Health Care Reform Memo: February 8, 2010

A 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 new administration and implications for the C-suite and various stakeholder groups.

Breaking news: Health reform summit announced

Yesterday the President told CBS anchor Katie Couric he will host a half-day health care planning session with Republican and Democrat leaders next month. The session will be televised from the Blair House and “all ideas” will be on the table.

Health reform spotlight shift to states: Medicaid the flashpoint

Last week the Virginia State Senate voted 23-16 to preclude an individual mandate requiring Virginians to purchase health insurance. The Illinois Supreme Court threw out the state’s caps on non-criminal damages from medical liability (one of 30 states with caps on pain and suffering). In Oregon voters approved Measures 66 and 67 to raise $900 million to fund the state’s shortfalls in education and health care (Oregon has the highest income tax rate in the U.S. at 11 percent but is one of five without a sales tax). In Massachusetts the attorney general released an investigation showing “Massachusetts insurance companies pay some hospitals and doctors twice as much money as others for essentially the same patient care… based primarily on market leverage.” Petitions to begin universal coverage legislation are being circulated in California and Missouri. In New Hampshire and South Carolina efforts to facilitate access to health insurance across state lines are underway. In Tennessee the Governor is leading efforts toward statewide adoption of electronic medical records and health information exchanges. And so on. In every state, health care is arguably the most complex, costly and politically treacherous issue to tackle. It is one-fourth of the average state’s budget, and its obligations to Medicaid, SCHIP and other programs compete for funding with teacher pay, homeland security, general services, transportation and other priorities.

Medicaid and SCHIP commitments are especially challenging.

Background: Medicaid is funded jointly by the federal government and states according to a complex formula (Federal Medical Assistance Percentage-FMAP) with federal contributions ranging from 50-84 percent. In 2009 the average was 57 percent federal, 43 percent state. It represents 22 percent of the average state’s operating budget and covers services for lower income children and adults, disabled, and the poorest seniors (the medically needy). Accrued deficits to Medicaid stand at $250 billion, thus recent efforts to offset the shortfalls--$87 billion from the American Reinvestment and Recovery Act of 2009 (ARRA), and $25 billion from the FY11 federal budget. However, states are not allowed to limit eligibility/enrollment if they accept these funds, and after receipt, legislators worry about recurring operating costs. According to the National Association of State Budget Officers (NASBO), after these one-time grants, states will have a Medicaid shortfall of $14.9 billion in 2010 and $21.9 billion in 2011. NOTE: For every one percent increase in unemployment, the uninsured increase by 1.1 million, and state revenues decline by three percent (Source: National Conference of State Legislatures, Kaiser Family Foundation). The trends are compelling: enrollment growth (5.4 percent annually), health costs increases (6.2 percent annually) and declining state revenues. Understandably, states are taking action: cuts in Medicaid benefits (36 states), limits on enrollment (29 states), lower payments to doctors and hospitals (38 states), and continued dependence on general fund revenues to fund partial shortfalls (44 states).

SCHIP (State Children’s Health Insurance Program), created in 1997, covers low income children and parents under 19 years of age who do not qualify for Medicaid. In the first week of the Obama administration, SCHIP enrollment was increased by four million, bring total coverage to 11 million. Similar to Medicaid, SCHIP is managed by states with federal oversight of mandatory benefits/services afforded enrollees. Some analyses indicate that these programs pay providers less than their costs—physicians, hospitals, allied health professionals—forcing hospitals, doctors and others to make up the difference through contracts with commercial plans and individuals (the hidden transfer tax).

In some states providers are required to treat Medicare, Medicaid or SCHIP patients; in others, providers may elect to participate or negotiate payments separately. Each of these is the backbone of coverage to under-served populations. Coupled with the uninsured, these two populations pose tension in the delivery system as providers seek to limit or eliminate coverage altogether as a result of the financial losses and increased liability associated with these populations.

Our take: as appetite for a comprehensive health reform bill lessens, state efforts to reform health systems will likely increase. Funding for Medicaid and SCHIP will be among the primary concerns, but rivals will be health benefits costs for state employees, funding and effectiveness for human services and public health programs, school-based health, fraud surveillance for public programs, licensing and scope of practice for the health care workforce and medical professionals, regulatory oversight of commercial health insurance, food and environmental safety, and medical management of at-risk populations—children, disabled, prison health, dual eligibles, and others. Thirty-five governors races are on tap for 2010: no doubt, state efforts to reform and contain costs will be a major if not dominant issue in these campaigns.

FY11 budget: News is mixed for key health care sectors

The $3.8 trillion FY11 budget was released Monday by Office of Management and Budget (OMB) Director Peter Orszag. The news is mixed for health industry stakeholders at a time when Congress is considering an additional $1.9 trillion to the federal borrowing limit after a $250 billion expansion in December.

  • Key assumptions in the budget suggest a protracted economic recovery period extending to 2014 or beyond. The budget assumes inflation at 1.9 percent through 2020 and unemployment recovering to 5 percent (considered “full employment”) in 2015. Revenues to the federal government, down $250 billion as a result of the downturn, will not recover in the near term while spending will produce deficits of more than $1 trillion annually until 2020 adding $8 trillion to national debt. Spending on health care and social security entitlement programs are expected to increase 6 percent annually and contributions to state Medicaid programs at slightly less.

  • Targeted increased allocations in the health care are included.

The FDA: The budget calls for a 6 percent increase in its funding ($2.5 billion from government, plus $1.5 billion from industry fees from food, drug, device, and tobacco manufacturers). NOTE: $250 million of the $1.5 billion are new fees not approved by Congress. The agency says it will add 1,250 staff and focus on expedited approvals for generic drugs, medical devices, food safety and surveillance, and new standards for oversight of drugs and devices derived through nanotechnologies and genetic research.
Community health centers (CHCs): $290 million to expand federally funded health centers (currently 1,200 centers provide primary care to 20 million mostly under-served). The allocation allows coverage expansion for an additional three million. NOTE: In the stimulus package (ARRA), community centers received $2 billion for infrastructure and expansion. Also, in the House bill $12 billion was budgeted to increase the numbers of CHCs; $7 billion in the Senate bill. Notable gaps in access to primary care for underserved populations were remedied in both bills through substantial CHC expansion in addition to increased primary care residencies.
NIH: The National Institutes of Health gets a $1 billion increase. NOTE: the NIH also received $10 billion additional in the stimulus package in 2009.
State Medicaid programs: Overall 6.2 percent increase to $290 billion to fund the federal portion of the obligation to the 55 million enrollees. FY11 includes $25.5 billion to extend stimulus funding six months in addition to the initial $87 billion allocated in ARRA.
Medicare: A 6 percent increase in funding to $489 billion.
Comparative effectiveness: $236 million to develop comparative effectiveness priorities and delivery options.
Comparative effectiveness research: $1 billion to fund the development of the research necessary to widespread implementation.
Autism: $222 million for expansion of autism spectrum disorders research.
Health IT: $110 million for continuing efforts to strengthen health IT policy, coordination, and research activities.
Primary care: $169 million for expanded access to primary care in under-served areas via the National Service Corps.
HIV/AIDS research: $3 billion for prevention and treatment expansion.
Child obesity: $1 billion per year to reduce childhood obesity through school-based programs.
Indian Health Service (IHS): $4.4 billion for IHS services to 1.9 million Native Americans.
Chronic care pilots: Funds innovation in community-wide chronic care management programs in ten cities.
Department of Education: Funding for Promise Neighborhoods, teacher and principal performance improvements, and use of information technologies in classroom and after school setting are prominent—affording connectivity between local health systems, public health programs, and schools.
Department of Defense: In the budget of $549 billion, $31 billion for 9.5 million military beneficiaries medical care (5.8 percent increase), programs for trauma and post-traumatic stress disorders ($919 million) and a 3 percent increase in program funding for military families.
Department of Veteran Affairs: 20 percent increase in benefits to $57 billion, with focus on specialized care programs bridging Departments of Defense and Veterans Affairs needs ($5.2 billion) and social programs to reduce veteran homelessness and social skills. A notable line item in the VA budget is $3.3 billion for information technologies to improve the efficiency and effectiveness of its programs—follows $2.7 and $3.3 billion investments in prior years.

  • New taxes, industry fees, cuts in Medicare likely. The $3.8 trillion budget assumes a $1.6 trillion deficit, $381 billion in tax relief and $2.2 trillion in revenue raising provisions. Tax breaks for working families and small businesses, tax increases for higher income individuals and corporations, reform of international tax rules, an end to tax preferences for oil and gas companies, and closing of perceived loopholes in corporate taxes are key features of the budget proposal. Health care related programs exceed $900 billion in the budget, and it is likely the industry will face deeper cuts to Medicare and other entitlements—a likely focus of the to-be-named Presidential Commission on Debt Reduction. NOTE: Please see the attached issue of Deloitte Tax News and Views for a complete summary of tax related provisions in the FY11 budget proposal.

The theme of the President’s State of the Union speech on January 27 was jobs and the economic recovery. The FY11 budget includes a deficit of $1.6 trillion (11 percent of GDP) shrinking to $727 billion in 2013 (4.2 percent of GDP—highest since World War II). Health care is in a precarious position relative to these goals. Consider the following:

  • The economic downturn has resulted in the loss of 8.2 million jobs since December 2007; the health care industry’s employment grew 600,000 in the same period.
  • The economic recovery will likely require slower growth in government spending on entitlements including Medicare, but this program is popular among its 42 million enrollees and cuts in an election year are politically challenging.
  • Physicians, arguably the most trusted source in health reform, face cuts in their payment schedules (see sustainable growth rate fix) and increased personal income taxes along with others, so job creation and economic recovery is likely to fall on deaf ears to clinicians - considering early retirement, limiting access to patients in public programs, or considering practice closures.
  • Life science companies—medical devices, biotech, pharmaceutical companies—might elect to invest capital and add employees in developing markets and offshore operations if the U.S. economy and tax climate is adverse to their interests.

For these reasons, some economists argue increased spending in the health care industry will vitalize the economy producing jobs and stimulating innovation. Others note the costs of health handicaps competition in a global economy giving unfair advantage to countries where costs are less. For the present, efforts to control the rate of health cost growth seem dominant over consideration of the industry’s capacity to produce jobs.

There is no argument that health care reform will continue to be a high profile focus of policy and political debate in 2010. The pause in efforts to pass a comprehensive reform bill will probably mean a series of bills more narrowly focused combined with budgetary maneuvers to reduce spending at the federal and state levels. Medicare (CMS) will likely emerge as the driver for many of the delivery system reforms while states may take the lead in insurance-related legislation deemed helpful to insurance affordability and oversight. Thus, Health Reform 2.0 is likely to be a series of bills and actions at the state and federal level rather than a comprehensive bill.

House Democrats plan bill to take away anti-trust exemption from health insurance companies; beginning of a la carte health reforms

As Congressional leaders consider a comprehensive reform bill that could prove challenging in an election year, legislators are taking steps to introduce bills focused on specific targets of reform. Several House Democratic leaders announced last week their intent to bring to the floor this week a bill to repeal the exemption insurance companies have from antitrust laws. The measure would primarily apply to the 17 million individual policyholders in the commercial insurance market, affording them the opportunity to purchase policies across state lines via an e-Bay type model. The bill would not apply to the 159 million insured through commercial group plans. Sen. Olympia Snowe (R-ME) announced she was considering a bill to raise Medicare taxes (a feature of the Senate bill passed December 24) for individuals with income above $200,000 and households above $250,000.

Less controversial bills will likely address areas where Republicans and Democrats were previously in agreement, e.g. extension of dependent coverage to 25/27 years of age; bans on lifetime limits and rescissions in commercial insurance plans, and tax credits to middle-income households to purchase insurance.

Health care lobbying: 2009

Trade groups, companies and special interests spent $648 million on health lobbying efforts in 2009, according to the Center for Responsive Politics.

End of life care: Second look

Palliative care is “an approach that improves the quality of life of patients and their families facing the problems associated with life threatening illness through the prevention and relief of suffering by means of early identification and impeccable assessment of treatment of pain and other problems physical, psychosocial, and spiritual” (Source: World Health Organization). 27 percent of Medicare spending is in the last year of the patient’s life. 40 percent of the 2.7 million seniors who die annually are enrolled in hospice programs; but in some cities as few as 5 percent. (Source: National Hospice and Palliative Care Organization). There are 4,700 palliative care programs in the U.S. including 1,200 in the nation’s 5,800 hospitals. In the current health reform debate, end of life care will inevitably get more attention. Consider: emphasis on coordination of care is not likely to subside. Medicare will continue to encourage performance-based payments to hospitals and integrated system that reward avoidable readmissions and coordination of care. End of life care coordination will be a focus as studies show palliative care saves money and increases patient and family satisfaction.

House, Senate approve temporary provisions for physician fix

The AMA was once again disappointed in its effort to fix the sustainable growth rate (SGR) formula for paying physicians. Last week, the House voted 233 to 187 to approve a patch through 2014 following the Senate’s passage of a temporary fix in January. The SGR model would have cut physician payments 21 percent beginning in March had the House not acted. The AMA wants the formula permanently thrown out at a cost of $247 billion—the amount of accrued liability owing to one-year fixes since 2004. Liability reform and the SGR fix are the top items on the AMA’s reform agenda.

Congressman Ryan proposal: raise eligibility age for Medicare enrollees

Wisconsin Republican Representative Paul Ryan and five co-sponsors introduced a bill that would allow Medicare and Medicaid beneficiaries to purchase private insurance and both raise the retirement age gradually to 70. In 1965, when Lyndon Johnson passed the Medicare bill in his Great Society program, beneficiaries could expect to receive benefits for five years when enrolled on their 65th birthday. Today, its 42 million beneficiaries receive benefits for 14 years on average while the eligibility age has not changed. Some analyses indicate the Medicare Trust Fund may be insolvent by 2017 unless new revenues are added and changes made to elements of beneficiary eligibility and delivery of services.

Cloud computing access provides opportunity to accelerate clinical research and personalized medicine

Thursday, the National Science Foundation announced a three-year deal with Microsoft to permit free access to the company’s cloud computing process. The upside: researchers will have access to complex computing capacity and data management for scientific studies requiring management of huge datasets, e.g. genetic sequencing, etc. The company is of one of several in the cloud computing market along with Google, IBM, Yahoo, and others.

HITECH update

As part of President Obama’s $3.8 trillion budget released last week, $110 million was designated for health IT activities. Under the proposal, ONC would receive $78 million to continue to lead programs developed under ARRA and the HITECH Act. The remaining health IT funds would go to the Agency for Healthcare Research and Quality (AHRQ), HHS Office for Civil Rights (OCR), and the Office of the Assistant Secretary for Planning and Evaluation (ASPE). This budget proposal would increase ONC's funding by $17 million compared to FY10. President Obama has stated health IT is one of the key components to health care reform and both Democrats and Republicans have supported the health IT initiative to provide Americans with better care.

Controversial autism study officially withdrawn from medical research

Tuesday, the prestigious Lancet announced it expunged the 1998 research of Andrew Wakefield from the journal ending a 12-year industry challenge to the veracity of the findings. In the study a link was found between the MMR (measles, mumps, rubella) vaccine and autism and bowel disease, but other studies found no correlation. The controversy caused widespread consumer confusion and led to a steep drop in vaccinations in the United States and Europe. In its statement, Britain's General Medical Council (GMC) called the Wakefield study "irresponsible and dishonest" resulting in “disrepute” to the medical profession.

Fact file

  • Commercial health insurance premiums will increase 10.3 to 11.1 percent in 2010 (Source: Buck Consultants survey of 100 health plans covering 78 million enrollees).
  • The average Medicare enrollee has 33 Part C (Medicare Advantage Plans) to choose from. Currently, there 11,000,000 seniors are enrolled in Part C plans.
  • Physicians who experience a 10 percent increase in medical liability risk work 1.7 hours per week—equivalent to loss of production of 21,000 physicians annually (Source: Journal of Law and Economics).
  • 803—the numbers of suits filed against individuals for Medicare fraud in FY2009.

FDA oversight of drug promotion increases

Last week, the Food and Drug Administration (FDA) illustrated its stepped-up oversight by sending a warning letter to high profile Miami dermatologist Leslie Baumann advising against “expression of enthusiasm” for Dysport, an injectable anti-wrinkle therapeutic not yet approved by the FDA. Dr. Baumann violated the FDA restrictions because she was an investigator on a clinical trial for Dysport and promoted it before the drug’s approval in April 2009.


"More than $60 billion in public and private health-care spending is lost to fraud each year. That is a staggering amount of money. It's more than the net worth of America's eight largest private foundations. And it's 33 times the amount of money that Avatar – now the highest-earning movie of all time – has made at the box office."

–Attorney General Eric Holder, Thursday, to Dept of Justice Health Care Summit

“There is a deep populist anger brewing in America and… America cannot return to fiscal health without tackling entitlements.”

 –Economist February 5, 2010, p.14.

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