APPENDIX B Abstracts of Commissioned Papers on Unintended Consequences

THE ROBERT WOOD JOHNSON HEALTH POLICY FELLOWSHIPS PROGRAM

David Altman

The Story of Medicaid’s Disproportionate Share Hospital Payment Program

The Disproportionate Share Hospital (DSH) payment program for Medicaid was established in a provision of the Omnibus Budget Reconciliation Act of 1981 (OBRA 1981, P.L. 97–35). Congress’s intent in establishing the program was to require state Medicaid programs to “take into account the situation of hospitals which serve a disproportionate number of low-income patients with special needs” when setting reimbursement rates for inpatient services. Congress based this language on the assumption that certain hospitals, while serving Medicaid enrollees, also served a substantial number of indigent persons not eligible for Medicaid. It would not be easy for these hospitals to shift the costs of any uncompensated care to other payers, given the relatively small number of privately insured patients they would serve.

The DSH program was further expanded in 1985 with a ruling from the Health Care Financing Administration that allowed states to receive donations from providers to generate federal Medicaid dollars. In addition, a provision in OBRA 1996 permitted states to pay hospitals serving a large number of low-income patients rates that exceeded the Medicare upper payment limit. Costs for the program skyrocketed from $1.4 billion in 1990 to $19 billion in 1995, as DSH payments became a critical source of income for many hospitals, both public and private. Recent legislation, particularly the Balanced Budget Act of 1997, has attempted to reduce both the overall size and the state-to-state inequities of federal DSH payments.

Altman’s paper suggests that the evolution of the DSH program, rather than helping to sustain vulnerable safety net providers, brought about a set of circumstances that have undermined the ability of many public hospitals to survive. Altman contends that these unintended consequences have come about not because of the legislation per se but, rather, because of the characteristics of the programs, legislation, politics, and the environment with which the DSH program has had to contend.

E.Andrew Balas

Legislation by Body Part: Consequences of Health Care Benefit Mandates

With the emergence of managed care and various efforts to control the costs of health care, the proliferation of legislated health care benefit mandates has accelerated nationwide. Mandates and similar regulatory initiatives often fall into the category of “body part” legislation by (a) specifying a disease- or condition-specific health care benefit, (b) requiring the provision of or coverage for health services, and (c) focusing on services provided by the private sector and not directly reimbursed by the federal government. With considerable variations among states, mandates have been legislated for sterilization without restrictions, in vitro fertilization, breast reconstruction, treatment of temporomandibular joint dysfunction and craniomandibular disorder, acupuncture, bone marrow transplants to treat breast cancer and Hodgkin’s disease, stool examinations, prostrate screening, lead poisoning treatment, 48-hour hospital stays following childbirth, and countless other clinical procedures. Health care benefit mandates tend to revolve around payment or access to hospitalization and



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Unintended Consequences of Health Policy Programs and Policies: Workshop Summary APPENDIX B Abstracts of Commissioned Papers on Unintended Consequences THE ROBERT WOOD JOHNSON HEALTH POLICY FELLOWSHIPS PROGRAM David Altman The Story of Medicaid’s Disproportionate Share Hospital Payment Program The Disproportionate Share Hospital (DSH) payment program for Medicaid was established in a provision of the Omnibus Budget Reconciliation Act of 1981 (OBRA 1981, P.L. 97–35). Congress’s intent in establishing the program was to require state Medicaid programs to “take into account the situation of hospitals which serve a disproportionate number of low-income patients with special needs” when setting reimbursement rates for inpatient services. Congress based this language on the assumption that certain hospitals, while serving Medicaid enrollees, also served a substantial number of indigent persons not eligible for Medicaid. It would not be easy for these hospitals to shift the costs of any uncompensated care to other payers, given the relatively small number of privately insured patients they would serve. The DSH program was further expanded in 1985 with a ruling from the Health Care Financing Administration that allowed states to receive donations from providers to generate federal Medicaid dollars. In addition, a provision in OBRA 1996 permitted states to pay hospitals serving a large number of low-income patients rates that exceeded the Medicare upper payment limit. Costs for the program skyrocketed from $1.4 billion in 1990 to $19 billion in 1995, as DSH payments became a critical source of income for many hospitals, both public and private. Recent legislation, particularly the Balanced Budget Act of 1997, has attempted to reduce both the overall size and the state-to-state inequities of federal DSH payments. Altman’s paper suggests that the evolution of the DSH program, rather than helping to sustain vulnerable safety net providers, brought about a set of circumstances that have undermined the ability of many public hospitals to survive. Altman contends that these unintended consequences have come about not because of the legislation per se but, rather, because of the characteristics of the programs, legislation, politics, and the environment with which the DSH program has had to contend. E.Andrew Balas Legislation by Body Part: Consequences of Health Care Benefit Mandates With the emergence of managed care and various efforts to control the costs of health care, the proliferation of legislated health care benefit mandates has accelerated nationwide. Mandates and similar regulatory initiatives often fall into the category of “body part” legislation by (a) specifying a disease- or condition-specific health care benefit, (b) requiring the provision of or coverage for health services, and (c) focusing on services provided by the private sector and not directly reimbursed by the federal government. With considerable variations among states, mandates have been legislated for sterilization without restrictions, in vitro fertilization, breast reconstruction, treatment of temporomandibular joint dysfunction and craniomandibular disorder, acupuncture, bone marrow transplants to treat breast cancer and Hodgkin’s disease, stool examinations, prostrate screening, lead poisoning treatment, 48-hour hospital stays following childbirth, and countless other clinical procedures. Health care benefit mandates tend to revolve around payment or access to hospitalization and

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Unintended Consequences of Health Policy Programs and Policies: Workshop Summary specialists while intertwining quality issues with special interests. In a similar vein, legislation authorizing the creation of an entity to set health care standards represents an alternative regulatory approach to ensuring quality. The Balas paper argues that there are at least two major unintended consequences of “overzealous” legislating of health care quality: (1) many health care mandates, passed under the banner of improving health care quality, show little relationship to available scientific evidence, pertinent research, or outcomes of care; and, (2) unsound federal benefit mandates add unnecessary burdens to the health care system and represent an indirect tax. Unfortunately, according to Balas, a definition of the fine line between necessary patient protection and unjustified intrusion into the practice of medicine remains elusive due to the lack of comprehensive and scientifically sound analyses focusing on the impact of legislated benefit mandates. In the absence of reliable data, he suggests, “Congress should probably strengthen pertinent research but otherwise stay out of the hospitals and medical practices.” Richard L.Bucciarelli Unintended Consequences of Title XXI: State Children’s Health Insurance Program Crowd-Out and Adverse Risk Selection Passage of the State Children’s Health Insurance Program (SCHIP) in 1997 was hailed as an important step forward in incremental health insurance coverage. SCHIP, a federal grant-in-aid program, offers states generous matching funds to develop programs aimed at providing coverage to “targeted low-income children.” The goal of SCHIP is to reduce the number of uninsured children while providing states with maximum flexibility. Although the legislation includes specific provisions to help bar SCHIP from supplanting the existing Medicaid program or replacing private insurance with publicly sponsored coverage, concerns about the unintended consequence of a “crowd-out” effect remain. In this paper, Bucciarelli and Shenkman study the crowd-out effect as it pertains to the implementation of Florida’s Healthy Kids Program. Researchers found that low-income families dropped their employer-sponsored coverage to enroll in the program primarily because they were eligible for premium subsidies. Further analysis of the Healthy Kids program showed that retention in the program is sensitive to both family out-of-pocket premium costs and whether the covered child actually uses health care services. Low-income families are more likely to drop coverage if their children do not use health services over an extended period. The paper suggests that crowd-out of private insurance coverage and the shift to publicly sponsored coverage could be ameliorated by preventing further erosion of employer-based coverage. This could be accomplished by prohibiting employers from substituting plans with higher premium-sharing options. Available data suggest that families will remain in employer-based coverage if their out-of-pocket premium costs are limited to no more than 5 percent of total family income. Premium costs for low-income families (for both private and public coverage) must be kept affordable in order to encourage healthy children to enroll, prevent adverse selection, and maintain a stable insurance product. Gerald Charles Whatever Happened to Agent Orange? The controversy about the use of the herbicide called Agent Orange to kill vegetation and food crops during the Vietnam War continues to be an area of policy interest and major public awareness. In many ways the Agent Orange question became symbolic of the controversy surrounding American involvement in the war. Concern about the potentially serious long-term health effects of Agent Orange first received headline attention in the late 1970s when veterans began to claim a connection between their illnesses and exposure to the herbicide. The Charles paper focuses on early legislation directed at defining what health effects might relate to Agent Orange since scientific studies of long-term health effects are few. These efforts quickly

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Unintended Consequences of Health Policy Programs and Policies: Workshop Summary evolved into a clash between the demands and difficulties of conducting epidemiological studies to scientifically assess long-term health effects versus the pressure in Congress “to do something” for the veterans who fought an unpopular war. During the time period Charles discusses, problems in designing and conducting the epidemiological studies that Congress hoped would define causal relationships between Agent Orange and health effects led Congress ultimately to accept “statistical associations” as the best answers that could be provided in the time frame the politics of the issue required. Although not originally intended as a basis for making decisions about paying compensation to Vietnam veterans, these statistical associations were ultimately used for that purpose, rather than the previous standard that a condition was “caused by or temporally related to military service.” The departure from “cause” as the vital link radically restructured the veterans’ compensation system and will likely have significant future effects on both the fiscal impact of those programs as well as certain aspects of any future military actions the United States enters. Robert Crittenden A Safety Net No More? The Inadvertent Undermining of Access for the Uninsured Washington State has played a leading role in using Medicaid and other public and private programs to expand coverage for the uninsured and those not previously eligible for Medicaid. Washington’s Basic Health Plan, implemented in 1989, provides state-subsidized insurance coverage for uninsured persons and families with incomes below twice the poverty level. Over the years the program has grown to cover more than 130,000 people. During this time, Medicaid has also grown and now covers pregnant women and children at up to 200 percent of the poverty line. Despite these significant expansions, the number of uninsured in King County, Washington, has increased due to welfare reform and a decline in employment-based coverage. The Crittenden paper suggests that those who remain uninsured represent a higher-risk, potentially sicker population. At the same time, some leading historical safety net providers, competing for their share of the Medicaid managed care market, are beginning to limit care for the uninsured. Private physicians have also reported a shrinking ability (or willingness) to care for the uninsured. In looking at the unintended consequences of health care reform in Washington, Crittenden reports that the net results of the changes have been increased access for those who are eligible for the health insurance expansions but declining access for a growing number of uninsured. Johanna Dwyer Unintended Consequences of Medicare Restructuring on Elders’ Nutritional Care: Requiem or Renaissance for Dietitians? The prevalence of nutrition-related health problems in this country is high, especially among the elderly. Levels of malnutrition ranging from 15 to 50 percent have been shown to exist among the elderly in U.S. hospitals and nursing homes. Medicare policies on nutrition care and services vary greatly, both by the settings in which care is provided and by disease. In general, they have traditionally been the most rigorous for nutrition and dietary services provided in institutions. In 1998 the Health Care Financing Administration proposed new rules for hospitals that eliminated the requirement that they have a qualified dietitian on staff, with the goal of focusing more on outcomes and less on process. However, aside from improvements in sanitation, no new outcomes resulted. The Dywer paper outlines how the 1998 change in Medicare nutrition policies failed to recognize malnutrition as a comorbidity or complication, thus increasing the costs of care, masking the costs of malnutrition in diagnostic-related-group (DRG) classification systems, and de-emphasizing nutrition services. Among the unintended consequences of Medicare s restructuring of nutrition services, Dwyer cites a de-emphasis and fragmentation of nutrition services in the care of the frail elderly; lack of upward adjustment in DRG payments related to malnutrition treatment, creating economic disin-

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Unintended Consequences of Health Policy Programs and Policies: Workshop Summary centives for aggressively treating this illness; and, in general, a de-emphasis on nutrition services in hospitals. Further health care restructuring related to managed care may result in a requiem for dietetics. She suggests, however, that the potential for a renaissance of this allied health profession as a more community-based service also exists. The achievement of this latter objective will depend on the future course of health policy in both the public and private sectors. Jeffrey Geller The Institution for Mental Disorders Exclusion: The Federal Government’s Impaired Vision in the Care and Treatment of Its Citizens with Chronic Mental Illness In the complex and still unresolved campaign to improve the care and treatment of this nation s chronically ill, a little-known provision of the Social Security Amendments of 1950 came to play a powerful role. Predating Medicaid, the Institution for Mental Disorders (IMD) “exclusion” rule stipulated that Social Security payments on behalf of those in IMDs were excluded from old age assistance. The basis for exclusion was that states had historically been responsible for the care of citizens with chronic mental illness who were receiving long-term care in psychiatric facilities, and the federal government wanted to make sure that states continued to support the provision of such care. The passage of Medicaid in 1965 and the rules of Federal Financial Participation created an opportunity for states to shift the cost of care and treatment of the mentally ill to the federal government. States now had strong incentives to empty their mental institutions and to place patients in community-based homes and facilities eligible for Medicaid payments. Some states were able to steer Medicaid payments to IMDs through the Disproportionate Share Hospital payment program, but the 1997 Balanced Budget Act severely curtailed the use of these funds for this class of providers, putting another nail in the coffin of long-term inpatient care for the severely mentally ill. Whether the intended consequence of the IMD exclusion—the maintenance of state responsibility in caring for the institutionalized mentally ill—was justifiable or reasonable remains open to question. Geller’s paper points out, however, that the indirect consequences of the law contributed significantly to reshaping mental health policy since 1950, a reshaping characterized primarily by the wholesale movement of caring for the mentally ill from inpatient to community-based settings. Although he agrees that “deinstitutionalization” has brought with it new venues for effective and humane care, the uncritical adoption of a “one-size-fits-all” policy for a very heterogeneous population has caused unneeded harm if not preventable deaths. Geller argues that programs and policies designed almost exclusively around fiscal motivation and cost shifting thwarted the chance to change and improve the evolution of mental health policy in this country. Karen Guice Unintended Consequences of the Employee Retirement Income Security Act Many consumer advocates argue that the Employee Retirement Income Security Act (ERISA), enacted in 1974, resulted in certain unintended consequences for the nation’s health care system; others contend that ERISA’s effects were entirely purposeful and intended. The current debate over liability for managed care organizations has renewed the focus on the legacy of ERISA, its unintended consequences, and future challenges. ERISA is important to the state regulation of health insurance for two reasons. First, if a state wants to develop and sponsor a statewide program of health insurance, as Hawaii did in 1974, it must obtain a statutory exemption from Congress. Several states, including Minnesota, New York, Oregon, and Washington, have proposed but not obtained such exemptions in recent years. Second, as a federal statute, ERISA preempts states from regulating health insurance plans that are self-funded by employers. Because an increasing proportion of individuals who have employer-sponsored health insurance are covered by self-funded plans, state proposals to reform health insurance or regu-

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Unintended Consequences of Health Policy Programs and Policies: Workshop Summary late managed care plans may not affect the majority of those who have employer-sponsored health insurance. Over the years a number of courts have rendered decisions regarding ERISA preemption. In the well-known case, New York State Conference of Blue Cross & Blue Shield Plans v. Travelers’ Insurance Co., the court acknowledged that certain regulations relating to access or quality of health care may be considered separate from “employee benefit plans” and come under the jurisdiction of state law. Since then, the shift of many employers away from traditional indemnity health insurance products to prepaid or managed health care raises further concerns that the existing ERISA remedies are no longer adequate to guarantee provision of the health benefits within an employee benefit plan. These concerns arise largely from the restriction of health care services to control costs. These days many consumer advocates support “opening” ERISA, suggesting that the current law falls short of distinguishing between benefit determinations and medical decisions and protecting plan participants and beneficiaries when health care benefits are denied. The Guice paper outlines the unintended consequences of ERISA and highlights the difficulty of aligning employee expectations and employer interests in today’s health care marketplace. Barbara Langer The Each/RPCH Approach to Protect Access of Rural Medicare Beneficiaries to Health Care The 1983 passage of the Prospective Payment System (PPS) for hospitals focused new attention on the often precarious financial condition of rural hospitals and the threat of closures. In 1988 a record number of rural hospitals across the United States closed, raising concern that access to care for Medicare beneficiaries living in the affected areas would be negatively affected. The elderly are disproportionately represented in rural regions of the nation making up 12 percent of the U.S. population but 25 percent of the population in rural areas. The original PPS statute established separate rural and urban standardized rates, adjusted for area differences in hospital wage levels. The urban-rural payment differential was developed using 1981 data that indicated rural hospitals had average Medicare costs per case that were about 40 percent lower than those for urban hospitals. During the first year of Medicare PPS, Medicare margins in rural hospitals were about half the margins in urban hospitals. Over the next several years rural hospitals garnered growing congressional support for reducing, if not eliminating, the urban-rural differential in Medicare PPS. To guide legislation, the Prospective Payment Advisory Commission (ProPAC) recommended that “policies affecting rural hospitals must balance access to care in rural areas with improved hospital efficiency.” In the end, Congress passed legislation that focused primarily on the short-term goal of infusing additional revenues into rural hospitals. A by-product of the legislation was the passage of two grant programs (the Essential Access Community Hospital [EACH] and Rural Primary Care Hospitals [RPCHs] demonstrations) designed to address longer-term issues such as restructuring and conversion. Using the implementation of EACH/RPCH in Kansas as a case study, Langner suggests that these modest grant programs, which were originally a controversial by-product of larger legislation, became an important building block for improving access and developing a more rational and effective health care delivery infrastructure in many rural communities.