In This Issue:

• The Five Megatrends Shaping Pharma’s Next Decade: Sustaining Success in a New Market Landscape
• Answers to Five Key Questions on Five Healthcare Megatrends
• How Will the Megatrends Play Out in Mexico? Healthcare Challenges and Opportunities in the Mexican Market
• Laser Focus on Health IT Interoperability
• You’re Invited to a New, Free Webinar: “Avoiding the Regulatory Land Mines of Commercial ACOs”

The Five Megatrends Shaping Pharma’s Next Decade: Sustaining Success in a New Market Landscape

Authors: Nancy McGee, Managing Director, Manatt Health Solutions | Helen Pfister, Partner, Healthcare Industry, Manatt, Phelps & Phillips, LLP | Ian Spatz, Senior Advisor, Manatt Health Solutions | Annemarie Wouters, Senior Advisor, Manatt Health Solutions

Editor’s Note: From swelling Medicaid ranks to unprecedented numbers of hospital mergers to soaring growth of Accountable Care Organizations (ACOs), powerful forces are converging to reinvent healthcare. But which of the trends making headlines will be the true game changers for pharma? In a recent webinar, “The Five Megatrends Shaping Pharma’s Next Decade,” Manatt Health revealed the answer, analyzing the five major forces pharma leaders need to watch and respond to in the volatile years ahead. If you missed the program, click here to view it free on demand. We also have created a new white paper, “Five Megatrends Driving the Seismic Shift in Healthcare,” summarized below. Click here to download a free copy of the full paper or a free PDF of the webinar presentation.

Disruptive trends in the healthcare system will force companies to change their strategies. With new care models emerging, breakthrough technologies launching and value taking center stage, “business as usual” is no longer an option. Five of the megatrends coming together to remap the healthcare landscape will be particularly impactful for life sciences companies:

     1. From volume to value

     2. Centrality of the states

     3. Mega health systems

     4. Employer recalibration

     5. Healthcare everywhere

1. More with Less: From Volume to Value

New technologies, including pharmaceuticals, offer patients improved health but at greater costs. These higher prices increasingly are shifting to patients through higher premiums and cost sharing. Seeking to drive down costs, payers are transitioning from volume-based to value-based payment methods. Since most health systems remain reliant on volume-based constructs, however, pharmaceutical companies, for the foreseeable future, must balance success across two concurrent paradigms:

• The volume-based model, which is still in play, and
• The emerging value-based environment, which consists of new payment methodologies that are either being formally tested in demonstration projects or are spreading through the market as they are adopted by payers, providers and integrated delivery networks.¹

Abandoning the volume-based system too quickly can reduce sales and profits. At the same time, failing to explore new value-based options puts companies at risk of being left behind by competitors and alienating key stakeholders.

A key element of success in the value-based system is understanding what value means to specific market segments. For every product line, companies need to identify the aspects of value that are most important to different healthcare stakeholders.

For example, 51% of ACO customers are led by physicians, and 33% are jointly led by physicians and hospitals.² Physicians can be expected to ask different value questions than pharmacy directors or pharmacy benefit manager (PBM) executives. In bundled payment initiatives, several customers may emerge, as entities compete for control of the payment bundle.³

As the market shifts to more value-based paradigms, it will be important to identify which products are good candidates for value-based pricing or risk-share strategies. Value-based pricing:

• Opens the door to greater product adoption, even when there is uncertainty among the payer and provider community about the value of the technology.
• Provides protection from loss while offering positive health benefits to a population.
• Presents opportunities to link clinical evidence and outcomes to coverage and payment.

In building a case to demonstrate value for a specialty drug, a risk-share arrangement may provide a mechanism to address resource constraints and engage one or more utilization management tools to target these drugs appropriately to the patients who need them. Products that are major determinants of health outcomes and have costs that justify the effort—e.g., treatments for chronic conditions—are potentially good candidates for risk-sharing.

Integrated Delivery Systems (IDS) and ACOs are still early in the learning curve for building value-based partnerships.⁴ For these players, manufacturers may want to support programs that identify high-risk patients and improve their medication adherence, leading to better outcomes.⁵

Key takeaways for manufacturers as they face the “volume to value” megatrend include:

• Manufacturers must maintain expertise in volume-based requirements, while developing business and legal expertise in value-based paradigms.
• For certain products, risk-sharing arrangements will be key to driving adoption of products with high costs and uncertain outcomes.
• Developing appropriate metrics is critical for offering ways to share the risks of participating in the market and decrease the probability of access issues.
• For organizations early in the value-based learning curve, manufacturers may want to consider providing medication-related program delivery support services.

2. New Sheriff in Town: Centrality of the States

The Affordable Care Act (ACA) has transformed the role of states in healthcare. The impact of the increasing state role in healthcare delivery, financing and regulation on pharmaceutical access is still unfolding. Medicaid is undergoing its most substantial transformation since its inception, moving out of the welfare space and into the health insurance market. The interest in expanding Medicaid is being fueled by several factors, including:

• The potential expansion of Medicaid coverage to an additional 16 million people.⁶
• Concerns about the sustainability of the Medicaid program in the wake of growing state and federal budget deficits, Medicaid’s countercyclical spending cycles and the aging of the population with its associated long-term care needs.

Given expected increases in pharmaceutical spending and the central role pharmaceuticals play in managing patient health, Medicaid formularies will be a critical component of reform efforts. Following are key developments for pharmaceutical companies to monitor:

• With the recent expansion of Medicaid, growth in managed care, and increasing focus on managing the care of dual eligible populations, manufacturers can no longer assume that entering into rebate agreements will ensure access for Medicaid beneficiaries.⁷
• Adults who are enrolled in expanded Medicaid are entitled to coverage under Alternative Benefit Plans (ABPs). Unlike standard Medicaid benefits, ABPs must cover the greater number of drugs, either one drug in every United States Pharmacopeia (USP) category and class or the number of drugs per category and class in the drug benefit of a designated essential health benefit base benchmark plan. Manufacturers will need to monitor states as they submit their ABPs to determine possible changes to pharmaceutical access.
• Patients enrolled in Medicaid MCOs also will experience differential formulary coverage. Consequently, traditional MCO utilization mechanisms, such as prior authorization and generic dispensing requirements, will be leveraged to manage budgets more aggressively than Medicaid fee-for-service programs.⁸
• Dual eligibles—those eligible for both Medicaid and Medicare—constitute 15% of Medicaid beneficiaries, but account for almost 35% of Medicaid spending.⁹ The ACA contains initiatives to enable and encourage coordinated service delivery to mitigate differences in Medicare and Medicaid rules and misaligned payment incentives. Implementation of dual eligible demonstration projects are underway, and interest in the program is strong. Going forward, we can expect efforts to blur the lines between Medicare and Medicaid with the goal of accessing Medicaid’s drug price savings. Manufacturers will need to understand the factors that are driving the increased influence of the states and the possible impact of blended benefit structures.

Growing state influence is not limited to public insurance constructs. Through Medicaid expansion and the emergence of marketplaces, states are experiencing a growing alignment between public coverage and private insurance. Premium assistance—or private option strategies—is a prime example of the convergence of public and private insurance markets. Under premium assistance programs, Medicaid coverage is provided through enrollment in marketplace qualified health plans (QHPs), and commercial-level reimbursement rates are paid to providers.

Rollout of the private option program in Arkansas was followed by similar proposals in Iowa, New Hampshire and Pennsylvania. We anticipate interest in the private option will continue to grow as states seek alternative approaches to expand coverage.¹⁰

Important takeaways for manufacturers planning for the “centrality of the states” megatrend are:

• State reimbursement of drug costs under Medicaid is changing due to the implementation of ABPs for newly eligible adults, the extension of drug rebates in Medicaid Managed Care and new efforts to manage high-need Medicaid and dually-eligible populations.
• The increasing convergence of public and private markets will drive efforts to reduce pharmaceutical expenditures.

3. Big Is Bigger: Mega Health Systems

Between 2007 – 2009 and 2010 – 2012, hospital mergers increased by 25%.¹¹ Larger systems offer the potential for greater resource efficiency, consistency in delivering services to patients and transparency regarding health outcomes. Conversely, they make it difficult to provide personalized service to patients.

Unchecked, future healthcare systems might consist of a few players with immense market influence, which may have consequences for market access and product pricing. Large health systems will seek to manage pharmaceutical use more aggressively, as the pharmaceutical supply chain is a visible area of interest for reducing costs. Pressure from large health systems will:

• Impact the structure of contracts with wholesalers, retail pharmacies and PBMs, disrupting already thin margins.
• Make it difficult for manufacturers selling directly to health systems to preserve pricing without demonstrating product value or risk-sharing based on clinical outcomes.

A significant upside to large health systems is the ability for system participants to align their electronic health records to manage medications, decreasing adverse reactions while monitoring adherence. More efficient systems may mean increased use of utilization management mechanisms, therefore channeling patients to preferred drugs. Further, consolidating pricing data may present challenges to manufacturers in preserving product pricing due to greater transparency of prices across all products, including the competition.

In addition, clinical integration has the potential to increase the market power of large healthcare providers. Evidence suggests that hospital mergers in concentrated markets generally lead to price increases of almost 20%.¹² There are multiple ways, however, for payers to counteract higher prices. For example, through integrated information systems, payers can better estimate patient out-of-pocket costs. Therefore, they can identify opportunities to lower patient liabilities by creating limited networks that do not include high-cost providers.¹³

For many of these mega health systems, the future of the 340B drug discount program is critical. The 340B drug pricing program requires pharmaceutical manufacturers to provide outpatient drugs at discounted prices to eligible healthcare providers. One-third of hospitals currently participate.¹⁴ In addition, the ACA expanded 340B eligibility to five new categories: critical access hospitals, sole community hospitals, rural referral centers, freestanding children’s hospitals and freestanding cancer hospitals.

340B pricing provides an approximate 51% discount off average wholesale prices. In addition, reimbursement levels for drug administration costs in hospital outpatient facilities are on average an incremental 189% of the physician office-reimbursed costs for commercially insured patients under the age of 65.¹⁵ Accordingly, some healthcare systems have moved drug administration services from physician clinics to outpatient settings.¹⁶

Major takeaways for manufacturers working with mega health systems include:

• Downward pressure on drug pricing will emerge as a result of the growing negotiating power of mega health systems and pressures on these systems from payers to improve quality while saving costs. Mega health systems will want to be included in preferred provider networks, remain competitive under reference pricing and earn shared savings under ACO arrangements.
• Mega health systems are likely to be interested in delivery support programs to improve appropriate medication use and adherence. Non-branded support programs can be important components of value-based partnerships.
• The future of 340B may create additional bottom-line pressures for mega health systems.

4. Change in the HR Office: Employers Recalibrate

Consumer choice marketplaces—public and private—are the future of health insurance for most employers and employees. Employers will find it appealing to step away from their traditional role as health insurance purchasers, as the marketplaces mature and grow. Where competitive situations won’t allow them to abandon their role in healthcare completely, they will seek to control costs and improve their employees’ choices by creating defined contribution plans and outsourcing health insurance procurement to marketplaces.

Private marketplaces are already being created to serve this need. Aon Hewitt reports growth in private exchanges from 150,000 members in 2013 to 600,000 in 2014. Of these enrollees, 75% feel they chose the plan that offered the best value, and 87% like being able to choose among multiple carriers.¹⁷

Marketplace plans may have drug benefits that differ greatly from those that employers traditionally offered. Recent formulary analysis of the exchanges indicates that:

• Individuals are twice as likely to experience utilization management controls on prescription drugs, compared to people enrolled in employer-sponsored plans.¹⁸
• Silver plans, the most commonly selected, are nearly four times as likely to have a combined deductible for pharmacy and medical benefits.
• Enrollee cost sharing is 38% higher than employer plans.¹⁹
• Combined deductibles impose a much higher member cost-sharing burden for pharmacy benefits than other benefits.²⁰

State legislatures are responding to low marketplace premiums that mask high out-of-pocket expenses by considering legislation to limit out-of-pocket spending on drugs. These efforts are not likely to impact the largest employers, whose plans are protected from state legislative oversight by the federal ERISA law. It is unlikely for the time being that government will attempt to regulate private marketplaces.

Key takeaways for manufacturers as employers recalibrate include:

• Marketplace formularies will grow in importance, as employers choose to delegate the insurance role to them.
• The number of employers providing generous drug benefits with low cost sharing will decline over time.
• State efforts to rein in cost sharing may have limited impact. Manufacturers should actively monitor developing state laws to understand how states are working to serve the needs of the marketplace population.
• Marketplaces are a new customer for drug makers.

5. The Doctor’s Not in the Office Now: Healthcare Everywhere

Driven by the rise of new technologies, experts predict that, over the next decade, as much as 50% of healthcare will move from hospitals and clinics to homes and communities. Ubiquitous dissemination of powerful and affordable technology will put the power of connectivity, health information and healthcare applications into everyone’s hands, enabling patient and consumer engagement (also known as m-health).

Handheld technologies, such as smartphones and the Internet of Things (IoT), a network of everyday objects embedded with sensors and communication capabilities, hold the potential to transform any place into a doctor’s office. Devices will be used for remote monitoring of vital signs, conditions and compliance with treatment plans, and providing alerts to providers just a subscription away.

The technological transformation also will:

• Capture and allow the de-identified aggregation of enormous amounts of data on treatments and their real-world effectiveness. Everyone, everywhere has the potential to form a patient registry with sophisticated data mining and analysis, yielding real-time, regularly updateable data on clinical effectiveness.
• Transform the distribution of care delivery. Care sites will move out of acute settings and into ambulatory settings and retail clinics, where treatment will be delivered by lower-cost care providers, such as pharmacists, nurses and physician assistants.
• Drive the development of systems of care, which will aim to optimize the allocation of care delivery across the care continuum.

These changes have huge implications for pharmaceutical companies:

• Clinical and real-world trial costs could, potentially, drop dramatically, as the opportunities to study patient medicine use expand to new locations using cheaper data collection modes.
• Information dominance will shift from manufacturers to customers with up-to-the-minute insights into utilization and effectiveness.
• Consumers will become even more important players in drug selection.

Critical takeaways for companies as they adapt to “healthcare everywhere” include:

• The doctor’s office and hospital will lose their primacy as the locus of care delivery.
• Understanding the changing places and modes of delivery will be a core competency of all healthcare organizations.
• Partnering with m-health and other connected healthcare technology providers will provide pharmaceutical manufacturers with a leg up in understanding these changes and staying ahead of them.
• Expanding pharmaceutical manufacturers’ ability to use social media will be critical to ensuring that they can continue to reach patients and providers.

Conclusions

For the next five to ten years, manufacturers must maintain and build expertise in both volume-based and value-based paradigms. In addition, as health systems assume more risk under value-based payment reforms, manufacturers will need to participate in risk sharing and build partnerships with payers and providers around product solutions, rather than just products.

All of the five megatrends embed pricing pressures of some sort that manufacturers will need to build into their strategies. Companies also will need to communicate with many new customers in addition to the traditional physician decision makers, including ACOs, IDS, managed care entities, private marketplace benefit managers, and patients.

Answers to Five Key Questions on Five Healthcare Megatrends

Authors: Nancy McGee, Managing Director, Manatt Health Solutions | Helen Pfister, Partner, Healthcare Industry, Manatt, Phelps & Phillips, LLP | Ian Spatz, Senior Advisor, Manatt Health Solutions

Editor’s note: One of the most compelling segments of our recent webinar, “The Five Megatrends Sharping Pharma’s Next Decade,” was the dynamic question-and-answer session with our audience, which exceeded 1,060 participants. So many of our viewers asked questions that we ran out of time to cover them all. Below are the answers to five questions that represent broad importance to our industry. If you haven’t yet watched the session and want to hear all of the questions with our responses, click here to view it on demand.

Question 1:

There are some drugs that do not show cost efficiency across large patient populations. They do show promise, however, in smaller populations. Do you think we are focused too much on being population-based rather than patient-centric when thinking about value-based paradigms?

Answer 1:

An important part of operating in a value-based environment is the ability to identify patients within large populations who have the best chance of being responsive to a specific drug or treatment. This is particularly important when the treatment option is expensive. Companion diagnostic tests represent one way that manufacturers are helping to demonstrate a commitment to finding patients in which a particular treatment has the best chance of being the most clinically effective.

Providing payers with evidence of a product’s clinical utility to treat an individual patient, in advance of receiving the treatment, can help payers structure corresponding coverage policies to support appropriate patient access. Delivering the right treatment option to the right patient at the right time is a core component of a value-based system.

Question 2:

Is there any possibility that covered-entity status will be redefined for 340B?

Answer 2:

The list of covered entities that are entitled to purchase outpatient drugs at 340B prices are set forth in the statute and include the following:

• Federally qualified health centers (FQHCs) and FQHC look-alikes
• Native Hawaiian health centers
• Tribal and urban Indian health centers
• Ryan White HIV/AIDS program grantees
• Certain disproportionate share hospitals (Disproportionate share hospitals are those that treat indigent patients. Among other things, to be eligible for 340B discounts, a disproportionate share hospital must have a disproportionate share adjustment percentage of greater than 11.75%.)
• Certain children’s hospitals
• Certain critical access hospitals
• Certain free-standing cancer hospitals
• Certain sole community hospitals
• Certain rural referral centers
• Black lung clinics and tuberculosis clinics
• Title X family planning clinics and sexually transmitted disease clinics
• Comprehensive hemophilia diagnostic treatment centers.

Congressional action would be required to amend the statute. This appears unlikely in the current political environment. The Health Resources and Services Administration (HRSA), however, has issued guidance over the years which further refines the eligibility categories. For example, HRSA has issued guidance on the circumstances under which an offsite facility of a hospital is deemed part of the hospital for purposes of 340B eligibility. HRSA also has issued guidance on who is considered a patient of a covered entity for 340B eligibility purposes.

The long-anticipated “mega rule” is expected to address, among other things, the patient definition and the eligibility of offsite facilities for 340B pricing. (The core controversy with the 340B program is around whether eligible patients are receiving the discounted pharmaceuticals.) While the actual categories of 340B-covered entities are statutorily defined and unlikely to change in the near future, the mega rule probably will include regulations that refine the extent to which patients of covered entities are eligible for 340B drugs.

Question 3:

The FDA recently provided guidance on social media, but it isn’t very clear. Is there a way to get more clarity, as it seems that social media could help the quality of care?

Answer 3:

At this point, further clarity is unlikely to improve the ability of health product sponsors to enhance care quality. The FDA has been sufficiently clear already that it is not budging from its stance that each and every message, even those limited to 140 characters, must be complete and balanced in communicating benefit and risk information. This view is at odds with the actual use of social media and underestimates the abilities and research skills of social media users. What’s needed is an evolution of the FDA’s views, similar to the one that occurred when the FDA eventually opened up television to drug advertising.

The July issue of our Manatt “Health Update” included a summary and analysis of the two additional draft guidances that the FDA released on June 17, 2014. The two guidances put greater definition around how pharmaceutical and medical device companies can use social media. The first guidance focuses on using social media platforms with space limitations, such as Twitter. The second deals with how to correct third-party misinformation about prescription drugs and medical devices.

The long-awaited draft guidances are consistent with the FDA’s previous statements and enforcement actions that set out a conservative and limited role for product sponsors. It does appear, however, that the FDA is willing to give companies more freedom than might be expected to correct inaccurate information about their products that appears on the web. To read the article detailing the guidances, click here.

Question 4:

Millennials are bucking traditional trends such as full-time work and home ownership. How will this wave of part-time workers impact the five megatrends?

Answer 4:

The increase in part-time workers will have the greatest impact on employers, as they seek to recalibrate the role they play in health insurance. Employers and employees are changing their relationships and their responsibilities to each other. In this new world, employees – or contractors, as many will be – will want more control over their own health insurance. Employers, in turn, will move toward defined contributions. The sea change we’ll see will be similar to the move employers made when they encouraged employees to manage their own retirement benefits, and pension plans dissolved.

Question 5:

What’s the best way to stay up-to-date on the megatrends?

Answer 5:

Manatt Health monitors healthcare trends to keep the industry up-to-date on the latest developments and their implications. Because Manatt Health works with all the key healthcare stakeholders—including 4 of the top 5 payers, 8 of the top 10 life sciences companies, more than 20 states and many of the most influential foundations and associations—we provide a unique, 360-degree view of each critical trend. Feel free to reach out to any of our webinar presenters for more information on how to respond to the megatrends:

• Nancy McGee, Managing Director – 415-291-7402 or nmcgee@manatt.com
• Helen Pfister, Partner – 212-830-7277 or hpfister@manatt.com
• Ian Spatz, Senior Advisor – 310-312-4339 or ispatz@manatt.com

How Will the Megatrends Play Out in Mexico? Healthcare Challenges and Opportunities in the Mexican Market

Author: Andrew Rudman, Managing Director, ManattJones Global Strategies, LLC

Editor’s Note: According to a new GlobalData report, Mexico’s pharmaceutical industry will be worth approximately $22.5 billion by 2020. Combined with the medical device industry—expected to grow to $5.4 billion over the same period—the total value of the Mexican healthcare market will be $27.9 billion. Clearly, Mexico is a growing market, offering drug and device manufacturers significant opportunities for expansion. The article below shares insights into Mexico’s substantial market potential—as well as some of its challenges. ManattJones offers exceptional knowledge and firsthand understanding of the Mexican market, with an on-the-ground team in Mexico City and a network that reaches into the highest levels of federal, state and municipal governments.

Are the five megatrends shaping pharma’s next decade in the United States also key change drivers for Mexico? Certainly, there are some commonalities for companies doing business in both countries—but there are also major variations. To succeed in Mexico, manufacturers can’t just “export” the strategies they adopt in the U.S. They must understand the unique challenges and opportunities that Mexico presents for life sciences firms—and craft plans customized to the demographic, economic, cultural and regulatory environment of the Mexican market.

Opening Doors—and Overcoming Hurdles

Mexico is experiencing the “demographic bubble” that we saw in the United States during the post-World War II baby boom. Concurrently, there have been increases in the average lifespan, leading to higher demand for treatments of non-communicable diseases (NCDs). Those changes—combined with the growth of Mexico’s middle class and the economic reforms President Enrique Peña Nieto and the Mexican Congress are introducing—have begun to reduce the differences in standards of living between the two countries.

Narrower differences, however, do not translate into the convergence of our healthcare systems. The fact that the United States shares many healthcare challenges with Mexico does not mean companies can operate the same way in both countries and expect to achieve equal success.

The historic and cultural variations between our nations—along with the still-significant gap in per capita income and inequality—remain key determinants of how our respective systems work. For some segments of the healthcare sector, these differences create challenges and even impediments to doing business. For others, the differences can open doors to important new opportunities. Reviewing each of the five megatrends individually reveals the potential obstacles and opportunities the Mexican system holds for healthcare stakeholders.

From Volume to Value: Increasing Cost Pressures and Growing Rates of Non-Communicable Diseases

As in the United States, cost pressures are central to healthcare delivery in Mexico. Mexico has seen important economic changes over the past two decades, since the implementation of, but not solely due to, NAFTA. The changes have driven the growth of the middle class. They also have dramatically increased life expectancy, from 70 in 1990 to 75 in 2011.

Along with the overwhelmingly positive changes have come some downsides that have altered the composition of the services that Mexican healthcare agencies provide. As incomes have risen, so has the prevalence of NCDs. Today, Mexico has one of the highest rates of diabetes in the world, as well as significant incidences of coronary disease and some cancers. As a result, Mexico is especially vulnerable to both the increasing costs of treating NCDs and the indirect costs of not treating them.

What’s driving the soaring rates of diabetes? Mexico has surpassed the U.S. as the most obese country in the world – and not because Americans have gotten thinner. In late 2013, the Peña Nieto administration sought to address the obesity challenge by proposing an additional tax on soft drinks sweetened with sugar, as well as on products with extremely high caloric content. Although the so-called “junk-food tax” passed, revenues were not allocated specifically to healthcare. Therefore, the tax represented a missed opportunity to augment strained healthcare budgets.

What does this mean for the industry? In simple terms, higher demand for healthcare services will not, at least in the short term, be met with greater access to resources. Just as in the United States, pharmaceutical and device manufacturers will increasingly need to look for creative and innovative approaches, such as risk-sharing agreements, when selling to government agencies.

For the Mexican healthcare system truly to deliver higher value to its consumers, it will need to refocus its resources. President Peña Nieto observed in his National Development Plan (issued in early 2013) that the healthcare system currently focuses more attention on cures than on prevention. This concentration on treating disease rather than preventing it may, in part, cause the bottlenecks at the primary care level within the public system. While attention improves at secondary and tertiary care levels, changes in the overall approach to healthcare will be required to enhance the system’s efficiency.

(Non)Centrality of the States: Understanding the Relationships of Mexican States to Federal Institutions

The Mexican healthcare model is significantly different than the U.S. model in terms of the role of the states versus the federal institutions. Mexican states have a more limited role than their U.S. counterparts. In fact, concerns about misuse of funds and unacceptable differences in care levels among the states have prompted the federal government to exert greater control over state delivery of healthcare.

When Mexico’s universal healthcare program, known as Seguro Popular, was established in 2003, individual states were responsible for providing healthcare for the uninsured. Although Seguro Popular is only one of five federal healthcare programs, it is among the largest, with roughly 50 million beneficiaries.

When it was established, Seguro Popular was funded through allocations from the federal government and state governments, supplemented by contributions from participants. Each state would determine which services to provide and individually procure the necessary drugs and devices. More recently, Mexican federal authorities have sought to limit or control states’ flexibility, ensuring healthcare funds are spent more efficiently. How this effort to assert greater fiscal responsibility and uniformity of care for the uninsured will play out is still unknown. Increased centrality could lead to greater price uniformity across the country. At the same time, it also could expand the market for some medicines and devices.

Mega Health Systems: Identifying Where Consolidation Might Occur

Any consolidation in the Mexican healthcare system will occur within the public systems in an effort to establish a National Universal Health System that would provide healthcare access, regardless of employment or economic status. As noted above, there are five main public providers of healthcare in Mexico. Participation is determined by an individual’s employer (or in the case of Seguro Popular, the absence of a formal employer).

Mexico’s Social Security Institute (IMSS) is the largest of the five systems—and the biggest social security institution in all of the Americas—providing healthcare services to 53 million beneficiaries. Seguro Popular is second largest, covering those without a formal employer. The other three plans cover government workers (excluding the military), defense department employees, and employees of the state-owned petroleum company, PEMEX.

During Pena Nieto’s 2012 presidential campaign, he suggested consolidating Mexico’s five public systems into a single institution. More recent discussions have focused on establishing “portability” under which beneficiaries of one system could receive treatment at facilities belonging to another, a practice which is currently prohibited. Lifting the prohibition could provide more efficient and rational use of healthcare facilities, while also encouraging best practice sharing within and across the institutions.

The reaction of the powerful healthcare unions, and their willingness to accept systemic changes, will be the key challenges to introducing portability successfully. Also challenging will be establishing the rules and technical capacity to share patient data and manage reimbursement across the institutions. Mexico will need to develop innovative solutions, if it is to create a more seamless and efficient system.

On the private side, economies of scale may drive consolidations, just as in the United States. Mexico has a parallel private system which caters largely to its more affluent citizens. Those who can afford it turn to the private system seeking:

• More diverse treatment options without the constraints of institutional formularies,
• Individualized attention from physicians, and above all,
• Shorter waiting times for treatment.

Private hospitals and healthcare systems are looking for opportunities to improve their negotiating position vis-à-vis distributors and manufacturers through outsourcing hospital management. This trend may provide opportunities for outsourcing discreet services within a hospital system, such as laboratory analysis or routine procedures.

Employers Recalibrate: Exploring Medical Tourism

The trend toward employer recalibration in the United States may lead some companies, providers and beneficiaries to contemplate healthcare or medical tourism in Mexico. Medical tourism may look especially appealing to states on the Mexican border.

Mexico already attracts numerous Americans each year for care not typically covered by insurance plans. Popular categories for medical tourism include dental and vision care, as well as weight-loss surgeries. Those seeking to try experimental therapies not approved by the FDA also often travel to Mexico for treatment.

There are several reasons providers, employers and employees may be seriously exploring programs that permit (but do not require) beneficiaries to seek care in Mexico. The savings from choosing treatment in Mexico vs. the United States are substantial, ranging from 36% to as high as 89%. In addition, large populations of Mexican and Mexican-American residents live within miles of the border, making Mexico a convenient choice for cost-effective healthcare. Mexico also can be a good alternative for surgeries which require longer rehabilitation times, such as orthopedics, as well as for those that have become routine, such as coronary bypasses.

Some hurdles must be overcome before medical tourism can reach its full potential. Obstacles include the perception of security problems in Mexico, patient and U.S. physician confidence in quality of care, and uncertainty about insurance coverage. While none of these issues can be easily addressed, the pressure on both providers and patients to control costs may drive them to give greater consideration to medical tourism.

Healthcare Everywhere: Dealing with Limited Access

The development of new technologies will have a similar impact in Mexico as in the U.S. and may generate similar opportunities. One key difference, however, is the more limited access to broadband in Mexico. According to the Organization for Economic Cooperation and Development (OECD), the United States has nearly three times as many broadband subscriptions per 100 inhabitants as Mexico overall—and the difference in rural areas would likely be much greater.

Inequality in Mexico is manifested in many ways, not least of all in access to technology. Wealthier, urban Mexicans have access to all the same technologies available in the United States, while their poorer, rural counterparts do not. These access differences – both in terms of broadband connectivity and the resources necessary to obtain devices to connect to the Internet – place limits on the immediate ability to implement m-health solutions.

At the same time, the potential to provide new technologies, expand healthcare to new populations and reduce the costs of providing care to existing patients is exciting. In particular, telemedicine may help Mexico address the efficiency challenges currently plaguing its healthcare infrastructure.

Conclusion

Trends prevalent in the United States will play out in Mexico, as well. The differences in the healthcare systems and the populations they serve, however, will lead to very different outcomes.

Mexico is currently experiencing a demographic bubble, which will be followed by a commensurate increase in retirees and the associated growing need for healthcare. At the same time, the standard of living is improving, driving a growing demand for better healthcare. As a result, despite its issues, Mexico presents important expansion opportunities for drug and device manufacturers.

While the private insurance model provides an outlet for those frustrated with the deficiencies of the public system, the Peña Nieto administration must look to “do more with less” to address the expanding healthcare market. Healthcare reform has not received the level of attention that has been extended to energy and labor reform. As those reforms bear fruit, however, President Peña Nieto and his team will inevitably turn to healthcare, where both the possibilities and the challenges remain great.

Laser Focus on Health IT Interoperability

Author: Deven McGraw, Partner, Healthcare Industry, Manatt, Phelps & Phillips, LLP

The Health Information Technology for Economic and Clinical Health Act (HITECH Act) requires that the U.S. Department of Health and Human Services (HHS), in implementing the electronic medical records “meaningful use” incentive program, focus on the secure exchange of health information to improve individual and population health. Exchange requirements were fairly minimal, however, in the first stage of the program. Stage 2 began for early adopters this year, and concerns are being raised about the inability of program participants to meet exchange objectives, including:

• Exchanging information with other healthcare providers to support transitions in care.
• Sharing data with patients through portals and secure e-mail.

Lack of Interoperability Interferes with Sharing

Lack of “interoperability” is commonly perceived to be the main obstacle to sharing data. From a technical standpoint, interoperability is “the ability of two or more systems or components to exchange information and to use the information that has been exchanged.” (IEEE Standard Computer Dictionary, 1990) In the context of health IT, interoperability is more broadly understood to refer to the ability of disparate entities to access and share health information that can be easily utilized to inform decision-making by providers and patients and provide the foundation for improvements in individual and population health.

Pockets of interoperability exist today. The more robust interoperability needed to fully leverage the promise of health IT, however, has not yet been realized.

At the August Health IT Policy Committee, the HHS presented a summary of survey research on health information exchange activity between physicians and hospitals, as well as between providers and patients. Prior to Stage 2 of meaningful use, exchange among providers – particularly exchange with external providers – remained fairly limited, although it had increased since 2008. Early Stage 2 data shows there still is only a limited exchange of data to support transitions in care, and a significant number of patients continue to report gaps in information-sharing.

The HHS summary reinforced key themes that emerged from “listening sessions” conducted by the Health IT Policy Committee’s Information Exchange workgroup and reported to the Policy Committee at its April 2014 meeting. Those sessions revealed that providers participating in the meaningful use program were undergoing significant challenges in meeting both of the Stage 2 exchange goals—supporting transitions in care and implementing data sharing with patients through secure portals and e-mail.

New Focus on a Solution

In the past, solving obstacles to exchange was seen as having at least two major dimensions:

• Technical barriers (specifically, the inability of different electronic medical record (EMR) systems to be able to send, receive and “consume” relevant clinical information about a patient), and
• Lack of incentives to share information in fee-for-service payment models.

With payment reform—including Accountable Care Organizations (ACOs), medical homes, and bundled and value-based payments—gaining a greater foothold in the industry, the demand from providers to share data with one another is growing. In addition, HHS now seems more focused on finding answers to the remaining technical and policy obstacles to exchange.

The latest effort to overcome challenges to interoperability began in March 2013, when the Centers for Medicare and Medicaid Services (CMS) and the Office of the National Coordinator (ONC) sent out a request for feedback from the public on “Advancing Interoperability and Health Information Exchange.” Several months later, the agencies jointly issued a report summarizing the public’s comments and identifying a number of principles and strategies for accelerating HIE.

On June 5, 2014, ONC, under new leadership, issued a “10-Year Vision to Achieve an Interoperable Health IT Infrastructure” that includes a short list of overarching guiding principles, broad goals and representative “use cases” that illustrate those goals to be met within three, six and 10 years. The agenda for achieving the vision, which is intended to engage all aspects of the federal government, focuses on five “building blocks”:

1. Core technical standards and functions
2. Certification to support adoption and optimization of health IT products and services
3. Privacy and security protections for health information
4. Supportive business, clinical, cultural and regulatory environments
5. Rules of engagement and governance

A National Interoperability Roadmap to Achieve the 10-Year Vision

At the August 2014 meeting of the Health IT Policy Committee, Erica Galvez, the Interoperability Portfolio Manager for ONC, presented ONC’s efforts to develop a national interoperability roadmap to achieve its 10-year vision. The roadmap is expected to address three key questions:

• What are the critical technologies and policies (including governance) required to achieve the vision?
• Who needs to do what and by when (including government, technology developers and technology users)?
• How will the roadmap be updated over time and at what frequency?

The roadmap is currently in development, informed by both an online community forum and the federal Health IT Policy and Standards Committees. The work is being augmented by research and analysis that both staff and consultants are actively performing.

The initial draft is expected to be released in October, in time for a joint meeting of the Health IT Policy and Standards Committees scheduled for October 15. The draft will be subject to comment from the Committees and their working groups, as well as from the public. The final roadmap is expected to be released in March 2015.

Efforts Informing the Roadmap’s Development

A number of developments could inform the roadmap’s development, including:

• In March 2014, the GAO issued a report criticizing HHS for its exchange strategy. The report urged the Department to develop specific actions to advance health information exchange and to set milestones with timeframes for the actions to gauge progress more accurately.
• In April 2014, the Agency for Healthcare Research and Quality released the JASON report prepared by Mitre Corporation, on “A Robust Health Data Infrastructure.” The report includes recommendations for developing a health information-sharing software infrastructure within the next 12 months, based on published application programming interfaces (APIs). Patients would control the sharing of their health data through expressed privacy preferences. The Health IT Policy and Standards Committees have established a joint workgroup to evaluate this report and provide feedback.
• In June 2014, an article published in JAMIA by the SMART (Substitutable Medical Applications and Reusable Technology) C-CDA Collaborative identified issues with interoperability for C-CDAs, the standard for document exchange to support transitions of care for Stage 2 of meaningful use. The article suggested practical opportunities to improve C-CDA exchange capabilities in the coming years.
• The U.S. Senate included language in the draft HHS appropriations bill directing the federal Health IT Policy Committee to submit a report on the technical, operational and financial barriers to electronic health records interoperability.
• The private sector also is launching efforts to advance interoperability, including Healtheway’s Carequality initiative and the eHealth Initiative’s 2020 Roadmap.

Conclusion

The onset of Stage 2 has placed long-standing obstacles to exchange in sharper relief, and the recent spate of activity presents a critical opportunity for HHS to use its policy levers to build a firmer foundation for advancing interoperability. The success of this intensive effort, however, will depend as well on the willingness of the industry and other stakeholders to participate—and to embrace and support the changes that may be necessary to achieve interoperability.

You’re Invited to a New, Free Webinar: “Avoiding the Regulatory Land Mines of Commercial ACOs”

Click here to register free—and join us on September 30 from 1:00 – 2:00 p.m. ET.

Commercial Accountable Care Organizations (ACOs) are increasingly attractive to providers, because they offer more flexibility but less burdensome requirements than Medicare. They also present greater risks, however, because the regulations under which they operate are not as clear. In a new, free webinar, Manatt Health helps you safely navigate the potential pitfalls of commercial ACOs while taking advantage of their benefits. Join us for “Avoiding the Regulatory Land Mines of Commercial ACOs”—and discover new approaches for conquering the compliance challenges of hospital-physician commercial ACOs.

How can commercial ACOs protect against price-fixing claims and antitrust scrutiny? How can physicians and hospitals collaborate in commercial ACO arrangements without fear of violating the Stark Law or Anti-Kickback Statute? How can doctors and hospitals structure financial relationships and calculate market value to minimize compliance risks? The webinar will reveal the answers—and show you creative paths to protecting your organization in an uncertain regulatory environment. During the program, you will:

• Learn how commercial ACOs can potentially implicate the Stark Law and Anti-Kickback Statute.
• Examine how the corporate structure and contracting arrangements of commercial ACOs affect the application of fraud and abuse laws.
• Find out the scope of the fraud and abuse waivers established under the Medicare Shared Savings Program (MSSP)—and when the waivers can (and can’t) be used to protect commercial ACOs.
• Discover how MSSP affects the antitrust analysis of commercial ACOs.
• Explore concentration and market share analyses for ACOs.
• Evaluate clinical integration for commercial ACOs.
• Gain insight into contractual constraints—and how sensitive they are to antitrust analyses.

While commercial ACOs provide benefits, they also present risks. But careful planning and innovative thinking can keep your organization out of danger. The webinar will provide important guidance on how you can realize the advantages of commercial ACOs—without stepping on a regulatory land mine!

Even if you can’t make the original airing September 30 at 1:00 pm ET, register now, and we’ll send you a link to view the program on demand.

Presenters:

Robert Belfort, Partner, Healthcare Industry, Manatt, Phelps & Phillips, LLP
Martin Thompson, Partner, Healthcare Industry, Manatt, Phelps & Phillips, LLP

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