In an interview with KHN in advance of the release of the rankings, Tuckson characterized the state-by-state report card of health stats as a grim call to arms. After improving an average of 1.6 percent a year since the 1990s, the annual index remained flat this year for the first time in its 22 years of existence. And, as Tuckson bluntly asserts, a sicker nation means a more expensive nation at a time when health costs are already stretching consumers and employers beyond their limits. He warned: “You’re going broke!”

Tuckson, a physician and executive vice-president of , a leading insurance company, says a rise in obesity rates from 26.9 percent in 2010 to 27.5 percent this year is the leading reason the index has plateaued. The related disease, diabetes, also appears on the rise since last year’s results, and child poverty rates are increasing, too.

Obesity in the nation has ballooned from 11.6 percent of the adult population in 1990 to 27.5 percent in 2011. A 2009 report commissioned by Tuckson’s foundation projected that the obesity rates could reach 43 percent by 2018 if trends continued. “And, they have continued,” he said.

Many of the factors contributing to obesity and diabetes are beyond the medical industry’s reach. “I hate it, as a doc, being left holding the bag for stuff I can’t control,” he said. The foundation is working to change that, by initiating talks with leaders from other sectors to try to figure out how to tackle the obesity problem.

Tuckson recounted one food-retailing executive’s lament expressed at a recent meeting. The exec said it’s not hard to get asparagus onto grocery shelves, “but nobody is buying it,” Tuckson said. “People don’t know how to cook it.” A remedy being considered is to find a way to incorporate recipes into the packaging and marketing of fresh vegetables.

That meeting brought together mid-level executives at companies ranging from agribusiness conglomerates to fast food chains. The food industry representatives complained to Tuckson and others present, “We can’t change demand.”

On the bright side, the rankings show that slightly fewer people smoke this year than last year and violent crime is down significantly since 1990.

Updated at 9:55 a.m. on Dec 7 to correct a date.

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S.C.’s top health official, Anthony Keck, and Gov. Nikki Haley, not fans of the 2010 health law, are likely to decide to let the federal government run the state’s exchange. (Haley photo by MaryAustinPhoto via Flickr)

Instead, the state should let the federal government build the insurance marketplace in the state for now, Anthony Keck, the director of the state’s Department of Health and Human Services, said in an interview. That recommendation is expected to go to a committee appointed by the governor to study the issue on Friday.

South Carolina, a state dominated by health-law-averse Republicans who got a tea party boost in last year’s election, has been heading down this road for months. But the recommendation is the latest step in formalizing objections to the exchange — and it frames the move as pragmatism, even as the state hands over power to the federal government.

The No. 1 reason for the wait-and-see approach? The stakes are so low. If a state does nothing, Washington is required to step in and build an exchange by 2014. That thinking — as well as a list of technical and logistical problems — is swaying decision-makers in other states too, industry analysts say.

State officials say the 2014 deadline is too tight given that rules for the exchanges are not complete, which is one incentive to defer to Washington. Plus, if South Carolina officials don’t like the federally run exchange, they can always circle back and start their own later under rules issued by the federal health department in July.

“What is the first mover advantage for states to rush ahead and implement this, given all the uncertainty?” Keck asked. “States have the safety valve of being able to take it over when they want to.”

“Sometimes, the smartest thing when you’re doing something new like this is to wait,” he said.

The exchanges were devised as online shopping centers for consumers in the individual and small-business markets to compare and purchase health insurance. Exchanges would also allow lower- and middle-income families and individuals to collect federal subsidies, potentially worth thousands of dollars.

A draft recommendation Keck is preparing for the state’s says his department’s available resources are “fully committed to improving the current Medicaid program.” The program serves 900,000 low-income residents and expects up to 600,000 new enrollees in 2014 when the health care law expands eligibility. That expansion leaves little manpower to tackle exchanges too, the draft recommendation says.

Keck, the lead author of the document, also argues that the main function of the exchanges is to deliver the federal subsidies. That, according to Keck and other members of the subcommittee he chairs, “is solely a federal concern in which the state has no compelling interest.”

Instead, Keck proposes cultivating exchanges run by private entities, such as employers and consumer groups. He also recommends a push to make information about the cost of health care more transparent.

Federal officials have been wary of operating exchanges on behalf of states. They’ve argued that insurance regulation has long been a state matter, and exchanges should be an extension of that jurisdiction. This stance also deflects criticism that the health overhaul law infringes on states’ rights.

“One of the primary benefits of the [exchanges] is the flexibility afforded to states that enables them to set up an exchange to meet their unique needs,” said Bennett Blodgett, a spokesman for the federal agency overseeing exchanges.

The broader panel advising on South Carolina’s exchange future, created by Gov. Nikki Haley, must make its final recommendation by the end of November. The committee was initially set to make its recommendation last month, but requested an extension.

So far, South Carolina — along with 49 other states — has accepted a $1 million planning grant to begin contemplating the exchange. But in September, Haley, a Republican, said the state would not accept any more exchange funding, even as the committee continued studying the issue.

Blodgett confirmed the state had not applied for additional funds.

More states are warming to Keck’s position — wait and jump in later — on exchanges, said Brett Graham, a consultant at Salt Lake City-based Leavitt Partners, a firm that advises states and other clients on exchanges. It is run by Michael Leavitt, who served as Health and Human Services Secretary during the George W. Bush administration.

One reason is that even though states can get big grants to build exchanges, they would have to finance ongoing operations once they launch. By leaving the work to federal officials, they hope to dodge those potential costs.

Graham said states also believe there is no penalty if “they wait on the bench and then jump in” later, taking over a federally operated exchange. However, he points out, if a state decides after 2014 to launch its own exchange, the federal funding to build it will no longer be available. So far, the federal health department has awarded $515 million in grants to states to plan and build exchanges.

States that wish to open an exchange later than the Jan. 1, 2014, deadline — taking over from the federal government — will have to give Washington a year’s notice before doing so.

The details of what a federally run exchange would actually look like remain unclear. HHS has contracted with several technology vendors to begin developing some components, but has not publicly discussed details of its plan. A spokeswoman declined to elaborate.

That South Carolina seems primed to rebuff the exchange comes as no surprise advocates for building an insurance marketplace in the state.

“It was clear from the outset that this administration was resistant to the idea” of running its own exchange, said state Rep. Gilda Cobb-Hunter, an Orangeburg Democrat who introduced legislation to create one. Cobb-Hunter’s bill failed in the statehouse.

“With the need as great as it is in South Carolina, to say that idea won’t work here and we’ll wait for the feds to do it to me seems to be kicking the can down the road,” she said.

However, Cobb-Hunter acknowledged that the federal exchange — lampooned by critics on the right as part of an alleged federal takeover of health care — may work out just fine, especially compared with a version that could clear the conservative legislature.

Keck also seemed to nod to that idea. “Why would we drag it through the statehouse?” he asked, noting that many state lawmakers there view exchanges as a politically toxic distraction from other priorities.

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Well, it’s complicated. A new heart valve device and procedure last week costs less than the standard treatment, but it can’t replace that procedure. Instead, it will allow an estimated 20,000 more patients — who would otherwise be inoperable due to frailty — to get the new valve. So the money that will be spent on these patients is in addition to the dollars already being spent. The new technology shows promise to extend the lives of very sick patients, but it doesn’t save money.

Rob Kuhling, a venture capitalist who had invested in a similar new technology, summed it up bluntly: “Death is always cheaper.”

Here are the details: The standard way to treat is open heart surgery. The new Sapien valve by can be inserted by threading a catheter from a small incision in the leg through an artery to the heart. Estimates put the total cost for the new device and hospital stay at about $70,000 versus up to $100,000 for the open heart procedure and hospital stay in the most complicated patients.

But the Sapien valve hasn’t been approved for people who can now get open heart surgery. Its statistical outcomes don’t “beat” open heart surgery for patients who are well enough to undergo that demanding, traumatic operation.

The product has been used in Europe since 2007 for patients too sick for open-heart procedures. It has increased stroke rates in patients who get it, but overall the 365-person trial the FDA reviewed found that 69 percent of patients who got the new valve lived another year, while only 50 percent of those who received other, nonsurgical treatment survived that long.

Kuhling, of Onset Ventures, invested in a company developing a similar device that has not yet gained approval and is now owned by Boston Scientific. He said a driving factor in his investment plan was the promise that the new product could reduce the cost of aortic valve replacement surgeries, and attract value-conscious customers.

For now, though, it is unclear whether the innovation will rise to that goal.

If the Sapien valve gains traction and is ultimately adopted as an alternative to open heart surgery for to some patients, Kuhling and other investors who spoke with Kaiser Health News hope it could ultimately prove less expensive in those cases.

Right now, Medicare pays Stanford Medical Center up to $100,000 for doing open-heart surgery for complex cases, while less complicated ones command much lower payments. Analysts expect the valve to gain broader approval next year,

Kuhling put the target price for the product he invested in, being developed by, at around $45,000 for the entire procedure including hospital stays. “People aren’t going to invest in device companies that don’t have those economics,” he told KHN.

Related story:

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Venture capitalist John Doerr invested in a laboratory to develop software and services to help doctors and insurers tackle costs. (Photo by JD Lasica via Flickr)

America’s health care spending is “twice what it was ten years ago, and it’s forecasted to grow in an unaffordable way for the country,” said John Doerr, the Kleiner Perkins Caufield & Byers partner who backed Google, Twitter and other technology giants. Doerr’s answer to the health care problem is Essence Group Holding Corp., a St. Louis health plan he bought in 2007 and converted into a laboratory to develop software and services to help doctors and insurers tackle costs.

Doerr isn’t alone in spotting an opportunity in health care’s high costs. Venture capitalists are increasingly interested in nuts-and-bolts businesses like data mining and grassroots care management. Meanwhile, the appeal of companies that seek high-ticket, high-risk medical breakthroughs is on the wane.  

The share of venture dollars flowing to seed and early stage investments in biotechnology and medical devices has plummeted since 2007, when investors pumped $3.6 billion into 332 deals in which a price was disclosed, according to data compiled for Kaiser Health News by . As of late October, investors had spent $1.1 billion on only 89 such deals this year. Overall venture investing declined by nearly one-third as the economic recession set in, but is on track this year to return to nearly pre-recession levels.

“There’s a realization that part of the health care cost problem is adding on the bells and whistles of [medical] technology,” said Ian Morrison, a health care consultant based in Menlo Park, Calif.  “The smart money is recognizing that’s not the winning formula for the future.”

What’s Hot, What’s Not

Some of that money is increasingly going to information technology, business services and other health-focused companies. For instance, software companies that cater to the health care industry saw $407 million in investments in the first three quarters of this year, compared with $311 million for the full year in 2007 before the recession, according to PricewaterhouseCoopers researchers, who compile the industry-backed quarterly MoneyTree Report. Though the increase so far remains modest – not yet approaching the e-health boom in 2000 – investors say interest in the sector is heating up.

 Venture capitalists are still looking for strong companies in all sectors – drugs, devices, and services – but, cost concerns and other factors have led to changes in demand. Investors are wagering customers will pay attention to the promise of lower costs.

“If you come in with [a device] that’s 10 percent better and twice as expensive, it’s hard to get anyone to care,” said Bryan Roberts, a Palo Alto, Calif.-based venture capitalist at Venrock who invests both in health services and device and drug makers.

Doerr’s firm, Kleiner Perkins, and Camden Partners, put $61 million into Essence this summer in a bid to help market the technologies it has developed to rival health plans. Sandbox Industries followed with a $9 million investment late last month.

Investors are generally wary of businesses that depend on government action, such as electronic medical records that were subsidized in the 2009 stimulus law. But the 2010 health overhaul law has accelerated demand for companies that use data to make health care more efficient, provide online services to help consumers shop for care and help the insurance industry adjust to new regulations.   

“The changes in the health system are rocket fuel for entrepreneurs,” said Bob Kocher, a former Obama health policy advisor who was hired by Venrock in part to capitalize on the expertise he cultivated working on the law in the White House.

Kocher is eyeing businesses that do things like help hospitals keep patients from coming back soon after treatment, a big-ticket cost for years that the health law will now tie to new penalties. Like other investors, he also anticipates that many people who gain coverage under the law will face high insurance deductibles. So, Venrock and other firms have funded Castlight Health, a technology company that helps patients choose the cheapest care.

Gambling Or Investing?

Whether such investment continues – and pays off – depends in part on Washington. Legal and political challenges to the law lie ahead in 2012 with the Supreme Court likely to weigh in and voters deciding on the next president and Congress.

“If you’re investing in a law with very little social support, political support and a tenuous legal basis, you’re not investing – you’re gambling,” said David Brailer, a former Bush administration official and head of Health Evolution Partners, a private fund launched in 2007.

Though Brailer is skeptical, he still expects broad change, describing his firm as “the health care version of a green investor,” betting that cost pressure will fell titans of the industry as new upstarts – such as a hospice company and a radiology outsourcing group Brailer financed– promise lower cost.

Brailer and most investors interviewed for this story envision two futures: One in which the health law remains intact and providers and insurers face ever lower payments and increasing pressure to reduce costs, and another in which it is repealed and costs continue to balloon. Either way, health companies need to be rescued from out-of-control costs. “They’re all looking for life boats,” Brailer said.

Meanwhile, in the device sector, the combined forces of cost pressure, a stricter Food and Drug Administration and an economic recession have made it more difficult to raise capital or sell companies and that has discouraged private investment, said Rob Kuhling, a partner at Onset Ventures in Menlo Park.

In response, device investors are prowling for products they can market as savers. Kuhling and others have backed companies that seek to bring a new heart valve to the United States. Medicare now pays $66,000 for open heart surgery to replace failing valves at Stanford Medical Center, in Silicon Valley. The new valve could be inserted through an artery without open surgery. Though the product itself is more expensive than typical replacement valves, it could potentially reduce hospital stays and become a lower-cost option—about $45,000 in total—for some patients, Kuhling estimated.

The valve Kuhling backed is pending approval at the FDA. Another version, Edwards Lifesciences’s Sapien valve, for patients who are too ill to undergo open heart surgery.

Investing In Meals On Wheels

Biotechnology faces its own set of problems. The industry “is cognizant of the fact that the health system is moving towards a more cost-conscious system,” said Michael Yee, an RBC Capital Markets analyst. But, he believes the market could rebound and that the industry is facing largely short-term problems. The health law introduces new fees on drug makers, for instance, but also promises millions of new customers as more people eventually gain insurance coverage. “A lot of this is near-term fear,” Yee said.

The same fear – of a health system with fewer resources – is, however, propelling the new wave of companies sought out by private investors. It’s hard to imagine a venture firm betting on the “largest meals-on-wheels operator” in Texas, but that’s what’s happening for Independent Living Systems.

In the next couple of weeks, the company led by chief executive Nestor Plana expects to finalize a cash infusion from Oak Investment Partners. The company operates a range of long-term care management services in several states, including outsourcing for health plans that serve low-income seniors, care management, and the nutritional services Plana boasts about. Neither Plana nor Ann Lamont, an Oak venture capitalist, disclosed the amount of the investment.

With the added funds, Plana will try to cash in on states’ needs to rein in long-term care costs, which consume nearly half of some states’ health care budgets. Meanwhile, the health law showers companies in the business of managing health for poor seniors with new business opportunities, greasing the wheels to expand managed-care to these patients and funneling money to states seeking to experiment with more efficient ways to care for them.

“This is the time to get into that space, and ride that wave,” said Plana, who added that this was his company’s first venture investment. He predicted the move would help turn Independent Living Systems into a national name.

Younger entrepreneurs and would-be investors are starting to rethink healthcare, too. Bob Higgins, the founder of Highland Capital Partners, teaches a class on health care entrepreneurship at Harvard Business School.  “My sharpest students are all trying to go to places like ZocDoc and Castlight,” both venture-backed online start-ups that help patients shop for care, Higgins said.

A few years ago the “classic” prospective employer for his students was an emerging biotech firm, Higgins said. But few of those companies are now hiring.

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That’s a small share of the 569 private Medicare plans, but it’s a laurel much of the industry is now chasing. For the first time, Medicare plans will get big cash bonuses for higher scores, a new reward created by the 2010 federal health law.

The star ratings are part of a push by the Obama administration to increase the quality of care provided by private plans that contract with Medicare. The ratings are based on 36 measures, ranging from rates of hospital readmissions to the volume of consumer complaints a plan gets.

The administration has argued that Medicare Advantage plans cost more than traditional Medicare without providing better results for patients. The 2010 federal health law tried to remedy that discrepancy by cutting plan payments by $136 billion over ten years. But the star-rating bonus system restores some of those losses to high-performing plans.

Five-star plans will also have the ability to enroll members year-round, rather than only during Medicare’s annual open enrollment period, which this year begins Oct. 15 and ends Dec. 7.

Gundersen Lutheran Health System’s Medicare Advantage plan attained its first five-star rating this year and intends to take full advantage of that perk. Gundersen’s chief financial officer, Gordon Edwards, said the Wisconsin-based plan will begin expanding into Iowa in January. The five-stars will allow Gundersen to gain members quickly—while competitors like Humana and UnitedHealth Group have to wait for next year’s enrollment period.

Kaiser Permanente, the California based managed-care organization, operates four of the nine five-star plans. (Kaiser Health News is not affiliated with Kaiser Permanente.) The other five-star winners are a mix of smaller, regional plans.

“Everyone is taking this seriously,” said Sarah Baker, of Health Dialog, a Boston-based insurance analytics firm that is advising plans on how to improve their ratings. Higher ratings now offer a “huge competitive advantage,” she added.

United plans fell well short of five stars this time, but the company is trying to change that. United, the largest insurer by revenue, has set a goal of having all of its members – currently, 2.3 million seniors are on its rolls – in four star or better plans by 2014, said Dr. Rhonda Medows, the chief medical officer overseeing quality for the insurer.

That will be a big leap compared to current scores: In 2011, UnitedHealth Group averaged only 3.18 stars in its 68 Medicare Advantage plans, according to a Barclays Capital research note.

But, United is investing heavily in the ratings, said Medows, launching, for instance, a new Web tool that will let doctors track quality measures that can boost the scores. The results are already showing.  The portion of United members in 3.5 star-or-better plans increased by 10 percentage points this year, Medows said.

Overall, health plans boosted their ratings to 3.44 stars on average in 2012 from 3.18 stars this year, a senior Medicare official said in an interview. The official attributed the increase to the health law bonuses.

Beginning in January, plans with three stars or better, will get bonuses of 3 to 5 percent of their total Medicare payments.  In November, the Medicare agency expanded the bonus program well beyond what was required in the health overhaul law.

Today’s ratings, based on 2010 data, are the first to reflect what plans have been up to since the health law passed.

The federal Medicare agency did not disclose the total value of the bonuses it will award next year, but an analysis of publicly available Medicare data suggests the 2012 bonuses will exceed $4 billion nationwide.

Given that many Medicare Advantage plans operate on a 3 percent profit margin, even the smallest available bonuses – an additional 3 percent for a three-star plan – are a huge boon, said John Gorman, of Gorman Health Group, a Medicare Advantage consulting firm. Health plans’ quality improvement departments “moved from being a cost center to a potentially game changing profit center,” he said.

For some plans, the bonuses are easing what would otherwise be painful cuts. Group Health Cooperative, a Seattle-based health system and insurer, achieved a five-star rating this year, up from 4.5 last year, and will get the highest possible bonus. Diana Birkett Rakow, a Group Health lobbyist, said without the bonuses, the health plan would have faced cuts of as much as 25 percent in coming years because of the health law. “I don’t know what kind of choices we’d have had to make,” she said.

Plans can use the bonuses to increase benefits available to their members or to reduce the premiums Medicare beneficiaries pay out of pocket, increasing their allure to prospective enrollees.

Star ratings were largely an afterthought to insurers before the health law passed. The rating system was put in place in 2007 to help

But the new cash incentives have commanded the attention of health plan executives.

Now “the stars equate to dollars,” said Ann Marie Scimmacco, vice president of Fallon Community Health Plan in Massachusetts, and top executives are tuning into quality measures. “We have definitely heard that from the finance department, ‘How can you get to five stars?'” she said.

Plans on the cusp of the top rating that didn’t make the cut this year are not giving up. KelseyCare Advantage, a Houston-based plan affiliated with the Kelsey-Seybold Clinic, scored 4.5 stars in 2011 and 2012, the only plan in that market to do better than a 3.5 star rating.

Our goal next go-around is to be a five star rated plan,” said KelseyCare president Marnie Matheny. “We’ve got initiatives built around every measure.”

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They’re after the highest mark on Medicare’s quality exam, a one-to-five star rating system that was an afterthought until the 2010 health law tied it to big cash bonuses.  The Medicare Advantage plans’ latest ratings for 2012 will be released Wednesday. Top scoring plans will also win the ability to enroll new members year-round, rather than a few weeks each autumn.

“It’s a huge game changer in Massachusetts,” said Ken Arruda, executive director of Medicare services for Blue Cross Blue Shield of Massachusetts, which currently has 4.5 stars. Also in the Boston area, Fallon Community Health Plan and Tufts Health Plan are on the cusp of the top score. Each says their strategy is to reach five stars as soon as possible –a feat only three plans nationwide have achieved so far.

Competition is fiercest in places like Boston, where high-ranking plans are near their goal, but shades of this quality arms race are visible throughout the country. Insurers have rarely competed on quality measures, but as the federal government prepares to unleash an estimated $3 billion to $4 billion next year in bonus payments, the industry is following the money. Star-ratings are bleeding into bottom lines, board meetings, and corporate strategy as the insurers chase top scores.

Wednesday’s announcement comes just ahead of the open enrollment period which runs from Oct. 15 through Dec. 7. About one quarter of Medicare beneficiaries are now in private plans that contract with the federal government to provide health benefits to seniors and disabled people.

The star ratings have been on the books since 2007 and are the only guide to health plan performance available to consumers. Next year, though, is the first in which there is money at stake for the companies.

“[T]o say that the [private plans] put less than optimal resources toward star quality ratings in the past would be an understatement,” wrote Barclays Capital analyst Joshua Raskin. Now, he said by e-mail, he sees a “clear effort on improving the ratings at most companies.”

The federal health law cut $136 billion in payments to Medicare Advantage plans over 10 years, and health plan accountants increasingly see the new star-rating bonuses as a way to mitigate the losses.

The Obama administration has argued that the private plans, originally devised as a way to reduce Medicare costs, have long been overpaid. They cost the government as much as 114 percent of the cost of traditional Medicare patients, without producing better health outcomes for enrollees. The federal government announced in November that it would increase the bonuses. The program is part of a push for quality, led by Medicare administrator Dr. Donald Berwick, that is meant to boost results even as the cuts kick in.

Consumer advocates, such as Ilene Stein, the Medicare Rights Center’s federal policy director, are hopeful that the ratings will improve quality for Medicare beneficiaries. However, Stein cautioned, the Medicare agency will need to oversee the bonus system so health plans don’t game the measures.

Beginning in January, plans with three stars – the average rating – or better, will get bonuses of 3 to 5 percent of their total Medicare payments.  The ratings are based on 36 measures, ranging from diabetes care to the volume of consumer complaints. Twenty-two insurers across the country now boast a 4.5 star rating. Of 396 plans that received 2011 scores, only three achieved five stars: one each in Colorado, Florida and Wisconsin.

Attention to the ratings is new even to the top performers. At Marshfield Clinic’s 5-star Security Health Plan in Wisconsin, the plan’s top administrative officer, Steve Youso, described the high score as a natural byproduct of the insurer’s culture of quality.

But, now executives there are paying attention, too, knowing the top rating is worth keeping. “Prior to March 2010” – when the health law passed – “[ratings were] probably not a topic of discussion,” Youso said. Now, “our senior executive team is talking about this on a weekly basis.”

There’s a similar dynamic at Massachusetts’s Fallon Community Health Plan, which is still gunning for five stars. “The finance department is more interested in our [quality] results than ever before,” said Ann Marie Sciammacco, vice-president of health services. “Basically, the stars equate to dollars.”

In Worcester County, the hub of Fallon’s service area, five-star plans would earn $8 a month more than 4.5 star plans for a typical member, according to Medicare data. For Fallon’s 28,000 members there, it would add up to $2.7 million a year – money that could be used to reduce premiums and attract more customers.

Sometimes boosting ratings is simple work. One measure the government tracks is the rate of colorectal cancer screening for certain patients. Fallon members get a birthday card from their insurance company that reads, “Every nine minutes, someone in the U.S. dies from colorectal cancer.” Eighty-four percent of Fallon patients get the screening.

Fallon – or a rival plan in the Boston-area – could also benefit from the year-round enrollment perk, which would allow a five-star plan to pick off its competitor’s members.  “The primary – but untested in this market – competitive advantage of being five stars… is the ability to enroll year round,” said Richard Burke, Fallon’s president of senior care services, in an e-mail.

Nationally, lower ranking insurers, such as the publicly traded HealthSpring, which runs mostly three-star plans, view star ratings as a crucial ingredient to boosting revenues and competing more effectively. Jason Feuerman, a top HealthSpring executive, said in an April interview, “We’re putting the resources in place to make sure we can drive those ratings.”

During a visit that month to a HealthSpring-operated clinic in Philadelphia, administrator Nathaniel Decker pointed out equipment, such as a digital retinal camera, that he said was installed to help boost star ratings by allowing doctors to easily perform one of the tasks measured: eye exams for diabetic patients.

In addition to missing out on the bonuses, plans that consistently score less than three stars could eventually be booted from the program altogether under a proposed regulation released early this month by the Medicare agency.

Plans’ interest in boosting ratings is widespread enough to fuel a niche consulting business. The consulting arm of OptumInsight, a subsidiary of UnitedHealth Group, for instance, says it has picked up 35 health plan clients seeking star-related services. “As soon as you start attaching some money to it, it’s amazing,” said Steve Wood, an Optum management consultant.

In some markets, the star ratings could boost underdogs. Houston-based KelseyCare Advantage, a Medicare plan affiliated with the Kelsey-Seybold Clinic, is on the cusp of a five-star rating. In membership, though, it trails TexanPlus, a Medicare plan operated by the publicly-traded Universal American Corporation, that has 50,000 members – twice as many as KelseyCare. But TexanPlus has only 3.5 stars this year.

KelseyCare President Marnie Matheny is hoping to achieve five stars – and a marketing edge that could level the playing field with a competitor who can do things like rent out the Reliant Center for a Wii bowling tournament to attract customers.

“It will be huge for us,” said Matheny. When patients see “there’s no one else in the market [with five stars], they’ll think there’s something special about KelseyCare.”

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HCA, the nation’s largest for-profit hospital chain, drew $657 million in supplemental Medicaid payments from Texas in 2010, making it especially vulnerable.

The payments – about one-quarter of all state-paid hospital financing — support public hospitals and those that treat high numbers of uninsured and Medicaid patients. They’re also used to induce other private hospitals to care for the poor, expanding the reach of the health care safety net.

But some powerful backers of the Texas  say not enough of the funds are reaching the poor, going instead to finance hospital construction projects and pad the bottom line of big companies and health systems.

HCA’s share of the funds is “not based on seeing patients that were poor or could not pay. It was based on a formula that skewed in their benefit,” said state Rep. Garnet Coleman, a Houston Democrat who chairs a legislative committee overseeing the proposal. “The [proposal] corrects that, and rightly so. That was a windfall on a loophole that must be closed.”

HCA’s 157 hospitals nationwide generated $30 billion in revenue and $2.2 billion in pre-tax profits in 2010, the company said in filings to the Securities and Exchange Commission. Texas is among its biggest markets, home to 39 of its hospitals. More than half of the company’s revenues come from its combined 75 hospitals in Florida and Texas.

The state says its proposal would make the $2.7 billion-a-year Texas supplemental payment program more transparent – and guarantee the money buys care for the poor. The proposal would expand funding available under federal rules, reroute some payments through public hospitals and create a new funding stream for hospital projects that help the poor, such as new community clinics. The new money would be distributed by coalitions of public and private hospitals.

Another change in the proposal could sharply curtail the dollars available to dozens of private hospitals beginning in 2013. The change affects the formula that sets the maximum amount of supplemental payments each hospital can receive.

Hospitals that treat a disproportionate share of uninsured people could see higher payments, said Stephanie Goodman, a spokeswoman for the Texas Health and Human Services Commission, but those “that don’t do a lot of uncompensated care should see a reduction.” Most of HCA’s Texas hospitals fall into the latter category.

“We want to make sure the dollars are directed to the hospitals that are doing the bulk of uncompensated care,” Goodman said.

The money at stake is especially profitable to HCA, said Thomas Gallucci, a senior analyst at Lazard Capital Markets, because it comes on top of normal Medicaid payments. Gallucci provided data reported by HCA showing that, of the $657 million in 2010 supplemental payments from the state of Texas, $303 million were profits.

The exact impact on HCA and other private hospitals is impossible to determine. Texas’s proposal got a tentative thumbs-up in a Sept. 14 , but has not gained final approval. Hospitals continue to lobby the state for changes, and data needed to project the exact effects are not available. Hospitals may also be able to figure out new ways to increase their funding.

But, “there definitely appears to be a risk,” said Jason Gurda, a Leerink Swann financial analyst. “The potential loss of [some of] those payments in 2013 would be a huge headwind.”

A corporate HCA spokesman did not return a phone message. A Texas-based HCA employee declined to comment on the record. But, in an August filing with the SEC, the company acknowledged that the proposal “could result in the payment programs being reduced or eliminated.”

In an August meeting of the Houston-area Harris County Hospital Board, a senior HCA executive, Maura Walsh, complained, “We don’t know the rules of the game are going to be,” according to a recording of the meeting.

Interviews with a dozen hospital finance consultants, executives, lobbyists, attorneys and public officials underscore the hazard the Medicaid proposal poses to the private hospitals. Most agreed to speak on the condition of anonymity, to protect business and political interests. One consultant predicted some private hospitals could lose as much as 50 percent of their total Medicaid revenue.

A spokesman for the Texas Hospital Association, John Hawkins, said hospitals could “innovate” new ways to subsidize care for the uninsured if they lose supplemental payments, and could access the new funding the proposal makes available for specific projects. If a hospital loses some payments, it could also treat fewer Medicaid and uninsured patients, leaving the burden to other facilities, Hawkins said.

Under the current system, public hospitals and counties forge agreements with private hospitals that commit to caring for the uninsured. The public entities contribute money, which the federal government matches. The state then distributes funds to private hospitals up to limits set by complicated formulas under the so-called “upper payment limit program.”

Public hospitals and those that deliver large amounts of uncompensated care receive payments based on the cost of care they provide to Medicaid patients and the uninsured from various programs. By contrast, private hospitals, including most of HCA’s facilities, are paid the difference between what the hospital charges for Medicaid services and the actual Medicaid payments.

Under the proposal, all hospitals would be paid based on their costs, which are often much lower than what they charge for care.

Even if hospitals end up losing significant Medicaid funding, they may find it’s difficult to cut back providing care. Marty McVey, a private investor who purchased Spring Branch Medical Center from HCA in February, hasn’t received supplemental payments since then. But the Medicaid and uninsured patients kept coming, he said. “They don’t see or care who owns the hospital.”

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Blue Cross, the dominant financier of the state’s health system with 54 percent of the insured on its rolls, stands to benefit if the electronic records help doctors practice a more efficient style of medicine. For instance, the computer can prompt doctors to do blood tests or other follow-ups with patients.

And the doctors, who all work for either free clinics or in independent small practices, get a free piece of technology they may not otherwise be able to afford. The 2009 stimulus bill available to each physician who successfully adopts electronic records, but those payments only begin to arrive after doctors make investments.

The Blue Cross money, on the other hand, is available upfront and will help physicians move faster than the stimulus funds, said the insurers chief executive, Brad Wilson, in an interview earlier this month. The move shows the urgency with which insurers seek ways to bring costs down, and the remaining barriers physicians face in making changes.

“Even with the [stimulus] incentives it’s difficult for small practices to make those upfront investments,” said Greg Griggs, the executive vice president of the North Carolina Academy of Family Physicians. To “really do it right, and use it in a meaningful manner, is still extraordinarily expensive.”

Blue Cross will cover 85 percent of the costs of going digital for participating practices – which can reach into the tens of thousands of dollars per doctor –  and will pay the full cost of implementation for 39 free clinics included in the project.

The electronic record program is also financed in part by , the Chicago-based vendor that is supplying the software and technical assistance to small practices.

While the move is one of a number of projects Blue Cross has unveiled to improve ties with doctors, such as an imploring people to stop scapegoating doctors, pharmaceutical executives and others for health care’s high costs and instead search for answers, the insurer also has a lot to gain.

In a press release announcing the deal – to be released at 10 a.m. today – Blue Cross said the electronic records could help practices form more organized groups, known as medical homes. Such practices have helped Blue Cross cut specialist visits by 50 percent and emergency room trips by 70 percent in some cases, the press release said. The $15 million investment could buy the insurer some future savings, too.

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The Medicaid proposal, which came up in Thursday’s Republican presidential debate, could prove increasingly inconvenient for Perry’s presidential campaign narrative.

The state gained tentative federal approval to begin rolling out the proposal that, , would prepare the health system “to serve newly insured individuals … in 2014,” when the 2010 federal health law that Perry forcefully opposes expands health coverage.

Federal officials said in they had reached “agreement in principle” with the state on the Medicaid plan, which would waive some federal laws to reshape the way hospital care for the poor is financed.

The idea is to reroute federal funds the state would otherwise lose — an undesired consequence of expanding managed care — to subsidize hospitals’ uncompensated care costs. The plan would also finance projects to help the uninsured, such as new clinics. Final approval could come as soon as Sept. 30.

Texas’s proposal is not an audacious cure for the state’s staggering health care problems, and it does nothing to expand health coverage now to the 26 percent of residents who are uninsured. But, Democrats and consumer advocates welcome the plan as a cushion for a surge of new Medicaid patients in 2014, when the federal law expands to cover 16 million more people nationwide.

“We’re the biggest beneficiary — in terms of newly insured — of health reform of any state, by far,” said state Rep. Garnet Coleman, a Houston Democrat who chairs a legislative committee overseeing the new Medicaid plan. The effort “will extend more services to individuals who are not being served,” Coleman said.

Other Democrats and consumer advocates back the proposal, though some have objected to specific provisions to finance it, such as a move congressional Democrats said Thursday would hurt local pharmacists.

“We’re cautiously optimistic” that the overall changes will help uninsured and low-income patients, said Anne Dunkelberg, the associate director of the Austin-based Center for Public Policy Priorities. “[Perry’s] administration has not been marked by a lot of other proactive health initiatives.”

The Texas Medicaid proposal had to be in a form that could win approval from the Obama administration, of course, so it couldn’t fully reflect Perry’s health care views. Indeed, Perry shot down legislation earlier this year to create a health insurance exchange, a cornerstone of the federal overhaul. Texas is one of the states challenging the federal health law in court. Perry also signed a health care compact seeking to dodge overhaul requirements, such as a mandate that individuals obtain health coverage.

And, at the Google-Fox News debate Thursday in Orlando, Fla., Perry blamed the federal government’s reluctance to approve Medicaid waivers, such as the Texas plan, for his state’s flagging health system and millions of uninsured people. “We are proud of what we put together in the state of Texas,” he said.

Texas’s waiver application is a complicated request for extra funding from Washington, the financier of about 60 percent of the state program. The proposal will reroute $40 billion over five years to public hospitals and new Regional Healthcare Partnerships, coalitions of public and private hospitals, to fund care for the uninsured and projects such as new clinics.

The money would offset losses hospitals face as Texas replaces its traditional Medicaid program with private managed-care companies. The private insurers aim to save the state about $600 million over two years by coordinating care. But, the change would cost hospitals at least $15 billion over five years in extra payments that Washington only finances in traditional Medicaid.

The initiative’s warm reception by Democrats and consumer advocates, and the federal funds it seeks, could add up to a political liability for Perry. His 2010 book, “Fed Up,” rejects any whiff of federal money — and the rules that come with it.

“Candidate Rick Perry bashes federal health care spending. But Gov. Rick Perry is asking the federal government to spend more money on health care for the people of Texas,” said Democratic consultant Paul Begala. “The word ‘hypocrite’ was invented for politicians like Rick Perry.”

A Perry campaign spokeswoman, Katherine Cesinger, said Perry sought to make Medicaid more sustainable “even before the passage of the onerous one-size-fits-all Obamacare.”

The Texas hospital finance plan mimics California’s “Bridge to Reform” plan, which gained federal approval last year. California’s plan, unlike Texas’s, also significantly expands health coverage.

California officials advised their Texas counterparts on the hospital finance proposal, said Stephanie Goodman, a spokeswoman for the Texas Health and Human Services Commission.

But, a meeting between Texas and California officials in Sacramento was recently canceled, after Perry announced his presidential bid. Goodman cited scheduling conflicts. During a legislative hearing last week, Texas Medicaid chief Billy Millwee said, “It’s not the intent to transform the Texas Medicaid program into the California program.”

Texas conservatives haven’t balked. “The waiver is the technical correction to allow for the expansion of managed-care programs while ensuring hospitals receive federal safety net funding,” Texas Conservative Coalition spokesman Brent Connett said in a statement.

Yet, some officials acknowledge Texas must prepare to support a much broader safety net. A March study by the Urban Institute, a D.C. think tank, that of the 27 million uninsured people who would gain health coverage if the overhaul law were now in effect, nearly 4 million live in Texas.

“If all of a sudden we see this influx of individuals, we’re going to see the health system strained quite a bit,” said Rep. John Zerwas, a Houston Republican. Zerwas opposes the federal health law, but added, “What we are trying to do is let Texas fare as well as it can fare [under the law].”

Hospital leaders expect more demand for their services as the uninsured people they already treat gain coverage — a green light to seek more care.

Texas now funds care for the uninsured through a hospital financing maneuver called the upper-payment limit program. Counties and public and private hospitals forge agreements to treat the uninsured and extract supplemental payments — this year about $2.7 billion beyond the state’s normal Medicaid rates — from the federal government. The counties contribute a share of that money before Washington chips in, and will continue to do so.

Under the new plan, public hospitals “will be able to better target [the money] to facilities that are building infrastructure to serve uncompensated care patients,” said Robert Earley, the chief executive of JPS Health Network, a public hospital system in Fort Worth. Some private hospitals may feel threatened, but Earley said those that continue to provide uncompensated care should continue to get a cut of the money.

Insiders gave state health officials high marks for navigating the policy through turbulent politics.

“The [Texas health] commission did a very good job of threading the needle” between politics and policy, said Coleman, the state lawmaker.

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The letter, dated Sept. 14 from federal Medicaid director Cindy Mann, said her agency has “reached agreement in principle” on the Texas plan to expand Medicaid managed care across the state and create funding pools to finance hospital infrastructure and quality improvement programs.

“Based on our discussions over the past several weeks, we are pleased with the progress [and] eager to continue to work,” Mann writes in the letter to the Texas associate director for Medicaid and CHIP.

The new funding pools are essentially a workaround to keep money flowing to hospitals that would otherwise be canceled out by the managed-care expansion. Hospitals have expressed concern over whether the proposal would meet approval at the federal level.

The Texas Health and Human Services Commission had initially sought approval by Sept. 1, to quell hospitals’ concerns before an initial managed care expansion began on that date. The Centers for Medicare and Medicaid Services said in the letter that it could not promise a date for final approval, but indicated that it could come as early as Sept. 30.

A spokeswoman for the Texas health commission acknowledged in an August interview that the state, which submitted the proposal in mid-July, was on a “crazy time-frame” but believed it could quickly gain approval because a similar plan was successfully proposed last year by California.

The Texas request is called the “.”  By contrast, California called its plan the “,” a comparison that critics of the Texas Gov. Rick Perry, a GOP presidential candidate, have been quick to point out.

The proposal, according to Texas’ initial request, will “help transform the current delivery of care and payment systems in Texas to a system that is more transparent, accountable, and ready to serve newly insured individuals who would enroll in Medicaid or federally subsidized insurance under current law starting in 2014.” That’s a reference to the 2010 federal health law, which Texas is also suing in federal court to block, an effort joined by 25 other states.

A spokesman for CMS confirmed the letter, saying only, “we continue to work with the state.”

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