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Health Care Reform Memo: December 20, 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 big news last week was Monday’s ruling by U.S. District Judge Henry Hudson that the individual mandate violates the Commerce Clause of the Constitution. Opponents to the Patient Protection and Affordable Care Act (PPACA) seized on the news as evidence of its pending demise. Supporters were quick to note that the judge did not rule against the entire law, thus allowing its implementation to continue with or without an individual mandate.

I am a data geek and news junkie. I watch C-SPAN for entertainment and prefer dissecting studies to espionage novels in my downtime. Health system reform and the individual mandate are not easily explained in sound bites. And data about both seems often relegated to factoid cherry-picking: a specific “fact” used out of context or inaccurately applied. It happens on all sides of the debate about health reform it seems.

The premise of the individual mandate is simple: since everyone uses or has the ability to access the health system, like the water system or schools or food produced on farms, it is a federal matter. After all, Medicare is a federal program. No one seems to be arguing it be set aside.

The practical view of the mandate, as espoused by its proponents, is its centrality to creating a market for health insurance—it facilitates pooling of risk. Subtract those in high risk unable to buy insurance via state-run, federally subsidized high-risk pools; add these to the new insurance pool who are currently uninsured by force of the individual mandate; and the net is a more stable market for coverage for everyone, so it goes.

Opponents will challenge it as not the only mechanism for risk pooling, arguing other methods can be used and opining that the natural evolution of the health care market is a better path to its needed transformation. And its fiercest opposition has settled on the federal government’s right to force a purchase by its citizens—is the individual mandate to purchase health insurance enforceable by a penalty (that resembles a tax since it is left to the Internal Revenue Service (IRS) to collect) a breach of basic rights granted in our constitution?

Tough questions: is health care, like any other market, deemed “commerce”? Can the government require insurance be purchased? Where do federal powers stop in these United States of America?

Academics and lawyers will no doubt fight it out in journals, white papers, and courts in coming months. It’s a useful discussion. As the 112th Congress convenes January 5, 2011 and Campaign 2012 news coverage escalates, the volume of health reform sound bites will no doubt increase from all sides. Here’s my prediction:

  • The judicial process involving the individual mandate will continue to the Supreme Court, perhaps as early as 2012.
  • Each state will seek waivers around provisions of PPACA to be compliant within constraints of each state’s fiscal and political environment. Like auto insurance minimum requirements for drivers in all 50 states whether an auto is owned or not, an individual health insurance mandate might be state-led initiative rather than federal.
  • Regardless of how legislation about the individual mandate plays out in courts, major elements of health reform will be implemented by plans, hospitals, drug companies, and others because it’s the law.

So the next venue for health reform’s meander through the judicial system is the Florida district court, then other proceedings to follow. For news junkies and data geeks, it’s a compelling, almost never-ending blockbuster. For most, I suspect, a bit boring. For all, no less relevant to our future.

Paul Keckely

Paul Keckley, Ph.D.

Judicial process update: Virginia judge challenges individual mandate, arguments presented in Florida

Monday, a U.S. district court in Richmond, Virginia ruled Congress exceeded its authority under the Commerce Clause (Article I, Section 8 of the Constitution) when enacting PPACA’s individual mandate. PPACA (Sec. 1501) requires individuals to obtain coverage starting in 2014, exempting individuals who cannot afford coverage, incarcerated individuals, individuals outside the U.S., those with religious objections, and individuals with incomes below the tax filing threshold. Non-complying individuals will be subject to a monetary penalty in their annual tax return.

The legal arguments presented in the Eastern District of Virginia District Court frame the likely challenges to PPACA expected in subsequent Circuit Court/Supreme Court deliberations:

Constitutional powers Key question Defense (HHS) Plaintiff (Virginia) Court’s decision
Commerce Clause
(Article 1, Section 8, Clause 3)
Is engaging in the health care system an economic
Everyone uses the health care system thus engaging in a form of economic activity, thus Congress can regulate purchasing of health insurance as an economic activity. The Commerce clause allows regulation of existing economic activity and does not allow Congress to regulate economic activity that individuals choose not to participate in, such as purchasing health care. Upheld the plaintiff’s argument. Concluded the individual mandate is misperceived to be economic activity and that the commerce clause does not apply to economic inactivity.
Taxation to promote the general welfare clause
(Article 1, Section 8, Clause 1)
Is the individual mandate enforced via a tax or penalty? The penalty is a tax that is published in the Internal Revenue Code and enforced by the IRS. It also will raise $4 billion in general revenue. The provision is mischaracterized as a tax and is a penalty, as stated in the law. Upheld the plaintiff’s argument. Concluded PPACA specifically uses the word “penalty” and not “tax” in the provision.
Necessary and Proper clause
(Article 1, Section 8, Clause 18)
Does Congress have the right to enact individual mandates to ensure the success of insurance market reforms? The individual mandate ensures success of other insurance market reform provisions. Violates state sovereignty. Upheld plaintiff argument. Concluded that the individual mandate is not validated by the commerce clause, it cannot be supported by the necessary and proper clause.

The next judicial venue is the federal district court in Pensacola, with State of Florida v. U.S. Department of Health and Human Services (HHS). Thursday, arguments began on behalf of Florida and 20 other states on whether Congress exceeded its authority under the Commerce Clause when enacting the individual mandate. The lawsuit also challenges the individual mandate’s tax penalty, the establishment of state health insurance exchanges, Medicaid expansions, and the employer responsibility.

Judicial recap: the judicial process is likely to continue into 2012 per most observers with the possibility it might end up in the Supreme Court. Most notable of rulings to date:

State Summary
Virginia v. Sebelius On December 13, Judge Henry Hudson of the Eastern District Court of Virginia, ruled the individual mandate violates the commerce clause of the Constitution but did not rule the entire PPACA invalid as a result of his individual mandate decision.
New Jersey Physicians Inc. et al v. Obama In December, a court in New Jersey dismissed a lawsuit by a physician’s advocacy organization, cardiologist, and patient, claiming that PPACA violates the Commerce Clause and the Fifth Amendment.
Liberty University, Inc. v. Geithner In November, a court in Virginia ruled that the individual and employer mandate to provide health coverage was legal under the Commerce Clause.
U.S. Citizen's Association et al v. Obama et al In November, a court in Ohio partially dismissed a lawsuit claiming that the law violates freedom of association, due process, and privacy protections. However, the judge is considering arguments that the law exceeds Congressional authority under the Commerce Clause.
Thomas More Law Center v. Obama In October, a court in Michigan partially dismissed a lawsuit claiming that Congress had the authority under the Commerce Clause to enact the individual mandate. The Center filed an appeal last Friday.
Baldwin et al v. Sebelius et al In August, a court in California dismissed a lawsuit, under appeal at the Ninth Circuit Court that claims that PPACA violates the Constitutional Commerce Clause, individual rights, physician-patient privileges, and increases taxes. In November, the U.S. Supreme Court dismissed an independent appeal by the group that filed the suit because the law needed further litigation in lower courts.

President signs one-year physician fix

Last week, President Obama signed the Medicare and Medicaid Extenders Act of 2010, extending current Medicare payments to physicians through the end of 2011 and delaying a 25 percent cut in Medicare reimbursements. This is the eleventh time Congress has enacted a temporary fix, setting aside the sustainable growth rate (SGR) recommended physician payment tied to overall inflation. Eliminating the SGR and increasing Medicare physician fees for inflation would cost over $300 billion between 2011 and 2020.

The Extenders Act repeals Sec. 6502 of PPACA, requiring Medicaid agencies to exclude individuals or entities that owned or managed an entity that failed to repay Medicaid overpayments, had been suspended, excluded, or terminated from Medicaid, or had been affiliated with an individual or entity that had been excluded or terminated from the program.

Also last week, Congress passed and the President signed a two-year extension for all tax cuts that were set to expire on December 31, including tax cuts for families with yearly earnings over $250,000. The $858 billion bill also extends unemployment benefits through next year. For more information, please see Staying in place: Congress extends the Bush tax cuts, prepared by the Tax Policy Group of Deloitte Tax LLP in Washington, D.C.

AHIP study: Health Savings Account utilization in 2009

America’s Health Insurance Plans (AHIP) released a study on the use of Health Savings Accounts (HSAs), via an in-depth look at 1.2 million policy holders who use three banks for their HSA holdings. Key findings:

  • In 2009, 67 percent of HSAs had personal deposits, 42 percent had employer contributions, 61 percent had withdrawals, 72 percent had interest earnings, and 46 percent were charged fees.
  • The average balance for HSAs at 2009 was $1,307—a ten percent decline from 2008.
  • The average deposit in 2009 was $2,050 for accounts, with employer contributions accounting for $1,058. The average withdrawal was $1,850. Interest earnings averaged $17 while fees averaged $33.
  • Current balances: 14 percent of open HSAs had zero balances, 54 percent had less than $1,000, 13 percent had $1,000 to $2,000, 13 percent had between $2,000 and $5,000, and seven percent had $5,000 or more.

HIT update: “Meaningful Use” guidance for Stage 2 and 3 compliance

On December 13, the Health Information Technology (HIT) Policy Committee’s Meaningful Use Workgroup shared its preliminary draft recommendations for Stage 2 and 3 criteria, which will be the basis for a Request for Comment (RFC) to be released in January 2011. Among major areas of guidance from the Workgroup:

  • Thresholds increased for many of the criteria associated with a numerator/denominator, except those which were already at 80 percent (medication list, medication allergies, problem list). Additional items were proposed as core measures.
  • Evidence-based analytics (clinical knowledge management prompts, alerts and reminders tools) for medication management and drug interactions will be a focus.
  • New criteria: 30 percent of Eligible Professional (EP) visits have at least one electronic note, 30 percent of Eligible Hospital (EH) patient days have at least one electronic note, and 30 percent of EH medication orders are tracked via an Electronic Medication Administration Record (eMAR). In addition, the Advance Directives criterion was extended in Stage 2, as were several other measures.
  • Enhancements to patient connectivity: expansion of efforts to provide patients web-portal based tools for access to their medical information.

OIG report: inappropriate use of Medicaid personal care

Tuesday, the Office of Inspector General (OIG) issued its analysis of inappropriate claims for Medicaid Personal Care, finding that 18 percent of claims (totaling $724 million) for personal care services (PCS) were inappropriate because lack of documentation of qualifications. Fifty-seven percent of those had documentation of some but not all qualifications, and 43 percent had no qualifying documentation. Medicaid paid an additional two percent of PCS claims, totaling $63 million, for which claims data had no record of services provided.

Supreme Court to consider generic labeling

In its next session, the U.S. Supreme Court will hear arguments on whether generic drug companies can be sued under state law claiming they failed to provide adequate label warnings about potential adverse events. Last year, the Supreme Court ruled on a similar issue, deciding that Food and Drug Administration (FDA) drug regulations do not prevent pharmaceutical companies from being sued under state law over drug labeling. The court will likely hear arguments in March or April, with a decision by the end of June.

MLR challenge

Rep. John Carter (R-TX) introduced a resolution to set aside the HHS medical loss ratio (MLR) final rule published December 1. The MLR regulations, as required under PPACA, require small health plans to spend at least 80 percent of premium payments on providing care and 85 percent of premiums for large group plans. State officials in Iowa and Maine have petitioned HHS to allow waivers for the individual insurance market MLR threshold citing its potential to de-stabilize their insurance markets.

Rules for physician-owned hospitals published

PPACA amended the "whole hospital" and rural provider exceptions to the Stark Law restricting the ability of physicians and immediate family members from holding an ownership interest in a hospital. Hospitals that had physician ownership in place on or before March 23, 2010 (the date of PPACA’s enactment) were "grandfathered" per the law but subject to other requirements.

PPACA introduced three compliance dates relating to the whole hospital exception — March 23, 2010, December 31, 2010, and September 23, 2011, but there are “hanging chads” in their interpretation/overlap. For example: the aggregate physician ownership for a hospital would need to be in place by March 23, 2010, but could individual participating physicians be added until December 31, 2010? Furthermore, it is unclear what Congress intended by establishing an over-arching compliance deadline of September 23, 2011.

In the Centers for Medicare & Medicaid Services (CMS) final rule published in the Federal Register November 24, 2010, guidance was provided:

  • A physician-owned hospital must have had physician ownership in place as of March 23, 2010 in order to qualify for the whole hospital exception. If a hospital had no physician ownership or investment in place as of March 23, 2010, and later adds physician owners or investors, the hospital will not satisfy the whole hospital or rural provider exceptions.
  • A hospital may decrease its physician ownership after March 23, 2010, so long as it retains some physician ownership on December 31, 2010. A physician-owned hospital may add or increase the number of physician owners or investors, or replace physician owners or investors, as long as the aggregate percentage of physician ownership or investment does not increase.
  • To qualify for the whole hospital exception (or rural provider exception), a physician-owned hospital must have a Medicare provider agreement effective on or before December 31, 2010.
  • The compliance deadline for all other provisions that do not contain explicit requirements is September 23, 2011.

Note: 262 physician-owned hospitals are expected to be covered by these provisions.

State watch: Wisconsin

Wisconsin Governor-elect Scott Walker (R) told reporters last week he proposed that state employees contribute five percent of their pay to their pensions and increase their health care contributions to 12 percent, thus reducing the state’s $3.3 billion deficit by 20 percent. Other states, including California, have a ten percent contribution to pensions. Note: 12 states do not allow government workers collective bargaining rights, and another 12 allow it only for some unions.

Study: Medicare premium increases for Part B, D premiums

Part B Physician Services Premiums: PPACA modifies a 2007 requirement that upper-income Part B enrollees pay higher monthly Part B premiums if their incomes exceed $85,000 for individuals and $170,000 for couples. These income thresholds are fixed (not indexed) to 2010 so that the share of Part B enrollees subject to the income-related Part B premium will increase from five percent (2.4 million in 2011) to 14 percent (7.8 million enrollees in 2019). Monthly Part B premiums will range from $161.50 to $369.10 per month in 2011 for those with incomes above the threshold, depending on income, while the standard Part B premium will be $115.40 per month in 2011.

Part D Prescription Drug Premiums: PPACA also creates an income-related Part D premium schedule using the same non-indexed threshold—the national average monthly Part D premium will be $32.34 in 2011. The total amount that higher-income Part D enrollees pay will depend on the premium of the plan they select and their income. Three percent (1.2 million Part D enrollees) will be subject to the premium in 2011, increasing to nine percent (4.2 million beneficiaries) in 2019.

Source: “Medicare Policy Project,” Kaiser Family Foundation and Actuarial Research Corporation study released December 13, 2010.


“At its core, this dispute is not simply about regulating the business of insurance—or crafting a scheme of universal health insurance coverage—it's about an individual's right to choose to participate.”

 – December 13 ruling by Judge Henry E. Hudson of the Eastern District of Virginia declaring the individual mandate in PPACA violates the constitution

“Today’s young people can no longer afford to buy the houses that have made so many of the boomer generation effortlessly rich; and they will have to stump up for their parents’ and grandparents’ generous defined-benefit pension schemes. The contract between the generations—under which people of working age pay to bring up the young, who in turn will look after them when they get old—has broken down.”

 – Barbara Beck, “The Slow Farewell,” The Economist Special Edition, December 2010: The World in 2011

Fact file

  • World population: near the end of 2011, the world population will reach seven billion. It took 250,000 years to reach one billion in 1800, two billion by 1927, three billion by 1960, four billion by 1974, five billion by 1986, and six billion by 1998. Notably, the next billion will be slower—14 years—as worldwide fertility rates slow to 2.1 overall. (Source: United Nations)
  • Number of countries in the world: 193 (with new state, South Sudan). (Source: United Nations)
  • Total per capita health care spending for females is 32 percent higher than for males. (Source: Cylus et al, “Pronounced Gender And Age Differences Are Evident In Personal Health Care Spending Per Person,” Health Affairs, December 13, 2010)
  • Sixty-two percent of personal bankruptcies in the U.S. in 2007 were the direct result of health care expenses unpaid, up from 46 percent in 2001. Drugs were the largest out-of-pocket expense for 19 percent of those filing bankruptcy due to medical bills and illness in 2007. Interestingly, 75 percent of those bankruptcy filers in 2007 had health insurance. (Source: American Journal of Medicine)
  • Thirty-one percent of Medicare eligible adults 65 years and older are in the workforce. (Source: U.S. Bureau of Labor Statistics)
  • Massachusetts: 98.1 percent of residents have health insurance coverage, including 99.8 percent of children. (Source: Massachusetts Division of Health Care Finance and Policy 2010 annual survey)
  • Five percent (2.4 million) of Medicare beneficiaries will be subject to income-related Part B premiums increasing to 14 percent (7.8 million) by 2010. Three percent of all Part D enrollees (1.2 million) will be subject to PPACA enacted new income-related Part D premiums in 2011, increasing to nine percent (4.2 million) in 2019. The Congressional Budget Office (CBO) projects savings of $36 billion 2010-2019 per PPACA Sec. 3402 (Part B) and. Sec. 3308 (Part D) provisions. (Source: Kaiser Family Foundation)
  • One-third of 3.6 million adults seeking acute care over a five-year period visited two or more different hospitals. These patients were also associated with frequent hospitalizations and greater cost, and were more likely to be young, male, and have a primary psychiatric diagnosis. (Source: Archives of Internal Medicine, December 2010)
  • Commonwealth forecast for pre-retiree coverage among current uninsured: the majority of 8.6 million uninsured adults age 50-64 will gain coverage in 2014. Thirty-eight percent will enter Medicaid, 41 percent will receive subsidized private insurance, and 17 percent will purchase unsubsidized insurance. (Source: The Commonwealth Fund)
  • Electronic health record (EHR) use: from 2009 to 2010, physician usage of EHRs varied by state with a high of 80.2 percent in Minnesota to a low of 38.1 percent in Kentucky. EHR usage by office-based physicians increased from 18.2 percent in 2009 to 50.7 percent in 2010. (Source: CDC)
  • Economic recovery update: GDP will grow 2.6 percent in the current quarter and three percent for 2011; odds of a double-dip recession: 15 percent, down from 22 percent in September. (Source: Wall Street Journal survey of 55 economists, December 13, 2010)

Holiday Note: Health Care Reform Memo

In observance of the upcoming holidays, there will be no Health Care Reform Memo on Monday, December 27. Publication of the next Health Care Reform Memo will be on Monday, January 3.

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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