Post-Election Healthcare Legislative and Regulatory · PDF filePost-Election Healthcare...

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Monday, November 14, 2016

Noon – 1:30 Pacific / 1:00 – 2:30 Mountain / 2:00 – 3:30 Central / 3:00-4:30 PM Eastern

Post-Election Healthcare Legislative and

Regulatory Outlook

Sponsored By:

Andrew B. Bressler, CFA

Research Analyst

MLPF&S

[email protected]

+1 202 442 7454

BofA Merrill Lynch does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Refer to important disclosures on page 42-47

http://www.baml.com/healthcare

Election Results

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President-Elect Trump

• Electoral Votes: Trump 306 vs. Clinton 232 (pending for MI & NH)

• Popular vote: Clinton 60.1 million vs. Trump 59.8 million

Election Results - President

Source: BofA Merrill Lynch Global Research

4

House of Representatives

• Republican maintains control 241-194 (pending a couple of races) – Change of 5 votes

• Speaker Paul Ryan likely to maintain his Speakership

• Ways and Means Committee: Chairman Brady (R-TX) remains; Health Subcommittee Chair Tiberi (R-OH)

• House Energy and Commerce Committee will see changes Chairman Upton (R-MI) is term limited:

• Possible Chairman: Shimkus (R-IL); Walden (R-OR);

• Possible Health Subcommittee Chairmen: Murphy (R-PA); Burgess (R-TX)

Senate

• Republicans maintain control with 52-48 margin (vs. 54-46 margin currently)

• Senator McConnell continues as Majority Leader; New Senate Democratic Leader: Chuck Schumer (D-NY)

• Otherwise, likely to see same Chairmen in Senate Committees: Finance (Hatch), and HELP (Alexander)

Health and Human Services – Potential Leaders

• Governor Bobby Jindal, former Governor of Louisiana

• Newt Gingrich, former Speaker of the House

• Dr. Ben Carson, former Pediatric Neurosurgeon, and former candidate for President

• Governor Rick Scott, Florida

• CMS Administrator - ??

Congress & Trump Administration

Source: HHS, BofA Merrill Lynch Global Research

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Significant Potential Changes for Affordable Care Act

• Use of Reconciliation to repeal significant portions of the ACA

• Coverage Provisions at Risk: Repeal Exchange Subsidies / Medicaid Expansion

• Repeal Individual Mandate / Employer Mandate

• Repeal Tax Provisions: Medical Device Tax; Health Insurance Industry Tax; Cadillac Tax, etc.

Uncertainty About What Comes Next?

• Repeal and Replace – But, Replace with What?

• Trump does not have much detail on health care on health care policy

• Likely to look towards Congressional leaders for guidance: Speaker Ryan / Majority Leader McConnell

• Payment reform models (Value Based Purchasing / ACOs / Bundled Payments, etc.) likely to Remain in place

Two Big Take-Aways

• Significant Concerns about Coverage Expansion & impact on hospitals and other providers;

• Less focus on Pharmaceutical-Biotech pricing / regulation – compared to the set of proposals from Hillary Clinton

Health Care Issues for 2017


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21st Century Cures Act

• House and Senate Leadership are committed to completing this effort by December

• Includes provisions to speed clinical trials / research / approvals at both FDA and NIH

• Breakthrough designation for medical devices

• Additional funding for NIH

• Negotiations continue to hinge on how to pay for additional funding associated with the bill

FY2017 Appropriations / Continuing Resolution – Expires December 9

• Omnibus Appropriations vs. Another Continuing Resolution (3-4 months)

Mental Health Reform Legislation – More Likely for 2017

• Senate efforts at moving legislation have slowed due to gun provisions being debated as part of this bill

• Effort would not likely include repeal of IMD exclusion for Medicaid – due to costs

Other Legislation

• LTCH 25% rule – delay until July 1, 2017

• Hospital Outpatient Department site neutral provision – expanded grandfathering from November 2015 implementation

• Other Hospital Provisions

• Health Insurance industry tax moratorium extension – through 2018

• Tax extenders

Lame Duck Session of Congress


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User Fee legislation (Must pass by September 30, 2017)

• Prescription Drug User Fees

• Medical Device User Fees

• Generic Drug User Fees

• Biosimilar User Fees

• May see other proposals to provide incentives for generic drug approvals / speed FDA process / provisions from 21st Century Cures Act

Medicare and Medicaid and CHIP Program provisions to be Extended (by September 30)

• Medicare extenders include Ambulance add-ons, Part B therapy exceptions, MDH program, etc.

• CHIP reauthorization – expires at end of FY2017

• Other Medicare / Medicaid proposals may also be included (Post-acute VBP, Hospital proposals, Bundled Payments, etc.)

Additional Health Care Legislation that Will be Addressed in 2017


Health Care Reform Issues

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Health Insurance Exchange Enrollment

Source: HHS, CBO

HHS expects end-of-year 2016 Exchange enrollment of 10 million • Exchange Enrollment expected to reach 13.8 by end of 2017 Open Enrollment period (January 31, 2017) • CBO original estimates called for 22 million+ enrollment by 2016 -- expecting a larger shift from Employer Plans, as well as a

large decline in the off-exchange individual market – which has not happened • Now projecting exchange enrollment to reach 19 million by 2019 – looking less and less likely, given recent issues on HC

Exchange plan participation, and premium increases

Total HC Exchange Enrollment / Estimates (Millions)

8.1

6.7

11.7

9.9

9.0

12.7

10.0

13.8

0

2

4

6

8

10

12

14

16

April 2014 Oct 2014 Feb 2015 June 2015 Dec 2015 Feb 2016 Dec 2016 - CMS Est. Feb 2017 - CMS Est.

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State Medicaid Expansion Plans

Source: AP, Urban Institute, BofA Merrill Lynch Global Research

Medicaid Eligible Uninsured Adults with income below 133% of FPL (Thousands) • HHS estimates expansion has increased Medicaid Enrollment by 15.7 million (since fall of 2013) • 31 States are now expanding Medicaid

Idaho 126

Washington

375

Montana 73 North Dakota

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Wisconsin 235

South Dakota 49

Kentucky 366

Iowa 130

Kansas 17

Oklahoma

303 Arkansas 254

Louisiana 392

Mississippi

293 Alabama

397

Wyoming 31

Oregon 292

Utah 145

New Mexico 162

Minnesota 168

Missouri 402

Georgia 843

North Carolina 720

South Carolina

389

Tennessee 459

Indiana 438

Illinois 700

Ohio 705

Pennsylvania 613

New York 811

New Jersey (349)

Maryland (224)

Delaware (137)

Massachusetts (108)

Maine 59

Vermont 18

New Hampshire (58)

Virginia 412

W. Virginia

154

Florida

1,552

Hawaii 45

Nebraska 99

Texas

2,036

Arizona 354

Colorado 291

California

Nevada 204

Alaska 46

Connecticut (113)

Rhode Island (51)

2,456

State Medicaid Expansion

Has expanded

Has not Expanded

Michigan

676

Considering Medicaid

Expansion / Alternatives

Alternative

Medicaid Expansion in place

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Reform / Implementation Issues

Source: CMS

CMS Reports Strong Medicaid Expansion Enrollment Through August 2016 of 15.7 Million since fall 2013 31 States have expanded so far (Louisiana latest state to expand), with a few others have looked to expand

2.4 3.2

4.9

6.0

6.9

7.8 8.2

9.1 9.6

10.0 10.5 10.8

11.6 12.1

12.6 12.8 12.8 13.1 13.2 13.6 13.3 13.5

14.1 14.5

14.9 15.0 15.0 15.0 15.1 15.2 15.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Medicaid Expansion Enrollment- US

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Reform / Implementation Issues

Source: Gallup-Healthways Survey

Significant Declines in the Number of Uninsured • Uninsured rate down to 11%, from a peak of 18%

Un-insured rates for Adults, Age 18 and over

16.1%

17.3%

17.1% 16.8%

18.0%

15.6%

13.4%

12.9%

11.4%

11.9%

11.0%

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

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There Have been Concerns about Plan Participation in the Exchanges and Plan Premium Increases for 2017

• Enrollment slower than expected – Original estimates were 21-23 million enrollment in exchanges by 2016 (CMS estimates 13.8 million signed up by January 31)

• Exchange Risk Pool – more costly than expected

• Special Enrollment Periods contributing to higher costs / risk pools – estimated 55% more costly for enrollees in Special Enrollment Periods – CMS is now implementing changes to address this

• Risk Corridor Payments paid out at only 13% to Health Plans in 2015 (for 2014 plan year) – Administration is considering using a settlement fund to payout additional risk corridor payments – however, Republicans in Congress oppose this approach as circumventing Congress

• Few employers dropped coverage – yielding fewer covered lives in exchanges

• Individual health insurance market outside of Exchanges remains robust – expectations were that more individuals would shift coverage to HC Exchanges (about 9 million – with an estimated 2.5 million who would be eligible for exchange subsidies)

• Premium increases for 2017 – Came at a Politically Sensitive time (22% increases on average, with some states as high as 100%+)

2016/2017 Health Exchange Issues


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CMS announced a range of proposed rules to strengthen the Exchange marketplaces:

• Curbing Abuses of Short-Term Plans:

• Proposal to limit short-term limited health plans to no more than 3 months;

• Coverage may not be renewed

• Requires disclosure to consumers that short-term coverage does not meet minimum requirements;

• Risk Adjustment modifications:

• Include an adjustment for partial year enrollees (beginning in 2017);

• Include prescription drug utilization data in risk adjustment (in 2018);

• Possible other future risk adjustment changes.

• Transition Enrollees at age 65 into Medicare

• Special Enrollment Period Documentation Requirements

• Addressing Data Matching issues for Exchange Enrollees

• Third party payer limitations / steering of patients into exchange plans (i.e., Dialysis/Drug companies)

Recent Health Care Exchange Plan Regulatory Actions


Affordable Care Act – Repeal Outlook

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President Trump – Healthcare Proposals

Source: Candidates websites, BofA Merrill Lynch Global Research

Donald Trump’s Health Care Proposals

Repeal Obamacare

However, recently stated he may be willing to keep “some” portions of Obamacare:

Coverage of children up to age 26 on parents plan No pre-existing condition exclusions

Limited detail, but, primarily Republican framework for reform:

Expand use and availability of HSAs (Health Savings Accounts)

Allow for purchase of health plans across state lines

Allow individuals to fully deduct health insurance premium payments from their taxes

Require price transparency from healthcare providers: especially physicians, clinics, hospitals

Move Medicaid to a Block Grant program

Likely to defer to Congressional Republican Leaders / Speaker Ryan regarding health care reform modifications / replacement

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House Republican Health Care Reform Alternative Proposals


House Republican White Paper

Paul Ryan (R-WI) and Republican leaders in Congress released their White Paper on health care replacement legislation in late June:

Promotion of Health Savings Accounts (HSAs) – Republicans support the promotion of HSAs, and some call for providing up to $1,000 refundable tax credit to incentive individuals to start an HSA.

Refundable advance tax credit for individuals to purchase health coverage – Would attempt to level tax treatment between employer coverage and individual coverage by providing a tax credit for all individuals to purchase health insurance coverage.

Federal funding for State Innovation Grants, as well as state-based High Risk Pools. These efforts would seek to shift health care reform down to the state level.

Cap tax exclusion for employer health benefits – Proposal would call for a cap on the value of the employer health benefit tax exclusion (deductibility) – Employers and Unions have historically opposed these efforts, which are akin to the “Cadillac tax”

Medicare Premium Support – Proposal has been championed by Speaker Ryan in the past, and would call for phasing in a competitive market for Medicare health plans to compete more directly with Medicare Fee for Service.

Medicaid Reforms / Block Grants – Shift Medicaid payments to a block grant approach with states choosing between a per capita allotment, or a block grant, while providing more flexibility to states to manage their Medicaid programs.

Sale of Insurance Across State Lines -- This proposal would allow individuals to purchase health coverage from out of state health plans

Coverage for Pre-existing conditions / Guaranteed issue with No Individual or Employer Mandates – These efforts would focus on high risk pools, and other targeted subsidies for individuals with pre-existing conditions.

Allow dependent coverage up to age 26 on parents plan.

Health insurance premium rating band modified to be 5:1 vs. current 3:1, but, would allow state flexibility

Range of Medicare reforms – These reforms include repealing IPAB; repealing the Center for Medicare and Medicaid Innovation CMMI; modifications to Medicare Advantage program; repeal ban on physician owned hospitals; revise and delay Medicare/Medicaid DSH reductions; and increasing the eligibility age for Medicare to age 67, beginning in 2020.

Medical Malpractice Reforms

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House Republican Health Care Reform Alternative Proposals


House Republican White Paper

Will there be any Medicare / Medicaid / Entitlement Reforms – Supported by Many Congressional Republicans - However, Trump has stated that he would not be in favor of Medicare or Medicaid “Cuts”

Medicare / Medicaid provisions Include:

Strengthen MA / MA & FFS Medicare Performance Parity

MA VBID

Medicare Premium Support (starting in 2024)

Raise Medicare age to 67

Repeal IPAB

Repeal CMMI

Combining Medicare Parts A & B

Medigap Reform

Repeal Ban on Physician-Owned Hospitals

Uncompensated Care Reform – Suspend Medicare/Medicaid DSH Cuts – replace with uncompensated care pool

House Republican Proposal Insurance Regulatory Revisions:

Would maintain HC Coverage for children up to age 26 on parent’s health plan

Would keep some insurance regulations: Require guaranteed issue / renewability / No Pre-existing limits

Calls for requirement of continuous insurance coverage – otherwise face increased premiums

Revise community rating to 5:1 instead of 3:1

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Previous Reconciliation Bill


Key Provisions from HR 3762 (vetoed by President Obama in January 2016)

Repeal of HC Exchange Subsidies – Beginning in 2018

Repeal of Medicaid Expansion – Beginning in 2018;

Eliminate Individual Mandate & Employer Mandate Penalties;

Repeal Medicaid DSH Cuts ($37.5 billion in costs)

Repeal Specific Tax Increases:

Health Insurance Industry Tax

Medical Device Tax

Pharma industry Tax

Cadillac Tax

OTC medications Tax

Medicare Payroll Tax / Net Investment Tax

Transition Period of 2 years

Did not include a repeal of any Medicare Payment Reductions (MB cuts, VBP, etc.)

Did not include any revisions to Health Insurance Regulations – Since Procedurally not able to be included in Reconciliation

All Reconciliation provisions must be budget related

But, a separate “companion” bill could include insurance regulatory provisions

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Health Care Reform Revisions


Legislative Revisions in Health Care Reform Law Have Been Limited

Congress has focused on several reforms/revisions

Medical device tax - Congress has Suspended the Tax for 2 years (2016/2017)

Cadillac Tax / High-cost health plan tax (takes effect in 2018) - Congress has delayed the tax until 2020 - President Obama remains supportive of the Cadillac tax as a way to control future HC costs. Democratic leaders in Congress also support repeal, as well as Hillary Clinton and Bernie Sanders

Health Insurance Industry Tax – Congress suspended the tax for 2017

Other proposals to modify ACA include:

Health Reimbursement Accounts for Small Businesses – Allow firms with less than 50 employees to fund pre-tax HRAs

Repeal Increases in Income Threshold for Medical Expense Deduction

Revise Rating Bands from 3 to 1 to 5 to 1: Commonwealth Fund estimates that this change would result in roughly 400,000 fewer older enrollees, but, overall, could see 1.8 million more enrollees

Revise ACA’s current 90 day premium payment grace period down to 30 days:

Require exchanges to verify eligibility to enroll during special enrollment periods

Require states to return any unspent health exchange grants

Pre-enrollment Verification - for those using special enrollment periods

Use of Section 1332 Waivers – Theoretically allow States to Significantly modify ACA Requirements

However, must receive approval from HHS

Could be used as a vehicle for making significant changes under a Republican President

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District Court Decision in House of Representatives vs. Burwell

• Decision sides with Republicans striking down cost sharing subsidy payments for HC Exchange Plans

• However the decision is being appealed to the DC Circuit Court – Not likely to see a decision until 2017, and may be appealed to the Supreme Court after that

• 2016 cost sharing subsidy payments of $7 billion

• Does not impact premium subsidies of $32 billion (in 2016)

Impacts:

• Beneficiaries would still see lower cost sharing

• However, health plans would no longer receive payments to offset costs

• Likely see premium increases

• Likely see premium subsidies increase (as premiums rise)

• Reduce enrollment in exchange plans as premiums rise

House of Representatives vs. Burwell


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Reconciliation Process

• Requires a Budget Resolution to Establish Framework

• Avoids the need for 60 votes to overcome a filibuster in the Senate

• Both Congressional Leaders and Trump have suggested moving very quickly on an ACA Repeal (first 100 days)

• Only Budget related provisions can be included, and, therefore additional legislation may be needed to address health insurance regulatory changes

Implementation of a Replacement Health Care Plan (at least 2-3 Years)

• Republicans would like to have at least some Democratic Support

• Likely will see a Transition Period of at least 18-36 months – to limit disruption for existing individuals in Exchange Plans / Medicaid Expansion

• Sensitivity to States – Particularly Medicaid Expansion state with large numbers of enrollees

• Includes many Republican Governors who have supported Medicaid Expansion

• Sensitivity to Elections in 2018

Timeline for ACA Repeal


Drug Pricing Issues

24 Source: BofA Merrill Lynch Global Research

Pharmaceutical Pricing Issues

Congressional Actions --

Senate Finance Committee report into Sovaldi Pricing (released Dec. 2015) –Senators Wyden (D-OR) /Grassley (R-IA)

Senate Aging Committee Hearings / Investigation targeting Turing Pharmaceuticals and Valeant – First hearing was on December 2015; Follow up hearings in March and April (focus on Valeant)

House Oversight and Government Reform Hearing on February 4th – Focus on Turing Pharma & Valeant

House Judiciary Committee hearing on PBMs, Pharmacy and Competition

Upcoming PDUFA legislation may also provide a vehicle for drug pricing initiatives

Focus on FDA drug approval process; and need to approve generic drugs more quickly

New Congressional Hearings on Mylan / EpiPen pricing issues, with Bipartisan support

Obama Administration has looked at range of options for Regulatory actions:

HHS forum on Drug Pricing Issues (Nov. 2015)

FDA could speed approval of generic backlog / Allow new competitor companies to have accelerated approvals in certain cases / Competition from compounding pharmacies (Daraprim, Makena, etc.) / use of drug shortage authority to approve additional competition for certain high cost drugs

CMS / CMMI proposed Medicare Payment Reforms: Medicare Part B demonstration: “Value Based Drug Pricing” models / Pricing transparency

Other potential demonstrations that could impact Medicare Part D, or Medicare Part B

Focus on Mylan’s EpiPen Medicaid classification as a generic (vs. Brand) for purposes of Medicaid rebates

Drug Pricing Issues

25 Source: BofA Merrill Lynch Global Research

Medicare Part B Drug Pricing Reform Demonstration

Phase I of the Demonstration (Beginning no sooner than 60 days after the final rule - likely in late 2016) – Revises Part B drug payments from ASP+6% to ASP+2.5% plus a flat fee payment of $16.80 per drug per day changes. CMS notes that Phase I is structured to be budget neutral, but, CMS hopes to achieve savings from behavioral changes.

Phase II of the Demonstration (Beginning no earlier than January 2017) – Incorporates the use of value based pricing tools. CMS expects that these efforts would reduce payments for drugs. Proposals include:

Discounting or eliminating patient cost-sharing - Decrease or eliminate patient cost sharing to improve access and appropriate use of effective drugs;

Feedback on prescribing patterns and online decision support tools - Create evidence-based clinical decision support tools as a resource for providers and suppliers focused on safe and appropriate use for selected drugs and indications;

Indications-based pricing - Vary payments for a drug based on its clinical effectiveness for different indications;

Reference pricing -- Set payments to be based on a standard payment rate-a benchmark-for a group of therapeutically similar drug products;

Risk sharing agreements based on outcomes - Allow CMS to enter into voluntary agreements with drug manufacturers to link patient outcomes with price adjustments.

We note that this Demonstration has not been finalized

And, Not Likely to move forward under a Trump Administration, as it has been strongly opposed by Republicans in Congress, along with opposition from Physicians, Hospitals, patient groups, and some Democrats

Drug Pricing Issues

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Drug Pricing Issues


Other Pharmaceutical Pricing Issues

State ballot initiatives to limit drug prices to VA California Prop 61 did not pass (lost 54-46) called for limiting drug prices paid by Medi-Cal and CalPers down to VA formulary levels

Other state legislative efforts call for Drug Price Transparency - justification for large drug price increases (Vermont, Massachusetts, and 10 other states have considered similar proposals

Independent Payment Advisory Board (IPAB) – Can be used to propose Medicare payment reforms, if Medicare cost growth exceeds threshold growth (greater than CPI/GDP +1%). Strong opposition from Republicans and many Democrats. IPAB authority can still be used even if no members are named to Board (authority shifts to HHS) – Likely to be repealed

FTC efforts to limit Branded-Generic drug settlements; Potential investigations on drug pricing and anti-competitive actions (REMS programs to limit competition; use of Citizen’s Petitions)

Federal and State investigations into anti-competitive actions by drug companies; Patient Assistant Programs, etc.

MedPAC/Other Policy proposals and recommendations

Adjustments to Medicare part B drug pricing – down from ASP+6%

Potential reduction in Medicare Part B drug payments for 340B drug discount hospitals

Medicare Part D benefit revisions, including more flexibility on formularies, revise copays for LIS beneficiaries, changes to risk-corridors, beneficiary cost-sharing changes, Revise Medicare Part D protected Classes – removing immunosuppressants and antidepressants

Regulatory/Payment Issues

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Rate / Regulatory issues

CMS finalized a net Inpatient Hospital Medicare payment increase of +0.9% for FY2017 –in line with expectations – but, includes additional code creep adjustment of 1.5% for FY2017

Includes reductions in uncompensated care / DSH funding of $217million (down 2.2% from FY2016)

Also, includes a reversal of previous reductions related to the 2-Midnight Rule – yielding a +0.8% adjustment for FY2017

CMS finalized a net 1.7% payment increase for HOPD rates for 2017 – in-line with expectations.

Comprehensive Care for Joint Replacement (bundled payments for hip and knee procedures) – Took effect April 1, 2016; 67 markets across US (23% of volumes) – modest positive for hospitals, but, post-acute at risk

Proposed Bundled Payments for Cardiac procedures (AMI & CABG) & Hip/Femur Surgeries – Proposed to take effect on July 1, 2017 in 98 markets for Cardiac, and 67 markets for Hip/Femur (same 67 as CCJR demo)

Site Neutral Payments for HOPD – Remains and Issue for Policymakers / MedPAC

AHA efforts to push back on any additional site-neutral payment reforms

Potential House Ways and Means Legislation on Hospital Payment Reforms

Site Neutral

Value Based Purchasing for Post-Acute

Hospital Sector Regulatory / Legislative Issues


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Payment Reforms for Physicians

Annual Updates:

2016 through 2019: +0.5% per year

2020 through 2025: No update

2026 and Beyond: 0.75% Update for physicians in APM; 0.25% Update for all other physicians

Alternative Payment Models: 5% bonus payment to all physicians who quality beginning in 2019, through 2024

Merit Based Incentive Payment System – Value based purchasing program for physicians:

2019: +/- 4%

2020: +/- 5%

2021: +/- 7%

2022 and beyond +/-9%

MACRA Final Regulation – Released in October; CMS included additional flexibility/options for physicians data reporting beginning in 2017

Final 2017 Medicare Physician Payment Update calls for essentially flat payments in 2017, however, one specialty continues to see significant volatility:

Independent Pathology Labs: -5%

Physician Payment Reforms - MACRA


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Regulatory Issues for FY2017

Home health – Final 2017 regulation includes a net 0.7% payment reduction,

Includes code creep adjustment of 0.97% (CMS phasing in 2.88% code creep over 3 years); and final year of re-basing payment adjustment.

New Value Based Purchasing program implemented in 7 states, with payment adjustments starting at +/- 3% in 2018, phasing up to +/- 8% by 2021 (7 year mandatory program)

Pre-claim review demo in 5 states (prior authorization model-now delayed, but, still likely to move forward)

Skilled Nursing Facilities – CMS finalized FY2017 payment increase of +2.4% - in-line with expectations, and did not include any additional payment reforms addressing therapy payments – However, CMS notes research continues to refine SNF PPS, especially for therapy payments.

Inpatient Rehab Facilities – CMS finalized FY2017 payment increase of +1.9% - no major changes in policy

LTCHs – CMS finalized FY2017 net payment reduction of 7.1%; CMS estimates 45% of cases were site-neutral, and those cases will see a 23% reduction in FY2017

CMS also re-instituted the 25% rule effective October 1, 2016

“Site-Neutral Payments” – FY2017 is year 2 of 2-year phase-in – exempts patients with 3-day ICU or Ventilator

Moratorium on new LTCHs continues through September 30, 2017

Hospice – CMS finalized FY2017 payment increase of +2.1%

Note that Hospice payment reforms took effect on January 1, 2016 with revised payments for hospice stays less than 60 days / more than 60 days; and additional add-on payment for skilled care in last 7 days of life.

Continued scrutiny on long-stay hospice patients, as well as patients discharged alive, and potential payment adjustments for hospice patients in LTC facilities.

Post-Acute Regulatory / Legislative Issues


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Other CY2016 Payment Regulations

Inpatient Psych Hospital Issues

The FY2017 payment increase is +2.2%; and did not include any PPS refinements – We note that CMS only issued a rate update notice for FY2017, with no significant policy changes for FY2017 - Positive outlook

Administration also finalized easing the IMD exclusion for Medicaid managed care plans – a positive for Inpatient Psych

Legislation in Congress also seeks to provide some relief from the IMD exclusion for all Medicaid inpatient psych patients – but, ultimately was not included in latest Mental Health legislation due to potential costs.

ASC Payments

CMS Finalized a net 1.9% payment increase for 2017– Update better than expected with a CPI estimate of 2.2%, less a 0.3% productivity factor reduction.

Dialysis Payments

CMS proposed a net 0.7% increase in payment for 2017; Congress mandated payment adjustments for 2016-2018

CMS / Insurer concerns over steering dialysis patients into HC Exchanges, and out of Medicare/Medicaid coverage – Will see additional regulations limiting this practice.

Clinical Lab Payment Reforms – Delayed until 2018

Final clinical lab payment regulation for reporting commercial payment rates released in June, calls for delaying payment reforms until January 2018, and will also include hospital outreach labs in the data reporting of commercial payment rates. CMS estimates net payment reductions of more than 5% in 2018.

Separately, CMS finalized new coding and payment rates for “drugs of abuse” testing in 2016 – that result in significant reductions for these tests; moving to 3 codes for presumptive tests / 4 tiered coding for definitive tests with significant proposed rate cuts. However, for 2017, CMS has released preliminary rate adjustments to mitigate these cuts with payment increases. Final lab coding payment determinations will be announced in November.


32

Other Key Regulatory Issues


Final MACRA Medicare Physician Payment Reform Regulation (Released in October)

Implementing Value Based Purchasing (Merit-Based Incentive Payment System (MIPS)) and Alternative Payment Model approaches for physicians (SGR replacement)

Final Medicaid Managed Care Regulation (Released in April)

Includes a range of new federal requirements for states to follow to regulate Medicaid Managed Care plans. Final regulation came in pretty much as expected, included 85% MLR for Medicaid Managed Care plans, also, CMS Finalized IMD Exclusion Relief for Managed Care plans.

Final Medicare Clinical Lab Payment Reforms (Released in June)

New Medicare payment revisions delayed until 2018 , and CMS also will include hospital outreach lab data in reporting of commercial lab payment rates – a positive for the clinical lab industry.

FDA Guidance on Laboratory Developed Tests (LDTs) – Still TBD

Implementing new FDA regulation on lab tests developed without previous FDA oversight (historically regulated by CMS under CLIA)

Payment Reform Demonstrations from CMMI

CCJR Bundled Payment demo took effect on April 1 across 23% of US markets

Proposed new Bundled Payment demo for Cardiac Care and Hip/Femur surgeries – scheduled to take effect July 1, 2017

Part B Drug payment reform Demo – Final regulation due later in 2016

Home Health Pre-Claim Review Demo in five states (IL, FL, TX, MI, MA) beginning in 2016

CMS issuing RFI regarding providers “inappropriately steering patients into HC Exchanges”

Request for information on potential new guidance / regulations to limit practice – impact for dialysis providers

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Alternative Payment Models Update

Source: CMS BofA Merrill Lynch Global Research

Medicare Payment Reforms Gain Traction into 2016

Value Based Purchasing / Alternative Payment Models continue to expand in Medicare

CMS estimates that 85% of all FFS payments will be linked to quality and 30% of FFS will be through an Alternative payment model in 2016

Physician payments will shift to VBP and APMs by 2019

Bundled Payments expanding under Medicare

Joint replacement bundled payment program effective April 1, 2016 across 23% of US

Additional bundled payment demos to take effect July 1, 2017 for Cardiac & Hip/Femur procedures

Other Payment reforms also take effect in 2016 and beyond

Site neutral payment reforms for HOPD DME competitive bidding prices expanded across US and into Medicaid Hospice payment reforms LTCH site neutral payment reforms Other potential payment reforms for SNF payments (TBD), Clinical lab payment reforms (2018)

0%

20% 30%

50%

68% 80% 85% 90%

0%

20%

40%

60%

80%

100%

2011 2014 2016 2018 Alternative Payment Models Linked to Quality

Percentage of Medicare FFS Payments in Alternative Payment Models / Linked to Quality

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Questions

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To Complete the Program Evaluation

The URL below will take you to HFMA on-line evaluation form.

You will need to enter your member I.D. # (can be found in your confirmation

email when you registered)

Enter this Meeting Code: 16AT58

URL: http://www.hfma.org/awc/evaluation.htm

Your comments are very important and enables us to bring you

the highest quality programs!

http://www.hfma.org/awc/evaluation.htm

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Important Disclosures

BofA Merrill Lynch Research Personnel (including the analyst(s) responsible for this report) receive compensation based upon, among other factors, the overall profitability of Bank of America Corporation, including profits derived from investment banking. The analyst(s) responsible for this report may also receive compensation based upon, among other factors, the overall profitability of the Bank’s sales and trading businesses relating to the class of securities or financial instruments for which such analyst is responsible.

BofA Merrill Lynch Global Credit Research analysts regularly interact with sales and trading desk personnel in connection with their research, including to ascertain pricing and liquidity in the fixed income markets.

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Other Important Disclosures

Prices are indicative and for information purposes only. Except as otherwise stated in the report, for the purpose of any recommendation in relation to: (i) an equity security, the price referenced is the publicly traded price of the security as of close of business on the day prior to the date of the report or, if the report is published during intraday trading, the price referenced is indicative of the traded price as of the date and time of the report; or (ii) a debt security (including equity preferred and CDS), prices are indicative as of the date and time of the report and are from various sources including Bank of America Merrill Lynch trading desks.

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This report may contain a trading idea or recommendation which highlights a specific identified near-term catalyst or event impacting a security, issuer, industry sector or the market generally that presents a transaction opportunity, but does not have any impact on the analyst’s particular “Overweight” or “Underweight” rating (which is based on a three month trade horizon). Trading ideas and recommendations may differ directionally from the analyst’s rating on a security or issuer because they reflect the impact of a near-term catalyst or event.

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Copyright 2016 Bank of America Corporation. All rights reserved. This research report is prepared for the use of BofA Merrill Lynch clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of BofA Merrill Lynch. BofA Merrill Lynch Global Research reports are distributed simultaneously to internal and client websites and other portals by BofA Merrill Lynch and are not publicly-available materials. Any unauthorized use or disclosure is prohibited. Receipt and review of this research report constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report (including any investment recommendations, estimates or price targets) without first obtaining express permission from an authorized officer of BofA Merrill Lynch.

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