Health Care Reform Memo: August 1, 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

Since 1962, the U.S. debt ceiling has been raised 74 times; the 75^th was historic. At no time in recent history has our debt capacity been as prominent in news coverage and water cooler chatter as the current debate.

Late last night, a deal was negotiated that will result in expansion of the debt ceiling by as much as $2.4 trillion, coupled with approximately $2.4 trillion in spending cuts over 10 years: $917 billion implemented immediately, and $1.5 trillion to be specified by a bipartisan commission before Thanksgiving. A central feature in the Phase Two debate will likely be entitlement reforms—changes to Medicare, Medicaid, and Social Security. As a result, public discussion about government spending, debt reduction, and economic recovery will not likely subside in coming weeks.

The attention to the debt ceiling is not a surprise. Like health reform, it dominated the news for weeks. Like health reform, it is a work in progress. And the similarities between the two are based on three realities:

1. It’s a connected world: the world’s financial markets are impacted by the U.S. debt ceiling and economic recovery. The solvency and liquidity of the Triple A U.S. debt is in question; no doubt, the full credit of the U.S. will be intact but perhaps damaged slightly. Likewise, the U.S. health system is on the world stage. We fund 70 percent of the world’s innovations in bio-pharma and devices. We train 3,000 clinicians annually from foreign homelands, and many return to their homeland to build systems of care. Reform of the U.S. system impacts the health industry worldwide—an inescapable reality.
2. It’s about economic recovery: 18 percent of the U.S. gross domestic product (GDP) is health care; 8-12 percent in the 26 European Union (EU) countries and 2-6 percent in developing economies. In all, demand for health services is dramatically increasing and costs accordingly. The Centers for Medicare & Medicaid Services (CMS) Office of the Actuary predicts 5.8 percent annual health spending increases through 2020 in the U.S., against annual GDP growth of 4.7 percent. The world’s developed economies are struggling. Greece, Spain, Portugal, UK, Ireland, Germany, and others have taken steps to rein in costs and re-engineer their country’s financial systems to improve solvency. The Chinese are implementing health reforms as a central feature in the country’s 12^th Five-Year Plan. In every country, modernization of the health care system is complicated by increased demand and health cost containment. The health care industry’s fortunes cannot be separated from the bigger context of a nation’s economy.
3. It’s emotional and divisive: the debt ceiling debate is highly charged. Deep philosophical differences have surfaced punctuating rhetoric about government spending and economic recovery. Likewise, emotion around health reform is palpable. With Campaign 2012 already in full swing, it will not likely subside soon. Opinions vary widely among knowledgeable people with widely divided points of view, and among ordinary citizens, whose personal circumstances drive their strongly held beliefs. The U.S. debt ceiling debate and health reform share underpinnings in deeply held beliefs not easily swayed.

The 75^th expansion of the debt ceiling appears a done deal. But like health reform, it’s only the first chapter of the thick novel. Though a law is passed, its implementation is work in progress. And implementation is key to effectiveness for both.

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

Implementation update

Health exchange update: scenarios for planning

July 11, CMS issued guidance about the operation of state-run health exchanges, per Section 1311 of the Affordable Care Act (ACA). In essence, starting January 1, 2014, states must operate exchanges to support access to affordable insurance plans for individuals and small employers (up to 100 employees). A state may choose from several models to engage “qualified health plans” (QHPs) in their exchange or opt to allow the federal government to operate the state exchange.

The Congressional Budget Office (CBO) assessment of enrollment, released last year, calculated that exchanges will support 23 million users, including some from employer-sponsored programs. However, a number of factors might push the number to 65 million in 2020, per a Deloitte Center for Health Solutions scenario analysis. This higher level might be realized: (1) if 25 percent of large companies above 5,000 employees and 50 percent of small companies drop coverage altogether, (2) if state health exchanges operate effectively starting in 2014, and (3) if the employer penalty of $2,000 per employee for coverage is not increased via an amendment to ACA. This scenario (B3) is one of eight modeled in the study per the summary table below:

*Projected enrollment in millions (% of total)
Not all numbers add up due to rounding

Scenario A – “Intended results”: baseline
Scenario B – “Unintended results”: example: B3—employer penalty with up to 25 percent of large employers and 50 percent of small employers dropping employer-sponsored insurance (ESI) due to costs—many end up in exchanges
Scenario C – “Unintended results”: no individual penalty
Scenario D – “Unintended results”: delays/changes to original legislation

Source: Deloitte analysis, “The Impact of Health Reform on Health insurance Coverage”

Note: no one knows for sure how many will be covered through health exchanges. But states are making preparations to comply with January 2013 application requirements, and plans are determining whether to participate. Most states will operate exchanges and many plans will package products to participate provided a competitive market is structured by the states. State officials and health plans expect changes to the rules after the comment period—September 28, 2011—and each sees flexibility in CMS guidance as a plus. Stay tuned.

CO-OP funding deadline announced

Thursday, CMS posted the Consumer Oriented and Operated Plan (CO-OP) program funding opportunity appropriating $3.8 billion for start-up costs (to be repaid in five years) and loans to enable financially viable CO-OPs to meet state insurance solvency, and reserve requirements (to be repaid in 15 years with interest). The deadline for first-round funding is October 17, 2011.

Note: per ACA Section 1322, a CO-OP is a private, nonprofit organization that will offer QHPs through the health insurance exchanges beginning on January 1, 2014; CO-OPs will be subject to the same market rules as other health insurers. States have the option of starting CO-OPs if they deem the state’s health insurance market uncompetitive or conditions for accessible insurance for individuals and small employers otherwise not conducive to coverage expansion.

Association health plans subject to rate review rule under ACA: NAIC

Per ACA Section 1003, any proposed rate increase by individual or small group market insurers at or above ten percent must be reviewed by the state to determine if it is reasonable. CMS will conduct the reviews for states that lack the resources or authority to do thorough actuarial reviews. Last week, the National Association of Insurance Commissioners (NAIC) released its recommendations regarding association health plans that typically sell individual policies through affinity groups (farmers’ CO-OPs, for example):

• The rate review requirements in the law for individual/family coverage apply to every block of association or trust coverage that is individually underwritten or rated (applicants provide health information to determine eligibility for coverage or to determine a rate level).
• The rate review requirements in the law for small group coverage apply to every block of association or trust business that covers small group employees through their employer.

Note: in ACA, NAIC is requested to submit recommendations about specific areas of the law regarding health insurance oversight by states. CMS is not obligated to accept its recommendations, but has thus far done so with a few exceptions.

Supreme Court petitioned to hear case challenging individual mandate

Wednesday, the Thomas More Law Center formally petitioned the U.S. Supreme Court to overturn the 6th Circuit Court of Appeals’ decision, which upheld ACA and the requirement that individuals much obtain essential health coverage starting in 2014, or face a financial penalty per ACA Section 1501. In a 2-1 ruling on June 29, the Circuit Court ruled that Congress has a “rational basis” to require individuals to purchase health insurance.

CBO: modification to ACA Medicaid eligibility could save $3 billion

The CBO published a cost estimate of Senator Mike Enzi’s (R-WY) bill (S.1376) that would change the calculation of Modified Adjusted Gross Income (MAGI) used in ACA to determine Medicaid eligibility. At issue: adding retiree benefits to calculations of MAGI. According to CBO, enacting the legislation to include those benefits as income in considering Medicaid eligibility would save $3 billion (2012-2016) and $13 billion (2012-2021).

Legislative update

CMS actuaries: health spending to increase 5.8 percent annually through 2020

CMS actuaries’ projections released last week suggest that health spending will increase 5.8 percent through 2020, outpacing average annual growth in the overall economy by 1.1 percent (4.7 percent). In 2010, spending is projected to reach $2.6 trillion, increasing 3.9 percent, down from 4.0 percent in 2009. Between 2011 and 2013, spending is projected to increase and reach $3.0 billion by 2013, then increase 8.3 percent to $3.2 billion in 2014, when major ACA coverage expansions (e.g., Medicaid coverage expansions, health exchanges) begin. In 2020, national health spending is projected to grow 6.2 percent reaching $4.6 trillion, comprising 19.8 percent of the GDP. (Source: National Health Expenditure Projections 2010-2020, CMS Office of the Actuary, July 2011.)

House subcommittee approves Children’s GME program

The House Energy and Commerce health subcommittee unanimously approved legislation that would reauthorize the Children’s Graduate Medical Education (GME) program and restore the current funding level of $330 million over five years.

Proposed law would require Medigap plans to meet ACA MLR requirements

Representative Pete Stark (D-CA) and Senator John Kerry (D-MA) introduced legislation to increase the medical loss ratio (MLR) thresholds for Medigap insurers from 65 percent in the individual marketplace and 75 percent in the group market to 80 percent and 85 percent, respectively—consistent with ACA (Section 1001) requirements for MLR in the individual and group markets.

Commonwealth Fund analysis: provider preparedness for ACOs risk-sharing low

Monday, the Commonwealth Fund released a study of private accountable care organizations (ACOs) concluding, “it is too early to know whether independent providers can or will reorganize themselves to deliver coordinated care.” Key findings include:

• Payer-provider shared-risk models are in an early developmental phase; there are few operational shared-risk models aside from the traditional capitated health maintenance organization (HMO) model.
• There are varying definitions of shared risk, and shared risk initiatives use a variety of program designs.
• Providers do not currently have the infrastructure required to take on and manage risk successfully, though some payers are providing infrastructure and other support to providers.

Source: Delbanco et al, “Promising Payment Reform: Risk-Sharing with Accountable Care Organizations,” The Commonwealth Fund, July 2011.

Note: per Section 3022 of ACA, and subsequent rule March 31, 2011, clinically integrated provider organizations may participate in the Medicare Shared Savings Program, implementing either a one-/two-sided model over a three-year period. These options and conditions for participation were covered in the Health Care Reform Memo on April 4, 2011. CMS received more than 1,600 comments about the rule, mostly concerns about the potential upside for providers and costs for implementation. The final rule from CMS is pending.

Industry news

510(k) medical device review process update: IOM report and FDA guidance

Friday, the Institute of Medicine (IOM) released an evaluation of the 510(k) approval process for medical devices concluding the current process is “flawed based on its legislative foundation” dating back 35 years. “The [U.S. Food and Drug Administration’s] FDA’s finite resources would be better invested in developing an integrated premarket and postmarket regulatory framework that provides a reasonable assurance of safety and effectiveness throughout the device life cycle.”

Wednesday, the FDA released draft guidance to medical device manufacturers about premarket notification submission 510(k) for changes or modifications made to a previously approved device, superseding the 1997 guidance. Under the new guidance, manufacturers will be required to submit 510(k) if changes could “significantly” affect the device’s safety or effectiveness or if changes make a major modification in the device’s intended use. FDA is accepting comments on the guidance.

Note: the Federal Food, Drug, and Cosmetic Act (FFDCA) requires a “reasonable assurance of safety and effectiveness” before a device can be marketed. FDA is responsible for enforcing this requirement. Devices deemed to have a moderate risk to individuals generally cannot be marketed until they are cleared through the 510(k) process (per Section 510(k) of the FFDCA).

Physician groups challenge Medicare eRx Incentive Program

Monday, the American Medical Association (AMA) and 91 state and specialty medical groups sent a letter to CMS Administrator Donald Berwick on CMS’s proposed changes to the 2011 Electronic Prescribing (eRx) Incentive and 2012 eRx penalty programs. The letter states, “While we appreciate CMS’ steps to modify these programs, we are concerned that more changes are needed, including establishing an additional eRx reporting period in 2012 and not applying penalties until 2013; otherwise, a significant number of physicians and other eligible professionals will be unfairly penalized starting on January 1, 2012.” The groups also expressed concerns “over the backdating of the 2012 eRx penalty program to require reporting in 2011, and the lack of adequate exemption categories for physicians who would have difficulty complying with the eRx program requirements through no fault of their own.”

NFIB study: small employers concerned over ACA, anticipate benefits cuts

The National Federation of Independent Business (NFIB) conducted interviews with 750 small employers with 50 or fewer full-time employees to assess the impact of ACA on their businesses. Highlights of the study include:

• 20 percent expect to significantly change their benefits package and/or their employees’ premium cost-share in their next enrollment cycle.
• Almost all significant changes expected to decrease benefits, increase employee cost-share, or both.
• Since enactment, 12 percent of small employers had their health insurance plans terminated or been told that their plan would not be available in the future.
• 18 percent think they are “very familiar” and another 40 percent said they are “somewhat familiar” with ACA.

Source: NFIB Research Foundation, “Small Business and Health Insurance: One Year After Enactment of PPACA,” July 2011.

Note: per ACA Section 1311, in January 2014, insurance exchanges in each state will provide coverage to individuals and small businesses (up to 100 employees). Per ACA Section 1421, businesses with ten or fewer employees whose average compensation for full-time employees is less than $25,000 are eligible for tax credits if they purchase insurance.

Quotable

“Let’s cut out the waste and fraud in health care programs like Medicare—and at the same time, let’s make modest adjustments so that Medicare is still there for future generations… Most Americans, regardless of political party, don't understand how we can ask a senior citizen to pay more for her Medicare before we ask corporate jet owners and oil companies to give up tax breaks that other companies don't get.”

 – President Obama, July 25, 2011 press conference addressing the debt ceiling debate

“Combined with the entry of the baby boomers into Medicare and Medicaid, the impact of the Affordable Care Act—stemming from the expansion of Medicaid, subsidies associated with exchanges, and administrative costs associated with implementing and operating the various provisions—is projected to increase federal, state, and local governments’ estimated share of total health spending to near 50 percent in 2020. At the same time, households and private businesses are anticipated to pay for a smaller portion of the nation’s health bill than they would have without the Affordable Care Act, but still will face a growing burden on their respective limited resources.”

 – Keehan et al, “National Health Spending Projections Through 2020: Economic Recovery And Reform Drive Faster Spending Growth,” Health Affairs Vol. 30, No. 8 (July 2011)

Fact file

• In 2020, 49 percent of total health spending, or $2.28 trillion, will be spent by state, federal, and local governments, compared to 45 percent in 2010. (Source: CMS Office of the Actuary, July 2011)
• More than one in six Americans who work a full- or part-time job also report assisting with care for an elderly or disabled family member, relative, or friend. (Source: Gallup-Healthways Well-Being Index)
• Drugs with about $255 million in global annual sales will go off patent between now and 2016, and generic versions of seven of the world’s 20 best-selling drugs will enter in the next 14 months. (Source: EvaluatePharma Ltd.)
• In 2011, hospitals will spend between 46.5 percent and 48.3 percent of their total information technology (IT) capital budgets on IT applications such as electronic health records (EHRs) and revenue cycle management (RCM) software, up two percent from 2009. (Source: HIMSS Analytics)
• Those with private health insurance were more likely to seek health information online over the past year (59 percent) than those covered under Medicaid (31 percent) or with no coverage (33 percent). (Source: 2009 National Health Interview Survey)
• 59 percent of rural primary care doctor respondents plan on accepting new Medicaid patients, compared with only 44 percent of their urban counterparts. Up to five million of the 16 million new Medicaid enrollees resulting from ACA live in rural areas. (Source: UnitedHealth Center for Health Reform & Modernization, UnitedHealth Group, July 2011)
• Medicare spending on hospice care for patients in nursing facilities increased by 69 percent from $2.6 billion in 2005 to $4.3 billion in 2009. A third of Medicare hospice spending in 2009 was for the care of 337,000 patients in nursing homes. (Source: Department of Health and Human Services [HHS] Office of the Inspector General [OIG])
• June unemployment rate: in 28 states up from 9.1 percent to 9.2 percent; no change in 14 states. (Source: U.S. Bureau of Labor Statistics [BLS])
• The Thomson Reuters Healthcare Spending Index for Private Insurance (HSI-PI) increased in the first quarter (Q1) of 2011 to 165 compared to 159 in Q1 2010. The rate of inflation slowed, with overall annual inflation estimated at 3.8 percent in Q1 2011 compared to 6.3 percent inflation for the 12-month period ending in Q1 2010. The table below shows spending by category:

Source: Thomson Reuters, Healthcare Spending Index for Private Insurance, July 2011

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 www.deloitte.com/us/healthreform/whatnow today.

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