Health Care Reform Memo: July 5, 2011
Deloitte Center for Health Solutions publication
The health care reform memos are issued on a weekly basis, highlighting news from the previous week's activities in the administration and implications for the C-suite and various stakeholder groups.
From Paul Keckley, Executive Director, Deloitte Center for Health Solutions
Like more than half of all Americans, I take medications daily or at least I try. Sometimes I forget—on those days, I hope the half-life of my meds works at least until I resume the regimen.
The biopharma market in the U.S. is a big deal—11 percent of total spending, almost $300 billion annually and increasing fast as boomers age and new therapies enter the market. Its research and development (R&D) investment last year was $65 billion with an additional $30 billion spent by the National Institutes of Health (NIH) in basic science research.
The future is bright for biopharma, at least in terms of the promises of science and personalized medicine. The typical biotechnology firm has five products in development, with a lead product in Phase II clinical trials, a secondary product in Phase I clinical trials and three in pre-clinical (Source: Biotechnology Industry Organization [BIO]). The numbers are even higher for most pharmaceutical companies.
But the backlog of promising compounds faces a U.S. Food and Drug Administration (FDA) approval process that’s problematic: since 1999, the average length of clinical trials has increased 70 percent up to 15 years in some cases (Source: Tufts). In 2011 to date, the FDA has approved more than 150 new brand name and generic drug product and 18 new molecular entities (new chemical structures that have never been used in clinical practice). But hundreds more await, and the FDA faces cuts at a time when its operational scope has exponentially expanded to include increased oversight of food safety, post-market surveillance of drugs, and new oversight provisions for tobacco and bio-similars.
Last week 12,000 descended on Washington, DC for the annual 2011 BIO international convention where the focus was expansion of opportunities in the U.S. and abroad. 70 percent of the bio industry is private—most companies have 50 or fewer employees. Like the medical device industry, it features many early stage companies with promising innovations that face two hurdles—access to capital, and access to commercial markets via the FDA approval processes.
Understandably, U.S. consumers believe the drugs we use are safe and effective: in the 2011 Deloitte Survey of Health Consumers, 77 percent of prescription medication users say they were “confident in the effectiveness of their medications” and only 21 percent reported switching medications in the past 12 months, despite economic pressures in many households.
To continue to bring new biopharma therapies to the U.S. market, this industry faces unusual challenges—regulatory processes must be accelerated, capital must be accessible, evidence of efficacy and effectiveness more transparent, R&D processes overhauled to improve precision—and the upside for investment in the U.S. market at least as attractive as other economies that compete for these dollars.
I took my meds this morning. I trust they will contribute to an uneventful day where my work routine is resumed and my family protected from a life-altering health event. The biopharma industry does good things—maybe it deserves credit for what didn’t happen to many of us today.
Paul Keckley, Ph.D., Executive Director, Deloitte Center for Health Solutions
Sixth Circuit Court of Appeals to uphold the individual mandate
Wednesday, the Sixth Circuit Court of Appeals ruled 2-1 that the Affordable Care Act’s (ACA’s) individual mandate that requires individuals to obtain insurance in 2014 or pay a penalty is "a valid exercise of Congress's authority under the Commerce Clause." The decision came in the lawsuit filed by the Thomas More Law Center. It is the first federal Court of Appeals to rule on the constitutionality of the ACA.
CMS publishes rule on administrative simplification of electronic health transactions
Friday, the Centers for Medicare & Medicaid Services (CMS) issued an interim final rule to simplify transactions between providers and insurers using electronic records per ACA Sec. 1104, “administrative simplification”. The rule establishes operating rules for electronic health care transactions, making it easier for providers to determine whether a patient is eligible for coverage and the status of a health care claim submitted to a health insurer. According to the U.S. Department of Health and Human Services (HHS), the new rule will save an estimated $12 billion.
APHA report: ACA public health provisions unfunded
June 24, the American Public Health Association (APHA) reported that to date only 11 of 19 ACA public health workforce provisions have received funding, with funding levels substantially lower than authorized levels. The report also notes that the majority of the funding has gone towards the clinical care workforce, not the public health workforce as a whole.
CRS report: president authorized to recess-appoint IPAB members
According to the Congressional Research Service (CRS), President Obama may appoint members to the Independent Payment Advisory Board (IPAB) using his recess appointment authority: “It is possible that [the president] could, in fact, make recess appointments only to those membership slots that are likely to be filled by members of his own party: the three filled in consultation with the Senate majority leader, the three filled in consultation with the House minority leader, and the three filled without consultation. If the President were to make such recess appointments, nine of the 15 member positions would be filled, and this number would be, as noted above, sufficient to provide a quorum for the board to conduct business.” Senator Tom Coburn (R-OK) requested the report.
Note: per ACA Section 3403, IPAB will provide recommendations to reduce Medicare cost growth in particular years where the projected per capita growth rate for Medicare spending per beneficiary exceeds a target growth (based on inflation [2015 to 2019] or the economy [2020 and beyond]). Congress cannot override IPAB recommendations unless it enacts alternate legislation that achieves the same spending target via a different mechanism and passes the alternative in a fast-track legislative process set forth in ACA.
Senators propose plan to reduce Medicare spending
Thursday, Senators Joe Lieberman (I-CT) and Tom Coburn (R-OK) introduced a proposal to save Medicare and save more than $600 billion over ten years, based on reviews of Congressional Budget Office (CBO) estimates. The plan would:
- Replace Medicare’s current complicated cost-sharing requirements with a unified annual deductible and a maximum out-of-pocket limit for all enrollees
- Adjust the eligibility age for Medicare to reflect gains in life expectancy (two months/year for all born in 1949 and after)
- Increase savings in home health industry from productivity adjustments
- Require higher income Americans to pay more out-of-pocket for Medicare
- Limit Medigap coverage of Medicare’s cost sharing
- Phase out Medicare payments for hospital bad debt
- Require higher income Americans to pay more for their share of Medicare Part B and Part D
- Increase the minimum premium to 35 percent of the program’s costs for enrollees
- Three year temporary SGR extension (cost $38 billion) to bring stability to Medicare Physician pay
- Improve Medicare’s ability to combat waste, fraud, and abuse
CMS proposes physician pay formula for 2012
Friday, CMS issued its Medicare Physician Fee Schedule (MPFS) proposal for calendar year (CY) 2012 to avert the 29.5 percent cut per the sustainable growth rate (SGR) formula. The aversion is widely accepted since on ten previous occasions since 2002, Congress has set aside the formula in lieu of payment increases to one million Medicare providers. The proposal Friday included technical corrections, expansion of telehealth services and its misvalued code initiative as mechanisms to avoid the cuts, but provided no estimate of 2012 pay for providers.
Hospital outpatient, ambulatory surgery center, dialysis center oversight changes: CMS proposed rules
Friday, CMS issued proposed rules in three areas:
- For 4,000 hospital outpatient departments (HOPDs) and ambulatory surgical centers (ASCs) beginning Jan. 1, 2012, the proposed rule strengthens the Hospital Value-Based Purchasing (HVBP) Program per ACA, will tie a portion of a hospital’s payment for inpatient stays under the Inpatient Prospective Payment System in fiscal year (FY) 2014 to its performance score on a set of quality measures.
- CMS also proposed a change to the Medicare Electronic Health Record Incentive Program that would allow eligible hospitals and critical access hospitals (CAHs) to report clinical quality measures for 2012 by participating in an electronic reporting pilot.
- In addition, CMS issued a proposed rule that would update Medicare policies and payment rates for 5,304 dialysis facilities paid under a new bundled Prospective Payment System (PPS) that was implemented in CY 2011. The proposed rule covers operations after 2012 strengthening incentives for improved quality of care and better outcomes for beneficiaries diagnosed with end-stage renal disease (ESRD) through proposed improvements to the ESRD Quality Incentive Program (QIP). Note: CMS forecasts that payment rates for Medicare dialysis treatments will increase by 1.8 percent to $8.3 billion in 2012.
CMS: almost 500,000 received 50 percent drug discounts in 2011
Tuesday, CMS reported that 478,272 Medicare beneficiaries who reached the Part D gap in coverage (known as the “donut hole”) received the automatic 50 percent discount on their covered brand-name prescription drugs. Nearly 14 percent of the benefits provided to date, more than $36 million, were for cancer drugs; more than eight percent or $21 million, for drugs to help control high blood pressure and cholesterol; and more than seven percent about $20 million, are for drugs provides to diabetic patients.
Note: ACA Sec. 3301 requires drug manufacturers to provide a 50 percent discount to Part D beneficiaries for brand-name drugs and biologics purchased during the coverage gap beginning January 1, 2011.
Iowa health plans to sell child-only policies for six weeks
Iowa regulators negotiated a compromise with the state health insurers to allow Iowa families to purchase child-only policies from July 1 through August 14.
Note: ACA requires plans that write child-only policies for children under 19 years of age to do so without regard to pre-existing conditions. Given the uncertainty about costs of coverage, some insurance companies chose to exit child-only markets in certain states.
Utah seeks to convert Medicaid contracts into ACO model
July 1, Utah filed a Section 1115 waiver with CMS to convert its Medicaid managed care contracts in the state to an accountable care organization (ACO) model. ACOs would receive monthly risk-adjusted, capitated payments based on enrollment. According to the waiver, “converting these contracts to an accountable care organization contract model can better align financial incentives to control costs and to deliver appropriate care to clients.”
NY law would ban health plan mail-order prescription fills
June 20, the New York Senate approved legislation that would prohibit health plans from requiring that prescription drugs be purchased solely from mail-order pharmacies. Instead, policies providing prescription drug coverage must allow participants to fill prescriptions at an in-network retail pharmacy, if the pharmacy agrees to accept a price comparable to the mail-order price. Plans would also be prohibited from charging a copayment for prescriptions filled at retail pharmacies, unless one was also charged for prescriptions filled through mail order. The state Assembly approved the legislation earlier in June.
Health information exchange allows emergency room access prescription drug history
A regional health information exchange (HIE) in the Washington, D.C. metropolitan area is conducting a pilot allowing emergency department (ED) physicians to access patient prescription drug histories, regardless of where in the U.S. the prescription was issued. The Northern Virginia Regional Health Information Organization (NovaRHIO) launched the pilot in April at a Northern Virginia hospital that converts patient medication histories, including pharmacy point of sale and other pharmacy information into an interface used by the emergency department. The HIE is working to create a statewide network and plans to provide its medication history service for EDs to other health providers. NovaRHIO is partially funded by the Commonwealth Foundation.
Minnesota shutdown over budget
Thursday night, the Minnesota legislature failed to approve a budget, shutting down state services and suspending pay for 22,000 state employees. It is the sixth shutdown of a state over budget matters since 2002. Republicans control both chambers of the legislature; newly elected Governor Mark Dayton is a Democrat. The state faces a $5 billion deficit.
State revenues up, deficits anticipated
State tax collections increased 9.3 percent in first quarter of 2011, per the U.S. Department of Commerce Tuesday. The report indicated $135 billion federal stimulus funds has been spent by states that face additional deficits.
Congress to hold hearings on FDA prescription drug user fees Thursday
Thursday, the House Energy and Commerce health subcommittee will hold a hearing on prescription drug fees authorized under the Prescription Drug User Fee Act (PDUFA). The Senate health committee is also expected to hold hearings on PDUFA fees this July. PDUFA will expire late 2012 and is up for reauthorization in 2012. The prescription, biological, and generic drug industries have been involved in negotiations with Congress regarding such fees. The FY12 proposed White House proposed budget includes an 11 percent decrease in FDA funding, suggesting industry fees are likely higher.
Note: PDUFA was enacted in 1992 and renewed in 1997, 2002, and 2007 and authorizes the FDA to collect fees from companies that produce certain human drug and biological products. User fees fund about half of new drug review costs, leading to expedited drug approval processes.
Fees for overseas drug manufacturers considered
Senator Sherrod Brown (D-OH) sent a letter to the FDA requesting feedback on assessing fees on drug manufacturers that operate outside of the U.S. to fund the increased cost of inspecting foreign facilities. Brown also seeks FDA feedback on a blanket fee on pharmaceutical and active pharmaceutical ingredient facilities and explanation for the difference between cost of inspections in foreign facilities (about $52,000) verses inspection in domestic facilities (about $23,000).
Avastin, Provenge to be covered by Medicare
Thursday, CMS announced Medicare would cover the two cancer drugs: Avastin from Genentech for breast cancer and Provenge from Dendreon for prostate cancer. Avastin, previously approved for lung and colon cancer, costs $88,000/year for a course of treatment; Provenge $93,000.
Hospitals launch campaign against Medicare and Medicaid cuts
Monday, a coalition of hospital groups launched a multi-million dollar media campaign to prevent Congress from enacting Medicare and Medicaid payment cuts, as Congress considers a deficit reduction deal. The campaign is funding by American Hospital Association (AHA), Federation of American Hospitals (FAH), Association of American Medical Colleges (AAMC), National Association of Public Hospitals and Health Systems (NAPH), Catholic Health Association (CHA), the National Association of Children's Hospitals, and other health care provider groups.
Note: According to the coalition’s website, Congress is considering a $100 billion cut in Medicare and Medicaid spending reductions. Medicare and Medicaid account for 55 percent of hospital revenues on average.
Physicians petition White House for SGR repeal
Monday, the American Medical Association (AMA) along with over 100 physician groups sent a letter to President Barack Obama to “strongly urge” him to repeal the SGR which determines Medicare payments and to include a permanent fix to the Medicare physician payment system in the final bill to authorize an increase in the debt ceiling. The letter states that short-term fixes have driven up the cost of a long-term fix.
Physicians oppose cuts for diagnostic imaging services in proposed South Korean trade agreement
Wednesday, the AMA released a statement and American Osteopathic Association (AOA) sent a letter to the U.S. Senate Majority and Minority Leaders, Harry Reid (D-NV) and Mitch McConnell (R-KY) opposing a proposal to use Medicare payment reductions for diagnostic imaging services to offset costs of The South Korea Free Trade Agreement.
Note: Thursday, the Senate Finance Chairman Max Baucus (D-MT) removed a proposed element in the trade agreement that would have reduced Medicare payments by $400 million for the imaging providers. Baucus replaced the policy with a $525 million offset from the Medicare Improvement Fund for an additional year through 2020 for physicians who do not adopt meaningful use of electronic health records (EHR). Separately, ACA reduced Medicare payment for imaging providers by an estimated $3 million. ACA Section 3135, as amended by Section 1107 of the Reconciliation Act, sets the utilization rate assumption for advanced diagnostic imaging services at 75 percent for the practice expense effective January 1, 2011.
Study: declines in physician acceptance of Medicare and private coverage
Physicians’ willingness to accept patients is based on insurance payment rates: in 2008, physicians were willing to accept nearly 88 percent of patients with private insurance, down from 93 percent in 2005 and 93 percent of Medicare patients in 2008, down from 96 percent in 2005. (Source: Bishop et al, “Declines in Physician Acceptance of Medicare and Private Coverage,” Archives of Internal Medicine, 2011; 171(12):1117-1119).
“But no drug maker, ever, has formally and so publicly challenged the ukase of the FDA—an agency that can make or break companies and is known for punishing those who challenge it… What Genentech is really challenging is the FDA’s statistical purism that blinds it to the benefits that accrue to some patients amid the averages of randomized control trials. Avastin offers some terminally ill women months or years of life. For others, it delays the onset of symptoms, improves their quality of life and gives their doctors another tool to better control the disease. No treatment in late-stage oncology is perfect, but a good definition of insanity is denying all patients an option because it may only help some of them… The future of cancer treatment is therapies targeted to subpopulations identified by individual biomarker. As the fields of genomics and systems biology advance, care will improve, but the war against cancer isn’t the Falklands. It’s the Somme and Verdun: progress is slow, incremental and reversible.”
– “Race against the Cure” editorial in Wall Street Journal Wednesday, June 29, 2011, about FDA hearing last week for Genentech’s breast cancer drug Avastin
- In 2010, 48.6 million persons of all ages (16 percent) were uninsured, 60.3 million (19.8 percent) had been uninsured for at least part of the year, and 35.7 million (11.7 percent) had been uninsured for more than a year. (Source: Centers for Disease Control and Prevention National Health Interview Survey, June 2011)
- Half of Medicare beneficiaries had incomes below $22,000 in 2010; less than one percent had incomes over $250,000. Half of all Medicare beneficiaries have less than $2,100 in retirement account savings and half of all Medicare beneficiaries have less than $31,000 in other financial assets; five percent have combined savings of more than $1,000,000. (Source: Kaiser Family Foundation Program on Medicare Policy, June 2011)
- Chronic pain affects approximately 116 million American adults and costs up to $635 billion annually in medical treatments and lost productivity. (Source: Institute of Medicine, June 2011)
- Safety-net hospitals reported spending 27 percent less than they would have spent on outpatient drugs as a result of the 340B program, resulting in an average annual savings of $5.2 million in 2010. (Source: Safety Net Hospitals for Pharmaceutical Access, June 2011)
- Hospital operating margins for Medicare: 11 percent in 1997, -5.2 percent in 2009. (Source: Medicare Payment Advisory Commission)
- Imaging studies (supply driven health care): ten percent of physicians perform 78 percent of CT scans, 76 percent of MRI and 81 percent of nuclear studies. (Source: MedPAC)
- The nation's nonprofit hospitals collected $8.26 billion in philanthropic donations in fiscal year donations and grants to health care institutions in the not-for-profit sector totaled $8.2 billion in fiscal 2010, up $620 million over the $7.6 billion raised in fiscal year 2009. While last year's total was still short of the $8.6 billion raised in FY 2008 and the FY 2007 level of $8.3 billion, the eight percent growth was the healthiest rate of advance since FY 2006. (Source: Association for Healthcare Philanthropy)
- Life expectancy range for men: 69.5 to 81.1 for men, 73.5 to 86 years for women. (Source: Population Health Metrics, University of Washington)
- In 2000, 245,000 deaths were attributable to low education, 176,000 to racial segregation, 133,000 to poverty. (Source: American Journal of Public Health)
- Party affiliation (Source: Pew):
|1970||49 percent||31 percent||20 percent|
|2011||35 percent||28 percent||37 percent|
- Successful deficit reduction formula: $5 in spending cuts for $1 in tax increases. (Source: “Analysis of Successful Deficit Reduction” by Bureau of Economic Research, 2010) Note: The Bipartisan Policy Commission on Deficit Reduction and Bowles-Simpson Commission appointed by the White House each recommended a 3:1 relationship between spending cuts and increased revenues. Cuts to projected Medicaid and Medicare rates of federal spending would likely be included.
- Independent physicians employed by health systems will grow by an annual rate of five percent over three years. (Source: Accenture)
- 66.2 million Americans provide care for a family member or friend consuming an average 20 hours/week. Savings to Medicare and Medicaid are $177 billion annually as well as $111 billion is forgone taxes. (Source: Deloitte Center for Health Solutions analysis)
- 80.3 percent of 335 metropolitan markets are considered “highly concentrated” by the Department of Justice and the Federal Trade Commission's Herfindahl-Hirschman Index. Sixty-three percent of hospitals are in multi-hospital systems. (Source: America’s Health Insurance Plans, June, 2011)
• In 2009, 14 percent of troops, 80,000 of the two million who have deployed since 2001, reported breathing problems, compared with ten percent among those who had not deployed. (Source: Millennium Cohort Study)
- Type 2 diabetes: 465,000 newly diagnosed annually; incident rate: 3.7 percent of 20-44 years of age in U.S.; average life years reduced life expectancy at age 20: 17 years for men, 18 for women. (Source: American Diabetes Association Annual Meeting, San Diego June 24, 2011)
- Per Medicare Modernization Act (MMA) section 1011, from 2005 to 2008 the federal government set aside $250 million annually for the cost of emergency services provided to undocumented aliens. Two-thirds of the funds are allocated to states based on their relative percentages of immigrants. Nineteen states have exhausted their funds in 2011 to date. (Source: CMS, American College of Emergency Physicians)
- Three-quarters of all physician searches include a performance bonus for the doctor. Fewer than ten percent of those bonuses are tied to something other than volume of procedures. (Source: Merritt Hawkins survey of 2,700 physician searches between April 1, 2010 until March 31, 2011; 56 percent conducted for hospitals vs. 23 percent for hospitals five years ago)
- Hospitals that perform at least 375 weight loss operations a year have the best safety record for bariatric surgeries, while those that performed fewer than 75 a year had the highest rate of complications, according to a new study by a hospital rating group. Those that treated 375 or more patients per year had an overall complication rate of 5.76 percent compared to 8.69 percent for hospitals that treated 75 patients or fewer. (Source: HealthGrades)
- Health care executives believe that the percentage of physicians on active staff at hospitals is expected to increase from 10-25 percent by 2013. Since 2000 independent physicians’ ranks have been declining by two percent annually and that rate is expected to accelerate to five percent every year by 2013. (Source: Society for Healthcare Strategy and Market Development)
Value Based Purchasing in Health Reform: Update
This issue brief provides a case study about the Hospital Value Based Purchasing Program (section 3001 in ACA). Along with episode-based payments, the program represents a fundamental shift in how providers will be paid, requiring important changes in operating models, clinical processes, and alignment of interests between physicians and hospitals. This significant change requires every hospital executive team to re-think current operating assumptions and forecasts. To learn more, please click here.
National health reform: What now?
National health reform is here. The health reform bills (HR3590 and HR4872) are now law and will trigger sweeping changes and disruptions – some rather quickly and some over many years. The industry is asking, “What now?” At Deloitte, we continue to explore and debate the key questions facing the industry, and we look forward to helping our clients find and implement the right answers for their organizations. To learn more, visit www.deloitte.com/us/healthreform/whatnow today.
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