Health Care Reform Memo: July 13, 2009

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.

Hospitals agree to cuts; get important concessions

Wednesday, Vice President Biden announced that the hospital industry agreed to concessions of $155 billion over 10 years to fund health reform. $103 billion would come from a reduction in market basket updates and productivity adjustments, and $47 billion would come from reductions in the disproportionate share payments to hospitals beginning in 2015. In return, the industry won some major commitments from the White House:  (1) assurance that the public plan option would pay providers at rates similar to private payers, rather than Medicare rates, and (2) bans/restrictions on physician referrals to clinics or hospitals in which they have an ownership stake.

In the official announcement, the White House web site noted, “As part of this agreement, hospitals have committed to support policies that will help pay for health reform and reduce overall costs to the Medicare program. These reductions will be achieved through a combination of payment reforms, including additional reductions in hospitals’ annual inflationary updates. They will be more than offset as health reform takes hold and hospitals bear less of the financial burden of caring for the uninsured or underinsured. In addition, in the area of delivery system reform, hospitals are reaffirming their long-standing commitment to improve quality and reduce costs in the health care system by supporting initiatives such as value-based purchasing; testing ways to better integrate care; and taking steps to reduce unnecessary hospital readmissions.”

Participants in the news conference were Vice President Biden; HHS Secretary Kathleen Sebelius; Richard Bracken - President & CEO, Hospital Corporation of America; Wayne Smith - President & CEO, Community Health Systems; Sister Carol Keehan - President and CEO, Catholic Health Association of the United States (CHA); and Rich Umbdenstock - President and CEO, American Hospital Association.

NOTE: Last week, the White House announced concessions from the pharmaceutical industry who pledged $80 billion savings by discounting the costs of drugs for Medicare Part D enrollees whose expenditures hit the “donut hole” (between $2700 and $6100 per year). In exchange, the industry was promised additional cuts in payments by Medicare would be avoided and rebates to state Medicaid plans would not increase. In summary, the treasury will benefit by savings of $50 billion and seniors will pay $30 billion less.

Still on the table for hospitals: increased scrutiny of tax exempt status for not-for-profit status. Sen. Chuck Grassley (R-IA) says he wants hospitals to offer a minimum amount of charity care and tone down their collection practices or face an excise tax. In 2008, hospitals avoided payment of $12.6 billion in taxes and received $32 billion in state/federal subsidies.

Updates: three major efforts, costs and funding increasingly sticky

To date, only the Senate Health, Education, Labor and Pension Committee has introduced a bill—the “Affordable Health Choices Act” introduced by Committee Chair Ted Kennedy with 30 co-sponsors. The other two: one from the Senate Finance Committee, and another from the combined effort of the 3 House committees (Ways and Means, Budget and Finance, Labor and Pensions) have circulated outlines for comment, but bills per se have not been introduced.

Status report:

Senate Health, Education, Labor and Pension (the Kennedy sponsored “Affordable Health Choices Act”): This week, its sponsors worked to lower its price tag closer to $1 trillion and raise the numbers of uninsured it covers through subsidized coverage. Per the Congressional Budget Office, its price tag is now $1.1 trillion leaving 15-20 million without insurance in 2019. Key features of the bill include: a public option, individual mandate with subsidies for those under 500 percent of the federal poverty level, and employer pay-or-play mandate for those with 25+ employees. Funding would be provided through elimination of a portion of the employer tax exclusion, lower payments by Medicare and increased taxes (sliding scale of 1-3 percent) on individuals and households above $250,000 adjusted gross income.

Senate Finance (Baucus): The much anticipated Baucus bill is stalled as its strongest advocates pursue theirs as the bi-partisan solution. Though Senate majority Leader Harry Reid (D-NV) encouraged the committee to abandon efforts toward a bi-partisan bill, its Chairman, Max Baucus, was indignant in stating his aim for a bi-partisan bill that would cost less than $1 trillion, not include a public option and cover substantially all without insurance. The Baucus bill includes an individual mandate with subsidies for lower income individuals up to 300 percent of the federal poverty level ($54,930 for family of three), employer pay-or-play provision and development of the Institute for Comparative Effectiveness Research to align provider performance with adherence to evidence-based practices. In the Baucus bill, there are two sticking points that are likely to delay its introduction indefinitely: alternatives to a public plan option and funding. The co-op model (see below) has emerged as a possible alternative to the public plan. Or, a public option that’s triggered when lack of competition among commercial plans is demonstrated in communities/states with congressional oversight assuring it competes fairly. Funding for the Baucus bill is its biggest challenge: currently, all options are on the table to raise $1 trillion, including limiting the employer tax exclusion above a certain threshold, limiting individual income tax deductions to no more than 28 percent, increasing the 1.45 percent Medicare tax on earned income, adding a 5 percent surtax on individuals who earn more than $500,000 or couples who earn more than $1 million and taxes for sodas and sugary drinks.

The House effort: The “Tri Committee” late Friday announced its intent to rely on two funding sources: (1) a surtax on individuals with adjusted income above $280,000 and married filers above $350,000 in order to generate $550 billion over 10 years, and (2) reduced Medicare payments to physicians, hospitals, Medicare Advantage Plans and long-term care. NOTE: the Tri-Committee proposed surtax on upper income households would begin in 2011 with a 1 percent tax for earners up to $500,000; 1.5 percent for earnings between $500,000 and $1,000,000; and increase to 3 percent for earnings above $1,000,000. The House bill will go to Congress for mark-up starting Monday, July 13^th with a target completion date of Thursday, July 16^th.

NOTE: Given the challenge facing the Senate to pass a bill, the timeline for its passage prior to Congress’ August recess is not likely. This week, the House bill will be in the spotlight, along with the confirmation hearings for Supreme Court nominee Judge Sonia Sotomayor.

Medicare cuts loom large in funding reform

A major portion of funding for health reform will be cuts in forecasted spending for the Medicare program.

The $490 billion federal Medicare program was signed into law July 30^th, 1965 by President Lyndon Johnson and today covers more than 45 million seniors aged 65+ and individuals with permanent disabilities. About half of Medicare beneficiaries live at or below 200 percent of the federal poverty line (i.e., $20,800 annual income for a single person and $28,000 for a couple); over a third of the beneficiaries are afflicted with three or more chronic conditions; and 6 million are dual eligibles—qualifying for both Medicare and Medicaid benefits.

The program is funded through payroll taxes (41  percent), general tax revenues (39  percent), premiums paid by seniors (12 percent) and interest earned on its trust fund (8 percent).  In 2009, it represents 13 percent of the federal budget and 3.5 percent of the country's GDP. The solvency of the trust fund is a focus of concern: in its FY10 budget forecast, the Obama administration noted the trust fund’s solvency would expire in 2017—two years sooner than originally forecast—as a result of: (1) a 30 percent increase in enrollees over the coming decade bringing enrollment to 59 million, and (2) increased costs per enrollee for medical care-- a 50 percent increase from $11,000 to $17,000.

Cuts in future growth rates for Medicare payments are likely to be significant in funding the reform bills forthcoming.

Franken seated; Democrats appear to have the votes for a health reform bill…but do they?

Seemingly, the math is simple: with the swearing in of Senator Al Franken (D-MN) this week, the 111^th Congress is now at full participation. The Democrats have solid majorities in both houses:

• The House split is 255 Democrats to 178 Republicans.
• The Senate is 58 Democrats, 30 Republicans and 2 Independents (who have historically voted with Democrats).

But beyond these numbers, the challenges facing proponents of a health reform bill are significant. Consider…

Two powerful Democratic Senators haven’t voted in months: Sen. Edward M. Kennedy (D-MA), 77, is battling brain cancer, and Senator Robert C. Byrd, 91, is dealing with the after- effects of a staph infection incurred during a hospitalization in May. Passage of a bill with 50 votes in the Senate might be challenging with notable Democratic moderates like Conrad, Lincoln, Specter, Nelson and others expressing concern about its cost and alternatives to the public plan. And a Republican Senator, Olympia Snowe (ME) has indicated support FOR a public option.

In the House, the 52-member Blue Dog Democrats might have the strongest voice: it opposes the public plan option and fears a sweeping increase in tax rates during an economic recovery.

A health reform bill passed by early fall is likely, but what will be included in the bill is still unclear. An individual mandate; employer pay-or play mandate with exceptions for small businesses; a “triggered” public plan option; and comparative effectiveness and preventive health emphasis all appear to be consensus ingredients, but “funny things happen in politics”. According to the AMA, in 42 states, two or fewer plans represent 50 percent or more of total enrollment in commercial plans lending support to the “trigger” approach to a public plan option.

Co-op model gets attention as alternative to public plan; Group Health Cooperative in spotlight

The House Tri Committee and Kennedy reform proposals include a Medicare-like public plan that is considered a threat in the long-term to the sustainability of the system due to expected lower payments to providers. An alternative, the co-op model, was first proposed by Senator Kent Conrad (D-ND), Chairman of the Senate Budget Committee. A key feature of the co-op model is governance by an elected board voted by its members.

The Group Health Cooperative in Washington (state) is touted as a prototype. Created in 1947 by trade unions and the Grange as a not-for-profit corporation, its 2008 revenues ($2.6 billion) are reinvested or distributed among members per the guidance of its board. Capital budgets, provider compensation, and facility upgrades all fall under the oversight of the board. With 550,000 enrollees in Washington, it is the smallest of three major insurers in the state, with 9 percent market share. Group Health physicians are salaried and are eligible to receive up to a 20 percent bonus for high-quality care delivery. Primary care coordination, group visits, e-visits, team-based care, and use of a comparative effectiveness program to assess coverage are key features of the clinical model. But is not without its flaws: in its last board election, less than 1 percent of enrollees voted. Annual increases for individual policies have averaged 12.3 percent since 2000, peaking at 24.2 percent in 2003.

According to the co-op model’s major proponent, Senator Conrad, the federal government would provide seed funding—between $4 and $10 billion to create the co-op infrastructure.

Child health, poverty linked: A new report examines this issue

Friday, the Census Bureau released "America's Children: Key National Indicators of Well-Being," profiling the 74 million people in the U.S. under 17 years of age—24 percent of the population. For health industry stakeholders, the findings are mixed:

• Challenging: 18 percent were living in poverty in 2007, up from 17 percent in 2006; 77 percent live in a household with at least one working adult, down from 78 percent in 2006; 40 percent were born to unmarried women, up from 34 percent in 2002; the teen pregnancy rate rose slightly for the second year in a row to 22.2 per 1,000 girls ages 15 to 17; and those living in households where parents described children as being hungry, having skipped a meal or having gone without eating for an entire day, increased from 0.6 percent in 2006 to 0.9 percent in 2007.
• Encouraging: 89 percent of children had private/government-funded health insurance in 2007, up from 88 percent in 2006; pre-term births were 12.7 percent of the total, down from 12.8 percent in 2006; and the proportion of low-birth-weight infants was 8.2 percent, down from 8.3 percent in 2006.

The report noted that 14 percent of all children have special health-care needs including allergies, asthma, attention deficit disorder, depression and/or headaches.

Long-term care proposal gets positive response from CBO

Last week, after a positive assessment of potential savings by CBO, HHS Secretary Sebelius announced intent to promote the Community Assistance Services and Supports Act (CLASS Act) to give workers an option to have the government use payroll deductions of $65 to $100 a month for future long-term care needs. The projected savings, according to CBO estimates, is $58 billion over 10 years.

NIH guidelines for stem cell research expansion issued; Collins named Director

The administration announced easing of policies relating to stem cell research and expanding access beyond the 21 lines approved during the Bush administration. The new guidelines issued Tuesday by the National Institutes of Health (NIH) permit federal funding for research using approximately 700 embryonic stem cell lines believed to be in existence. The NIH ethical principles employed in its policy included provisions that: (1) the embryo that was destroyed to create a line must have been discarded after an in vitro fertilization procedure, and (2) “the donors must have been informed that the embryo would be destroyed for stem cell research and made fully cognizant of their choices, including donating the embryo to another couple who wants a baby. No donors could have been paid for an embryo, and no threats or inducements could have been used to nudge couples toward making a donation”.

Wednesday, Frances Collins, MD, PhD, was named the NIH Director. Previously, the 59 year-old geneticist was director of the National Human Genome Research Institute (NHGRI), one of the 27 institutes and centers that make up the NIH in Bethesda, Maryland.

Fact File

More than 350 lobbyists have been employed by various industry groups to lobby health reform, spending $1.4 million per day YTD (Source: Washington Post July 6, 2009)

C-Suite Action Items

• Employers should assess health costs, benefits design, and coverage policies and procedures to prepare for possible reforms. While unclear today, it is likely certain provisions involving the design and structure of benefits design will change.
• Hospitals should evaluate capital budgets and operating efficiencies to prepare for episode based payments and likely promotion of the stronger roles for primary care gate-keeping. Physician-hospital integration appears necessary to coordinate care across the continuum including preventive and long-term care.
• Health plans should anticipate growing scrutiny of business practices and anti-competitive market presence.
• Life sciences stakeholders should assess near-term and long-term strategies in context market access: domestic market volatility will likely drive strategic collaboration opportunities while foreign markets (including some developing systems) look to afford long-term growth potential.

Join us this Tuesday, July 14 at 2 p.m. EDT for a Webcast on “Comparative Effectiveness: A Compelling Approach to Cost Control and Quality Improvement”

On Tuesday, July 14 at 2 p.m. EDT, join us for a 1-hour free Webinar to discuss: different models of comparative effectiveness used in developed health systems; realities of implementing comparative effectiveness in the U.S., including the status of health reform efforts to advance comparative effectiveness; and implications for plans, providers, life science organizations, and government. Click here to learn more and register (free; registration required).

Related Content

Library: View all Health Care Reform Memos
Debate: The Public Plan Option on Health Care: Holy Grail or Pandora’s Box 
Report: Reducing Costs While Improving Care in the U.S. Health System: The Health Care Reform Pyramid
Report: Health Care and Public Policy: What Do Americans Want?
Resource: Administration of Change - The Obama Impact on Health Care Policy
Overview: Deloitte Center for Health Solutions
Overview: Health Sciences 

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