped facilitate the creation of standards for educating medical professionals. It supported the landmark Flexner Report. In surveying the state of medical education across the country, the report called for a significant reduction in the number of medical schools, restriction of state medical licenses, and higher prerequisites to start medical training. These recommendations drove up the cost of healthcare services due to more stringent education, but quality of care arguably improved as well.

However, the report has notably been criticized for racism because it focused on the treatment of black Americans to protect the health of white Americans they were in contact with, not for the sake of black Americans’ own health. The report also recommended the closure of most black medical schools and in the long-run reinforced segregation.

The AMA ramped up its position as a powerful lobbying force within the US government. In the 1890’s, the AMA promoted passage of laws to make smallpox vaccinations mandatory, and in the 1920’s, the AMA proved instrumental in the passage of the Caustic Poison Act which required product label warnings if an item contained certain caustic chemicals.

The organization in the 70’s was similarly activist — launching a “war on smoking”, making public calls for handicap access to buildings, urged a focus on treating hypertension, and speaking out against gender and sexual orientation discrimination.

Fights Over Health Coverage Laws

In the early 20th century, the AMA also held a strong position against compulsory health insurance at state and federal levels. These compulsory health insurance programs would likely reduce the cost of health coverage for patients, but it took away from the physician’s power to set their own prices.

President Truman, in 1945, laid out a strategy to support the development of the American healthcare system. It aimed to invest in public health services, research, and training for medical professionals. Most notably, this was also the first proposal for a national health insurance plan that Americans would pay for through payroll taxes. He stressed that patients and physicians would retain freedom to choose health services and that the intent was to ensure any patient can receive care.

The AMA railed against the plan — capitalizing on paranoia about the USSR by decrying the plan as “socialist”. In a change of policy stance preferring that there be no third-party in the patient-provider relationship, the AMA proposed increasing the usage of private health insurance plans. Truman was quite upset at this:

Socialism is a scare word they have hurled at every advance the people have made in the last 20 years. Socialism is what they called public power. Socialism is what they called social security. Socialism is what they called farm price supports. Socialism is what they called bank deposit insurance. Socialism is what they called the growth of free and independent labor organizations. Socialism is their name for almost anything that helps all the people.

President Harry S. Truman

By the time Truman and his party lost control of Congress, the bill died, and it was what he considered one of his most troublesome moments as president.

When the Medicare bill was making its way through Congress in the mid-1960’s, the AMA pursued Operation Coffee Cup to get physicians and their spouses to rally support against Medicare (one notable supporter of their case was a younger Ronald Reagan). It must be noted that since the passage of Medicare, the AMA has opposed cuts to the program.

Since then, the AMA has made efforts to curb the cost of liability insurance for physicians and at the end of the 2000’s called for expanding access to healthcare coverage. During the passage of the Affordable Care Act (ACA), the AMA provided its “qualified support” to the Obama administration in passing it.

What’s interesting to note is that the AMA does not represent all physicians. It stands at over 250,000 members — almost a quarter of American physicians — and it has a House of Delegates which votes in a way similar to the House of Representatives in Congress. This also means that not all physicians in the AMA are on the same page, as exemplified by internal debates over support for the ACA.

The Recovery Plan

For the first time in almost 3 years since the start of the COVID-19 pandemic, the AMA recently started an organized lobbying effort on Capitol Hill. Although the AMA keeps a team of lobbyists in DC, this recent push covered by NPR features doctors speaking with Congressional aides and representations themselves. A new set of Republicans bent on cutting Medicare are likely the target of this push — physicians are concerned that cutting Medicare will mean less reimbursement for medical services given to seniors under the Medicare program.

To encourage quality of care, Medicare operates the Quality Payment Program (QPP), which provides physicians with incentives and higher reimbursement for favorable measures of clinical quality. The AMA was successful in pushing for flexibilities to this program during the COVID-19 emergency, which allowed physicians to get these rewards easier.

Late last year, the AMA and a coalition of other healthcare organizations managed to reduce a proposed 8.5% cut to Medicare payments. The AMA holds that over 2001-2021, the cost of running a medical practice rose 39% while Medicare payments to physicians fell over 20%. The argument to lawmakers? Cut Medicare and doctor’s can’t afford to keep their doors open to take care of patients.

At the moment, the long goal for the AMA is some way to tie adjustments in Medicare payments to doctors against inflation and to make changes in payment amounts less extreme.

Another area of concern for the AMA is prior authorization reform. To control the cost of medical services for a population, insurers use the prior authorization process to check whether medical services are deemed necessary. For this, physicians must submit a request to the insurer, and it is not uncommon for these requests to be denied. If denied, the physician must try file a new request or the patient is on the hook for paying entirely out-of-pocket.

The AMA is pushing for rules that would increase transparency and standardization of these prior authorization processes to reduce the complexity and administrative cost of this process.

Among other issues, the AMA is also pushing to ensure that Medicare reimburses equal amounts for telehealth services and working to hammer out policy to prevent stigmatization of physicians pursuing mental health treatment for burnout. Another notable push, which was discussed on last week’s issue of this newsletter, is the AMA’s work to prevent nurses and physician assistants from having increased authority to practice medicine.

The full “progress report” on the AMA’s plan is available here.

The Nationwide Shortage of Doctors

Even before the COVID-19 pandemic, there were widespread concerns about the availability of enough healthcare professionals in the labor market. The pandemic accelerated already concerning trends of physician burnout, and it led to a mass exodus of healthcare workers from the industry.

Consider the following quote from an advisory published by the Office of the Surgeon General

The Association of American Medical Colleges (AAMC) projected in 2020 that physician demand will continue to grow faster than supply, leading to a shortage of between 54,100 and 139,000 physicians by 2033, with the most alarming gaps in primary care and rural communities.

What’s even more concerning is how fast-approaching shortages in healthcare will disproportionately affect communities that already have difficult access to healthcare. Shortages are likely to be more extreme in low-income and rural regions where organizations have less resources to recruit and retain care providers.

Financial pressures in rural communities have been especially apparent. The same Surgeon General advisory highlighted a declining ability of rural hospitals to serve more patients:

Between January 1, 2010, and March 31, 2022, 138 rural hospitals across the nation closed completely or converted to provide services other than inpatient care. In March 2020, rural areas had between 37 and 42 percent fewer ICU beds per persons who were at risk of developing severe COVID-19 based on age and comorbidities than persons in urban areas.

Even with temporary staffing solutions, these professionals tend to cost the healthcare provider higher rates than more permanent employees. One Wyoming hospital had to stop offering labor and delivery services after a nursing shortage and the cost of temporary staffing became financially unsustainable.

One report found that hospital labor costs rose 37% from 2019 to 2022. The same report highlighted exploding use of contract labor.

Leaving millions of Americans out of access to care threatens entrenching poorer health outcomes. Limited access to diagnostic and preventative services will likely lead to worse long-term health and lead to higher healthcare spending per patient in disadvantaged communities.

Populations with worsening health outcomes tend to be associated with higher healthcare costs. It becomes more expensive for healthcare providers to treat worsening, preventable conditions while health plans must raise premiums and deductibles to offset higher costs. It creates a vicious cycle that makes future investments in healthcare delivery less effective over time, sometimes to the extent that it deters such initiatives in the first place.

Then, of course, there is the simple market phenomenon that less healthcare professionals will drive up the price of the medical services which they provide.

What is Full Practice Authority

One proposed, but controversial, solution is to allow physician assistants (PA’s) and nurse practitioners (NP’s) to perform diagnosis, treatment, and prescriptions without the supervision of a licensed physician or agreement with the state’s Board of Medical Examiners.

Such proposals for full practice authority (FPA) would allow NPs to “evaluate patients, diagnose, order and interpret diagnostic tests and initiate and manage treatments — including prescribing medications” if the NP has a license from the state’s Board of Nursing.

In states with FPA, NPs can conduct these elements of practice. Other states have reduced practice, which allows nurses to perform at least one of these activities.

Proponents of FPA highlight reduced costs associated with NP practices and an improvement of health outcomes for areas with historically poor access to health. Through an analysis of counties along the Maryland-Pennsylvania border, implementation of FPA in Maryland greatly increased the density of NPs in Maryland counties. The same report estimated that FPA in Pennsylvania could eliminate half of the designated health professional shortage areas (HPSAs) in the state.

Another study suggested that through FPA, higher use of routine healthcare services reduced emergency room admissions from preventable concerns while reducing administrative and duplicative costs associated with physician supervision. The implication is savings for government programs like Medicare and Medicaid and even private health plans.

As indicated in the chart above, states like Montana, Wyoming, and North Dakota have already implemented FPA for nurses, and multiple bills seek to extend similar independence for PA. It is no surprise that these measures are being spearheaded by low-density states with large swaths of rural area.

Balancing Quality and Access

These measures have brought up opposition from patient safety advocates and physicians. The argument is that NPs and PAs do not receive as much training and could endanger the lives of patients.

One working paper on the National Bureau of Economic Research analyzed the relationship between NP care in the emergency department (ED) and patient outcomes. The paper found that patients getting care from NPs had stays longer in the ED by 11% and increased the cost of care by 7%. This body of research came from an analysis of 1.1 million visits to EDs from the Veterans Health Administration (VHA).

One significant argument is that allowing NPs and PAs this independence “could lead to siloed care and that team-based care is the better alternative.” Retaining the role of the physician prevents overlooking certain conditions and diagnoses whilst also having a highly trained professional ready for more complex cases.

These ongoing debates are crucial to watch, especially for those involved in consumer health and virtual care. Even if physicians against such PA and NP independence may be looking out for their own jobs, there are valid questions to ask about how consumer health tools powered by questionnaires and AI or clinicians who cannot interact with the patient’s person physically will ensure the same level of care quality.

Addressing some Republicans who have threatened to repeal the Inflation Reduction Act, Biden proclaimed:

We can go on about Medicare negotiating drug prices and prescription drug price ceilings, but the court system just dealt a blow to a less talked-about federal program to expand access to drugs.

This program — the 340B Drug Pricing Program — is at the core of a huge fight between the federal government and care providers on one side, and pharmaceutical companies on the other.

Supporting Care for Low-Income Patients

Medicaid, the federal and state health program to cover low-income Americans, imposes certain requirements on pharmaceutical companies in order to have drugs covered by Medicaid plans. Because the Medicaid program covers millions of Americans (76 million in summer 2021), these drug manufacturers have a large incentive to comply with federal and state requirements to have access to this large market of patients.

In an effort to control spending on drugs, Congress created the 340B Drug Pricing Program in 1992, named after Section 340 of the Public Health Service Act. Under 340B, pharmaceuticals have to offer discounts on the order of 25-50% for outpatient drugs sold to covered entities like certain hospitals and clinics.

In general, eligible covered entities are non-profit or government healthcare providers whose patient populations consist of a large number of low-income and disadvantaged patient groups. With these savings, safety net healthcare providers can save financial resources to treat more underserved patients.

When considering the care of low-income Americans, many of whom are uninsured, the 340B Program also assists hospitals in dealing with the cost of uncompensated care. The Emergency Medical Treatment & Labor Act (EMTALA) requires hospitals to examine, treat, or transfer all patients coming for emergency examination and treatment regardless of the patient’s ability to pay. When an uninsured patient comes into the ER, there is a chance that they will not be able to pay, and the care provided by the hospital goes uncompensated.

The American Hospital Association (AHA), a trade group of hospitals, notes that the national cost of uncompensated care was over $40 billion in each of 2018, 2019, and 2020. Savings from programs like 340B provide significant support to hospitals treating large low-income populations that correlate with higher rates of uncompensated care.

Drama and Attempts at Oversight

Of course, with any policy, there are winners and losers. In this case, pharmaceutical companies must lose out on profits. The Affordable Care Act (ACA) of 2010 expanded the definition of which organizations count as covered entities, and the usage of the 340B program exploded. Further, the ACA allowed providers to contract with any number of third-party pharmacies to dispense these drugs purchased at a discount.

Adoption of the program has exploded. In 2000, 8,100 sites were participating in the discount program, and by 2020, that number ballooned to 50,000 sites. The value of discounted purchases surpasses $40 billion annually.

Drug manufacturers argue that many of the program’s operations are not transparent and lack oversight. They claim that discounts are being duplicated, especially with contract pharmacies — demanding covered entities to submit drug claims data and not applying discounts in some cases.

The Trump and Biden administrations have been fairly consistent in asserting that covered entities are largely compliant, and that in fact, drug manufacturers are not delivering enough discounts to hospitals and providers. A December 2022 audit document found that three of five audited drugmakers did not follow price ceilings and had to repay providers. Another firm was placed on a corrective action plan to submit proper pricing data.

Another consideration to make is that in 2020, 340B-priced drugs made up only 7% of the American drug market.

Legal Battles and the Near Future

Members of Congress have not been afraid to call on the Department of Health and Human Services (HHS) to go after manufacturers more aggressively for overcharging covered entities. This includes members of both parties like Representative Abigail Spanberger (D-VA) and Senator Chuck Grassley (R-IA) who sent letters to the Biden administration to call for updates on investigations into enforcement action against pharmaceutical companies violating 340B provisions.

A number of cases are circulating in the federal court system. Remember the unlimited contract pharmacies that 340B-participating providers can work with? In summer of 2020, six pharmaceutical companies imposed restrictions on discounted drug sales to contract pharmacies. In 2021, the Health Resources and Services Administration (HRSA), which administers 340B under HHS, issued a warning on these companies — Eli Lilly, Sanofi, United Therapeutics, Novartis, AstraZeneca and Novo Nordisk — to lift restrictions or face $5,000 penalties for each violation of the 340B program.

These companies launched a flurry of lawsuits against HHS claiming that they are allowed to restrict discounts to contract pharmacies to prevent giving duplicated discounts to contract pharmacies and covered entities of the 340B program.

A few big cases have made their way to appeals courts across the federal judiciary:

• DC: Novartis Pharmaceuticals v. Carole Johnson, et. al.; United Therapeutics v. Carole Johnson, et. al.

• 3rd: Sanofi v. HHS; Novo Nordisk v. HHS; Astra Zeneca v. Secretary United States Department of Health and Human Services

• 7th: Eli Lilly and Company v. Xavier Becerra

In lower courts, the messages were somewhat mixed on whether the federal government sides with pharmaceuticals or HHS’ interpretation of the 340B law. One of the first appeals cases has already been decided in the 3rd district, wherein judges sided with Sanofi, Novo Nordisk, and Astra Zeneca.

The judge ruled in late January 2023:

Congress never said that drug makers must deliver discounted Section 340B drugs to an unlimited number of contract pharmacies. So by trying to enforce that supposed requirement, the government overstepped the statute’s bounds

Drugmakers celebrate this ruling, and providers are railing against the decision. Other case decisions in the 7th and DC courts may contradict this, and these cases may work up to the Supreme Court.

In the balance are billions worth of drugs and potentially the financial survival of several care providers across the country.

Insulin is a necessary drug that millions of Americans rely upon for their health, not a luxury good. With today's lawsuit, we're fighting back against drug companies and PBMs that unacceptably and artificially inflate the cost of life-saving medication at the expense of vulnerable patients

California Attorney General Rob Bonta

California is just one of numerous states suing big players in the insulin industry. This brings up crucial questions like what exactly are these PBM’s, and what legal power do involved state and federal bodies have to rein in the ballooning cost of insulin?

(Legal) Drug Cartels and their Middlemen

It likely comes as no surprise that the market for producing insulin, a life-saving treatment for millions with diabetes, is highly concentrated, which many cite as the reason for its exorbitant price in the United States.

Insulin’s first inventors sold its patent in 1922 to the University of Toronto for $1 to give affordable access to patients with diabetes. One RAND review noted that in 2018, the average cost of a vial of insulin was almost $100 while consumers in other highly industrialized countries like Japan, Australia, and the UK had average prices under $15.

A 2019 suit by the state of Kentucky against the pharmaceutical companies Novo Nordisk, Sanofi, and Eli Lilly mention that they control 96% of global insulin volume.

The insulin manufacturing supply has accurately been labeled an oligopoly, an industry in which a few actors control most of the market share. Firms in an oligopolistic industry tend to operate like a cartel in which leading players retain control through measures like restricting supply and price fixing.

Another area of the industry is the pharmacy benefit manager’s (PBM’s) role. Drug manufacturers understand that many patients cannot afford to pay for list prices that must account for past investments in R&D. Getting covered by an insurer means that patients can (ideally) pay lower out of pocket costs while the insurer pays the rest to the manufacturer.

Health plans detail the drugs that they cover on formularies which are tiered lists that determine which drugs the insurer will cover. Those higher on the list will have lower out of pocket costs for the health plan member, because the insurer agrees to pay a larger share of the drug. These drugs higher on the formulary tend to also get purchased more, because patients have a lower out-of-pocket cost.

To structure these lists, insurers employ the help of PBM’s, often described as the middlemen that negotiate with drug manufacturers on what the insurer will pay if the drug gets on the formulary. In order to rank higher on the formulary (or get on it in the first place), manufacturers can pay the PBM a rebate.

When talking about higher insulin (and other drug) costs, many drugmakers blame these rebates for the reason that they must raise prices.

Another concern is that the PBM industry is not transparent. Prices and the structure of formularies are considered trade secrets, and the one-on-one negotiations mean that drugmakers are unable to make data-informed judgements about when rebates are too high.

Combined with the fact that CVS Health, Express Scripts, and OptumRx collectively control 80% of PBM work with insulin, it’s clear this second market is in need of scrutiny. Another fun fact — Express Scripts is owned by the insurer Cigna, and OptumRx is owned by the insurer UnitedHealth Group

Feds Taking A Look

In 2019, pharma and PBM executives went before Congress for hearings on the rising cost of prescription drugs like insulin. In fact, Congress heard directly from executives at the aforementioned firms — Novo Nordisk, Sanofi, Eli Lilly, CVS Health, Express Scripts, and OptumRx. In these hearings, the drugmakers’ executives endorsed a Trump administration proposal to outlaw rebates unless they were passed on directly to consumers of drugs.

This, of course, still does not address the drugmakers’ ability to strangle insulin market supply. Senator Whitehouse of Rhode Island noted that manufacturers shifting the blame to PBM’s was “political jujitsu.”

In early 2022, the House voted on and passed a bill to cap the out of pocket cost of insulin to $35. The Inflation Reduction Act, which passed both houses of Congress and was signed into law that summer, included the price cap for individuals on Medicare. An amendment to expand that price cap to all individuals on health insurance failed to get the necessary 60 votes in the Senate to be included in the final law.

That same summer, the Federal Trade Commission (FTC) announced an inquiry into the PBM industry by requiring the six largest firms to disclose information about business practices to the FTC. The goal is to gather information that could allow the FTC to enforce laws on antitrust and cracking down on other anticompetitive practices conducted by the PBM’s.

States Banding Together

More interestingly, individual states are suing the top insulin manufacturers and PBM’s.

California’s lawsuit against the top three insulin manufacturers and top three PBM’s seek to demonstrate that the companies are unlawfully, unfairly, and deceptively raising insulin prices. The goal is to force these companies to adjust business practices to introduce price competition and induce lower prices. Other states like Kentucky and Mississippi have pursued similar suits.

In Minnesota, the Alex Smith Insulin Affordability Act, named in honor of a man who died at the age of 26 while rationing insulin, requires insulin manufacturers to provide free insulin to those who can’t afford it and allows diabetics to make urgent requests to pharmacies for the drug. The trade group PhRMA challenged the law in court, but a federal US District Court judge dismissed the case.

What makes these state-led initiatives interesting is the past success of states leading efforts to bring change to the national level.

To settle dozens of lawsuits filed against 45 tobacco companies, in 1998, 52 states and territories signed the Tobacco Master Settlement Agreement. As part of this, the tobacco industry was forced to pay out fines to state governments and face heavy restrictions on advertising.

More recently, in 2021, a bipartisan group of state attorney generals announced a $26 billion opioid lawsuit settlement with Johnson and Johnson and three pharmaceutical distributors.

By threatening the pain of costly lawsuits, it could be a fruitful path forward to controlling firms unfairly jacking the cost of insulin.

Medicare’s Drug Program

As the largest public health program in the country, Medicare covers most Americans over the age of 65 (as well as others with specific medical conditions). Membership in late 2021 was almost 64 million people, quite a significant portion of all 330 million Americans.

To organize the types of benefits given by the program, there are different “parts” to it. In Traditional Medicare, members get their coverage directly through the federal government. Part A covers inpatient care (mostly hospitalizations) while Part B covers outpatient services like doctor’s visits and specialty services. Almost half of members on Medicare are on an alternative Part C, more commonly known as Medicare Advantage (MA). These plans are administered through private insurers that sell plans offering Part A and B services in addition to other benefits (like dental and vision).

During the 90’s and early 2000’s, the rising cost of prescription drugs became a key concern of Medicare members. In response, lawmakers under the Bush administration passed the Medicare Modernization Act of 2003 (MMA). It added Medicare Part D, and optional supplemental health plan that Medicare members may pay monthly premiums for in exchange for better access to lower cost drugs.

Public reception ranged from muted to bad. One poll found 47% of seniors opposed the changes while only 28% approved.

A number of restrictions on the new Part D plans reflected the loads of lobbying that shaped the bill and its poor popular support. These plans were only to be purchased through insurance companies, and the federal government was entirely banned from negotiating the prices of drugs on any Part D plans. Insurers, on the other hand, had the ability to bargain.

As a side note, Representative Billy Tauzin, a chief architect of the MMA, left Congress shortly after the bill was signed into law and took on a role as the chief lobbyist of Pharmaceutical Research and Manufacturers of America (PhRMA), the primary pharma lobbying group in Washington. His salary was rumored to be $2M annually.

Bargaining Power and Pricing

With larger market power, a firm typically gains an upper hand negotiating lower prices. They can offer volumes that may offset smaller margins for the counterparty, and this phenomenon has been demonstrated in practice. In areas where a single insurer has more market power, they can negotiate lower prices with hospitals for certain medical services in their territory.

In fact, the same Commonwealth Fund study found that the power of an insurer can even bring down the price of healthcare providers with regional monopolies.

From the drug pricing perspective, insurers negotiate with drug manufacturers, usually through middlemen called pharmacy benefit managers (PBMs). In this process, the insurer devises a formulary, which sets the list of drugs that an insurer will cover, how much it will pay the manufacturer, and how much the member must pay out of pocket.

Architects of the MMA claimed that they wanted to prevent federal involvement in negotiation because private insurers already had experience setting formularies. This of course, ignores the fact that Medicare had been negotiating prices for hospitals and doctors for decades before 2003.

Given significant pharma lobbying during the passage of the MMA, it seems that the industry pushed for the ban on the federal government negotiating to enable setting higher prices on the comparatively smaller players of private insurance.

Repealing the ban became a focus of President Biden’s healthcare agenda, and the Inflation Reduction Act amended the MMA’s “non-interference” clause. It gave the Secretary of the Department of Health and Human Services to negotiate with a handful of expensive brand-name drugs.

Down the Road

A small number of drugs account for large swaths of spending on drugs in the Part B and Part D programs, so even though the government is only negotiating for a few drugs, it can bring down total spending by billions annually.

From 2026, Part D will set a maximum negotiated price for 10 drugs in 2026, 15 more in 2027, and it will keep adding drugs in following years. From 2028, these negotiated maximum prices will also be in effect for Part B members, meaning some may not need to subscribe to the extra Part D plan.

Negotiations will start this year, and the penalties for pharma companies refusing to engage in negotiations are tough. Remember, Medicare has significantly more bargaining power than any single private insurer, which will likely lead to lower negotiated rates. To manufacturers tempted to refuse negotiation, they can face either aggressive tax penalties (65-95% of US product sales) or removal from coverage by all Medicare plans, which means significantly lower revenue.

These measures will not allow the federal government to negotiate for all drugs, at least by the current wording of the law. It’s important to see what these negotiated maximum prices will be set to, and there will likely be a close eye on how private insurance for younger people will change prices paid to pharma companies. There’s also always the risk that this power of Medicare will be challenged and struck down in the federal court system, like many measures of the Affordable Care Act.

Public Health Emergencies

The US federal government has a partnership between the Departments of Health and Human Services (HHS), Veterans Affairs (VA), and Defense (DoD) called the National Disaster Medical System (NDMS).

This partnership can provide medical and healthcare support services in response to public health emergencies (PHE’s), offering support to state, local, tribal, and territorial teams on the ground. For military health emergencies, NDMS also has the authority to assist the military and VA in treating combat casualties.

When the Secretary of HHS or President declares a PHE, the NDMS activates and unleashes vast resources which have historically been used for crises including but not limited to:

• hurricanes

• tornado outbreaks

• wildflowers

• opioid crisis

Most notably for today’s discussion, PHE’s have also been declared for disease outbreaks like H1N1, Zika, and COVID-19. By default, these PHE’s last up to 90 days but can be extended by the Secretary.

The Secretary of HHS gains new powers under Section 319 of the Public Health Service Act (PHS). They can, among other actions:

• create grants and initiate contracts for conducting and supporting investigations

• access parts of the Public Health Emergency Fund

• allow the Centers for Disease Control and Prevention (CDC) director to access Infectious Diseases Rapid Response Reserve Fund

• grant extensions and flexibilities on data that must be reported

• allow the DoD to deploy military trauma care providers

Basically, HHS can tap into rainy day funds immediately without having to wait for Congress to get more cash while bypassing traditional operating procedures.

Note that HHS also runs large programs like Social Security, Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP). In the event of a PHE, section 1135 of the Social Security Act lets HHS waive and modify requirements for these programs.

1135 Waivers and Telehealth

HHS’ 1135 waivers are intended to allow the Department to sidestep laws and regulations that would otherwise impede the delivery of emergency healthcare services. To help care providers see more patients in the face of limited space at healthcare facilities, HHS waived rules that limited telehealth services.

In fact, these changes were so extensive, that 1135 wavier powers had to be broadened by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Prior to the public health emergency, the Centers for Medicare and Medicaid Services (CMS) imposed restrictions on which services doctors could administer remotely and bill Medicare for. Because Medicare is a significant revenue stream for many providers seeing older patients, and because certain services could not be billed if administered remotely, there were many medical services that doctors would not offer via telehealth.

The CARES Act gave CMS the authority to waive these limitations on what services could be billed for when given to the patient via telehealth. All of a sudden, there was a revenue potential for giving these services remotely. Combined with another waiver allowing providers to bill Medicare for services furnished with audio-only telehealth options, this 1135 waiver unleashed a wave of new telehealth offerings.

The number of CMS beneficiaries has grown from 12,000 weekly telehealth visits to "well into six figures"
Source: Becker’s Hospital Review June 2020

Extensions and Tough Questions

These telehealth waivers are set to end 151 days after the end of the COVID-19 PHE. The COVID-19 PHE is currently set to expire today, but the spending bill passed by the outgoing 2021-2022 Congress overrode the 151-day post-PHE expiration of the telehealth flexibilities. Now, these flexibilities will stay through 2024.

So what’s going to happen after 2024?

The American Hospital Association, a lobbying group representing hospitals, endorses continued extension of these telehealth flexibilities. Why wouldn’t they? Telehealth services are cheaper to administer, because now you can see more patients with less overhead from running an in-person facility.

There are of course arguments that such telehealth flexibilities give providers a financial incentive to maintain support of remote offerings that open the door to better accessibility of medical services to rural populations that otherwise face high barriers to visiting medical facilities in-person.

However, telehealth come with a host of vulnerabilities related to secure exchange of patient health information. Such expansion of telehealth usage must come with safeguards to protect patient privacy. Because Medicare is funded by the taxpayer, there are also necessary discussions about whether healthcare professionals should be paid the same for giving in-person and telehealth services. In the event that telehealth services are compensated less by Uncle Sam, how do we make sure that providers don’t make the business decision to offer less telehealth services which yield lower revenue?

Then of course, what do we do about populations with limited access to broadband technology and poor digital literacy? Before wholly committing to telehealth, the federal government must put forward plans to ensure disadvantaged communities don’t get left too far behind by a national commitment to telehealth.

So why exactly does Centene do, and why are they in such hot water?

Centene and Medicaid

Centene is a healthcare company that works largely as a intermediary for government-supported and privately-insured health programs. Many government programs like Medicare and Medicaid contract out coverage to companies like Centene. For example, rather than directly getting Medicare benefits through the federal government, Medicare Advantage (MA) plans administer Medicare benefits and some extra services via private health insurers like Centene. In this case, the federal government gives Centene some funds to cover these Medicare patients, and Centene likely charges a small premium on top of what’s paid to Medicare for said extra services.

The Medicaid program is a health plan to support those with low income levels. Unlike Medicare, which is operated directly by the federal government, each state operates its own Medicaid plan with significant federal funding. Many of these states contract the administration of the state Medicaid plan to private insurers with the idea being that these contractors have more experience handling the intricacies of operating a health insurance plan.

Centene has developed a significant line of business by running state Medicaid plans. The company’s website lists that it runs Medicaid operations in 29 states. In the 4th quarter of 2021, Centene raked in almost $21 billion in Medicaid-related revenue.

Administering health plans is not the only line of business that Centene is a part of. In another line of business, Centene operates pharmacy benefit managers (PBM’s). PBM’s are huge in the realm of how much is paid for prescription drugs. These organizations negotiate with drug manufacturers to set the prices that insurers will pay for certain medications. The idea is that PBM’s help drug manufacturers get to market by getting insurers to help pay for them while insurers are promised cost savings.

The PBM industry has been controversial for the lack of transparency and claims that it actually leads to rising drug prices. It’s also incredibly consolidated, with 3 firms controlling 80% of the market in 2021. This consolidation means that PBM firms have freedom to raise prices on insurers and drug manufacturers.

Centene’s Wrongdoing

In 2018, the Columbus Dispatch reported that the Buckeye Health Plan, Ohio’s Medicaid plan administered by Centene, contracted 2 other Centene subsidiaries for pharmacy benefit management services. Yet, CVS Caremark had already been paid for those services. The reporting alleged that Centene was effectively double-dipping and making taxpayers spend money on the same service twice.

The state of Ohio’s Attorney General Dave Yost opened an investigation and sued Centene in March 2021 for using its subsidiaries to overcharge Ohio taxpayers millions of dollars.

In specific, Yost’s suit detailed a number of breaches in the contract with Centene including:

• seeking payment for already paid-off services

• failing to accurately disclose pharmacy services and discounts to Medicaid

• artificially inflating drug prices

Centene agreed to pay Ohio $88 million in June 2021, but by then, 20 more states opened investigations and began to sue the company for overcharging. By November, Centene announced its exit from the PBM market as lawsuits mounted, finalizing the sale of its Magellan Rx business unit.

At the end of the day, Centene leveraged its market power in the Medicaid space to overspend taxpayer money in the millions by leveraging its own subsidiaries. Preventing debacles like this requires closely monitoring the multi-billion dollar arrangements between state and federal governments with private contractors, especially in healthcare. There may also be something to say about how the complexity of healthcare and lack of awareness of middlemen like PBM’s may have further enabled such practices, because how do you know to look if you don’t know they exist.