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Health Care Reform Memo: August 13, 2012

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: Paul Ryan selected as VP running mate: a signal that health care is focus of campaign

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

The naming of Wisconsin Republican Representative Paul Ryan as Mitt Romney’s running mate Saturday morning in Norfolk, VA, is a strong indicator that health care will be a centerpiece in the campaign for the White House and in each contested race for the next 85 days. A likely focus of attention will be a fundamental change in how the Medicare program operates, for example, a proposal for a premium support program that would allow seniors to choose a private health plan with some of their premium paid directly to the plan by the government.

The 42-year old Gen X Chairman of the House Budget Committee’s report, “The Path to Prosperity: A Blueprint for American Renewal” (March 20, 2012), offers a version of the premium support program for seniors—one of several that have surfaced in the past two years as the solvency of the Medicare program received attention.

In essence, premium support follows the path many employers have taken to transition benefits from a defined benefit to a defined contribution, thus shifting responsibility to the individual and allowing the rate of spending growth to shrink over time. I interpret Congressman Ryan’s plan for Medicare as follows:

Eligible seniors would be able to enroll in a private health plan of their choice. Qualified plans, in turn, would receive payments directly from the government to offset some of their premiums, with lower income seniors getting higher premium support. As opposed to a voucher whereby the government would provide funding directly to seniors who in turn would shop for coverage, the premium support concept is to create competition among plans seeking to serve the Medicare population.

Over time, the federal government’s costs for Medicare would be indexed against the overall Consumer Price Index (CPI) and private health insurance plans would compete for enrollees, differentiating their plans based on the value they provide seniors. Thus, the combination of the index plus competition among plans to provide value to Medicare enrollees are the basis for potential slowing of Medicare costs.

Certain elements of the Affordable Care Act (ACA) would be thrown out in the Ryan program, for example, the 15-member Independent Payment Advisory Board (IPAB) would be replaced by spending caps indexed to the CPI. A federal exchange for Medicare enrollees would replace the state-run health insurance exchanges in the ACA. Private plans would be required to cover any Medicare applicant without regard to a pre-existing condition, and Medicare exchange plans would not be allowed to charge sicker enrollees higher premiums. They would be required to cover the “actuarial equivalent” of traditional Medicare benefits. And per the Ryan plan, a senior wishing to stay on their traditional Medicare program could do so though premiums for traditional coverage would likely increase. His premium pricing is based on a complicated formula as are each of the other proposed premium support proposals: the funds the federal government would put in would be based on the prices of the competing plans in the Medicare exchange and be the cheaper of the second-least-expensive private plan or traditional Medicare. If a senior chooses a plan that’s more expensive than the government allowance, the extra cost will come out of pocket. If a senior is sick and gets sicker, government funding to their plan would increase to accommodate. And all of these changes start in 2023, i.e., for those under the age of 55 – today.

This stuff is complicated and there’s a lot at stake. I am fiercely independent. The gold standard for me is not the party label. It’s the vision that drives policy, and the underlying data that supports decisions. So, the naming of Rep. Ryan to the slate increases the likelihood that Medicare and health reform will remain in the spotlight for the next 85 days.

Medicare premium support is a big idea. It deserves attention. But its attention must not be limited to the close-up view of Campaign 2012. Rather, it must be through the long lens of the future—it’s not just about the seniors and the costs of their care, nor the pact a society has with its elderly. No one disagrees that Medicare’s solvency is at risk; the disagreement is about how to fix it and how to pay for it.

The issue is not just about the expansion of the program from 48 million enrolled today to 79 million in 20 years. It’s about the health system Gen X and Millennials will inherit in an increasingly global economy where resources are stretched and tough choices necessary.

So let’s discuss premium support as adults, and consider all other alternatives. I hope it leads to a rational discussion about the principles and vision sought for our health care system sans heated rhetoric, demonization of political adversaries and incendiary sound bites. There’s too much at stake otherwise.

Paul Keckely

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

PS. Last week’s Monday Memo featured Medicare—statistics, structure, enrollment, premiums, and more. It can be a good start to a conversation about the future of the program even as the campaigns prepare to advance their views.

Recent premium support efforts:

  • Dr. Alice Rivlin and Representative Paul Ryan, November 7, 2010
  • CATO Institute, April 1,2011
  • Republican Study Committee, April 8, 2011
  • Heritage Foundation, May 10, 2011
  • American Enterprise Institute, May 25, 2011
  • Former Senator Pete Domenici and Dr. Alice Rivlin, Bipartisan Policy Center “The Domenici-Rivlin Protect Medicare Act,” November 1, 2011
  • Senator Ron Wyden (D-OR) and Representative Paul Ryan, “Guaranteed Choices to Strengthen Medicare and Health Security for All: Bipartisan Options for the Future,” December 15, 2011
  • Senator Richard Burr (R-NC) and Senator Tom Coburn (R-OK), “The Seniors’ Choice Act,” February 16, 2012
  • S. 2196, the “Congressional Health Care for Seniors Act of 2012,” introduced by Senator Rand Paul (R-KY), and co-sponsored by Senators Lindsey Graham (R-SC), Mike Lee (R-UT), and Jim DeMint (R-SC), March 15, 2012
  • Representative Paul Ryan’s “The Path to Prosperity: A Blueprint for American Renewal,” March 20, 2012

Implementation update

CMS to states: OK to drop expansion coverage after implementation; states want flexibility

In an interview with National Conference of State Legislatures (NCSL) last week, Centers for Medicare & Medicaid Services (CMS) Medicaid Director Cindy Mann announced that if a state decides to expand Medicaid to 138 percent of the federal poverty level (FPL), per the ACA, they will be allowed to later drop the expanded coverage if they wish. In addition, the Director emphasized that there is no deadline for states to decide if they are going to expand their Medicaid programs.

Republican governors responded that this new flexibility is minor and does not focus on the underlying concerns of governors—that Medicaid is in need of reform. Republican Governors Association spokesperson Mike Schrimpf stressed that the governors have not received answers to detailed questions about Medicaid they sent in a letter to the Administration on July 10. Governor Bob McDonnell (R-VA) sent an additional letter on July 23 emphasizing the questions and requesting additional feedback.

Related: NCSL released a legislative report July 25 indicating 20 states had enacted laws opposing some aspect of the ACA, including Missouri, Montana, New Hampshire, Utah, and Wyoming, that barred their states from further implementation activities without approval by their legislatures. Another 27 states considered legislation opposing the ACA but never enacted laws. At its annual business meeting in Chicago Tuesday, NCSL adopted a resolution regarding Medicaid expansion urging Congress to provide states with new flexibilities to “implement some, but not all of the expansion provisions without penalty”.

HHS releases administrative simplification rule for electronic transactions

Background: the Health Insurance Portability and Accountability Act of 1996 (HIPAA) amended the Social Security Act by adding Administrative Simplification to Title XI of the Act. The rules required the U.S. Department of Health and Human Services (HHS) to adopt standards for certain electronic administrative health care transactions to enable health information to be exchanged more efficiently and to achieve greater uniformity in the transmission of health information. Per ACA Section 1104, electronic funds transfer (EFT) transactions were added to the list for which HHS must adopt a standard under HIPAA.

Last week, HHS released an interim final rule on administrative simplification, to require the adoption of operating rules for the health care EFTs and electronic remittance advice (ERA) transactions. The new billing rule has projected net savings between $300 million and $3.3 billion over the next ten years for the industry, primarily for physician services. Compliance with the EFT & ERA operating rule set must be met by January 1, 2014. CMS estimates the cost to implement the new standards is between $1.2 and $2.7 billion for government and commercial health plans (including third party administrators), hospitals, and physician practices. However, the savings from and cost benefit of using the EFT & ERA operating rule set is projected to be between $3 and $4.5 billion for government and commercial health plans, hospitals, and physicians’ offices. HHS will accept comments until October 9, 2012.

Legislative update

President Obama signs Sequestration Transparency Act of 2012

Last Tuesday, President Obama signed the Sequestration Transparency Act of 2012, a bill requiring the administration to submit a detailed report to Congress on the implementation of certain discretionary reductions and non-exempt direct spending 30 days from the date the Act was signed into law.

House bill challenges individual mandate as a tax

On August 2, Representative Raul Labrador (R-ID) introduced legislation (H.R. 6334) that aims “to provide that the individual mandate under the Patient Protection and Affordable Care Act shall not be construed as a tax.” The bill is co-sponsored by Representatives Roscoe G. Bartlett (R-MD), Ann Marie Buerkle (R-NY), David P. Roe (R-TN), and James Sensenbrenner (R-WI).

State update

  • A Section 1115 waiver application has been submitted to CMS to allow New York to use up to $10 billion in Medicaid savings to expand primary care and implement the Medicaid Redesign Team (MRT) action plan. The application seeks permission to reinvest $10 billion of an estimated $17.1 billion in federal savings to be generated by MRT reforms.
  • Last Friday, Kansas Governor Sam Brownback (R) submitted his state’s Section 1115 waiver request to CMS to create KanCare, to be implemented January 1, 2013 with four major initiatives: (1) moving all Medicaid populations into managed care; (2) covering all Medicaid services through managed care; (3) establishing safety-net care pools to reimburse uncompensated hospital costs and to provide payments to essential hospitals; and (4) creating and supporting alternatives to Medicaid.
  • Last Thursday, a special legislative committee authorized Colorado to obtain a $43 million federal grant to establish its health insurance exchange.
  • The Substance Abuse and Mental Health Services Administration (SAMHSA) awarded health information technology (IT) grants worth a total of $5 million. The recipients, based in California, Iowa, Pennsylvania, Tennessee, West Virginia, and Wisconsin will use the grant funds for web-based services, smartphones, and apps – all with the goal of expanding access to substance-abuse treatment.
  • Wednesday, the board responsible for regulating the digital health information exchange (HIE) in Kansas decided to postpone its vote on a proposal to dissolve and turn regulatory authority over to a state agency. Instead of dissolving, the board will form a committee to develop a list of pros and cons regarding the dissolution proposal. The committee will return a recommendation to the board for consideration at its September meeting.
  • Three consortia will participate in the ACA demonstration program Independence at Home, which will evaluate whether primary care services delivered at a chronically ill patient’s home can improve the quality of care and reduce costs. The three consortia, one each in Florida, Illinois, and Virginia, are in addition to 16 individual practices selected for the program in April.
  • A district court judge is requiring Georgia’s Medicaid program to cover Makena, a drug used to prevent premature births. The state had argued that a cheaper, compounded version of the drug was available but Judge Charles Pannell rejected the argument, noting that the more expensive drug had received FDA approval while the cheaper drug had not.

Industry update

FTC has no plans to challenge the Generic Pharmaceutical Association’s Accelerated Recovery Initiative

The Food and Drug Administration (FDA) Safety and Innovation Act passed in June 2012 requires manufacturers to notify the FDA in advance about potential shortages of non-biological prescription drugs that are life supporting, life sustaining, or intended for use in prevention of a debilitating disease or condition. Last Wednesday, the U.S. Federal Trade Commission (FTC) issued an advisory opinion letter regarding the lawfulness of the Generic Pharmaceutical Association’s (GPhA) proposed Accelerated Recovery Initiative (ARI), which is designed to assist the FDA in responding to shortages of critically important medicines. The letter stated ARI will likely not harm competition, as it is a “non-exclusive” program. Furthermore, the letter also states proprietary information will not be at risk because a third party is collecting the information and appropriate safeguards are in place to discourage collusion. The third party will be tasked with collecting and reporting objective data only and will not be providing the FDA with strategic analysis on how to address drug shortages. If implemented as planned, the FTC will not challenge the Initiative.

FDA announces guidelines to expedite device reviews

Last week, the FDA published draft guidance on how it will determine whether the most common medical device application, a 510(k), is “administratively complete.” Under the guidance, which would replace instructions that are almost 20 years old, the agency would commit to report what is missing from an application within 15 days of receipt.

Study: enrollment increases in health savings accounts significant led by larger companies

Background: health savings accounts (HSAs) were first authorized by the 2003 Medicare Modernization Act, intended to be used in conjunction with qualified high-deductible health plans (HDHPs)—those with minimum deductibles of $1,200 for single coverage and $2,400 for family coverage in 2012 (unchanged from 2011). Consumers, family members, and employers can make deposits into a tax-favored account (up to annual limits) for qualified medical expenses. Funds not withdrawn for “qualifying” health expenses can remain in the account and be rolled over annually to build savings for future health-related costs. HSA plans and similar health reimbursement arrangement (HRA) plans compose the broad category of consumer-directed health plans (CDHPs). Unlike HSAs, HRAs are held by employers and are not usually portable if an employee leaves the firm.

  • The number of people with an HSA/HDHP increased to 13.5 million in January 2012, up from 11.4 million in January 2011, 10 million in January 2010, 8 million in January 2009, and 6.1 million in January 2008.
  • Between January 2011 and January 2012, the fastest growing market for HSA/HDHP products was large-group coverage – 59 percent of all HSA/HDHP enrollments in January 2012, up from 55 percent of HSA/HDHP enrollments in January 2011.
  • Among adults ages 21–64 with private insurance in 2011, 15.8 million—13.1 percent of the commercial health insurance market—were enrolled in CDHPs or an HSA-eligible HDHP, but had not yet opened an account. That figure increased to 21 million people when enrollees’ children were counted. (Employee Benefit Research Institute, December 2011)
  • 26 percent of enrollees in CDHPs were enrolled in their plans for three to four years, and 21 percent were enrolled for five or more years. Among traditional plan enrollees, the figures were 18 percent and 44 percent, respectively. (Employee Benefit Research Institute, December 2011)

Source: Health Savings Accounts and Account-Based Health Plans: Research Highlights, AHIP, July 2012

Study: bend in cost curve not caused by recession

A new study found that the moderation in health spending growth began before the recession and has continued through May 2012. According to researchers, the common comparison of the growth in health care spending relative to the overall economy gives a “false sense of ‘excess’ health care spending growth during economic recessions and recoveries.” The report found that excess growth decreased from >3 percent in 2003 to <1 percent beginning July 2005, and continued until near the end of the recession in June 2009. Excess growth then surpassed 1 percent during the post-recession period until May 2011 when it dropped below 1 percent. Researchers concluded that cost moderation began over two years before the recession and they do not solely attribute the “bend in the curve” to the lagging economy. (Source: “When the Cost Curve Bent – Pre-Recession Moderation in Health Care Spending, New England Journal of Medicine, August 8, 2012)


“We will help care for those who cannot care for themselves… Unlike the current president who has cut Medicare funding by $700 billion, we will preserve and protect Medicare and Social Security. Under the current president, health care has only become more expensive. We will reform health care so that more Americans have access to affordable health care, and we will get that started by repealing and replacing Obamacare.”

—U.S. Representative Paul Ryan in acceptance speech as Vice Presidential running mate with Mitt Romney Saturday, August 11, 2012

“I see full and real health reform as a four-stage process, along these lines: Health Reform 1.0: Access – insurance coverage, ability to obtain services; Health Reform 2.0: Delivery System Reform – cost control, quality improvement, efficiency; Health Reform 3.0: Public Health – prevention, wellness, population health improvement; Health Reform 4.0: Health in All Policies.”

—John McDonough, Health Stew, The Stages of Health Reform, August 8, 2012

Fact file

  • Physician acceptance of Medicaid patients: in a recent survey, 31 percent of physician respondents indicated they would not accept new Medicaid patients, 17 percent said they would not accept new Medicare patients, and 18 percent indicated they would accept no new privately insured patients. New Jersey had the lowest acceptance rate (40 percent) and Wyoming the highest (99 percent). (Source: Health Affairs, “In 2011 Nearly One-Third of Physicians Said They Would Not Accept New Medicaid Patients, But Rising Fees May Help,” August 2012)
  • Medicare prescription drug premiums: HHS announced that average basic premiums for Medicare Part D plans are projected to remain constant in 2013 at approximately $30. Average premiums for 2012 were projected to be $30 and averaged at $29.67. The administration pointed out that at the same time, older adults and individuals with disabilities have saved $3.9 billion on prescription drugs as the ACA began to close the donut hole in coverage of prescription drugs. (Source: HHS, “Medicare prescription drug premiums to remain steady for third straight year,” August 6, 2012)
  • Home health and personal care aides: the U.S. Department of Labor estimates that the employment of professionals in this field will grow 70 percent from 2010 to 2020 and that 1.3 million jobs will be added in the same time period. Professionals in the home health and personal care field make on average $20,170 per year ($9.70 per hour). (Source: Bureau of Labor Statistics, Home Health and Personal Care Aides, 2012)
  • Generic prescription drug use: for the ten-year period of 2002 through 2011, the use of generic drugs in place of brand name drugs saved consumers and the health care system approximately $1.02 trillion dollars. In 2011, generics saved $192 billion—an average of greater than $1 billion in savings every other day. According to the report, nearly 80 percent of the four billion prescriptions written in 2011 were dispensed using generic versions of brand name counterparts. (Source: Generic Pharmaceutical Association, “Generic Drug Savings in the U.S.” 2012)
  • Employer benefits costs: large U.S. employers expect to see, on average, a 7 percent increase in health care benefit costs next year, which is the same as this year but smaller than the previous three years. The survey also found large employers are embracing wellness initiatives and, of employers currently offering incentives, the median amount employees and dependents can earn will increase by 50 percent in 2013. (Source: National Business Group Health, August 2012)
  • July unemployment: the number of unemployed Americans was 12.8 million in July resulting in an unemployment rate of 8.3 percent. 12,000 jobs in health care were added last month, including outpatient care centers (+4,000) and hospitals (+5,000), with losses in nursing and residential care facilities (-2,200). Health care added 13,000 jobs in June and 33,000 in May. (Source: Bureau of Labor Statistics, “The Employment Situation,” July 2012)
  • Economic outlook update: the U.S. economy is projected to grow 2.3 percent in 2012 (previously 2.7 percent) and 2.7 percent in 2013 (previously 3 percent)—reductions that will amount to $776 million over ten years. (Source: Federal Reserve, July 27, 2012)
  • Medicaid expansion: two-thirds of people surveyed support Medicaid expansion to cover more low-income, uninsured adults—87 percent of Democrats, 67 percent of independents, 39 percent of Republicans. Support is lower for expansion in one’s own state when respondents were told that taxpayers would pay 10 percent of the cost, with less than half (49 percent) saying they want their state program to expand. (Source: Kaiser Health News, “Medicaid Expansion Favored In General, Less So Near Home, Survey Finds,” July 31, 2012)
  • Medicaid expansion demographics: of the roughly 15 million people who could become eligible for Medicaid if states fully take up the expansion under the federal health law, half are under 35, but two million are in the more vulnerable age range of 55 to 64. 55 percent are white, while about 19 percent are black and 19 percent Hispanic. 82 percent of the 15 million are adults who are not living with dependent children. (Source: “Opting in to the Medicaid Expansion under the ACA: Who Are the Uninsured Adults Who Could Gain Health Insurance Coverage?” Urban Institute August 2012)
  • Teen smoking: in 2011, 30 percent of U.S. high school males and 18 percent of high school females used some form of tobacco, continuing 11-year decline in rate. (Source: CDC)
  • Women in health care: 73 percent of medical and health services managers are women; 4 percent of health care organization CEOs and 18 percent of hospital CEOs are women. Barriers: women reported that self-confidence (50 percent), time constraints (45 percent), and the ability to connect with senior leadership (43 percent) were barriers to advancement. (Source: Rock Report, “Women in Healthcare,” January 2012)
  • GDP 2Q 2012: +1.5 percent. (Source: U.S. Department of Commerce, released July 30)
  • California: 13 percent of U.S. GDP, 20.3 percent underemployed, 11.2 percent unemployed. (Source: Bureau of Labor Statistics, “Alternative Measures of Labor Underutilization for States, Third Quarter of 2011 through Second Quarter of 2012 Averages”, and The Wall Street Journal blog)
  • Hip fractures: 40 percent of 1.7 million patients with hip fractures die within a year, and this is expected to increase to 6.3 million by 2050 as the population ages (Denmark researchers studied 8,553 cases between 1999 and 2011 followed for up to 730 days—biomarkers identified most likely to die). (Source: The Wall Street Journal Online, “Test May Reduce Death After Hip Fracture”, July 30, 2012)
National health reform: What now?

National health reform: What now?

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