Health Care Reform Memo: April 5, 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.

Health Reform Timeline and Impact: Perspective

With the signing of the Patient Protection and Affordable Care Act (PPACA) last Tuesday, health reform became law.

Some of its major features begin in 2010 – expanded access to children and disabled adults, regulatory reforms in the health insurance industry, et al – while others start later – delivery system reforms involving doctors, hospitals, long-term care and allied health professionals, individual mandates, employer penalties, et al.

The major efforts span a decade at a projected cost of $938 billion per the Congressional Budget Office. Please download the attached slide at the bottom of this web page for an overview of the timeline for these changes.

Each major sector is impacted. At a high level:

  • For the health insurance industry, new federal regulations combined with increased state restrictions will be challenging. And fees totaling almost $80 billion from 2013-2019 combined with premium controls, mandated coverage requirements for essential benefits, implementation of ICD-10 by 2013, administrative simplification, transparency in pricing, customization of products and services, pressure from employers and consumers for value-based purchasing, and public trust will be C suite concerns. The delay in increased coverage via subsidies for the underinsured will challenge management to innovate while reducing costs for scalability and sustainability.
  • For hospitals, Medicare and DSH payment cuts, increased bad debt, negotiating pressures from insurance plans, and increased supply-chain costs will threaten operating income and access to cost effective capital. Implementation of information technologies (ICD-10 conversion, clinical support systems, electronic health records) and physician alignment will compete for funding with traditional investments in clinical programs and facilities. Connecting health services with human services programs (community health centers, school and public health programs, et al) and transitioning from acute-centric operating models to regional population-based care management organizations will require new competences and tax workforce preparedness. Managers will face tough decisions about investments for the long-term vs. survival in the near term.
  • For long-term care providers, market-basket cuts, integration/collaboration with acute delivery systems, infrastructure investments in information technologies and outcomes measurement, participation in bundled payments and gain-sharing, adherence to evidence-based practices, safety and quality, and intensified focus on fraud will highlight C suite agenda. The interdependence of long-term care on acute providers and physicians will be a focus of C suite strategic planning.
  • Life sciences organizations face parallel pressures: New excise taxes and fees, increased transparency and intensified pressure on pricing in their supply chain negotiations with hospitals and physicians and increased oversight of R&D processes and commercialization tactics by regulators in the Food and Drug Administration (FDA). As providers – especially hospitals and physicians – see margins erode, device, drug and biotech companies will face tough negotiations. Innovations in contracting and pricing will be essential, while companies seek growth markets in new services or global venues.
  • Physicians likewise face daunting challenges resulting from the bill and pending resolution (or not) of the payment formula (sustainable growth rate – SGR – model). Expansion of pay for performance programs rewarding “value not volume,” increased scrutiny and new regulations around physician ownership of facilities to which they refer (hospitals, diagnostic imaging, surgery centers), shifting Part B payments to primary care, increased disclosure requirements of conflicts of interest, scope of practice issues at the state level, and infighting between specialists and primary care physician societies will exacerbate challenges. The implementation of value-based payments, acceleration of physician-hospital integration and attention to inappropriate variation resulting from supply-driven demand will change the posture of medicine from small businesses to big businesses and from clinical autonomy to technology-enabled care management in teams.

Consumer and employers will notice change almost immediately – higher insurance premiums, new alignments among providers and new taxes for higher income individuals. The reform legislation impacts every company and every individual in the U.S.: It is a bill with far-reaching implications and potentially unforeseen consequences.

In our view, every sector and stakeholder in health care is impacted by the bill – some sooner than others, some more directly than others. While it’s popular to place bets on winners and losers, a more objective view is that within each sector there will be both. Winners will place bets based on fact-based impact analytics and forward-looking strategic flexibility. Losers will do otherwise.

The seven last words of a dying organization: We never did it that way before!

Paul Keckley
Executive Director
Center for Health Solutions

Coverage for children under two years of age by insurance companies: Update

The PPACA requires children under two years of age be covered without regard to pre-existing condition starting in September 2010. Plans raised a question last week: Is coverage for families of these children also required since it is not required in the legislation? Tuesday, Department of Health and Human Services (HHS) Secretary Sebelius issued a statement noting, “Children with pre-existing conditions may not be denied access to their parents’ health insurance plan,” and “Insurance companies will no longer be allowed to insure a child but exclude treatments for that child’s pre-existing condition.” It remains unclear whether the rules allow insurers to charge higher premiums to families with children with pre-existing conditions. Administration officials said they would be monitoring any rate increases.

Bridge program for catastrophic, disabled announced; begins July 1, 2010

Friday, the White House announced the establishment of a temporary insurance pool where uninsured people with medical problems could buy coverage at reduced rates until that pool is replaced by the terms of the reform bill starting January 1, 2014, wherein pre-existing conditions cannot be used by insurance companies in coverage decisions, premium pricing or marketing programs that discourage enrollment. The HHS will administer the temporary program by contracting with states, operating the pool directly or hiring a nonprofit organization to run it in states not able to comply – $5 billion is set aside in the reform bill for the program.

To qualify for the high-risk pool, a consumer must have a pre-existing condition and have been uninsured for the six months before filing an application. Premiums in the new program will be set at “standard rates,” based on the average premiums charged by private insurers for similar coverage in the individual market. Secretary Sebelius is expected to set out-of-pocket limit on medical costs at $5,950 a year for an individual in the pool. Note: According to the Government Accounting Office, 35 states currently operate high-risk pools serving 200,000 nationwide with claims paid of $1.9 billion in 2008. Fifty-four percent of revenues are from enrollees, 23 percent are from third-party insurance companies and 23 percent are from state general revenues. The average claim was $9,437 in 2008.

Assessing impact: Winners and Losers

When it appeared the Senate bill (HR3590) plus some changes (HR4872) would be law, speculation began about winners and losers. Some notable examples:

  • Forbes (March 21, 2010): Winners: The uninsured, private insurers (especially those who serve large employers), drug and biotech manufacturers, plaintiff attorneys, labor unions, seniors who need prescription drugs, Medicaid recipients. Losers: Doctors, the insured, the wealthy, banks (due to student loan provision added to bill).
  • Credit Suisse (March 22, 2010): “In our view, coverage of 32 million uninsured provides the greatest benefit to hospitals. The final bill has some incremental adjustments/reductions to the group.” “Nonetheless, we believe health care reform could provide hospitals with slight upside to numbers. More importantly, greater coverage of the uninsured should alleviate a large portion of bad debt expense.”
  • Deutsche Bank (March 22, 2010): “Our long-standing view is that the reform bill will be a net long-term negative for industry profitability; the benefits of covering more than 30 million uninsured will likely be more than offset by the negative impact of Medicare Advantage payment cuts, industry taxes, and stringent new regulations on underwriting practices.”
  • Standard and Poor’s Equity Research (March 22, 2010): “We view the passage by the House of Representatives of the health reform package as positive for managed care organizations (MCOs), on balance. The MCOs will face fees, which are delayed until 2014, and will have restrictions such as the ban on rescissions, no lifetime caps, and inability to bar coverage based on health status, which can pressure margins. But we think these negatives may be offset by enrollment gains, providing economies of scale, leverage over general and administrative costs and greater negotiating clout with providers. We also see potential opportunities for consolidation.”

States in spotlight: 14 Attorneys General challenge constitutionality of reform; courts, states will be focus of attention

Attention will likely shift to states quickly as health reform is implemented. Here are some examples:

Last week, Florida Attorney General Bill McCollum and 13 other Attorneys General announced plans to challenge the constitutionality of the reform bill. They intend to challenge the constitutionality of state mandates (health insurance exchanges, Medicaid expansion financial responsibilities) as federal encroachment on state sovereignty – a violation of the 10th Amendment. Note: In at least three states – Arizona, Georgia, Nevada – Republican Governors indicate they will seek to go around Democratic Attorneys General to join the suit. By contrast, in Colorado, a petition was signed by 8,400 pro-reform voters who want the state to withdraw from the federal suit.

Three states have already voted that the individual mandate is not constitutional (Utah, North Dakota, Virginia) and others are rumored to follow. As many as 31 others might follow suit.

And in Maine, a much-watched case is unfolding where the state insurance commissioner will answer the question, “How much profit should a for-profit health insurance company be allowed to earn?” Note: In 30 states, insurance commissioners currently regulate insurance premiums. The new federal law sets up a new federal premium oversight process above the states, while requiring states to set up health insurance exchanges. Will states exercise control of premiums or will federal oversight supersede state responsibility? The President made a stop in Maine Thursday citing the state’s 1993 law requiring that all applicants for individual insurance be accepted as a precursor to a similar federal mandate starting 2014.

Meanwhile, Governors face funding budget challenges and are taking advantage of Centers for Medicare and Medicaid (CMS) matching funds: In Georgia, the state will impose a 1.45 percent tax on hospital revenues for the next three years generating $216 million per year, which will be matched by $870 million in state and federal funds for hospitals, with those that serve the most Medicaid patients. And last week, Colorado Governor Bill Ritter (D-CO) was granted approval by CMS to impose a similar patient tax on hospitals with matching federal funds. Per the National Conference of State Legislators, the total budget shortfall for states in FY11 will be $180 billion led by Illinois ($12.8 billion), California ($12.3 billion) and New Jersey ($10 billion).

Companies take charges for retiree drug discount program change

In the reform bill, the 28 percent subsidy to companies that provide a retiree drug discount (authorized in the Medicare Modernization Act of 2003) ends in 2013. Thus, at close of business Friday, at least 15 companies announced non-cash charges of $2.8 billion per Federal Standards Accounting Board Statement 106 (circa 1990) requiring future retiree health costs be recorded as a liability.

Background: In the negotiations around the prescription drug act, companies were allowed to deduct 100 percent of the cost of the drug benefit provided their retirees though paying only 72 percent. Estimates are that $14 billion might be charged by 3,500 companies who covered 6.5 million workers with the benefit. (Sources: Dow Jones, American Benefits Council)

Fact file

  • 46 percent of individuals who pay a penalty for non-compliance with the individual mandate starting 2014 will be under 300 percent of the federal poverty level ($37,500 for individuals/$66,150 for family). (Source: Internal Revenue Service)
  • 30 percent of nursing home patients needing rehabilitation are in the five most expensive of the 23 authorized Medicare billing categories. Estimates by the Office of Inspector General (OIG) are that $542 million was overpaid by up coding that was expected to be only five percent of the total population of nursing home patients. The variance by state is striking: 54 percent in Florida were coded in the most expensive categories vs. three percent in Alaska. The OIG audit in 1999 indicated 46 percent of codes were inappropriate; HHS found 26 percent of medical records in long-term care contained treatments inconsistent with the medical records of patients. (Sources: OIG, HHS)
  • 5,721 disciplinary actions were taken against physicians in 2009, a six percent increase over 2008 (Source: Federation of State Medical Boards)
  • 1,200 community health centers received $11 billion in new funding in the reform bill with the goal of expanding services to 20 million additional low income enrollees in Medicaid and uninsured. (Source: The White House, President Obama speaking in Maine, April 1, 2010)
  • In 2009, U.S. prescription drug sales rose 5.1 percent. Generics posted a 5.9 percent increase while branded experienced a 7.6 percent decline. Generics accounted for 75 percent of all prescriptions filled, up from 57 percent five years ago. (Source: IMS Health)
  • Patients with advance directives/living wills are more likely to choose limited care (92.7 percent) or comfort care (96.2 percent) at end of life vs. unlimited care (1.9 percent). One in four elderly Americans lacks the ability to make a decision about their medical care at the end of their life, and fewer than half (42.5 percent) have advanced directives/living wills. (Source: Maria J. Silveira, M.D., M.P.H., Scott Y.H. Kim, M.D., Ph.D., and Kenneth M. Langa, M.D., Ph.D. “Advance Directives and Outcomes of Surrogate Decision Making before Death,” New England Journal of Medicine, Volume 362:1211-1218, April 1, 2010)
  • U.S. employers added 162,000 jobs in March but the news was mixed: One-third were temporary jobs for Census workers and earlier forecasts had predicted 200,000. The unemployment rate is 9.7 percent; 8.2 million jobs have been lost since the downturn started in December 2007, while total employment in health care increased 600,000. (Source: U.S. Bureau of Labor Statistics)
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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