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Health Care Reform Memo: December 6, 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 

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

Walter Lippmann, the celebrated journalist of the 1920s, said “when all think alike, no one thinks very much.” I am struck that current debate about public education reform mirrors our current journey in health. In defending charter schools and performance-based compensation for teachers, retiring New York City Education Chancellor Commissioner Joel Klein said “traditional proposals for improving education—more money, better curriculum, smaller classes, etc.—aren't going to get the job done. Public education is a service-delivery challenge, and it must be operated as such. Changing the system wasn't easy. The people with the loudest and best-funded voices are committed to maintaining a status quo that protects their needs, even if it doesn't work for children.” Substitute health care for education.

Last month, two national commissions—the Bipartisan Policy Committee and the National Commission on Fiscal Responsibility and Reform—reported their assessment on health care spending. The health system’s costs are not sustainable. A goal of reducing the rate of health spending to 1 percent above the annual gross domestic product (GDP) by the end of the decade is the common thread of the two reports.

Whether the Patient Protection and Affordability Care Act (PPACA) is repealed, replaced, corrected, cherry-picked, or fully implemented, the reality is the health care industry must address its costs head-on. At 7 percent per year overall, and 8.4 percent of late for Medicare, the spend spiral threatens the solvency of the U.S. Health costs are 23 percent of the federal budget, 21 percent of the average state’s budget and 16 percent of total discretionary spending in the average U.S. household—the fastest growing line item in all three.

It’s customary for each sector to look to the inefficiencies and blame the other. Physicians see too much red tape, too many “suits” and the suggestion to balance costs and quality an intrusion unless the profession alone sets the rules. Health plans think hospitals and doctors wildly inefficient and ineffective in holding down costs. Hospitals and some policymakers think the value proposition of health plans marginal while medical device, pharmaceutical and biotech companies duck from the crossfire and hope volume gains offset margin losses. Employers rail against costs without understanding they’re complicit via counter-productive employee benefits designs, and consumers are clueless, confused, and confounded by health costs.

I am struck that the new faces on the hill entering next month face an enormous expectation. Many promised to cut government spending. Most promised to end Washington “business as usual”. Perhaps a rational, non-partisan national discussion about health costs and the system it currently affords is a necessary next step. Ours is a system perfectly designed to get the results it has gotten thus far. Is it the system we can afford going forward? And is the value of the system commensurate with its costs? Let the discussion begin afresh. It’s not about bad people; it’s about a flawed system.

Paul Keckely

Paul Keckley, Ph.D.

Deficit commission “Moment of Truth” plan released, fails to get needed support in critical vote

Wednesday, the National Commission on Fiscal Responsibility and Reform released its 59-page proposal “The Moment of Truth”, targeting $3.885 trillion in deficit reduction by 2020 reducing the annual deficit to 2.3 percent of GDP by 2015. It would cut federal employment ten percent, overhaul the tax code, eliminate $1.1 trillion tax breaks, simplify and lower tax rates, reduce mortgage interest deductions, cap government revenue at 21 percent of GDP and reduce debt to 40 percent of GDP by 2035. The Moment of Truth would repeal the Community Living Assistance Services and Support (CLASS) act provisions of PPACA, extend the age of eligibility for Medicare, and reduce Social Security and Medicare benefits over time.

Friday, this plan failed to get the required 14 votes (of the 18 members of the commission) to convey the report to Congress and the White House. The President issued this statement Friday after receiving the Commission vote tally: “…The Commission's majority report includes a number of specific proposals that I—along with my economic team—will study closely in the coming weeks as we develop our budget and our priorities for the coming year.”

ACO guidance from CMS

At the National Committee for Quality Assurance policy conference last week, officials from the Center for Medicare & Medicaid Services (CMS) provided an update about pending regulations for accountable care organizations (ACOs), including:

  • ACOs should be structured to assume risk eventually. CMS officials said the ACO final rules next month will allow for multiple structures with the goal that ACOs go beyond shared savings models to assumption of risk.
  • ACOs will be responsible for communicating to Medicare beneficiaries the nature of the ACO’s relationship with Medicare: transparency, ongoing education of beneficiaries will play a key role in ACO coordination of care activities.

MedPAC offers guidance for home health, inpatient-outpatient rates for FY2012

As it prepares for its January 13-14 meeting, the Medicare Payment Advisory Board (MedPAC) provided guidance on the recommendations it is likely to give Congress next year at its meetings:

  • Home health: MedPAC will recommend revamping Medicare's method of paying for the home health benefit, including instituting first-time copayments for some beneficiaries, eliminating the 2012 market basket payment update. This would start a two-year rebasing of home health rates in 2012 instead of 2014 as assumed in PPACA. The recommendations also include revisions to the home health case-mix system to rely on patient characteristics to set payments for therapy and non-therapy services, and suspension of use the number of therapy visits as a payment factor. Note: two major trends were noted in the MedPAC home health analysis:
    • Since 2002, the majority of home health beneficiaries has changed from those discharged from hospitals to those admitted from a community-based setting, and
    • Access to home health services has substantially improved—99 percent of the eligible population is served by one or more agencies currently. The report noted that Medicare margins for home health are currently 17.5 percent. The commission is considering recommending that Congress establish a fixed, per-episode copayment for beneficiaries other than dual eligibles—those covered under both Medicare and Medicaid.
  • Inpatient and outpatient hospital rates: Thursday, MedPAC recommended a full "market basket" update of 2.6 percent for FY 2012 for inpatient hospital payments, with a 1.6 percent point reduction to account for overpayments due to documentation and coding improvement (DCI), for a final update of 1.0 percent. It also recommended a 1.0 percent update for outpatient hospital and physician payments but did not recommend applying both the coding offset and the productivity adjustment to hospital payments.

Update: President signs 31-day physician payment fix

Tuesday, President Obama signed the Physician Payment and Therapy Relief Act of 2010, delaying the scheduled 23.2 percent cut and extending the 2.2 percent increase to Medicare reimbursement for doctors by one month (December 1 through December 31). The one-month payment extension will cost approximately $1 billion paid for by cutting reimbursement for physical therapy services. The new law also avoided a scheduled cut to TRICARE providers, who are also paid with the sustainable growth rate (SGR) model.

Beginning January 1, 2011, Medicare payments for doctors will be cut by 24.9 percent, as required under the SGR model, unless legislation addressing physician payments is passed. Starting in 2014, the Independent Payment Advisory Board will assume control of physician payments.

Secretary of Defense considers increasing TRICARE fees

To contain military health care costs, U.S. Defense Secretary Robert Gates is considering a proposal to increase TRICARE fees in next year’s U.S. Department of Defense’s (DOD) budget. Gates, who recently met with leaders of President Obama’s non-partisan deficit reduction commission which proposed raising TRICARE fees, included proposals to increase TRICARE fees for military retirees in three of his past four defense budgets. Fees have not been raised since 1995.

Note: TRICARE provides care for almost ten million eligible beneficiaries. This number is expected to grow as more military retirees and their families seek health care through the DOD due to rising private health care costs. According to the DOD, total health care costs for the Pentagon, the nation’s single largest employer, were more than $50 billion last year and are expected to increase to $65 billion by 2015. Health costs represent ten percent of the total defense budget today.

Senate passes Food Safety Act

Tuesday, the Senate passed the U.S. Food and Drug Administration (FDA) Food Safety Modernization Act, by a 73-25 vote. The U.S. House of Representatives supported a different version of the bill in July 2009. The Act expands FDA oversight over food safety, including the ability to recall food if a company does not do so voluntarily and increase food inspections at certain processing plants.

Constitutional challenges to PPACA: update

Tuesday, a federal judge in Virginia dismissed a constitutional challenge to PPACA’s individual mandate brought by Liberty University, a Virginia state lawmaker, and four individuals. The Western District of Virginia judge ruled that PPACA’s individual mandate provision did not violate the Commerce Clause of the Constitution; the judge also ruled that PPACA’s requirement for large employers to provide insurance is Constitutional. Along with a recent ruling in Michigan, the Virginia decision is the second judicial ruling supporting the Constitutionality of PPACA’s individual mandate. A pending decision in Florida filed by 20 states challenging the individual mandate is the most closely watched.

House Energy and Commerce Committee requests Berwick testimony

Monday, Rep. Barton (R-TX), Ranking Member of the U.S. House Energy and Commerce Committee, sent a letter to CMS Administrator Donald Berwick asking him to personally brief members of the Committee on PPACA and his work at CMS. Last week, Berwick appeared before the Senate Finance Committee, his first testimony on the hill as CMS director.

House Judiciary Committee hearing on anti-trust and health reform

Wednesday, the U.S. House Judiciary Committee held a hearing on the effects of anti-trust laws on health providers, plans, and patients. The hearing focused on anti-trust issues, especially those related to ACOs. Officials from the Department of Justice and the Federal Trade Commission testified that their agencies are developing guidelines and rules to help providers form ACOs without violating existing anti-trust laws. Other testimony by the American Hospital Association (AHA) and a senior fellow at the Center for American Progress Action Fund recommended that guidelines address clinical integration and opportunities for providers to collaborate.

IRS seeks comment about excise tax on retail medical devices

Friday, the Internal Revenue Service (IRS) and Treasury Department issued a request for comments about issues to be addressed in implementing new excise taxes on medical devices under tax code Section 4191. The IRS’s focus is specifically exemptions for medical devices available to the general public for retail purchase and personal use, i.e. home monitoring and self-care devices, etc. Section 4191 is in the Health Care and Education Reconciliation Act of 2010, in conjunction with PPACA. The new excise taxes on medical devices apply to sales of taxable medical devices after December 31, 2012. Comments must be submitted by March 3, 2011.

Deloitte Tax: Recap of health care tax related news from last week

  • Senate failed to pass repeal of 1099 reporting requirements. On November 29, the Senate defeated two competing amendments that would repeal the 1099 reporting requirements imposed in the health care reform bill. While there is general consensus in Congress that the provision should be repealed, lawmakers have disagreed on how to pay for the gap in revenue that would arise. An amendment offered by Sen. Mike Johanns (R-NE), that requires the Office of Management and Budget (OMB) to find unobligated federal funds to replace the money the 1099 requirement would have raised, was defeated 61-35 (67 votes were needed for approval). An amendment offered by Finance Chairman Max Baucus (D-MT), which did not specify offsets, was defeated 44-53.
  • Health Care Tax Credit for Small Employers. The IRS on December 2 issued guidance related to the section 45R health care tax credit for small employers. The guidance addresses questions about which small employers qualify for the credit.
  • Annual Fee on Prescription Drug Makers, Importers. On November 29, the IRS released guidance on the annual fee imposed on covered entities engaged in the business of manufacturing or importing branded prescription drugs by PPACA Sec. 9008, as amended by section 1404 of the Health Care and Education Reconciliation Act of 2010.

For more information about tax implications of PPACA and various health reform topics, contact the Deloitte Tax Policy Group.

HIT update

  • CMS establishes the Medicare and Medicaid Electronic Health Record Incentive Program National Level Repository System: CMS published a notice announcing the establishment of a new system of records, “Medicare and Medicaid Electronic Health Record (EHR) Incentive Program National Level Repository (NLR)”. The primary purpose of the NLR system is to collect, maintain, and process information that is required for the Medicare and Medicaid Electronic Health Record Incentive Program, enacted under the American Recovery and Reinvestment Act of 2009 (ARRA). CMS will accept comments on the proposed use of the NLR system through December 29.
  • First models of National Health Information Network released: The Direct Project, a national health information network (NHIN) by the Office of the National Coordinator for Health Information Technology (ONC), released its first version of a framework of tools and services to enable health record exchanges between providers through secure messaging. The project, formerly named NHIN Direct, has attracted support from 23 health information technology (HIT) vendors.

State watch

Note: PPACA puts enormous responsibility on states to expand Medicaid enrollment, create and operate health insurance exchanges, manage state employee and retiree health benefits, facilitate implementation of health information exchanges, and oversee substantial public health and delivery system transformations. States face huge deficits—$41-55 billion on operating income of $636 billion for the current fiscal year per the National Association of State Budget Officers, and budgetary shortfalls are especially acute in states where in economic recovery is not evident to date. Given the significance of state responsibilities in PPACA, states are positioned to be the epicenter for its implementation and the originator of significant waiver requests to the Secretary of HHS.

  • Wyoming Gov. Dave Freudenthal (D) approved an operating plan for a state-funded, limited health insurance program on Tuesday that will begin enrollment in 2011. The program, Healthy Frontiers, will provide limited benefits, with a focus on primary and preventive care, to individuals working at least 20 hours per week and earning less than 200 percent of the federal poverty level (FPL). To be eligible, residents must participate or have participated in Job Assist, a state job training program. The plan is intended to provide an alternative to Medicaid, which provides coverage to over ten percent of Wyoming’s residents. The plan will be administered by Blue Cross/Blue Shield.
  • Indiana: The Secretary of the state’s Family and Social Services Administration requested an additional $900 million in state funding over two years beginning July 1, 2011, and recommended reducing some optional services currently provided to control costs.
  • Washington: State Insurance Commissioner Mike Kreidler is requesting state permission to include surplus and investment income in rate reviews for non-profit insurers currently prohibited in the state. Kreidler hopes to remove the 2011 deadline of his authority to review rate increases, prohibit rate hikes after insurers build up a surplus equal to three months of claims expenditures, and provide transparency around rate hikes to consumers.
  • Kaiser study: States’ abilities to regulate insurance premiums highly variable: A recent Kaiser Family Foundation study examined laws in all 50 states and interviewed state department of insurance leaders in ten to assess preparedness of states to implement health insurance premium oversight provisions of PPACA. The study conclusions were:
    • A state’s statutory authority often tells little about how rate review is actually conducted in the state… The rigor and thoroughness that states bring to rate review can vary widely, and some states had little express statutory authority to disapprove rates prior to their use.
    • In many cases, statutory authority to disapprove rates does not extend to all market participants. A number of states only require certain carriers to undergo rate review and exempt other commercial carriers.
    • Most states interviewed use a subjective standard to guide the review and approval of rates. Common standards are that rates cannot be “excessive, inadequate, or unfairly discriminatory,” or that “benefits are reasonable in relation to premiums charged.”
    • Most of the states interviewed have made little or no effort to make rate filings transparent. Generally, states require the public to physically visit the department of insurance to access the documents in a rate filing. And many states allow carriers to designate some portions of the rate filing to be “trade secret” and thus not available to the public.
    • Many states lack the capacity and resources to conduct an adequate review. Many states do not have a sufficient number of trained actuaries to review all filed rates. In addition, statutory clauses that deem a rate approved if it is not acted on within 30 or 60 days can limit a state’s ability to conduct a thorough review.

(Source: Kaiser Family Foundation. December 2010 “Rate Review: Spotlight on State Efforts to Make Health Insurance More Affordable.”)

Business Roundtable study: U.S. health system slowly gaining value, still costly

Tuesday, the Business Roundtable released its latest analysis of the comparative value of G-5 health systems (France, Germany, Canada, U.S., and Japan), noting:

  • The U.S. system improved its performance in smoking cessation and hospital error reduction
  • The U.S. leads the G-5 nations in controlling systolic blood pressure but lags in obesity management
  • The U.S. gained 3.4 points in overall value trailing the G-5 by 1.6 points on broad measures of health care quality and health in the past year
  • The U.S. lags in adult life expectancy at birth and is the most costly system of the G-5.

Note: The Business Roundtable represents CEOs of large U.S. based companies.

Obama proposes two-year pay freeze for civilian employees

President Obama proposed a two-year pay freeze for civilian federal employees. According to the U.S. Bureau of Labor Statistics (BLS), there are approximately 27,000 civilian physicians and surgeons, all of whom could be subjected to the pay freeze. The Veterans Administration Health Care Workforce, which employs about 16,000 physicians and over 7,000 nurses, could be significantly impacted. The two-year pay freeze will save $2 billion for the remainder of FY 2011, $28 billion over the next five years, and more than $60 billion over the next ten years.


“CMS does not see an ACO as an organization coming into the program to simply roll the dice and to try to earn shared savings.”

 - Jonathan Blum, Deputy Administrator and Director of Medicare at CMS, at the annual policy conference of the National Committee for Quality Assurance Friday, December 3.

“For now, everyone in the House and Senate knows the facts. They know that if they run for office saying, "We have to cut now!" they will be elected. But if they add a second sentence—‘We have to focus on where the money is, the entitlements’—they will probably be politically done for.”

 - Peggy Noonan “A New Start in Washington”. Wall Street Journal Editorial December 4, 2010.

“I am very pleased to say that the days of these mini med plans are numbered. The new health care reform law is slowly putting an end to health plans that place caps on essential health services.” - Sen. Jay Rockefeller’s (D-WV) opening statement during the Senate hearing on mini-med plans last week.
“If you look past the next eight to ten years, Medicare is the deficit problem... And there's simply no way we can address our fiscal problems without coming to terms with Medicare's future.”

 - Douglas Holtz-Eakin, former Director, Congressional Budget Office.

Fact file

  • 2010 electorate self-described political philosophy: 42 percent called themselves “conservative”, 29 percent ‘independent”, 20 percent “liberal” and 9 percent had other descriptions. (Source: Gallup)
  • The Federal Employee Health Benefits Plan (FEHBP) is available to 2.6 million federal employees and offers 243 plan options. Annual premium increases were 7.8 percent from 1975-2009. (Source: OMB)
  • Employment update: the private sector added 39,000 jobs last month—19,000 in health care, 8,000 in hospitals. The November total is down from a gain of 172,000 in October. Unemployment increased from 9.6 percent to 9.8 percent, 15 million people are out of work; 6.3 million jobless for six months or longer. (Source: U.S. Bureau of Labor and Statistics)
  • In 2008, 62 percent of drugs paid for by Medicaid payments ($17.8 billion/75 percent of Medicaid total drug costs) were FDA approved; the remaining 38 percent of scripts representing 25 percent of Medicaid drug costs were for drugs not listed in the National Drug Code Directory. (Source: Office of the Inspector General)
  • 62.2 percent of U.S. pharmacy dispensing revenues in 2010 was from six major retailers: CVS Caremark, Walgreens, Medco Health Solutions, Rite-Aid, Walmart, and Express Scripts. (Source: 2010-11 Economic Report on Retail and Specialty Pharmacies)
  • Between 2003 and 2009, total family premiums for employer-sponsored plans increased 41 percent and individual plan deductibles increased 80 percent in both small and large firms (Source: The Commonwealth Fund)
  • A 65-year-old woman retiring this year will need to have $143,000-$242,000 to cover health insurance premiums and out-of-pocket expenses in retirement. Due to a shorter life expectancy, a 65-year-old man retiring this year would need $124,000- $211,000. (Source: Employee Benefit Research Institute Report, November 30, 2010)
  • Pharmacists’ participation in patient care was associated with a nearly 50 percent decrease in adverse drug reactions, fewer medication errors, improved patient compliance with drug regimens, and higher overall quality of life scores. (Source: Chisholm-Burns, M.A., et al. October 2010. U.S. Pharmacists' effect as team members on patient care: systematic review and meta-analyses. Medicare Care, 40; 10.)
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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