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Health Care Reform Memo: January 18, 2010

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.

Massachusetts Senate race

Tuesday’s Senate vote pitting Martha Coakley, Democratic Attorney General vs. Republican State Senator Scott Brown is being watched closely as an early test of pending national health reform legislation. The backdrop is key; the state has elected Democratic Senators since 1972 and President Obama, who carried the state in Campaign 2008 by 26 percent, campaigned for Coakley yesterday. In 2006, the state passed health reform featuring individual and employer mandates resulting in expansion of coverage to 476,000, 97 percent coverage and $1.2 billion deficits. Candidate Brown appears to be running an anti-health reform campaign; Coakley’s pro-health reform carries the legacy of Senator Ted Kennedy who died August 25. The race has drawn national attention: an upset win by Brown would provide Republicans a 41st vote in the Upper Chamber, enough to filibuster the reform bill-in-the-making. A win by Coakley would not be a surprise, but a close win could likely signal what many moderate Democrats fear: a rough 2010 election year.

Update: Reform bill negotiations among House, Senate Democratic leaders

Last week, Democratic health committee chairs from the House and Senate met for three days to iron out differences between the bills with the goal of getting a proposal to the Congressional Budget Office (CBO) for scoring by next week. Presuming the CBO scoring turnaround next week, the House could vote by the end of the month, to be followed by the Senate in early February. The State of the Union address is likely intended to feature a successful health reform bill; the date has not yet been set as the final bill undergoes the Senate approval process.

In the closed-door meetings with no electronic devices to discourage leaks, the leaders agreed to several substantive changes working primarily from the Senate bill as the framework per the President’s suggestion:

  • Risk bands for insurance premiums: The House proposed 2:1, the Senate 3:1. The compromise: 2.5:1 (still expected to increase premiums for younger insureds to offset costs by older adults)
  • Cadillac tax: Originally not in the House bill but a key proposal in the Senate bill that provided $149 billion to fund reforms. The Senate thresholds were $8,500 for individuals and $23,000 for families; above the levels that were not indexed for inflation annually, a health plan would pay a 40 percent tax on the excess value beginning 2014. Under the original terms, the tax would have been applicable to 31 million workers, 19 percent of whom are union members, according to the AFL-CIO. As a result, the Senate agreed to exempt miners, police, firefighters, communications workers and longshoremen; 190 members of the House objected, arguing that union members had received richer benefits packages in lieu of higher wages. The compromise: collective bargaining agreements with unions that included health benefits, and state and municipal workers that exceed the threshold are exempt from the tax until 2018. The thresholds were increased to $8,900 and $24,000, and will be indexed by 1 percent per year above the consumer price index. Unions may offer members coverage through health exchanges beginning in 2017. And, starting in 2015, costs for dental and vision care would not be included in the calculations. Note: the net result is a reduction of $59 billion in reform funding from the Cadillac tax
  • Subsidies: The House bill featured subsidies above Medicaid eligibility up to 400 percent of the federal poverty level (FPL) with higher proportionate subsidies for the 150-250 percent cohort; the Senate subsidies up to 400 percent from 133 percent with higher proportionate subsidies for the 250 percent and above cohort. The compromise appears to shift subsidies closer to the House thresholds to strengthen insurance participation for lower-middle income individuals and families
  • Public option: Included in the House bill but not the Senate, House leaders conceded the public option to the Senate language but received assurances insurance industry regulations and access to affordable insurance would be strengthened in the final bill

Yet remaining are critical differences:

  • Abortion: Resolution of the stricter provisions in the House bill (the “Stupak Amendment”) vs. the Senate’s less restrictive terms of access conceded to Sen. Ben Nelson (NE)
  • Medicaid funding for states: Governors in both parties believe the expansion of Medicaid starting in 2013 by 14-17 million will exacerbate dire budget circumstances. 44 states are under water on Medicaid funding and a $260 billion deficit for states in 2010 is likely due to reduced tax revenues and increased costs. Under current proposals in both bills, the federal government would pay 100 percent of the costs for Medicaid expansion for 3 years, then 90 percent thereafter (except for Nebraska in the Senate version that gets 100 percent in perpetuity). Attorney generals in 15 states have filed suit to get the “Cornhusker Concession”. Note: the costs for states resulting from Medicaid expansion, disproportionate share hospital (DSH) payment cuts and increased obligations to fund health-related programs will be a major focus of proponents and opposition to the health reform bill. Also, according to the CBO it will cost $27B to fund 100 percent of Medicaid expansion thru 2019 above costs already in the bills
  • Insurance exchanges: The House bill proposed federal oversight; the Senate gives primary responsibility to states under the auspices of the Office of Personnel Management. Late last week, it appeared the House provision had gained momentum
  • Employer mandate: The House version that includes a mandate vs. the Senate version that provides for penalties for companies above 50 employees (see discussion of Employer Impact below)
  • Individual mandate penalties: The House version tied to a percentage of adjusted gross income vs. the Senate version with phased-in ceilings of $750/person or $2,250 per household.
  • Data exclusivity period for biologics (and larger issues impacting innovation in the life sciences): The House proposed a five year period; the Senate 12.The issue pits a looming question for life science companies including medical device manufacturers, biotech and pharma: if increased taxes and regulations are in the bill including shorter commercial life for biologics to make way for generics, how will R&D risks be rationalized and innovation impacted? Late Friday, the biologics issue was still on the table and additional taxes on life sciences industries being considered.

Because of these compromises, the funding formula is getting attention as additional revenues to offset concessions are sought. Some ideas tested last week:

  • Increase the Medicare withhold tax: The Senate version proposes an additional tax of 0.9 percent on the receipt of wages and earnings from self-employment by individuals above $200K and joint filers above $250K. The compromise might include a higher additional tax and of extending the HI tax on high-income taxpayers so that it also applies to investment income
  • Increase industry fees: Medical devices could see a $10B increase over ten years to $30B; prescription drug companies increase of $10B to $90B, and additional taxes on nursing homes above the $15B in the Senate proposal.
  • Additional Medicare cuts: Medicare cuts are $438B of the Senate bill—42 percent of total funding including cuts in projected growth rates to hospitals, increased drug company discounts, and others. Increased cuts might be necessary to offset additional costs of the bill.

New coalitions emerge to advocate for single issues

As the legislation process proceeds, several new coalitions formed to promote revisions:

  • Ten unions led by the AFL-CIO met with the White House to encourage Cadillac plan excise taxes be excluded from the bill, and a public option included. Note: Thursday, the White House conceded on changes to Cadillac plan provisions but the exclusion of the public option is intact
  • 75 association and trade groups led by AHA, ACP, MGMA and ACS rallied in opposition to a proposed Independent Payment Advisory Board that would set payment rates for doctors and hospitals
  • 150 physician and nurse professional associations led by Kaiser Permanente lobbied for changes to Senate fee on health insurers to extend the fee to self-insured plans of employers
  • 118 trade and professional groups sent letters to Congressional leaders encouraging increased Medicaid payments for primary care physicians arguing that Medicaid rates, which average 66 percent of Medicare rates, are inadequate and harmful to care for at-risk populations

Employers’ considerations: Update

The employer mandate: The Senate version requires employers with more than 50 employees to provide insurance or pay $750/fulltime equivalent (equals 30+ hours per week averaged on monthly basis) if one or more employees is eligible for and chooses to use a federal subsidy to purchase insurance (part-time and seasonal employees are not included in the calculation). The Senate version is likely to prevail in the final bill.

Self-funded employers: The Senate bill maintains ERISA provisions for self-funded plans but adds several regulatory requirements to self-funded employers with more than 200 employees: notice requirements, reporting requirements, etc.

The Senate bill also provides for employer-participation in subsidized coverage: If an employer’s premium cost is more than 9.8 percent of the employees adjusted gross income, the employee can opt out of the employer’s coverage and use a voucher to cover insurance obtained through an exchange-approved plan. The House version is more restrictive to employers; the Senate version above is likely to be accepted.

Waiting period for employer-sponsored insurance: The Senate language requires the waiting period for eligible employees to be no longer than 90 days and imposes a penalty of $600/employee if the wait is longer than 60 days (current Senate language; likely to stay as-is).

Busy first year

If a bill is passed, a number of changes will occur in 2010, among them, the following:

  • Tanning salon taxes start
  • Coverage requirements by insurance plans change: reconstructive surgery for children with congenital/developmental deformities, elimination of pre-existing conditions for children under 19 and victims of domestic violence, expansion of dependent coverage to adults up to 26 years of age (27 in Senate version), and coverage for “essential preventive health benefits” with no co-payment/cost sharing
  • Elimination of lifetime limits in insurance plans—“new plans” in Senate bill, all plans in House 2010 under the legislative proposals
  • Creation of new long-term care programs
  • Creation of a health benefits advisory committee
  • A $5 billion fund to finance an immediate temporary insurance program for those who are deemed uninsurable because of pre-existing conditions
  • Incentive payments to states that enact alternative medical liability law
  • And requirements that fast food companies post calories for all items on menus (an item that has bi-partisan support)

EHR requirements for vendors; Meaningful use criteria for hospitals and doctors published in Federal Register Wednesday

The HHS Health Information Technology Policy Committee met Wednesday to discuss missed opportunities in the standards published re: HITECH deployment. Three areas are the focus in expected revisions: provisions to include physician progress notes (considered an important context for evaluating diagnostic and therapeutic decisions of physicians), capture of indicators about physician substitution of generic drugs, and use of diagnostic imaging tools for diagnosis. The publication of the two specifications— “Medicare and Medicaid Programs; Electronic Health Record Incentive Program Proposed Rule” (NPRM) and the “Initial Set of Standards, Implementation Specifications and Certification Criteria for Electronic Health Record Technology”—in the Federal Register begins the official 60 day public comment period.

Note: 45,000 physicians with high Medicaid practice patient volume are eligible for $63,500 grants to purchase a certified EHR starting March 2010, and the balance are eligible for $44,000 grants starting January 2011.

Drug costs get attention of Congress

In the midst of the reform bill debate, the Government Accounting Office released a study last week indicating prices of 416 branded drugs increased by at least 100 percent between 2000 and 2008. The report indicated half were in three therapeutic classes: central nervous system, anti infective, and cardiovascular. In 2008, the prices for 71 drug products increased by 100 percent, but in 2000, only 28 drug product prices increased by that amount, per the report. The number of brand-name drug products that had these extraordinary price increases each year trended upwards, more than doubling from 2000 to 2008; however, they represent about half of 1 percent of all brand-name drug products.

Fact file

  • U.S. obesity rate 2008: 34 percent (but leveled off in past five years)—Source: CDC
  • U.S. national debt: $12.3 trillion—70.4 percent of the U.S. GDP, highest since 1939)—Source: U.S. Office of Management and Budget
  • Federal spending on health care as percent of total federal budget: 36 percent
  • For every 1 percent increase in unemployment, 1.1 million lose their health insurance (Source: Bureau of Labor Statistics). Currently 10.2 percent of workforce is unemployed (14.4M). A poll of 57 economists by Bloomberg predicts unemployment will peak at 10.7 percent in 2010, end the year at 10 percent and 9.3 percent in 2011
  • 26 percent of the U.S. workforce who work from home as independent contractors purchasing individual insurance plans through associations/cooperatives (Source: “The Disposable Worker,” Business Week, January 18, 2010)
  • 70 of 306 hospital regions deliver high value (low costs, high quality) hospital care (Source: Institute of Medicine)
  • 27 percent of physicians and 20 percent of nurses/allied health professionals and 18 percent of pharmacists in the U.S. are immigrants vs. 15 percent of the total U.S. workforce (Source: Immigration Policy Center Report: 2009)

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