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Health Care Reform Memo: June 1, 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.

House passes temporary physician fix

Friday, the House approved a $22 billion, 19-month fix for Medicare payments to doctors, avoiding a scheduled 21 percent cut June 1. Under the bill, physicians will get a 2.2 percent increase for the balance of 2010, followed by a 1 percent increase in 2011. The Senate will consider the bill after June 7 when it returns from recess, but passage is likely. 

Note: This marks the 9th time since March 1, 2003 Congress has set aside the sustainable growth rate (SGR) model in favor of a temporary fix. The temporary fix through 2011 means physicians will face a 33 percent cut in 2012 per the SGR model.

ONC Update: Efforts to connect HITECH with reforms, Homeland Security efforts ongoing

From Wednesday’s HIT Standards Committee meeting, three important updates:

  1. Per Joy Pritts, Office of the National Coordinator for Health Information Technology’s (ONC’s) Chief privacy officer, the Health IT Policy Committee and Standards Committee workgroups on privacy and security will join forces in a “tiger team to address privacy and security issues on an expedited basis."
  2. Janet Corrigan, chair of the Standards Committee’s quality workgroup, indicated that metrics for determining quality elements of meaningful use would be ready by August for implementation in 2013.
  3. Doug Fridsma, acting director of ONC’s Office of Standards and Interoperability announced eight of 11 vendors had been selected for grants for development of the national health exchange network that will mirror Homeland Security’s methodology for sharing inter-agency information across the Internet.

House bill: Tax increase on venture capital-funded gains

The House of Representatives voted 215-204 on May 28 to approve the American Jobs and Closing Tax Loopholes Act of 2010, legislation that, among other things, includes a provision that would impact venture capital by treating most carried interest derived from an investment services partnership interest (ISPI) as ordinary income rather than capital gain. Until the end of 2012, 50 percent of carried interest would be treated as ordinary income, while the other half would receive capital gain treatment. Beginning on January 1, 2013, the ratio would increase to 75 percent ordinary income treatment and 25 percent capital gain.

Senate Majority Leader Harry Reid (D-Nev.) said May 28 that his chamber intends to amend the bill after the Memorial Day recess, but did not discuss specific changes. Several Senate Democrats as well as Republicans, however, have supported exempting venture capital firms from the carried interest provision.

Note: Venture funding is a key to start-ups in health care.

Reinsurance pool update: Immediate action for employers recommended

Beginning today (June 1), and continuing until January 1, 2014, certified employer-sponsored health plans for early retirees are eligible for the $5 billion in funding made available through the U.S. Department of Health and Human Services (HHS) for the reinsurance pool. Because applications will be processed in the order they are received, the fund is likely to run out before the end of the period.

Note: The program provides partial reimbursement of the cost of health benefits for early retirees over age 55 not eligible for Medicare, retirees' spouses, surviving spouses and dependents. The reimbursement is 80 percent of the cost of the early retiree's health claims between $15,000 and $90,000 per year that are paid by the health plan. Costs for an insured health plan include actual claims paid but not premiums for coverage. Reimbursements are not taxable to employers but must be used to lower future health costs via wellness, preventive health and chronic care management programs, among others.

NAIC recommends stepped up enforcement against sale of variable annuities to terminally ill patients

Last Thursday, the National Association of Insurance Commissioners (NAIC), a group of state regulators, held a hearing to evaluate increased enforcement of current laws that regulate the sale of variable annuities to terminally ill patients, when investors receive the death benefit (Stranger Originated/Owned Annuities). In the scheme, investors pay the annuitant a fee in exchange for being named the beneficiary of the insurance upon the person’s death. The NAIC recommended closer scrutiny and a possible crackdown on the practice.

OSHA investigating handling of infectious agents; hospitals, labs, biotechnology likely focus

Last week, Occupational Safety and Health Administration (OSHA) announced it was investigating safety issues related to the handling of pathogens and infectious agents commonly used in research labs. The occupational risks seem particularly salient to the biotechnology industry’s 233,000 employees. 

Note: Increased scrutiny of wet labs in academic medicine, clinical labs and research and development (R&D) programs in pharmaceutical and biotechnology manufacturing is likely.

Drug rebate checks in the mail

Thursday, the White House announced 80,000 seniors whose drug costs hit the donut hole — for 2009, $2,830 — will receive $250 rebate checks starting June 10. Note: Under original terms of the Medicare Prescription Drug, Improvement, and Modernization Act (MMA), annual costs to seniors were 25 percent of drug costs up to $2,830, 100 percent between $2,830 and $4,550 and 5 percent thereafter. In the Patient Protection and Affordable Care Act (PPACA), the drug companies agreed to fund elimination of the donut hole by 2020 at a cost of $80 billion over 10 years. The rebates are a one-time benefit. Starting in 2011, beneficiaries will get a 50 percent discount on brand-name medications once they reach the coverage gap.

The implementation challenge

PPACA includes the “Secretary shall...” 1,051 times and involves the creation of 105 new agencies, task forces, commissions and boards. Two “not later than 60 days from enactment” deadlines have already slipped: The Alaska task force on its population health status and the breast cancer education task force (part of Education and Awareness Requires Learning Young, or EARLY) have not been named to date.

Taxes on beverages—state watch

Two states have passed legislation taxing beverages (Washington approved a new excise tax on soda and Colorado removed a sales tax exemption) and 15 states have proposed legislation underway. In addition, at least four major city governments have announced similar efforts—Washington, DC; Philadelphia; Baltimore and Anchorage. 

Sources: National Conference of State Legislatures, American Beverage Association

Employer investments in wellness programs increasing

Per PPACA, effective January 1, 2014, employers will be able to use employee wellness program rewards of up to 30 percent of the cost of individual health coverage, up from the current limit of 20 percent. According to a survey of 1,300 employers by the Midwest Business Group on Health, 60 percent of employers are likely or very likely to create or expand their wellness programs as a result of the wellness provision vs. 33 percent that said they are unlikely/ not very likely to do so (seven percent did not answer).

Source: Midwest Business Group on Health

Las Vegas employers push hospital transparency, performance

Last week, the Health Services Coalition, a group of 24 self-funded insurance plans representing large employers in Las Vegas advised 13 area hospitals that they would direct their 260,000 enrollees to Intermountain Healthcare facilities in neighboring Utah if quality and transparency efforts did not improve. Specifically, the 20-year-old business coalition is seeking to change incentives from volume to quality and efficiency.

Q and A

Q: What is the “innovation center” scope of responsibility? Where will it focus?

A: Section 3201 of PPACA authorizes the creation of the Center for Medicare and Medicaid Innovation (CMI), one of the bill’s 105 new agencies, commissions and boards. Its focus is to test innovative ways to reduce costs and improve quality for Medicare and Medicaid. If a new approach is promising, the Secretary of HHS is authorized to expand the programs without Congressional approval. CMI is charged with starting programs before January 1, 2011 and reporting results starting 18 months later. Its funding is $5 million for FY 2010 and $10 billion (total) for FY 2011-2019, subject to annual reviews and appropriations, but not subject to “paygo” rules. CMI will operate under the Centers for Medicare and Medicaid Services (CMS) as an internal work group. Based on the latitude and the authority given to HHS to implement its programs without authorization, it will likely be a key driver of recommended changes in Medicare and Medicaid payment and delivery system changes.

Section 3201 lists 18 programs that might qualify, but does not limit the list. Desired goals included in the authorization are:

  • Coordination of health care services across treatment settings
  • Reduction of preventable hospitalizations
  • Prevention of hospital re-admissions
  • Reduction of emergency room visits
  • Improvement in quality and health outcomes
  • Improvement in the efficiency of care
  • Reduction in the cost of health care services 
  • Achievement of beneficiary and family-caregiver satisfaction.

Q: If Medicare payments are too low, will physicians opt to close their practices to Medicare patients?

A: Possibly. Currently physicians participate in three categories:

  1. PAR: The physician agrees to accept Medicare’s approved amount—that is 80 percent paid by the government and 20 percent by the patient’s co-payment
  2. NON-PAR: A non-PAR physician files claims to Medicare for 95 percent of approved amounts. In addition, limiting charges for non-PAR physicians are 115 percent of the Medicare approved amount
  3. PRIVATE CONTRACTING/OPT OUT: A physician chooses not to participate in Medicare, foregoing submission of claims for any Medicare patient for two years

Medicare typically pays physicians less than their actual charge for the service per a formula linked to inflation, local costs and efficiency. Given the growth of Medicare enrollment as Baby Boomers enroll starting next year, and the likelihood the Deficit Reduction Commission will recommend deeper cuts to Medicare, it is likely more physicians will opt to be NON-PAR or OPT OUT. In the event of widespread OPT OUT response by physicians, two scenarios might result: The government might require a minimal level of participation by physicians tied to licensing or hospital credentialing or the government might impose excise taxes on physicians to fund coverage for Medicare enrollees.

There’s no way to know at this point, but clearly physicians and Medicare enrollees are concerned.


“The Affordable Care Act passed by Congress and signed by President Obama this year will provide you and your family greater savings and increased quality health care. It will also ensure accountability throughout the health care system so that you, your family, and your doctor—not insurance companies—have greater control over your care.

These are needed improvements that will keep Medicare strong and solvent. Your guaranteed Medicare benefits won’t change—whether you get them through Original Medicare or a Medicare Advantage plan. Instead, you will see new benefits and cost savings, and an increased focus on quality to ensure that you get the care you need.” 

Kathleen Sebelius, Secretary of HHS, opening paragraph in 4-page brochure, "Medicare and the New Health Care Law — What It Means for You," which was sent to 40 million seniors last week.

Note: The brochure provides bullet points of PPACA’s features under three major headings: “What Stays the Same,” “Improvements in Medicare You Will See Right Away” and “Improvements in Medicare You Will See Soon.”

“We estimate that, on net, the combination of provisions in the new law will reduce health care spending by $590 billion over 2010-2019 and lower premiums by nearly $2,000 per family. Moreover, the annual growth rate in national health expenditures could be slowed from 6.3 percent to 5.7 percent.” 

The Commonwealth Fund, Issue Brief, “The Impact of Health Reform on Health System Spending”, May 21, 2010, David M. Cutler, Ph.D., Karen Davis, Ph.D. and Kristof Stremikis, M.P.P.

Note: The “author estimates” assumed $415 billion of additional costs for the previously uninsured (2010-2019) and 3 sources of savings: Savings resulting from scheduled cuts in PPACA ($416 billion); reduced administrative costs for insurance ($184 billion, based on reduction of administrative costs in health plans to 10 percent resulting from insurance changes and administrative simplification) and savings from health system modernization ($406 billion, Independent Payment Advisory Board, episode-based payments, comparative effectiveness, et al). On an annualized basis, the analysis concluded that coverage for the newly insured would add 2 percent to the annual costs of the U.S. system — $75 billion per year.

Previous estimates have noted the bill would result in a surplus of $140 billion (Congressional Budget Office, March 2010) and deficit of up to $251 billion (CMS Office of the Actuary, April 2010), depending on assumptions made about the effectiveness of the delivery system and administrative simplification measures in the bill. The Deloitte Center for Health Solutions conclusion: The costs and impact of PPACA are not known; directionally every assumption rides on three factors: Enrollment and costs of coverage for those previously uninsured; continued participation in employer-sponsored insurance and the timeliness and effectiveness of payment and delivery system reforms in the bill.

“We are talking about a digital pharma stealth economy that is emerging. You don’t know who is being paid to moderate. You don’t know who’s listening in to your conversation. You don’t know what exactly they are focused on and what they are doing with the information.” 

Jeff Chester, director of the Center for Digital Democracy, The New York Times, May 28, 2010, regarding, and social networking sites where drug manufacturers and consumers interact.

“It’s one of the worst pieces of legislation I’ve ever seen. I don’t think I’ve ever felt so vindictive about a piece of legislation in my life.” 

Stuart Altman, Brandeis University, commenting on the SGR formula for physician payment model, May 25, 2010.

“The U.S. regulatory system for prescription drugs is the toughest and safest in the world.” 

Ken Johnson, Senior Vice President, Pharmaceutical Research and Manufacturers of America, commenting on the FDA’s stepped up enforcement policies.

Note: Since January 2009, 43 drug company warnings have been issued.

Fact file

  • 9 percent of companies came out of prior recessions stronger; 17 percent did not survive. (Source: “Roaring out of the Recession,” Harvard Business Review, March 2010, analysis of 4,700 companies across 3 recessions)
  • 20 states opted not to participate in the temporary high risk pools authorized under PPACA. (Source: National Governors Association)
  • 2010 election cycle: Current lame ducks in Senate—13 (6 Democrats, 7 Republicans) either retiring or lost in primaries. (Source: Politico)
  • Hospital pension funding: 90.4 percent fully funded in 2007; 68.6 percent fully funded in 2009. (Source: Standard & Poor’s, May 2010)
  • 49 percent of primary care physicians say they would agree to see the expanded Medicaid population if they were paid Medicare rates vs. 47 percent who said they would not. (Source: Center for Health Reform & Modernization, UnitedHealth Group, April 15, 2010)
  • Physician population: 188.4 percent increase in physicians from 1970 to 2008 (from 330,824 to 954,224). In the same period, the U.S. population grew 49.5 percent from 203 million to 304 million. (Sources: American Medical Association, U.S. Census Bureau)
  • 40 percent of physicians older than age 65 still practice. (Source: American Medical Association)
  • 10 percent of litigation in civil court system in the U.S. is medical malpractice. 21 percent of jury awards are $1 million or higher; the average is $400,000. (Sources: Manhattan Institute for Policy Research, U.S. Department of Justice)
  • 21 states encourage or require use of sonograms for expectant mothers as a means to discourage abortion. (Source: Guttmacher Institute)
  • Average length of stay in U.S. hospitals: 4.6 days for 36.4 million discharges in 2000 vs. 4.6 days for 39.5 million discharges in 2009. (Source: National Center for Health Statistics)
    • Note: Days per 1,000 population vary widely in the data: The U.S. average is 645/1,000, ranging from highest (1,545 in Washington, DC) to lowest (380/1,000 in Utah).
  • U.S. health spending will increase from $2.6 trillion in 2010 to $4.7 trillion by the end of the decade—an 80 percent increase. (Source: CMS Office of the Actuary, April 22, 2010)
  • Average annual growth rate of Medicare spending 2000-2007: 4.7 percent (highest is 10.3 percent Compound Annual Growth Rate (CAGR) in McAllen, TX). (Source: The Dartmouth Atlas of Health Care)
  • Healthcare Professional Shortage Areas (HPSAs) 2009: (Source: Health Resources and Services Administration, U.S. Department of HHS)
    • 6,204 Primary Care HPSAs with 65 million people living in them. It would take 16,643 practitioners to meet their need for primary care providers (a population to practitioner ratio of 2,000:1).
    • 4,230 Dental HPSAs with 49 million people living in them. It would take 9,642 practitioners to meet their need for dental providers (a population to practitioner ratio of 3,000:1).
    • 3,291 Mental Health HPSAs with 80 million people living in them. It would take 5,338 practitioners to meet their need for mental health providers (a population to practitioner ratio of 10,000:1).
  • Medicaid disability costs: 10 percent of the average state’s Medicaid budget goes to treat 618,000 developmentally disabled Americans; average spending for each person is 10 times higher than for all Medicaid recipients; in 1993, the average Medicaid cost for each person with disabilities was $48,500; in 2008, the average was $55,000. Adjusted for inflation, that actually represents a 23 percent decrease. (Source: Charlie Lakin, University of Minnesota, The Wall Street Journal, May 20, 2010)
  • PPACA Medicaid impact: Medicaid enrollment will increase by 15.9 million 2014-2019 above normal enrollment and the number of uninsured will fall by more than 11 million. The Medicaid expansion cost will be $443.5 billion federal (95 percent) and states $21.2 billion. (Source: Kaiser Family Foundation analysis)
  • Telemedicine business sector—includes biomonitoring, distance medicine: $3.9 billion in 2009, 10 percent annual growth. (Source: Datamonitor)
  • Self-pay in hospitals is growing faster than patient revenue in 60 percent of hospitals; suggests shift of financial responsibility to consumers by plans and employers, plus growth of individual high-deductible insurance programs. (Source: American Hospital Association)
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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