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Health Care Reform Memo: April 19, 2010

Deloitte Center for Health Solutions publication

The health care reform memos are issued on a weekly basis, highlighting news from the previous week's activities in the new administration and implications for the C-suite and various stakeholder groups.

My take

As the dust settles from passage of the Patient Protection and Affordable Care Act (PPACA), it is prime time for reflection and punditry. Will the bill lower costs over the long term? Will the individual mandate reduce bad debt for providers and expand the insurance market? Will subsidies entice the uninsured to take the plunge into insurance or will some default to penalties? Will the myriad of demonstration and pilot programs produce results sooner rather than later to bend the curve? Will the cuts in Medicare in the bill be enough or will additional cuts follow? Will insurance companies survive? Will the system thrive in the new normal?

No one knows for sure. Current consensus is that the 14-month debate about health reform raised awareness of the system’s trifecta challenges – access, quality and costs. It likely sets the stage for debate again this fall as Campaign 2010 replaces health reform on the front page.

The summer legislative agenda will be full. Banking system reform is expected to surface the question “what is too big to fail?” Immigration reform will prompt consideration of rights, privileges and responsibilities for the 10.8 million who work in our midst. But attention to health reform will not dissipate and its mention will likely prompt deeper discussion of fundamental questions that are profound and answers complex:

  • Is health care in the U.S. a right or privilege?
  • Is access to affordable insurance the appropriate means to the end of ensuring better care cost effectively or is there a better path?
  • Should employers play a role as middleman or would a direct-to-consumer model work better?
  • How much profit is too much? And without profit, where is the capital for growth and innovation?
  • Should two levels of care—one for those with insurance and another for those without—be accepted as norm?
  • Is it possible to connect health services with human services programs in communities?
  • Will the health care workforce—15.6 million strong—adapt to the new normal? Can it adapt to new incentives, team based care, technologies that enhance accuracy and coordination, and respect for its varied professions?
  • Can the public’s lack of knowledge about the health care system be remedied?
  • How can consumer be held accountable to live healthier lives and shun self-destructive behaviors?
  • What is the right balance of resources between primary and preventive health and specialized services?
  • Will incentives for performance and value replace volume, or will the piecework model prevail?
  • Can evidence-based medicine become the national standard to reduce inappropriate variation and avoidable costs?
  • Is 17 percent of the GDP a great value or excessive spending for the current system?
  • Will PPACA reduce costs and increase access after all?

Two things are clear: the intended and unintended results of PPACA will not be known anytime soon. With the exception of early efforts to add 32 million to the ranks of the insured, most of its impact is TBD.

And the status quo—runaway costs, variable quality and uneven access—was not sustainable. Change was needed. Like all bills, PPACA is expected to have its challenges. Only time will tell its effects, and with certainty it will maintain its prominence as the single most important domestic agenda items of our day.

The health system looms as a public obligation of mammoth proportion. Ours is a unique system: at $7,681 per capita the world’s most expensive and arguably the best. Is a better course for its future the likely result of PPACA? Will it reduce cost and cover everyone? We hope so. We have much at stake.

Paul Keckley

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

Deloitte Center for Health Solutions analysis: Medicaid long term care obligations in states a looming challenge

Medicaid is the primary payer for long-term care services and support to the elderly and disabled in the U.S., financing 34 percent of all home health care and 43 percent of the nation’s nursing home spending. The total long-term care (LTC) Medicaid expenditures for FY 2008 were $106.4 billion – 32.1 percent of total Medicaid spending of $331.8 billion.

In 2009, Medicaid spending increased 9.9 percent overall to $378.3 billion—the biggest single-year increase since 2002. It is expected to increase 7.5 percent in 2010 and at an annual rate of 8.6 percent annually for the next decade per the CMS official forecast. Long-term care services will serve one-fourth of all enrollees and consume one-third of its funding under the current forecast.

Looking ahead, Medicaid long term care costs will become an increasing challenge to state operating budgets. From ten representative states, the trend lines suggest LTC will be a focus for savings if addressed with innovative medical management and care coordination efforts. A likely scenario is:

Deloitte Center for Health Solutions analysis

Deloitte Center for Health Solutions analysis: assume 20 percent growth in Medicaid enrollment, linear progression of chronic and long-term population disease and conditions, and Office of the Actuary of the Centers for Medicare and Medicaid Services assumptions re: health inflation costs.

Long-term care is included in PPACA with a variety of demonstration programs aimed at improved care coordination and avoidance of unnecessary hospital admissions. LTC in Medicaid represents an immediate opportunity for innovation by states to control costs and improve quality.

Note: Upcoming release from the Deloitte Center for Health Solutions: Long-Term Care in Medicaid: Burning Platform for States.

UnitedHealth Group study: $365 billion ten year savings achievable via Medicaid managed care

Thursday UnitedHealth’s Center for Health Reform and Modernization released its analysis of the savings potential for state Medicaid programs that will consume $439 billion in PPACA funding 2014-2019. It identified four major categories where ten year savings are substantial for states:

Program Federal Savings State Savings Total Savings
Coordination of care for new enrollees $11B $1B $12B
Coordination of care for current enrollees $46B $35B $81B
Administrative modernization of Medicaid $80B $53B $133B
Coordination of care for LTC Medicaid enrollees $80B $60B $140B

State watch: Health reform aftermath

  • Three states – Missouri, Tennessee and Louisiana – are already moving legislation to ban abortion coverage in the [health insurance marketplaces known as] exchanges. And that is even though the exchanges themselves are not required to be up and running before 2014.
  • A Pennsylvania court has ordered the Commonwealth to transfer more than $800 million from its general fund into an account that helps physicians pay their malpractice premiums. Commonwealth Court panel on Thursday issued a 4-1 decision in favor of Pennsylvania’s hospitals and physicians, which had argued the commonwealth should not have been able to divert surplus money from a program known as MCare.
  • Newly elected New Jersey Governor Chris Christie announced budget cuts last week including savings from excluding 12,000 immigrants from the state’s Family Care health insurance program.

COBRA extension

Congress acted this week to approve another extension of the COBRA premium subsidy. The eligibility period was extended to include those who experience an involuntary termination of employment during the period April 1 through May 31. President Obama signed the bill late on April 15.

The eligibility period for the COBRA subsidy has been extended a few times, but expired on March 31. Recently proposed legislation would have extended the eligibility period through December 31, 2010 – as well as provided extended unemployment benefits – but the offsets to pay for those benefits were moved to help pay for the health reform bill. Some members of Congress are hopeful the mini-extension through May will provide enough time to formulate funding sources for longer-term relief.

Physician fix: Update

Thursday the Senate voted 59-38 to approve a legislative package that pushes back until June 1 a 21.2 percent Medicare physician pay cut. The legislative package is priced at about $18.1 billion over the next decade, with about $2.1 billion of the cost coming from the fix. Note: since 2004, the sustainable growth rate (SGR) model that triggers an automatic pay cut to physicians has been over-ridden by Congress. In all likelihood, the new Independent Medicare Payment Commission will face the daunting challenge of the fix as one of its early deliverables to Congress.

Quality slipping: New reports

  • Rates of postoperative sepsis— or bloodstream infections—increased by 8 percent between 2008 and 2009. Other findings: post-operative catheter associated urinary tract infections increased by 3.6 percent and postoperative pneumonia declined by 12 percent. (Source: National Healthcare Quality Report, Agency for Healthcare Research and Quality released Wednesday)
  • Most American children do not routinely receive counseling from their physicians about exercise and healthy eating. (Source: National Healthcare Disparities Report, Agency for Healthcare Research and Quality released Wednesday)
  • In 2009, less than half of 1,244 hospitals voluntarily reporting to Leapfrog met Leapfrog's outcome, volume, and process standards for six high-risk procedures and conditions: aortic valve replacement (11.8 percent), abdominal aortic aneurism repair (36.1 percent), pancreatic resection (33.5 percent), esophageal resection (31.5 percent), weight loss (bariatric) surgery (36.6 percent), and high-risk deliveries (29.9 percent). Increased adherence to evidence-based guidelines for pneumonia treatment (59 percent in 2009 vs. 34 percent in 2008), heart bypass surgery (54 percent in 2009 vs. 43 percent in 2008) and heart angioplasty (44 percent in 2009 vs. 33 percent in 2008) were areas of most improvement. (Source: Leapfrog 2009 Quality Report released Tuesday)
    Note: since hospitals report voluntarily, it is widely believed the extrapolation to the entire population of 5,800 non-federal hospitals would produce lower results.
  • For three of five major types of serious hospital-related infections, the rate of illness increased in 2009. (Source: Department of Health and Human Services annual Quality Report)

Employer alert: Early retiree subsidy funding available in June, might run out

Wednesday, HHS announced reimbursement forms for federal subsidies to help pay employers for early retiree health care claims will be available June 23. PPACA authorized $5 billion to reimburse employers who cover health insurance for early retirees aged 55-64 paying 80 percent of the costs for claims between $15,000 and $90,000. The funding begins June 23 and runs through 2013 unless exhausted first.

Consumer spending on health care: Snapshot of out-of-pocket costs for average household

From 1984 to 2007, health spending increased at average rate of 4.4 percent annually, costs increased at 6.4 percent, and consumer after-tax income increased 4.7 percent. In 1984, health care represented 4.94 percent of after tax expenditures, and 4.69 percent in 2007. While health care costs appear to have sharply increased, the percent of our income we spend on health care actually decreased a fraction of a percent.

Health Releated Consumer Spending

Key trends from U.S. Bureau of Labor Statistics, U.S. Dept of Commerce and U.S. Bureau of the Census data

Note: for 2008, overall consumer expenditures increased 1.7 percent vs. 2.6 percent in 2007. Spending increased most for entertainment (5.1 percent), insurance and pensions (5.0 percent) and health care (4.3 percent).

Medical loss ratio (MLR) requirements for plans start in 2011; specific measures to be known June 1

Under PPACA, health plans must spend at least 85 cents of every premium dollar on medical care for group coverage, and at least 80 cents for individual coverage. Costs associated with medical care such as call centers, patient education, disease management programs etc. may qualify as medical costs along with other services plans provide. Regulators in the Department of Health and Human Services are charged with oversight of the new regulation. Accordingly, it met with the National Association of Insurance Commissioners Tuesday to discuss specifics of what MLR will include and a timeline for release. "HHS is seeking to publish regulations as soon as possible to allow sufficient time for health insurance issuers to incorporate these changes," HHS Secretary Kathleen Sebelius noted after the meeting.

IRS role in individual mandate enforcement

Thursday, in testimony before the Senate Finance Committee, IRS Deputy Commissioner for Services and Enforcement clarified the IRS role in implementing the individual mandate penalty provisions. The Internal Revenue Service will withhold tax refunds if individuals fail to comply with the individual mandate. Under PPACA, penalties for failure to purchase health insurance apply starting in 2014. By 2016, the penalty is the greater of $695 per year, or 2.5 percent of household income up to $2,085. Those who are not required to file a tax return because their income is below the filing threshold are not subject to penalties.

PPACA: Not for profit hospitals face new accountability requirements

PPACA imposes new accountability and disclosure requirements that nonprofit hospitals must satisfy to maintain their federal tax-exempt status. For a tax-exempt organization that operates more than one hospital facility, the new requirements apply separately to each hospital. Among major requirements for which tax exempt hospitals must be compliant :

  • Hospitals must conduct a Community Health Needs Assessment every three years
  • Hospitals must develop and make widely known a financial assistance policy that specifies ways uninsured and lower income individuals may access services and understand costs, and how the hospital collects on unpaid bills (disclosure of reasonable efforts to collect unpaid bills after the individual has been qualified for assistance)
  • Hospitals must submit audited financial statements with IRS Form 990 disclosures
  • Limits are placed on the use of gross charges (via the chargemaster) to individuals who qualify for financial assistance

Hospitals required to post charges

PPACA requirement: each hospital operating must establish and make public a list of the hospital’s standard charges for items and services provided by the hospital including for diagnosis-related groups (DRG specific data).

PPACA impact on employer plans

PPACA has far-reaching impact on employer-sponsored plans. Some examples:

  • Waiting period for enrollment – Employers can impose waiting periods of no longer than 90 days before extending health care coverage to employees.
  • Opt out instead of opt in – Employers are required to automatically enroll employees unless those employees opt out.
  • Dependent coverage – Employees’ children are eligible up to age 26 regardless of student status or marital status.
  • Elimination of annual and lifetime coverage limits – Qualified plans cannot impose limits under the PPACA.
  • Preexisting conditions – Employers must accommodate pre-existing condition requirements of commercial plans; includes dependents.
  • Preventive health and wellness – Employers may invest more in preventive health programs per PPACA and are allowed more leeway for employers to build incentives for improved health in their plans, provided employees have a “reasonable chance” of achieving health goals. Note: the provision cannot be used to discriminate against unhealthy employees.

Joint Committee on Taxation: Impact of PPACA on medical deduction change

PPACA raises $15.2 billion (2010-2019) by raising the medical expense deduction from 7.5 percent to 10.0 percent in 2013. Once the law is fully implemented in 2019, the JCT forecasts the deduction limitation will affect 14.8 million taxpayers--14.7 million of them will earn less than $200,000 a year.

HITECH update: CCHIT names Bell director

The Certification Commission for Health IT (CCHIT) has named Dr. Karen Bell, a former executive in the Office of the National Coordinator for Health IT (ONC), as its chair, effective April 26. CCHIT is currently the only organization set up to verify and test the capabilities of electronic health record systems, though ONC indicates other certification agencies will be deemed to carry out its oversight requirements.

Q and A

Q: In Massachusetts, the newly insured created a long-jam to see primary care physicians? With the newly insured in the bill, won’t the same happen? How is the shortage of PCPs handled in the bill?

A: The shortage of primary care providers is addressed in a number of ways in PPACA: consider increased funding for community health centers, nurse managed clinics and federally qualified health centers (sec. 5601, 5316, 5503), expanded opportunities for nurses in primary roles (sec. 10501, 5302, 5308), expansion of patient centered medical home demonstration programs (sec. 10321), expansion of primary care residency programs (5503) and expansion of the patient navigator program (sec. 3510), and others. In addition, the HITECH stimulus bill puts primary care practices that see disproportionate numbers of uninsured at the front of the line to get stimulus funds for electronic health records. PPACA seems to address the workforce shortage in three major ways: (1) expansion of funding for workforce development—nurses and physicians, (2) increased investments in programs targeting populations dependent on primary care—geriatrics, pediatrics, public health programs, community health centers, nurse midwifery programs et al—and (3) mechanisms in the bill that encourage coordination of care via bundled payments et al. Will 32,000,000 newly insured inundate the system and create a resulting backlog for primary care services? Possibly.

Q: What will consumers notice first as a result of the reform bill?

A-It depends on where you work, your insurance status and income status. Consider:

If you work for company that provides health insurance benefits in which you are enrolled, it’s likely your company will be evaluating whether the plan is grandfathered or is subject to changes in what’s covered and how much you pay.

If you are not insured, there are no immediate changes BUT in 2014, you’ll have to choose to be insured or agree to pay a penalty. If your family income is below $88,000, you will be eligible for subsidies to help you buy insurance.

Effective 2013, if you earn employment income above $200,000 individually, or $250,000 on a joint return, your employee share of Medicare payroll taxes will be taxed an additional 0.9 percent above that amount. An additional 3.8 percent tax on unearned income also applies to taxpayers with modified adjusted gross income above the $200,000/$250,000 thresholds.

And for everyone, the costs of hospitals, physicians, drugs, devices and insurance premiums will likely go up in the short term as they absorb new fees and costs associated with compliance with the reform bill.

Q-Does the bill mean physicians can’t own hospitals any longer?

A-Physicians may continue to own hospitals, but they are not allowed as a group to increase their equity ownership as a group, and they will be subject to a number of new regulations that require increased transparency and compliance. PPACA does not eliminate physician-owned hospitals, but it may subject them to increased scrutiny from regulators.


“A lot of good policy fails to become reality because it can’t get through the political Stargate, and some pretty bad stuff gets baked into otherwise sound bills in order to win passage. The challenge is to get a policy through with your integrity unscathed, with your idea intact, and with a design that can be implemented.” 

—William D Eggers & John O’Leary, If We Can Put a Man on the Moon: Getting Big Things Done in Government, Harvard Business Press, 2009 (Note: Must read to capture essence of reform bill-making process)

“To avoid large and unsustainable budget deficits, the nation will have to choose among higher taxes, modifications to entitlement programs and Medicare or some combination.” 

—Federal Reserve Chairman Ben S. Bernanke, Dallas Chamber of Commerce

“The personal health insurance coverage of Senators, representatives and their staff members are affected by the bill…It is unclear whether members of Congress and Congressional staff who are currently participating in FEHBP may be able to retain this coverage.” 

—Congressional Research Service Memo to Congress

“Right now, the employees who are healthy and living a healthy lifestyle are paying for those who are not. They are overpaying almost twice as much for the unhealthy: the obese, the smokers, people like that. You, an employee who is healthy and doesn’t smoke, are subsidizing the medical claims, with your premiums going up every month, to pay for someone who smokes, for someone who is obese.” 

—Helen Darling, President of the National Business Group on Health

“It took a year of the country's energy. It's now time to move on… If you look at the outcome, and our industry being vilified, that's a bad outcome.” 

—David Cordani, Chief Executive Officer, Cigna (Forbes Interview April 14, 2010)

Fact file

  • Total unfunded Medicare liability: $38 trillion (U.S. Department of the Treasury based on actuarial model 2010-2085)
  • Twitter unique users as the company enters its fourth year of operation: 106 million growing at a rate of 300,000 per day. 55 million posts per day; 180 million log on monthly. (Source: “Chirp”—the Twitter developer conference, Wednesday)
    Note: CEO Evan Williams announced @anywhere—an expanded platform for geo-locations featuring expanded functionality in locating hospitals and health services among others while also expanding posting capacity beyond 140 characters. The company’s open source platform has produced 100,000 independent Twitter applications—75 percent of Twitter traffic comes through apps other than
  • The annual social security surplus will end in 2017 and become an annual deficit, and run dry by 2041. (Source: Industrial College of the Armed Forces Analysis)
  • 28 states are considering changing rules to allow nurse practitioners to practice independently to offset the physician shortages and accommodate anticipated demand for primary care. (Source: AMA)
  • Doctors were paid $95.43 by Medicare for a new-patient visit through March 31 but with the physician fix deadline missed, the reimbursement is down to $75.20. (Source: CMS)
  • Pay disparity in health care workforce: across all industries, the typical woman working 40 hours per week earned 87 percent of what a man earned in 2008. However among all physicians, women earned 61 percent of the average for men due to disproportionate representation in lower income specialties internal medicine, pediatrics, family medicine, emergency medicine, etc. (Source: U.S. Census Bureau)
  • Since 1970, the federal government has spent more than it raised in all but 4 years—1997-2000. (Source: White House Office of Management and Budget)
  • CBO looks at Medicare savings: Rising the eligibility age for Medicare from 65 to 67 will save $86 billion over ten years. Raising the Part B premium for seniors from 25 percent to 35 percent would save $217 billion. (Source: Congressional Budget Office)
  • 72 percent increase in Medicare enrollment by 2030 and ratio of workers paying Medicare tax per beneficiary will drop by 35 percent. (Source: CMS)
  • Health costs for employers increased 7.3 percent more on heath care in 2009 vs. 2008 while overall health costs increased 4.8 percent. (Source: Thomson Reuters)
  • Total retail sales increased 1.6 percent in March—the biggest increase since November. (Source: U.S. Department of Commerce)
  • PPACA included an additional $3 billion for comparative effectiveness research in addition to stimulus (ARRA) funding of $1.1 billion. This funding facilitates the set-up for the new Patient-Centered Outcomes Research Institute that will oversee the program. (Source: HHS)
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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