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Health Care Reform Memo: January 3, 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.

My take 

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

I am a data guy. I tend to break down the world’s pressing problems into quantifiable probabilities and risks. Looking ahead, my bet is the probabilities are high these will be the stories as health reform is implemented in 2011:

States will seek waivers, experiment with reforms: with 26 new governors (including 23 new non-incumbent) to be sworn in this month including 11 GOP freshmen, the likelihood is high states will pursue waivers around or modification of provisions for Medicaid coverage, health exchanges, and state high-risk pools. The Patient Protection and Affordable Care Act (PPACA) places enormous responsibilities on states; many are expected to seek workarounds that achieve goals of coverage and insurance reforms but allow for innovation and alternatives. Probability: high.

Food and Drug Administration (FDA) role will expand; resources stretched: last year, the FDA approved 21 new drugs, down from 26 in 2009. And its plate is full: implementation of new Food Safety Modernization Act of 2010, oversight of the biosimilar approval process (Section 7002, PPACA), regulation of tobacco, expanded oversight of over-the-counter therapies, reauthorization of user fee laws (Medical Device User Fee and Modernization Act [MDUFMA] and the Prescription Drug User Fee Act [PDUFA]) by January 15, 2012, creation of parallel review processes between the Center for Medicare & Medicaid Services (CMS) and FDA for prescription drugs and medical devices, potential revision of Premarket Notification (510k) process for device manufacturers, potential for sharing of drug trial information with other countries, comparative effectiveness, and more. Will Congressional appropriations allow for the agency to do its work? Will the industry fees increase in tandem with new device and pharmaceutical excise taxes in PPACA? Will consolidation in the industry accelerate? Will its major players expedite opportunities in emergent markets? Probability: high.

Adapting to PPACA will produce winners and losers in each sector: the prospect of reducing aggregate investments in the U.S. health system to no more than one percent above the annual gross domestic product (GDP) by 2019 means two things: growth will be absolute but lower than in prior years and winning companies in each sector will emerge with new business models, improved efficiency, and stronger value propositions. The U.S. health system is ripe for new entrants—non-incumbents who bring radically new ideas and strategies. Many of these new entrants will join the winner’s circle. Consider for 2010: the Dow gained 11 percent, the S&P 500 gained 13 percent, and the typical equity fund returned 19 percent. So there’s plenty of capital waiting for deployment in sectors where consolidation, scalability, innovation, and efficiency are rewarded. Think health care. Probability: high.

Health reform 2.0 visibility will be high: The 2011 chapter in health reform, “health reform 2.0”, will most likely be about PPACA implementation and industry responsiveness. Its backdrop will be Campaign 2012 as GOP candidates attempt to break from its crowded field and Congress tries to reduce deficits and restore jobs. Daily news feeds from new rule-making authorities and appointments to PPACA authorized task forces, boards, agencies, and commissions will likely fuel intensified public attention to health reform. “Repeal and replace” is expected to continue to be a popular sound bite. Probability: high.

So for a data guy, health reform 2.0 circa 2011 will be about monitoring lag and lead indicators that signal how the industry is adapting to the new normal. It’s possible the emotion surrounding health care may drive decisions perhaps more than data—that’s regrettable in my view. But for now, the industry that consumes 17 percent of the U.S. GDP, 23 percent of the federal budget, 21 percent of the state budget, and 16 percent of discretionary spending in the average household touching 100 percent of the U.S. population is poised for change.

Stay tuned for health reform 2.0.

Paul Keckely

Paul Keckley, Ph.D.

Health reform review: key events leading to the passage of PPACA and events since its passage

February 13, 2009 American Recovery and Reinvestment Act (ARRA) signed into law: $814 billion stimulus program including $27 billion for health IT, $87 billion for state Medicaid, and additional $10 billion for the National Institutes of Health (NIH)
March 9, 2009 Executive order signed to expand stem cell research including embryonic stem cells
June 22, 2009 Smoking Prevention and Tobacco Control Act signed; permits FDA to regulate tobacco as a drug
August 25, 2009 Senator Edward Kennedy (D-MA) dies
November 7, 2009 U.S. House of Representatives passes Affordable Health Care for America Act 220-215
December 24, 2009 U.S. Senate passes PPACA 60-39
January 19, 2010 Scott Brown (R-MA) wins open Senate seat
March 21, 2010 House passes PPACA Senate bill 219 – 212
March 25, 2010 Senate approves PPACA and attached amendments 56-43; House approves 220-207
March 30, 2010 President Obama signs PPACA into law
September 30, 2010 House Republicans release “Pledge to America” to “repeal and replace” PPACA
November 2, 2010 Election results: GOP regains control of House with net gain of 61 seats in House; GOP net gain of 8 Governors; 6 Senators; 52 House Democrats lose re-election bids including 22 who voted against health reform legislation

Health reform 2.0 calendar: 2011 look ahead

Some of the most notable provisions that take effect in the first half of 2011 include:

  • Reports to Congress: the National Quality Strategy, National Prevention Strategies from the U.S. Department of Health and Human Services (HHS)
  • Establishment of the CMS Center for Innovation
  • Implementation of insurance plan requirements: medical loss ratio (MLR), premium increase oversight, and others
  • Start of Medicare bonuses to primary care providers and general surgeons who treat under-served populations; equivalent pay to certified nurse practitioners for primary care services
  • Prohibitions against preventive services cost sharing start for Medicare enrollees
  • New employer W-2 reporting (1099 provision)
  • Enhanced Medicaid home and community-based services funding for states
  • Start of the annual pharmaceutical manufacturer excise tax ($2.5 billion per year)
  • Discounts for branded prescription drugs in Part D coverage begin for Medicare enrollees
  • New disclosure requirements for ownership of skilled nursing and nursing homes
  • Initiation of nutrition labeling on menus and vending machines
  • Enhancement of government websites: (for insurance), Physician Compare, and others
  • First working sessions for the Patient Centered Outcome Research Institute (PCORI) (members already named and recruitment for an Executive Director is underway)

Also, for 2011, the following regulations and guidance are expected:

  • Proposed rule on accountable care organizations (ACOs), expected mid January 2011
  • Proposed rule on state innovation waivers, expected early 2011
  • Proposed rule on health insurance exchanges, expected early 2011
  • Proposed rule on nationwide health information network (NHIN), expected early 2011
  • Proposed rule on hospital value based purchasing program, expected early 2011
  • Proposed rule on insurance premium rate review, expected early 2011

PPACA Implementation Updates

Also see the pdf attachment for an update on tax provisions in PPACA from the Washington, D.C. National Office of Deloitte Tax LLP.

HHS publishes proposed rule on “unreasonable premium increases”; ten percent or higher increases the focus of scrutiny

On December 21, HHS published its proposed rule regarding its review process of “unreasonable premium increases” required by Section 2794 of the Public Health Service Act (PHSA), added by PPACA Section 1003. Its guidance includes:

  • For rate increases of ten percent or more in the individual and small group markets filed in a state on or after July 1, 2011, or effective on or after July 1, 2011, insurers will be required to publicly disclose and justify the proposed increases and the increases would not be presumed unreasonable.
  • For rate increases filed in a state during calendar year 2012 and thereafter, or effective during calendar year 2012 and thereafter, a state-specific threshold would be set for disclosure of rate increases. The threshold would be determined using state-specific cost data and trends.
  • States with effective rate review systems would conduct the reviews; HHS would conduct the reviews for states that lack the resources or authority to do thorough actuarial reviews.
  • The results of all reviews, along with the justification provided by insurers for those increases determined to be unreasonable, will be posted on the HHS website. Also, each insurance plan will be required to post its justification for a rate increase on its own website.

Note: For the large group market, HHS is soliciting comments. Its guidance to date says that the individual and small group market “reasonableness” procedures would also be applicable to the large market. Forty-five states and the District of Columbia accepted $1 million each in PPACA grants to assess and update their rate review processes and infrastructure.

Guidance for health plan compliance with enrollee notifications, steering enrollees to high-value providers, et al.

On December 23, the U.S. Departments of HHS, Labor, and Treasury published guidance about the implementation of new insurance market reform provisions included in PPACA. Highlights include:

  • Plans may use reasonable medical management techniques to steer patients towards a particular high-value setting, such as an ambulatory care setting for providing preventive care services, without violating PPACA rules.
  • Employers will not be required to comply with automatic enrollment requirements until the Department of Labor completes rulemaking, which is expected by 2014.
  • Plans will not be required to comply with a 60-day prior notice requirement to inform plan participants about material modifications in their plans or plan coverage until agencies issue standards for benefit summaries and coverage explanations.
  • PPACA does not prohibit distinctions based upon age that apply to all coverage under the plan, including coverage for employees and spouses as well as dependent children.
  • If a percentage-of-compensation formula for calculating an out-of-pocket limit on cost sharing does not change but an employee's compensation increases, the employee’s increased cost sharing will not cause the plan to relinquish its grandfathered status.

RFI about value-based insurance design for coverage of preventive services published; comments requested by February 28, 2011

The Internal Revenue Service (IRS), the Labor Department's Employee Benefits Security Administration (EBSA), and the HHS Office of Consumer Information and Insurance Oversight (OCIIO) are soliciting information about how group health plans and health insurance issuers can employ value-based insurance design (VBID) in the coverage of recommended preventive services. The Request for Information (RFI) requested information about how VBID can be used in Medicaid, the Children’s Health Insurance Program (CHIP), and related public health programs to encourage use of the most efficacious preventive health care services and discourage use of the least beneficial services.

Note: Section 1001 of PPACA covers provisions for preventive health care services. This section added a new Section 2713 to the PHSA, and a complementary new Section 715(a) (1) to the Employee Retirement Income Security Act, and a new Section 9815(a)(1) to the tax code. The law change made PHSA Section 2713 applicable to group health plans and health insurance coverage offered by group health plans that are not grandfathered or elect not to be grandfathered under PPACA.

Guidance for health exchanges from NAIC

On December 17, the National Association of Insurance Commissioners (NAIC) Joint Executive Committee & Plenary Committee approved model legislation to be used by states to facilitate the establishment of health insurance exchanges.

The committee also approved model language for the following:

  • Preexisting condition exclusions for individuals under the age of 19
  • Lifetime and annual limits
  • Preventive services
  • Prohibition on rescissions of coverage
  • Dependent coverage for individuals to age of 26
  • Choice of health care professional
  • Rate filing disclosure form
  • Standard definitions and standards for the summary of benefits and coverage

Long-term care: three month delay for face-to-face encounter requirements for hospices and home care providers

Per its announcement last week, CMS will delay implementation of PPACA’s requirement that home health and hospitals have face-to-face encounters before certification for three months until March 2011. Section 6407 of PPACA, requires physicians, nurse practitioners, clinical nurse specialists, certified nurse midwives, or physician assistants to have a face-to-face encounter with an individual either 90 days prior to or 30 days after the start of care prior to issuing a certification for home health services or durable medical equipment (DME). Section 3131b requires providers to have a face-to-face encounter with an individual prior to the 180-day rectification and each subsequent recertification. PPACA also requires documentation of patient encounters starting for care beginning January 1, 2011.

Payment changes for therapy services

On December 21, CMS published changes to the multiple procedure payment reduction (MPPR) for selected therapy services enacted by the Physician Payment and Therapy Relief Act of 2010 which froze Medicare physician payments at current FY 2010 levels until December 31, 2011. The law changes the MPPR reduction from 25 percent, as implemented by CMS in the 2011 Medicare physician payment rule, to 20 percent for second and subsequent therapy services (speech-language pathology, occupational therapy, physician therapy) furnished in office and other non-institutional settings to the same individual on the same day, effective January 1, 2011. The MPPR reduction will remain at 25 percent for therapy services furnished in institutional settings.

Note: Section 3134 of PPACA, authorizes the Secretary Sebelius to identify potentially misvalued codes by examining multiple codes that are frequently billed in conjunction when providing a single service. CMS notes that applying this new MPPR reduction to the practice expense (PE) payment of select therapy services paid under the Medicare physician fee schedule as a step under this PPACA provision.

Three major Medicare drug benefit changes per PPACA: January 1, 2011

The three million Medicare enrollees whose total drug costs for 2011 fall between $2,840 and $6,448 will get a 50 percent discount on branded prescriptions compared to a $250 rebate PPACA authorized in 2010. Medicare beneficiaries with annual incomes above $85,000 for individuals and $170,000 for couples will get a smaller government subsidy for Medicare Part D prescription drug coverage.

Note: The new $2.5 billion excise tax on drug manufacturers started January 1.

GAO report: Medicaid pharmacy reimbursement for generic drugs

A GAO report circulated last week concluded that PPACA’s changes to Medicaid pharmacy reimbursements for generic drugs, which reversed drastic pharmaceutical payment cuts set in 2005, would be effective in returning reimbursements to appropriate levels. PPACA set the federal upper limit payment to pharmacists at 175 percent of average manufacturer price (AMP), weighted by utilization. The GAO analysis did not examine the adequacy of dispensing fees.

Nurse midwives’ payment increase

Effective January 1, certified nurse midwives will be paid at 100 percent of physician rates for services to Medicare enrollees, up from 65 percent of primary care physician rates last year.

Electronic health records grants available today: CMS

Effective today (January 3, 2011), physicians and hospitals may register for Medicare and Medicaid electronic health record (EHR) incentive programs. The Health Information Technology for Economic and Clinical Health Act (HITECH) included in the 2009 Economic Stimulus Bill (ARRA), enacted Medicare and Medicaid incentive payments for providers that adopt and demonstrate “meaningful use” of health information technology.

Dual eligibles focus of FCQ

Last Thursday, HHS formed the Federal Coordinated Health Care Office (FCQ) per requirements in PPACA Section 2602 in CMS by March 1, 2010. Its focus is to improve the coordination between the Federal and State governments in the delivery of benefits for individuals eligible for both Medicare and Medicaid (dual eligibles).

MLR waiver indications in states

To date, 12 states have indicated interest and intention to seek waivers from the 80 percent individual and small group MLR requirement of PPACA citing the potential for instability in their insurance markets that might result: Alabama, Arkansas, Florida, Georgia, Iowa, Louisiana, Maine, Mississippi, Nevada, Oklahoma, South Carolina, and West Virginia.

Medicaid quality measures posted

Last Thursday, HHS published its proposed set of 51 health quality measures for adults enrolled in Medicaid. The measures, based on recommendations from the National Advisory Council for the Agency for Healthcare Research and Quality (AHRQ), fall into five categories: prevention and health promotion, management of acute conditions, management of chronic conditions, family experiences of care, and availability of care. PPACA Section 2701 directs Secretary Sebelius to develop quality measures for Medicaid eligible adults similar to the quality measurement program for children enacted in the CHIP Reauthorization Act of 2009. Measure reporting is voluntary among state Medicaid programs, health plans, and providers.

Industry News

Florida Constitutional challenge: update

Article I, Section 8 of the Constitution gives Congress the power "to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States”. In Florida, 20 states have challenged these state mandates as exceeding Congress' spending power based on South Dakota v. Dole (1987) where the Supreme Court upheld the congressional mandate that every state raise its drinking age to 21, or lose five percent of its highway funding. The Court said that "in some circumstances, the financial inducement offered by Congress might be so coercive as to pass the point at which 'pressure turns into compulsion'" thus concluding that the drinking age mandate was appropriate because a state would only "lose a relatively small percentage of certain federal highway funds".

The Florida challenge revolves around the PPACA requirement that every state adjust its Medicaid eligibility formula to 133 percent of the federal poverty level (FPL) or risk losing 100 percent of its federal funding for Medicaid starting in 2014. In the average state budget, 18 percent of its total revenues fund its portion (43 percent) of Medicaid program costs. Thus, the Florida argument revolves around the degree to which the Medicaid mandate in PPACA represents coercion by the federal government. The ruling is anticipated to be soon with appeals in circuit courts likely to follow.

Advance-care planning in Medicare rule

On December 3, CMS issued guidance for Medicare coverage of advance-care planning involving physician discussions with patients about end of life care options. In previous guidance (2003 and 2008), physicians were allowed to discuss end of life planning as part of the “welcome to Medicare” enrollment process. PPACA specifies that seniors are allowed an annual “wellness visit” including a physical exam with no out–of-pocket cost, and end of life planning can be discussed in that context.

Fifteen states get bonus payments for Medicaid program expansion

Last Monday, HHS announced $206 million bonus payments to 15 state Medicaid programs for enrolling previously uncovered eligible children in CHIP. To qualify, states must have adopted at least five of eight measures aimed at streamlining enrollment and quantify Medicaid caseload increases not attributable solely to the economic downturn in the state. Thirty-two states did not even apply for the grants; three of 18 state applicants were denied bonuses.

Note: 82 percent of eligible children are enrolled in CHIP or Medicaid programs representing a third of all U.S. children, and 13 states have participation levels lower than 80 percent. Medicaid covers 24 million children, most below the poverty line, and CHIP covers eight million in families with slightly higher incomes.

2011 DSH payments: slightly less than 2010

CMS’ budget for disproportionate share hospital (DSH) payments for FY 2011 is $365 million less than preliminary FY 2010 budget for payments.

Note: higher DHS payments for FY 2009 and FY 2010 were included in ARRA.

Safe harbor changes anti-kickback statute sought by OIG; ACO guidance anticipated

Per the Federal Register announcement on December 28, the Office of Inspector General (OIG) is requesting recommendations for developing new safe harbor provisions to be applied to the federal anti-kickback statute per the annual mandate by the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The safe harbor provisions were first implemented in the Medicare and Medicaid Patient and Program Protection Act of 1987. It is likely guidance will be provided as to safe harbors for ACOs from this round of comments.


“It is the connective tissue for a tenth of the planet. Facebook is now the third largest country on earth and surely has more information about its citizens than any government has…Facebook has merged with the social fabric of American life, and not just American but human life: nearly half of all Americans have a Facebook account, but 70 percent of Facebook users live outside the U.S.”

 – Time’s profile of its person of the year, Facebook CEO and Co-Founder Mark Zuckerberg, “Only Connect,” December 27, 2010-January 2, 2011

“Nurses have to be full partners with physicians and other health professionals in redesigning the health care system…nurses must be used effectively and fully represented at the table.”

 – The Institute of Medicine’s “The Future of Nursing: Leading Change, Advancing Health,” October 2010


 – The Wall Street Journal’s editorial “Death Panels Revisited: The left won't admit that Sarah Palin had a point about rationed care”, December 29, 2010

“If government can limit Americans' choice of effective medical treatments, there's no limit to its control over our bodies, and the right to bodily autonomy is an illusion. In the context of the new health law, the FDA's Avastin decision is the tip of a looming iceberg of government rationing. It must be challenged.”

 – The Wall Street Journal’s editorial “Death Panels' Come Back to Life: The FDA's restrictions on the drug Avastin are the beginning of a long slide toward health-care rationing,” David Rivkin and Elizabeth Foley, December 30, 2010

Fact file

  • January 1, 2011: the first of the Baby Boomers will reach the age of 65. (Source: U.S. Bureau of the Census)
  • Total Medicaid enrollment million in 2009: 50.3 million—up 2.4 million over 2008, with half the increase among children. (Source: CMS)
  • FDA approved about 21 drugs in 2010 vs. 26 in 2009. (Source: FDA)
  • Average per capita health cost increase: 6.7 percent in year ending on October 2010. Costs for health plan claims increased 8.21 percent, costs for Medicare claims increased 4.18 percent—lowest rate since January 2008. (Source: Standard & Poor’s Healthcare Economic Composite Index)
  • Seventy-five percent of the uninsured are in working families, 61 percent are from families with one or more full-time workers and 16 percent from families with part-time workers. (Source: Kaiser Family Foundation)
  • Forty-five states face shortfalls in 2011 led by Nevada (55 percent), Illinois (40 percent), New Jersey (38 percent), Arizona (36 percent), and Maine (35 percent). The states without a shortfall include: Alabama, Hawaii, Arkansas, Montana, North Dakota (Source: Center for Budget and Policy Priorities)
  • 2010 pharmaceutical and biotechnology industry investment in research for new drugs: $65.3 billion. (Source: PhaRMA)
  • The National Committee for Quality Assurance, which has a long history of rating the performance of health insurers, started a medical home program in 2008 and, since then, has recognized 1,161 practices as meeting its medical home standards. (Source: Modern Healthcare)
  • Official 2010 population: 308,745,538 Americans—up 9.7 percent since 2000, the slowest rate of growth since the 1930s. Results in changes in House seats: seat gains in Texas (4), Florida (2), Arizona (1), Georgia (1), Nevada (1), South Carolina (1), and Utah (1) and seat losses in New York (2), Ohio (2), Illinois (1), Louisiana (1), Massachusetts (1), and New Jersey (1). (Source: U.S. Bureau of the Census Report December 21, 2010)
  • 336 of the 435 Congressional districts’ borders are drawn by state legislatures: Republicans have full control of 196, Democrats control 49, and 91 are split. The rest (99) are drawn by divided legislatures or appointed commissions. (Source: The New York Times)
  • Facebook impact: as of July 21, 2010, the 500 millionth person joined Facebook; 1 billion pieces of content posted daily; average of friends on Facebook: 150 per user; 2 million websites integrated with Facebook; and 10,000 new sites integrating every day. (Source: Time’s profile of its person of the year, Facebook CEO and Co-Founder Mark Zuckerberg, “Only Connect,” December 27-January 2, 2011)
  • Of the ten states losing House seats, Democrats will control redistricting in two: Massachusetts and Illinois. (Source: Gallup)
  • Average 2008 Medicare revenue per primary care physician in U.S.: $50,000. (Source: CMS)
  • Fifteen percent of physicians in the U.S. practice in a large group or integrated health system. (Source: Crosson et al “ 21st Century Healthcare: the Case for Integrated Health Systems” New England Journal of Medicine 2009: 361 (14) 1324-1325)
  • Paperless systems: 57 percent of companies paid bills by paper checks in 2010, down from 74 percent in 2007. Seventy-five percent of retail transactions are electronic. (Source: National Retail Federation)
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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