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Health Care Reform Memo: July 12, 2010

Deloitte Center for Health Solutions publication

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

My take

Since the March 23 signing of the Patient Protection and Affordable Care Act (PPACA), health reform seems to have taken back seat to financial services reform legislation, and early primaries leading to the November elections. Lest we forget:

PPACA will cost $940 billion 2010-2019. Funding includes $508 billion in new taxes and fees, and $575 billion in spending cuts. $434 billion will go for expansion of Medicaid enrollment by 16 million; $464 billion will fund subsidies to assist individuals and small businesses to purchase insurance. It does not include liability reform nor does it include a “fix” sought by physicians to Medicare payment rates set to expire in December 2010.

PPACA’s four big bets are:

  1. Will the individual mandate work? Will the uninsured buy insurance? And will they buy before they need it for an expensive medical problem? Will hospitals, insurance companies, medical device and prescription drug companies benefit financially from the 32 million newly insured – the basis for the new cuts, taxes and excise fees they’ll pay?
  2. Will employers pay or play? For shareholders and owners, is it advantageous to pay the penalty, lose the tax deduction for health benefits costs and walk away from health insurance? And what might an employer use to keep an adequate and productive workforce instead of health insurance?
  3. Will states be able to stand up health exchanges by 2014 to accommodate demand that’s hard to gauge? Will they be able to accommodate expansion of Medicaid and the State Children's Health Insurance Program (SCHIP), increased regulatory oversight of the health insurance and delivery systems while their revenues are shrinking and deficits soaring?
  4. And will delivery system changes in PPACA bend the cost curve? Will accountable care organizations, the medical home, value-based purchasing, comparative effectiveness and bundled payments work?

In the weeks ahead, news media attention might be focused elsewhere, but health reform will loom large as legislators and regulators at the state and federal levels grapple with implementation, and every employer takes notice of eminent reporting requirements and new regulations for employee health benefits.

No doubt, PPACA will emerge again in the media spotlight in the run-up to the November elections. Pundits will once again herald its merits or assail its limitations and flaws. “Hanging chads” will become apparent; follow-on legislation and rule-making will fix programs and correct miscues. Meanwhile, for the industry’s stakeholders, the “new normal” represents a fundamental, transformational change impacting 17 percent of the economy and 15 million in the civilian workforce.

The U.S. health care industry is vital to the economic recovery and deeply personal to every citizen. It’s the law and it’s here to stay.

Paul Keckley

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

Berwick appointed CMS head

Wednesday, Don Berwick, MD, MPP, FRCP, 63, Harvard pediatrician and former Director of the Institute for Healthcare Improvement, will assume responsibility as Director of the Centers for Medicare and Medicaid Services (CMS) via a recess appointment in lieu of a Senate Finance Committee confirmation hearing. Berwick will serve until 2011 in the post most recently filled by Bush appointee Mark McClellan who left in 2006. Dr. Berwick is widely known in patient safety circles and received endorsements from the American Hospital Association, the Federation of American Hospitals and the Catholic Health Association among others. Previously, he served as vice chair of the U.S. Preventive Services Task Force, Independent Member of the Board of Trustees of the American Hospital Association, and chair of the National Advisory Council of the Agency for Healthcare Research and Quality.

51 percent of employer sponsored plans might lose grandfathered status: HHS

The Department of Health and Human Services’ (HHS) analysis of how many employer-sponsored plans are expected to lose grandfathered status before 2014:

  Small Employer Plans Large Employers All Employers
2011 30 percent 18 percent 22 percent
2012 51 percent 38 percent 38 percent
2013 66 percent 45 percent 51 percent
Covered lives 42,000,000 133,000,000 175,000,000

ONC, U.S. Office of Civil Rights announce new provisions of the Health Insurance Portability and Accountability Act (HIPAA)

Thursday, the Office of the National Coordinator for Health Information Technology (ONC) head David Blumenthal announced a major policy change that makes billing companies, customer service contractors and other businesses that routinely handle private health records liable for privacy and security breaches. The proposed rule would treat these companies the same as doctors, hospitals and insurance companies The maximum civil penalties are $50,000 per violation, and $1.5 million a year.

Medicare Modernization Act (MMA) donut hole update: Second batch of $250 checks on the way to 300,000 seniors

In PPACA, seniors whose expenditures for drugs hit the donut hole (between $2,830 and $6,440 out-of-pocket for which seniors pay 100 percent of costs) receive a $250 tax free check from the federal government. In June 80,000 seniors received checks; last week 300,000 additional checks were mailed. Note: In PPACA, the donut hole goes away over the decade at a cost of $80 billion as drug and biotechnology companies forfeit revenues as part of an agreement with legislators and the White House. The trade-off for the industry: increased revenues as 32 million newly insured people enter the system, protections against drug importation, protections of intellectual property via 12 year data exclusivity and concessions in discounts to state Medicaid agencies. Revenues in the U.S. pharmaceutical industry are $290 billion; in 2011, $157 billion of sales will go off patent between 2010-2015.

Q and A

Q: How are avoidable readmissions to hospitals likely to be treated as part of health reform?

A: Section 3025 of PPACA stipulates “CMS shall calculate national and hospital-specific data on the readmission rates of Medicare participating subsection (d) hospitals and hospitals paid under section 1814 (b)(3) for eight conditions that the Secretary selects based on spending and readmission rates. Starting in FY2012, the Secretary shall share data with hospitals, and the data shall be publicly reported on the Hospital Compare website”

Timing is key: Starting in FY2013, hospitals with readmission rates above the 75th percentile will have payments for the original hospitalization reduced by 20 percent if a patient with a selected condition is re-hospitalized with a preventable readmission within seven days and by 10 percent if a patient with a selected condition is re-hospitalized with a preventable readmission within 15 days. CMS will use three years of historical data (June 2009 – May 2012 for the 2013 assessment) to assess a hospitals performance according to a formula that uses an annual adjustment to the Medicare diagnosis-related group (DRG) payment rate every year to penalize under-performers (-1 percent in FY2013, -2 percent in FY2014, -3 percent in FY2015).

Threshold performance is the basis for performance assessment: Similar in design to CMS Hospital Compare, hospitals with readmissions above the 75th percentile (based on 30 adjusted rates) for targeted conditions will be subject to reduced payments policy for the selected conditions DRGs – starting in 2013 for acute myocardial infarction (AMI), heart failure (HF), and pneumonia, and in 2015 chronic obstructive pulmonary disease (COPD), coronary artery bypass grafts (CABG), percutaneous transluminal coronary angioplasty (PTCA) and others to be added at the discretion of the Secretary of Health and Human Services.

Over the course of the program, PPACA anticipates collecting $7.1 billion from hospitals who fail to manage avoidable readmissions effectively.

Q: Can a commercial health plan contract with an accountable care organization (ACO)?

A: Under PPACA (Section 3022), ACOs “that meet quality-of-care targets and reduce the costs of their patients relative to a spending benchmark are rewarded with a share of the savings they achieve for the Medicare program”. An ACO is defined as a clinically integrated group of providers who work together to manage and coordinate care for Medicare fee for service beneficiaries. In PPACA and earlier versions (MedPAC 2009), ACOs may include physician groups, hospitals, nurse practitioners and physician assistants, and others.

Five structures will likely be the focus of ACO efforts: (1) a medical group practice, (2) a networks of individual practices, e.g.: an Independent Physicians Association (IPA), (3) a partnerships or joint venture between a hospital and practicing physicians, e.g. Physician Hospital Organization (PHO), (4) hospitals with an employed group of physicians, and (5) “other arrangements” deemed appropriate by the Secretary of HHS. The legislation stipulates that starting January 2012, eligible Medicare ACOs must cover a minimum of 5,000 enrollees and be organized to align provider incentives with quality and efficiency performance. Therefore, the bill does not limit an ACO to Medicare enrollees nor does it stipulate that plans may not use a similar contracting arrangement with a provider organization. $4.9 billion is funded in PPACA for bonus payments to ACOs.

PPACA does not preclude a commercial plan or a plan offered through health exchanges from contracting with an ACO. Therefore, for a health plan might consider using an ACO for contracting beginning in 2012 based on:

  1. An independent assessment assess of the clinical integration processes (medical management, outcomes measurement, adherence to evidence-based practices, etc.) of the ACO.
  2. The capabilities of the ACO to manage risk (infrastructure, payment models, incentive-sharing, reporting, adjudication, etc.).
  3. Willingness/capabilities of the ACO to manage populations, i.e. commercial, Medicaid, etc.

Q: How will Clinical Translational Science Awards (CTSA grants) to academic medical centers change as a result of PPACA?

A: The traditional research apparatus in academic medicine, General Clinical Research Centers (GCRCs), will be phased out as GCRCs convert to CTSAs. The budget changes in PPACA and the National Institutes of Health (NIH) reflect the intentional shift to CTSA from GCRC: between FY2010 and FY2011, budgeted funding for GCRCs is cut by $8.8 million to $29.9 million/year while CTSA funding increases by $20 million to $477.7 million/year. Over time, GCRCs will be phased out as the more rigid requirements of CTSAs become the norm for academic research.


“If you’re buying a car, there are dimensions of quality: safety, fuel efficiency, comfort, fun in driving, durability and so on. We’re used to that. But what are the dimensions of ‘goodness’ in health care?”

 – Source: Don Berwick, Institute for Healthcare Improvement, “Defining Quality: Aiming for a Better Health Care System”

“Our health care costs over the past 12 months were $300 million. Every employee who works 20 hours per week receives health benefits. The thought that we would cut that benefit—I couldn’t do that. You have to be willing to fight for something you believe in.”

 – Source: Howard Shultz interview of Harvard Business Review, July-August 2010

“Of the 13 recessions the U.S. has endured since the Great Depression of 1929-1933, none has presented a more punishing combination of length, breadth and depth than this one.”

 – Source: Pew Research May 2010 Poll of 2,967 U.S. adults

“One perverse effect of the law [PPACA] is that insurers might have less incentive to drive down reimbursement rates to hospitals and doctors because that might push their administrative expenses above the ObamaCare cap of 15 percent of total costs.”

 – Source: “Where Inflation Lurks,” Forbes July 19, 2010 p. 30

“We’ve celebrated cowboys, but what we need is more pit crews… The stories we doctors tell ourselves about what it means to be great are very important. We like to imagine we can be infallible and be that heroic healer. But the fact is it’s teams and often great organizations that make for great care, not just individuals.”

 – Source: Atul Gawande, “The Checklist Manifesto”

“Changing the culture of medical practice to encourage more thoughtful use of imaging today will help to ensure that future patients will benefit from continued imaging innovation.”

 – Source: “The Uncritical Use of High Tech Medical Imaging” Hillman, Goldsmith, New England Journal of Medicine, July 1, 2010

“New technologies and social media have made it possible for a single dissatisfied customer to inflict lasting damage on a brand.”

 – Source: “Empowered,” Bernoff, Schadler, Harvard Business Review July-August 2010

Fact file

  • Uninsured: 46.3 million in 2009; at some point in the year, 58.5 million went without health insurance. – Source: CDC
  • State budget shortfall for FY11: $140 billion. 46 states will have deficits as revenues increase 3.7 percent compared to +8 percent in 2008, leaving a $53 billion shortfall ‘08-‘09, and $55 billion ‘09-’10. – Source: Center on Budget and Policy Priorities, National Governors Association
  • In 14.6 percent of U.S. households, including 21 percent of households with children, access to food (researchers call it “food security”) is an issue; this is an increase of 32 percent since the economic downturn. – Source: U.S. Department of Agriculture Life Sciences Research Institute
  • Current household savings rate in US: 3.9 percent vs. 2.8 percent in Japan, 7 percent in UK, 11.7 percent in Germany and 14.3 percent in Switzerland. Per capita federal debt in the US: $16K in 2001 vs. $34K in 2009. – Source: Federal Reserve Board
  • Global spending on information technology in 2010: $1.5 trillion (+3.8 percent ’10 vs. ’09 contracted to -4.2 percent ’09 vs. ’08. – Source: IDC Research
  • 25 percent of customers have positive things to say about customer service vs. 65 percent who do not. The 25 percent of satisfied tell ten others; 48 percent of the dissatisfied tell ten others. – Source: “Stop Trying to Delight your Customers,” Harvard Business Review July-August 2010
  • 57 percent of employees say they understand the strategy of the company where they work; 33 percent think their company executes its strategy effectively. – Source: “Can Hierarchy Hurt Strategy Execution,” Harvard Business Review July-August 2010
  • Colorectal screening incidence among adults 50-75: 63 percent in 2008 vs. 52 percent in 2002. Breast-cancer screening rates among women 50 to 74: 81.1 percent in 2008 vs. 81.5 percent in 2006. – Source: CDC
  • 2.3 percent excise tax on medical devices will add $2 billion/year to national health costs starting 2013. – Source: Advamed
  • Friday's monthly employment report from the: private-sector employment increased 91,000 jobs in June. Unemployment remains at 9.5 percent. – Source: U.S. Department of Labor
  • Retirement age change: 66 for those born between 1943 and 1954, and 67 for those born between 1960 or later. – Source: Social Security Administration
  • U.S. average annual rate of Medicare cost increases 1992-2006: 3.5 percent –highest = McAllen Texas (8.3 percent), lowest = Honolulu Hawaii (1.6 percent). – Source: Dartmouth Atlas
  • Breakdown of spending in commercial insurance and estimated increased in 2010: 33 percent is spent on professional services (+5 percent for 2010), 31 percent for hospital services (+4 percent), 16 percent for prescription drugs (+6 percent) and 17 percent for outpatient services (+4 percent). – Source: Milliman Medical Index
  • Health information exchanges: in 2009, 193 are in various stages of development or operation. – Source: ONC
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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