Health Care Reform Memo: May 16, 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

I am 61 years old. I have old clothes and old habits. But I have a tablet I’m learning to use, a smartphone that’s virtually implanted, and a laptop that’s fired up for 20-hour writing days. It is, after all, the age of technology.

Arguably, the health care industry’s most significant improvements will be the result of information technology (IT) applied to its pressing issues—variable quality, high costs, uneven access, and lack of transparency. It is the key to connectivity between providers and shared decision-making with patients. But we’re playing catch-up.

The industry was an early adopter of systems to know if a patient is insured and how we’ll get paid, but a laggard in using clinical tools that improve outcomes and reduce error. The $27 billion available to hospitals and doctors to adopt certified electronic medical records (EMRs) via the Health Information Technology for Economic and Clinical Health (HITECH) Act is probably justified, but idealistically I wish more providers had been early adopters of clinical applications proven to improve the accuracy of their diagnoses and appropriateness of treatments simply because it was the right thing to do.

Last week, Deloitte hosted its health care partners’ meeting in Las Vegas, where technology that speeds innovation and transcends borders was a featured theme. Technology is everywhere. It’s the tsunami that some fear, many embrace, and a few like my son Josh understand completely. But I must confess it’s still daunting to me.

I have come to two conclusions:

1. Solving the health system’s problems—lowering its costs while improving quality—cannot be done without appropriate, widespread and expanded use of IT. No more excuses.
2. The major barriers in the industry are not technologic; we have people problems. We are collectively change-averse and prone to self-protection. Life-long learning is not routine in this industry. We often reward seniority over competence and resist technologies that pay less than an immediate return. Maybe it’s fear that limits us. Maybe health reform’s biggest challenge is fear itself.

My friend John Boettiger lives life fearlessly like no one I know. He studies health care because he wants to form his own conclusions. He embodies courage, strength, dignity, and integrity. He keeps his priorities straight and people relationships strong. And he’s unafraid of change and uncertainty.

If the health system could inject the genotype of John Boettiger in its DNA, our fear would dissipate. Our embrace of technologies that improve efficiency and effectiveness would accelerate exponentially. Our patients are online, onboard and demanding. They’re not patients; they’re consumers seeking value in the system that’s costing them almost 20 percent of their disposable income.

It’s time to embrace IT and resist fear of the unknown. It’s not likely the clock will roll back.

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

PS: Yesterday, John Boettiger passed away at 40 leaving three daughters, wife Michelle, and countless friends. I called on John to help explain health reform to audiences; in the process he taught me about living life with purpose and passion. He is gone but will never be forgotten.

ACA implementation update

Costs for implementing ACO up to 15 times higher than government estimate: AHA

Friday, the American Hospital Association (AHA) released an estimate of costs for establishing an accountable care organization (ACO) per Section of 3022 of the Affordable Care Act (ACA). In its 429-page guidance issued April 30, Centers for Medicare and Medicaid Services (CMS) estimated start-up costs and one-year operating costs at $1.755 million. The AHA analysis said costs would range between $11.6 million and $26.1 million.

ACO update: big groups push back

Wednesday, the American Medical Group Association (AMGA) notified CMS that 93 percent of its members would not participate in the ACO demonstration project. Separately, on Thursday, ten of the nation's biggest multispecialty groups notified CMS administrator Don Berwick they will not take part in the ACO program. Concerns noted by both groups:

• Financial risk: downside risk for shared savings compounded by high investment costs required for ACO start-up and operation
• Severity adjustment for complex patients: limits on accounting for beneficiary acuity level dilutive to savings and potentially compromising proper patient management
• Excessive quality measurement requirements: too many quality measures in the first year (65 measures in five domains)
• Patient attribution: retrospective attribution will limit efforts to reduce costs
• Patient opt-out: an impractical opt-out system for Medicare beneficiaries

The same groups participated in the Physician Group Demonstration Project (circa 2005), considered the predecessor to the ACO. Only two were able to attain better than a two percent savings in the first year, and two were able to achieve the threshold after three years. Per CMS, the minimum savings threshold ranges from 3.9 percent for an ACO managing 5,000 Medicare fee-for-service (FFS) enrollees to two percent for an ACO with 60,000 enrollees.

Note: As noted in the May 2 Monday Memo, a provider organization must be clinically integrated to qualify for the shared savings upside by managing at least 5,000 Medicare FFS patients. It must choose either a one-sided or two-sided route in 2012, depending on its risk tolerance. However, the decision for most organizations will be about broader strategic considerations than participation in the ACO per se: is clinical integration necessary to improved patient outcomes and reduced error? Is clinical integration necessary to episode based payments, avoidable readmissions management, value-based purchasing and medical homes? Will local commercial health plans, Medicaid and employers contract on the basis of risk and set aside FFS payments? If the answers are yes, clinical integration aligning physicians and hospitals is a strategic imperative in which an ACO is merely an element. An understandable decision to pass on ACO participation does not negate the compelling trend toward clinical integration and value-based purchasing by payers seeking risk-based contracting with providers.

$100 million in ACA grants to help create healthier U.S. communities

Friday, U.S. Department of Health and Human Services (HHS) announced the availability of $100 million for up to 75 Community Transformation Grants per ACA Section 4201 aimed at helping communities implement projects proven to reduce chronic diseases such as diabetes and heart disease. By promoting healthy lifestyles and communities, especially among population groups experiencing the greatest burden of chronic disease, these grants will help improve health, reduce health disparities, and lower health care costs.

Constitutional challenge update: Virginia circuit

Tuesday, the Fourth Circuit Court of Appeals in Richmond heard arguments on Virginia Attorney General Kenneth Cuccinelli’s to ACA (Virginia v. HHS). Per the court’s tradition, three of the 14 appeals judges were randomly selected to hear arguments, two appointed by President Obama and one by President Clinton. In listening to the arguments from both sides, the jurists’ questions focused on whether a decision not to purchase health insurance constitutes a willful act and therefore a commercial activity. The court’s opinion is expected this summer.

HHS announces new office to assist states in coordination for dual eligibles

Wednesday, HHS announced an initiative aimed at helping states coordinate health care and reduce costs for the 9.2 million Americans who are dual eligibles—those enrolled in both Medicaid and Medicare. Specifically, in a data alignment initiative through a new office, the Medicare-Medicaid Coordination Office (MMCO), HHS will enable state Medicaid programs to gain quicker access to treatment information for dual eligibles who receive health services under the federal Medicare program.

Note: the dual eligibles program covers 15 percent of enrollees in Medicaid but consumes 39 percent of its budget–$120 billion per year. Two-thirds of dual eligibles are over age 65; one-third qualify through a disability. In Medicare, dual eligibles are 16 percent of enrollees but account for 27 percent of Medicare spending.

Kaiser report: House GOP budget plan would cut Medicaid funding by $1.4 trillion over ten years

The Kaiser Commission on Medicaid and the Uninsured projects that the House budget plan to convert Medicaid into a block grant program and stop Medicaid expansion under the ACA would reduce federal Medicaid spending by 34 percent from 2012 to 2021, saving a total of $1.4 trillion. By 2021, federal Medicaid spending would be 44 percent less than under current law ($243 billion less annually) and between 31 and 44 million fewer would be covered under the program. Hospitals would see payment reductions of 31 to 38 percent by 2021. Reduction in federal spending by state ranges from 25.7 percent in Washington to 44.4 percent in Wyoming.

Legislative update

Medicare trust fund will be exhausted in 2024: report

The Medicare Part A Hospital Insurance (HI) trust fund will be exhausted in 2024, five years sooner than earlier predicted, according to the annual Medicare Board of Trustees report released May 13. Highlights of the report released Friday:

• The fund will see a $34 billion deficit for 2011 due to lower tax revenues and continued expenditure growth
• Deficits will continue at a declining annual rate from 2012 to 2018 as the growth in taxable earnings accelerates
• Upon exhaustion in 2024, dedicated program revenues would only be able to pay 85 percent of Medicare Part A costs

Note: in 2010, payroll tax revenues were $182 billion, $2.5 billion less than earlier forecast, and lower than expected since the downturn started in December 2007. The fund tapped $14 billion in interest income and $34 billion in assets to help finance expenditures that otherwise would have been offset by the Medicare. The HI trust fund has not met the trustees' formal test of short-range financial adequacy since 2003, the report said. Total Medicare expenditures were $523 billion in 2010. As a percentage of gross domestic product (GDP), expenditures are estimated to increase from 3.6 percent of total GDP in 2010 to 6.2 percent by 2085. The report noted that the HI trust fund would have been insolvent in 2016 without the ACA.

House panel approves bill lifting maintenance of effort requirements

Thursday, the House Energy and Commerce Health Subcommittee approved the State Flexibility Act (H.R. 1683) that allows states to put in place stricter eligibility rules for Medicaid and the Children's Health Insurance Program (CHIP) without losing federal funding. By a party-line vote of 14-9, if approved by the full House and Senate, the law would lift the maintenance of effort (MOE) requirements included in the 2009 economic stimulus law and the federal health reform law.

Law seeks waiver of co-pay for telehealth

Monday, Senators Mark Begich (D-AK), Chuck Grassley (R-IA), and Jon Tester (D-MT) reintroduced the Veterans Telehealth Act of 2011, to waive copayments for veterans’ telehealth and telemedicine. The legislation was originally introduced in August 2010 but was not considered outside the Senate Veterans’ Affairs Committee.

CMS: health reforms will save Medicare $120 billion by 2015

Payment reforms and stronger anti-fraud measures will result in $120 billion in savings to the Medicare program by 2015, according to a CMS report released Thursday. Major savings opportunities identified in the report:

• Changing provider payment incentives—quality over quantity of care ($55 billion in savings through 2015)
• Improving patient safety—lowering hospital readmissions and hospital-acquired conditions ($10 billion through 2013)
• Getting the best value for Medicare beneficiaries and taxpayers for durable medical equipment ($17 billion over ten years)
• Eliminating Medicare Advantage (MA) payments to insurance companies that exceed what it would cost Medicare to cover the same individuals ($50 billion through 2015)
• Stronger anti-fraud initiatives, such as enhanced screening for Medicare enrollment and increased use of Recovery Audit Contractors (RACs)—($1.8 billion through 2015)

House Committee approves malpractice bill that sets cap on noneconomic damages

Wednesday, the House Energy and Commerce Committee approved legislation that would overhaul the medical malpractice system by a party-line vote of 30-20. The Help Efficient, Accessible, Low-cost, Timely Healthcare Act (HEALTH Act, H.R. 5), would cap noneconomic damages at $250,000, establish a three-year statute of limitations for malpractice claims beginning when an injury is discovered, restrict punitive damages, limit attorney contingency fees, and create a safe harbor from punitive damages for the manufacturers or distributors of medical products if the products were approved by the U.S. Food and Drug Administration (FDA). The HEALTH Act would preempt state medical malpractice laws in some cases, specifically:

1. It allows states to set caps on damages that are lower or higher than in H.R. 5
2. If a state law prohibited caps or if its supreme court has ruled against caps, the state would be subject to the federal law
3. It would not preempt state laws that provide greater protection to health care providers and organizations

Note: March 10, the Congressional Budget Office (CBO) said H.R. 5 would reduce national health spending by about 0.4 percent and reduce the federal deficit by $40 billion from 2011 to 2021. However, last year the Illinois Supreme Court ruled caps on pain and suffering unconstitutional, and administration officials have indicated they oppose caps in favor of alternative models of liability reform. The HEALTH Act received endorsements from the American Medical Association (AMA); opponents include the National Conference of State Legislatures (NCSL), consumer rights advocate Public Citizen, and trial attorneys affiliated with the American Association for Justice.

Single-payer health system bill introduced

Tuesday, Senator Bernie Sanders (I-VT) introduced the American Health Security Act of 2011 to create single-payer health systems in each state, similar to the bill recently approved in Vermont. The legislation would set guidelines and minimum standards for state-run plans. Representative Jim McDermott (D-WA) introduced a companion bill in the House.

Bipartisan caucus to make drugs more affordable

Thursday, Representatives Peter Welch (D-VT) and Jo Ann Emerson (R-MO) launched the bipartisan Congressional Affordable Medicines Caucus aimed to garner bipartisan support to make prescription drugs more affordable and reduce health care costs. Caucus members will be recruited in the coming weeks.

ASPE study: uninsured unable to pay hospital bills

Tuesday, the Office of the Assistant Secretary for Planning and Evaluation (ASPE) published its research brief “The Value of Health Insurance: Few of the Uninsured Have Adequate Resources to Pay Potential Hospital Bills”. Findings include:

• On average, uninsured families can only afford to pay about 12 percent of hospitalizations they might experience. Uninsured families with incomes above 400 percent of the federal poverty level (FPL) can afford to pay for only 37 percent of their hospitalizations.
• Hospitalizations for which the uninsured cannot pay in full account for 95 percent of the total amount hospitals bill the uninsured.
• Although an individual is 50 percent more likely to have a car accident in a year than to be hospitalized, the average bill for a hospitalization is over two and a half times higher than the average loss for a car accident. And, while the bill for a single hospitalization is about the same as the loss from an average house fire, a person is ten times more likely to be hospitalized than to experience a house fire.

State watch

MLR waivers update: New Hampshire, Nevada join Maine in getting waiver

Friday, HHS granted medical loss ratio (MLR) waivers to New Hampshire and Nevada:

• Individual health insurers in New Hampshire will be able to meet a MLR of 72 percent for 2011 and 75 percent for 2012 before meeting the full 80 percent requirement in 2013. New Hampshire insurance commissioner Roger Sevigny had requested adjustments to 70 percent until 2014.
• HHS granted Nevada an adjustment to 75 percent for 2011. The state had requested a 72 percent standard for 2011.

March 8, Maine became the first state to get an adjustment, allowing individual insurers to meet a 65 percent MLR until 2013, when it will be re-examined. HHS is considering waiver requests from Florida, Iowa, Kansas, Georgia, Kentucky, North Dakota, Louisiana, and Guam.

Round-up

• Hawaii’s Department of Human Services announced Tuesday that it will reduce Medicaid eligibility standards from 200 percent FPL to 133 percent FPL. Additionally, benefits for healthy adults under age 65 will be modified, imposing annual limits of 20 outpatient visits, ten inpatient days, and three outpatient surgical procedures. Changes will take effect January 1, 2012.
• Montana Governor Brian Schweitzer (D) vetoed a GOP budget bill aimed to divert money from a main funding source of Healthy Montana Kids, a state-subsidized coverage plan for low-income children, and remove presumptive eligibility from the program.
• Minnesota has enrolled over 60,000 residents under its early Medicaid expansion. The state projects a total of 95,000 residents will be covered under the new program. Most new enrollees were previously covered by a state-subsidized health plan. Minnesota, along with California and Connecticut, has expanded its Medicaid programs prior to the required 2014 expansion.
• Tuesday, North Carolina General Assembly approved a two-year plan to close a $515 million budget gap in the state’s employee health program. The plan would require all active employees and teachers to pay a monthly premium for their insurance for the first time; monthly premiums would range from $5 to $21.63. The Senate has already approved the plan. It is unclear whether Governor Bev Perdue (D) will approve.
• Tuesday, the Texas House approved legislation that would request federal approval to operate the state’s Medicaid program through a block grant.
• Wednesday, Washington Governor Chris Gregoire (D) signed into law a bill to establish the state’s insurance exchange.

Quotable

“Many hospitals are already finding that a combination of rising costs, heavy debt, and looming budget cuts is forcing them to seek mergers with stronger institutions or even private-sector takeovers. There are worries that as the government seeks to save $33 billion in hospital running costs over the next four years, some closures will be inevitable.”

 – Referring to UK hospitals: “Reforming Hospitals” The Economist, May 7, 2011.

“As currently proposed, ACOs have a greater potential for incurring losses under either track, than for generating savings. This risk-reward imbalance makes it difficult, if not impossible, for internal decision-makers to accept the financial design.”

 – Letter from ten large multi-specialty groups to CMS regarding ACO regulation last week.

“The Affordable Care Act introduced important changes to the Medicare program that are designed to reduce costs, increase revenues, expand the scope of benefits, and encourage the development of new systems of health care delivery that will improve health outcomes and cost efficiency. Consideration of further reforms should occur in the near future. The sooner solutions are enacted, the more flexible and gradual they can be.”

 – 2011 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Fund, May 13, 2011.

Fact file

• Average per capita costs for health care services increased 6.29 percent in 2010 from 2009. The increase in 2009 from 2008 was 6.05 percent. (Source: Standard and Poor’s)
• Comparative effectiveness (efficacy) data was available to the FDA for 51 percent of approvals from 2000 to 2010. (Source: Goldberg et al., “The Availability of Comparative Efficacy Data at the Time of Drug Approval in the U.S” Journal of the American Medical Association [JAMA], May 4, 2011)
• Hospital ownership of physician practices increased from 35 percent in 2009 to 42 percent of total physicians in 2010. (Source: MGMA)
• As of April, 2011, 43,000 providers had registered for the HITECH program that offers monetary incentives for adoption and meaningful use of EHRs. A total of $83 million in incentives has been paid. (Source: CMS)
• After 2014, within a six-month period, more than 35 percent of all adults with family incomes below 200 percent FPL will experience a shift in eligibility that will remove them from Medicaid and put them into an insurance exchange subsidy program, or the reverse. Within 12 months, 43 percent of adults newly enrolled in Medicaid will experience a disruption in coverage. (Source: Rosenbaum et al., Health Affairs)
• Electronic prescribing by U.S. office-based physicians increased 71 percent to 326 million in 2010 vs. 190 million in 2009. Physicians with the highest e-prescribing adoption rates are cardiologists (49 percent) and family practitioners (47 percent). (Source: Surescripts)
• Ageless online: online usage in minutes per day is highest for adults 45 to 54 at 39 hours per month. Ninety percent of seniors age 65 plus use e-mail (Source: Media Metrix, Pew Research)
• 88 percent of antipsychotic drugs administered to nursing home patients with dementia are prescribed off-label. (Source: HHS Office of Inspector General)
• The 250 largest law firms shed 9,500 lawyers in 2009-2010, 8 percent of total. (Source: National Law Journal)
• Average operating margin for 85 not-for-profit health care organizations: 4.2 percent in 2010. (Source: Commonwealth Fund)
• Nearly one of three women ages 19 to 64—an estimated 27 million women—were uninsured during 2010. Forty-eight percent of working-age women reported that because of cost they did not fill a prescription; skipped a recommended test, treatment, or follow-up; had a medical problem for which they did not visit the doctor; or did not see a specialist when needed—an increase from 34 percent in 2001. (Source: The Commonwealth Fund)
• The health IT market is anticipated to grow at a compound annual growth rate (CAGR) of 24 percent from 2012 to 2014. (Source: RNCOS)
• 76 percent of hospitals participating in the National Hospital Preparedness Program met 90 percent or more of all program measures for all-hazards preparedness in 2009. (Source: HHS)
• The world market for biosimilars will grow to $3.7 billion by 2015 from $243 million in 2010. (Source: Datamonitor)
• As of June 30, 2009, 24 million Medicaid beneficiaries were enrolled in managed care plans, out of 50.5 million total.
• In 2010, 4.5 percent more medical licenses were revoked than in 2009, but disciplinary action by state medical boards dropped 1.2 percent. (Source: Federation of State Medical Boards)
• Total cost of care for a family of four (Milliman Medical Index, or MMI) under a preferred provider organization (PPO) increased 7.3 percent to $19,393 from 2010 to 2011. Employee share of cost rose to 39.7 percent in 2011. MMI in 2002 was $9,235. (Source: Milliman)
• Of 152 hospital Chief Information Officers (CIOs) surveyed across North America, Europe, and Australia about IT budgets and priorities over the next 24 months, 42 percent said they are increasing IT spending in 2011 compared to 14 percent in last year’s survey. Seventeen percent said they’d cut their budget compared to 22 percent in last year’s survey. (Source: UK-based Ovum)
• Ten percent of patients with the most complex routines filled 23 or more prescriptions over the three months, made 11 or more pharmacy visits, and used four doctors. (Source: Peters et al., Archives of Internal Medicine, May 9, 2011, Veterans Affairs Medical Center in Bronx, New York)

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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