Health Care Reform Memo: November 16, 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.

Spotlight next on Senate

As the dust settled from the 220-215 passage of House Bill 3962 Saturday, November 7, the spotlight turned to the Senate where most expect a lively debate leading to a vote by year-end.

Since the Senate Finance Committee‘s 14-9 vote October 12, Senate Majority Leader Harry Reid (D-NV) has played an active role in negotiating differences between the Health, Education, Labor and Pensions Committee (HELP) bill (Kennedy-Harkins) and the Baucus (Senate Finance) plan. The differences of the two revolve around these questions—

• How should an individual mandate be structured to accelerate maximum enrollment by those currently uninsured individually? How should penalties be structured and how much will the subsidies costs?
• What is the role of the employer in health insurance for employees and dependents? Is the goal a sustainable major role or a lesser role over time?
• How should insurance reforms achieve increased competition and access in health insurance industry?
• And how should health reforms be funded? And how much will the final bill cost?

Context and timing: while the negotiation continues with active participation by the White House Office of Health Reform (Nancy Ann DeParle) and Chief of Staff Rahm Emanuel, recent events suggest the ultimate bill might not be ready until after the first of the year.

1—Unemployment and economic growth—October unemployment (Bureau of Labor Statistics) increased to 10.2 percent--highest since 1983 with almost 16 million adults unable to find employment. Consumer spending remains sluggish as leading indicators suggest holiday retail sales will be flat to no more than 2 percent above 2008 levels. And Congress will soon face a vote to authorize expansion of the $12.1 trillion debt ceiling owing to the FY2009 record deficit of $1.4 trillion. And, some members of Congress believe a second stimulus package might be necessary to stimulate economic recovery.

2—Elections in Virginia, New Jersey—The gubernatorial races in both states featured fiscal conservatism that won victories for Republicans McDonnell and Christie over Democrats. Each of the 435 members of the House, 37 senators and 35 governors races will feature the economy as issue one with health reform closely related. Pundits readily observe the growing chorus of moderates and independents who assert the need for slower spending and economic recovery as a precursor to health reform.

Given these, moderates in both parties increasingly ask “why now” and “how much”. And key industry groups are anxious. In the Senate Finance bill’s earlier version, industry was tagged with $13 billion per year of new taxes to pay for reform beginning October 2010 (FY2010). The Senate Finance Committee (SFC) rationale was that a strong individual mandate would expand the market driving more revenue to providers, suppliers and plans. Industry groups are concerned that earlier agreements with the White House were set aside and call attention to the timing misalignment between the timing of new taxes (FY2010) and the market expansion via the individual mandate (beginning FY2013). The current posture of the major trade groups is:

Pharmaceutical industry: The pharmaceutical industry agreed to an $80 billion reduction in drug industry revenues to half the donut hole in the Medicare Prescription Drug Plan (2003)—a benefit to lower income seniors who participate in the popular program and It negotiated a $106 billion over 10 years concession from a lower-than-first-requested rebate for drug purchases by Medicare and Medicaid spending and promises the industry would be protected from unfair global competition and streamlined performance of the FDA review process. The industry considers the SFC $2.5 billion per year surtax unacceptable since it was not part of its original deal. Note: the pharma industry’s major challenge is not health reform. The loss of patents for several blockbuster drugs to generics over the next two years will reduce industry revenues by more than $100 billion.

Biotechnology: The biotech industry—$90 billion of the overall $360 billion per year pharma spending—sought data exclusivity and patient protection for 12 years. Personalized therapeutics is the wave of the future in the life sciences; however, costs associated with R&D in biotech are high and access to commercial markets arguably tougher since these drugs cost more to patients and cost more than traditional medicines. The give-back from biotech—support for efforts to increase R&D output in personalized therapeutics and support for long-term efforts to create bio-generics. Notably, then Senator Barack Obama co-authored the Personalized Therapeutics Act of 2006 and at the time appeared to be a proponent of personalized therapies and biosimilars.

Medical devices: The $130 billion medical device industry essentially had no deal with the White House or Senate negotiators. It sought parity with pharma and biotech in its role as innovator, and worked behind the scenes to delay/avoid targeted cuts for specific device-driven payments by Medicare, i.e. electrocardiograms, diagnostic imaging. The industry was surprised in the Senate Finance bill to see a $4 billion per year surtax and has negotiated a compromise to align the fee with actual receipts via a sales tax on device purchases (thus aligning new revenues with the individual mandate guarantee of market expansion).

Note: A common concern among pharmaceutical manufacturers, biotechnology companies and medical device manufacturers is the pending Comparative Clinical Effectiveness Act of 2009 introduced by Senators Max Baucus (D-MT) and Conrad (D-ND) July 9. The bill would create an independent agency to oversee evaluation of diagnostic and therapeutic innovations, comparing standards of care based on evidence of effectiveness and cost. Though a long-term project, support for the comparative effectiveness effort is included in each reform bill and a likely element of the final product.

Clinical labs: In the SFCs final version, a proposed $750 million per year (over 10 years) surtax was dropped. The industry appears supportive of overall changes but is cautious about Medicare coverage and payment rates for tests, and increased regulatory requirements around data privacy and transparency.

Health insurance companies: The commercial health insurance industry agreed to reforms involving eligibility, risk rating, increased transparency and health insurance exchanges. It sought protection from the public option on the premise that the government would use its leverage to undercut commercial plan premiums and debilitate the industry. Assurances to the industry were an individual mandate with federal subsidies for up to 30,000,000 would expand the health insurance market if adequately structured. Thus, the insurance industry would see growth overall though offset by increased regulation of its business practices. The add-on of the $6.7 billion per year industry fee in the Senate Finance bill is viewed by the industry as unfair, and the weakened individual mandate penalty problematic. In addition, in the House and Senate bills, cuts to Medicare Advantage (Part C) insurance plans of $123-177 billion over 10 years are likely to change the way insurers structure services to seniors or determine their ability to compete in the market at all. Note: since June, the rhetoric of health reform has been dominated by “health insurance reform” rather than “health reform” suggesting growing acrimony between the industry and reform advocates in the White House and Congress.

Pharmacy benefits managers (PBMs): No deals were negotiated with the industry, and it has not successfully fended off increased regulatory oversight in its business operations including transparency around the rebates negotiated with drug manufacturers—long a source of contention between health plans and PBMs. Anticipated cuts in overall drug spending and more aggressive negotiation between Medicare and drug manufacturers will likely trickle down to PBMs as added pressure to reduce margins and improve service to enrollees.

Hospitals: Hospitals agreed to $155 billion/10 years Medicare cuts based on savings from improved safety, efficiency and avoidable readmissions. The give-back: the strong individual mandate that would reduce hospital industry bad debt ($171 billion/10 years) and limitations on physician-owned single specialty hospital market growth that compete for privately insured patients leaving hospitals with disproportionately higher Medicare, Medicaid and uninsured patient populations. To date, the hospital agreement appears in tact though concerns about increased Medicare cuts and features of the public option that might tie its payments to Medicare are high.

Physicians: The American Medical Association endorsed HB3962 with the assurance that the sustainable growth rate (SGR) payment model to physicians would be permanently replaced by a better payment system for physicians. Two secondary concerns—that the public option not be tied to Medicare payment rates and malpractice reform—have been its focus. The White House and key committees have sought the endorsement of organized medicine on the merits of increased access to patients who are uninsured. Resolution of the 3 issues is at this point only speculative. Note: The SGR fix would add $210-247 billion to the deficit. It is likely both houses of Congress will pass a "band-aid" solution—a one year 0.5 percent increase in physician payments with the appointment of an independent commission to develop a permanent solution (thus preventing election year hostility from physicians).

Medicare cuts, funding focus of Senate debate

The Senate bill will seek to be deficit neutral and is likely to rely on Medicare cuts of more than $500 billion over 10 years to fund reform. Last week, Majority Leader Reid suggested an increase in the Medicare tax rate from 1.45 percent on all income to 1.95 percent for adjusted gross income above $250,000. The cost of the reform bill, and the mechanism to pay for it, are likely to be the major focus of the Senate debate.

In the Senate bills, four sources of revenue are anticipated to pay for the $900 billion to $1.1 trillion anticipated costs:

1—Increased income taxes on the wealthy—A prominent feature in the House bill is an income tax on individuals and families. However, the tax could be applied to small businesses that operate as proprietorships/sub S companies, thus potentially deflating job growth. Outlook for Senate discussion: an income tax on the wealthy might not find its way into the Senate version, replaced by higher contributions to the Medicare trust fund (see below).

2—Taxes on “Cadillac” health insurance plans—The SFC bill included a new 40 percent tax on health plans-- individuals with total value above $8,000 and family policies above $21,000 per year (the CBO scored its potential to produce $215 billion to fund reform). However, the tax hits more working class than expected, e.g. union members, firemen, police, etc. and might have the unintended result of seeing their benefits reduced dramatically without an offset in higher wages. Outlook: the Cadillac tax is reportedly likely to be in the bill with scaled back application and lower revenues.

3—Industry fees—The SFC bill initially anticipated $13 billion per year from industry fees starting October 2010, but as outlined above, the fees got strong pushback from the industry who understandably alerted regulators the fee would be passed through the industry’s supply chain to hospitals, doctors and others thus increasing overall costs. Outlook: industry fees in the final Senate bill will be scaled back or possibly negotiated down in joint conference.

4—Medicare cuts—In both Senate bills, Medicare cuts of $460-500 billion were anticipated, largely drawn from industry agreements to reduce costs to the Treasury for hospitals ($155B) and drugs ($50 billion), and by reducing payments to Medicare Advantage Plans ($123B). In essence, for most stakeholders, no harm, no foul. But cutbacks in anticipated revenues from the aforementioned three other sources portend increased Medicare cuts as a distinct probability.

Background: Medicare is a federal program begun in 1965 under the Johnson administration’s Great Society program to provide health care for seniors above 65 years of age, the blind and disabled. Life expectancy for seniors was 67 for males and 71 for females. Mandatory enrollment in the program provided hospital and physician benefits for five years on average. Today, life expectancy is 78.3 (77 for males and 81 for females). The average enrollee expects to receive benefits for 13 years. According to CMS, life expectancy increases one year every 15 years, so life expectancy in 2075 will be 82.6.

There are 38 million seniors today; by 2030, the ranks will swell to 71 million as Baby Boomers (born between 1946-1964) retire. In 2008, there are four workers per Medicare enrollee; in 2030, the ratio will be 2.4:1. Thus, some calculations indicate the insolvency of the Medicare trust fund could happen by 2017.

The Medicare program is funded through a withhold of 1.45 percent of an individual’s income matched by the employer. Unlike Social Security payroll tax which tops out at $106,900 income, the Medicare withhold has no ceiling.

The Congressional Budget Office (CBO) forecasts Medicare costs will exceed GDP by 1.0 percent annually for the foreseeable future increasing its costs relative to the GDP from 4.7 percent in 2030 to 9.4 percent in 2075. However, if historically, Medicare spending has increased by 2.8 percent more than GDP, indicating Medicare could be 5.4 percent in 2030 increasing to 13.2 percent in 2075.

Last week, Sen. Reid proposed the Medicare contribution by individuals and employers be increased from 1.45 percent to 1.95 percent for employees who earn more than $250,000 per year raising $40-50 billion per year. In addition, he indicated he was considering a change in the Cadillac plan provision (included the HR3962 and SFC) that would raise the threshold to $8,500 (individual) and $23,000 (family) for the 40 percent tax on plans.

Note: the possibility that Medicare eligibility age might be raised to 70 has received attention in recent weeks. The change would reduce costs of Medicare by 14 percent from 2010 to 2085.

Medicare enrollee support for health reforms problematic

Most Medicare enrollees feel secure about the program’s future and are satisfied with the program. They are less informed about the system and less inclined to think they’re financially secure in handling their health costs but grade the US system higher than other generations. Thus, a complex set of beliefs and attitudes that complicates the reform debate as evidence in the August town hall meetings.

The potential for Medicare cuts is problematic to Medicare enrollees who associate cuts with reduced access to physicians who’ll accept them as patients, and to increased out of pocket co-payments for services they receive.

Source: 2009 Survey of U.S. Health Consumers, Deloitte Center for Health Solutions

Physician pay for performance results

In 2008, physicians received $92 million in bonus payments from CMS’s Physician Quality Reporting Initiative (PQRI) compared to $36 million paid in 2007.

PQRI is a program that allows physicians and other eligible health care professionals to receive a two percent incentive bonus for voluntarily reporting data on quality measures related to services furnished to Medicare beneficiaries. In 2008, 153,000 physicians and health professionals participated.

Note: performance based payments to physicians and increased transparency about outcomes, safety and adherence to evidence-based practice are included in health reform bills. In addition, the “meaningful use” provisions of the stimulus funded HITECH monies to accelerate electronic medical record adoption includes requirements that clinicians and hospitals commit to transparent reporting of their results.

BusinessWeek 11/23 Cover Story: “Why Wait for Health Reform: 10 Ways to Cut Costs Right Now”

The feature begins “Seven hundred billion dollars. That’s a ballpark estimate of the how much is wasted in the U.S. medical system every single year... None of the health-care reform bills on the table in Washington do anything meaningful to address that wasted $700 billion." It lists ten ways to cut costs: crack down on fraud and abuse, develop a healthy workforce, coordinate care through family doctors, make health a community effort, stop hospital infections, get patients to take their medicines, discuss options near end of life, use insurance to manage chronic disease, let well informed patients decide, and apologize to the patient. Read the full article.

Readmission rates: heart failure

One in four Medicare enrollees discharged from a hospital after a heart attack was readmitted within 30 days according to “Circulation: Heart Failure: Recent National Trends in Readmission Rates after Heart Failure Hospitalization.” Using 2004-2006 Medicare discharge data for enrollees discharged alive, the authors concluded readmission rates had remained "virtually identical" over the three years examined. Note: avoidable readmissions is a focus of reform as a mechanism to reduce costs.

Primary care access uneven

There were 303,749 primary-care doctors (PCPs) in the U.S. at the end of 2007—an increase of 11 percent from 2000 versus 13 percent increase among specialists, according to the American Medical Association report. However, HRSA (Health Resources and Services Administration) data notes shortages of PCs in 6,215 designated areas (communities where there are fewer than one PC per 3,500 residents). In general, suburban and wealthier urban areas are adequately served by while rural areas and inner cities are short. Using this ratio, HRSA estimates a current shortage of 7,400 compared to a shortage of 35,000 to 46,000 PCPs noted in a 2009 study by the American College of Physicians. According to the MGMA, median income for primary care was $173,000 per year for PCPs versus $481,000 for orthopedic surgeons, $391,000 for radiologists, and $344,000 for anesthesiologists (PCP income increased 3.6 percent per year versus specialists income of 9.3 percent per year over the past five years). Note: increased payments to PCPs is a prominent theme in health reform as well as increased funding for the medical home pilots that reward primary care practitioners for patient adherence and population-based health improvement.

Sources: Health Services Research Agency of U.S. Dept of Health and Human Services, American College of Physicians, Medical Group Management Association

H1N1 prevalence (CDC), new vaccine for seasonal flu uses faster manufacturing process

The CDC updated its figures for swine flu: to date, 22 million Americans have been sickened by H1N1 and 3,900 have died including 540 children. Officials remain vigilant, especially as access to the vaccine has slowed due to manufacturing problems.

Meanwhile, Protein Sciences Corp. a private firm based in Meriden, Connecticut, announced it is seeking FDA approval for FluBlok, a seasonal influenza vaccine that uses a technology that could also be used to make an H1N1 vaccine more quickly than current methods (one month versus six months for traditional methods). FluBlok is made by taking a gene from a flu virus and inserting it into cells from a virus that infects caterpillars. The cells ferment for three to four days to produce a protein that can be made into a vaccine designed to fight the flu. The use of genetic material from an influenza virus rather than from the virus itself allows cells to be manipulated and replicated in days rather than weeks.

Data file: admin costs

Physicians spend three hours per week interacting with health plans in addition to time spent by office staff. The net cost is $23-31 billion/yr (“What Does it Cost Physician Practices to Interact with Health Insurance Plans?” Health Affairs, 28: w533-543).

Physicians spend 35 min/day and costs for 0.67 FTE staff dealing with insurance companies at a net cost of $85,276 per doctor per year. (“Peering into the Black Box: Billing and Insurance Activities in a Medical Group” Health Affairs 28: w 544-554).

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