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Health Care Reform Memo: August 8, 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

My head is swimming in numbers.

Tuesday, President Obama signed the Budget Control Act of 2011, previously approved by both the House (269-161) and Senate (74-26). It called for immediate cuts of $917 billion in government spending over ten years and authorized expansion of the U.S. debt ceiling of $900 billion. Its central feature is the creation of the Joint Select Committee on Deficit Reduction, a 12 person bipartisan commission that will recommend additional spending cuts of $1.5 trillion by November 23, 2011 for an up or down vote in Congress before December 23, 2011. If Congress votes against the committee’s recommendations, automatic spending cuts of $1.2 trillion are triggered, and authorization of the expansion of the debt ceiling is tied directly to actual cuts.

Medicaid, veterans’ benefits, and Social Security are exempt from the cuts. On the table for cuts: Medicare (up to two percent) and portions of the Affordable Care Act (ACA) might be changed or even dropped. No one knows for sure.

The financial markets reacted promptly. The Dow continued an eight-day slide losing 500 points Thursday, the biggest dip since 2008. Standard and Poor’s (S&P) health care index was down 4.1 percent overall—hospitals down 6.1 percent, health insurers down 3.4 percent, and drug companies down 1.2 percent. Over the weekend, S&P also announced it had downgraded U.S. credit from AAA to AA+—a surprise too few who had followed the rating agency’s running commentary on U.S. debt and its need for spending discipline in recent months.

To complicate matters, last week the Bureau of Economic Analysis (BEA) released its updated forecast for Medicare and Medicaid spending: it reported a ten percent increase in the second quarter from a year earlier to a combined annual rate of almost $992 billion; the two programs are on track to increase by $90 billion in 2011. Per BEA, Medicaid is increasing at a 12.3 percent clip and will likely end the year at $438 billion; Medicare is up 8.3 percent and will top out at $554 billion. Spending by the two programs, accounts for 57.5 percent of all monies paid to doctors, hospitals and other providers—up from 49.3 percent in 2005. The report notes: medical inflation—at 1.7 percent in 2011—is at its lowest level since in 15 years. Demand and utilization are the drivers; not prices.

What does it mean?

Increased volume is driving costs. Demand for services through the Medicare and Medicaid programs is driving costs higher, not underlying unit costs for prescription drugs, devices, and beds. Reducing demand in the system is the necessary focus if spending for these two programs needs to slow. However, that requires incentive change to reward outcomes instead of volume, and protection for providers from litigation when they say no to services not needed for appropriate care. Addressing volume is key to slowing spending in these programs.

It’s hard to know how the committee’s work will proceed or whether Congress will approve its suggestions. We know for sure that the committee’s work will be front-page news for the next 107 days. And we know it cannot address government spending unless it addresses health costs for Medicare.

So lots of numbers will be floating around. It’s easy to be overwhelmed. Maybe the simplest way for health care organizations to proceed is this: accept the reality that the good ole days are over. Operating with less is reality. Radical cost reduction is the obvious starting point across the industry, but that’s not enough. Growth through innovation and transformation of archaic models is necessary to survival and sustainability. There will be winners and losers in every sector.

I am a numbers guy, but this is not about numbers. It is common sense.

Paul Keckely

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

Implementation update

Joint Select Committee activity encouraged to be open

Thursday, six Senators—Kelly Ayotte (R-NH), John Boozman (R-AR), Dean Heller (R-NV), Ron Johnson (R-WI), Mike Lee (R-UT), and David Vitter (R-LA)—wrote to Senate Majority Leader Harry Reid (D-NV) and Minority Leader Mitch McConnell (R-KY) encouraging that the deliberations of the 12-member Joint Select Committee on Deficit Reduction be televised and open to the public.

CLASS Act concern to state legislators

Friday, the National Conference of Insurance Legislators (NCOIL) expressed “grave concerns” about the long-term care insurance program created by ACA in a letter to the U.S. Department of Health and Human Services (HHS) Secretary Kathleen Sebelius. It noted that the structure of the Community Living Assistance Services and Supports (CLASS) program could discourage young and healthy consumers from participating in the program and that there are few incentives for agents, brokers, and human resources professionals to promote enrollment.

FDA officials comment on biosimilar approval, oversight process

Wednesday, senior officials of the Food and Drug Administration (FDA) said the agency faces numerous challenges in developing a pathway for biosimilar drugs per requirements of ACA (Section 7002). The law created an abbreviated approval pathway for follow-on versions of biologic drugs charging the FDA with the task of implementing that pathway. The article noted that FDA must first establish scientific criteria to determine how similar a biosimilar needs to be to the innovator (or brand-name) product requiring a new paradigm for reviews to understand their complex structures. The officials also noted they are evaluating future user fees that FDA will charge to companies seeking biosimilar approval and market surveillance stating, “appropriate strategies must be developed to ensure the implementation of robust, modern pharmaco-vigilance programs for biologics.” (Source: Kozlowski, et al. “Developing the Nation's Biosimilars Program” New England Journal of Medicine. August 4, 2011)

HHS announces ACA covered preventive services for women

Monday, HHS announced coverage guidelines for preventive services for women following recommendations from the Institute of Medicine (IOM). Covered services include:

  • Well-woman visits
  • Screening for gestational diabetes
  • Human papillomavirus (HPV) DNA testing for women 30 years and older
  • Sexually-transmitted infection counseling
  • Human immunodeficiency virus (HIV) screening and counseling
  • FDA-approved contraception methods and contraceptive counseling
  • Breastfeeding support, supplies, and counseling
  • Domestic violence screening and counseling

Note: per ACA Section 1001, health insurance plans, including group health plans, are required to cover specific women’s preventive services without charging a co-payment, co-insurance, or a deductible for plan years beginning on or after August 1, 2012.

Third Circuit Court dismisses challenge to ACA

Wednesday, the Third Circuit Court of Appeals affirmed a lower New Jersey District Court’s dismissal of a lawsuit against the ACA (New Jersey Physicians, Inc., Mario A. Criscito, M.D., and Patient Roe vs. President of the U.S.). The plaintiffs sued arguing that the entire ACA is unconstitutional because of the requirement that individuals maintain “minimum essential coverage” starting 2014 (Section 1501). The appeals court concluded that the plaintiffs’ allegations failed to establish injury and did not meet their burden to demonstrate standing. Because the court concluded the plaintiffs lacked standing, it did not have to address the substantive challenge to the constitutionality of the individual mandate.

House Republicans challenge IPAB

In an August 1 letter, House Republicans asked HHS Secretary Kathleen Sebelius to explain mechanisms whereby an individual or entity might challenge a recommendation, proposal, or action initiated by the Independent Payment Advisory Board (IPAB). According to the letter, ACA (Section 3403) bans “administrative or judicial review” of IPAB’s decisions.

Industry news

CMS releases final rules for FY 2012 Medicare payments

Last week, the Centers for Medicare & Medicaid Services (CMS) published its final rules for the fiscal year (FY) 2012 Medicare hospital and post-acute care provider payment payments. The rules also implement several ACA provisions, Medicare market basket updates (ACA Section 3401), and quality initiatives (e.g. value-based purchasing [Sections 3001, 3004, and 3006], hospital readmissions [Section 3025], hospital acquired conditions [Section 3008]).The table below highlights key updates:

Note: additional spending cuts might be included in the Joint Select Committee for Budget Reduction slated to report its recommendations to Congress on or before November 23, 2011.

Provider Payment update in final rules
Acute impatient and long-term care hospitals (LTCHs)

For acute inpatient hospitals: a 1.0 percent payment update and projects Medicare payments to increase by 1.1 percent $1.13 billion). For LTCHs: institutes a 1.8 percent payment update and projects Medicare payments to increase 2.5 percent ($126 million)

Note: in the May 5 proposed rule, CMS proposed to reduce Medicare hospital payments by 0.5 percent for FY 2012, or an estimated reduction of $498 million. This final rule reflects a change in CMS’s policy.

Nursing homes

Reduced payments to skilled nursing facilities (SNFs) by 11.1 percent for a projected payment decrease of $3.87 billion.

Note: CMS states that they are reducing payments to “correct for an unintended

Hospices For urban hospice: projects payments to increase by 2.5 percent and by 2.3 percent for rural hospices. However, CMS projects payments to decrease by $80 million
Impatient rehabilitation facility Instituted 2.2 percent payment updates and projects payment increase of $150 million.

HHS: average Medicare Part D premiums will be $30 in 2012

Thursday, HHS announced that the cost of the average Medicare prescription drug plan premium in 2012 will be about $30. The average premium in 2011 is $30.76. HHS based the estimates on bids submitted by Part D plans for the 2012 plan year. Specifically:

  • January 1, 2011 to July 2011, there were 17,336,421 individuals, or 51.5 percent with Original Medicare who received one or more free preventive services (per ACA Section 4104).
  • January 1, 2011 to July 2011, 1,061,780 individuals with Original Medicare had a Medicare new Annual Wellness Visit (per ACA Section 4103), up from 780,000 in mid-June.
  • Through the end of June, 899,000 individuals with Medicare had a 50 percent discount on covered brand name drugs (per ACA Section 1101) in the Medicare Part D donut hole— an increase of over 420,000 individuals in June.
  • Out-of-pocket savings on drug costs for Medicare beneficiaries has risen to $461 million saved through June 2011, increasing from $260 million through May 2011, indicating that Medicare enrollees in the donut hole saved over $200 million in June.

Note: the projected 2012 premium is 44 percent lower than projected in 2003, when Medicare Modernization Act of 2003 passed. Since 2007, premium costs in the program have increased by $8. A key feature of the program is the requirement that brand-name drug makers discount medications to 47 million Medicare beneficiaries. In 2008, the discount averaged 14 percent for branded drugs, according to the Congressional Budget Office (CBO). Note: Part D coverage was associated with a $1,200 per year savings for hospital, nursing home, and other costs for seniors who previously did not have coverage (Source: McWilliams, et al. "Implementation of Medicare Part D and nondrug medical spending for elderly adults with limited prior drug coverage," JAMA 2011; 306(4): 402 - 409.)

Nursing home cuts will cost $50,000 for each facility

Per the American Health Care Association, the proposed FY2012 11.1 percent cut to skilled nursing reimbursement by Medicare, combined with the possible two percent across-the-board cuts that may be triggered by the new Joint Select Committee on Budget Reduction would mean an estimated $50,000 reduction in revenues for the average nursing home.

State watch

Michigan seeks MLR waiver

In a letter Thursday to HHS Secretary Kathleen Sebelius, Congressmen Fred Upton (R-MI) and Dave Camp (R-MI) requested a medical loss ratio (MLR) waiver for Michigan indicating that the state’s Office of Financial and Insurance Regulation has warned of “significant disruptions” for the 340,000 Michigan residents who have individual health insurance. In Michigan, seven health plans insure 90 percent of consumers in the individual insurance market totaling 305,003 people in 2010. Based on 2010 data, only two of the seven health plans would be able to meet the 80 percent MLR threshold. The seven plans would have lost $30.9 million in 2010 if forced to comply with the MLR requirements. Last Monday, Michigan formally applied for an MLR waiver requesting a gradual increase of the medical loss ratio to 65 percent this year, 70 percent in 2012, 75 percent in 2013, and 80 percent in 2014.

Note: per ACA Section 2718, plans must spend 80 percent of individual enrollee premiums on medical costs and 85 percent for group coverage. To date, HHS has granted MLR waivers to five states for the individual market.

GAO report: health insurance rate reviews processes vary, efforts underway in majority of states

Tuesday, the Government Accountability Office (GAO) published a report on the rate review processes across the 50 states. Highlights:

  • Forty-one states that received $1 million in HHS rate review grants have started making changes to their review process. About half reported taking steps to develop a new process, while two-thirds are adding staff and other capacity to review rates.
  • Thirty-eight states reported that all rate filings reviewed were reviewed before the rates took effect, while other respondents reported reviewing at least some rate filings after they went into effect.
  • Five states reported that over 50 percent of the rate filings they reviewed in 2010 were disapproved, withdrawn, or resulted in rates lower than originally proposed, while survey respondents from 19 states reported that these outcomes occurred from their rate reviews less than ten percent of the time.

Note: ACA (Section 1003) requires states to have mechanisms in place by 2014 to review health insurance plan premiums if annual increases exceed ten percent.

State round-up

  • New Hampshire lawmakers approved legislation requiring the state to decline $666,000 in exchange planning grant funds. July 14, Governor John Lynch (R) allowed the law to pass without his signature, despite wanting the state to set up its own exchange.
  • Friday, HHS Center for Consumer Information and Insurance Oversight (CCIIO) rejected Guam’s waiver request for a MLR waiver for 2011 to 2013 of 65 percent for the individual market, 70 percent for the small group market, and 80 percent for the large group.


“I write to you today regarding public disclosure of financial relationships between physicians and the drug, device, and biologic industries. For the past three years I have worked to shine light on these relationships, including with the help of Senator Kohl in securing the passage of the Physician Payment Sunshine Act of 2009 (PPSA).”

 – Letter from Senator Charles Grassley (R-IA) to Jacob Le, Director, Office of Management and Budget (OMB) August 4, 2011

“…We estimated physician practices in Ontario spent $22,205 per physician per year interacting with Canada’s single-payer agency—just 27 percent of the $82,975 per physician per year spent in the United States. U.S. nursing staff, including medical assistants, spent 20.6 hours per physician per week interacting with health plans—nearly ten times that of their Ontario counterparts. If U.S. physicians had administrative costs similar to those of Ontario physicians, the total savings would be approximately $27.6 billion per year. The results support the opinion shared by many U.S. health care leaders interviewed for this study that interactions between physician practices and health plans could be performed much more efficiently.”

 – Morra et al “U.S. Physician Practices Versus Canadians: Spending Nearly Four Times As Much Money Interacting With Payers” Health Affairs August 2011

Fact file

  • The New York Times surveyed 960 adult Americans, asking “Do you think the recent agreements about raising the debt ceiling were mostly about doing what was best for the country or mostly about gaining political advantage?” Eighty-two percent answered political advantage compared to 18 percent answering doing what is best. (Source: New York Times Poll, August 2-3, 2011)
  • Employers anticipate a two percent increase in their benefits plan enrollment because of ACA’s requirement to extend dependent coverage to children up to age 26 in 2014. (Source: Mercer survey of 894 employers, August 1, 2011)
  • In 2007, 75 percent of anti-depressants were prescribed by non-psychiatrists, up from 60 percent in 1997. Of the patients prescribed anti-depressants, 6.4 percent were not diagnosed with mental health problems. Note: after statins, anti-depressants are the second most frequently prescribed medication in the U.S. (Source: Mojtabai and Olfson, “Proportion Of Antidepressants Prescribed Without A Psychiatric Diagnosis Is Growing,” Health Affairs, August 2011, 30:81434-1442)
  • National 30-day mortality rates for heart attacks decreased from 2006 through 2009 from 16.2 percent to 15.9 percent. Over the same period, mortality rates increased from 11.2 percent to 11.3 percent percent for heart failure and 11.6 percent to 11.9 percent percent for pneumonia. National 30-day readmission rates for heart attack patients increased to 19.9 percent from 19.8 percent 2006 through 2009 rate; readmissions for heart failure and pneumonia decreased to 18.2 percent and 24.5 percent. (Source: CMS)
  • Total enrollment in Medigap policies in 2011 increased by about 300,000 policies to 9.7 million; 47 percent of new purchases were Plan C coverage. (Source: AHIP “Trends in Medigap Coverage and Enrollment, 2010-2011” released August 2011)
  • 59.7 million adults, or 26.0 percent of the U.S. adult civilian non-institutionalized population, had no ambulatory care visit in 2008. (Source: Agency for Healthcare Quality and Research [AHRQ] analysis of the Medicare Expenditure Panel Survey, July 2011)
  • 22.3 million individuals (8.4 percent) under the age of 65 were uninsured for the entire four-year period from 2006 through 2009. (Source: AHQR analysis of the Medicare Expenditure Panel Survey, July 2011)
  • U.S. physicians pay $83,000 a year for administrative costs—four times more than physicians in Canada. (Source: Mora et al, “U.S. Physician Practices Versus Canadians: Spending Nearly Four Times As Much Money Interacting With Payers,” Health Affairs, August 2011)
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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