Tag Archives: Richard Kipp

Top-down cost-allocation approach to universal healthcare

A top-down cost-allocation approach may help developing countries set appropriate bundled rates for providers to participate in universal healthcare coverage. Such an approach focuses on averaging the costs of current utilization and actual expenses for hospital groups. One advantage of this practical approach is that it is feasible in situations with limited data.

In this new paper, Milliman consultants discuss their experience utilizing this top-down approach under India’s Meghalaya Health Insurance Scheme (MHIS). The following excerpt highlights the scheme’s objective:

In its first phase of rollout, the Meghalaya Health Insurance Scheme (MHIS) had limited benefits. The government wanted to expand its scope to better serve the population by providing a wider breadth of procedures, including tertiary care specialist procedures in oncology, neurosurgery and cardiac surgery. However, to make its second phase a reality, the Meghalaya scheme needed greater participation by private healthcare providers offering such specialist services. The state needed to offer realistic pay rates to private healthcare providers to attract participants.

Milliman helped the state identify the potential demand and gaps in benefits by conducting an extensive review of hospital utilization data, publications about disease burden and disease registries in the state. This was the basis of recommendations for additional surgical procedures that needed to be included in the scheme to ensure comprehensive coverage.

Milliman was asked to develop indicative prices for recommended additional surgical procedures under expanded benefits. To determine rates, Milliman used a top-down cost-allocation approach to estimate the cost of each procedure, using local hospital utilization and financial information. We developed specific tools to collect data from a representative group of hospitals.

Here are the outcomes and important considerations:

Using the top-down costing approach, we were able to estimate the costs of the following:

• Per-bed-day department cost for the five hospitals in the study
• Cost of 20 common surgeries in MHIS Phase I as a reference point for comparison with existing package rates
• Cost of 160 surgical and 20 medical conditions for tertiary care benefit expansion in Phase II

Developing the final package rates involves additional parameters, making adjustments for inflation trend, capacity utilization, quality, profit margins and specific variations among the participating hospitals. MHIS will need to apply various adjustments for these parameters to arrive at the final cost of each procedure for the social insurance scheme.

If providers are not keeping reimbursements in line with their expenditures to manage a clinical condition, there will be a tendency to pass on the shortfall to the members and deny or avoid admissions for procedures, potentially compromising the quality of care. This makes it critical that frameworks for costing are regularly updated. These frameworks also need to seek wider participation from providers. Apart from recurring medical inflation, wider provider participation and cost impact of new practices should be consolidated in updates.

Double the ACOs

Yesterday, Health & Human Services announced 89 new accountable care organizations (ACOs), doubling the number of Medicare ACOs.

With this in mind we’ve pulled together all of our ACO research into a single location. Here you go:

Also, this video offers a nice overview of the ACO concept.

ACO gain/loss sharing

The Centers for Medicare and Medicaid Services (CMS) has proposed a shared savings arrangement with hospitals, physicians, and other healthcare providers that integrates and coordinates their services through accountable care organizations (ACOs) and achieves cost savings to Medicare as a result. In return, CMS offers, through the Medicare Shared Savings Program (MSSP), to return a portion of the amounts saved to the ACOs.

MSSP applications are due early in 2012 for ACO starting dates of April 1 or July 1, 2012. An application must include a plan for distributing shared savings or losses to providers within the proposed ACO, but CMS has not spelled out procedures for developing such a plan. Drawing up a savings-distribution plan requires careful, detailed decisions potentially affecting every provider entity within the new system.

The framework for allocating savings within an ACO is described in a new paper; the framework emphasizes rewards for an ACO’s component entities based on their relative contributions to the organization’s total shared savings and quality performance.

The paper focuses on CMS-contracted MSSP ACOs, as contained in the Patient Protection and Affordable Care Act (PPACA) of 2010, because they are facing the task as an immediate issue. However, the approach could also be applied to risk-sharing arrangements within any integrated delivery system.

Find the full paper here.

Controlling healthcare costs the old, new way

We’ve talked about cost control before (here and here in particular). A new healthcare reform briefing paper continues the discussion, focusing on the topic of provider risk sharing.

In the past, provider risk sharing has attracted substantial attention as a means of controlling healthcare costs. But efforts to implement provider risk-sharing strategies have often not lived up to their promise.

With healthcare costs reaching unprecedented level—and with certain reform provisions encouraging providers to shoulder more risk—the concept is again attracting attention. Given the far more precise tools now available to both payors and providers—not to mention the possibility for better coordination among all stakeholders—the healthcare system may now be primed for a successful move toward provider risk-sharing strategies.

Read the paper.

Optimizing Part D

The latest issue of Health Affairs includes an article examining possible changes to the Medicare Part D prescription drug program that could reduce costs (note: subscription required). Milliman analysis on formulary design highlights one opportunity. Quoting from the article:

Formulary design is a widely used private-sector tool for controlling health plans’ drug costs. Medicare limited the freedom of Part D plans to control their formularies through rules such as the safe harbor guidelines established by the U.S. Pharmacopeia17 and MMA’s requirement that Part D plans cover at least two drugs per class.18


The CMS went beyond the statute, requiring at least one drug in each subclass as well. In addition, the CMS has given special protections to six classes of drugs, requiring that “all or substantially all drugs” in the classes be included in the formularies.18 This rule effectively eliminates Part D drug price negotiations over anticonvulsants, antidepressants, antineoplastics, antipsychotics, antiretrovirals, and immunosuppressants. In other classes, Part D plans routinely exclude some drugs as part of the normal commercial formulary process.19 The 110th Congress solidified and expanded the protected classes. The July 2008 physician payment update legislation gave the CMS clear statutory authority to expand the protected drug classes and created a cumbersome process that delays competition within the classes.20


These rules limit the negotiating power of Part D plans and make drugs in those classes more expensive. A Milliman study found that these six protected classes accounted for 16.8-33.2 percent of Part D drug costs by Part D plan administratorsReversing this one rule would decrease prices in these classes by 9-11 percent, for a projected Part D savings of $511 million per year.21 To ease the negative effect such restrictions can have on price negotiations, Congress could modify the Medicare Part D rules to give private drug plans more freedom to control their formularies. More-flexible formularies would permit more-aggressive negotiations by Part D plans, because the plans would have more maneuvering room to negotiate for deeper discounts, as they do with some of their non-Medicare plans.22