Health Care Reform Memo: December 13, 2010

Deloitte Center for Health Solutions publication

The health care reform memos are issued on a weekly basis, highlighting news from the previous week's activities in the administration and implications for the C-suite and various stakeholder groups.

My take 

From Paul Keckley, Executive Director, Deloitte Center for Health Solutions

The big news of the week was the agreement between the White House and the GOP to extend the Bush tax cuts for two years and provide other temporary tax relief at a cost of $800 billion. But perhaps under the radar, the biggest news for doctors was an agreement to set aside the sustainable growth rate (SGR) model for 2011 -- the fifth time this year the SGR model has been thrown under the bus, this time to avoid a 25 percent pay cut scheduled for January 1, 2011.

The SGR formula was devised in 1997 by Congress to tie the amount Medicare would reimburse doctors for treating its patients to the overall economy. Enacted by the Balanced Budget Act of 1997 to amend Section 1848(f) of the Social Security Act, the SGR replaced the Medicare Volume Performance Standard (MVPS), which was the previous method that Centers for Medicare & Medicaid Services (CMS) used to control costs. An independent body of 17 commissioners, the Medicare Payment Advisory Commission (MedPAC), was established to be its watchdog.

Here’s how it works: each year, CMS sends a report to MedPAC about the previous year's total expenditures and the target expenditures for Medicare. Its report includes a conversion factor that changes the payments for physician services for the next year in order to match the target SGR. If the expenditures for the previous year exceeded the target expenditures, then the conversion factor decreases payments for the next year. If the expenditures were less than expected, the conversion factor increases the payments to physicians for the next year. On March 1 of each year, the physician fee schedule is updated per the formula. The estimated SGR for 2010 was -8.8 percent, and the conversion factor was -21.3 percent.

The conversion factor is the rub: it is a combination of the Medicare Economic Index (MEI) and the Update Adjustment Factor (UAF). The MEI measures the weighted average price change for direct and indirect costs involved with producing physicians’ services. The UAF compares actual and target expenditures, and is determined by a formula that includes the target and actual expenditures and the SGR. By law, the UAF cannot exceed -7.0 percent. The UAF element of the formula means actual costs for delivering a unit of service are not the major factor in setting Medicare fees for physicians, and thus the gap between practice costs and Medicare reimbursement has widened.

Since 2001, Congress has set aside the SGR formula 15 times in favor of paying physicians more than it suggested, accruing a liability $300 billion. Medicare enrollment is projected to increase from 44 million in 2011 to 50 million in five years. The deficit problem and economic recovery are not likely to be solved completely by then. The “physician fix” needs permanent fixing.


  1. he SGR formula is arcane. One other option is a model that rewards outcomes and performance rather than volume, and allow care team results to be a surrogate for individuals. Simply using the MEI as the sole metric to calculate payments would add $459 billion to the deficit (Source: Council of Economic Advisors) and reinforce practice inefficiencies and volume-based incentives that play a major role in spiraling Medicare costs.
  2. Equip consumers to know the costs and outcomes of physician performance as individuals, or better, as integrated groups of nurses and physicians. In this Google-Facebook-iPad-BlueTooth era, there are no excuses for a lack of transparency in information, and there are no excuses for consumers to know more about their football teams than their care teams. And thankfully academic medicine is embracing the reality that team-based care, where physicians, nurses, allied health professionals and consumers share responsibilities for decisions and results—is the path to better care and lower costs.
  3. Create Marcus Welby 2.0. The 1969-1976 icon of medicine—white coat, white hair, warm eyes—remained the standard for “modern medicine” for two generations. But Robert Young’s character was a product of his generation. The next generation requires more: competence based on demonstrated adherence to evidence-based practice… performance that’s transparent… and technologies that improve diagnostic skillfulness and treatment coordination.
  4. Make Medicare a consumer market: engage seniors in meaningful self-care using information technologies, different incentives, and innovative solutions to treatment planning and management. Regrettably, “senior care” is synonymous with paternalistic oversight and dependence on others. Yet this generation has adapted to innovation more than any prior—TV, computers, super-highways, internet, fast food, social media, and more. Perhaps the physician fix should focus on the enrollees themselves.

The physician fix last week is a band-aid. Perhaps we should discuss a fix that’s about patient outcomes, performance, and team-based delivery of health services.

Just a thought.

Paul Keckely

Paul Keckley, Ph.D.

House approves physician pay fix for 2011, related physician payment guidance from CMS

Following the Senate’s vote earlier in the week, on Thursday the House gave final approval (409-2) to the Medicare and Medicaid Extenders Act of 2010, avoiding a 25 percent cut in Medicare physician payments by freezing reimbursement rates at current levels until the end of next year. The Act includes other provisions:

Provision Cost over ten years (in billions)
Extend physician payment update for one year $14.9
Extend Medicare work geographic adjustment floor $0.5
Extend Transitional Medical Assistance $1.0
Extend the qualifying individual (QI) program $0.6
Repeal of delay of RUG–IV Does not score
Continued inclusion of orphan drugs as covered outpatient drugs for children’s hospitals under 340B drug discount program Does not score

The $19.5 billion cost of the “physician fix” for 2011 will be offset by changing the low-income individual coverage subsidy provision of PPACA to allow the government to recoup more of overpayments (caps at $250 individual/$400 family) that people might receive if they misstate their income or earn more than they expect in a given year. The bill will now move on to President Obama for his signature.

Updates in payment guidance from CMS…

  • Outpatient payments: Beginning January 1, 2011, CMS will increase Medicare payments for services furnished in outpatient facilities by 2.5 percent ($3.2 billion). CMS projects total Medicare payments of approximately $39 billion to hospital outpatient departments and $4 billion to ambulatory surgery centers (ACSs). PPACA Section 3401 requires a 0.25 percentage point reduction to the CY 2011 outpatient department (OPD) fee schedule increase factor, which resulted in a proposed CY 2011 outpatient prospective payment system (OPPS) market basket update of 2.15 percent. The applicable percentage increase for FY 2011 is 2.35 percent (2.6 percent market basket update less the 0.25 percentage point reduction required by PPACA).
  • Medicare Economic Index: CMS will continue to rebase the Medicare Economic Index (MEI) which will lead to additional decreases in the conversion factor for FY 2011. Currently, CMS is rebasing the MEI to reflect 2006 expenses (current base year reflects physicians’ expenses in 2000) by phasing in the use of data from the AMA physician practice information survey (PPIS). In order to offset increases in expenses (i.e. practice expense and professional liability insurance) that result from rebasing the MEI, CMS would usually have to decrease physician work values. However, instead of decreasing physician work values, CMS will apply an additional 8.2 percent reduction to the conversion factor for FY 2011.
    Note: The MEI measures changes in the cost of the physicians’ time and operating expenses; it is a weighted sum of the prices of inputs in those two categories. Most of the components of the index come from the Bureau of Labor Statistics. Changes in the cost of physicians’ time are measured using changes in nonfarm labor costs.
  • Imaging studies: in the physician payment rule for 2011, as required by PPACA Section 3135, CMS adjusts the technical component discount on single session imaging studies on contiguous body parts from 25 to 50 percent. CMS also adjusts the equipment utilization rate for practice expense of advanced diagnostic imaging services from 50 to 75 percent.
  • For cardiology services, most services that were previously reported with a series of three to five codes will now be reported with a single code. According to the American College of Cardiology (ACC), due to the complex bundling and continuing changes to payment methodology, the actual payment changes for these services are difficult to calculate. Overall, lower extremity revascularization services could receive more significant payment cuts than diagnostic cardiac catheterization services.

Update: mini-med guidance

Thursday, the U.S. Department of Health and Human Services (HHS) published guidance for health insurers and employers offering mini-med plans:

Under the new rules, health insurers offering “mini-med” plans must notify consumers in plain language that their plan offers extremely limited benefits and direct them to where they can get more information about other coverage options. The rules require health plans with waivers to tell consumers if their health care coverage is subject to an annual dollar limit lower than what is required under the law. Specifically, the notice must include the dollar amount of the annual limit along with a description of the plan benefits to which the limit applies.

HHS has also issued guidance restricting the sale of new mini-med plans except under very limited circumstances. The new guidance requires the consumer notice must include the dollar amount of the annual limit along with a description of the plan benefits to which the limit applies. This notice must be prominently displayed in clear, conspicuous 14-point bold type as a part of any informational or education materials, as well as in plan or policy documents provided to enrollees.

The guidance also outlines the very limited circumstances where insurers that have obtained a waiver can continue to sell new mini-med plans. For example, an employer that already offers a mini-med policy with a waiver may buy a new mini-med plan from a different insurer under certain circumstances.

Note: to date, HHS has granted 222 one-year waivers to mini-med plans offered by employers and commercial plans. In Thursday guidance, it noted “Waivers only last for one year and are only available if the plan certifies that a waiver is necessary to prevent either a large increase in premiums or a significant decrease in access to coverage.”

House approves budget bill with several health care-related provisions

Wednesday, the House narrowly passed (212-206) a Continuing Resolution (CR) to fund the government through FY 2012. The resolution would cap most Cabinet agencies’ annual operating budgets at the $1.2 trillion approved for the recently finished budget year. This represents a 3 percent or $46 billion cut from President Obama's request. The bill also includes the FDA food safety bill previously passed by the Senate. The Senate is expected to take up its version of the CR this coming week.

Health care programs for veterans and the military are exempt from the freeze; The Pentagon would receive a one percent increase to pay for health care. Budgets for key federal agencies involved in implementing PPACA are impacted including FDA, National Institutes of Health (NIH), HHS, Department of Defense (DOD), Internal Revenue Service (IRS), and others.

The Senate version of this bill may include additional appropriations to fund PPACA initiatives-- $19 million to the IRS, $6.25 billion to the Centers for Disease Control and Prevention (CDC) and $210 million to the Health Resources and Services Administration.

House committee leadership for key health care committees

Last week, the 34-member GOP House Steering Committee announced its designees to chair its 21 standing committees including these with significant oversight of health reform:

  • Rep. Fred Upton (MI)—Energy and Commerce Committee
  • Rep. Hal Rogers (KY)—Appropriations Committee
  • Rep. Paul Ryan (WI)—Budget Committee
  • Rep. Dave Camp (MI)—Ways and Means Committee
  • Rep. Ralph Hall (TX)—Science Committee
  • Rep. Jeff Miller (FL)—Veterans’ Affairs Committee

Special report: accelerating health exchanges, universal language

Last week, the President’s Council of Advisors on Science and Technology (PCAST) released recommendations to accelerate adoption of a “universal exchange language” to facilitate the transfer of “private and secure” health data via health information exchanges (HIEs). The Office of the National Coordinator for Health Information Technology (ONC) is seeking comments on the report. Among its notable recommendations to CMS and HHS:

CMS recommendations

  • CMS should direct its efforts under PPACA to facilitate utilization of health care data from multiple sources and formats and use its influence as “the Nation's largest health care payer” to accelerate the implementation of HIEs
  • CMS should “overhaul” the “antiquated” health IT infrastructure that currently exists to advance more strategic national health IT goals
  • CMS should create a technical plan outlining resources needed to implement a modernized and versatile health IT infrastructure
  • CMS should change the focus of meaningful use measures “as rapidly as possible” from data collection of specified lists of health measures to increased levels of data exchange and the increased use of clinical decision supports
  • Meaningful use criteria should include, by 2013, data submitted through reference implementation processes, either directly to CMS or through private entities authorized to serve this purpose (if CMS is not advanced to handle this)
  • CMS should provide incentives for hospitals and eligible professionals to submit meaningful use clinical measures that are calculated from computable data
  • CMS, by 2015, should encourage or require all quality measures under all of its reporting programs (i.e. the Physician Quality Reporting Initiative, hospital quality reporting programs, Medicare Advantage plans, and nursing homes) to be collected in a tagged data element model

HHS recommendations

  • In 2011, the Chief Technology Officer of the United States, in coordination with the Office of Management and Budget and HHS, should develop metrics to capture progress toward an “operational, universal, national health IT infrastructure” that can improve efficiency and care while reducing costs in the health care system
  • The FDA, CDC, NIH, and the Agency for Healthcare Research and Quality (AHRQ) should have aligned and interoperable IT systems for purposes of syndromic surveillance, recording adverse drug events, and conducting comparative effectiveness research
  • HHS should convene multiple task forces to align data standards, and population research data, between private and public payers, and develop specific recommendations on national standards that allow patient access, data exchange, and de-identified data aggregation for research, in a model based on tagged data elements

ONC announces $16.3 million in ARRA funding to states for Health information exchanges

Last week, the ONC announced $16.3 million in American Recovery and Reinvestment Act of 2009 (ARRA) funding for the Health Information Exchange Challenge Program which encourages breakthrough progress for nationwide HIE in five areas that challenge their adoption. Grants will be provided to ten states, ranging from $1 million and $2 million each. Pilots will focus on:

  • Improving long-term and post-acute care transitions through HIE
  • Providing patients access to their health information
  • Creating tools and mechanisms to search and share granular patient data
  • Developing strategies for population-level analysis

Senate Democrats draft FDA budget resolution

Senate Democrats are discussing a continuing resolution (CR) draft that would fund the FDA at levels requested by the President for FY 2011. The CR provides an estimated seven percent increase ($158 million). Although FY 2010 ended in September, Congress has passed two CRs to fund the government at last year's level; the latest CR expires on December 18. Line item authorizations included in the CR include:

  • FDA Office of the Commissioner and its sub-offices: $224 million
  • Center for Food Safety and Applied Nutrition and its field activities: $856 million
  • Center for Drug Evaluation and Research and its field activities: $963 million
  • Center for Devices and Radiological Health and its field activities: $362 million
  • Center for Biologics Evaluation and Research and its field activities: $328 million
  • Center for Veterinary Medicine and its field activities: $163 million
  • National Center for Toxicological Research and its field activities: $61 million

Note: the role and scope of the FDA has markedly increased in recent months as a result of health reform and related legislation: regulation of tobacco as a drug, increased scrutiny of medical device safety and oversight, increased regulatory attention to post-market surveillance of drugs, expansion of nutrition and food safety programs, management of bio-similars market entry per PPACA, oversight of direct-to-consumer advertising for drugs and devices, commercialization of genomic testing and others. The FDA is funded through annual budget appropriations and industry fees; given pressures to hold down government spending, substantial increases in industry fees seem certain.

FDA issues guidance agenda, seeks comments

The FDA released its annual guidance agenda (Federal Register, December 7, 2010) for public comment last week. The notice provides context as to what issues the agency may focus on which may or may not lead to regulatory jurisdiction for the FDA.

Drug-related topics for the Center for Drug Evaluation and Research (CDER) agenda:

  • Direct-to-consumer television advertisements
  • Drug promotions using social media tools
  • Drug diagnostic combination development
  • Including pregnant women in clinical trials
  • “Dear health care professional” letters
  • Appropriate naming, labeling, and packaging to reduce medication errors
  • Providing regulatory submissions in electronic format
  • Pediatric drug label information

Device-related topics from the FDA’s Center for Devices and Radiological Health (CDRH):

  • Medical device reporting for manufacturers
  • Protocol review guidance for in vitro diagnostics (IVDs)
  • Quality systems for lab-developed tests
  • Post-market surveillance under Section 522 of the Federal Food, Drug, and Cosmetic Act
  • 30-day notices and 135-day Premarket Approval Application (PMA) supplements
  • Tracking pediatric device approvals
  • Actions on 510(k) (premarket notification) submissions

State watch: final election results, challenges to PPACA, health exchanges on docket

Mid-term election recap:

  • With the Minnesota Governor’s race results now final (D Mark Dayton beat R Tom Emmer), the breakdown in 2011 will be 29 states with GOP governors, 20 states with Democrat governors and one Independent (Rhode Island). In 25 states, the GOP will have control of both legislative houses; in 16, both are controlled by Democrats; nine states are split. Republicans hold 54 percent (3,921) of the legislative seats in the 99 state legislative bodies.
  • Three new GOP Governors—Oklahoma, Kansas, Wyoming—have announced they intend to join the 20 state challenge to the constitutionality of the individual mandate.
  • Arizona and Oklahoma voters passed approval of bills to challenge the constitutionality of the individual mandate (Missouri passed its bill August 3). A similar bill, Amendment 63, failed in Colorado.

California fiscal emergency; legislative special session: Governor Schwarzenegger (R) declared a fiscal emergency on the first day of the special legislative session last week to address the $6 billion state budget shortfall for the current fiscal year. The governor announced a proposal to reduce the deficit by $9.9 billion over the next 18 months including.

Reductions in the Children’s Health Insurance Program (CHIP):

  • Increase monthly premiums ($31.2 million)
  • Eliminate vision coverage ($13.6 million)
  • Raise co-pays for emergency department visits ($6.8 million)

Reductions in Medicaid spending:

  • Cap payment on medical equipment ($12.4 million)
  • Limit prescriptions to six per month ($13.6 million)
  • Restrict physician visits to ten annually ($238.9 million)
  • Impose new co-pays for physician visits, emergency department visits and hospital stays ($698.9 million)
  • Eliminate coverage for newly qualified immigrants ($134.9 million)
  • End optional adult day health care benefits ($209.4 million)

Wisconsin’s attorney general JB Van Hollen announced last week he will challenge the constitutionality of the individual mandate enacted under PPACA when newly elected Governor Scott Walker takes office January 3. The attorney general has not decided if Wisconsin will file its own lawsuit or join the Florida PPACA lawsuit filed by 20 other states. He is expected to make a decision in a month or so.

Texas study: the state would lose $15 billion in federal funds if it opted out of Medicaid.
Officials from the Texas Health and Human Services Commission warned state officials Texas would face the loss of $15 billion in federal matching funds and would see an additional 2.6 million residents added to the ranks of the uninsured if the state opted out of the federal Medicaid program.

Alabama Governor-elect Robert Bentley (R), who campaigned as a critic of PPACA, announced last week his state would operate its own exchange rather than have the federal government take responsibility. Note: Nov. 18, HHS issued guidance that different models for the exchange would be acceptable per Elizabeth Fowler, deputy director for policy in HHS's Office of Consumer Information and Insurance Oversight.

Note: in coming months, challenges to the PPACA implementation timelines, waivers around its provisions, and funding necessary to implement its requirements will dominate state legislative agendas and significantly alter federal legislative efforts toward its implementation. The states are the frontline for implementation of health reform.


“I join the President in praising the bipartisan leaders in Congress for proposing legislation that will prevent a significant pay cut for doctors from taking effect on January 1. We are committed to ensuring that people on Medicare can continue to see the doctor they know and trust. This legislation simultaneously extends critical Medicare and Medicaid policies that expire at the end of this year. It also changes the way overpayments of the of the health insurance premium tax credit are paid back, making it fairer for recipients and all tax payers. I encourage Congress to act quickly to pass this proposal this week. And, I look forward to working with the new Congress on a permanent solution to fix Medicare’s physician payment system once and for all.”

 – Statement from HHS Secretary Kathleen Sebelius on physician payment fix, Thursday, December 9, 2010

“Medicare spending for the elderly is much higher in McAllen, Texas, than in El Paso, Texas, as reported in a 2009 New Yorker article by Atul Gawande. To investigate whether this disparity was present in the non-Medicare populations of those two cities, we obtained medical use and expense data for patients privately insured by Blue Cross and Blue Shield of Texas. In contrast to the Medicare population, the use of and spending per capita for medical services by privately insured populations in McAllen and El Paso was much less divergent, with some exceptions. For example, although spending per Medicare member per year was 86 percent higher in McAllen than in El Paso, total spending per member per year in McAllen was seven percent lower than in El Paso for the population insured by Blue Cross and Blue Shield of Texas. We... conclude that health care providers respond quite differently to incentives in Medicare compared to those in private insurance programs.”

 – Franzini et al., “McAllen And El Paso Revisited: Medicare Variations Not Always Reflected In The Under-Sixty-Five Population.” Health Affairs, December 2010

“We now have more information and facts around what was intended when the bill passed. And what we now see is that the implementation is producing significantly higher costs to implement. So I think there is a—let's call it a retool or a restart or some modifications that will be required.”

 – Verizon Communications Inc. Chairman and CEO Ivan Seidenberg, Chairman of the Business Roundtable, after meeting with HHS Secretary Sebelius Wednesday

Fact file

  • Electronic medical records (EMR) adoption update: increased adoption overall but varied based on setting:
    Setting January 2010 October 2010 Change
    Stand-alone hospital owned medical practice 44.1 percent 54.9 percent 10.8 percent
    Non hospital owned medical practice 34.4 37.1 2.7
    Multi-hospital system owned medical practice 50.2 61.2 11.0
    Non health system owned 34.2 36.8 2.6
    Solo practices 28.5 29.0 0.5
    Mid size practices (6-10 physicians) 54.4 60.8 6.4
    Large practices (25 plus physicians) 71.0 72.8 1.8
    Note: physicians can receive grants of up to $44,000 over five years from Medicare or $64,000 over six years from Medicaid to implement electronic medical records using certified vendors/systems that comply with “meaningful use” requirements of the Health Information Technology for Economic and Clinical Health (HITECH) Act. (Source: “Physician Office Usage of Electronic Healthcare Records Software” SK&A survey of 180,000 physicians)
  • Twenty five percent of health care information technology professionals—33 percent in medical practices, 14 percent in hospitals—who work in health care settings have not done a risk assessment on their systems to assess potential for privacy and security breaches. (Source: Healthcare Information and Management Systems Society survey of 262 IT professionals, November 2010)
  • Medicare expenditures for potentially preventable readmissions may be as high as $12 billion a year. Note: penalties of $8.2 billion from 2013-2019 will be assessed against hospitals for avoidable readmissions per PPACA Section 3025. (Source: MedPAC report to Congress, June 2008)
  • The military spent $19 billion on health care in 2001, $49 billion in 2010, with a forecast annual increase of five percent to seven percent, increasing to ten percent of the DOD budget ($693 billion in 2010) by 2015. Premiums, co-payments, deductibles for the 9.5 million active and retired service members who participate in the program have not increased since 1995. (Source: U.S. Department of Defense)
  • Up to nine million Americans will be eligible for rebates starting in 2012 as a result of PPACA requirements that health plans/employer insurance not have medical loss ratios of not less than 80 percent individual/small group and 85 percent large group. The law requires the plan to pay rebates to employers/enrollees for the underpayments. Total anticipated rebates in 2012: $1.4 billion; average rebates per person: $164 in the individual market. (Source: HHS, November 22, 2010)
  • Lifetime limits (precluded in PPACA beginning 2014): number of covered lives in plans with lifetime limits: 102 million; number of enrollees who hit lifetime limits on their insurance policies annually: 20,400. (Source: HHS, December 9, 2010)
  • Annual limits (precluded in PPACA starting in 2014): number of current enrollees in plans with annual limits: 18 million; number who hit annual limit annually: 3,500. (Source: HHS, December 9, 2010)
  • Employer-sponsored health costs: employer-sponsored health benefits costs increased 41 percent over the past six years while per-enrollee deductibles increased 71 percent. (Source: Commonwealth Fund)
  • Update: the number of uninsured adults increased 5.6 million between 2007 and 2009; the number of American adults under age 65 with employment-based insurance fell from 164.2 million to 156.2 million in the same period. (Source: Health Affairs)
  • In 2009, withdrawals were made from 61 percent of the ten million health savings accounts (HSAs), 72 percent had interest earnings, and 46 percent were charged fees. The average balance for HSAs at the end of last year was $1,307, down nearly ten percent from the average account balance in mid-2008. The average age of HSA account holders was 43: 16 percent ages 20 to 29, 25 percent 30 to 39, 27 percent 40 to 49, 23 percent 50 to 59, and eight percent 60 or older. (Source: “An Analysis of Health Savings Account Balances, Contributions, and Withdrawals in 2009,” AHIP Center for Policy and Research, December 6, 2010)
  • Two and a half million Medicare beneficiaries and about two million other patients are readmitted within 30 days of discharge, with total hospital costs (not including physician services) of about $44 billion. Half of Medicare patients who were readmitted within 30 days of a medical discharge to the community had not seen a physician between discharge and readmission. (Source: Jencks et al. “Defragmenting Care”, Annals of Internal Medicine, December 6, 2010)
National health reform: What now?




National health reform: What now?

National health reform is here. The health reform bills (HR3590 and HR4872) are now law and will trigger sweeping changes and disruptions – some rather quickly and some over many years. The industry is asking, “What now?” At Deloitte, we continue to explore and debate the key questions facing the industry, and we look forward to helping our clients find and implement the right answers for their organizations. To learn more, visit today.

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