Health Care Reform Memo: October 26, 2009

A 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.

Headlines for the week

Congressional Judiciary Committees appear poised to challenge anti-trust exemption of insurance companies.
State triggered public option and opt out gains momentum.
Sustainable growth rate (SGR) “fix” not fixed.

Anti-trust exemption on the table

Last Saturday, October 17, President Obama suggested the 1945 exemption that granted health insurance companies exemption from federal anti-trust laws might be revisited to encourage insurance reforms. This week, the House Judiciary Committee voted 20-9 to pursue this course, and Senate Judiciary Chairman Patrick Leahy (D-CT) said his committee would likely follow suit.

The trade group of health insurers, America’s Health Insurance Plans, stated it is regulated against anti-competitive business practices via the McCarran-Ferguson Act and these votes are unnecessary to maintain a competitive insurance market.

Public option gains momentum

Pronouncements via news releases from key Senate moderates that a state triggered public option tied to a to-be-determined level of affordable insurance with minimal coverage features were prominent last week. Related to the trigger, the ability for states to opt-out of the public option in favor of an alternative also gained proponents, among them influential Senate Budget Chairman Kent Conrad (D-ND), the original proponent for the co-op as an alternative to the public option.

SGR fix stalls in Senate; $247 billion price tag an issue

Wednesday, 12 Democrats and one Independent voted with the 40 Republicans to defeat a measure that would have “fixed” the Medicare payment for physicians at a cost of $247 billion through 2019. First enacted in 1997 as a mechanism for linking physician payments to overall health costs, the sustainable growth rate (SGR) formula includes drug costs and other factors physicians argue unfair. Under the SGR model, physicians were scheduled to get a 21 percent cut in 2010, followed by 5 percent annual cuts thru 2014. From 2004-2009, Congress disregarded the SGR model and awarded physicians annual increases of 1-3 percent—less than inflation but above SGR recommendations. In the Senate Finance reform bill, a one year fix was proposed—a 0.5 percent increase plus the creation of the Independent Medicare Advisory Commission (IMAC) to develop a permanent fix. In the House bill, a permanent fix was included at a cost of $228 billion (10 years). Senate Majority Leader Harry Reid (D-NV) had hoped to have a separate vote on the SGR fix this week, but moderate Democrats and Republicans prevailed in the view it be part of the overall reform package and have revenues to offset its costs. Thus, the total cost of the Senate bill forthcoming is likely to exceed $1 trillion (currently $829 billion per Congressional Budget Office (CBO) estimates).

Note: the total cost of the reform bill, and the sources of revenues to pay for it will be the central issue in coming debates. The President has stated a goal of $900 billion; with the SGR fix, each of the major bills exceeds $1.1 trillion in current form.

Paying for reforms will be dicey: four sources are included in the bills:

Taxes on “Cadillac “ insurance plans (Senate Finance)
Income taxes increases/reduced deductions for higher income citizens (Senate HELP, House Tri Committee)
Industry fees (Senate Finance, House Tri Committee) and
Medicare cuts (All)

However, each of the first three is getting pushback from various groups that argue Cadillac plans might reduce coverage or increase costs for employers which they’re likely to pass-through to employees; increased income taxes on wealthier households might impede economic recovery; or industry fees would be passed through to hospitals and doctors negating cost-reduction in health care.

The most significant discussion in coming weeks will be the costs associated with health reform relative to the benefits derived from a bill. While increasing access to insurance for 20-30 million Americans through a combination of increased Medicaid enrollment and insurance participation, 20-30 million will likely be without insurance, and at a time of slower than expected economic recovery, reduction of the 6.2 percent annual health costs might not be achieved.

In Deloitte’s Pulse Survey, 54 percent of U.S. adults doubt a bill will be passed this year, largely because the overall economic recovery is seen as a more urgent priority and lack of confidence in Congress’ ability to solve the system’s problems. (Deloitte Center for Health Solutions Pulse Survey, a telephone survey of 1,003 US adults 18 and over, conducted September 10-13, 2009).

Small businesses face higher premiums

In his Saturday radio address, President Obama cited “the crushing costs of health care—costs that have forced too many small businesses to cut benefits, shed jobs, or shut their doors for good” as the impetus for reform. While overall premium costs are expected to increase 10 percent in 2010, small businesses will likely see a 15 percent increase from $4,800 per employee (2009) to $5,500 (2010). Small businesses employ about 40 percent of the work force.

Medicare premiums to increase 15 percent in 2010 for one in four enrollees

The average premium for 27 percent of Medicare enrollees (12 million) will increase to $110.50 per month next year. By law annual Medicare premium increases generally cannot be more than Social Security cost of living adjustment (COLA) increases. But that protection applies only to about 75 percent of the Medicare population. Those paying higher premiums include those whose current Medicare premium is paid by Medicaid and high-income beneficiaries. Premiums can be as high as $353.60 a month, or more than $4,200 a year, for Medicare beneficiaries who file tax returns with adjusted gross income greater than $214,000 for an individual or $428,000 for a couple.

Medicare Advantage cuts in Senate Finance bill might not impact 30 percent of enrollees benefit

In the Senate Finance bill, cuts of $117 billion over ten years for Part C plans are included. However, three million enrollees in 13 states will not be affected as the bill set aside $10 billion to fund plans deemed to offer unique value/higher quality. Enrollees in plans in South Florida, Louisiana, New York City, Los Angeles, San Francisco, Minneapolis, Nashville, Birmingham, Denver, Long Island, Tampa, Tulsa, Pittsburgh, Salt Lake City and Phoenix are the beneficiaries.

Update: employer pay or play mandates

The Senate Finance bill does not include an employer mandate. Rather, it requires employers with more than 50 employees who do not provide health insurance to pay $400 per employee IF the employee uses government tax credits/subsidies to purchase insurance.

By contrast, both HR 3200 and Senate HELP include mandates: in the Senate HELP bill, employers with more than 25 employees that do not provide insurance and pay at least 60 percent of the employee’s premium would pay a penalty of up to $750 per employee. In the House Tri Committee bill, employers that do not provide health insurance would pay 2-8 percent of their total payroll costs (8 percent for companies for with a payroll of $750,000). The penalty in the HELP bill is modest compared to the total cost of providing health benefits to employees, and thus would possibly provide incentives for employers to discontinue their health benefits.

NEW! Special feature in the Monday Memo

Each week the Monday Memo will feature a special focus area to provide deeper background on special topics related to health reform.

Health Reform Snapshot: Individual Mandate

Each of the major reform bills includes an individual mandate targeting a subset of the 46.3 million uninsured. In each, a penalty for non-participation is a key feature.

The following chart illustrates the three different individual mandate proposals:

Senate Finance Committee	Senate HELP Committee	House Tri-Committee
1. Requires U.S. citizens and legal residents to have qualifying health coverage. 2. Enforced through penalty tax of $750 per adult per year. 3. Penalties phase in as follows: a. 2013 - $0 b. 2014 - $200 c. 2015 - $400 d. 2016 - $600 e. 2017 - $750 4. Exemptions will be granted for financial hardship, religious objections, American Indians, and if the lowest cost plan option exceeds 8% of individual income or if individual income is less than 133% of Federal Poverty Level. (FPL).	1. Requires U.S. citizens and legal residents to have qualifying health coverage. 2. Enforced through penalty tax of $750 per adult per year (maximum penalty per family four times the individual penalty). 3. Exemptions granted to residents of states that do not establish an American Benefit Gateway, members of Indian tribes, those whom affordable coverage is not available, those with coverage for fewer than 90 days, and those with incomes below 150% FPL.	1. Requires all individuals to have “acceptable health coverage”. 2. Those without coverage pay a penalty of 25% of modified adjusted gross income up to the cost of the average national premium for self-only or family coverage under a basic plan in the Health Insurance Exchange. 3. Exceptions granted for dependents, religious objections, and financial hardship.

The penalty for non-participation: a critical factor in debate

For hospitals, medical device manufacturers, pharmaceutical companies and health insurance plans, the expansion of the insurance market via an individual mandate with sufficient penalties that result in significant participation by young individuals and families is a critical focus of the reform debate. In various proposals, newly imposed industry fees beginning in FY2011 ($13 billion per year) are predicated on increased revenues from newly insured participants in the insurance system, thus benefiting suppliers and providers. Three features of the individual mandate are key to significant levels of participation: eligibility requirements, premium prices, and subsidies.

Subsidies and eligibility: each of the bills vary somewhat:

Senate Finance Committee	Senate HELP Committee	House Tri-Committee
1. Proposes to provide premium credits to individuals and families with incomes between 133 – 400 percent of the Federal Poverty Level starting in 2013, and including individuals and families with incomes between 133 – 400 percent of the FPL in 2014, to purchase insurance through the Health Insurance Exchange. 2. Premiums credits will be tied to the second lowest cost silver plan in the area and will be provided on a sliding scale basis from 2 percent of income for those at 100 percent FPL to 12 percent of income between 300 – 400 FPL. Less than 100 percent of FPL is eligible for Medicaid.	1. Proposes to provide premium credits on a sliding scale up to 400 percent of FPL to purchase insurance through the Gateway. 2. Premium credits will be based on the average cost of the three lowest cost qualified health plans in the area. 3. Individuals with income less than 400 percent of FPL pay no more than 12.5 percent of income and individuals with income less than 150 percent of FPL pay 1 percent of income with additional limits on cost-sharing.	1. Proposes premium credits based on the average cost of the three lowest cost basic health plans. The Energy and Commerce Committee proposal is as follows: 133 – 150% FPL: 1.5 – 3.0% of income 150 – 200% FPL: 3.0 – 5.5% of income 200 – 250% FPL: 5.5 – 8.0% income 250 – 300% FPL: 8.0 – 10.0% of income 300 – 350% FPL: 10.0 – 11.0% of income 350 – 400% FPL: 11 – 12% of income 2. Cost-sharing credits reduce the cost-sharing amounts and annual cost-sharing limits and have the effect of increasing the actuarial value of the basic benefit plan to between 70 -97 percent. 3. The Energy and Commerce Committee amendment states that to be eligible for the premium and cost-sharing credits, the cost of the employee’s premium must exceed 12 percent of the individual’s income.

Senate Finance Committee

Senate HELP Committee

House Tri-Committee

1. Proposes to provide premium credits to individuals and families with incomes between 133 – 400 percent of the Federal Poverty Level starting in 2013, and including individuals and families with incomes between 133 – 400 percent of the FPL in 2014, to purchase insurance through the Health Insurance Exchange.

2. Premiums credits will be tied to the second lowest cost silver plan in the area and will be provided on a sliding scale basis from 2 percent of income for those at 100 percent FPL to 12 percent of income between 300 – 400 FPL. Less than 100 percent of FPL is eligible for Medicaid.

1. Proposes to provide premium credits on a sliding scale up to 400 percent of FPL to purchase insurance through the Gateway.

2. Premium credits will be based on the average cost of the three lowest cost qualified health plans in the area.

3. Individuals with income less than 400 percent of FPL pay no more than 12.5 percent of income and individuals with income less than 150 percent of FPL pay 1 percent of income with additional limits on cost-sharing.

1. Proposes premium credits based on the average cost of the three lowest cost basic health plans. The Energy and Commerce Committee proposal is as follows:

133 – 150% FPL:
1.5 – 3.0% of income
150 – 200% FPL:
3.0 – 5.5% of income
200 – 250% FPL:
5.5 – 8.0% income
250 – 300% FPL:
8.0 – 10.0% of income
300 – 350% FPL:
10.0 – 11.0% of income
350 – 400% FPL:
11 – 12% of income

2. Cost-sharing credits reduce the cost-sharing amounts and annual cost-sharing limits and have the effect of increasing the actuarial value of the basic benefit plan to between 70 -97 percent.

3. The Energy and Commerce Committee amendment states that to be eligible for the premium and cost-sharing credits, the cost of the employee’s premium must exceed 12 percent of the individual’s income.

Experiences in the United States and abroad

Massachusetts has achieved a 97.4 insured rate by requiring that all citizens buy insurance since 2007. This reform effort also included an employer mandate, insurance market reforms, and a health insurance exchange, “The Connector”. After the first year of the mandate when the penalty for non-compliance was loss of the state income tax exemption (~$200), the penalty was up to 50 percent of the individual premium. In 2009, this equates to $624 for 18 – 26 year olds, and $1,068 for those 27 and older. As a result of the subsidies and mandate, the uninsured rate dropped from 7 percent in 2007 to an estimated 2.6 percent in 2009, budgeted at $869 million in FY 2009, or $2,000 per person.

Switzerland has achieved a 99 percent insured rate after adopting an individual mandate in 1996, using a highly decentralized system with premiums set by the 26 different cantons and government subsidies. Strict penalties, between 30 and 50 percent of premiums, are imposed on those who do not purchase health insurance for infants within 3 months of birth or after moving to Switzerland.

The Netherlands has achieved a 98.5 percent insured rate after adopting the Health Insurance Act in 2006 with an individual mandate, guaranteed issue, basic benefits, and community rated premiums with a sliding scale subsidy that assists approximately 38 percent of the population. Penalties may be up to 130 percent of premiums.

C-suite action items

Stakeholders should watch Senate and House debates about funding of health reform: it is anticipated bigger cuts to Medicare might be necessary to fund a deficit neutral bill thus impacting every sector. Cost reduction strategies across the system are an immediate focus.
Insurance industry reforms appear likely. Changes in premium pricing, product design, eligibility, and medical management policies and procedures are a necessary focus of immediate attention.
Each bill contains additional transparency provisions: all sectors should be familiar with requirements anticipated for quality, safety, prices and service satisfaction.
The FDA overhaul is likely to change regulatory compliance processes and commercialization timing. Life science companies should model scenarios with varied anticipated regulatory and administrative forthcoming from the FDA.