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Health Care Reform Memo: May 24, 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 new administration and implications for the C-suite and various stakeholder groups.

My take

Today marks the 70th edition of the Monday Memo. The odyssey began last February when a new President promised a health reform bill that would “reduce cost and cover everyone,” and the Deloitte Center for Health Solutions team set out to chronicle the journey.

On March 23, the President signed the Patient Protection and Affordable Care Act (PPACA). In the eight weeks since, we have visited 29 cities meeting with more than 100 senior management teams in pharmaceutical, device and drug manufacturing and distribution companies, hospitals and long-term care organizations, health plans, private equity fund managers, and technology and financial services industry leaders. The level of interest in the bill is high; apprehension about its intended and unintended results is significant and increasing. Most acknowledge the trajectory of the status quo was not sustainable; they vary widely in opinions about optimal solutions.

Business leaders believe health reform is a work in progress. They understand the rationale of the bill; they are carefully dissecting it to grasp its impact on their businesses. And all are cognizant of the “big bets” in PPACA:

  • Will large numbers of previously uninsured consumers enroll in insurance, thus reducing bad debt for providers and cost-shifting to employers and consumers? Or will they wait until they have a medical problem to enroll or simply pay the penalty that’s cheaper than the insurance options they’ll likely have in the exchanges?
  • Will employers opt to pay a penalty instead of maintaining benefits for employees (considering the penalty is less costly and health exchanges provide a safety net for coverage after 2014)? Will industry groups determine the end game for health reform is best played by ushering employees into individual insurance programs in the exchanges and away from employer-subsidized benefits?
  • Will the economy recover in a timely way to avoid deeper cuts to Medicare and Medicaid? Will the Independent Deficit Reduction Commission deem it necessary to reduce entitlement funding for Medicare in addition to the $439 billion, ten-year cuts in PPACA already?
  • And will the myriad of demonstration and pilot programs intended to transform the delivery system work to reduce cost, reduce inappropriate variation and improve outcomes? Will accountable care organizations, episode-based payments, comparative effectiveness research, value-based purchasing and the medical home combine seamlessly to transition the delivery system to a “new normal” marked by coordination of care in integrated systems with incentives for quality and efficiency replacing volume?

To be sure, health reform is more than PPACA. It includes state-led reforms, new strategies and priorities in key federal agencies and a plethora of follow-on bills and amendments. As the Monday Memo rolls on, it will continue to synthesize this large and growing body of legislation and program implementation news so management teams and boards have a readily accessible, non-partisan “go to” source to monitor PPACA implementation.

It is said “change is constant; success is not.” Health reform circa 2010 prompts substantial, transformative, urgent change in every sector of the industry, and for every employer and consumer. We will attempt to follow and report, avoiding partisan filtering in favor of data-supported neutrality.

So we will continue to chronicle the road to the “new normal” via the Monday Memo, recognizing it’s more than a single bill. It’s about additional legislation, rules and structures and their impact, intended or not on the industry’s stakeholders and users.

More to come!

Paul Keckley

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

House considers bill that includes key health issues: The physician fix, Medicaid expansion, COBRA extensions

Thursday, House Democratic leaders introduced the American Jobs and Closing Tax Loopholes Act (H.R. 4213), containing provisions with material impact in health care. The $190 billion bill includes:

  • Physician fix ($60 billion/three years): Allows a delay of the 21 percent scheduled cut until January 1, 2014; increases physician payment rates 1.3 percent in 2011, and 1 percent in 2012 and 2013, plus extra allowance to primary care doctors. Note: A permanent fix to the physician pay formula was sought by the American Medical Association but it would add $276 billion to the deficit per the Congressional Budget Office.
  • COBRA subsidies ($7.8 billion over ten years): The House bill extends COBRA—the fourth extension since 2009. Note: COBRA is the federal program that allows laid-off workers to stay on their employer's health insurance for up to 18 months. Historically, the former employee had to pay 100 percent of the costs. Recent bills provide a 65 percent COBRA health insurance premium subsidy for laid-off workers for up to15 months.
  • Medicaid funding ($24 billion over ten years): As states close their books on FY10 (46 states end their fiscal year June 30, 2010), a shortfall in Medicaid funding for FY11 was certain. Historically, the federal government paid 50-76 percent of state funding via the Federal Medical Assistance Percentages (FMAP) formula. After the stimulus bill—the American Recovery and Reinvestment Act (ARRA) of 2009—the federal percentage increased 6.2 percent across the board to 61-84 percent. The House proposal extends the higher rate through June 30, 2011. To access the extension, Governors must certify within 45 days that the state will request and use the additional federal funds. Note: In PPACA, states receive full federal funding for costs of expansion populations for 2014-2016; 95 percent in 2017; 94 percent in 2018; 93 percent in 2019 and 90 percent for 2020 and beyond. Between now and 2014, states get $87 billion through the stimulus package (ARRA FY10-FY11) and $25 billion additional was appropriated in the President’s FY11 budget proposal.
  • Hospital 72 hour rule exclusions ($4.5 billion cut to hospitals): The House proposal expands the list of therapeutic services provided Medicare enrollees within 72 hours of admission that are not reimbursable. Note: Currently, all diagnostic services including clinical laboratory tests provided by an acute hospital to a Medicare inpatient within three days of admission are deemed to be inpatient services and are reimbursed through the inpatient prospective payment system (IPPS). Non-diagnostic, or therapeutic, services are treated differently. Generally, if the therapeutic services are "related to" the inpatient admission, they too are reimbursed under IPPS.

Health plan effectiveness studies prominent in PPACA: Among “the Secretary shall…”

In PPACA, there are 1,051 “the Secretary shall” directives involving studies, implementation, legislative actions and the creation of the 105 new agencies, programs and oversight bodies in PPACA.

For example, some “the Secretary shall” directives involving evaluation of current self-insured and commercial insurance plans:

  • Section 1201 of PPACA requires the Secretary of Health and Human Services (HHS) to prepare a report for Congress about the effectiveness of wellness programs and their impact on access and costs of care. It stipulates:
  • “Not later than 3 years after the date of enactment of the Patient Protection and Affordable Care Act, the Secretary, in consultation with the Secretary of the Treasury and the Secretary of Labor, shall submit a report to the appropriate committees of Congress concerning:
    A. the effectiveness of wellness programs (as defined in subsection (j)) in promoting health and preventing disease;
    B. the impact of such wellness programs on the access to care and affordability of coverage for participants and non-participants of such programs;
    C. the impact of premium-based and cost-sharing incentives on participant behavior and the role of such programs in changing behavior; and
    D. the effectiveness of different types of rewards.
    In preparing the report, the Secretaries shall gather relevant information from employers who provide employees with access to wellness programs, including State and Federal agencies.”
  • Section 1253 requires an annual report about self-funded plans derived from Form 5500 data (the first annual report is due March 23, 2011, one year after enactment of PPACA). Anticipated information requirements will be plan type, number of participants, benefits offered, funding arrangements and financial filings of self-insured employers (including assets, liabilities, contributions, investments and expenses).
  • Section 1254 requires a study on characteristics of insured and self-funded group health plans (the first annual report is due March 23, 2011, one year after enactment of PPACA). The report will focus on the extent to which self-insured group health plans offer less costly coverage; claim denial rates, plan benefit fluctuations and limited recourse options on consumers; potential conflicts of interest related to health care needs of self-insured enrollees and self-insured employers’ financial contributions or profit margin resulting from the plan.
  • Section 1302 requires a periodic survey to assess typical employer plan benefits toward the definition of “essential health benefits” (EHBs). The survey(s) of employer-sponsored plans (single employer and multi-employer) will inform a report to Congress addressing the following: Difficulties accessing services due to coverage or cost; whether EHBs need to be modified or updated based on medical evidence or scientific advances; procedures for modifying gaps identified and identification of additional/expanded benefits to meet actuarial limitations. No date is specified for delivery of the first report.

In some cases, other departments are required to play a role in implementing PPACA:

  • Section 1513 requires the Secretary of Labor to conduct a study to determine whether employee wages are reduced by reason of the application of the assessable payments and make such determination on the basis of the National Compensation Survey published by the Bureau of Labor Statistics. The “Labor Secretary shall” report the results of the study to the House Ways and Means Committee and the Senate Finance Committee on or before January 1, 2014.

Disability focus: HITECH, PPACA crosswalk

High risk pools in states and Medicaid responsibility for the disabled (618,000 disabled at per capita cost of $55,000) are high level concerns in policy circles. Last week, HHS announced plans to create a new Center of Excellence in Research on Disability Services, Care Coordination and Integration to collect and analyze data from the Centers for Medicare and Medicaid Services’ Chronic Conditions Warehouse (CCW), state Medicaid plans, commercial datasets and other sources. The initial funding for the center came from the comparative effectiveness research provisions of the HITECH Act to develop best practices and evidence-based treatment guidelines.

Deloitte’s 2010 Survey of Health Care Consumers in the U.S.: Concern about government role high
Concern about government role high

The full report is now available online at

Q and A

Q: Will the health reform bill be repealed?

A: Not likely. A repeal effort would require 37 state legislatures to override the bill sending it back to the Congress for a constitutional convention. More likely are challenges to elements of the bill in the court system (the individual and employer “play or pay” mandates are being challenged in 20 states to date) where PPACA is considered a usurpation of the federal government’s powers limited to matters of commerce in Article 10 of the U.S. Constitution. In Wickard v. Filburn (1942), the Supreme Court rejected the claims of farmer Roscoe Filburn that wheat he grew for his own use was beyond the reach of federal regulation. The 1942 ruling upheld federal laws limiting wheat production, reasoning feeding wheat to his own livestock was implicitly affecting wheat prices. Subsequent rulings (Desegregation in Arkansas, Roe v. Wade, et al) have upheld the broader interpretation of the commerce clause which would be the centerpiece of constitutional challenges. But it is political season, and anyone can file a lawsuit and get newspaper coverage. So discussion of a constitutional challenge to PPACA is not likely to subside.

Q: What does the health reform bill do to ease the shortage of primary care physicians in the U.S.?

A: Half of the 900 million office visits to physicians in the U.S. were seen by primary care physicians (PCPs), yet they are less than one-third of practicing physicians overall. With the aging and poor health habits of the population, demand for primary care services will likely increase. There are several areas where PPACA seeks to address a likely shortage in primary care:

  • Increased funding to community health centers and federally qualified health centers: $11 billion through 2019, much of which is funded up front in the stimulus bill.
  • Increased funding to the National Health Service Corps to attract medical students to primary care.
  • Increased funding for mid-level practitioners.
  • Expansion of Patient Centered Medical Home demonstration programs started by Medicare in 2006.
  • Increased payment rates to PCPs (to Medicare levels) for treatment of Medicaid patients (including Thursday’s proposal in the House to provide additional funding to PCPs as part of the three-year physician fix).
  • Expansion of residency program opportunities in primary care.
  • Provisions that allow nurse-managed organizations, pediatric organizations and primary care-led physician organizations to sponsor accountable care organizations (starting January 2012).
  • And PCPs go to the front of the line for HITECH stimulus funding to implement Electronic Health Records if they see disproportionately high numbers of Medicaid and under-served populations.

And others.

Note: It is doubtful that these efforts alone will solve the problems of primary care supply. The shortage will likely be remedied by:

  1. innovative uses of technology for care management (bio-monitoring, distance medicine, e-visits, group visits, etc.)
  2. expansion of delivery channels (retail clinics)
  3. consumer adoption of self-care diagnostics and therapeutics (use of over-the-counter medications, mid-level practitioners for non-urgent medical problems)
  4. changes in academic training for the workforce (team-based care, use of electronic health records, etc.)
  5. emergence of health coaching models of care (the medical home, population health management programs)
  6. expanded scope of practice licensing and regulation for nurses (consumers are satisfied with care from nurse practitioners for non-complicated conditions and outcomes are equivalent).

Though the shortage is obvious, it might be overstated. If incentives for primary care are aligned with population health goals, innovations in design and delivery of technology-enabled self care management and regulatory reforms, the gap between supply and demand will be less than anticipated. It is fair to conclude shortages will exacerbate as the population ages and healthy living remains suboptimal. Unless these and other innovations are applied, we suspect the critical shortage of primary care will not be accommodated entirely by the provisions of the bill.


“We always overestimate the impact of change in the next two years and underestimate the effect of change in the next ten.” 

—Bill Gates, “The Road Ahead: Completely Revised and Up-to-Date,” Penguin Books, 1996.

“Somebody has to do something and it’s just incredibly pathetic that it has to be us.” 

—Jerry Garcia, Grateful Dead.

“To finance federal spending, the highest federal tax bracket would have to rise to 92 percent by 2050, assuming health care spending grows 2.5 percentage points faster than GDP, which is approximately the historical average.” 

—Congressional Budget Office, July 9, 2007; Chernew, ME, Baicker, K, Hsu, J, “The Specter of Financial Armageddon — Health Care and Federal Debt in the United States,” 2010, New England Journal of Medicine, Vol. 367, pp. 1166-1168.

“Mention health care reform and the image that instantly comes to mind is a big government program. But there is another broad transformation in health care under way, a powerful force for decentralized innovation. It is fueled in good part by technology — low-cost computing devices, digital sensors and the Web.
The trend promises to shift a lot of the diagnosis, monitoring and treatment of disease from hospitals and specialized clinics, where treatment is expensive, to primary care physicians and patients themselves — at far less cost.” 

—“High-Tech Alternatives to High-Cost Care,” The New York Times, May 23, 2010.

Fact file

  • Local variation: Hospital utilization severity adjusted days per 1,000 population. U.S. average: 645, Highest: 1,545 (Washington, DC), Lowest: 380 (Salt Lake City, UT). (Source: American Hospital Association, RAND)
  • Average annual premium for employer-provided family coverage: $13,375, $4,704 for single coverage in 2009. (Source: America’s Health Insurance Plans)
  • Emergency room use by Medicaid enrollees double use by privately insured and uninsured. (Source: National Center for Health Statistics) Note: Report indicates one in five Americans visited an emergency room last year. (Source: National Conference of State Legislators, National Center for Health Statistics)
  • Only 9 percent of companies recovered from previous economic recessions stronger, compared to 17 percent that did not survive and 74 percent who survived but experienced laggard growth. (Source: “Roaring out of the Recession,” Harvard Business Review, March 2010, analysis of 4,700 companies across 3 recessions)
  • Spending for care associated with chronic disease: 74 percent of private spending, 83 percent of Medicaid and 96 percent of Medicare. (Source: “What Accounts For The Rise In Health Care Spending?”, Kenneth E. Thorpe and Lydia Ogden, Emory University)
  • Total federal and state combined spending for Medicaid in 2009: $379 billion—7.9 percent increase over 2008. (Source: National Conference of State Legislators)
  • Current spending in federal budget
  • Mandated programs $2.17 trillion (56 percent of total spending): Social security – 19 percent,
  • Medicare – 13 percent, Medicaid – 8 percent, Other – 17 percent
  • Appropriated programs $1.42 trillion (37 percent of total spending): Security and Defense – 23 percent, Non-security 14 percent
  • Interest payments on debt $251 billion (7 percent of total spending)

Note: Health care programs as percent of federal budget have increased from 12.1 percent in 1980 to forecast 23 percent in 2010. (Source: Office of Management and Budget)

  • 63 percent of eligible seniors and 69 percent of low-income beneficiaries are enrolled in Medicare Part D (the Prescription Drug Discount Program) in 2006. (Source: CMS)
  • Readmission rates to hospitals: 20 percent of all discharges within 30 days, 34 percent within 90 days. (Source: American Hospital Association)
  • 14 percent of all mortgage loans are delinquent. (Source: American Bankers Association)
  • R&D investment trends: From 1983 to 2007 inflation adjusted: Academic research increased 60 percent, venture capital-backed investments increased 1140 percent and private equity backed R&D spending increased 1940 percent. (Source: National Science Foundation)
  • 18,000 lives saved annually if all states banned smoking in public places. Currently, 39 states have some type of public smoking bans, 26 ban smoking in any enclosed public space, while 11 states have no bans at all. (Source: Institute of Medicine)

Memorial Day Holiday: Health Care Reform Memo

Please note, in observance of the Memorial Day holiday, publication of the next Health Care Reform Memo will be on Tuesday, June 1.

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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