Health Care Reform Memo: November 15, 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

The UK Prime Minister David Cameron’s effort to rein in his government’s spending and dodge fiscal collapse has been closely watched. His formula—$1 new tax dollar matched with $3 in spending cuts—is perhaps a template that might play out in other troubled economies facing massive uncertainty or worst case economic meltdown.

Last week, the Chairmen of National Commission on Fiscal Responsibility and Reform circulated a draft of their ideas. Within minutes, it drew criticism from all sides. Seems cutting spending is always popular in concept, but when cuts hit home, it’s quite a different matter. Few want to pay higher taxes or give up tax incentives that support their business. The chairmen proposed to cut $282 billion in health spending 2011-2020 to offset the cost of a permanent physician pay fix; another $200 billion of health related cost savings this decade (nearly $400 billion of options were identified) and, after 2020, limiting growth in reducing annual spending to the U.S. annual gross domestic product (GDP) plus 1 percent. Tax portions of the proposals would repeal or limit the exclusion for employer provided health benefits.

Our tax policy team will provide Monday Memo readers with an up-to-date, accurate, and objective analysis of proposals as they unfold. No doubt, health care—at 23 percent of the federal budget—will be a focus as the 112th Congress tackles the deficit next year.

Can the U.S. health care system be more efficient? Can it improve population-based health status and reduce inequities and access issues simultaneously? Can the latest treatments and technologies be funded by a system in the cross hairs of deficit reduction? Will consumers accept less for more? Big questions.

The realities are three:

• Current health care costs are not sustainable.
• The implementation of the Patient Protection and Affordable Care Act (PPACA) will be framed in the broader context of economic recovery, deficit reduction, and fiscal discipline.
• Health care organizations must innovate, scale operations, and optimize efficiency to survive. There will be winners and losers in each sector.

With the 2010 election behind us, the business of lawmaking will occupy Capitol Hill. Health costs will likely be high on the agenda. Stay tuned.

Paul Keckley, Ph.D.

Lame duck agenda

The 111^th Congress convenes today. By Wednesday both parties will elect leaders and committee assignments for the 112th Congress. The remaining items from the 111^th Congress that are scheduled to be addressed before it adjourns include several major health care issues such as:

• The extension of unemployment benefits (set to expire November 30, 2010)
• The extension of the “Continuing Resolution” to keep federal agencies in operation including the U.S. Department of Health and Human Services (HHS) et al.
• The extension of core provisions of the 2001 Economic Growth and Tax Relief Reconciliation Act
• The extension of the Defense Authorization Act (funds continued support of military health programs)
• A temporary fix for physician pay to avoid scheduled 23 percent cut per the Sustainable Growth Rate (SGR) model (see below)

A major focus of the lame duck session and the 112^th Congress is reported to be the deficit, particularly the discussion proposals of the National Commission on Fiscal Responsibility and Reform, co-chaired by former Wyoming Senator Alan Simpson and former Clinton White House Chief of Staff Erskine Bowles. A draft of the Commission’s proposals were circulated Wednesday including five major proposals:

1. Enact tough discretionary spending caps and provide $200 billion in illustrative domestic and defense savings in 2015.
2. Pass tax reform that dramatically reduces rates, simplifies the code, broadens the base, and reduces the deficit.
3. Address the temporary fix for physician pay not through deficit spending but through savings from payment reforms, cost-sharing, malpractice reform, and long-term measures to control health care cost growth.
4. Achieve mandatory savings from farm subsidies, military, and civil service retirement.
5. Ensure Social Security solvency for the next 75 years while reducing poverty among seniors.

The Commission’s proposals are a combination of spending cuts and the elimination of taxes replaced by new sources of revenue. Notably, the Commission’s proposals include cuts and reduced spending saving of $282 billion (2011–2020) resulting in long-term health costs no more than 1 percent above the GDP. Medical liability reform, a permanent replacement of the SGR model for physician pay, drug rebates, and Medicare cost-sharing are included. The draft also identifies nearly $400 billion of illustrative savings in federal health expenditures by 2020, and for the long term, the plan would set a global target for total federal health expenditures to grow no more than GDP growth plus 1 percent after 2020. These saving options strengthen the Independent Payment Advisory Board (IPAB) and accelerate disproportionate share hospital (DSH) payment, Medicare Advantage, and home health cuts in the PPACA.

For updates to the tax Implications of the Deficit Reduction Commission’s work, Deloitte Tax LLP’s Tax News & Views is available for subscription. Please visit: Washington National Tax Office.

Medicare enrollment begins today

The annual enrollment season for Medicare fee-for-service plans and Medicare Advantage plans (Part C) starts today and continues through December 31. Cuts to Medicare Part C plan funding were passed as part of PPACA, and PPACA also added benefits to seniors such as annual physicals and access to preventive health without co-payments, so product differentiation, benefits design, eligibility, and enrollment efforts this year are significantly impacted by PPACA. Note: There are 40 million seniors 65 and older in the U.S. today increasing to 88.5 million by 2050; 5.8 million seniors are 85 or older; and 79,000 seniors are 100 or older.

Source: U.S. Census Bureau Population Projections

AMA requests 13-month fix

Monday, the American Medical Association (AMA) asked Congress to postpone a scheduled 23.2 percent pay cut per the SGR payment formula. The AMA proposed a 13-month temporary fix starting December 1, 2010 at a cost of $15.4 billion based on a 1 percent increase. Speaking at the Association of American Medical Colleges (AAMC) annual meeting in Washington, DC last week, HHS Secretary Kathleen Sebelius said the administration supports the effort to replace the SGR model and the 13-month fix. Note: Per the Medical Group Management Association (MGMA), physician income increased 3.4 percent in 2009 with fees from hospitals playing a key role in the increase; per the U.S. Department of Commerce, household income was down 1.9 percent during the same period. Also, the National Commission on Fiscal Responsibility and Reform proposal included replacement of the SGR formula with physician income tied more directly to overall economic conditions and increased powers of the IPAB to set annual spending targets.

Texas mulls changes to Medicaid program to assume greater control

Currently, 3.6 million Texans are enrolled in Texas’ Medicaid program. Jobless parents qualify if their income is below 12 percent of the federal poverty level ($22,050 for a family of four), and working parents qualify if their income is below 26 percent of the federal poverty level. The federal government covers 60 percent of the program’s $45 billion budget. In 2014 Medicaid eligibility in all states will be set at 133 percent of the federal poverty level ($29,327 for a family of four in 2010), per PPACA.

Leaders in Texas and other states are discussing an option of state-only funding to give broad flexibility in coverage, benefit, and cost. The scenario is this: Texas would drop Medicaid coverage for most enrollees since federal subsidies for coverage would be available for citizens in 2014 through the health exchanges per PPACA. The state would maintain responsibility for beneficiaries who require nursing homes and long-term care and for premiums and dual eligibles, but the vast majority of Medicaid enrollees would shift to federal funding via the exchanges.

A Heritage Foundation analysis concluded Texas would save $46.5 billion from 2014 to 2019 under this scenario. Cindy Mann, director of the federal Center for Medicaid and State Operations (CMSO), said HHS had not determined whether Medicaid recipients dropped by their home states would qualify for subsidies.

Source: Emily Ramshaw, “Texas Considers Medicaid Withdrawal,” The New York Times, November 6, 2010.

IOM to define “essential health benefits”

PPACA allows individuals and businesses to purchase health insurance directly through exchanges that will offer qualified health plans (QHP) that consumers can compare starting in 2014. QHPs vary in standardized coverage levels and have limits to patient cost-sharing. PPACA Section 1302 stipulates that QHPs will cover general categories of care including: ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services including behavioral health treatment; prescription drugs; rehabilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services including oral and vision care.

Last week, HHS announced that the Institute of Medicine (IOM) was commissioned to make recommendations on the criteria and methods for determining and updating the essential health benefits. It will review how insurers determine covered benefits and medical necessity and recommend policies and procedures to HHS on how to evaluate QHPs based on the health care needs of diverse segments of the population (including nondiscrimination based on age, disability, or expected length of life).

“Mini-Med” special rules expected; waivers given by HHS

Friday, HHS Office of Oversight Director, Steven Larsen, confirmed special rules would be provided to employers about "mini-med" insurance policies, which are limited benefits plans with low premiums typically paid through payroll deductions by part-time employees. Director Larson’s memo stated that "a special methodology that takes into account the special circumstances of ‘mini-med’ plans in determining how administrative costs are calculated" would apply for next year and "future decisions on how these types of plans will be treated on forthcoming data on the coverage these plans offer.” PPACA says insurers must have a medical loss ratio (MLR) of 80 percent (individuals and small groups) and 85 percent (groups).

HHS confirmed that employers are asking for special consideration on the MLR provision in lieu of dropping the plans altogether and issued additional guidance on “mini-meds.” Specifically, the guidance:

• Establishes transparency and disclosure requirements for plans that receive waiver approvals
• Clarifies that states can apply for a waiver on behalf of health insurance issuers in the state under certain circumstances and establishes a process for a state waiver request
• Describes factors that are considered in analyzing a waiver application
• Discusses the application of the MLR provisions
• Reiterates the requirement that waiver applicants are subject to record retention and audit requirements

As of November 13, HHS has granted more than 111 waivers to companies offering “mini-med” plans. The guidance notes that “mini-med” plans will receive special consideration (at least through 2011) in the MLR rule that is expected to be released before the end of the year.

CMS posts proposed rule on Medicare Advantage and Part D PPACA provisions

Wednesday, the Centers for Medicare & Medicaid Services (CMS) posted proposed rules changing Medicare Advantage and Part D per PPACA requirements. The proposed rule:

• Limits to cost-sharing under Medicare Advantage and Section 1876 Plans for specified services (administration of chemotherapy services, renal dialysis services, and skilled nursing care) at original Medicare levels and limits cost-sharing for home health services to that charged under original Medicare
• Prohibits Medicare Advantage and Section 1876 Plans from charging cost-sharing for in-network preventive services for which there is no cost sharing under original Medicare
• Clarifies that the Secretary is not required to accept any Part C or Part D bids and clarifies the Secretary’s authority to deny bids that propose significant increases in cost-sharing or decreases in benefits
• Codifies in regulations the voluntary de minimis policy for subsidy-eligible individuals enrolled in MA-PD Plans and standalone prescription drug plans (Section 3303)
• Provides regulations to implement a monthly adjustment amount for higher income Part D beneficiaries due to the Income Related Monthly Adjustment Amount (Section 3308)
• Eliminates Part D cost-sharing for Medicare beneficiaries who are eligible for full Medicaid benefits and who are receiving home and community-based services instead of being institutionalized (Section 3310)
• Codifies statutory changes to close the Part D coverage (Section 1101 of the Reconciliation Act)
• Provides the methodology for using quality ratings to determine Medicare Advantage bonus payments (Section 1102 of the Reconciliation Act)
• Implements policies to reduce wasteful dispensing of Part D drugs for beneficiaries in long-term care facilities (Section 3310)

CMS final rule on AMP for Medicaid reimbursement

CMS released its final rule about the withdrawal of average manufacturer price (AMP) and federal upper limits (FUL) for multiple source drugs from the “Medicaid Program; Prescription Drugs’’ final rule, also known as the “AMP” final rule, published in July 2007. CMS also withdrew the definition of multiple source drug as it was revised in the ‘‘Medicaid Program; Multiple Source Drug Definition’’ final rule published in October 2008. The original regulations had been challenged in court by pharmacy groups that claimed the government unlawfully changed the methodology by which pharmacies are reimbursed for dispensing prescription drugs to Medicaid patients.

CRS report studies potential savings from ACOs and Medicare Shared Savings Program

A new Congressional Research Service (CRS) report offers clarification about accountable care organizations (ACOs) and the Medicare Shared Savings Program (PPACA Section 3022). The Congressional Budget Office (CBO) estimates that the Medicare Shared Savings Program would reduce Medicare expenditures $4.9 billion from FY 2013 through FY2019 period. Key findings in the report include:

1. Physicians will play a key role in ACO performance:
   CRS defines ACOs as collaborations that integrate groups of providers, such as physicians (particularly primary care physicians), hospitals, and others around the ability to receive shared-saving bonuses from a payer by achieving measured quality targets and demonstrating real reductions in overall spending growth for a defined population of patients. Note: CRS bases this definition on the Aaron McKethan, Mark McClellan, Elliott Fisher, et al., definition, and CRS puts emphasis on physicians’ involvement noting “physicians’ control (directly or indirectly) affects 87 percent of all personal health spending.”
   Source: Lawton Robert Burns and Ralph W. Muller, “Hospital-Physician Collaboration: Landscape of Economic Integration and Impact on Clinical Integration,” Milbank Quarterly, vol. 86, no. 3 (2008), p. 377, citing A. Sager and D. Socolar 2005. Health Costs Absorb One-Quarter of Economic Growth 2000-2005. Boston: Boston University School of Public Health
2. ACOs should be provider-led:
   According to the report, although the composition of ACOs may vary geographically, reflecting local market conditions, analysts conclude that the effort needs to be provider-led. Insurers may be involved but the CRS report suggests their role is supportive rather than primary.
3. There may be difficulties with replicating existing ACO models and market conditions will dictate optimal models:
   The report notes that ACOs have somewhat limited experience in dense urban areas, where the insured have the ability to obtain services more easily from a non-ACO provider and in large rural areas, where the ACO may be a virtual entity and there may be a limited sense of shared commitment across providers spread over a large geographic area.
4. It is not clear how savings would be distributed:
   The CRS report indicates the methodology whereby Medicare savings will be calculated and shared with ACOs remains unclear. Note: CMS is expected to provide details in the next two to three weeks.
5. The impact of ACOs depends on alignment of incentives by the right combination of providers:
   The impact of ACOs on quality improvement and cost reduction will depend on the structure of the ACO to accommodate optimal alignment (physician-hospital, primary care-specialists) and execution of medical management and health coaching of Medicare enrollees.
6. Hospitals are likely to drive ACO development:
   Building on Berenson et al. (2010) analysis, the CRS report noted that hospitals are likely to be drivers of ACO development since physicians are not inclined to share risk or collaborate effectively.

Source: David Newman, “Accountable Care Organizations and the Medicare Shared Savings Program,” Congressional Research Service, November 4, 2010. Please click here.

CMS administrator to testify on health reform

CMS Administrator Donald M. Berwick, MD, will testify before the Senate Finance Committee this Wednesday. The agenda includes CMS plans for Medicare fraud, waste and abuse enforcement; mechanisms to encourage use of electronic health records; policies to reduce hospital readmissions; and the role of the CMS Innovation Center.

Representative Stark requests health insurance companies reduce premiums

Wednesday, Representative Pete Stark (D-CA), Chairman of the House Ways and Means Health Subcommittee sent a letters to ten health insurance chief executives requesting specific plans for premium reductions citing a 41 percent increase in profits ($9.3 billion) for the first nine months of 2010 as rationale. Robert Zirkelbach, spokesman for America’s Health Insurance Plans (AHIP), responded, “For every dollar spent on health care in America, less than one penny goes towards health plan profits, and it’s time Washington addressed the other 99 cents.”

Source: Ryan Grim, “Health Insurance Profits Soar, Dem Calls for Rebates,” Huffington Post, November 10, 2010

Quotable

“Americans aren’t liberal, and they’re not conservative. They feel abiding affection for neither Republicans or Democrats. In fact, they feel little enthusiasm for politicians or politics of any kind. The people, rather, like government that functions to their benefit. If they share the sense that their lives are going well and the state of the union is reasonably healthy, they’ll stick with the party in power, no matter how left wing or right wing it seems to be. If, on the other hand, they get worried about their own families and feel that conditions stink in the nation at large, they’ll turn the bums out, regardless of ideology.”

 – Michael Medved, “Voters want whatever works,” USA Today Editorial, November 10, 2010

Footnotes: election results

• In the 112^th Congress, there will be 24 physicians: 19 in the House and 5 in the Senate. (Source: Politico)
• New Connecticut Senator is Richard Blumenthal, brother of National Coordinator for Health Information Technology head David Blumenthal, MD.
• The change of House control to the GOP from Democrats marked the first time in history the lower House changed hands when the Senate did not. (Source: Roll Call)
• Per the independent Campaign Media Analysis Group, spending against the health reform law was five times more than support.
• Sixty incoming members of Congress have no prior elective office experience, highest since 44 were elected in 1948. (Source: UC San Diego Historian Gary Jacobson)
• Kaiser Family Foundation telephone poll of 1,502 adults conducted November 3-6: Asked to name what influenced their vote, voters listed health care fourth (17 percent) behind the economy (29 percent), party preference (25 percent) and the views of the candidates themselves (21 percent). When asked about specific provisions of PPACA, 70 percent supported tax credits for small businesses, assistance to help seniors pay for prescription drugs, subsidies to low- and moderate-income people to help them buy insurance, and a ban prohibiting insurers from denying coverage based on preexisting conditions. Support was lower for the individual mandate provision (27 percent) and increased Medicare payroll tax (54 percent). (Source: Kaiser Health Tracking Poll)
• GOP had net gains of nine in gubernatorial races: there are currently 29 GOP governors vs. 20 Democrats with the final result in Minnesota pending. Note: in 20 states, the GOP controls both houses of the state legislature. (Source: The Pew Center on the States)

Fact file

• Employer expectations of 2011 health costs increases nine to twelve percent. Fifty-seven percent say they will have employees pay a greater share of the cost of coverage. (Source: Mercer)
• Retiree health care expenses up 4.2 percent in 2009 contrasted to overall consumer price increases of 1.1 percent; up 56 percent since 2002. By contrast, overall consumer prices are up just 1.1 percent so far this year. (Source: Fidelity Investments)
• In the last three months, home prices fell in 76 of 155 markets tracked by the National Association of Realtors. The national median price for single-family homes was $177,900 down 0.2 percent from a year earlier. Nationwide, "distressed property," including foreclosures and homes at risk of foreclosure, accounted for 34 percent of third-quarter transactions, up from 30 percent a year earlier. (Source: National Association of Realtors)
• Five states – Alaska, Georgia, Iowa, Minnesota, and Wyoming – did not request $1 million funding available through HHS last month to assess and report on preparedness and infrastructure needs for reviewing health insurance premiums in their state. Forty-five states and the District of Columbia received funding. (Source: HHS)
• PPACA could save Medicare beneficiaries in fee-for-service plans an average of $3,500 2011-2020 as a result of reduced costs of prescription drugs and savings from waste fraud, and abuse. (Source: HHS)
• Medicare and Medicaid expenditures account for 4.7 percent of GDP, compared with an average of 4.1 percent of GDP over the past five years. (Source: CBO)
• CBO’s October 2010 budget review reported that Medicare and Medicaid spending accounted for 4.7 percent of GDP, compared to 4.1 percent over the past five years. (Source: CBO)

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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