Health Care Reform Memo: July 11, 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

Yesterday, party leaders convened with President Obama at the White House to hammer out a compromise to avert the U.S. from defaulting on its debt August 2. The stakes are high: defaulting means higher interest rates for borrowers and access to capital tighter at least in the short run. Figuring out the right combination of spending cuts and revenue increases is the tricky part.

Like the National Basketball Association season, the political season in DC seems never-ending. And politics complicates every policy, especially when the economy is less than robust.

Four big bets spanning two administrations have contributed: the Medicare Modernization Act (MMA) (2003), Troubled Asset Relief Program (TARP) bailout (2008), American Recovery and Reinvestment Act (ARRA) (2009), and Affordable Care Act (ACA) (2010)—representing combined investments of $3.2 trillion. It’s too soon to know the ROI for these; what’s known is that the investments on all but ACA have already been made. So what’s ahead for us:

1. Medicare, Medicaid, and Social Security structural changes are likely. These programs have merit, but the math on which they’re based is flawed. People are living longer; and the tax basis on which their funding is based is increasingly upside down. Extending the eligibility ages for Medicare and Social Security are common sense; leaving them alone and imagining they’ll survive sans change is naïve.
2. The health system will have to consume proportionately less of the economy. The bottom line: it’s costly, fragmented, and inefficient. At 17.6 percent of the gross domestic product (GDP) today, 23 percent of the federal budget, 21 percent of the average state budget, and 19.8 percent of consumer discretionary household income, with an expected annual growth rate of six percent annually for the foreseeable future, it’s not sustainable at current funding levels. Aligning its growth rate more closely to the GDP would stimulate the economy overall, but dampen innovation and risk taking by the industry’s incumbents. But failure to slow its rate of growth might significantly impede recovery.

I believe there are ways to slow health costs while improving the safety and quality of the health system. Many are in the ACA—administrative simplification to standardize how services are accounted and transactions between payers and providers are based, integration of the delivery system into clinically integrated provider organizations paid on the basis of efficiency and quality (value), and applying an evidence-based standard of care to coverage decisions are important starts. Add liability reform, required use of electronic health records (EHRs) with clinical tools for patients and providers, and increased personal accountability for healthier lifestyles and prudent purchasing, and perhaps the cost spiral would subside reasonably fast.

But in the political season, the obvious is never so obvious; the simple quite complicated. What is clear is that deficit reduction, economic recovery, and debt ceiling deliberation directly impact health care. We are an industry that contributes mightily to economic solutions but also to its problems.

So this is not about Blue vs. Red, Left vs. Right, insured vs. uninsured, plans vs. providers, for profit vs. not-for-profit, or the other notable pairings we frequently use to frame debate in this industry. It’s about the future for our country and the role the health care industry will play. It’s about all of us.

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

Implementation update

Federal requirements for health exchanges will be announced today

U.S. Department of Health and Human Services (HHS) Secretary Sebelius will unveil the administration’s long-anticipated guidance about state-run health insurance exchanges during a news conference this morning. The Center for Health Solutions will provide details later today.

Ohio District Court upholds the individual mandate

Tuesday, an Ohio federal district court ruled in favor of the ACA, affirming the constitutionality of the individual mandate in the judgment made by the Sixth Circuit Court of Appeals on June 26.

Restaurant groups ask FDA for flexibility on ACA menu labeling requirements

Tuesday, the National Restaurant Association and the National Council of Chain Restaurants, sent a letter to the U.S. Food and Drug Administration (FDA) challenging its April 26 rule about menu labeling requirements per ACA Section 4205. The groups believe the requirements are inflexible and asked the FDA to “adopt a broader set of options to conform the flexibility of the final rule to the complexities of the regulated conduct across our diverse industry.” The groups also asked FDA to expand the regulations to more food establishments, stating the FDA should, “adopt a broader interpretation of `similar retail food establishment’ that encompasses most locations where consumers routinely consume food away from home.”

Note: the FDA regulates food labeling and food safety, and conducts tobacco oversight in addition to drug and device approvals and market surveillance.

CMS implements clinical lab test demonstration

July 1, the Centers for Medicare & Medicaid Services (CMS) began enrollment for the ACA voluntary demonstration on direct Medicare payment for a complex clinical laboratory test (per Section 3113). The program will allow participating laboratories to bill Medicare directly for tests ordered by a patient’s physician less than 14 days following a hospital discharge; such tests are normally bundled into a hospital payment. Payments will begin January 1, 2012. The two-year program is subject to a $100 million payment limit.

CMS to conduct insurance premium rate reviews in ten states

Wednesday, the Center for Consumer Information and Insurance Oversight (CCIIO) said it will conduct premium reviews in seven states—Alabama, Arizona, Idaho, Louisiana, Missouri, Montana, and Wyoming—and small group market reviews in Iowa, Pennsylvania, and Virginia. Per ACA Section 1003, any proposed rate increase by individual or small group market insurers at or above ten percent must be reviewed by the state to determine if it is reasonable. CMS will conduct the reviews for states that lack the resources or authority to do thorough actuarial reviews.

Legislative update

HHS announces three new dual-eligible initiatives

Friday, the HHS announced three new initiatives to help states improve the quality and lower the cost of care for dual-eligibles (eligible for both Medicare and Medicaid):

• The CMS Center for Medicare and Medicaid Innovation (CMMI) will test two models to gauge potential savings and quality improvements: (1) a state, CMS, and health plan enter into a three-way contract where the managed care plan receives a prospective blended payment to provide comprehensive, coordinated care and (2) a state and CMS enter into an agreement by which the state is eligible to benefit from savings resulting from managed fee-for-service (FFS) initiatives designed to improve quality and reduce costs for both Medicare and Medicaid.
• CMS will competitively select independent organizations to partner with and implement evidence-based interventions at interested nursing facilities.
• CMS will establish a resource center to provide technical assistance to states at all levels of readiness to better serve beneficiaries, improve quality, and reduce costs.

Note: dual-eligibles represent 15 percent of Medicaid enrollees, 39 percent of total Medicaid costs, 16 percent of Medicare enrollees, and 27 percent of total Medicare costs.

ONC coordinator: Stage 2 meaningful use delay recommended

Wednesday, Farzad Mostashari, M.D., National Coordinator for Health Information Technology, told the Health Information Technology (HIT) Policy Committee he supported delaying Stage 2 of EHR meaningful use by one year to 2014 for providers who attest to Stage 1 in 2011. The delay must be approved by the Secretary of HHS.

State watch

Health Affairs study: Medicaid spending varies by state, volume key driver

A July Health Affairs report found substantial interstate variations both in the volume of services and in prices in Medicaid: “Overall, per capita spending in the ten highest-spending states was $1,650 above the average national per capita spending, of which $1,186, or 72 percent, was due to the volume of services delivered. Spending in the ten lowest-spending states was $1,161 below the national average, of which $672, or 58 percent, was due to volume.” (Source: Gilmer et al, “Differences in the Volume of Services and in Prices Drive Big Variations in Medicaid Spending Among U.S. States and Regions,” Health Affairs, July 2011, vol. 30 no. 71316-1324)

Note: in policy circles, the unit prices for health goods and services is seen as a major reason for the higher costs of the U.S. system relative to others. These data suggest volume of services, not unit prices, might be a greater contributor in Medicaid and perhaps other plans.

FY 2012 begins for states, deficits loom

Forty-six states began a new fiscal year (FY) Friday, July 1 entering this budget year with combined shortfall of $86 billion and after $30 billion in tax increases in 2009—2010, per the National Conference of State Legislatures (NCSL). Driving the shortfall: the end of $66 billion in federal stimulus aid and increased Medicaid costs ($16 billion this fiscal year), according to the National Association of State Budget Officers (NASBO). State and local governments cut 100,000 workers between January and May of 2011, and 350,000, or 1.8 percent of such workers, since the start of 2010.

Note: according to the Bureau of Labor Statistics (BLS), it costs about $12.44 more per hour ($40.54 vs. $28.10) to employ a state or local government worker compared with a private sector employee.

Medicaid cuts to providers

States that have announced FY 2012 Medicaid cuts to physicians: South Carolina, Colorado, Nebraska, Oregon, South Dakota, Arizona, and California. States reducing payments to hospitals: Colorado, Connecticut, Florida, Nebraska, New Hampshire, North Carolina, Oregon, Pennsylvania, South Carolina, Texas, Virginia, Washington, New York, and California.

Governors ask HHS to reimburse states for payments made due to SSA mistakes

In a letter to HHS Secretary Kathleen Sebelius, the National Governors Association (NGA) asked the federal government to reimburse states for services provided to disabled persons who were erroneously denied Social Security Disability Insurance coverage by the Social Security Administration (SSA) and not provided Medicare coverage. According the letter, “states collectively expended well over $4 billion of their own funds to cover the care that Medicare should have provided.”

State round-up from last week

• Arizona received federal approval to freeze Medicaid enrollment and re-enrollment for childless adults, effective July 8. The freeze will affect approximately 130,000 to 150,000 residents.
• Connecticut Governor Dan Malloy (D) signed into law a bill that will establish the state’s insurance exchange. Separately, Malloy vetoed legislation that would require a public hearing with the state’s premium rate review process (per ACA Section 1003).
• Idaho insurance exchange planning group recommended that the state establish its own exchange and seek federal funding. The group is now working on draft legislation.
• The Ohio Secretary of State office received a petition with 530,000 signatures requesting that voters be allowed to decide whether the state should opt out of ACA requirements.
• West Virginia raised the maximum income cap on the state’s Children’s Health Insurance Program (CHIP) from 250 percent to 300 percent of the federal poverty level (FPL).

Study: impact of Medicaid coverage on previously uninsured

A study released Thursday by the National Bureau of Economic Research (NBER) indicates newly covered Medicaid enrollees spend 25 percent more on medical care in the first year and are 35 percent more likely to go to a physician, 15 percent more likely to use prescription drugs, and 30 percent more likely to be admitted to a hospital.

Industry news

Reports examine repeal and caps to employer health insurance tax inclusions

Two recent reports calculated the tax exemption for employer sponsored health insurance (ESI):

1. The Employee Benefit Research Institute (EBRI) estimates the tax exclusion accounts for $1.1 trillion in lost federal tax revenue from 2012—2016, compared to retirement plans ($700 billion) and mortgage interest deductions ($600 billion). (Source: Fronstin et al, “Employment-based Health Benefits and Taxation: Implications of Efforts to Reduce the Deficit and National Debt,” EBRI Issue Brief #360, July 2011)
2. Economist Jonathan Gruber’s analysis (“The Tax Exclusion for Employer-Sponsored Health Insurance,” National Tax Journal, June 2011, 64 [2, Part 2], 511–530) estimates the employer exclusion costs the federal government $263 billion in lost tax revenue and costs states $30 billion in state income tax revenue in 2009. His analysis included models for three scenarios:
   • Elimination of the tax exclusion: increases federal revenue by about $263 billion; reduces employer insurance spending by almost $183 billion and employee spending by $17 billion; reduces ESI population by 15 million; and increases the uninsured by 11 million.
   • Cap exclusion for both income and payroll tax purposes: increases federal revenue by about $47 billion; reduces employer spending by $26 billion and employee spending by $7 billion; reduces ESI population by estimated 2 million and increases the uninsured by about 1 million. [Note: model assumes median national level of premiums and the cap is at $5,176 for single plans and $13,675 for family plans.]
   • Cap exclusion only for income taxes: increases federal revenue by about $32 billion; decreases ESI population by 1 million; and increases uninsured by 1 million. [Note: model assumes median national level of premiums and the cap is at $5,176 for single plans and $13,675 for family plans.]

Note: President Obama’s bipartisan National Commission on Fiscal Responsibility and Reform recommended that the exclusion be capped at the 75^th percentile of premium levels in 2014, with the cap frozen in nominal terms through 2018, and phased out by 2038. According to the Congressional Budget Office (CBO) (December 2008), income tax revenue would increase to $108.1 billion from 2009-2013 if the tax exclusion were limited to the 75^th percentile for health premiums and indexed to inflation and to $205.7 billion if it were replaced with a refundable tax credit equal to 25 percent of the health insurance premium.

Surgical groups: CMS physician payment rule undervalues their work

Tuesday, ten surgical groups including the American College of Surgeons (ACS), the American Society of Anesthesiologists (ASA), and the American College of Osteopathic Surgeons (ACOS), sent a letter to HHS Secretary Kathleen Sebelius and CMS Administrator Don Berwick stating, “CMS rejected a larger than average number of recommendations of the American Medical Association [AMA]/Specialty Society Resource Based Relative Value Scale Update Committee (RUC), for reasons which are very unclear to us,” regarding work values for surgical services used to determine Medicare payments for 2011. The surgical groups said that CMS devalues “procedures when the hospital designation has gone from inpatient to outpatient.” Other examples of devalued services include obstetric services, pain medicine, diabetic retinopathy screening, facture care, and urologic services. The groups urge CMS to use values approved by the RUC for 2011 payments “to more accurately reflect” their work.

Note: the RUC, a non-federal board representing providers, makes annual recommendations to CMS on relative value units used to determine Medicare physician payments. According to the letter, CMS has accepted over 90 percent of the RUC’s recommendations. In the 2011 Fee Schedule, CMS only accepted 71 percent of the 291 recommendations submitted by the RUC, and only two-thirds of the 2010 five-year review recommendations were accepted in 2011.

FDA issues draft guidance on new dietary ingredients

Tuesday, the FDA released draft guidance to manufacturers, distributors, and others about when premarket safety notification for a dietary supplement containing a new dietary ingredient is needed under the Food Safety Modernization Act (FSMA). The guidance requires manufacturers to notify the FDA in advance when they plan to add a new dietary ingredient to their products, except in certain situations when the ingredient was part of the food supply and has not been chemically altered for use in supplements. Notifications must identify the new dietary ingredient and evidence of its safe. Comments on the draft guidance will be accepted until October 3, 2011.

CMS home health update: 3.35 percent Medicare payment cut for home health agencies in 2012

Tuesday, CMS released a Medicare proposed payment rule for home health agencies (HHAs) that would reduce payments to HHAs by 3.35 percent in 2012—a net decrease of $40 million compared to calendar year (CY) 2011. The reduction includes market basket and wage index updates ($310 million increase) and reductions to the home health prospective payment system (HH PPS) rates to account for increases in total case-mix largely related to billing practices and not related to changes in the health status of patients ($950 million decrease).

Note: ACA Section 3401 requires CMS to reduce CY 2012 home health market basket amount by one percentage point resulting in a proposed 1.5 percent overall increase for HHAs in CY 2012. HHAs that do not submit quality data have their market basked update reduced by two percent resulting in a 0.5 percent decrease in CY 2012. CMS also proposes to reduce HH PPS rates by 5.06 percent in CY 2012 to account for the increase in the case-mix that is unrelated to changes in patient acuity. Also, ACA Section 3131 directs HHS to improve payment accuracy through rebasing HHA payments starting in 2014.

CMS home health update: Medicaid policy changes for face-to-face requirements

Tuesday, CMS released a Medicaid proposed rule that would require face-to-face encounters under the Medicaid program, per ACA Section 6407, to improve home health services provided to individuals eligible for both Medicare and Medicaid and to reduce administrative burden for providers participating in both programs.

CMS value-based purchasing update for home health update

Wednesday, CMS announced that it will share nearly $15 million in additional savings with more than 123 HHAs that participated in the intervention group of the two-year Medicare Home Health Pay for Performance (HHP4P) demonstration between January 2008 and December 2009. In Year 1, 166 intervention group agencies in three regions received $15 million in payments.

Quotable

“We’re gonna have to look at entitlements. And that’s always difficult politically. But I’ve been willing to say we need to see where we can reduce the cost of health care spending and Medicare and Medicaid in the out years. Not by shifting costs onto seniors, as some have proposed, but rather by actually reducing those costs.”

 – President Obama, June 29, 2011 Press Conference

“The existing ESI tax exclusion is both very expensive and highly regressive, with five-sixths of the benefits flowing to the top half of the income distribution. Repealing or capping the exclusion could result in significant increases in government revenues and an increase in the progressivity of the tax system. Yet it would also lead to a significant reduction in insurance coverage. Thus, repeal of the exclusion would make the most sense in the context of a system-wide reform that provided broader non-ESI options for insurance coverage.”

 – Jonathan Gruber, “The Tax Exclusion for Employer-Sponsored Health Insurance,” National Tax Journal, June 2011, 64 (2, Part 2), 511–530

“If workers send employers a message that they preferred to obtain health coverage through an insurance exchange and that employment-based health coverage was no longer a valued employee benefit, either because of the elimination of the preferential tax treatment or because of some type of tax cap or tax reform that reduces the value of employment-based coverage, employers might stop offering it.”

 – Paul Fronstin, “Employment-based Health Benefits and Taxation: Implications of Efforts to Reduce the Deficit and National Debt, EBRI Issue Brief #360, July 2011

Fact file

• Twenty-three percent of U.S. consumers feel prepared to handle their health costs vs. 24 percent in 2010. (Source: 2011 Deloitte Survey of Health Care Consumers in the U.S.)
• The June unemployment rate increased to 9.2 percent; the economy added 18,000 jobs led by the health care industry increase of 14,000 jobs. (Source: U.S. Department of Labor, BLS)
• In 2008, five percent of the U.S. population accounted for 47.5 percent of all health care spending, while 50 percent accounted for three percent of all spending. (Source: National Institute of Health Care Management based on 2008 Medical Expenditure Panel Survey [MEPS], June 2011)
• One in four Medicare beneficiaries is enrolled in a Medicare Advantage (MA) plan. (Source: Health Affairs, June 2011)
• Of the $189 million that Medicare allowed for power wheelchairs provided in the first half of 2007, $95 million was for power wheelchairs that were medically unnecessary or had claims that were insufficiently documented. (Source: HHS Office of Inspector General [OIG])
• Annual wellness visits for Medicare enrollees: to date, 780,000 Medicare enrollees of 46 million have used the provision (Section 4103). Note: to get paid by Medicare, a physician and nurse must complete 15 steps during a 30- to 45-minute exam, including brief screenings for dementia and depression, an eye exam, a medical history, and personalized health advice. They must also check weight, height, and blood pressure—the only time the patient must be touched. (Source: CMS)
• $30 billion/year could be saved with the lowest prices for imaging studies in local communities, based on 683 percent variance in pricing for Computerized Axial Tomography (CT) scan and Magnetic Resonance Imaging (MRI) analyzed in 82,000 medical records. (Source: change:healthcare)
• Wrong site surgeries: 40 per week in hospitals. (Source: Joint Commission on Accreditation of Healthcare Organizations [JCAHO])
• Fifteen percent of companies with 500 or more employees have primary care clinics on site, up from 11 percent the year before. (Source: Mercer)
• Prison health: 2.3 million were incarcerated in the U.S. in 2008—one of 100 adults in the U.S., 25 percent of total incarcerated in the world. Half of these have psychiatric disorders—four to eight times the prevalence in the general population, but 22 percent of state prisoners and seven percent of local jail inmates receive mental health treatment. (Source: Diagnostic and Statistical Manual of Mental Disorders, 4^th Edition [DSM IV])
• Medicaid funding: Federal-state Medicaid costs were $366 billion in fiscal 2009. ARRA (stimulus funding) $100 billion ended June 30. (Source: CMS, NASBO)
• Physician practice update: 65 percent of established physicians hired, and 49 percent of those finishing residencies went to employment arrangements with hospitals in 2009 (Source: Medical Group Management Association [MGMA], June 3, 2011). Twenty-five percent of physicians were in solo practice from 2007—2008 and 21.4 percent were in groups of two to four vs. 37 percent and 21 percent in 2001 (Source: AMA). Thirty-three percent of doctors are self-employed today (Source: Accenture). Students who graduated medical school in 2010 left with $157,944 in loans—a 1 percent increase from 2009; 13 percent had debt of more than $250,000 (Source: Association of American Medical Colleges [AAMC]).
• 37 million children are covered by Medicaid/CHIP “are less likely to receive specialty care than children covered by commercial insurance.” (Source: Bisgaier et al, “Auditing Access to Specialty Care for Children with Public Insurance,” New England Journal of Medicine, June 16, 2011)
• Adults with diabetes worldwide nearly doubled to 347 million over the last 30 years. (Source: Danaei, G, et al, “National, regional, and global trends in fasting plasma glucose and diabetes prevalence since 1980: systematic analysis of health examination surveys and epidemiological studies with 370 country-years and 2•7 million participants,” The Lancet, June 2011)
• 236,400 of the 1.1 million infected with HIV/AIDS have not been diagnosed; 56,000 newly infected annually. (Source: CDC)
• Cases of salmonella contamination increased ten percent in 2010 vs. 2009. (Source: CDC)
• Airline satisfaction: 683 out of 1,000; low-cost airlines: 751, traditional carriers: 555. (Source: JD Power and Associates)
• 75.8 percent of email traffic is spam (Source: AOL). The average American 15-plus years of age spends 48 minutes/day on “personal care;” 13 minutes daily taking care of the health needs of non-household members; and 2 hours 27 minutes in leisure activities, excluding TV watching (Source: BLS’ American Time Use Survey, June 22, 2011).
• Consumer market for cloud computing services: $12 billion in 2016. (Source: Forrester)
• Number of MA Plans: 2011—1,845 down from 2,314 in 2010. (Source: Kaiser Family Foundation)
• Hospital net revenue up 5.9 percent in 2010. (Source: American Hospital Association)

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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