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Health Care Reform Memo:
March 4, 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: The sequester: impact on the health care industry

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

For five years, my weekends have centered on writing the Monday memo on health reform—intended then, as now, to be a quick, non-partisan, objective read for folks who try to follow the themes, rules, and industry responses around U.S. health system reform, and how they relate to other industries outside health care.

In these five years, several pivot points have shaped this dramatic story…

  • February 24, 2009—President Obama promises health reform to reduce cost and cover everyone in his first address to Congress as Chief Executive.
  • August 3, 2009—Congress recesses, hearing public outcries about “death panels” back home based on a provision in health reform legislation proposed by the House.
  • November 7, 2009— the House passes a health reform bill on November 7, 2009: the Affordable Health Care for America Act.
  • December 24, 2009—the Senate passes its version of a health reform law, which ultimately becomes the version adopted: the Patient Protection and Affordable Care Act.
  • January 19, 2010—Scott Brown is elected to fill Ted Kennedy’s Senate seat, thus costing Senate Democrats a filibuster-proof 60 vote advantage, resulting in Democrats compromising on the proposed health reform legislation.
  • March 21, 2010—after deals with reluctant House members wanting a stronger law, the House approves the Senate version of the health reform law and makes modest changes through the Health Care and Education Reconciliation Act.
  • March 23, 2010—President Obama signs the Patient Protection and Affordable Care Act into law, now commonly referred to as the Affordable Care Act (ACA), accepting amendments made by the House…and the focus shifts to implementation.
  • November 2, 2010—elections brought 94 new members to Congress, solidifying the Tea Party as a force in Congressional primaries.
  • August 2, 2011—Budget Control Act of 2011 passes, extending the debt ceiling to $16.4 trillion with plans for federal government spending cuts or a defaulting to sequestration—$1.2 trillion in spending cuts over ten years with no Medicaid, Social Security and military benefits cuts, and a 2 percent cap on Medicare cuts starting January 1, 2013.
  • June 28, 2012—the U.S. Supreme Court upholds the constitutionality of the ACA, disallowing only one provision: mandated Medicaid expansion.
  • November 6, 2012—the re-election of President Obama and most incumbents who sought re-election (91 percent in the Senate and 90 percent in the House) made it so that there was continued emphasis on implementing the law. The composition of the Senate changed a little (Democrats net +2 seats), the House some change as well (Republicans net -6 seats), and Republicans gained net one seat in the Governors’ races.
  • January 1, 2013—sequestration delayed until March 1, 2013 along with a temporary patch to avoid physician pay cuts (Sustainable Growth Rate) for one year.
  • March 1, 2013—sequestration starts, with cuts of $85 billion in federal costs and/or budgets for March-September, 2013 will kick in.

So here we are again: another pivot point. Chances are the impact will be felt incrementally over the next 30 days or so, unless Congress and the White House navigate a way around the cuts.

When I speak to groups about health care reform and what it means for groups inside and outside the industry, I usually open with an update on the status of ACA implementation. I follow with the latest rules and what to expect next, and then open the floor to questions. Recently, I have received lots of questions about the sequester and its impact on the ACA. The four most frequent questions are these…

Question #1: How is the sequester expected to actually work?

Answer #1: each of 1,200 budgeted areas within federal agencies and programs is impacted. Of federal overall, half of the $85 billion in fiscal year (FY) 2013 cuts are reductions in what would have been spent, and the other half are real cuts (1.2 percent of federal spending or $43 billion) between March and September, 2013. Program managers impacted the hardest will likely do three things: freeze travel and discretionary spending in the program until further notice, furlough non-essential employees without pay on a rotating basis starting in April, and/or will not fill vacant positions. As it turns out, per the Budget Control Act of 2011, Department of Defense programs will feel the deepest cuts—half of the total $85 billion in spending cuts.

Sequestrable base and reductions by budget account

Programs Percent reduction
Defense discretionary 7.80%
Defense mandatory 7.90%
Nondefense discretionary 5.0%
Nondefense mandatory 5.10%
       Medicare payments to providers and plans 2.0%

Source: U.S. Office of Management and Budget (OMB), “Report to the Congress on the Joint Committee on sequestration for fiscal year 2013,” March 1, 2013

Question #2: What will the sequester do to funding for the implementation of the ACA? Might its appropriations not yet spent be cut as a way to reduce federal spending?

Answer #2: the direct impact on specific line items in the ACA is actually low relative to defense due to limitations in the Budget Control Act of 2011: $11 billion out of the $85 billion will be Medicare cuts. Medicaid and military health benefits are not directly cut. Late Friday, the OMB released this list of likely cuts related to the ACA:

Sequestration impact on ACA implementation

ACA major programs/provisions CBO projected federal spending Sequestration cuts, FY2013
Exchange subsidies and related $1,015 billion (FY2013-2022)1 $44 million4
Small business health insurance tax credit $23 billion (FY2013-2022)1 $6 million4
Prevention and Public Health Fund $16 billion (FY2012-2021)2 $51 million4
Increase in Health Care Fraud and Abuse Control Account
$100 million (FY2011-2020)3
$57 million4

1CBO projected 10 year effect on federal deficit, by fiscal year 2013-2023 (February 2013)
2CBO projected 10 year effect on federal deficit, by fiscal year 2012-2021 (April 2011)
Total amount appropriated by Congress in ACA: $10 million for fiscal years 2011-2020
OMB, “Report to the Congress on the Joint Committee on sequestration for fiscal year 2013,” March 1, 2013

Cuts included in the fiscal year 2013 sequestration report

Agency Bureau/Account/Function Sequester amount
Department of Health and Human Services (HHS) Food and Drug Administration (FDA)  
Revolving fund for certification, other services, and salaries and expenses $209 million
Health Resources and Services Administration $385 million
Indian Health Service $220 million
Centers for Disease Control and Prevention (CDC) $303 million
National Institutes of Health (NIH) $1.6 billion
Substance Abuse and Mental Health Services Administration (SAMHSA) $168 million
Centers for Medicare and Medicaid Services (CMS)  
Affordable Insurance Exchange Grants (Section 1311 of the ACA) $44 million
Program Management $40 million
State Grants and Demonstrations (may impact ACA programs) $27 million
Consumer Operated and Oriented Plan Program Contingency Fund (Section 1322 of the ACA) $13 million
Federal Supplementary Medical Insurance Trust Fund $5.3 billion
Federal Hospital Insurance Trust Fund $5.8 billion
Medicare Prescription Drug Account, Federal Supplementary Insurance Trust Fund $588 million
Health Care Fraud and Abuse Control Account (Section 10606 of the ACA) $57 million
Administration for Children and Families $989 million
Administration for Community Living $75 million
Departmental Management  
Prevention and Public Health Fund $51 million
Pregnancy Assistance Fund $1 million
Office of the National Coordinator for Health Information Technology $1 million
Office for Civil Rights $2 million
Public Health and Social Services Emergency Fund $38 million
General Departmental Management $24 million
Program Support Center $3 million
Office of the Inspector General $3 million
Department of Education Office of Elementary and Secondary Education $1.1 billion
Office of Innovation and Improvement $77 million
Office of English Language Acquisition $37 million
Office of Special Education and Rehabilitative Services $827 million
Office of Vocational and Adult Education $87 million
Office of Postsecondary Education $129 million
Office of Federal Student Aid $159 million
Institute of Education Sciences $30 million
Departmental Management $30 million
Department of Housing and Urban Development Government National Mortgage Association $1 million
Social Security Administration Office of the Inspector General, Federal Old-age and Survivors Insurance Trust Fund, and Federal Disability Insurance Trust Fund $286 million
Internal Revenue Service Taxpayer services  $114 million
Enforcement (make impact individual mandate enforcement effective January 1, 2014 per the ACA)  $267 million
Operations support $199 million
Business Systems Modernization  $17 million
Build America Bond Payments, Recovery Act $171 million
Payment to Issuer of Qualified Zone Academy Bonds $2 million
Payment to Issuer of Qualified School Construction Bonds $42 million
Payment to Issuer of New Clean Renewable Energy Bonds $1 million
Payment to Issuer of Qualified Energy Conservation Bonds $2 million
Payment Where Small Business Health Insurance Tax Credit Exceeds Liability for Tax (Section 1421 of the ACA) $6 million
IRS Miscellaneous Retained Fees  $2 million
Informant Payments $6 million
Department of Agriculture Office of the Secretary $1 million
Departmental Management $17 million
Office of Communications *
Office of Civil Rights $1 million
Office of Inspector General $4 million
Office of Chief Economist $1 million
Office of the General Counsel $2 million
National Appeals Division $1 million
Economic Research Service  $4 million
National Agricultural Statistics Service $8 million
Agricultural Research Service $55 million
National Institute of Food and Agriculture $39 million
Animal and Plant Health Inspection Service $56 million
Food Safety and Inspection Service $53 million
Grain Inspection, Packers and Stockyards Administration $4 million
Agricultural Marketing Service $48 million
Risk Management Agency $7 million
Farm Service Agency $530 million
Natural Resources Conservation Service $223 million
Rural development $9 million
Rural Utilities Service $30 million
Rural Housing Service $83 million
Rural Business Cooperative Service $10 million
Foreign Agricultural Service $92 million
Food and Nutrition Service  
Supplemental Nutrition Assistance Program $5 million
Commodity Assistance Program $5 million
Nutrition Programs Administration $7 million
Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) $333 million
Child Nutrition Programs $3 million
Forest Service $297 million
Department of Defense—military programs Operation and Maintenance, Defense-wide $3.1 billion
United States Court of Appeals for the Armed Forces $1 million
Drug Interdiction and Counter-Drug Activities $131 million
Office of the Inspector General $28 million
Department of Defense Acquisition Workforce Development Fund $31 million
Overseas Contingency Operations Transfer Fund $1 million
Defense Health Program $2.8 billion
Cooperative Threat Reduction Account $57 billion
Military Intelligence Program Transfer Fund $24 billion
Foreign Currency Fluctuations $76 billion
The Department of Defense Environmental Restoration Accounts $94 billion
Environmental Restoration, Formerly Used Defense Sites $26 million
Overseas Humanitarian, Disaster, and Civic Aid $14 million
Emergency Response Fund $17 million
Support for International Sporting Competitions $1 million
Operation and Maintenance, Marine Corps $752 million
Operation and Maintenance, Marine Corps Reserve $23 million
Operation and Maintenance, Navy $3.5 billion
Operation and Maintenance, Navy Reserve $107 million
Operation and Maintenance, Army $4.6 billion
Operation and Maintenance, Army National Guard $574 million
Operation and Maintenance, Army Reserve $253 million
Afghanistan Security Forces Fund $801 million
Afghanistan Infrastructure Fund $37 million
Operation and Maintenance, Air Force $3.5 billion
Operation and Maintenance, Air Force Reserve $266 million
Operation and Maintenance, Air National Guard $481 million
Emergency Response $1 million
Disposal of Department of Defense Real Property $5 million
Lease of Department of Defense Real Property $6 million
Overseas Military Facility Investment Recovery *
Miscellaneous Special Funds $2 million
Procurement $17.6 billion
Military Construction $1.6 billion
Family Housing $183 million
Revolving and Management Funds $263 million
Trust Funds $24 million

*Denotes $500,000 or less.
For more information on cuts to federal programs see the FY13 OMB Sequestration Report here.

Question #3: What does the sequester mean to the scientists and engineers who drive innovation in our industry? Is the U.S. role in research and development (R&D) global leadership at risk?

Answer #3: The NIH—funded at $31 billion per year—is likely to curtail research programs. That means private investors may face greater risks in bringing new science to the market based on basic research, and with similar cuts in the FDA, slower paths to commercial markets for drug and device manufacturers. These companies will likely respond by streamlining their R&D processes, re-focusing capital on emerging markets and more promising diagnostic and therapeutic categories, and seeking collaboration with bigger, better capitalized manufacturers.

A closer look at FDA user fees subject to sequestration cuts: the medical device, biotech, and pharmaceutical industries, per the FY2012 continuing resolution manufacturers are required to pay user fees to FDA although they may not receive the expected benefits, such as timely or expedited drug reviews and approvals. An estimated $209 million will be cut from the department’s funding, $500,000 or less from the revolving fund for certification and other services and $209 million from salaries and other expenses. In addition, user fees increased in FY2013 despite the continuing resolution setting FDA’s spending level of collected fees at the FY2012 levels— a difference of $40 million. User fees contribute $1.6 billion to the agency’s budget this year; 5 percent of these funds go to the Department of Treasury as a result of sequestration.

Note: as the White House observed in announcing its 15 year “Brain Activity Mapping” effort a few weeks ago, returns on R&D investments in the life sciences are substantial long-term, but require short-term investing. President Obama cited the Human Genome Project’s return on investment: 140 to 1 as an example of how the federal government’s investment of $3.8 billion paid off. We need a national discussion about our commitment to be the world’s leader in health care innovation, and a path to investing that encourages risk takers to jump in.

Question #4: What’s after the sequester? What’s the long-term outlook for the industry?

Answer #4: the long-term outlook may be brighter than expected, but the next pivot points are key and include: the Continuing Resolution to fund the day-to-day operations of the federal government before a potential shutdown March 27, and in April, the debt ceiling, will require Congressional authorization of long-term deficit reduction efforts intended to stabilize our economy, while also satisfying lenders that the U.S. economic is on sound, fiscal footing for the long-term.

Meanwhile, there’s the ACA. Its implementation is in full swing:

  • States are considering their Medicaid expansion options and how they’ll act on health insurance exchange (HIX) requirements.
  • Physicians and hospitals are managing accountable care, bundled payments, and medical home pilots, and stepping up efforts in fraud detection and adherence to care that’s necessary based on evidence.
  • Commercial health plans are preparing for expanded opportunities in managed Medicaid and HIX enrollees while looking to diversify their offerings in global and domestic growth markets.
  • Employers are attempting to navigate the new normal with increased demand for greater transparency and improved value from the health system—its providers, plans and regulators.

My take: the story is not the sequester cuts. Its impact will be felt, but not as robustly as perhaps imagined. It’s about the cumulative impact of cuts by employers, households, and the government’s health plans—Medicare, Medicaid, Children’s Health Insurance Program (CHIP)—that impact our system. The compounded impact is profound: the solutions mean there will be winners and losers in every sector. Cutting costs is another table stake—fundamentally changing our businesses with fresh ways of solving problems and educated bets on growth are requisite for those who will survive and thrive.

As for the long-term outlook: demand may increase, and our spending on health care will likely be at or slightly below 1 percent above the annual gross domestic product (GDP) for years to come. So it’s an industry that is expected to grow, but at a slower pace. And it may be more increasingly impacted by federal policies that directly impact the majority of the system’s users: Medicaid, Medicare, CHIP, military health, federal employee health, Indian Health Service, public clinics, qualified health plans (QHPs) on the HIXs, and more. And with immigration reform pending, it is conceivable that around 75 percent of the population will be impacted by a government framework for health care products and services within 20 years.

The lines between government and industry cross just as the financing and delivery of health care services are convergent paths. The new normal is more complicated—far from a repeat of the past. But I am confident it will spark huge opportunities for innovation and growth, at least for those prepared to act and willing to step ahead of the pack. Old rules, old excuses, old structures, old management skills, and old assumptions will not survive. In U.S. health care, the new normal is a new opportunity for a few.

I read a chief executive officer’s letter to his shareholders released Friday. He bemoans the fact that his fund returned “only” 14.4 percent to its shareholders last year, and that it made no major acquisitions. But throughout, he reminds his investors of two imperatives: the need to take a long-term view that accepts ups and downs, and the need for solid execution: strong management appropriately focused. Those lessons are true for health care, now more than ever.

Paul Keckely

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

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Implementation update

HHS issues proposed rule on enrollment for small businesses purchasing coverage through HIXs; significant for plans selling health insurance

Friday, HHS issued a 26-page proposed rule on the Small Business Health Options Program (SHOP)—specifically around enrollment outside the standard open enrollment periods and administrative processes. Comments will be accepted until April 10, 2013. Highlights:

  • Triggering event clarification: a triggering event includes an individual losing Medicaid eligibility and would allow an employee 60 days to enroll in a QHP through the SHOP.
  • Special enrollment periods: HHS proposes reducing the special enrollment period for SHOP from 60 days to 30 days to align with the special enrollment periods in the group market.
  • Transitional policy: contrary to previous guidance, HHS proposes that for plan years beginning on or after January 1, 2014 and before January 1, 2015, a SHOP would not be required to allow employers to offer their employees a choice of QHPs. While state-based exchanges (SBE) and state-partnership exchanges (SPE) will have the option to do so, the SHOPs offered on a federally-facilitated exchange (FFE) will only allow employers to offer employees a single QHP. HHS’ justification: the transitional policy will help ensure that the SHOP market is operationally sound.
  • Premium aggregation: a financial and administrative system that would allow an employer to receive a single bill for all QHPs that their employees are enrolled in and then aggregate premium payments from employers and distribute the payments to the appropriate QHPs is now optional for plan years beginning before January 1, 2015.

Background: per Section 1311 of the ACA, individuals and small businesses may purchase insurance from QHPs on a HIX. SHOP refers to the small group market that will be operated through HIXs for small businesses (<50 employees in 2014, with the option to expand to employers with <100 employees).

HHS issues final rule for benefit and payment parameters

Friday, HHS also issued a 482-page final rule on health benefit payment parameters for several ACA programs and a 52-page interim final rule that builds on the final rule. Both rules are effective May 10, 2013, but comments on the interim final rule will also be accepted until May 10, 2013. Highlights:

  • Risk adjustment: clarified that small group market plans will be risk adjusted in the state in which the employer’s policy was filed and approved.
  • Reinsurance: clarified that HHS will allocate and disburse reinsurance payments to each state operating its own reinsurance program, and will distribute directly to issuers if HHS is operating reinsurance on behalf of a state; revised procedures for counting covered lives for group health plans with a self-insured coverage option and an insured coverage option; and HHS will notify contributing entities of the reinsurance contribution amount to be paid for the applicable benefit year within 30 days of submission of the annual enrollment count.
  • Risk corridors: eliminated the adjustment to allowable costs for reinsurance contributions made by an issuer, and clarified the treatment of community benefit expenditures within the risk corridors calculation.
  • Advance payments of the premium tax credit (APTC) and cost-sharing: allows HIXs to distribute an APTC if one or more individuals in a tax household enroll in more than one policy through the exchange and permits HHS to adjust the cost-sharing reduction advance payments if the QHP issuer demonstrates that the cost-sharing reductions provided are likely to differ significantly from the advance payment amount. The user fee rate is applied directly to the premium set by the issuer.
  • SHOP: consistent with the proposed rule released on SHOP, each SHOP must allow qualified employers the choice of offering employees either all QHPs at a single level of coverage selected by the employer or, as a transition policy, a single QHP selected by the employer, Federally-Facilitated SHOP will not offer employee choice and premium aggregation until plan years beginning on or after January 1, 2015. QHP certification standard relating to participation in a SHOP does not apply if neither the issuer nor any other issuer in the issuer group has a market share of the state’s small group market greater than 20 percent. An issuer’s monthly user fee for 2014 is 3.5 percent and the monthly premium charged by the issuer for each policy offered through a FFE.
  • Medical loss ratio (MLR): amended the formula to subtract reinsurance contributions from earned premium as regulatory fees, instead of treating them as an addition to incurred claim.

OPM issues final rule on multi-state plan exchanges

Friday, the Office of Personnel Management (OPM) released a 154-page final rule establishing the Multi-State Plan Program (MSPP). Highlights:

  • Essential health benefits (EHB): revised proposed rule to ensure consistency with the prohibition on discrimination with respect to EHB.
  • SHOP: MSPP issuer’s will operate under the same rules as issuers of health insurance coverage in the small group market generally, and may phase-in participation in the SHOP if the state has set a standard that requires QHPs to participate.
  • Coverage: an MSPP issuer must offer coverage for both individuals and small groups in a state with a merged individual and small group market.
  • Cost-sharing: MSPP issuer will also be required to comply with state standards for cost-sharing.
  • User fee: OPM may begin collecting the fee in 2015, estimated at no more than 0.2 percent of premiums.

My take: per Section 1344 of the ACA, private insurance companies are allowed to contract with the federal government for plans targeting individuals and small companies across state lines. State insurance commissioners had been concerned that the federal government’s role in oversight of national insurance plans would usurp their authority, and the insurance industry had argued for elimination of conflicting, duplicative and costly regulatory oversight at the state and federal levels for multi-state plans they’d offer. This ruling, in effect, means that multi-state plans may operate under similar requirements as plans that operate within a state, with no added regulatory requirements—something a group of patient advocacy and provider trade had wanted.

IRS issues notice on annual fees to be imposed on health insurers per ACA

Friday, the Internal Revenue Service (IRS) issued guidance on the annual fee that will be imposed on health insurance issuers per Section 9010 of the ACA. The first fee is due to no later than September 30th of each calendar year (CY) beginning CY2014. Comments will be accepted until May 3, 2013.

CCIIO releases HIX implementation timeline

Last week, in response to a request from the Senate Committee on Finance Chairman Senator Max Baucus (D-MT), the Centers for Medicare & Medicaid Services (CMS) Center for Consumer Information and Insurance Oversight (CCIIO) released an implementation timeline for HIX.

  Policy Operations & IT Issuers & states Consumer assistance
Feb-13 Essential Health Benefits & Market Rules, Payment Notice Income Definition Business Rules Finalized State Partnership Marketplace Blueprints Due  
Mar-13 Medicaid FMAP* Rule Secretary Final Decisions for Marketplaces; Issuer QHP* Plan Designs Complete  
Apr-13 Eligibility Rule (Marketplace & Medicaid/CHIP* Appeals) Issuers Submit QHP Rating & Benefit Data for HHS Marketplace   Single Streamlined Application Finalized
Jun-13       Web Re-Launch & Call Center Launch
Jul-13   Final QHP Evaluation Results Recd. & Data Finalized State Dept. of Insurance Approval of QHPs, State Partnership Review of WHPs Complete Navigator Portal Available
Aug-13   QHP Plan Preview for HHS & Partner Marketplaces   Navigator/Agent/Broker Training Complete
Sep-13   IT Dev. & Integration Testing Complete    
Oct-13       Enrollment Begins

*CHIP: Children’s Health Insurance Plan
QHP: Qualified Health Plan
FMAP: Federal Medical Assistance Percentages (matching funds for Medicaid and other State-administered programs)
Sources: ACA, Marketplace Timeline

HHS report: rate increase requests from insurance plans slowing

Health insurers requested fewer rate increases of over 10 percent as a result of ACA, per an HHS report last week. In 2010, 75 percent of state filings to raise rates in the individual market were for increases of 10 percent or more. In 2012, 34 percent of requests were for 10 percent or more. So far this year, 14 percent of rate filings have been for an increase of 10 percent or more.

Legislative update

GAO analysis: health care costs will grow faster than overall economy for 75 years; ACA cost containment provisions helpful but not enough to reduce shortfall

According to a 53-page report released by the Government Accountability Office (GAO) last week, health care spending is projected to grow faster than the growth of gross domestic product (GDP) for the next 75 years, and the long-term federal budget outlook largely depends on whether the cost containment provisions in the ACA are sustained. Key take aways:

  • The ACA provisions to constrain spending were significant, but not enough to “to prevent an unsustainable increase in debt held by the public.”
  • Of the payment reforms and cost containment measures initiated by the ACA “it is too early to know which will result in lasting changes and what effect they will have on future federal spending."
  • “Reducing health care cost growth alone, however, is not sufficient to put the federal budget on a sustainable path. Even in simulations assuming health care cost growth can be constrained for an extended period, our simulations show debt held by the public rising as a share of GDP over time, particularly assuming historical trends and policy preferences for revenue and other spending continue. Therefore, more needs to be done to change the fiscal path. This will likely require difficult decisions about both federal spending and revenue.”

Source: GAO, “PPACA and the long-term fiscal outlook,” February 2013

Major cost-containment provisions in the ACA (10 years 2010-2019)

ACA Section Provision Projected cost savings when law was passed (2010-2019) Year cost savings were projected to begin (calendar year)
3401 Annual market basket updates reduced for providers; adjustment in 2012 $205 billion 2010
6411 Expansion of Recovery Audit Contractor (RAC) program $740 million 2010
4105 Evidence-based coverage of preventive services
$1.8 billion 2010
6407 Face to face encounters with patient required before physician may certify for durable medical equipment (DME) $2.3 billion 2010
1303 CMS-IRS Data Match to Find Fraudulent Providers $820 million 2012
3403 Independent Payment Advisory Board (IPAB) $23.7 billion 2013
3021 Establishment of Center for Medicare and Medicaid Innovation within CMS to improve coordination of services for beneficiaries $10 billion invested; projected to produce return on investment (ROI) over time  --
2702 Medicaid payment reductions for provider-preventable conditions $46 million 2010
3025 Reduces Medicare acute inpatient hospital payments for potentially avoidable readmissions $8.2 billion 2012
3022 Medicare Shared Savings Program enacted to promote to promote efficient care delivery (e.g., Accountable Care Organizations) $5 billion  2012
3023 National pilot on payment bundling to improve quality, coordination and efficiency of care Projected to produce ROI over time --
3001 Hospital value-based purchasing Projected to produce ROI over time --
3201 Reduction in reimbursement to Medicare Advantage plans $145 billion 2010

Sources: CMS, “ACA Update: Implementing Medicare Cost Savings” and CMS Office of the Actuary, “Estimated Financial Effects of the Patient Protection and Affordable Care Act as Amended,” 2010),

State update

OIG survey: one in four states says it’s not likely to be ready to confirm eligibility and enroll individuals and small businesses in HIXs

The HHS Office of the Inspector General (OIG) surveyed states to assess their “readiness to implement streamlined eligibility and enrollment systems” by January 1, 2014. The bottom line: based on self-reported preparedness, 35 states are prepared to meet all requirements. Findings:

Type of requirement to be met by January 1, 2014 Yes No No Response
States that anticipate having systems that meet requirements related to eligibility and enrollment systems 38 5 8
States that anticipate having application forms that meet requirements 40  2 9
States that anticipate implementing all eligibility data sharing and matching requirements 37 5  9
States that anticipate having secure electronic interfaces that meet requirements 37 5 9
States that anticipate having data sharing and matching agreements that meet requirements 40  2  9
States that anticipate implementing streamlined eligibility and enrollment systems, streamlined application forms, and data sharing and matching 35 9 7

Source: OIG, “Most states anticipated implementing streamlined eligibility and enrollment by 2014,” February 2013

State round-up: HIX

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 a partnership exchange with HHS. The remaining 26 states will default to a federally-facilitated exchange. 

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

Medicaid expansion update

25 states and D.C. have said they will expand their Medicaid programs; 16 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

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 3, 2013) and is subject to change.

Recent Medicaid announcements:

  • New Jersey Governor Chris Christie (R) announced his support of Medicaid expansion becoming the 7th Republican Governor to announce support of expansion.
  • Arkansas Governor Mike Beebe (D) announced and HHS indicated they will approve a proposal whereby the state may use federal Medicaid expansion funds to allow new enrollees to purchase private health insurance coverage through the HIX. Additionally, it gives the state legislature discretion to change the plan before the state bears any cost. The GOP controlled state legislature still needs to approve the expansion.
    Note: in a proposed rule issued earlier this year, CMS stated: “states can use federal and state Medicaid and CHIP funds to deliver Medicaid and CHIP coverage through the purchase of private health insurance through plans in the individual market, which in 2014, would include QHPs available through the Exchange.”
  • Oregon Governor John Kitzhaber (D), an emergency physician by training, announced a proposal to target low income Medicaid populations using 15 managed care organizations with incentives for improved outcomes and lower costs.

State round-up

  • Thursday, the Arkansas legislature passed the Human Heartbeat Protection Act, a ban on abortions after 12 weeks. Earlier this week, Arkansas’s Govern Mike Beebe (D) vetoed a bill prohibiting abortions after the 20th week of pregnancy prompting the former legislation. Both the Senate and House overturned the veto allowing it to become law.
  • Texas Senate Health and Human Services Committee heard testimony on a bill sponsored by Senator Jane Nelson (R) Tuesday that would expand Medicaid managed care over a seven year period. The bill would also establish a pilot program, which will try to cap costs and monitor services more efficiently.

Industry news

AHIP: proposed cuts by CMS will increase Medicare Part C premiums for seniors by $50-90 per month

America’s Health Insurance Plans (AHIP) is opposing CMS’ 2.3 percent cuts to Medicare Advantage (MA) plans proposed by CMS two weeks ago. In its press release, AHIP stated: “seniors and people with disabilities enrolled in MA plans will face higher premiums, reduced benefits, and loss of coverage options if new Medicare Advantage cuts proposed by CMS that take effect next year.” AHIP commissioned a study that concluded the proposed cuts, in addition to the $145 to $200 billion cuts to MA plans enacted by the ACA, “will result in benefit reductions and premium increases of an average $50 to $90 per month for a typical MA beneficiary next year.”

My take: MA plans, or Part C plans, are popular among seniors because they help them navigate the health care system, coordinating their medications, physicians and hospital utilization, while adding wellness programs that encourage prevention and avoidance of acute events. It would seem MA is a prototype for Medicare reforms intended to reduce costs while improving outcomes, based on the high levels of satisfaction and safety scores, and lower costs reported by most Part C plans.

Related: Senator Hatch (R-UT), Representative Fred Upton (R-MI) and Representative Dave Camp (R-MI) sent CMS a letter last week detailing their concerns about MA cuts stating: “while the Obama Administration has expressed its support for the MA program growth in the past and taken credit for increased enrollment during the demonstration period, we are concerned that cuts contained in the President’s health law and administrative policies are undermining that stated goal.” In the letter, the Congressman requested that CMS justify the methodology used to reduce MA payments by March 15, 2013.

AMA and McKesson announce collaboration to track molecular diagnostic tests

The American Medical Association (AMA) and McKesson Corporation announced their collaborative effort to develop “a consistent and transparent way to identify and track molecular diagnostic (MDx) tests. Under the agreement, McKesson Z-Code Identifiers will be grouped and indexed with the corresponding molecular pathology codes in the AMA’s Current Procedural Terminology (CPT) code set.” The goal is to support advanced diagnostics innovation through helping the health care industry understand the growth in MDx tests. According to the joint press release issued by the AMA and McKesson: “MDx is the fastest growing sector for clinical pathology lab testing, with revenues expected to reach $6.2 billion by 2014 and a projected compound annual growth rate of more than 11 percent.”

Excise tax on medical devices

Last week, the Healthcare Supply Chain Association published a list of 48 medical supply and device companies that plan to pass the 2.3 percent medical device tax onto providers. Most companies have already increased their prices or have added the cost to the product invoices.

Background: effective January 1, 2013 per Section 9009 of the ACA a 2.3 percent medical device tax is applied to all U.S. sales.

Biotech manufacturers cautious about biosimilar drug market entry

Biotech manufacturers have delayed or halted many biosimilarity efforts due to patent protections, legal action by branded drug manufacturers, difficulty replicating drugs, and outstanding FDA regulations for the sale of biologics. The FDA recently issued three draft guidance documents to assist biosimilar manufacturers, but as of January, of 2013, it had received only 13 applications from companies planning to conduct clinical trials. Recent reports have also highlighted a new source of concern to the biotech industry: 13 state legislatures (Arizona, Arkansas, Colorado, Florida, Indiana, Maryland, Massachusetts, North Dakota, Oregon, Pennsylvania, Texas, Virginia, and Washington) are considering bills to allow interchangeable biosimilar substitution by pharmacies and prescribing physicians.

Background: according to the FDA, a biosimilar “is a biological product that is highly similar to a U.S.-licensed reference biological product notwithstanding minor differences in clinically inactive components, and for which there are no clinically meaningful differences between the biological product and the reference product in terms of the safety, purity, and potency of the product.” Section 7002 of the ACA established an abbreviated licensure pathway for biological products that are demonstrated to be “biosimilar” to or “interchangeable” with an FDA-licensed biological product. Under this new law, a biological product may be demonstrated to be “biosimilar” if data show that, among other things, the product is “highly similar” to an already-approved biological product.

Study: mental health service utilization, costs increasing

The Health Care Cost Institute (HCCI) examined the impact of the Mental Health Parity and Addiction Equity Act (MHPAEA) of 2008, on spending, utilization, prices, and out-of-pocket payments for mental health and substance use inpatient admissions between 2007 and 2011. Findings:

  • Admissions: mental health admissions per 1,000 insured individuals increased from 2.4 in 2009 to 2.7 in 2011; substance abuse admissions per 1,000 insured individuals increased from 1.0 in 2009 to 1.4 in 2011
  • Length of stay (LOS): mental health admission: 6.1 in 2007 vs. 7.3 days in 2011; substance abuse admission: 6.9 days in 2007 vs. 8 days in 2011; medical/surgical: 3.9 days in 2007 vs. 4.1 days in 2011
  • Cost: mental health admission: $6,652 in 2009 vs. $7,842 in 2011; substance abuse admission: $6,174 in 2009 vs. $7,230 in 2011; medical/surgical admission: $17,462 in 2009 vs. $20,103 in 2011
  • Out-of-pocket per capita spending in 2011: mental health admissions: $2.08; substance abuse stays: $1.24; medical surgical admissions: $30.45
  • Insured Individuals share of inpatient per capita spending: mental health admission spending: 11 percent in 2009 vs. 10 percent in 2011; substance abuse admission: 13 percent in 2009 vs. 12 percent in 2011; medical surgical: 4 percent in 2009 & 2011

Note: the role of MHPAEA in these findings is not clear.

Source: HCCI, “The impact of the Mental Health Parity and Addiction Equity Act on Inpatient Admissions, February 2013

Background: MHPAEA requires medical and mental health benefits to be provided at parity―requiring an insurance plan cover physical and mental health benefits both benefits at the same level. To date, HHS has not issued a final regulation, but has issued interim guidance to support implementation. A final rule is expected this year.

Research snapshots

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

Nurse practitioners role in reducing primary care shortage

Objective: to determine how increasing the scope-of-practice for nurse practitioners (NPs) would alleviate primary-care provider shortages.

Methodology: researchers analyzed scope-of-practice laws in six states— Arkansas, Arizona, Indiana, Maryland, Massachusetts, and Michigan to measure physician supervision activities and requirements and how supervision impacts care. Interviews were conducted with NPs, practice managers, and physicians.

Key findings: “scope-of-practice laws in and of themselves don't appear to limit what primary-care services patients can receive from nurse practitioners, but requirements for documented physician supervision do appear to impact where and how NPs can practice.” The research team concluded health insurance payment policies were more influential in scope of practice than state legislative requirements: in Arkansas and Indiana, stricter physician supervision of NPs is more common among third-party carriers than other states.

Source: Tracy Yee, Ellyn R. Boukus, Dori Cross, and Divya R. Samuel, “Primary Care Workforce Shortages: Nurse Practitioner Scope-of-Practice Laws and Payment Policies,” National Institute for Health Care Reform, NIHCR Research Brief No. 13, February 2013

My take: managing demand for effective primary care services, not the role of nurse practitioners and/or physicians in primary care practices, should be the national discussion. It’s not about the numbers of physicians or NPs, but how technologies, incentives from employers and plans, and behavioral economics can be leveraged to better equip individuals and groups to manage their health. Guided self-care management should be the goal and a broader definition of primary care services implemented that is inclusive of nutritionists, psychologists, dentists, ophthalmologists, alternative health and traditional western providers…including MDs, DOs, APNs and NPs.

Psychiatric disorders linked genetically

Objective: findings from family and twin studies suggest that genetic contributions to psychiatric disorders do not in all cases map to present diagnostic categories. “We aimed to identify specific variants underlying genetic effects shared between the five disorders in the Psychiatric Genomics Consortium: autism spectrum disorder, attention deficit-hyperactivity disorder, bipolar disorder, major depressive disorder, and schizophrenia.”

Methodology: analysis of genome-wide single-nucleotide polymorphism (SNP) data for five disorders in 33,332 cases and 27,888 controls of European ancestry.

Key findings: four risk loci were identified as having significant and overlapping links with five major psychiatric disorders, after genome scanning of 33,332 patients and 27,888 controls in the largest ever genetic study of psychiatric illness. “Our findings show that specific SNPs are associated with a range of psychiatric disorders of childhood onset or adult onset. In particular, variation in calcium-channel activity genes seems to have pleiotropic effects on psychopathology. These results provide evidence relevant to the goal of moving beyond descriptive syndromes in psychiatry, and towards a nosology informed by disease cause.”

Source: Cross-Disorder Group of the Psychiatric Genomics Consortium “Identification of risk loci with shared effects on five major psychiatric disorders: a genome-wide analysis “ The Lancet, February 28, 2013 (Volume 381, Number 9868, p.699 – 776)

My take: the convergence of physical medicine and mental health is particularly salient as policymakers and insurance sponsors grapple with coverage policies. Increasingly the integration of the two is necessary, and the science helpful in diagnosing, treating and managing health co-dependents.


“Hospitals and health insurers are locking horns over how much health providers will get paid under new insurance plans that will be sold as the new federal health law is rolled out…The upshot: many plans sold on the exchanges will include smaller choices of health providers in an effort to bring down premiums.”

— Anna Wilde Matthews and Jon Kamp, “Health Law Pricing Begins to Take Shape,” Wall Street Journal, March 1, 2013

“…the big picture looks like this: We’re likely to spend $2.8 trillion this year on health care. That $2.8 trillion is likely to be $750 billion, or 27 percent, more than we would spend if we spent the same per capita as other developed countries, even after adjusting for the relatively high per capita income in the U.S. vs. those other countries. Of the total $2.8 trillion that will be spent on health care, about $800 billion will be paid by the federal government through the Medicare insurance program for the disabled and those 65 and older and the Medicaid program, which provides care for the poor. That $800 billion, which keeps rising far faster than inflation and the gross domestic product, is what’s driving the federal deficit. The other $2 trillion will be paid mostly by private health-insurance companies and individuals who have no insurance or who will pay some portion of the bills covered by their insurance. This is what’s increasingly burdening businesses that pay for their employees’ health insurance and forcing individuals to pay so much in out-of-pocket expenses.”

— Steven Brill, “Bitter Pill: Why Medical Bills Are Killing Us,” Time, February 26, 2013

“Pharmacy chains are branching out into health-care services, as a way to counter a slowdown in prescription drug sales and evolve beyond just dispensing pills... Drugstore chains see big opportunities as millions of uninsured Americans pick up health coverage next year. But the upside to pharmacies isn't found in dispensing more prescription drugs to a broader array of people. It's in making sure current patients stay on their medications or providing alternative venues for medical treatment, even if it is done virtually.”

—Timothy Martin, “Pharmacy Chains Push Into Health Care,” Wall Street Journal, February 28, 2013

Fact file

  • Public opinion about sequester: 39 percent favor a plan with more cuts, 37 percent want a plan with fewer cuts, 10 percent are not sure, and 14 percent are ok with the current automatic cuts. (Source: WSJ/NBC News poll of 1000 adults February 21-24, 2013)
  • Employment based coverage: individuals with insurance through an employer dropped from 64.4 percent in 1996 to 56.5 percent in 2010; half of individuals under 138 percent of the federal poverty level (FPL) have insurance through an employer; 71.1 percent of workers have employers offering insurance benefits. 42.9 percent of high school graduates and 78.9 percent of college graduates work for employers providing health insurance. 60 percent of workers age 19-25 and 75.7 percent of employees age 45-64 are provided with benefits. 68.7 percent of employers providing benefits offer coverage for spouses. 37.6 percent of employers offering benefits with 0-24 workers offer multiple plans when compared to 65.6 percent of companies with 1,0000+ employees. 50 percent of employees forgo coverage by choice. 1.1 percent is denied coverage. 66.4 percent forgoing insurance have benefits through other individual, while 27.4 percent decline due to cost. (Source: U.S. Department of Commerce, “Employment-Based Health Insurance: 2010,” February 2013)
  • Analytics jobs: there were 28,305 postings for jobs in statistics and analytics last month vs. 16,500 three years ago; U.S. colleges and universities conferred 3,000 bachelors, masters and doctorates in statistics in 2011 with increases of 68 percent, 37 percent and 27 percent vs. three years prior. (Source:; National Center for Education Statistics)
  • Avoidable readmissions: 30 day post-acute readmissions for Medicare enrollees dropped from 19 percent in 2008 to 17.8 percent in 2012; annual Medicare per capita expenditures decreased from 1.9 percent to .4 percent in the same period. (Source: CMS Report to the Senate Finance Committee Thursday, February 28, 2013)
  • Dementia: in the U.S., 5.4 million people suffer from dementia—projected to increase twofold by 2050. (Source: Wall Street Journal, “New Push for Early Testing, Treatment for Dementia,” February 25, 2013)
  • Retirement: the risk factor for stroke and heart attack for individuals age 50 and above is 40 percent higher for those who had retired, compared with those who remained in the workforce. (Source: Washington Post, “Health effects of retirement have proved hard for researchers to assess,” February 25, 2013)
  • Social media: patient satisfaction and quality of care ratings may be reflected by the “likes” a hospital receives on its Facebook page. (Source: American Journal of Medical Quality)
  • Nursing pay disparity: male nurses earn 16 percent higher than female counterparts; they are 10 percent of the nursing workforce. (Source: Wall Street Journal, “Male Nurses Make More Money,” February 25, 2013)
  • Missed diagnoses: in a study of 190 errors in patient diagnoses, within two weeks, each individual who was misdiagnosed was back in the hospital or returned to the emergency room or doctor’s office. (Source: Reuters News, “Missed diagnoses common in the doctor’s office,” February 25, 2013)
  • Mediterranean diet: following a diet high in virgin-olive-oil, deep sea fish (cod, salmon) and consumption of tree nuts (almonds/walnuts) produces a 30 percent lower risk of heart attack, stroke, or heart disease-related mortality, when compared to a low-fat diet, (Will get original source New England Journal of Medicine. (Source: CNN Health, “Mediterranean diet lowers risk of heart attack, stroke,” February 25, 2013)
  • Incidence of high blood pressure: 26.1 percent of Hispanics report having high blood pressure and 30.4 percent were not taking any form of medication for treatment. (Source: CDC Newsroom, “Million Hearts Releases New Spanish-Language Resources on Heart Health,” February 20, 2013)
  • Male breast cancer: 2,240 breast cancer cases vs. 232,000 cases diagnosed in women annually in the U.S. (Source: The Washington Post, “Because male breast cancer is rare, many cases aren’t caught till later states,” February 25, 2013)
  • Global sales of biologics: $157 billion in 2011--$200 billion by 2016. (Source: Wall Street Journal, “Biotech drugs still won’t copy,” February 26, 2013)
  • Medicare per-capita spending: $7,734 in Minneapolis vs. $11,646 in Chicago. (Source: New York Times, “Medicare needs fixing, but not right now,” February 26, 2013 )

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