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Health Care Reform Memo: September 13, 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 administration and implications for the C-suite and various stakeholder groups.

My take 

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

Congress returned from its August recess and the economy is its focus. Unemployment seems stalled at 9.7 percent. The annual deficit will be $1.3 trillion for FY10 when the U.S. Department of the Treasury closes his books September 30 following a $1.4 trillion deficit in FY09. Polls suggest voters are anxious about the economy; economists now caution against a possible double dip recession. In the midst of this, it’s election year, compounding confusion and escalating rhetoric.

Health care costs will likely be in the spotlight as a result. Health care expenditures are 23 percent of the federal budget, 22 percent of the average state budget and 16 percent of household discretionary spending—second only to housing costs. They’ll reach $4.6 trillion in 2019 and account for 20 percent of every dollar spent. Last week, the Congressional Budget Office (CBO) increased its 10-year annual Medicare spending forecast from 6.1 percent to 6.3 percent. Also last week, several insurance companies announced October 1 premium increases to cover medical costs and regulatory compliance requirements resulting from health reform.

That health costs are increasing is a surprise to no one. What it means and how to reduce costs without compromising care, remain elusive. For most, the crosswalk between economic recovery and health cost containment is unclear. And the system does not enjoy a reputation among voters who are prepared to defend its value proposition at any cost. Consider:

  • 35 percent of U.S. adults grade the system D/F vs. 21 percent who give it an A/B
  • 28 percent believe 50 percent or more of what’s spent is wasted
  • 42 percent prefer an employer-sponsored health insurance plan to a government plan

(Source: Deloitte 2010 U.S. Survey of Health Care Consumers)

Health system reform that controls costs while providing evidence-based care equitably to its citizens is widely sought by the left and right. Differences are about how, and at what price. And bringing along voters (consumers) is even more challenging.

So in the countdown to November 2, it’s unlikely politicos will wade into the complexities of what drives health costs, how the health industry might contribute to economic growth, how unhealthy lifestyles and inequities in the delivery of care occur, how regional inappropriate variation is rampant, how consumer expectations drive unnecessary costs or how the industry can be so data-rich and still lack actionable information. It’s simply too complicated for most.

In 2003, I was asked to start a program in Vanderbilt’s Owen Graduate School of Business for health care MBA students with a goal of describing and stress testing the complexity of the system. I didn’t know where to start. I created a model, assigned every sector to the framework (below) and monitored emerging technologies, business models, fund flows and performance criteria that separated winners from losers. Fast forward to 2010: The system remains complex, expensive and cumbersome. Health reform accelerated the attention it now gets; its costs in the context of economic recovery complicate matters. However, the trajectory of changes to this industry is not new. Innovation, efficiency and the right balance of profit and purpose are keys to sustainability for its stakeholders then and now.

Does the industry contribute positively to the economy? Yes. Has it operated efficiently and effectively, and is its value proposition strong to patients and consumers? Regrettably, no. And are its costs sustainable given the imperative for economic recovery? Probably not.

Health reform and economic recovery are inextricably linked. Escalating health costs limit the effectiveness of the federal government to appropriate resources for domestic and global impact. They put Governors and state legislators in the cross fire of declining revenues and increased obligations to Medicaid and state employee health benefits. They force difficult trade-offs between wage increases and benefits costs in the C-suite and in America’s living rooms where health premiums keep going up while paychecks don’t.

On February 24, 2009, President Obama announced plans to pass a health reform bill that would reduce costs and cover everyone. Then, as now, reducing costs may be its greatest challenge.

Paul Keckely

Paul Keckley, Ph.D.


The U.S. Health System Today: Fragmented, Expensive, Complicated, Disconnected


Premium increase announcements, HHS response

Tuesday, health insurance premiums grabbed headlines again. The headline in The Wall Street Journal “Health Insurers Plan Hikes: Rate Increases Are Blamed on Health-Care Overhaul; White House Questions Logic” captured the give and take between the insurance industry and administration officials. The article cited recent premium increase plans by companies in Oregon, North Carolina, Nevada, Washington, Massachusetts, California and Wisconsin ranging from 3 – 17 percent for individual and small group plans. The article also noted plans in Texas and Colorado that they were cancelling policies for certain groups due to the new federal regulations in the Patient Protection and Affordable Care Act (PPACA). In response, administration spokespersons (U.S. Department of Health and Human Services (HHS) Secretary Sebelius, White House Office of Health Reform Director DeParle) challenged the veracity and timing of the premium increases in feisty exchanges with media and a letter to the industry trade association, America’s Health Insurance Plans (AHIP). Earlier, the administration had said it expected premiums to increase 1-2 percent as a result of the bill’s requirements that plans adhere to various coverage and denial requirements under PPACA. Additional costs for PPACA compliance provided by four plans referenced in the article ranged from 3.4 – 9 percent in addition to medical costs increases ranging from 4 – 20.73 percent.

Rules for annual limits issued

Friday, sub-regulatory guidance about annual limits was issued by HHS:

Background on Annual Limits

Under PPACA (Section 2711), group health plans and health insurance issuers offering group and individual coverage are prohibited from imposing annual limits on the dollar value of health benefits. Although this provision goes into effect for plan years beginning on or after September 23, 2010, PPACA allows for restricted annual limits on the dollar value of essential health benefits for plan years beginning before January 1, 2014. Grandfathered individual policies are exempt from the provision, meaning that these grandfathered individual plans may continue to impose annual limits for plan years beginning before January 1, 2014.

The regulations implement a three-year phase-in of the restrictions on annual limits. The restrictions, which apply on an individual-by-individual basis, are as follows:

  • For plan years beginning on or after September 23, 2010 through September 23, 2011, the annual limits on the dollar value of benefits may not be less than $750,000
  • For plan years beginning on or after September 23, 2011 through September 23, 2012, the annual limits on the dollar value of benefits may not be less than $1.25 million
  • For plan years beginning on or after September 23, 2012 through January 1, 2014, the annual limits on the dollar value of benefits may not be less $2 million

The restriction on annual limits does not apply to health flexible spending arrangements (health FSAs), Medical Savings Accounts (MSAs) and Health Savings Accounts (HSAs). In addition, the annual limits restriction does not apply to retiree-only Health Reimbursement Arrangements (HRAs) or HRAs combined with other coverage as part of a group health plan.

For individuals enrolled in limited benefit plans (mini-medical) or in other similar coverage, the Secretary of HHS will establish a program to waive requirements related to restricted annual limits if complying with these regulations would result in a decrease in access to benefits or a significant increase in premiums.

Sub-regulatory Guidance

A group health plan or health plan issuer may apply for a waiver, which would only apply to plan years beginning between September 23, 2010, and September 23, 2011. Among other items, the application must include an attestation, signed by the plan administrator or Chief Executive Officer of the issuer of the coverage, certifying:

  1. That the plan was in force prior to September 23, 2010; and
  2. That the application of restricted annual limits to such plans or policies would result in a significant decrease in access to benefits for those currently covered by such plans or policies, or a significant increase in premiums paid by those covered by such plans or policies. The waiver is only valid for one year; plans must reapply for any subsequent plan or policy year, in accordance with future guidance from HHS.

2,000 employers, organizations approved for early retiree program

Tuesday, HHS announced it approved 2,000 employers and unions to participate in the $5 billion early retiree reinsurance program created in PPACA (Section 1102). The program to be operated by HHS’ new Office of Consumer Information and Insurance Oversight targets retirees age 55 and older not eligible for Medicare. The list of eligible employers (from public and private organizations) includes manufacturers, hospitals, health plans, unions, states (7), local governments and educational institutions, among others. Employers get up to 80 percent reimbursement for medical claims for early retirees and their spouses, surviving spouses and dependents. Funds are to be used to reduce future employee health care costs via premium relief to workers and families, or both. The program ends January 1, 2014, when state health insurance exchanges begin operating. Note: Employers may still apply for the program; contact the Early Retiree Reinsurance Program by contacting its hotline (877-574-3777 or 877-574-ERRP).

Plan profitability under PPACA: Weiss Ratings study of 543 health insurance plans

In 2014, states will be empowered to exclude health plans with excessive/ unjustified premium increases. Per Weiss Ratings’ analysis of 226 “not yet compliant” plans and 317 “already compliant” plans, companies that would have complied in 2009 had a net profit margin of 0.7 percent, while non-compliant plans had average net margins of 6.3 percent. Underwriting income, the difference between premiums collected and medical claims paid, showed major differences between the cohorts: The “already compliant” companies had an average underwriting margin of -0.2 percent; the “not yet compliant” had an average underwriting margin of +5 percent. “As long as their investment incomes hold up, most large insurers should be able to handle the increased medical expenses expected under the new health care reform,” Martin D. Weiss, Ph.D., Weiss Ratings president stated. “If investment income declines significantly, however, few insurers will be able to comply without debilitating impacts to their bottom line, and ultimately, their financial stability as well.” Note: Weiss Ratings provides independent analytics of the health insurance industry (

More primary care physicians does not correlate to better care: Dartmouth study

Thursday, researchers with the Dartmouth Atlas Project released their analysis of the relationship between Medicare enrollee access to primary care physicians and the quality of care received, finding no strong correlation and widespread variation in access and quality.

Per lead researcher David C. Goodman, M.D., M.S. of the Dartmouth Medical School, “Our findings suggest that the nation’s primary care deficit won’t be solved by simply increasing access to primary care, either by boosting the number of primary care physicians in an area or by ensuring that most patients have better insurance coverage. Policy should also focus on improving the actual services primary care clinicians provide and making sure their efforts are coordinated with those of other providers, including specialists, and nurses and hospitals.” (Study can be obtained at

Judge denies request from White House for continuation of stem cell research

Tuesday, U.S. Chief District Court Judge Royce C. Lamberth denied the administration’s emergency request to stay a preliminary injunction against federal funding for stem cell research while the government appeals the judge’s ruling. The judge had ruled current research violated 1996 rulings by Congress precluding the use of taxpayer money to destroy embryos used in studies.

Update: Pay for Delay Prescription Drugs

Tuesday, a federal appeals court upheld the U.S. Second Circuit Court of Appeals April ruling that a drug company may pay a generic manufacturer to keep a drug off the market. Retail drug chains are challenging the ruling; it is likely to end up in the Supreme Court.

Q & A

Q: With the physician fix scheduled to expire November 30, 2010, what is likely to happen to physician pay from Medicare?

A: Currently, the “sustainable growth rate formula” (SGR) calls for physicians to take a 23 percent cut from Medicare December 1, 2010, 6.5 percent cut January 1, 2011 and another 2.9 percent cut January 1, 2012. It’s not likely this will happen. Since 2004, overpayments to physicians based on the SGR model have been authorized by Congress nine times. We anticipate they’ll do it a 10th time, perhaps extending a temporary fix this time until 2014 when the new Independent Payment Advisory Board (IPAB, PPACA Section 3403) is authorized to set payments for physicians. IPAB will have enormous clout: It is a 15-person Board appointed by the President and approved by the Senate. It is charged with extending the solvency of Medicare, slowing Medicare cost growth and improving the quality of care delivered to Medicare beneficiaries. It is prohibited from making recommendations that ration care, raise revenues, increase beneficiary premiums (under Sections 1818, 1818A or 1839) or modify Medicare benefits, eligibility or cost-sharing requirements. Members serve six-year terms and are employed full-time. IPAB must submit its recommendations to Congress by January 1, 2014 that are to be implemented within 90 days. Prior to 2018, if the projected Medicare per-capita growth rate exceeds the average of the Consumer Price Index (CPI) and CPI–M, the Board shall be required to submit a proposal to Congress by January 1, 2014 that shall include recommendations for reducing the Medicare per-capita growth rate by 0.5 percent for 2015, 1 percent for 2016, 1.25 percent for 2017 and 1.5 percent for 2018 and subsequent years. Bottom line: Physician payments long-term will be subject to IPAB and are likely to go down after 2014. At that point, accrued overpayments to physicians totaling $330 billion dating back to 2004 will likely be added to the deficit.

Other elements of PPACA complicate matters for physicians: Physician self-referral limitations (Sections 6001-05), the application of the Patient-Centered Outcomes Research Institute’s guidelines that might challenge physician autonomy in treatment plans for patients (Section 6301), increased scrutiny of fraud (Section 10606), higher costs for prescription drugs and devices as companies pass through new regulatory compliance costs (Sections 9008, 9009), downward pressure on fees paid by insurance companies that face increased costs of regulation and new taxes (Sections 2701-09, 2711-19, 9001, 9010), increased use of bundled payments to hospitals forcing physicians to share income and risk with acute providers (Section 3022) and increased transparency requirements allowing public access to information about physician safety, outcomes, practice patterns, costs and patient satisfaction (Sections 10327, 10331, 3002-03), to name a few. For physicians, Medicare payment rates via the “physician fix” debate are perhaps a current focus, but other elements of reform legislation might be more challenging than expected.


“There will be zero tolerance for this type of misinformation and unjustified rate increases…Simply stated, we will not stand idly by as insurers blame their premium hikes and increased profits on the requirement that they provide consumers with basic protections…bad actors may be excluded from new health insurance markets that will open in 2014 under the law.”

 – Source: Letter to AHIP from Secretary Kathleen Sebelius, responding to premium increase announcements Wednesday in The Wall Street Journal, Thursday, September 9, 2010

“It’s a basic law of economics that additional benefits incur additional costs, and the impact on premiums depends on the type and amount of coverage policyholders had before. Health insurance premiums are increasing because of soaring prices for medical services, the impact of younger and healthier people dropping their insurance during the weak economy, and additional benefits required under the new law.”

 – Source: Karen Ignagni, president of AHIP, Thursday, September 9, 2010

“The Congressional Budget Office estimates that an astonishing half or more of the increased spending for health care in recent decades is due to technological, surgical and clinical advances. For the most part, such advances are a cause for celebration. But an expensive new drug is not always better than an older, cheaper drug, and sometimes a new technology or treatment that is highly effective for some patients is unnecessary or even dangerous for others….No one wants to bar patients from getting the treatment they need. But without curtailing the use of unnecessary, overly costly and even dangerous new technologies and surgical procedures, there is little hope of restraining the relentless rise in health care costs. That is a truth that American politicians and taxpayers cannot afford to ignore for much longer.”

 – Source: “Is Newer Better? Not Always,” The New York Times, Editorial, Saturday, September 11, 2010

Fact file

  • Election Day, November 2, 2010: 435 House seats up for grabs (43 open seats due to retirements/other circumstances), 37 Senate seats (15 open) and 37 Governor’s races (24 open). (Source: Politico)
  • Poll results: What matters in choosing a candidate you’d vote for? 61 percent favor “cutting government spending” vs. 28 percent opposed; 45 percent “repeal the health reform law” vs. 42 percent “keep reform bill”. (Source: The Wall Street Journal/NBC News Poll, Thursday, September 9, 2010)
  • Health costs in military budget: 6 percent in 2010, 10 percent in 2015. (Source: U.S. Department of Defense)
  • Key assumptions in reform bill per CBO announcement Thursday, September 9, 2010: Annual Medicare cost increases will increase from 6.6 percent in 2010 to 9.2 percent in 2014 and 6.7 percent for 2015-19, then end the decade at an annual rate of 6.3 percent (versus its earlier forecast of 6.1 percent). (Source: Centers for Medicare and Medicaid Services)
  • Costs of medical malpractice and defensive medicine in U.S.: 2.4 percent of spending/$55.6 billion per year. Costs for defensive medicine—additional tests, visits, procedures done to avoid litigation: $45.6 billion of total. (Source: “National Costs Of The Medical Liability System,” Michelle M. Mello, Amitabh Chandra, Atul A. Gawande and David M. Studdert, Health Affairs, 29, no. 9 (2010): 1569-1577)
  • Study of 35 medical specialties: Tort reform changes to cap pain and suffering would reduce medical malpractice premiums by 10 percent and reduce the nation’s total medical costs by 0.120 – 0.134 percent resulting in savings of $20 billion between 2010 and 2019. (Source: J. William Thomas, Ph.D., Cutler Institute for Health and Social Policy, University of Southern Maine)
  • Breakdown of the 354 million annual visits to doctors/acute facilities from 2001 to 2004: 42 percent to the patients’ personal physicians, 28 percent to emergency rooms, 20 percent to specialists, 7 percent to other outpatient settings. Half of visits of those without health insurance were to emergency rooms. (Source: “Where Americans Get Acute Care: Increasingly, It’s Not At Their Doctor’s Office,” Stephen R. Pitts, Emily R. Carrier, Eugene C. Rich and Arthur L. Kellermann,” Health Affairs, 29, no. 9 (2010): 1620-1629)
  • Health plan quality review by employers: 34 percent of firms employing at least 200 people and 5 percent of firms employing between three and 199 people reported reviewing performance indicators of health insurance plans’ clinical and service quality. (Source: Health Research and Education Trust study released Tuesday, September 8, 2010)
  • High risk pools update: Of the 4 million eligible for the new program that runs through 2014, only 2,000 have applied as of August 1. Twenty-three states opted to have the federal government run their plans. (Source: National Conference of State Legislatures)
  • 9 percent of commercially insured Americans buy individual insurance policies. (Source: U.S. Bureau of the Census)
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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