Health Care Reform Memo: November 28, 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.
From Paul Keckley, Executive Director, Deloitte Center for Health Solutions
Last week, the Joint Select Committee on Deficit Reduction (Super Committee) threw in the towel. It had been tasked to come up with a combination of spending cuts and revenue enhancements totaling $1.2 trillion by November 23 pursuant to a vote by Congress by December 23. It came up short. Plan B is now in operation: automatic cuts of $1.2 trillion starting in 2013—the sequestration default.
I will leave it to the pundits to assign responsibility for its failure: a skeptic might conclude the political environment in Washington is so toxic that compromise is virtually impossible.
Four simple observations:
The budget situation in the U.S. is frightening. The deficit must be addressed. Consider: over the next ten years, the federal government will spend $44 trillion—$7 to 11 trillion more than we produce in revenues from taxes. That’s a staggering gap. There are lots of reasons. It’s complicated and not easily fixed, especially in an election cycle. Two bipartisan commissions recommended cuts of $3.9 or $5.9 trillion (the National Commission on Fiscal Responsibility and Reform and the Bipartisan Policy Center’s Debt Reduction Task Force), major credit rating agencies had encouraged at least $4 trillion, but after combining the August cuts ($900 billion) plus the sequestered cuts of $1.2 trillion, the result falls short. The gap between revenues and costs will continue to increase unless decisive action is taken.
Health care spending contributes to the gap. Consider: Medicare spending increased 7.9 percent annually from 2008-2010 while the country encountered a recession. Medicaid spending by the federal government increased 9 percent annually in the same period. Together, the programs represent more than 23 percent of the federal budget. Through 2020, average annual health spending increase is forecast to be 5.8 percent, outpacing overall annual economic growth by 1.1 percent (based on fairly optimistic projection of above 4 percent gross domestic product (GDP) growth at the end of the decade). By 2020, national health spending will exceed $4.6 trillion, comprise 19.8 percent of the GDP, and be about 50 percent of the federal budget in 2020. (Source: Centers for Medicare & Medicaid Services [CMS], National Health Expenditures data). The gap can’t be closed unless innovative solutions are applied to federal health programs. Protecting the status quo only widens the gap and defers its balance due to future generations.
Consumers have serious skin in the game. When co-payments, deductibles, over-the counter products, and care provided to others is added, the average household spends 19.8 percent of discretionary income on its health care—more than transportation, food costs, and second only to housing. (Deloitte Center for Health Solutions, “The hidden costs of U.S. health care for consumers: A comprehensive Analysis,” March 2011). For the 169 million people with employer-sponsored insurance coverage, the majority of premium increases expected in 2012 (the range is 7 percent to 17 percent, depending on company size and plan, according to America’s Health Insurance Plans [AHIP]) will be passed through via increased co-payments, reduced benefits, or coverage dropped altogether. For those in Medicare and Medicaid, increased enrollment with fewer tax dollars to cover services means less access and more cost-sharing unless structural changes are made in each program. And for those without coverage—50 million and increasing—it means the system will be less accessible, public health programs strapped, and increased pushback from employers unwilling to pay a hidden tax to subsidize coverage for employers who do not insure their employees and individuals that choose to take their chances. (Source: U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage data). Make no mistake: the cost of the health system is embedded in every item we buy. But it is virtually invisible to most consumers because it’s hidden in indirect pass-throughs, piece-meal co-payments, and transfer taxes from those who don’t pay to those who do. Consumers will catch on; it’s just a matter of time. And most consumers (52 percent) already recognize the rampant waste in the system. (Deloitte Center for Health Solutions, “2011 U.S. Survey of Health Care Consumers,” June 2011).
It can be fixed. There are three simple solutions to slow health spending without compromising quality and safety. First, incentives for doctors and hospitals must change from volume to results—safety, efficiency, and outcomes. As much as 30 percent of the care provided is not medically necessary or evidence based: it’s no longer affordable. (Source: CMS, Office of the Actuary). Two, we must leverage information technologies that equip doctors, hospitals, nurses, and consumers to make better decisions about their care. Accelerating widespread deployment of electronic medical records (EMRs) connected to personal health records (PHRs) owned by consumers will accelerate widespread transformation of the system. Third, consumers must have skin in the game. The failure of the system to control its costs is in large measure attributable to our benign neglect to engage individuals and their families as THE primary customer. Our tradition is to call them “patients” and assume they will be. They’re not “patients” nor “patient”, nor enrollees, nor subjects—they are consumers. And they will increasingly demand more value for the dollar they spend in the system.
Only time will tell how the Millennials react to the health system’s aversion to change. The urgent matter at hand is how to reduce health costs while enhancing safety, outcomes, and service delivery. It’s achievable. It’s necessary.
Paul Keckley, Ph.D., Executive Director, Deloitte Center for Health Solutions
Insurance commissioners urge action protect agents and brokers
Last Tuesday, the National Association of Insurance Commissioners (NAIC) passed a resolution urging Congress and the U.S. Department of Health and Human Services (HHS) to amend the Affordable Care Act’s (ACA) medical loss ratio (MLR) provision and requirements per Section 1001: “Congress should expeditiously consider legislation amending the MLR provisions of the ACA in order to preserve consumer access to agents and brokers, and the Department of Health and Human Services should take whatever immediate actions are available to the Department to mitigate the adverse effects the MLR rule is having on the ability of insurance producers to serve the demands and needs of consumers and to more appropriately classify producer compensation in the final PPACA MLR rule.”
Reconciling ACA Costs after CLASS is withdrawn
In March, 2010, the Congressional Budget Office (CBO) scored the ACA as reducing the deficit by $210 billion in the years 2012-2021. Relative to CBO’s March 2011 baseline, $83 billion of these savings would come from its Community Living Assistance Services and Supports (CLASS) program because it received premiums from enrollees for five years before it paying any claims, thereby making the program appear to be “deficit-reducing” in the near term.
Per an October 31 CBO analysis, eliminating the CLASS program from ACA will have no budgetary effect, resulting in no deficit savings or costs.
Note: CBO originally estimated in November 2009 that the CLASS program would save $72 billion over ten years. They have since revised their estimates on the CLASS program, the latest being their October 31 analysis.
Supreme Court health reform cases
This spring, the U.S. Supreme Court will review these cases regarding ACA: National Federation of Independent Business v. Sebelius, No. 11-393; U.S. Department of Health and Human Services v. Florida, No. 11-398; and Florida v. Department of Health and Human Services, No. 11-400.
NCQA announces ACO accreditation program
Last Monday, the National Committee for Quality Assurance (NCQA) released its standards for accountable care organization (ACO) accreditation, aligning with many aspects of the “Medicare Shared Savings Program” per ACA Section 3022.
The “triple aim” sought by NCQA for all accredited ACOs are strong performance or significant improvement in (1) clinical quality, (2) patient experience, and (3) efficiency/utilization. To assess an ACOs capabilities, seven functional areas will be examined:
- Program Operations
- Access and Availability
- Primary Care
- Care Management
- Care Coordination and Transitions
- Patient Rights and Responsibilities
- Performance Reporting
NCQA will accredit ACOs at three levels:
- Level 1: Two-year provisional accreditation for organizations in formative or transformative stages that meet some standards but are not yet fully capable ACOs.
- Level 2: Three-year provisional status for organizations with the best chance of achieving the triple aim by entities demonstrating many but not all seven ACO capabilities.
- Level 3: organizations that achieved Level 2 and demonstrate strong performance or significant improvement in measures across the triple aim.
Note: organizations eligible for the NCQA’s ACO accreditation program include “providers in group practices, networks of individual practices, hospital/provider partnerships, hospitals and their employed or contracted providers, publicly governed entities that work with providers to arrange care and provider/health plan partnerships”.
Super Committee falls short; sequester next
November 21, the Super Committee announced it failed to reach agreement on a $1.2 trillion, ten-year package of spending cuts and revenue enhancements. The Budget Control Act (BCA) of 2011 (August 2, 2011) calls for a sequester of automatic spending cuts of $1.2 trillion starting in 2013 with cuts to Medicaid, military benefits, and Social Security precluded altogether, and a 2 percent cut ($123 billion) to Medicare allowed (in addition to schedule cuts resulting from the market basket updates). The cut in 2013 is estimated to equal $10.8 billion (Center for Budget and Policy Priorities). CBO estimates the BCA absent Congressional legislation (including a plan for the Super Committee) would reduce budget deficits by $917 billion between 2012 and 2021. Per rules in the sequester authorization, these cuts are authorized for 2013:
|Sequestration in 2013|
|Dollar reduction||Percent reduction|
|Non-defense Discretionary (NDD) programs||501||38.6|
|Veterans health and Pell grants, exempt (estimated)||80||0||0.0%|
|Health centers and Indian Health, 2% limit (estimated)||6||0.1||2.0%|
|Non-exempt mandatory programs||605||16.1|
|Medicare payments to providers and plans, 2% limit||542||10.8||2.0%|
Source: Richard Kogan, Center for Budget and Policy Priorities (CBPP), “How the Potential Across-the-Board Cuts in the Debt Limit Deal Would Occur,” updated November 22, 2011.
Note: CBPP’s estimates differ from CBO because they take into account funding outside the caps subject to sequestration (war funding and defense unobligated balances) or funding within the caps that is exempt from sequestration (VA medical care, Pell grants, and potentially Military Personnel) or subject to a 2 percent limit (health centers and Indian health.
Across the decade, hospitals will bear the lion’s share of sequestered cuts: 40 percent for inpatient and outpatient services, followed by group health insurance plans including Medicare Advantage (15 percent), physicians (12 percent), long-term care, including skilled nursing facilities and home health agencies (11 percent). (Source: Avalere Health LLC, “The Budget Control Act and the Impact of Sequestration on the Healthcare Industry,” November 2011).
Berwick resigns, Tavenner steps into CMS role
Last week, CMS Administrator Don Berwick, MD, announced his resignation effective December 2. He was a recess appointee in July 2010 and, as a result, did not go through the Senate’s confirmation process. Marilyn Tavenner, Deputy Administrator and former head of the Virginia Department of Health and Human Affairs and HCA executive assumes the post on an interim basis.
President signs Medicaid glitch fix
Last Monday, President Barack Obama signed a bill that prevents middle-income individuals from qualifying for Medicaid when the program expands in 2014. The glitch fix was included in a veterans’ employment bill, which repealed a 3 percent withholding requirement for government contractors.
Update: sustainable growth rate model and physician pay; temporary fix likely
Physicians are scheduled to see a 27.4 percent Medicare payment cut January 1 per the sustainable growth rate (SGR) formula. Some members of Congress had lobbied the Joint Select Committee to include a permanent fix in its deliberation. At the time, it would have added $300 billion to the deficit unless offset by other cuts. Last month, the Medicare Payment Advisory Commission announced its plan to repeal the SGR at a cost of $200 billion by freezing pay for primary care physicians for ten years and cutting specialists pay 5.9 percent for three years followed by a seven-year freeze.
There appear to be four options on the table: (1) new legislation to approve a short-term fix for up to two years as part of a bill extending Medicare payment policy—the most likely, (2) a continuing resolution to funding federal government operations that would include an adjustment, (3) a pay fix in legislation making tax changes that would include the Medicare extenders bill, or (4) do nothing.
Note: a temporary fix is likely as it is a political season. This will be the 13th time the SGR has been circumvented by Congress since 2001. Legislators, however, are increasingly wary of physician interests. Consider: to guard against financial gains from manufacturers of drugs and medical equipment and supplies on physician or hospital practice, ACA requires manufacturers to report payments or "transfers of value" to physicians or academic medical centers and teaching hospitals by January 1, 2012. The data collected is to be publicly viewable, according to the ACA by September 30, 2013.
Hospitals lose ground in sequester
As a result of the sequester, and assuming 2 percent cuts in Medicare payments across the board, hospitals moved from a net favorable position to red ink over ten years: preliminary analysis:
|Net gain from previously uninsured who become Medicaid eligible or purchase insurance through health exchanges (32 million)*||$177.3 billion|
Less ACA payment reductions and penalties:**
Net impact on hospitals resulting from ACA
|Less 40% of sequestered Medicare cuts for inpatient, outpatient services***||-49.2 billion|
|Less 20% of sequestered funds for physicians employed/fulltime faculty in U.S. hospitals (25%)***||-6.2 billion|
|Net impact with sequester||-$38.3 billion|
*American Hospital Association
**Patient Protection and Affordable Care Act, Congressional Budget Office
***Deloitte Center for Health Solutions
HHS rate review: Pennsylvania health insurer charging excessive premiums
Last Monday, the U.S. Department of Health and Human Services concluded its first rate review finding Everence Insurance of Pennsylvania’s 12 percent increase on small businesses premiums “excessive”. Per ACA (Section 2718), HHS will review premium increases where an insurer’s state-approved rate increase exceeds 10 percent. In its review of Everence, HHS concluded the company’s underlying cost assumptions were inaccurate since they were based on national norms rather than Pennsylvania-specific costs. HHS Secretary Kathleen Sebelius said, “by shining a light on unjustified premium increases, we will hold health insurers accountable like never before, and help keep money in the pockets of Americans.”
Study: retail clinic use up, popular among young urbanites
The use of retail clinics rose ten-fold between 2007 and 2009 based on data from 13.3 million commercially insured enrollees under 65. During the period studied, 3.8 million members of that population made at least one clinic visit. Clinic users were more likely to be female, younger than 44, and living in ZIP codes with median incomes of more than $59,000. “Proximity to a retail clinic was the strongest predictor of use. Patients living within 1 mile of a retail clinic were 7.5 percent more likely to use one than those living 10 to 20 miles away (P <.001). Women (0.9 percent, P<.001), young adults (1.6 percent, P <.001), patients without a chronic condition (0.9 percent, P <.001), and patients with high incomes (2.6 percent, P <.001) were more likely to use retail clinics. All these associations became stronger over time. There was no association between primary care physician availability and retail clinic use… If these trends continue, health plans will see a dramatic increase in retail clinic utilization. While use is increasing on average, it is particularly increasing among young, healthy, and higher income patients living close to retail clinics.” (Source: Ashwood et al, “Trends in Retail Clinic Use Among the Commercially Insured” American Journal of Managed Care (December 2011;17(11):e443-e448).
Physician notice of National Practitioner Database inquiries suspended pending rule
Physicians will no longer be notified if someone is checking their record in the Health Resources and Services Administration's (HRSA) National Practitioner Data Bank, per an HHS final rule published last Wednesday to be effective December 23, 2011.
Note: under the Health Care Quality Improvement Act of 1986, entities eligible to view information in the NPDB include: hospitals and other healthcare entities that conduct peer review; state medical, dental and other health care practitioner boards; state licensing authorities; agencies administering federal and state health care programs (including private entities administering such programs under contract); and state Medicaid fraud-control units and other law enforcement agencies. A 60-day comment period on the final rule closed on April 18.
Reactions to the failure of the Joint Select Committee to recommend a $1.2 trillion deficit reduction package to Congress:
“One way or another we will be trimming the deficit by a total of at least $2.2 trillion over the next 10 years. That's going to happen one way or another. We've got $1 trillion locked in, and either Congress comes up with 1.2 trillion, which so far they've failed to do, or the sequester kicks in and these automatic spending cuts will occur that bring in an additional $1.2 trillion in deficit reduction…my message to them is simple: No. I will veto any effort to get rid of those automatic spending cuts to domestic and defense spending. There will be no easy off ramps on this one. We need to keep the pressure up to compromise, not turn off the pressure
—President Obama, Statement on the Joint Select Committee on Deficit Reduction, November 21, 2011
“…we have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline. Despite our inability to bridge the committee's significant differences, we end this process united in our belief that the nation's fiscal crisis must be addressed and that we cannot leave it for the next generation to solve.”
—Co-chairs of the Joint Select Committee on Deficit Reduction, Representative Jeb Hensarling (R-TX) and Senator Patty Murray (D-IA), Statement on the Joint Select Committee on Deficit Reduction, November 21, 2011
“While I am disappointed, the House will forge ahead with the commitments we have made to reducing government spending and removing barriers standing in the way of private sector job creation. Doing otherwise is not an option. This process did not end in the desired outcome, but it did bring our enormous fiscal challenges into greater focus. I am confident the work done by this committee will play a role in the solution we must eventually find as a nation.”
—Speaker of the House Representative John Boehner (R-OH), Statement on the Joint Select Committee on Deficit Reduction’s failure to reach a bipartisan deficit reduction plan, November 21, 2011
“The sequester was designed to be painful, and it is. But that is the commitment to fiscal responsibility that both parties made to the American people. In the absence of a balanced plan that would reduce the deficit by at least as much, I will oppose any efforts to change or roll back the sequester.”
—Senate Majority Leader, Harry Reid (D-NV), Statement on the Joint Select Committee on Deficit Reduction’s failure to reach a bipartisan deficit reduction plan, November 21, 2011
“The failure of the deficit committee forces our nation to continue on an unsustainable path that puts current and future generations of Americans at risk for harsh consequences…The AMA [American Medical Association] is deeply concerned that continued instability in the Medicare program, including the looming 27 percent cut scheduled for January 1, will force many physicians to limit the number of Medicare and TRICARE patients they can care for in their practices. Congress has ignored the reality that short-term patches have grown the problem immensely. The cost of repealing the formula has grown 525 percent in the past five years and will double again in the next five years.”
—Peter W. Carmel, President of the AMA, Statement on the Joint Select Committee on Deficit Reduction, November 21, 2011
“Sequestration means that arbitrary reductions in resources for patient care under Medicare will now be set to take effect under the law for the remainder of the decade. This will have an impact not just on the elderly and disabled beneficiaries of the program, but also on their families. It will also have an impact on the ability of hospitals to provide essential public services to the communities they serve given the impact that Medicare has on the entire health care system.”
—Rich Umbdenstock President and CEO, American Hospital Association (AHA) Statement on the Joint Select Committee on Deficit Reduction, November 21, 2011
“The Fiscal Committee's inability to agree on fiscal measures that would stabilize U.S. government debt as a share of GDP is consistent with our Aug. 5 decision to lower our rating to 'AA+'. However, we expect the caps on discretionary spending as laid out in the Budget Control Act of 2011 to remain in force. If these limits are eased, downward pressure on the ratings could build.”
—Standard & Poor’s, Statement on the Joint Select Committee on Deficit Reduction, November 21, 2011
“Not to have a plan to solve our long-term fiscal problem is wholly irresponsible. Our country faces the most predictable economic crisis in history, yet our leaders in Washington continue to play politics and avoid making the tough decision needed to solve these problems.”
—Erskine Bowles and Sen. Alan Simpson, Statement on the Joint Select Committee on Deficit Reduction’s failure to reach a bipartisan deficit reduction plan, November 21, 2011
- Medicare update: federal outlay in fiscal year (FY) 2011: $477 billion—13 percent of its total federal spending. By 2021, estimated $864 billion—16 percent; enrollment today: 49 million, 64 million by 2020. Medicare spending has increased faster than the GDP by 1.7—2 percent historically. (Source: Kaiser Family Foundation, Deloitte Center for Health Solutions Forecast of Insurance Coverage 2020)
- Approximately 300-500 U.S. hospitals have yet to commit to a clinical information system vendor as of the start of 2011. (Source: KLAS estimate, November 2011)
- In 2011, 32 percent of companies with 500 or more employees offered high-deductible plans vs. 23 percent in 2010. 13 percent of insured employees in the survey were enrolled in such a plan this year, up from 3 percent in 2006. (Source: National Survey of Employer-Sponsored Health Plans, Mercer, November 2011)
- Average cost of employee coverage under high-deductible plans was nearly 20 percent lower than traditional insurance plans – $7,787 compared with $9,385. Average per-employee cost grew 6.9 percent last year. Costs have grown 6.1 percent this year and are expected to rise 5.7 percent in 2012. (Source: National Survey of Employer-Sponsored Health Plans, Mercer, November 2011)
- Disability claims trend: Social Security Disability Insurance program paid $124 billion in benefits in 2010, up from $55 billion in 2001. The backlog of pending appeals in September was 771,318, up from 705,367 in 2010 and 392,397 in 2001. (Source: Social Security Administration [SSA])
- Spending on imaging services per Medicare beneficiary dropped 13.2 percent since 2006 and 3 percent in the past 12 months. Spending for non-imaging Medicare services increased 20 percent since 2006 and 2 percent in 2010. (Source: Medical Imaging & Technology Alliance [MITA] study released November 16, 2011)
- Total 90-day readmission rate for patients after colorectal surgery: 23.3 percent; 30-day readmission: 11.4 percent. The mean length of stay during readmissions was eight days, with a median cost of $8,885 per stay. (Source: Wick et al analysis of 10,882 patients aged 18 to 64 years who underwent colon and/or rectal resection between 2002 and 2008, Diseases of the Colon & Rectum, December 2012)
- After 13 years, 18 percent of older adults with high education and high income developed heart failure, as did 17 percent of older adults with low education and high income. 23 percent of older adults with low income developed heart failure regardless of their education level. Patients with low education and low income had a 29 percent increased risk compared to those with high education and high income independent of other risk factors for heart failure.
Note: 5.7 million Americans have heart failure; with one in five is at risk starting at age 49. (Source: Review of National Heart, Lung and Blood Institute records of 5,153 Medicare-eligible older adults without heart failure in the Cardiovascular Health Study who lived independently in four U.S. communities in the early 1990s, American Heart Association's Scientific Sessions 2011 in Orlando)
- CMS processes three million eligibility inquiries and makes more than $1 billion in fee-for-service payments daily. (Source: Committee on Future Information Architectures, Processes, and Strategies for the Centers for Medicare and Medicaid Services, National Research Council, “Strategies and Priorities for Information Technology at the Centers for Medicare and Medicaid Services,” November 2011)
- One of four health care providers are now using tablet computers in their practice; another 21 percent expect to do so in the next 12 months, and more than half are using a smartphone at work, with 38 percent of these saying they run medical-related apps on a daily basis. (Source: August 2011 survey of 350 physician & dentists by CompTIA's 3rd Annual Healthcare IT Insights and Opportunities Study)
- For ambulatory care-sensitive conditions (ACSCs), which should have been avoidable through disease management and preventive care, uninsured patients stayed an average of 2.8 days compared to 2.9 days for private insurance and 3.2 days for Medicaid enrollees. For patients hospitalized with non-ACSCs, the average length of stay averaged 2.7 days for the uninsured, 2.8 days for the privately insured, and 3.1 days for Medicaid patients. (Source: Analysis of 850,000 hospital discharges 2003-2007 Arch G. Mainous et al, “Impact of Insurance and Hospital Ownership on Hospital Length of Stay Among Patients With Ambulatory Care–Sensitive Conditions,” Annals of Family Medicine, November/December 2011 9:489-495; doi:10.1370/afm.1315)
- One million Medicare beneficiaries discharged from hospitals in October of 2008, one in seven, experienced an adverse event; half were preventable medical errors, substandard care, and inadequate patient monitoring and assessment. (Source: Office of the Inspector General [OIG], November 2010)
- 2009 U.S. health spending: 17.4 percent of GDP vs. OECD average in 34 developed health systems of health at 9.6 percent. Following the United States were the Netherlands, France, and Germany, allocated 12.0 percent, 11.8 percent and 11.6 percent respectively of their GDP to health. (Source: OECD, Health at a Glance, November 23, 2011)
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 www.deloitte.com/us/healthreform/whatnow today.
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