Avalere Health CEO Dan Mendelson shares implications of the Supreme Court ruling (transcript)

This is the transcript of my recent podcast interview with Avalere Health's CEO regarding the Supreme Court ruling.David E. Williams: This is David Williams, co-founder of MedPharma Partners and author of the Health Business Blog. I'm speaking today with Dan Mendelson. He's founder and CEO of Avalere Health.Dan, thanks for being with me today.Dan Mendelson: Great to be here.Williams: So it's June 28th, 2012; obviously we're going to talk about the Supreme Court decision on the Affordable Care Act. From my reading of it, the vast majority of the law was upheld, but there were some provisions, particularly on the Medicaid side, that were not. Can you lay out what the decision was overall and how it relates to Medicaid?Mendelson: First of all, if you think about today in its historic perspective, it was a very significant day for the Affordable Care Act, but it's really clearing one hurdle and there are certainly many to come. So I'm sure that we're going to be talking about that. And while the Court is still split on this concept of a mandate, they essentially let the law go by because they saw the provision really as a tax. So it does have some significant implications for how policy is done in the future.With respect to Medicaid, it's interesting, because what they said was that the expansion was fine, but what isn't fine is bullying the states into accepting the expansion by threatening to take away base Medicaid funding. So the Court says very clearly that states need to be given a choice and that that choice is ultimately power held by the states, as opposed to the federal government saying that they must expand their Medicaid program.Williams: So does that mean that there will be a hodgepodge with some states doing the expansion and some not, or is it more nuanced than that?Mendelson: I think in reality most states, or I would even venture a guess that all states will be compelled to take the expansion, because remember that the federal government pays for the entire expansion until 2017 and then thereafter the subsidy rate is around 90%, so you'd really have to be a rogue state to refuse that.Or put slightly differently, if you're the governor of the state, how are you going to stand up in front of your electorate and say, 'I'm not going to cover people near poverty because I'm worried about the out-year liability that we might incur, and therefore I'm going to turn down the federal government's largesse.' I think it would be very difficult for a state to do that.Williams: So essentially the Court was saying that a stick should come out of the hands of the federal government, but the fact that the Affordable Care Act includes pretty significan carrots, it means that from a practical standpoint this is not a lot of change?Mendelson: That's right, and that's how we did the Children's Health Insurance Program back in '97 and '98. There was a generous subsidy that was put on the table and the states decided that they wanted to cover children or that they had to cover children and it wasn't long before 50 states had adopted that expansion.And I think that in this case as well, it is quite likely that unless someone really wants to make an unabashed political statement that states will go ahead and cover these folks who are near poverty.Williams: Is there likely to be a move toward adjusting Medicaid? I mean, are things like Medicaid block grants still potentially on the table even under this framework, or are we sort of set as to where Medicaid is going to go?Mendelson: No. I think that in a lot of ways, and this kind of goes back to my initial comments, that this is really just one stop along the way of redefining the entitlement programs. The current path both for Medicaid and Medicare is unsustainable, and that has been acknowledged, I think, really by all of the policymakers, including the Administration.There are competing visions for what the entitlement programs are going to look like in the future, and November is going to become very important for defining the next chapter of this. So if there is a Republican sweep, you can bet that Medicaid is going to go down a road of more state flexibility, if not a full-out block grant. If power is shared, I do think that you will continue to see a lot of latitude for states to experiment, particularly with the high-cost dual eligible populations that are currently vexing the policy process.Williams: So since you talk about dual eligibles, let's bring the Medicare piece into this. Any direct implications for the fate of Medicare coming out of the decision today?Mendelson: Well, things are upheld, and there are a variety of really important Medicare provisions in the Act that were really not the focus of a lot of the buzz going into the ruling.For example, the way that health plans are being paid on the basis of quality, the star rating system, that was a provision in the Act that has been upheld. The subsidy of pharmaceuticals in the 'donut hole', that has been upheld. So, really, all of those provisions that reshaped the Medicare program have been upheld.Very importantly, the structures that were put in place to create the Center for Medicare and Medicaid Innovation (CMMI) and the various other structures that have changed the face of the Center for Medicare and Medicaid Services have all been upheld. So it's really an affirmation of CMS's ability to shape the health care delivery system, and I think that that is really quite significant.Williams: What kind of expectations do you have for CMMI? There have been a lot of grants awarded lately with a little bit more certainty that those are going to continue along. Do you expect that to be just a footnote in the end if we look back five or 10 years or does that have some potential significance to it?Mendelson: I think it's potentially more significant than any other aspect of the law, but that chapter will be written in the next five years.The law covers 30 million people, and that is of itself significant, but it still leaves 20 million uninsured people, and it's quite possible that we won't get to the 30 million mark, that it will turn out to be something more like 20 by the time all is said and done.The changes in the delivery system have started with the reform law and they have been accelerated with the efforts of the private sector to get into the game. So there is a very strong focus on care integration and delivery system integration and a lot of other aspects of thinking about the patient experience. A lot of the merger and acquisition activity that we see at the local level is being driven in large part by the kinds of ideas that are being pushed out through CMMI.You can personalize these changes to one agency, but I think that would be a mistake in some ways. The idea has predated CMMI and will probably be there long after CMMI, but the grants that are being provided right now by the federal government are certainly fueling these changes and pushing the private sector down the road that they're already on.Williams: Let me ask you about one element of the private sector that we haven't talked about so far, and that's employers, especially larger employers. There hasn't been a lot of talk lately about the so-called 'Cadillac tax,' but it seems as though it's something that's looming and may become more important.Can you just remind us of what the Cadillac tax is and what impact that might have?Mendelson: I think of all the stakeholders here, employers are probably the most upset at this ruling and frankly the most worried about what their future is.There are a couple of elements that employers are struggling with. I think it all goes back to the fact that the costs of health care are going up so much more rapidly than all the other input costs, and the perception that the law will put more responsibility back on to business. The Cadillac tax itself is an additional payment that the employers will have to make to the federal government in cases where benefits are very generous, and they disproportionately hit a lot of the older, manufacturing-oriented companies that are perhaps struggling the most with health care generally because they have older benefit structures.So that's certainly one of the areas of concern to employers. I think that this question of 'How do you think about the benefit that you're giving to your employees relative to the exchange?' is perhaps a more prevalent set of concerns for employers.Williams: Some supporters of the Affordable Care Act, including myself, have at least been open to the argument that it does make it difficult for states to experiment and it is a little bit of a 'one size fits all' approach. I'm wondering, under the Affordable Care Act, do states still have some latitude to try things that will work in their own states, or are people all forced into the same hole?Mendelson: I think that it is a legitimate criticism of the present Medicaid construct. Look, the federal government will always try to build consistency across states in the Medicaid program because there is a desire to have it be one program. Having said that, all health care is local, so flexibility is something that states typically will want.I'll go back to the dual eligibles because that is likely to be a major focus going into the next legislative session. The states desperately want to experiment to try to get those costs under control. The federal government has really been quite reluctant to go past a certain level.I do think that this is one of the areas where November is going to be a major determining factor, and if Romney is elected, then we will see a very, very different Medicaid policy because I do think that there is a fair amount of latitude that has been granted under this law to the Administration to change the way that care for the dual eligibles is done in this country.Williams: So it sounds like overall the nature of the decision today makes November a more important focus, because if there had been more of a split decision or an outright repeal, there may have been less to settle coming up in November.Mendelson: Absolutely. And you see that banner statement of, well, 'This shows why you need to elect us.' So we move now towards the next hurdle, which is November, and the likely outcome of the election, and then I think it's really in November that we will have better clarity on how much of the Act will likely stick.Williams: So I guess, in closing, maybe it's a good time to own a media outlet that's going to get a share of the advertising on the health care issue between now and November?Mendelson: It's going to be a really busy time. And again, the Supreme Court ruling does not do anything about the fact that we have a crushing debt that is pressing down on this country and the fact that the entitlement programs need to be addressed as part of that discussion.So one hurdle is cleared, but there are a number of hurdles in the future. I think there needs to be an important discussion about what the future of these programs is likely to hold.Williams: I've been speaking with Dan Mendelson, founder and CEO of Avalere Health. We've been talking about some of the aspects of today's Supreme Court ruling on the Affordable Care Act.Dan, thank you so much.Mendelson: It's been my pleasure.