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Health Care Reform Memo: April 26, 2010

Deloitte Center for Health Solutions publication

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

CMS Office of the Actuary Report: PPACA covers more, costs more

Thursday, the CMS Office of the Actuary released its analysis of the costs and likely impact of the Patient Protection and Affordable Care Act (PPACA) for 2010-2019. Note: The CMS methodology includes all costs for health care versus the Congressional Budget Office (CBO) analysis (3/21/2010) that included only federal revenues and expenses. Highlights of the report:

  • PPACA will increase costs for health care $311 billion (.9 percent) above what would be spent otherwise during the period.
  • PPACA will cost $828 billion (versus $940 billion in 3/21/2010 CBO report) and save $577 billion (vs. $138 billion in CBO).
  • PPACA will increase enrollment in insurance by 33.8 million (vs. 32 million in CBO) with 23.1 million remaining uninsured in 2019 (25 million in CBO). Of these, 20 million will be new enrollees in Medicaid (vs. 16 million in CBO) at a cost of $430 billion increasing its enrollment from 63.5 million to 83.9 million. Employer-sponsored coverage will decrease from 165.9 million to 164.5 million; individual coverage will increase from 25.7 million to 41.6 million and Medicare will be unchanged at 60.5 million.
  • Penalties (2014-2019) will result in $33 billion from individuals who do not purchase insurance and $87 billion from employers.
  • Total consumer spending on health care will decrease $237 billion (2010-2019).
  • Medicare cuts will impair 15 percent of hospitals with debt and reduce Medicare Advantage plans (Part C) 50 percent from 14.8 million to 7.4 million. The Medicare trust fund will increase its solvency to 2029 from 2017 as a result of the bill (vs. 2025 in CBO).

“The actual future impacts of the PPACA on health expenditures, insured status, individual decisions, and employer behavior are very uncertain. The legislation would result in numerous changes in the way health care insurance is provided and paid for in the US, and the scope and magnitude of these changes are such that few precedents exist for use in estimation.” 

— Chief Actuary Richard S. Foster, “Estimated Financial Effects of the ‘Patient Protection and Affordable Care Act,’ as Amended” (page 4)

My take

The cost and impact of the PPACA is an unknown. Intended and unintended results might be forecast, but no one knows for sure. Reforms to the health insurance and delivery systems are bold and dramatic in the legislation. The reforms set a “new normal” for all stakeholders, as such employers and consumers will need to adjust health-related activity and spending.

Paul Keckley

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

PPACA impact on employers: A timeline

For employers, the impact of the PPACA is immediate and significant:

Effective Plan Years Beginning on or after September 23, 2010
(or 1/1/2011 for calendar year plans)
Effective January 1, 2011 Effective January 1, 2012 Effective January 1, 2013 Effective January 1, 2014 Effective January 1, 2018

Prohibit lifetime limits on the dollar value of coverage and requires annual limits be reasonable


Coverage must be available to eligible dependent children (married or unmarried; student or not) to age 26


Prohibits pre-existing condition limitations for children under 19 years of age


And for non-grandfathered plans, A and B rated preventive health services recommendations by US Preventive Services Task Force must be provided without cost sharing


In accordance with regulations, new full-time employees must be automatically enrolled in an employer-sponsored health plan (employee may opt out)

Over-the-counter medications are not reimbursable through HRAs, HSAs or Health FSAs (prescribed medicines, drugs and insulin still qualify)


Employers required to disclose on Form W-2 the value of health benefits

Employers required to provide an understandable summary of benefits and coverage prior to enrollment or reenrollment

Additional 0.9% Medicare Part A payroll tax withholding with respect to individuals earning over $200,000 and married taxpayers earning over $250,000


Elimination of employer tax deduction for Medicare Part D prescription drug subsidy


FSA contributions limited to $2,500 annually (indexed)


Employers required to notify employees of health insurance exchange options for eligible employees (state-run exchanges begin operation in 2014)

Individual mandate begins (employees may opt out of employer coverage and pursue coverage through exchanges)


State-run health exchanges begin: Small employers may offer employees plan options through exchanges


Elimination of “reasonable” annual limits on the dollar value of coverage


Waiting periods for employee enrollment in health plan cannot exceed 90 days


Employer-sponsored plans cannot deny coverage for pre-existing conditions for adults


“Essential benefit provisions,” as defined annually by the Secretary of HHS, apply to all new plans


Employer mandate and penalties begin


Employers may offer rewards to employees who participate in wellness programs up to 30% of the cost of self-only coverage (vs. 20% today)


Federal reporting requirements: Employees must report coverage periods, % of premiums paid by employer and related data re: regulation compliance

“Cadillac plan tax” (40% tax on high-value employer-sponsored plans – over $10,200 for individuals and $27,500 for families) begins

Note: Steve Kraus, Principal, Human Capital, Deloitte Consulting LLP acted as a resource for information regarding the impact of the PPACA on employers.

CMS provides guidance to states in interim Medicaid enrollment, funding formula

Under the PPACA, effective January 1, 2014, states are required to expand Medicaid coverage to individuals under 65 years of age, not pregnant, not entitled to Medicare Part A or Part B benefits, and whose income do not exceed 133 percent of the Federal Poverty Level (FPL). For 2014-2016, states get a federal medical assistance percentage (FMAP) rate of 100 percent to cover the costs of the expansion. In later years, FMAP rates are 95 percent in 2017; 94 percent in 2018; 93 percent in 2019 and 90 percent in calendar year 2020 and after. If a state wishes to expand coverage before 2014, the state must submit a State Plan Amendment ("SPA") outlining its proposal (by June 30, 2010 if the state intends to add enrollees in 2010).

Health reform education plan emphasis

Stephanie Cutter, a veteran senior staffer to Senators Edward M. Kennedy (D-MA) and John F. Kerry (D-MA), Treasury Secretary Timothy F. Geithner and, most recently, Supreme Court Justice Sonia Sotomayor, will be the chief architect for the health reform public education campaign. A Kaiser Family Foundation poll released Thursday indicated 55 percent of US adults were confused about the PPACA.

Public health in PPACA

The PPACA created the Prevention and Public Health Fund (Section 4002) that directly appropriates funding “to provide for expanded and sustained national investment in prevention and public health programs to improve health and help restrain the rate of growth in private and public sector health costs.” The FY 2010 appropriation is $500 million increasing to $2 billion in FY 2015 and thereafter. This funding is expected to be spent in five purpose areas under the oversight of the Centers for Disease Control (CDC):

  • Core public health infrastructure for state, local and tribal health departments (35 percent)
  • Delivery of community preventive and wellness services (44 percent)
  • Prevention task forces (1 percent)
  • Prevention and wellness research (10 percent)
  • Core public health infrastructure and activities for CDC (10 percent)

Medicaid drug rebates: States must give up rebate

The PPACA requires drug manufacturers to increase rebates for brand name drugs from 15.1 percent to 23.1 percent, with proceeds for the additional rebate going to the federal government. Historically, states shared the rebate with the federal government. Under the PPACA, 100 percent of the rebate now goes to the federal government.

Transparency, conflicts of interest for medical societies

Wednesday, 32 medical societies representing 650,000 physicians announced a new Code of Ethics intended to clarify conflicts of interest between physicians and suppliers of medical devices and drugs. Among the more restrictive changes in the code: Leaders of any medical societies and editors of journals are precluded from all consulting deals or financial ties to industry. The code requires societies to:

  • Disclose publicly all financial relationships with industry
  • Discontinue industry funding for clinical guidelines development
  • Disclose financial ties of society officers and board members have with industry
  • Ban use of branded supplies/materials and giveaways at conferences.

Note: In the PPACA, physician self-referrals and increased transparency (quality, prices) are addressed in the context of physician-owned hospitals and ancillary services and quality reporting. In the stimulus bill’s meaningful use provisions, hospitals and physicians receiving federal funding for electronic health records agree to the use of de-identified clinical information useful to consumers in assessing the quality of the practice. Attention to physician performance is a central theme in health reform.

Florida schedules constitutional amendment vote on reform bill

Last week, the Florida legislature voted to add a constitutional amendment on the November ballot to preclude a requirement that individuals buy insurance. Twelve other states are in the process of adding amendments to their fall ballots.

Q and A

Q: Are additional Medicare cuts likely beyond what is in the PPACA now?

A: If the economy doesn’t recover and overall health costs continue to increase at 6-7 percent per year, yes. In the PPACA, the task will fall to the Independent Payment Advisory Board (IPAB), a group of 15 White House appointees who serve six-year terms as full-time employees to monitor Medicare payments and make cuts if its expenditures exceed statutory limits. IPAB has clout: Its recommendations must be enacted within 30 days unless modified or rejected by Congress. The President could veto a Congressional resolution; it would then take a two-thirds vote of both houses of Congress to override the veto. Ultimately, IPAB might be the single-most important feature of the PPACA. After 2014, it will have the authority to set payment rates for doctors, and after 2019 for hospitals and long-term providers. However, it is precluded from changing benefits and out-of-pocket costs for Medicare enrollees per the PPACA.

Q: Does the PPACA promote disease management efforts?

A: Yes, but not as the disease management industry might have preferred. The PPACA encourages funds expansion of the medical home pilot programs wherein primary care practitioners (physicians, nurses) get incentives to coordinate a panel of patients and it allows employers who provide health insurance benefits to retirees ages 55-64 with high health costs ($15,000-$90,000) to receive subsidies up to 80 percent of the insurance costs IF they invest the difference in wellness and chronic care management programs. But it falls short of the Disease Management Association’s desire for explicit funding of its programs ($19 billion annually). The contention that disease management programs suffer from suboptimal results (regression to the mean) has been the basis for proponents of the medical home that puts the chronic model under the oversight of a PCP-led team. In the PPACA, expansion of the medical home model is explicit; otherwise the bill does not appear to promote the traditional model of disease management used by many plans and employers leveraging a call center opt-out methodology.

Q: Will newly insured clog primary care practices and result in delays for care?

A: Probably. In Massachusetts, a new patient waits 44 days to see a PCP. The PPACA includes some relief: In 2013-2014, PCPs will receive 100 percent of Medicare rates for Medicaid patients, funding for community health centers will be increased and 10 percent bonuses from Medicare for PCPs and certain specialties are available 2011-2015 if services are provided in areas of shortage. But these changes are not likely to accommodate increased demand. The shortage of PCPs, per the American Academy of Family Physicians (AAFP), is already 17,000; expansion of residency slots for doctors of medicine (MDs) and doctors of osteopathic medicine (DOs) will not solve the problem. Innovation in primary care delivery – such as scope of practice for nurse practitioners and advanced practice nurses, expansion of retail clinics (1140 are operating today), group visits and e-visits – and changes in incentives (coordination of care, not visits and volume) will be key.


“September 23 is the magic date for many of the changes. The early deliverables to seniors and families is a critical component to having some buy-in from the public on the merits of the reforms.” 

— HHS Secretary Kathleen Sebelius, Thursday, April 22, 2010 to reporters

“[Implementing health care reform and getting it right will be] the mother of all implementation challenges….The effort will be even harder than getting the $737 billion in stimulus funds out the door rapidly.” 

— Senator Mark Warner (D-VA), Government Executive's Excellence in Government conference Monday, April 19, 2010

Fact file

  • About 4 million will likely face fines totaling $4 billion per year beginning in 2017 for not enrolling in insurance per the individual mandate provisions of the PPACA (requires fine of $695 or up to 2.5 percent of household income). The majority of those remaining uninsured (21-25 million) will not face penalties due to exemptions in the PPACA, (Source: Congressional Budget Office, April 22, 2010)
  • Medicaid costs from 2014-2019 will increase 1.25 percent per year over what would have been spent without the PPACA. (Source: Center on Budget and Policy Priorities)
  • The average premium for a family health insurance plan purchased through an employer in 2009 was $13,375, which is double the premium in 2000 and an increase that is three times faster than wages. (Source: National Association of Insurance Commissioners)
  • E-prescriptions tripled in 2009 to 191 million from 68 million in 2008 (12 percent of the 1.63 billion original prescriptions, excluding refills). 25 percent of all office-based doctors use e-prescribing technology. (Source: Surescripts)
  • The global market for pharmaceuticals is $773 billion: $238 billion in the US (10 percent of total US health expenditures). Note: Between 2011 and 2016, 18 of the 20 biggest patents expire. (Sources: PhaRMA, CMS)
  • Characteristics of the 17.1 million low-income uninsured adults (37 percent of total uninsured) eligible for Medicaid expansion: Most have dependent children, half have family incomes below 50 percent of the FPL. (Source: Kaiser Commission on Medicaid and the Uninsured and Urban Institute analysis of the 2009 ASEC Supplement to the CPS)
  • Between 2001 and 2011, costs for military health (active military, dependents, retired military) covering 9.6 million increased 167 percent from $19.7 billion per year to $50.7 billion. In the same time frame, total national expenditures for health care increased 84 percent from $1.5 trillion to $2.5 trillion. (Source: The US Department of Defense)
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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