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Health Care Reform Memo: July 18, 2011

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

Last Monday, the U.S. Department of Health and Human Services (HHS) released guidance to states about the set-up and operation of health insurance exchanges required in Section 1311 of the Affordable Care Act (ACA). Meanwhile, legislators on Capitol Hill continued negotiations about raising the national debt ceiling as Standard & Poor’s announced “a substantial likelihood” it would downgrade the U.S. credit rating if the stalemate is not resolved. These are complicated times!

I doubt many non-health care people noticed the exchange rule: the deficit talks seemed to dominate the evening news – understandably so. Defaulting on our debt would have global implications and increase interest costs for every U.S. consumer for years to come. I am in China today: they are watching our debt reduction talks with great interest here. But make no mistake: the health exchange rules and how the health insurance market is likely to change in coming years is big news.

ACA seeks to increase access to affordable insurance by using health exchanges and incentives to allure up to 16 million currently uninsured citizens and small businesses to buy policies from qualified health plans (QHPs). The Congressional Budget Office (CBO) estimated up to 25 million might use the exchanges eventually, projecting only nominal erosion of traditional employer sponsored coverage.

The employer “pay or play” provision of ACA includes a penalty for companies that do not provide coverage to fulltime employees—a penalty of $2,000 per employee. For most employers that provide health insurance benefits already, the cost of the penalty would be less than the after-tax cost of health insurance benefits.

The fundamental premise of the exchange concept is the creation of an affordable market for individuals without employer/government-sponsored insurance and small businesses to purchase insurance on their own. Proponents of consumer-directed health care would likely see their dream fulfilled if employers exited and consumers took charge of their insurance. And the transparency requirements, website tools to support consumer choices, and premium constraints featured in the exchanges seems aligned with the shift toward informed decisions by consumers.

Tomorrow, we will release our forecast of insurance coverage shifts through 2020. We believe health insurance exchanges will play a major role, perhaps serving up to 65 million by decade end. No one knows for sure, so our forecast is built around several scenarios each plausible as events play out.

Escalating health costs might drive more employers to exit traditional coverage and feed accelerating exchange enrollment. States may use the exchanges to channel Medicaid enrollees or structure public employee insurance programs through their exchange. And individuals who currently purchase individual policies might migrate to exchange offerings. They’re all possibilities.

The numbers of consumers and small businesses that will purchase through the exchanges, the plans that choose to participate as “qualified” pursuant of this market, the capabilities of states to set up and operate their exchange efficiently and effectively, the degree to which employers integrate an exchange in their long-term game plan for workforce access and productivity, and fees exchange-based plans pay providers for services—these are the big unknowns that impact everyone.

So while to most the health exchange news might have flown under the radar after deficit reduction and the last voyage of the Atlantis shuttle, it’s a big deal. And it matters to everyone.

Paul Keckely

Paul Keckley, Ph.D., Executive Director, Deloitte Center for Health Solutions

Implementation update

Health insurance exchange proposed rules published; comment period for 75 days

July 11, 2011, HHS published two proposed rules setting the minimum standards for health insurance exchanges per Section 1311 of ACA. Overall, the 347-page rules follow closely language in ACA giving states a high degree of flexibility in overseeing the development and operation of their exchanges. Key highlights:

States will operate two exchanges: one for individual purchasers, and a second for small businesses (the Small Business Health Options Program [SHOP]). States may opt to govern the exchanges by one board, composed of knowledgeable health industry representatives; the voting majority cannot be made up of individuals licensed to sell health insurance. Otherwise, the two must be governed by separate boards and the state needs to ensure the SHOP will coordinate and share relevant information with the exchange. The day-to-day operations of the two may be integrated. In certain cases, an exchange may operate in two or more states, and a state is allowed to operate regional exchanges if it chooses.

Basic exchange functions

  • Enrollment and eligibility: an exchange must use a single streamlined application to determine eligibility and to collect information necessary for enrollment for: (1) QHPs, (2) premium tax credits, (3) cost-sharing reductions, and (4) Medicaid, the Children's Health Insurance Program (CHIP), or the Basic Health Plan (BHP). It must also manage the open enrollment periods for individuals (ex. Oct 15-December 7 is open enrollment) and a rolling enrollment process for the SHOP program.
  • Consumer support website: exchanges must operate websites that make it easy for consumers to compare between QHPs in terms of coverage, costs, and services.
  • Navigator program development and operational oversight: exchanges must award federal grants to support consumer assistance in selecting and using health insurance programs.
  • Payment of premiums: exchanges may (1) take no part in payment of premiums, (2) create an electronic “pass through” without directly retaining any payments, or (3) establish a process to collect premiums from enrollees and pay the QHP issuers.
  • Federal compliance: consistent with ACA, states will have responsibility for quality and performance reporting to HHS, and insurance premium increases of more than ten percent will be subject to review.

State responsibility for risk mitigation in implementing exchanges:
ACA established three risk-mitigation programs to offset market uncertainty and risk selection to maintain the viability of exchanges: (1) temporary reinsurance and (2) risk corridor programs, and (3) a permanent risk adjustment program. In the 103-page companion rule to the requirements for the health exchanges, the Centers for Medicare & Medicaid Services (CMS) outlined requirements for these programs intended to stabilize premiums and spread risk in the initial phases of exchange implementation.

Employer participation:
Employer size: until 2016, states can set eligibility thresholds at up to 50 or 100 employees. In 2017, states may allow employers with more than 100 employees to use SHOP.
Tax credits for certain small employers: starting in 2014, SHOP eligible employers are eligible for a tax credit of up to 50 percent of their premium payments if: (1) they have 25 or fewer employees, (2) their employees have an average annual wage of less than $50,000, (3) they offer all full-time employees coverage, and (4) they pay at least 50 percent of the employee premium.

Health plan participation:
QHPs: the exchange must certify a health plan is a QHP using criteria it develops to assure that the plans meet criteria for quality and affordability.

Yet to be determined with guidance forthcoming:

  • Specifics of federal reporting requirements by exchanges (e.g. quality and administrative performance, financial integrity)
  • Procedures for SHOP eligibility determinations, premium tax credits, cost-sharing reductions, benefit design standards for QHPs, including essential health benefits and calculations of actuarial value
  • Procedures for exemption from the individual mandate

Key dates:

  • September 28, 2011: proposed rules’ comment period ends
  • January 1, 2013: states must receive approval or conditional approval to implement their exchanges, or notify CMS it intends for the federal government to operate the exchange (existing exchanges as well as new exchanges)
  • January 1, 2014: exchanges begin operation

Note: the Deloitte Center for Health Solutions will release its detailed analysis of the Health Insurance Exchange proposed rules at the Bipartisan Policy Center’s event entitled “Insurance Exchange Development and Innovation in the States” on July 27, 2011. For more information on the event, please visit

CBO coverage projections challenged by Senator

Tuesday, Senator Olympia Snowe (R-ME) requested details of the CBO cost and coverage projections used in assessing ACA. The primary impetus for the query is the potential that three million additional individuals will be eligible for Medicaid in 2014 because ACA uses a single income test to determine eligibility, modified adjusted gross income (MAGI). MAGI does not include social security benefits in the income calculation, therefore the ACA calculation may add individuals the law did not intend to be Medicaid eligible.

House bill would prevent early retirees from becoming Medicaid-eligible

This week, Representative Diane Black (R-TN) will introduce a bill that would ensure middle-class early retirees will not be eligible for Medicaid coverage after the 2014 ACA expansion. According to the CBO, the proposal would save $10 billion over ten years by reducing the number of newly eligible Medicaid beneficiaries by three million to five million people.

Senators request flexibility with essential health benefits

Monday, Senators Mike Enzi (R-WY) and Orrin Hatch (R-UT) asked the Institute of Medicine (IOM) to “consider the impact of federal benefit mandates on the cost of health insurance and on access to health insurance as premiums increase on individuals and families.” At issue is ACA Section 1302 wherein IOM is to recommend essential health benefits required in all QHPs sold through health insurance exchanges. Its recommendation is due in September 2011.

HHS announces ACA funding for school-based health centers

Thursday, HHS awarded $95 million in ACA grants to 278 school-based health center programs. According to HHS, awardees are currently serving approximately 790,000 patients; the new funding will enable programs to increase their capacity by over 50 percent, to an additional 440,000 patients.

Note: ACA appropriated a total of $200 million for 2010 through 2013 for the School-Based Health Center Capital Program to address capital needs in school-based health centers.

Legislative update

Repeal on ACA restriction for OTC drug reimbursement sought

Thursday, Senators Ben Nelson (D-NE) and Pat Roberts (R-KS), and Representatives Shelley Berkley (D-NV) and Lynn Jenkins (R-KS) introduced legislation to repeal ACA Section 9003, which requires patients to obtain a prescription to pay for over-the-counter (OTC) medications with their health savings accounts (HSAs) or health flexible spending arrangements (FSAs). The National Association of Chain Drug Stores, the National Community Pharmacists Association, and the Health Choices Coalition support the bill.

Energy and Commerce chairman concerned about medical malpractice reform policies

Tuesday, House Energy and Commerce Committee Chairman Fred Upton (R-MI) encouraged HHS Secretary Kathleen Sebelius to step up efforts toward medical malpractice reform. Upton supports the Help Efficient, Accessible, Low-cost, Timely Healthcare (HEALTH) Act of 2011—a proposed law that would limit medical malpractice litigation in state and federal courts by capping monetary awards and attorney fees, modifying the statute of limitations and the “collateral source” rule, and eliminating joint and several liability—as a possible solution.

Note: in a June 16 letter, Secretary Sebelius wrote that the Administration established a $25 million initiative to support state and health system efforts to develop, implement, and evaluate patient safety and medical liability reforms in 2009 and the President’s fiscal year (FY) 2012 budget includes $250 million in grants to reform state medical liability laws. CBO estimates that medical liability reforms, such as those included in the HEALTH Act, could reduce federal deficit by $57 billion.

Supplemental funding for HIT usage in multi-campus hospitals sought

Wednesday, Representatives Michael Burgess (R-MD), Eliot Engel (D-NY), Kevin Brady (R-TX), and Charlie Rangel (D-NY) introduced The Equal Access and Parity for Multi-Campus Hospitals Act to ensure that multi-campus hospitals that use health information technology (HIT) systems meeting appropriate standards receive incentive payments that take into account the higher costs of implementation. The legislation was introduced with over 50 bipartisan co-sponsors.

NAIC committee does not endorse broker and agent exemption

Last week, the National Association of Insurance Commissioner's (NAIC) Executive Committee did not endorse a House bill that would exempt broker and agent compensation from the ACA medical loss ratio (MLR) calculation. Last month, a NAIC task force voted to endorse. The task force is now working with HHS and stakeholders on a possible compromise.

State watch

Study: state governments to spend at least $90 billion less under ACA

Monday, the Robert Wood Johnson Foundation and Urban Institute published a study predicting that the implementation of ACA will reduce states’ health care spending $92-129 billion between 2014 and 2019.

  • Between 2014 and 2019, the federal government would spend $704 billion to $743 billion more under ACA.
  • State costs for Medicaid expansions will be offset by $66 billion in new federal spending on existing Medicaid enrollees under ACA, as such enrollees move into eligibility categories that qualify for higher levels of federal support. The federal government would also spend $345 billion on premium and cost-sharing subsidies in the new health exchanges
  • If states and the federal government reduce their total spending on uncompensated care by 12.5 percent to 25 percent, the federal government will save between $39 billion and $78 billion while states collectively save $26 billion to $52 billion.

Note: the report finds considerable state and regional variation in these costs and savings, due to differences in such factors as current Medicaid eligibility rules and the characteristics of the pre-reform uninsured. (Source: Matthew Buettgens, Stan Dorn and Caitlin Carroll, “Consider savings as well as costs, state governments would spend at least $90 billion less with the ACA than without it from 2014 to 2019,” Robert Wood Johnson and Urban Institute, July 2011)

NGA: Medicaid spending target harmful to states

July 9, the National Governors Association (NGA), sent a letter to President Obama and Congressional leaders involved in deficit reduction and debt ceiling negotiations stating that a proposal to blend several federal Medicaid matching rates into a single unified rate for each state would be problematic. The NGA estimates that the targeted ten-year Medicaid reduction of $100 billion is equal to five percent of Medicaid state spending in FY 2012.

State round-up

Tuesday, Hawaii Governor Neil Abercrombie (D) approved legislation that will establish an insurance exchange in the state.

Michigan lawmakers are considering a proposal to charge a one percent fee on health insurance claims in order to draw down additional federal Medicaid funds. If the Senate fails to pass the plan, the state’s Medicaid program faces a $1.2 billion deficit.

Industry news

Study: small group health insurance market profile

America’s Health Insurance Plans (AHIP) released results from its 2010 study of the small group health insurance market. Key findings include:

  • Among employees with small group coverage: 68 percent were covered in a preferred provider organization (PPO) plan in 2010; 23 percent had health maintenance organization (HMO) coverage, often with a point-of-service (POS) option; seven percent – HSAs; two percent -- health reimbursement accounts (HRAs) with a qualifying high deductible health plan or indemnity plans.
  • In 2010, the average monthly premium for small group health insurance was $426 ($5,107 annually) for single coverage and $1,117 ($13,409 annually) for family coverage.
  • Premiums fell as firm size increased. Average monthly premiums for individual coverage by firm size include $406 (between 26 and 50 employees), $419 (between 11 and 25 employees), and $446 (firms with ten or fewer employees).
  • Average monthly premiums ranged from a high of $565 ($1,483 for family coverage) in West Virginia to a low of $302 ($793 for family coverage) in North Dakota (among states with substantial enrollment represented in the survey).

Note: The survey was sponsored by AHIP in July 2010 using member companies offering coverage in the small group health insurance market.

Study: biopharmaceutical industry impact on U.S. economy

Tuesday, the Pharmaceutical Research and Manufacturers of America (PhRMA) released a report conducted by Battelle Technology Partnership Practice estimating that the overall impact of the biopharmaceutical sector on the U.S. economy is more than $917 billion annually. Other findings include:

  • The biopharmaceutical sector supports more than four million jobs in the U.S. with $258 billion in wages and benefits in 2009.
  • The sector paid $33 billion in state and local taxes and more than $42 billion in federal taxes in 2009.

A $10 billion change in biopharmaceutical revenues would result in $29.7 billion in total output, 130,000 total jobs, and $9.2 billion in personal income.

Hospital drug shortages significant and growing problem

Tuesday, the American Hospital Association (AHA) released a survey of its members finding that 99.5 percent reported experiencing one or more drug shortages in the past six months, and nearly half reported 21 or more drug shortages.

Separately, the American Society of Health-System Pharmacists (ASHP) found that 70 percent of the respondents felt that the information resources available to manage drug shortages were not good and that labor costs associated with managing shortages in the U.S. cost an estimated $216 million annually. The ASHP study surveyed 353 directors of hospital pharmacies.

FDA personnel changes announced

The U.S. Food and Drug Administration (FDA) named former Dartmouth Medical School Dean Stephen Spielberg deputy commissioner for medical products and tobacco, a newly created position. FDA Compliance Office Director Deborah Autor was also promoted to deputy commissioner for global regulatory operations and policy.


“The same people who told you that health care reform would kill grandma are saying that the IPAB [Independent Payment Advisory Board] will ration care and kill Medicare. And that part of it’s just politics. The reality is a little more boring… It’s an incentive for Congress to spend more time solving problems before we reach a crisis point and less time talking about it while costs just skyrocket.”

 – White House deputy chief of staff Nancy-Ann DeParle, July 12 U.S. Chamber of Commerce conference on rising health care costs.

“The intent of this proposed rule is to afford States substantial discretion in the design and operation of an Exchange. Greater standardization is proposed where required by the statute or where there are compelling practical, efficiency or consumer protection reasons.”

 – HHS proposed rule 1311, July 11, 2011.

Fact file

  • Consumers price increases: For the 12-month period ended in June 2011, hospital consumer prices increased 6.1 percent compared with 8.3 percent a year ago. Physician-office consumer prices increased 2.7 percent after a three percent increase the prior year. The overall consumer price index (CPI) increased 3.6 percent before seasonal adjustment. (Source: U.S. Bureau of Labor Statistics, Consumer Price Index June 2011)
  • Ten percent of electronic prescriptions contain an error; clinical error (wrong drug/dosing) is responsible for 7.5 percent of all errors noted. (Source: Journal of the American Medical Informatics Association, June 30, 2011)
  • Hospital employment growth (Source: U.S. Bureau of Labor Statistics):
  2007 2008 2009 2010 2011 YTD
Layoffs 7,595 9,268 11,787 10,490 3,357
Hiring 91,600 112,300 40,100 17,900 36,200
  • Number of hospitals with full/partial health plan ownership (Source: AHA, 2011):
Percent revenues anticipated through health insurance exchange-based QHPs (assumes 28 million enrolled, per CBO in 2019) (Source: IBS World) Percent revenue from QHPs in health exchanges
Specialists 55.5 percent
Primary care 55.0 percent
Podiatrists 51.5 percent
Dentists 45.0 percent
Diagnostic and medical laboratories 43.5 percent
Pharmacies and drug stores 42.0 percent
Ambulance services 40.0 percent
Energy and other outpatient centers 37.5 percent
Hospitals 34.5 percent
Mental health and substance abuse centers 25.0 percent
  • Combined federal Medicare and Medicaid spending was $3 billion higher in June 2011 compared to June 2010. (Source: CBO, July 2011)
  • The number of private health information exchanges (HIEs) increased from 52 last year to 161 in July, while live public HIEs grew more slowly – from 37 in 2010 to 67. (Source: KLAS)
  • Union workers covered through their own job fell from 82 percent to 80.4 percent between 2007 and 2009, a two percent decline. In contrast, the percentage of nonunion workers with coverage through their own job fell from 55.9 percent to 52.2 percent, a 6.5 percent decline. (Source: Employee Benefit Research Institute, “Notes”, vol. 32, no. 7, July 2011)
  • In 2009 medical device spending totaled $147.0 billion or 5.9 percent of total national health expenditures ($2.5 trillion). (Source: AdvaMed, July 2011)
  • More than $790 million has been obligated to contractors from various federal departments and agencies for the implementation of ACA. (Government Accountability Office, July 2011)
  • Raising the eligibility age for Medicare from 65 to 67 would save $124.8 billion by 2021. (Source: CBO, March 2011)
  • Survey results of 163 physicians in Brockton, Newburyport, and North Adams enrolled in the Massachusetts eHealth Collaborative since 2005: in 2009, 78 percent said they could generate a registry based on lab results compared to 44 percent in 2005, and the portion that could create a list based on medications jumped from 33 percent in 2005 to 83 percent in 2009. (Source: Health Affairs)
  • Policies sold on exchanges could be worth nearly $60 billion in premium revenue by 2014, and nearly $200 billion by 2019. (Source: PwC U.S. Health Research Institute)
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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