Healthcare Reform: Implications for Health Delivery

1. Healthcare Reform:Implications for Health Delivery Discussion Notes June 2010

2. EXECUTIVE SUMMARY The healthcare reform law – summary • The CBO estimates roughly 32 million additional Americans will have health insurance by 2019. • The law creates new insurance mandates for individuals and incentives for employers to offer coverage as well as major reforms to the market and business practices of the health insurance industry. It also reinforces the ties between quality and payment and provides an environment to make progress in accountable care and wellness. There are two “waves” of coverage reforms: • This year: • Elimination of lifetime limits on benefits, restrictions on annual limits • Pre-existing condition exclusions prohibited for those 19 and younger • Rescission (cancellation) of coverage prohibited except for fraud • Age limit for dependent coverage extended to age 26 (in the next coverage year) • Temporary high risk pool for adults unable to obtain health insurance because of a pre-existing condition • Tax credits for small businesses offering health insurance • Beginning January 2014: • Guaranteed issue, elimination of pre-existing condition exclusions for all age groups • Individuals are required to obtain health coverage, fines will be assessed for non-compliance, and subsidies are available for low income individuals (up to 400 percent of the poverty line) • Rates can only vary based on age, geography, smoking status and family size; size of variation capped. • Employers are not required to offer coverage, but firms with more than 50 employees will be fined if low income employees qualify for subsidized coverage; small employers get tax incentives to provide coverage. • Essential Health Benefit Packages establish minimum benefit, coverage and cost sharing standards for affordable health coverage • Eligibility criteria and funding for Medicaid programs expanded to provide coverage for all citizens up to 133% of poverty line.

3. EXECUTIVE SUMMARY The healthcare reform law- summary • The new law also creates new requirements and reforms to improve the performance of private sector and government health care and coverage programs • Creation of American Health Benefit Exchanges (“Exchanges”) for each state or region to provide a transparent electronic marketplace for affordable coverage plans offered to individuals and small groups initially • A variety of Medicare, Medicaid and CHIP reforms in the areas of provider reimbursement and program cost structure • Reduction and then elimination of the “donut hole” coverage gap for Medicare Part D beneficiaries. Starting with $250 in 2010. • No deductable or co-pay for Medicare preventive services • New Medicare and Medicaid payment payment options that stress accountability for quality and cost reduction across the spectrum of care • An additional $310 million to fight waste, fraud, and abuse in Medicare, Medicaid and CHIP from 2011 through 2016 • Expansion of HIPAA transaction standards and mandates to promote administrative simplification and related cost reduction • By January 2011, refunds by health plans that do not meet target: Individual and small group plans medical care costs of at least 80 percent of premium and large group plans at least 85 percent.

4. March 23, 2010 • Healthcare reform signed into law • January 1, 2014 • Second wave of market reforms (insurance is guaranteed issue; plans prohibited from imposing pre-existing condition exclusions on any individuals, etc.) • By June 23, 2010 • Temporary national high risk pool established (ends in 2014) • January 1, 2011 • Medicare Advantage payment restructuring begins • PCPs and general surgeons in shortage areas receive 10% bonus (ends 2015) • Medicare A & B preventive services covered • January 1, 2014 • Medicaid eligibility expanded to include those at or below 133% FPL • October 1, 2014 • Hospitals in the top quartile of hospital-acquired conditions now subject 1% Medicare payment reduction for a given fiscal year • By January 1, 2011 • CMS Innovation Center established • March 23, 2011 • Grants for establishing Exchanges available to states • By January 1, 2015 • EFT operating rule effective • January 1, 2013 • Eligibility verification operating rule effective • By January 1, 2012 • Medicare shared savings program begins; providers can form ACOs • January 1, 2016 • Electronic claims operating rule effective • January 1, 2013 (through 2014) • Medicaid payment rates to PCPs at least equal Medicare rates 2010 2011 2012 2013 2014 2015 • October 1, 2012 • Medicare value based purchasing program begins; base DRG payment amounts reduced by 1% for all hospitals (increases to 2% by 2017) • Hospital readmission reduction program begins; maximum reduction to base DRG payment amounts is 1% (increases to 3% by FY2015) • January 15, 2014 • Independent Payment Advisory Board submits first proposal • January 1, 2014 • Individual mandate begins • Federal subsidies available for low income individuals (up to 400% FPL) • Employers subject to penalties if affordable coverage not offered and low income employees qualify for federally subsidized coverage • Plans on the individual and small group market must include “essential benefits” • Exchanges go live • January 1, 2011 • Increased funding of $310 million to combat waste fraud and abuse • September 23, 2010 • First wave of market reforms (Lifetime limits on coverage prohibited; prohibition on cancellations, etc.) • July 1, 2010 • A $250 rebate awarded to beneficiaries in the Medicare “donut hole” in 2010 Market reform Public program expansion Accountable care Administrative simplification Waste, fraud & abuse

5. Health Reform: SUMMARY Individual Mandate and Subsidies U.S. citizens will be required to be enrolled in “minimum essential coverage” starting in January 2014. • “Minimum essential coverage” includes: • A government sponsored program such as Medicare, Medicaid, CHIP or TRICARE • A plan purchased on the individual market • An employer-sponsored plan • “A grandfathered health plan”, defined as any group plan an individual was enrolled in as of March 23, 2010 • Other plans such as a state high risk pool • Individuals who are not enrolled in minimum essential coverage in any month starting January 2014 will be subject to a penalty when they file their annual tax returns • The penalty is either a flat fee or a designated percentage of household income (whichever is higher) • The total penalty will be proportional to the number of months the individual lacked coverage during the year • Individuals under 18 will be subject to half the penalty • Starting January 2014, individuals and families with incomes up to 400% of FPL will be eligible for federal subsidies to help pay for health insurance

6. Health Reform: SUMMARY “Essential Benefits” Health reform establishes a minimum standard for health insurance coverage in 2014 to address the needs of the individual and small group market segments. • Any individual or small group market plan will need to include the “essential health benefits package” (“essential benefits”), which by definition: • Includes the minimum level of standard health benefits • Essential benefits will be defined by the HHS Secretary and “must be equal in scope to the benefits of a typical employer plan” • At a minimum the essential benefits must include ambulatory services, emergency services, hospitalization, preventative and wellness services, prescription drugs, etc. • Offers one of four coverage levels (platinum, gold, silver, or bronze) plus a high deductible option for people under 30 • Options differ only by premium amount and cost sharing level • Platinum level includes the highest premium amount and lowest cost sharing level; bronze includes the lowest premium and highest cost sharing • For individuals under 30, a high deductible “catastrophic” plan will also be available • Must cover the essential benefits, but coverage (aside from at least 3 primary care visits) does not begin until a $5,950 deductible is met • Places limits on out-of-pocket spending • For individual plans, annual out of pocket spending for essential benefits cannot exceed $5,950; for a family plan, total annual out of pocket spending on cannot exceed $11,900 • Annual deductibles for employer-sponsored plans in the small group market covering an individual will be prohibited from exceeding $2,000; annual deductible for an employer-sponsored family plan in the small group market prohibited from exceeding $4,000

7. Health Reform: SUMMARY Changes to Reimbursement and Accountable Care The law makes changes to provider reimbursement and establishes programs under Medicare and Medicaid to encourage new payment models that stress accountability across the spectrum of care. • There will be significant financial incentives for provider organizations that demonstrate high-quality, tightly coordinated and efficient care. • By January 2012, providers will be able to form accountable care organizations (ACOs) and be eligible to share in any savings accrued to Medicare & Medicaid • Bundled payment pilots will be available under both Medicaid (starting in 2012) and Medicare (starting in 2013) • Medicare’s value-based purchasing program will tie a portion of reimbursement to actual performance (rather than a hospital’s ability to report) on metrics starting in October 2012 • Hospitals that limit preventable readmissions by 2012 and hospital acquired conditions by October 2014 will avoid penalties imposed by new programs • Some changes will be made to provider reimbursement. • In addition to a “productivity adjustment” for inpatient hospitals (a downward adjustment to a hospital’s market basket update to account for expected productivity gains), the law implements further market basket reductions of 0.3 in FY 2014; 0.2 in FY 2015 and FY 2016; and 0.75 in FY 2017, FY 2018, and FY 2019 • This will result in payment reductions totaling an estimated $113 billion over 10 years for inpatient hospitals • A dedicated Medicare and Medicaid Innovation Center will be established by January 2011 to test “innovative” payment and service delivery models • An Independent Payment Advisory Board will be established with the authority to impose payment cuts to Medicare if costs exceed certain thresholds starting in 2014 • 10% bonus payments will be awarded to primary care physicians and general surgeons practicing in health professional shortage areas (2011-2015) • Medicaid payment rates to primary care physicians must at least equal Medicare payment rates in 2013 & 2014

8. Health Reform: SUMMARY Accountable Care: Value-Based Purchasing Starting in October 2012, a portion of a hospital’s Medicare reimbursement will now be tied to actual performance on quality and efficiency measures. • Under the value-based purchasing (VBP) program, Medicare base DRG payment amounts for all subsection (d) hospitals will be reduced starting in October 2012. • To qualify for a value-based incentive payment, a hospital will need to meet or exceed specified performance standards in a given fiscal year. • The amount available for value-based incentive payments will equal the total reduction in base DRG payments for all hospitals in a fiscal year • Hospitals that meet or exceed performance standards for a fiscal year will receive increased base DRG payments for all discharges in that fiscal year • Hospitals with higher performance scores will receive larger value-based incentive payments • For federal fiscal year 2013, incentive payments will be tied to performance on quality measures selected by the Secretary: • Measures that cover specific conditions or procedures (AMI, heart failure, pneumonia, surgeries, healthcare-associated infections • Measures tied to HCAHPS (consumer survey) • For federal fiscal year 2014 and beyond, incentive payments will also be tied to efficiency measures, including Medicare spending per beneficiary. • HHS will make individual hospital performance scores publicly available

9. Health Reform: SUMMARY Accountable Care: Additional Inpatient Payment Adjustments The government has specifically targeted spending on preventable hospital readmissions and hospital acquired conditions as key areas for payment reductions. • Applicable conditions for hospital readmission reduction program • Federal Fiscal Year 2013 • Acute myocardial infarction (AMI) • Heart failure (HF) • Pneumonia (PN) • Federal Fiscal Year 2015* • Chronic obstructive pulmonary disease (COPD) • Coronary artery bypass graft (CABG) • Percutanueoustransluminal coronary angioplasty (PTCA) • Other vascular • *HHS Secretary to expand to the extent practicable • Starting in October 2012, CMS will establish a hospital readmission reduction program (HRRP) focused on conditions associated with high volume or high expenditures. • Reduction to base DRG payment amounts for all discharges will be based on the dollar value of each hospital’s percentage of potentially preventable Medicare readmissions for AMI, HF, and PN • Overall reduction to base DRG payment amounts for all discharges cannot exceed 1% in FY 2013, 2% in FY 2014, and 3% in FY 2015 and beyond • List of conditions will be expanded starting in FY 2015 • Information on hospital readmissions will be made publicly available • Starting in October 2014, hospitals in the highest quartile of national, risk-adjusted hospital-acquired condition (HAC) rates for a given fiscal year will be penalized 1 percent of their otherwise applicable Medicare payment for inpatient hospital services in that year. • The Secretary will have the authority to expand the policy to additional conditions in future years and will be required to calculate and make publicly available information on all patient hospital readmission rates for certain conditions

10. Health Reform: SUMMARY Accountable Care: Penalties Reductions to DRG payment amounts will add up quickly. • Changes to DRG payment amounts under the VBP program and hospital readmission reduction program (HRRP) apply to the hospital’s base operating DRG amount (i.e. the DRG payment amount prior to any adjustments made by either program) • For FY 2013, actual DRG amounts will be: • (Base DRG amount before any adjustments x adjustment factor for readmissions1) – (Base DRG amount before any adjustments x annual VBP reduction percentage2) + (Base DRG amount before any adjustments x VBP bonus percentage3) • Reductions to DRG payment amounts under the hospital acquired condition (HAC) program apply to the hospital’s base operating DRG amount after adjustments under VBP and hospital readmission program have been applied. • For hospitals in the top quartile of HACs in FY 2014 and beyond, actual DRG amounts will be: • 0.99 x [(Base DRG amount before any adjustments x adjustment factor for readmissions1) – (Base DRG amount before any adjustments x annual VBP reduction percentage2) + (Base DRG amount before any adjustments x VBP bonus percentage3)] • The maximum reduction to a hospital’s base operating DRG amount will total almost 6 percent by FY 2017. 1Between .99 and 1.00 in FY13; between .98 and 1.00 in FY14; between .97 and 1.00 in FY15 and beyond 21% in FY13; 1.25% in FY14; 1.5% in FY15; 1.75% in FY16; 2% in FY17 and beyond 3Based on hospital’ performance score under VBP program

11. Health Reform: SUMMARY A Significant Decrease in People Without Health Insurance The CBO estimates that the individual mandate and expansion in Medicaid eligibility will result in roughly 18 million newly-insured Americans in 2014 alone -- and an additional 11 million in 2015 and 2016. Projected Number of Non-Elderly Adults Without Health Insurance in the U.S., 2011-2019 • January 1, 2014 • Individual mandate and new employer requirements begin • Medicaid eligibility expanded to include those at or below 133% FPL • Second wave of market reforms (insurance is guaranteed issue; pans prohibited from imposing pre-existing condition exclusions on any individuals, etc.) • Exchanges go live Source: CBO.gov, March 20, 2010

12. Health Reform: SUMMARY Combating Waste, Fraud, and Abuse (WFA) The law includes provisions to fight fraud and improve the program integrity of Medicare, Medicaid, and CHIP. • Increased funding to fight fraud and abuse (and increased penalties) • The legislation appropriates $310 million additional funding for 2011 through 2016 • Civil monetary penalties of up to $50,000 per violation for committing fraud or abuse • States are required to terminate entities from Medicaid if they are terminated from Medicare • Provider screening and new enrollment requirements: • The Secretary and OIG will establish appropriate procedures for screening providers and suppliers • Beginning March 23, 2011, providers must disclose affiliations with suspended providers and suppliers • Providers and suppliers must adopt their own internal compliance programs to reduce WFA • By January 1, 2011, the Secretary will release a rule requiring providers to use their national provider identifier (NPI) at all times • Other provisions designed to improve program integrity: • The OIG and DOJ will be given access to the claims and payments data of HHS and its contractors • The RAC program will be expanded to Medicaid to identify state Medicaid overpayments • The Secretary and HHS Inspector General will establish a self-referral disclosure protocol (SRDP) • Physician-owned hospitals that do not have a provider agreement in place by December 31, 2010 will be prohibited from participating in Medicare • New requirement to report and repay Medicare and Medicaid overpayments: • If a person becomes aware of an overpayment, then within 60 days the person must report and return the overpayment, and notify the entity of the reason for the overpayment • The period for submitting Medicare claims is reduced from 36 months to 12 months (eff. Jan. 1, 2010)

13. Health Reform: SUMMARY Administrative Simplification Health reform will standardize administrative transactions and the implementation of operating rules in an effort to improve interoperability. • The Secretary will adopt a standard set of financial and administrative transactions to achieve: • Price transparency at the point of care, or prior to care • Eligibility checking (specific to physician, facility, and date) • Real-time adjudication of claims • Timely status reporting for electronic transactions • Consistent data elements (i.e. no ambiguous terms or optional fields for reason or remark codes) • The HHS Secretary is required to adopt three new sets of operating rules: • Health plans must become certified by adopting the new standards or else face penalties • By April 1, 2014, the Secretary will begin assessing annual penalties • The penalty amount will be $1 per covered life per day until the health plan is certified • The penalty will accumulate up to a limit of $20 pcl (or $40 pcl if plan knowingly misled HHS)

14. Health Reform: SUMMARY Other Provisions to Improve Quality and Access to Care • Create process for developing quality measures (strategy due to Congress by January 2011) • Five-year funding beginning in January 2011 and continuing for five years to support consortiums of providers to coordinate services for low income, uninsured and underinsured. • Fund a five year grant program beginning in FY2010 to support delivery of evidence based , community based prevention and chronic disease management-especially in rural areas. • Increase funding for community health centers and National Health Service Corp by $11 billion. • Fund a new program to strengthen trauma care, develop demonstration programs on new models for emergency care (including pediatric emergency care)

15. Health Reform: SUMMARY Other Provisions • Brand name pharmaceutical companies • To help pay for reform, the federal government will impose new fees on branded prescription pharmaceutical manufacturers and importers: • $2.8 billion in 2012-2013; $3.0 billion in 2014-2016; $4.0 billion in 2017; $4.1 billion in 2018; $2.8 billion in 2019 and beyond • The FDA will be authorized to approve generic versions of biologic drugs and grant biologic manufacturers 12 years of exclusive use before generics can be developed (effective upon enactment) • Employers • Five year funding for grants to small employers for wellness programs (begins January 2011) • Conduct a national workplace survey of policies and programs, provide technical assistance and resources to evaluate employer-based wellness programs. • Allow employers to offer discounts to employees that participate in health related activities. • Health Coverage Co-ops (“Co-ops”) • Co-ops will provide coverage through an Exchange • A co-op must be not-for-profit, primarily engaged in provide health care coverage, licensed by the State in which they do business, and made up of members who are beneficiaries of the insurance coverage • Grants will be available to assist with co-op formation and start up costs beginning September 23, 2010

16. Health Reform: SUMMARY The Massachusetts Plan The national health reform law is very similar to the one passed by Massachusetts in 2006. • In 2006, Massachusetts already had many of the market reforms included in the national law already in place (guaranteed issue, elimination of pre-existing condition exclusions, etc.) and had relatively low number of uninsured. • Similar to the requirement in the national health reform law, all adults in Massachusetts must be enrolled in a minimum level of benefits during a given year or face a fine on their annual tax return • Both the Massachusetts law and the national law include subsidized coverage options to low-income adults who are ineligible for Medicaid • Both laws include penalties on employers over a certain size that fail to offer employees affordable coverage and whose employees qualify for subsidies • The Massachusetts law established an online health insurance exchange called the Commonwealth Connector to improve access to coverage in the individual and small group market; under the national law Exchanges will be required in every state or region by 2014 • According to the Massachusetts Division of Health Care Finance and Policy, only 2.7 percent of Massachusetts residents were uninsured in 2009. (Massachusetts Division of Health Care Finance and Policy, October 2009)

17. Health Reform: SUMMARY Key Findings from Massachusetts Although almost all residents in Massachusetts now have health insurance, the increase in demand has strained capacity. • More low income residents have access to care, but the influx of new patients has put a strain on providers, particularly on the outpatient side • By the fall of 2008, more than 87 percent of low-income adults in Massachusetts reported having a usual source for care other than the emergency room, an estimated increase of roughly 102,000 people from the fall of 2006. • However, only 44 percent of internal medicine practices in the state reported accepting new patients in 2009, down from two thirds in 20051 • In response to the surge in demand, Massachusetts carriers are required to allow nurse practitioners to act as PCPs • Emergency department use did not change post-reform • ED use remains unchanged and many residents continue to visit the ED for non-emergency conditions • Among working age adults who had at least one ED visit between the fall of 2007 and the fall of 2008, 44 percent said their last ED visit was for a condition that “could have been treated by a doctor had one been available.” • There are no indications that the availability of more comprehensive individual options has caused employers to stop offering health insurance • 71 percent of Massachusetts adults were enrolled in employer-sponsored coverage in the fall of 2008, up from 69 percent in the fall of 2007 and 66 percent in the fall of 2006 • Public opinion of the law remains favorable overall http://www.massmed.org/AM/Template.cfm?Section=Home6&CONTENTID=31511&TEMPLATE=/CM/ContentDisplay.cfm For more information on the Massachusetts experience : http://assets1.csc.com/health_services/downloads/CSC_Health_Insurance_Reform_in_Massachusetts.pdf

18. Implications/Advice to Clients

19. Implications/Advice to ClientsHealth Delivery Organizations

20. Implications/Advice to Clients: Health Delivery Organizations Health Delivery Implications The most obvious impact of health reform is 32 million more people seeking care • The addition of 32 million people with insurance coverage will exacerbate the existing capacity shortage – especially in primary care. • 16 million new Medicaid patients and 15 million patients under the mandate will enter the system. • 18 million new people entering in 2014, then gradual increase to 32 million by 2019 • Most patients will be new to the “system” and require help becoming effective users. • Many will have unaddressed health issues; at least half will be at Medicaid rates. • This will immediately create an even more severe shortage of primary care providers. • 32 million patients equals a need for at least 11,000 more PCPs, and an approximately 10-20 percent increase in demand for specialty care and hospitalization. • Without PCPs, these patients will seek care in the Emergency Department.

21. Implications/Advice to Clients: Health Delivery Organizations Health Delivery Implications “Savings” in Medicare = cuts in reimbursement • The CBO predicts that reductions in annual updates to Medicare fee-for-service rates will total $196 billion through 2019. • In addition to a “productivity adjustment” for inpatient hospitals (a downward adjustment to a hospital’s market basket update to account for expected productivity gains), the law implements further market basket reductions of 0.3 in FY 2014; 0.2 in FY 2015 and FY 2016; and 0.75 in FY 2017, FY 2018, and FY 2019. • Over the next ten years hospitals are projected to absorb $113 Billion in Medicare adjustments; home health $40 Billion. • The law did not make any overall changes to Medicare payments to physicians (so in theory a big [21%] cut is still looming – and built into the economic assumptions) • The law does provide an short term increase in Medicaid payments for primary care; they will be raised to equal Medicare rates for two years (2013 and 2014). There will also be a 10 percent Medicare bonus for primary care and general surgeons in shortage areas for 2011-2015.

22. Implications/Advice to Clients: Health Delivery Organizations Quality performance has a potentially much larger impact on reimbursement than the market basket and productivity adjustments. Health Delivery Implications • New requirements for quality performance for full Medicare reimbursement starting in 2013 • All Medicare DRG payments reduced 1-2 percent starting in October 2012 • Increased DRG payments for all DRGs if meet/exceed quality performance targets for specific conditions • Potential for 1-3 percent reductions in DRG based on readmission rates • Up to 1 percent reduction if in the worst quartile for hospital acquired conditions • Allows Accountable Care Organizations to share in Medicare savings starting in 2012 • Bundled payments: Medicaid (starting in 2012) and Medicare (starting in 2013) • Accountable care organizations with shared savings (Medicare and Medicaid starting in 2012.)

23. Implications/Advice to Clients: Health Delivery Organizations The net for health delivery Health Delivery Implications • Many new patients demanding care • Need to expand capacity without raising costs • Everyone “work to license” • Charity care will be reduced – not eliminated (individual penalties are low, some will not know how to sign up, illegal residents are not eligible for insurance coverage.) • Provider’s reimbursements will be the first target to make up for any cost increases. • New patients will be at low reimbursement • Need to ensure quality performance to get bonuses • Providers who can make accountable care work will win – in both the short and the longer term. • Quality performance will have a big impact on reimbursement

24. Implications/Advice to Clients: Health Delivery Organizations Advice to Health Delivery Organizations-Immediate Actions • Double down on throughput improvements to increase capacity • Accelerate quality efforts starting with specified conditions • Reduce readmissions, redesign process to exceed quality standards • Make quality data a by-product of care • Use data for real-time improvement • Align with physicians (and physician incentives) to coordinate care • Leverage every provider to work to license • Move as quickly as possible to increase PCP capacity (including non-physician PCPs) • Plan for health reform, ICD-10, and meaningful use together • Make sure ED and PCPs are meaningful users of EHRs before 2014 • Code for quality measures with ICD-10 or SNOMED

25. Implications/Advice to Clients: Health Delivery Organizations Expand your thinking of your role for the longer term Advice to Health Delivery Organizations • Help patients understand reform, sign up for coverage, get PCPs – avoid ED visits • Exploit opportunities to improve wellness in the community • Organize to manage chronic disease, manage episodes of illness • Collaborate with commercial health plans to implement new models of care and reimbursement • Think like an accountable care organization – while you organize to be one.