This site uses cookies to provide you with a more responsive and personalized service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.

Bookmark Email Print this page

Health Care Reform Memo:
April 1, 2013

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: Medicare reform 

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

In Chattanooga, Tennessee where I grew up, I am still called Paul Jr. My dad was a quiet man who made a huge impact on his sons by living simply, working hard and deflecting attention where possible. Only after his death did I learn much about his life—family, faith, and opera were his passions. He taught us by oft repeated simple sayings:

  • “Everyone puts their pants on one leg at a time”… i.e. no one is above or beneath you!
  • “Average is just as close to the bottom as the top”… i.e. excel in what you do, and work harder than most.
  • “Be willing to question your beliefs and doubts”… i.e. never stop learning, and don’t be afraid to change your mind.

He died at a local hospital after surgery to repair a heart valve. I made the DO NOT RECUSITATE decision that resulted in his passing without permission from my mom or brother: I knew what dad wanted, and have never regretted the decision though I think about it daily. I knew what quality of life meant to dad, and how months in a vegetative state would have robbed my mom of the life she had, and dad of the peace he deserved.

What Medicare did or did not pay didn’t enter my mind in 1994; it was about Mom and Dad, and their sense of purpose and wellbeing. We talked about their health a lot. Dad faced enormous health challenges: a brain tumor forced his early retirement, followed by lung surgery, and two bypass procedures— the last, a quadruple with valve during which he suffered the fatal stroke.

Between those procedures, we’d look at his bills and doctors’ orders. I kept his paper records and doctors’ notes. He had complete trust in his doctors, and from all accounts, he received the best care accessible at that moment in time.

Medicare then, as it is now, was confusing. It was difficult for us to understand how Part A and Part B had different co-pays and deductibles, and where and how certain elements of his care were not covered, even with supplemental insurance (see call out box).

Discussions like ours at his bedside and at the dinner table are repeated across America everyday as Baby Boomers assist their family and friends in navigating Medicare. Then, as now, it’s confusing. Four parts—A, B, C, and D. There are also new models like medical homes and accountable care, new ways of paying providers a la bundled payments and value based purchasing, new visibility from employers hoping to spotlight inefficiencies and best practices and regulators hoping to weed out fraud, and increased attention on cost in the context of efforts to reduce the federal deficit and a “grand bargain.”   

Case in point: today, the Centers for Medicare and Medicaid Services (CMS) will announce changes in payments for Part C (Medicare Advantage or MA) that 13.1 million seniors choose over the traditional fee-for-service (FFS) Medicare option. MA is a popular program; enrollment increased 10 percent to 27 percent of total Medicare enrollment whose monthly charge has actually fell $4 to $35 in 2011— down from $44 in 2010 (CBO, Kaiser Family Foundation).

The health insurance industry issue is this: the MA program is popular— seniors like its focus on navigating Parts A, B, and D seamlessly (i.e. managed care). As enrollment has grown, the complexity of the Part C population’s medical problems has increased. Risk scores used by the government to calculate intensity of services to enrollees increased and are higher than traditional Medicare: 4.2 percent higher in 2010, 4.6 to 5.3  percent higher in 2011, and 4.9 to 6.4 percent higher in 2012.1 Insurance companies want CMS to maintain an adjustable reasonable risk methodology in their payments to Part C plans.

The government’s issue is this: per the Affordable Care Act (ACA), cuts to the program’s funding formula are projected to save $136 billion over ten years (U.S. Congressional Budget Office [CBO]). Part C payments cost $3.2 to $5.1 billion more than FFS for 2010-2012 (Government Accountability Office [GAO]). CMS’ position is that to achieve overall savings in the Medicare program, Part C payments should be more in line with FFS Medicare to avert adverse selection, and the Part C risk scoring methodology should be adjusted down resulting in a 2.3 percent cut to Part C plans, which was announced in a call letter February 15, 2013. (Note: final decision on payment adjustment is expected to be finalized today).

The Medicare program today

Coverage Date of Enactment Financing
Part A Hospital insurance (inpatient, skilled nursing facilities, home health, and hospice) 1965

Financed through payroll tax: 2.9% split evenly between employer and employee.

Higher income taxpayers (more than $200,000/individual or $250,000/couple) will see an increase of 0.9 percentage points on payroll tax earnings in 2013.

Part B Physician related services (outpatient, home health, and lab) 1965

Financed through monthly premiums and general revenue.

Beneficiaries with higher annual incomes ($85,000/individual or $170,000/couple) pay a higher, income-related Part B premium reflecting a larger share of total Part B spending.

Per the ACA, income thresholds are frozen through 2019.

Part C MA (formerly Medicare+Choice) 1997 Financed by the Hopsital Insurance (HI) and Supplementary Medical Insurance (SMI) trust funds.
Part D Prescription drug coverage 2003 Financed by premiums, general revenue, and state payments for dual eligibles.


It’s hard to know exactly how all this will play out. This much we know:

  • The Medicare program means a lot to seniors. It’s about their security, and its front of mind. Though they don’t understand its complexity, they assume its solvency and are confident that care for them is secure.2 It’s the reason in our surveys, comparing individuals by insurance coverage or age, seniors with Medicare are the most secure and content in their coverage.
  • Medicare is expensive and how it’s spent is uneven: 10 percent of its enrollees represent 63 percent of the expenditures, and the 5 percent who die each year account for 30 percent of its costs often involving intensive care that extends lives with no hope of recovery (2012 Medicare Trustee’s Report). So a solution to Medicare spending will necessarily require difficult discussions in our society about how we treat should treat our seniors to provide evidence-based, cost effective care, and how at the end of their lives we should support families as they navigate death that’s dignified and appropriate.   
  • Fixing the federal government’s fiscal challenge as part of the “grand bargain” will require changes to the Medicare program that reduce the volume of services provided to seniors. Today, the federal government spends $551 billion on the Medicare—3.7 percent of our GDP increasing to 5.4 percent in 2035 (CBO). It’s 21 percent of total health spending in the U.S, but last year, on a per enrollee basis, its costs increased only .4 percent (CBO). So in recent years, the cost of the program has been driven by increased demand more than increased prices. Reducing demand as 8,000 Americans turn 65 everyday (AARP) means regulators face a daunting challenge: eliminating waste and overuse using incentives and technologies to transform what’s provided, and educating seniors and their families that more care is not necessarily best care.

My dad always said, “if you see a problem, fix it.” He had little patience for complainers lacking solutions and respected candor. I learned a lot about life from Dad’s punctuated reminders. He was a quiet man not prone to verbosity. I guess that’s why I remember his sayings so vividly.

Medicare is a problem that needs fixing. And it can be done. Let’s fix it.  

Paul Jr.

Paul Keckely

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

P.S. join us this Thursday, April 4, at 1:00 PM ET for a  "Live from the Center" webinar to gain insight on the potential impact of Congress' debt reduction efforts on the health care industry. To register, click here.

Also, check out the April issue of the Harvard Business Review. The Mike Raynor-Mumtaz Ahmed piece, “Three Simple Rules for Making a Company Truly Great,” is based on their analysis of 25,000 public companies’ results (return on assets).  They conclude that success is a result of three rules: better before cheaper, revenue before cost, and “there are no other rules”. It’s one of the best pieces I’ve read in a long time. A must read for health industry professionals. Notably, they identified 174 companies that were “Miracle Workers”—those that deliver results via consistent management of gross margins, and 170 as “Long Runners”—those that manage results by maintaining a cost advantage as the basis for their rules.

1CMS reimburses MA plans based on a risk score (a relative measure of expected health care for each beneficiary) adjusted for health status and demographic characteristics. In 2010, the GAO reported that CMS reimbursed MA plans at a higher rate than Medicare FFS plans due to a difference in diagnostic coding that caused the risk scores for MA plans to be higher. The GAO subsequently directed CMS to adjust for the differences in coding. In January 2012, the GAO reported that CMS’ risk adjustment score (3.4 percent) had not sufficiently reduced the amount of excess payments to MA plans.

2Deloitte Center for Health Solutions’ 2012 Survey of U.S. Health Consumers (see the Fact File)

return to top


Medicare milestones 

Year Milestone
1965 Medicare is enacted as Title XVIII of the Social Security Act, extending health coverage to Americans age 65 or older (e.g., those receiving retirement benefits from Social Security or the Railroad Retirement Board)
1966 19 million individuals enroll July 1 of that year after Medicare was implemented

Medicare eligibility extended to individuals under age 65 with long-term disabilities and to individuals with ESRD

Medicare is given the authority to conduct demonstration programs


Coverage of Medicare home health services broadened

Medicare supplemental insurance, i.e. "Medigap," brought under federal oversight

1982 The Tax Equity and Fiscal Responsibility Act allowed health maintenance organizations (HMOs) to contract with the Medicare program establishing Part C in 1985
1983 The Resource-based Relative Value Scale (RBRVS) system is implemented for inpatient acute hospital prospective payment system adopted to replace cost-based payments
1985 The Emergency Medical Treatment and Labor Act (EMTALA) requires hospitals participating in Medicare that operate active emergency rooms to provide appropriate medical screenings and stabilizing treatments for anyone regardless of insurance status
1988 The Medicare Catastrophic Coverage Act improves hospital and skilled nursing facility benefits, covers mammography, and includes an outpatient prescription drug benefit and a cap on patient liability
1989 The Medicare Catastrophic Coverage Act of 1988 repealed after higher-income elderly protests new premiums
1996 The Health Insurance Portability and Accountability Act (HIPAA) created the Medicare Integrity Program which allows CMS to contract for program integrity services with outside organizations
1997 Balanced Budget Act of 1997 authorizes creation of Medicare + Choice Plans (Part C) to coordinate coverage for enrollees
1998 The internet site launched to provide updated information about Medicare

Coverage extended for Lou Gehrig’s disease patients (ALS)

Crossing the Quality Chasm published by the Institute of Medicine (IOM) points to safety and quality issues; prompts Medicare to measure safety and quality via demonstrations, pilot programs


The Medicare Prescription Drug, Improvement, and Modernization Act (Medicare Modernization Act, MMA) created a prescription drug discount card effective 2006 allowing competition among private health plans.

Medicare beneficiary income incorporated for first time in premium costs: beneficiaries with incomes less than 150% of the federal poverty level (FPL) eligible for subsidies for the new Part D prescription drug program; beneficiaries with higher incomes pay a greater share of the Part B premium starting in 2007.

Pursuant to the MMA, "Medicare+Choice" plans were allowed to add prescription drug coverage, which became known as "MA" offered through private MA Organizations (MAO)

2010 The ACA was signed into law, making various amendments to the Medicare program, i.e. provider payment reductions, closing the “donut hole”, coverage of preventive benefits at no cost-sharing, etc. See below table below.

Source: CMS, Key Milestones in CMS Program

return to top

Key ACA programs related to Medicare 

The ACA’s major impact on Medicare are three: it changes the way providers are organized and compensated to diagnose and treat enrollees, it reduces the costs of their prescription drugs, and it creates a mechanism whereby the care that’s delivered is aligned with evidence of usefulness:

Section Provisions Implementation updates
3401 Changes provider rates by reducing market basket updates in several areas Began fiscal year (FY) 2010
2602 Creates a Federal Coordinated Health Care Office to manage care for dual eligibles Began March 1, 2010
3301 Requires pharmaceutical manufacturers to provide a 50% discount on brand-name prescriptions, in order to fill in the Medicare part D coverage gap

Began January 1, 2011

On August 4, 2011 900,000 Medicare beneficiaries received discounts on prescription drugs who had previously hit the coverage gap

5501 Provides a 10% Medicare bonus payment for primary care services Implemented: January 1, 2011-December 31, 2015
4103 Eliminates cost-sharing for preventative services Began January 1, 2011
3021 Created the Centers for Medicare and Medicaid Innovation (CMMI) to test new payment and deliver system models aimed towards reducing cost while improving quality

Began January 1, 2011

On January 26, 2012 CMMI released a report outlining the new initiatives

3402 Freezes the income threshold for Medicare Part B premiums for 2011 through 2019 at 2010 levels resulting in more people paying income-related premiums Began January 1, 2011
3207 Begins phasing- in MA payments set at smaller percentages of Medicare FFS rates Began January 1, 2011
3403 Establishes Independent Payment Advisory Board –15-member board to submit proposals on reducing the growth in Medicare spending

Began FY 2011

First Recommendation January 15, 2014

3022 Allows providers in Accountable Care Organizations (ACOs) that meet quality thresholds to share in the cost savings

Began January 1, 2012

Over 250 CMS-authorized ACOs

3024 Creates Independence at Home Demonstration program to provide high need Medicare beneficiaries primary care services at home Began January 1, 2012
3102 Extends the employee wage and rent portions of the practice expense geographic index for Medicare beneficiaries Began January 1, 2012
6401 Establishes procedures for screening, oversight, and reporting for providers and suppliers that participate in Medicare Began January 1, 2012
3001 Establishes a value-based purchasing program in Medicare to pay for hospitals, skilled nursing facilities, home health agencies, and ambulatory surgical centers Began FY 2012
3025 Reduces Medicare payments to hospitals for preventable hospital readmissions Began FY 2012
1101 Begins phasing-in federal subsidies for brand-name prescriptions filled in the Medicare Part D coverage gap Began January 1, 2013
3023 Creates a national pilot program to make a bundled payment program for different types of care Began January 1, 2013
9015 Increases Medicare Part A tax rate on wages by 0.9% on earnings over $200,000 for individuals Began January 1, 2013
9012 Eliminates the tax-deduction for employers who receive Medicare Part D retiree drug subsidy payments Began January 1, 2013
3133 Reduces Medicare Disproportionate Share Hospital (DSH) payments by 75% and subsequently increases payments based on percent of uninsured population Begins FY 2013
3013 Reduces Medicare payments to certain hospitals for hospital-acquired conditions by 1% Begins FY  2015

Source: ACA and Kaiser Family Foundation

In addition to these changes, the ACA created a mechanism wherein seniors enrolled in traditional FFS Medicare (not in MA plans) are eligible to get rebates for their branded prescription drug costs if they hit the “donut hole” resulting from the MMA:

Projected ACA savings for beneficiaries in traditional Medicare not in “donut hole”:

Year Effects of reduced Part B premium Effects of reduced A & B coinsurance Effects of increased part D premium Total effect
2011 $19 $14 $(6) $27
2012 $54  $41 $(2) $92
2013 $72 $62 $ -    $134
2014 $90 $79 $ (1) $168
2015 $113 $101 $ (2) $212
2016 $139  $124 $ (2) $261
2017 $169 $148  $(7)  $310
2018 $192 $175 $ (13)  $354
2019 $218 $207 $(20) $405
2020 $248 $245 $(31) $462
2021 $281  $291 $(33) $539

Source: ASPE Issue Brief, “Medicare Beneficiary Savings and the Affordable Care Act,” February 2012

Year Effects of reduced A & B coinsurance and B premium /1 Effect of increased D premium /1 Filling the donut hole /2 for a beneficiary whose spending reaches the hole Reducing the growth in part D OOP threshold for a beneficiary in the gap /1 Total effect
2010 $(6) $-    $250 $-    $244
2011 $33 $(6) $604 $-   $631
2012 $94 $(2) $643 $-   $735
2013 $134 $-   $723 $-    $857
2014 $169 $(1) $780 $48 $996
2015 $214 $(2) $879 $62 $1,152
2016 $263 $(2) $954 $112 $1,327
2017 $317 $(7) $1,114 $131 $1,555
2018 $367  $(13) $1,293  $153 1,799
2019 $425 $(20)  $1,492 $178 $2,075
2020 $493 $(31) $1,734 $-    $2,196
2021 $572 $(33) $1,847 $-    $2,386

Source: ASPE Issue Brief, “Medicare Beneficiary Savings and the Affordable Care Act,” February 2012

return to top

Deadline for Pioneer ACO participation extended 

The 32 Pioneer ACOs have until May 31, 2013 to decide whether they will continue to participate in the Pioneer ACO Model Demonstration. The deadline – initially April 30 – was extended due to concerns from program participants about the performance measures CMS is using to evaluate cost savings and quality of care.

Note: CMS has the authority to change the measures, but no decision has been made.

Background: for more information on ACOs see the March 25, 2013 Monday Memo.

return to top

Legislative update 

Congress on recess 

Congress is on recess until the week of April 8, 2013.

return to top

White House to release budget next week 

Thursday, a White House spokesman announced it will release its FY 2014 budget April 10. The House and Senate passed FY 2014 budgets last month setting the stage for negotiations about the FY 2014 budget in the broader context of spending reductions and revenue growth, i.e. the “grand bargain”. 

return to top

GOP wants HHS to restrict HIX implementation grants 

Last week, Senators Orin Hatch (R-UT) and Chuck Grassley (R-IA) sent Secretary of U.S. Health and Human Services (HHS) Kathleen Sebelius a letter inquiring about sequestration’s impact on health insurance exchange (HIX) grant funding, citing concern that over $1 billion has been awarded to 33 states with little restrictions or accountability. Senators request a detailed explanation by April 22, 2013 regarding the appropriation of future funds for HIX planning grants to “ensure proper use of American taxpayer dollars during hard budgetary times.”

Note: federal subsidies for HIXs were subject to sequestration cuts; a $44 million reduction in FY 2013.

return to top

State update 

BHP Program guidance expected this year for states 

Last week, HHS announced it will issue a proposed rule on the Basic Health Plan (BHP) Program no later than April 15, 2013.

Background: in February 2013, CMS announced the implementation of the BHP Program will be delayed until January 2015—one year after its original start date. The BHP Program was enacted by Section 1311 of the ACA and will allow states to administer a public health insurance program for individuals between 133 percent and 200 percent of the FPL who would otherwise be eligible to purchase health insurance coverage through a HIX. States will receive 95 percent of the federal subsidy that the individual would have received if they had purchased coverage through a HIX. Proponents of the program believe that the BHP Program will reduce the cost of insurance for low-income uninsured individuals; opponents argue that the BHP Program will undermine the HIX market.

return to top

CMS issues final rule on Medicaid FMAP methodology 

Friday, CMS issued a final rule on Medicaid expansion per Section 2001 of the ACA. While the rule is final, comments will be accepted on certain provisions until May 31, 2013. Highlights:

  • CMS finalized the Federal Medical Assistance Percentage (FMAP) rates effective January 1, 2014 in states that opt to expand Medicaid eligibility to 133 percent of FPL: 100 percent, for calendar quarters in calendar years (CYs) 2014 through 2016; 95 percent, for calendar quarters in CY 2017; 94 percent, for calendar quarters in CY 2018; 93 percent, for calendar quarters in CY 2019; 90 percent, for calendar quarters in CY 2020 and all subsequent calendar years.
  • The final rule adopts the “threshold methodology,” which states must use to submit claims to CMS for the increased FMAP rates – one of three methodologies initially proposed.

return to top

CMS issues guidance about expansion using private plans, exchanges 

CMS also issued guidance on using Medicaid expansion dollars to subsidize the purchase of health insurance for residents on HIX beginning in 2014. Arkansas and Tennessee are among states that have expressed interest in the approach. Highlights:

  • States must show that enrolling Medicaid beneficiaries in HIX is budget neutral
  • Beneficiaries must be offered two choices of health plans with wrap-around benefits
  • Premium support must be provided
  • Enrollment must be limited to individuals who don’t require additional medical services outside the scope of HIX health insurance plans, e.g. the medically frail. “[HIX] plans were not designed to offer broader benefits and could experience unexpected adverse selection due to enrollment of [certain] groups.”

return to top

Medicaid expansion update 

25 states and D.C. have said they will expand, or have Governors in support of expanding, their Medicaid programs in 2014; 17 states have indicated they are highly unlikely to expand their program:

Announced or Governor in support of expansion Not participating or highly unlikely to participate Undecided or undeclared

Democratic  ■ Republican ■ Independent
Source: Kaiser Family Foundation

Note: states do not have a deadline to make a decision on Medicaid expansion and may opt in or out of participation at any time. This chart was compiled using publicly available information (as of March 30, 2013) and is subject to change.

  • Maine’s Department of Health and Human Services Commissioner has requested that the federal government pay 100 percent of all Medicaid expansion costs for a minimum of ten years. Maine is also seeking flexibility for operating its program, by instituting a “global waiver” which would allow state officials to make changes to the program.
  • Iowa’s Senate approved (26-23) expansion of the Medicaid program after a 90 minute debate last week, with the vote split along party lines. Governor Terry Branstad (R-IA) is opposed to expanding Medicaid.
  • Last Monday, medical and business groups in Missouri backed an altered Medicaid expansion plan, set forth by Representative Jay Barnes (R-MO). This bill would “cut thousands of children from Medicaid, provide coverage through competitively bid managed care insurance policies, and allow for cash incentives for residents who keep health care expenses low”. HHS has not approved this proposal. Note: currently, Medicaid eligibility in Missouri is capped at one-fifth of the FPL for custodial parents (less than $4,500 annually for a family of four), and does not cover single adults. (Source: The San Francisco Chronicle, “GOP Medicaid alternative supported in Mo. Hearing,” March 25, 2013)
  • Governor Bob McDonnell (R-VA) signed a bill that would permit Medicaid expansion in the state of Virginia if cost-saving reforms are implemented. A ten member panel of legislators will be established and will be responsible for determining when the reforms have been successfully achieved.  
  • Tennessee Governor Bill Haslam (R-TN) announced the state would propose too HHS a Medicaid expansion plan similar to the framework proposed in Arkansas; using federal Medicaid expansion funds to subsidize Medicaid beneficiaries’ purchase of private health insurance coverage through the HIX. The state legislature would need to support the plan before Tennessee could accept federal funding to expand program eligibility for up to 300,000 residents.

return to top

HIX update 

17 states—12 led by Democratic Governors, four led by Republicans, and one Independent—and the Democratic mayor of D.C. have announced plans to operate state-based exchanges. Seven states—four led by Democratic Governors and three led by Republicans—will participate in state-partnership exchanges with HHS. The remaining 26 states will default to a federally-facilitated exchange.

State-based exchange State-partnership exchange Federally-facilitated exchange

Democratic  ■ Republican ■ Independent
Source: HHS

HIX announcements last week:

  • Maryland House of Delegates passed a bill (94-42) appropriating funding for its HIX. The legislation also expanded the state’s Medicaid eligibility to 133 percent of the FPL, 9 percent above current levels. Similar legislation has been introduced in the Senate.

return to top

State round-up 

  • California received approval to place dual-eligibles (i.e. individuals eligible for both Medicare and Medicaid) in managed-care plans. The program, Cal MediConnect, is expected to begin in October. Similar programs are in Illinois, Ohio, Massachusetts, and Washington.

return to top

Industry news 

MA FY 2014 payment adjustment expected today 

Background: on February 15, CMS issued a call letter announcing that reimbursement for MA health plans would be reduced by 2.3 percent in FY 2014. Today, April 1, CMS is expected to announce their final decision.  

Per a legal analysis published by the Congressional Research Service (CRS) last week, HHS has the legal authority to modify the 2.3 percent cut to MA plans this year. The calculation is based on the fact that the Sustainable Growth Rate (SGR) will reduce payments to providers by 25 percent in 2014. If CMS assumes that the SGR is going to be repealed, MA plans would not see a negative payment adjustment.

Note: HHS’ has held it does not have the authority to base decisions on “hypothetical” or pending legislation (i.e. the repeal of SGR). CRS makes the argument that HHS may have the legal authority to reverse current interpretation of the law.  

Industry reaction:

  • America’s Health Insurance Plans (AHIP): “The proposed changes to [MA] payments are a crushing blow to the 14 million seniors and people with disabilities who count on this critically important part of Medicare.  The combined effect of the ACA cuts and new proposed payment changes will likely result in seniors facing higher out-of-pocket costs, reduced benefits, and fewer health care choice… The cumulative impact of these changes will reduce [MA] payments next year by more than eight percent, or approximately $11 billion, destabilizing the program and putting at risk the health care coverage upon which millions of beneficiaries rely. Washington cannot tax and cut [MA] this much and not expect seniors to be harmed.  These changes will disrupt coverage for [MA] beneficiaries at a time when evidence clearly demonstrates that MA provides higher-quality care than the fee-for-service part of Medicare."—AHIP, “Proposed Medicare Advantage Payment Changes Will Hurt Seniors,” March 27, 2013
  • MedPAC: “The Commission has long held the view that the SGR method for determining physician payments is flawed and should be replaced. We have made specific recommendations for a different approach, detailed in our most recent report to the Congress. Each year, the Congress has forestalled full implementation of the SGR cuts, virtually at the last minute. This approach leads to confusion, uncertainty, and dissatisfaction among physicians, and if this process continues it could affect beneficiary access to care if physicians decide to leave the Medicare program or limit the number of Medicare beneficiaries to whom they provide care. In the case of [MA], with over one fourth of Medicare beneficiaries now enrolled in [MA] plans, it creates uncertainty in the bidding process and a situation where the plan payments have to “catch-up” year after year. The effect on [MA] may be an unintended consequence of the timing of Congressional action and CMS administrative actions, but it is another very real effect of the delay in action to repeal the SGR and replace it with a more rational system.”—MedPAC, “Re: Request for comments on the Advance Notice of Methodological Changes for Calendar Year (CY) 2014 for Medicare Advantage Capitation Rates, Part C and Part D Payment Policies and 2014 Call Letter, March 26, 2013

return to top

Report: incentives for value-based performance by providers missing in most health plans 

Last Tuesday, the Catalyst for Payment Reform (CPR), released its national scorecard on payment reform using data submitted by health plans on a voluntary basis to the National Business Coalition on Health. Highlights:

  • Value oriented: 11 percent of all commercial health plan in-network payments are value-oriented (i.e. either tied to performance or designed to cut waste); 89 percent of all commercial health plan in-network payments are traditional fee-for-service (FFS), bundled, capitated and partially capitated payments without quality incentives.
  • Financial risk: 57 percent of value-oriented payments put providers at financial risk for their performance, while 43 percent offer a potential financial upside only.
  • Quality: 60 percent of non- FFS payments do not use quality measures as a factor, 35 percent of non-FFS payments do use quality measures, and 5 percent are unclassified.
  • Transparency: 98 percent of commercial health plans offer consumers a cost calculator; 86 percent reported that cost information provided to members considers the members’ benefit design relative to copays, cost sharing, and coverage exception; 77 percent of hospitals and physician choice tools have cost calculators; 2 percent of health plan enrollees use these tools.
  • ACOs: 2 percent of commercial plan members have a provider participating in a payment reform contract, such as an ACO or a patient-centered medical home.
  • Primary care: 75 percent of total outpatient payments for physicians are made to specialists vs. 25 percent paid to primary care physicians.

(CPR, “National Scorecard on Payment Reform”, March 2013)

My take: CPR was started in 2009 by employers’ discontent with the health industry’s slow adoption of value based methods to pay providers and plans for improved performance. It set a target of 20 percent of health services payments to be value-oriented by 2020, so this study is its baseline. Notably, CPR is led by employers who are increasingly pushing health insurance companies and providers to deliver more value by encouraging incentives that align value and compensation. This project parallels organized efforts by employers seeking more value in government, higher education and the transportation industries. Employer activism in health care is perhaps the most significant and formidable challenge facing the industry.  Employers that have historically provided employee and retiree health coverage are increasingly frustrated by provider waste and inefficiency and health plans that have not brought innovative solutions fast enough.

return to top

Commonwealth study: 84 percent of premiums to medical care, 1 percent of premiums for quality improvement 

A Commonwealth Fund study concluded that insurers paid less than 1 percent of their premiums on either medical loss ratio (MLR) rebates or quality improvement activities in 2011. Researchers found that publicly traded insurers had significantly lower MLRs in each market segment (i.e., individual, small group, and large group), and were more likely to owe a rebate in most segments compared with non–publicly traded insurers. Key findings:

  • Allocation of premiums: health insurers spent 84 percent of premium revenues on medical expenses, 11 percent for administrative overhead, 0.7 percent to quality improvement activities, and 0.5 percent to premium rebates. Insurers retained the remaining 3.9 percent of premium revenues as operating surplus/profit.
  Median rebate per member Median simple MLR Median adjusted MLR
Individual Market
Publicly traded $94 75%  80%
Non-publicly traded $174  82% 86%
For profit $122 75% 80%
Nonprofit $34 90% 92%
Small Group Market
Publicly traded $111 81% 83%
Non-publicly traded $119 84% 87%
For profit $119 81% 83%
Nonprofit $98 86% 88%
Large Group Market
Publicly traded $90 85%  88%
Non-publicly traded $144 90%  91%
For profit $99 85% 88%

(Source: Commonwealth Fund, “Insurers’ Medical Loss Ratios and Quality Improvement Spending in 2011”, March 2013)

return to top

FDA drug approvals: breakthrough designation for cancer drug, third drug for MS 

The Food and Drug Administration (FDA) approved “breakthrough therapy designation” for a Novartis compound that can be used for treatment of lung cancer patients with metastasized lymphomas. The drug became the fifth given the designation for an expedited drug approval pathway.

Background: for more information on FDA breakthrough therapy designation see the February 25, 2013 Health Care Reform Memo

Wednesday, the FDA approved the third drug treatment for multiple sclerosis (MS), Tecfidera, developed by Biogen Idec Inc. The drug is projected to reach $1.1 billion in sales annually by 2015. Clinical trials results found that patients had fewer relapses, and were less likely to have deteriorating disability.

return to top

“Pay-to-delay” oral arguments in Supreme Court—ruling expected in June 2013 

Monday, the Supreme Court heard oral arguments on “pay-to-delay” agreements between brand-name and generic pharmaceutical companies. The issue: do federal antitrust laws permit a brand name manufacturer holding a patent for a drug to enter into an agreement with a generic manufacturer to delay entry of the generic product into the market? The Federal Trade Commission affirms that pay to delay violates antitrust laws. A Supreme Court opinion is expected in June 2013.

Background: the “pay-to-delay” question has been litigated in several lower courts: in July 2012, the Third Circuit Court of Appeals opinion held that “pay-to-delay” must be viewed through the lens of antitrust law with “the patent holder bearing the burden of showing that the payment ‘was for a purpose other than delayed entry’ or ‘offers some pro-competitive benefit.’” In the Second, Eleventh, and Federal Circuits, “pay-to-delay” was upheld based on the federal antitrust laws as long as they do not exclude competition beyond the scope of the patent.

return to top

Independent drug stores pursue challenge to PBM transparency 

Independent pharmacists are pushing for legislation that would require pharmacy-benefit managers (PBMs) to disclose pricing data that would allow them to negotiate better reimbursement rates, and avoid dispensing drugs that would result in a loss of profit. PBMs oppose such legislation—arguing revealing reimbursement data could cause pharmacies to unite against PBMs on pricing, prescribe expensive, more profitable drugs over generics or those with little return on investment. Eight states are currently considering similar legislation, and three states are considering bills that would require that PBMs be licensed with their state's pharmacy board, giving more regulatory oversight over their mail-order pharmacies to states.

(Source: The Wall Street Journal, “Drugstores press for pricing data,” March 27, 2013)

My take: PBMs act as intermediaries for insurance companies and drug manufacturers and pharmacies and hospitals that prescribe medicines. They negotiate deals with drug manufacturers, process claims and keep a portion of the profits they earn by keeping drug costs lower. Historically, the terms and conditions in agreements between PBMs and manufacturers, pharmacies and providers have been protected so they could not be used by competing groups to leverage more aggressive prices from manufacturers, providers or retailers. This challenge by pharmacies is about transparency in business relationships in the health care industry. It is a trend gaining momentum: conflicts of interest by clinical investigators, group purchasing organization agreements with device manufacturers, physician ownership and self-referral limitations are its most recent manifestations. It is likely to accelerate.

return to top

EHR meaningful use dominated by big players 

Of 378 certified vendors, 25 serve 80.3 percent of eligible professionals (EPs) participating in the Electronic Health Record (EHR) Incentive Program; 353 other vendors serve the remaining 26,131.

Background: as of February 2013, more than 234,000 EPs have received $12.5 billion in payments for participating in the Medicare and Medicaid EHR Incentive Programs.  To receive an EHR incentive payment, providers have to show that they are “meaningfully using” their EHRs by meeting thresholds for 25 objectives.

return to top

Appeals court reverses decision regarding DSH payments for duals 

The 6th Circuit Court of Appeals overturned a lower court decision, giving HHS the right to exclude dual eligibles when calculating the amount of money hospitals receive under the Disproportionate Patient Percentage (DPP). Court opinion: “In sum, we conclude that the rulemaking process was not arbitrary and that the resulting regulations are a permissible construction of the DPP provision that warrants judicial deference.”

Background: in 1985, Congress enacted the DPP, which is the adjusted payment amount given to a hospital for serving a high number of low-income patients. In 2010, the Western District Court of Michigan ruled in favor of Metropolitan Hospital, finding that HHS’s exclusion of dual eligible patients cost them more than $2.1 million in FY 2005.

return to top

IOM: payment reform should target decision makers, not geographic variation 

According to an IOM report, a geographic value index (i.e. adjusting payments to all providers in a defined area based on aggregate measures of spending and quality) rewards low-value health care providers in high-value regions and punishes high-value providers in low-value regions. Researchers observed variation in health care spending at every geographic level studied (i.e. hospital referral regions [HRRs], hospital service areas, and metropolitan statistical areas), and found variation among hospitals within HRRs, among physicians in the same group practice, and within individual providers when treating different conditions. HRRs do not consistently rank high or low across quality measures, and no consistent relationship exists between utilization and various quality measures, according to the IOM. The report concluded that payment reforms being tested in the market (i.e. value-based purchasing, ACOs, and bundled payments) should be targeted to decision makers rather than geographic areas.

(IOM, “Interim Report of the Committee on Geographic Variation in Health Care Spending and Promotion of High-Value Health Care: Preliminary Committee Observations”, March 2013)

My take: in all likelihood, geographic variation as well as decision-makers variation will be necessary to appropriately reduce inappropriate variation in the health system. The IOM findings are not surprising: providers in high value markets where provider adherence to the evidence and low inappropriate variation is noticeably lower than in other markets are likely to practice better overall than providers in “low value markets,” so adjustments made without considering both the standard of care of providers as well as the community value standard are likely to unnecessarily harm some providers who deliver high value in low value markets.

return to top

Research snapshots 

New industry and peer-reviewed studies of note to health system transformers…

ACA will cause medical claims costs to increase 32 percent for insurers; non-group individual market to grow 115 percent 

Citation: Society of Actuaries, “Cost of the Future Newly Insured under the Affordable Care Act,” March 2013

Objective: to assess relative morbidity for newly insured and their costs compared to the currently insured.

Methodology: researchers conducted a micro-simulation using the Lewin Group Health Benefits Simulation Model. “The HBSM model outputs are based on expected cost results in 2014, but assuming full implementation of the 2016 penalties (when full penalties apply) and also assuming that ultimate enrollment in the various programs and the Exchanges is completed right away… HBSM uses the 2002-2005 Medical Expenditure Panel Survey (MEPS) and 2008-2010 March Current Population Survey (CPS) data to provide the underlying distribution of health care utilization and expenditures across individuals by age, sex, income, source of coverage, and employment status.

Study limitations: “Reality will likely result in a lag in enrollment shifts, such that not all people who are modeled to ultimately take coverage will do so in immediately in 2014, as presented in this research.  Observations from prior Medicaid expansions show that it may take three to four years to reach an ultimate enrollment state. In addition, this research does not reflect that newly insured individuals may have a pent-up demand for services due to previously unmet health care needs, and further does not reflect that the earliest new enrollees may differ from the average risk group that will ultimately enroll. Therefore, each user of this report will need to make their own assumptions for each state with respect to how the initial years’ (2014 and 2015) enrollment and distribution of risks may occur, as well as the appropriateness of the model for 2016 and subsequent years.”

Key Findings: physicians are pessimistic about the future of medicine. The majority worry about the profession’s erosion of clinical autonomy and income, and its inability to achieve medical liability reform. Highlights:

  • Medical claims costs in the individual market will increase 32 percent for health insurers as a result of the ACA; non-group individual market will grow 115 percent.
  • Wide variation between states: 80 percent increase in costs associated with medical cost claims in Wisconsin vs. -13 percent in Massachusetts if all states expand Medicaid.
  • Newly insured individuals will “increase utilization of about 100 percent in spending…savings from improved primary care would be more than offset by increased use of other care, including elective services.”
  • Additional highlights:
    Percent uninsured pre-ACA 16.6%
    Percent uninsured three years after implementation of exchanges and insurer restrictions 6.8% to 6.6%
    Size of individual non-group market pre-ACA 12 million
    Size of individual non-group market post-ACA 26 million
    Percent of individual non-group market projected to enroll in HIX 80.4%
    Average individual non-group market per member per month (PMPM) pre-ACA $314
    Average individual market PMPM post-ACA $413

My take: the Society’s study is based on assumptions that the newly insured population through HIX and Medicaid expansion will occur per CBO estimates, but no one knows for sure how many will be insured. What is known is that the individual insurance market is the most adversely impacted by the ACA’s provisions about medical loss ratios (minimum 80 percent) and age-rating (3:1), which means in essence the premiums for individual policy holders who are young and healthy will be higher as their premiums subsidize the sicker and older individual policyholders. While this study perhaps paints the direst potential impact, individual premium increases in the double digits seems likely given the constraints of the ACA.

return to top


“Nine out of ten dollars paid into the health system with no attention to whether the care provided was performed well or poorly, or whether it was appropriate in the first place. We need accountability on a national scale. Otherwise, it’s easy to let anecdotes about reform make it feel like something is really happening.”

— Suzanne Delbanco, Catalyst for Payment Reform Executive Director March 26, 2013

“Society will need to shed some of its obsession for causality in exchange for simple correlations: not knowing why but only what. This overturns centuries of established practices and challenges our most basic understanding of how to make decisions and comprehend reality.”

Victor Mayor-Schonberger and Kenneth Kukier, Big Data: A Revolution that will Transform How we Live, Work and Think, 2013

return to top

Fact file 

  • Eligibility and enrollment
    Key statistics 1965 2011
    Median household income (family households) $53,323 1
    (2011 dollars)
    $62,273 2
    Number of families (in thousands) 48,279 1 80,506 2
    U.S. population3 200 million 308 million 3
    Medicare eligible population4 19.1 million 4

    49.44 million 5   (2012)


    MA   12.7 million 5 (2012)
    Life expectancy at birth, all races, both genders 70.2 years 6  77.9 years 7
    All races, females 73.8 years 6 81 years 7
    All races, males 66.8 years 6 76 years 7
    National health expenditures $42 billion 8 $2.7 trillion 9
    National health expenditures share of gross domestic product (GDP) 5.8% 8 17.9% 9
    Medicare spending percent of GDP 0.6% 4 3.7% 10
    Percent of older Americans reporting having some form of health insurance 8 52% 11 99% 12
    Total Medicare benefits payments $2 billion 13 $509 billion (2010) 13
    MA (Part C) - 23% 13
    Inpatient and outpatient hospital services 73% 13 33% 13
    Physician payments 26% 13 13% 13
    Outpatient prescription drugs -- 11% 13
    Home health -- 4% 13
    Skilled nursing facilities -- 5% 13
    Other services -- 10% 13
    U.S. Census Bureau, "Income in 1965 of Families and Persons in the United States," 1967
    2U.S. Census Bureau, “Income, Poverty, and Health Insurance Coverage in the United States: 2011” 2012
    State Health Facts, “Total Number of Residents, states (2010-2011), U.S. (2011),” 2011
    CMS, Office of the Actuary, National Health Statistics Group; U.S. Department of Commerce, Bureau of Economic Analysis; and
    Health Affairs, “Three Decades Of Health Care Use By The Elderly, 1965–1998”
    State Health Facts, “United States: Medicare,” 2012
    6Congressional Research Service, “Life Expectancy in the United States,” 2006
    United Nations, “Table 2A - Life Expectancy,” 2012
    8CMS, Office of the Actuary, National Health Statistics Group; U.S. Department of Commerce, Bureau of Economic Analysis; and U.S. Bureau of the Census
    9Center for Medicare and Medicaid Services, “National Health Expenditures 2011 Highlights,” 2011
    U.S. Social Security Administration, “A Summary of the 2012 Annual Reports,” 2012
    11 Social Security Bulletin, “Health Insurance Coverage of the Aged and Their Hospital Utilization in 1962: Findings of the 1963 Survey of the Aged,” 1964
    12Administration on Aging, “A Profile of Older Americans,” 2011
    13Kaiser Family Foundation, “Medicare Chartbook, Fourth Edition,” 2010
  • MA enrollment trends:

    Source: MedPAC March 2013 report; Milibank Quarterly, “An Economic History of Medicare Part C,” June 2011
  • Opinions and beliefs: Medicare vs. Medicaid and employer sponsored health insurance:

    Source: 2012 Deloitte Survey of U.S. Health Consumers
  • Opinions and beliefs: generational differences:

    Source: 2012 Deloitte Survey of U.S. Health Consumers
  • Median out-of-pocket health care spending among Medicare beneficiaries:

    Source: Kaiser Family Foundation, “Analysis of CMS Medicare current beneficiary survey cost and use file.” 2009 data.
  • Age 65+ annual health care expenditures by income (row percentages):
    Income Annual health care expenditure for 65+ in U.S.
      Percent in range of $0 - $293 annual spending Percent in range of $294 - $990 annual spending Percent in range of $991 - $3,599 annual spending Percent in range of $3,600 - $616,631 annual spending
    Low 9% 9% 26% 56%
    Medium 8% 11% 27% 55%
    High 7% 9% 31% 53%
    Source: DCHS analysis of MEPS 2009 data
  • Enforcement actions against MA plans: in the past two years, CMS has taken 546 compliance actions against MA organizations on issues related to consumer protections of importance to dual-eligible beneficiaries through use of notices, warning letters, and requests for corrective action plans (CAP). In addition, 22 enforcement actions against MA organizations have been taken: 17 civil money penalties and five suspensions of MA enrollment and marketing activity. States also took compliance actions with Medicaid managed care organizations; during the same period, Arizona, California, and Minnesota required managed care plans to undertake 91 CAPs. The majority of problems related to plans' appeals and grievances processes. Background: dual-eligible beneficiaries include 9.9 million low-income seniors and individuals with disabilities enrolled in Medicare and Medicaid representing 39 percent of Medicaid spending and 31 percent of Medicare. 
    (Source: GAO, “Consumer Protection Requirements Affecting Dual-Eligible Beneficiaries Vary across Programs, Payment Systems, and States,” December, 2012)
  • Medicare supplemental coverage:
    Medicare supplemental coverage
    Source: MedPAC analysis of Medicare Current Beneficiary Survey. Cost and Use file, 2009. "Data Book: Health spending and the Medicare Program," June 2012

return to top

Subscribe to the health care reform memo 

Health care reform memo — The weekly health care reform memo is available for subscription. Please visit /healthmemos/subscibe.

  • Step 1, confirm your sector(s) of interest. 
  • Step 2, select the health care reform memo as one of your subscriptions.

return to top


Related links

Share this page

Email this Send to LinkedIn Send to Facebook Tweet this More sharing options

Stay connected