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Health Care Reform Memo: March 29, 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.

Health reform bills pass: What’s ahead?

Thursday, the health reform bills (HR3590, HR4872) became law as the Senate passed amendments to its original bill passed December 24, 2009.

The 2010-2011 changes most noticeable to consumers will be:

  1. Drug, medical device industry fees: $2.5 billion/year on drug companies (annual increases to $4.2B in 2018, then $2.8B/year 2019 and after)
  2. Medicaid expansion: States may increase eligibility threshold to 133 percent of the federal poverty level (mandated by 2014)
  3. Donut hole in Part D: Seniors enrolled in Part D will receive a rebate for up to $250 and in 2011 will start seeing discounts up to 50 percent for brand name medications (donut hole eliminated by 2020)
  4. Tax credits for small businesses: Businesses with 25 or fewer employees and average wages of less than $50,000 can qualify for a tax credit of up to 35 percent of the cost of their premiums
  5. Dependent coverage: Parents are allowed to keep children on their health insurance until age 26 if the child is ineligible for coverage through an employer
  6. High-risk pools: In the next 90 days, individuals with pre-existing conditions that left them uninsurable for the last six months may enroll in a new high-risk insurance program subsidized by the federal government and administered by the states
  7. Risk assessments and preventive health plans for seniors: Effective 2011, Medicare enrollees will be provided a comprehensive risk assessments and personalized prevention plans as part of the program
  8. Insurance industry regulatory changes: Lifetime caps eliminated, rescission of coverage for other than fraud eliminated, mandatory reporting of medical loss ratios, and elimination of pre-existing condition as a basis for coverage for children under two years of age (begins for adults in 2014)
  9. Physician bonuses: Primary care and general surgeons who practice in underserved areas will be eligible for 10 percent bonuses
  10. Federal subsidies for retiree health costs: Through 2013, the federal government covers 80 percent of retiree medical claims of more than $15,000 through 2013, capped at $90,000 — at which point the employer’s plan will pay the rest
  11. Long-term care: In 2011, the provisions of the CLASS act funding long-term care services through voluntary premiums (w/o a federal subsidy) begins; includes provisions for individuals with disabilities and cognitive impairment to receive coverage

In 2012, Medicare Advantage (Part C) plan cuts begin lowering payments to insurance companies. The tax deduction for expenses funded through the Medicare Part D subsidy is also eliminated.

In 2013, the major item getting attention of consumers will be the Medicare payroll tax: an additional 0.9 percent tax on wages and earnings from self-employment for singles with adjusted gross income (AGI) of $200,000 and families with an AGI of $250,000 plus a 3.8 percent tax on capital gains, dividends, interest and other “unearned income.” Deloitte’s Tax Practice calculates the additional wage tax will be $450 for a single person earning $250,000, $2,250 for a family earning $500,000 and $6,750 for a family with $1,000,000 AGI. In addition, Medicare will begin episode-based payments to hospitals and doctors who bundle services and coordinate care. A 2.3 percent tax on certain medical devices also takes effect in 2013. For more information, please visit Deloitte’s Prescription for change ‘filled’: Tax provisions in the Patient Protection and Affordable Care Act.

And in 2014, the most significant changes begin: Medicaid is expanded to 133 percent of the FPL, employers begin paying penalties if they do not provide qualified health insurance coverage to employees, individual mandates begin with subsidies for individuals/families up to 400 percent of the FPL and penalties for non-participation, and health exchanges are set up with states holding the option of starting not-for-profit insurance plans to compete with private plans where competition is weak. Independent Payment Advisory Board starts its work to oversee Medicare payments to providers, drug and medical device companies and insurance plans. And industry fees from insurance companies start: $8B in 2014 increasing to $14.3B in 2018, after which the fee will rise yearly by the rate of premium growth based on industry averages discounted for not-for-profit plans.

In 2017, businesses with more than 100 employees can purchase insurance through exchanges.

And finally, in 2018, sponsors of high-cost insurance plans are subject to a 40 percent tax if the plan is valued at more than $10,200 for individuals or $27,500 for families. These thresholds are increased by $1,650 and $3,450 for retirees and certain high-risk professions.

For most industry groups, the impact is still being calculated. For most consumers, confusion seems understandable since the enormity of the bill and the attention it has received are seemingly overwhelming.
In the next two weeks, we will spotlight the likely impacts on each sector of health delivery: What parts of the reform bill will affect which sector most, and what likely intended and unintended results need monitoring.

Deloitte Tax analysis

Deloitte Tax Practice has prepared an analysis of the health care reform tax provisions affecting businesses and individuals: Prescription for change ‘filled’: Tax provisions in the Patient Protection and Affordable Care Act. As soon as the President signs HR 4872, the analysis, which originally described the two bills separately, will be revised to provide a single integrated description of the tax changes.

Berwick named Centers for Medicare & Medicaid (CMS) head

Institute for Health Improvement (IHI) CEO Don Berwick, MD, will be named CMS Administrator today by the President and HHS Secretary Sebelius. Berwick is best known for IHI’s efforts to reduce medical errors in hospitals including the widely acclaimed “100,000 Lives” campaign targeting hospital-acquired infections. He founded the not-for-profit organization in 1991 and succeeds Mark McClellan as CMS Administrator. McClellan was the last fulltime CMS Administrator, leaving the post in 2006. It has been filled by interim replacements since.

Physician fix in limbo

The much-watched sustainable growth rate (SGR) fix for physicians is nowhere in sight. The likely scenario is a temporary adjustment to the formula that would avert a 21 percent cut next month, and the appointment of a commission to create a new formula that accommodates changes in technology, increased attention to chronic and preventive health, access to targeted workforce shortages (primary care, general surgery), demand in high intensity services (ortho-neuro, non-invasive cardio) and balances professional and technical fees in formula. To complicate matters, the implementation of the formula will necessarily need to accommodate implementation of the new ICD-10 coding system in 2013.

Food and Drug Administration (FDA) looking at device approval process

In a much-watched episode in the FDA, a challenge made to the 510K approval process for replacement medical devices (such as ReGen’s Menaflex) suggests the agency’s oversight of device approvals is likely to intensify in coming months. Previously, the agency indicated it was re-thinking its policy toward the use of the 13 private contractors who perform reviews on its behalf. More to come as the FDA continues its transformation.


“The key thing for our fiscal future and for slowing cost growth over time is reorienting the system toward quality. This is the single most consequential piece of legislation that moves in that direction in the history of the country” 

– Peter Orszag, Director, Office of Management and Budget, Wednesday, March 24, 2010

“Most medicine is delivered by teams of people, with the physician, in theory, the team captain. Yet we don’t train physicians how to lead teams or be team members. This should begin in medical school…The stories we doctors tell ourselves about what it means to be great are very important to who we are, but they create cognitive dissonance. We like to imagine we can be infallible and be that heroic healer. But the fact is, it’s teams and often great organizations that make for great care, not just individuals. So we need to change these stories we tell ourselves and reshape the discussion…We’ve celebrated cowboys, but what we need is more pit crews.”

 – Interview in Harvard Business Review, April 2010 with Atul Gawande, MD, author of The Checklist Manifesto (2010)

Fact file

  • Medicare cuts: $439 billion—total cuts from forecast Medicare expenditures 2010-2019 included in funding for health reform bills. Includes cuts in payments to Medicare Advantage, hospitals and drug companies. (Source: Congressional Budget Office)
  • Advocacy: 1,541 organizations lobbied Congress for health reform in 2009, spending $576 million. (Source: Center for Responsive Politics)
  • Individual mandate challenges: Legislators in 36 states plan challenges to the constitutionality of the individual mandate (Source: American Legislative Exchange Council). Note: three UT, VA and ID have already passed laws precluding the mandate.
  • Primary care update: In 2010, 2,272 medical students will enter general internal medicine residencies – a 3.4 percent increase over 2009 but well below 1985 (3,884). However, only one in four of these is likely to practice general medicine—others are opting for medical specialties, e.g. cardiology, endocrinology, etc. Note: median compensation for PCPs is $173,000 vs. $419,000 for cardiology and $481,000 for orthopedic surgeons. MGMA data suggests median starting salaries for all primary care physicians grew by 7.4 percent between 2005-2008 to $150,000 while the median starting salaries for all specialists grew by 25 percent to $275,000. (Sources: 2010 National Resident Matching Program, American College of Surgeons, Medical Group Management Association)
  • Employment: The U.S. Department of Labor released February 2010 stats: Seasonally adjusted consumer price index was unchanged in February after increasing an unrevised 0.2 percent in January. Core consumer prices, which strip out volatile energy and food items, were up by a monthly 0.1 percent in February. In January, core prices fell by 0.1 percent. On an annual basis, which is not adjusted for seasonal factors, consumer prices rose by 2.1 percent in February. Core consumer prices rose by 1.3 percent from 12 months ago, the lowest increase since February 2004.
  • Massachusetts reform update: 97 percent of the population is insured; 68 percent of the state’s 408,000 newly insured receive subsidies and half of these pay nothing. A Massachusetts family of four pays annual health costs of nearly $13,788, the highest in the country and 27 percent higher than the national average. 56 percent of Massachusetts internal medicine physicians no longer are accepting new patients and for new patients who do get an appointment with a primary-care doctor, the average waiting time is 44 days. (Sources: Massachusetts Medical Society, Massachusetts Connector, Health Affairs)

My take

On February 24, 2009, the President spoke to Congress in his first address to a joint session announcing “reducing costs and covering everyone” were his goals for health reform. He expressed desire that Congress pass a bill in 2009 and challenged it to deliver the bill. Last week, health reform circa 2010 passed along partisan lines. The combined bill—HR3590 and HR4872—is now the law of the land.

It features expansion of coverage to 32 million currently uninsured, regulatory changes to control premiums and competition for insurance plans, delivery system reforms to coordinate care and reward value instead of volume, and mechanisms to bridge gaps between human services programs and health care especially for underserved populations.

Will it bend the cost curve? No one really knows for sure. Even the Congressional Budget Office ascribes its estimates as “preliminary”. The impact of insurance reforms combined with new industry taxes will likely increase premiums above the underlying cost of health for most Americans. And the physician fix is not “fixed” even as economic recovery is slower than hoped. Curve-bending resulting from delivery system reforms—integrated health systems, evidence-based medicine, the medical homes, pay for performance, primary and preventive health—combined with a dose of personal accountability for healthier living and adherence to recommended treatments—are delayed in the bill so we’ll likely not know until after the decade is past. Though promising and logical, unknowns prevail.

Will access to insurance for underinsured populations increase? It appears so. That up to 32 million will have access to health insurance through Medicaid or private insurance is encouraging, but conservative estimates that at least 25 million others will lack coverage at the end of the decade is disappointing. And an unintended consequence of Medicaid expansion might be logjams in doctors’ offices and emergency rooms. The wait for a new primary care patient in Massachusetts is now 44 days and physicians are crumbling.

Will quality of care improve? Conceivably the deployment of health care information technology, implementation of comparative effectiveness, transparency of outcomes and satisfaction will increase its likelihood. And the promise of widespread use of electronic health records with personal health records is worth serious pursuit.

On reflection, the public debate about health reform polarized opinion already pulled apart by special interests and sectarian media coverage on all sides. Both sides have claimed unique insight about what “the American people” like and dislike. Each has come to different conclusions. And somewhere along the way, health care became a test of sound bites instead of a reasonable discussion of complex topics about which evidence in some cases is lacking or conflicting.

Demonization of key industry groups—insurance companies, pharmaceutical companies, hospitals and physicians—opened wounds that are not likely soon to heal. And the impact of personal accountability to lead healthier lives and engage actively in managing one’s health was seemingly lost in the public discourse.

Health reform is not about bad people; it is about a flawed system. The remedy requires innovation among all stakeholders in a regulatory climate that rewards risk while assuring fairness. It requires finding middle ground on complex issues for which trade-offs are necessary. It means changes for everyone including regulators, industry leaders, and consumers.

The events of the past year hopefully will lead us on a path to fundamental improvements in the U.S. health system that improve quality, rein in unsustainable costs, and eliminate disparities in access. And perhaps it might spark the beginning of a change in the way discourse about complex issues is carried out.

Health care is deeply personal and highly complex. It is too important to default to sound bites and pandering politics. It is too complicated to be relegated to simple black and white options, especially when information is missing and alternative solutions untested. The health care industry is foundational to our society and fundamental to the economy. So at the least, health reform circa 2009-2010 will be remembered as the beginning of a timely and important discussion about this industry. And ideally, all stakeholders will embark on transformational changes in their organizations that reward innovation and efficiency.

It’s a new day. The health care industry will thrive because it’s too important to fail.

Paul Keckley

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

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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