Summary of the U.S. Healthcare Reform Initiative

FOR MANY OF US, the whirl of news about health- Senate Finance Committee continues to work to find care reform has left us somewhat unclear as to what it a bipartisan compromise before unveiling its bill. means. The bills that are currently being drafted and The House Ways and Means, Energy and Commerce, considered by committees of the U.S. House of and Education and Labor Committees have each Representatives and the U.S. Senate are complex and, approved the portion of the House healthcare reform if passed, will have far-reaching consequences bill within their respective jurisdictions. The com- throughout the and perhaps interna- mittee with the most significant jurisdiction in the tionally. Healthcare reform legislation has the poten- House, Energy and Commerce, is continuing with its tial to fundamentally impact how we deliver, pay, and mark-up. The committees have chosen to address insure for healthcare, and, for the first time, may the principal issues in ways that are both different and afford near-universal access to U.S. citizens. As a similar and which are discussed below. result, healthcare reform legislation may be more Access and Affordability significant than the employer-based healthcare In 2009, it is estimated that expenditures upon benefit system developed after World War II or the healthcare within the U.S. will total approximately enactment of legislation that created the Medicare $2.5 trillion or $8,160 per person. This sum repre- and Medicaid programs in the mid-1960s. At the sents 17.6% of total U.S. economic output and is same time, the prospect of healthcare reform presents more than any other major economic power in the significant opportunities and challenges to businesses, world spends on healthcare. By contrast, the U.K. employees, their families, the uninsured, insurers, spends $2,723 per person or 8.3% of its economic healthcare providers and their suppliers, which will output, while for Japan the numbers are $2,358 per remain with us for many years. person and 8% of economic output. Yet, despite this It is easiest to understand the current healthcare extraordinary expenditure of dollars, the U.S. lags reform initiative as a set of three principal issues, behind many countries in life-expectancy and meas- including: (i) Access and Affordability; (ii) Funding ures of good health, and is one of the few major and Cost Savings; and (iii) Sustainability. economic powers not to afford its citizens universal Several committees within the U.S. House of access to healthcare services. It is estimated that Representatives and the U.S. Senate are charged with approximately 46 million U.S. citizens are without drafting the healthcare reform legislation. On the healthcare insurance coverage.1 As part of the health- House side, the chairmen of the committees on Ways care reform initiative, various proposals have been and Means, Energy and Commerce, and Education put forward to address the issue of access including pro- and Labor worked together to produce one bill, the posals for insurance reform, expansion of Medicaid, relevant pieces of which were reviewed in the com- and a public healthcare insurance option. Proposals mittee of jurisdiction. On the Senate side, the for health insurance reform have included, among Finance Committee and the Committee on Health, Education, Labor and Pensions (“HELP”) are drafting 1. The number is somewhat misleading since it includes illegal aliens, separate healthcare reform bills. The Senate HELP healthy young adults who choose not to carry health insurance and Committee has completed its markup of legislation individuals who are eligible for Medicaid but chose not to participate in the program. The number also does not reflect those who are los- that encompasses the areas within its jurisdiction. The ing healthcare coverage as a result of the current economic downturn.

© 2009, BLANK ROME LLP. Notice: The purpose of this supplement is to review the latest developments which are of interest to clients of Blank Rome LLP. The information contained herein is abridged from legislation, court decisions, and administrative rulings and should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel. One Logan Square • Philadelphia, Pennsylvania 19103-6998 • 215.569.5500 others, a prohibition upon exclusions for pre-existing individuals whose income does not exceed 133% of conditions; a restriction upon premium ratings based the federal poverty level ($14,400 per individual or on gender, health status, or occupation; a limitation $29,330 per family of four). Since roughly half of upon the portion of premium dollars that may be Medicaid expenditures are borne by the states, the used for administrative expense; a requirement of fiscal impact of expansion is unclear. Many governors, guaranteed availability and coverage; and a prescribed both Democrat and Republican, have expressed con- minimum set of benefits. Health insurers that satisfy cern that the expansion will constitute an unfunded these requirements, along with other requirements, mandate that the states can ill-afford during this time would qualify to compete for subscribers through of economic downturn and strained state budgets. health insurance exchanges. To guard against adverse Both the House and Senate proposals include selection, a system of risk adjustment would be devel- penalties for employers and individuals who do not oped for plans with actuarial risk above and below purchase insurance, with certain hardship exceptions. the actuarial risk of all health plans participating in Employers with greater than 25 employees must offer the exchange. insurance or contribute funds on their behalf or pay Proponents of healthcare reform argue that com- a penalty of either a fixed fee per employee (Senate petition among plans participating in exchanges HELP) or payroll tax equal to 8% of the cost of the would encourage further reform by allowing employer’s payroll (House). Similarly, under the indi- for different benefit levels among plans as well as vidual mandate, individuals who do not maintain rewarding healthcare plans that are able to realize cost health insurance are subject to a penalty fee (HELP) savings through programs that encourage both or 2.5% tax on “modified” adjusted gross income efficiencies and improvements in the quality of (House). The penalties create a disincentive for failing healthcare delivery. A criticism of the health insur- to procure health insurance. ance exchanges is that they include a firewall that In addressing the principal issue of access, the precludes participation by individuals already eligible most contentious proposal has been whether health- to participate in an employer-sponsored plan. By care reform requires a public option to compete with limiting participation in the exchanges, there is con- private insurers in the exchanges. That is, whether the cern that the effect will blunt the benefits anticipated federal government should establish a public healthcare from competition among health insurers. insurance option available to anyone who qualifies to Many employers have found self-insurance as a purchase insurance in the newly-established exchange cost-effective way to provide employee health benefits system. Basically, this would include individuals who coverage. Such arrangements are expressly permitted are not insured and do not have access to employer- under ERISA and U.S. tax laws. The House bill sponsored plans and those who do not otherwise requires the Departments of Labor and Health and qualify to participate in the Medicare or Medicaid Human Services to conduct a study and report back programs. To ensure access, the public option would to Congress within eighteen months with recommen- make government subsidies available to individuals dations to protect against adverse selection in self- whose income levels fall below certain specified levels. funded health benefit programs. Proponents of the public option argue that it would An expansion of the Medicaid Program has also encourage competition among health benefit plans been proposed to allow individuals and families who which, in turn, would lead to cost savings through pro- are above the poverty level, but unable to afford grams that encourage both efficiencies and improve- health insurance, to participate in Medicaid. One ments in the quality of healthcare delivery. proposal would extend the Medicaid Program to

2 Opponents argue that a public plan would unfairly Funding and Cost Savings compete with private plans by mandating rates that In pressing a healthcare reform initiative, the are at or slightly above Medicare rates. In addition, a President and Congress have been insistent on identi- public plan would not have to raise initial capital and fying the funding and savings that would pay for would be able to utilize the existing infra- healthcare reform so as not add to the budget deficit. structure of Medicare. The Director of the Con- The CBO pegged the cost of the initial proposals for gressional Budget Office (“CBO”) testified recently healthcare reform at $1.6 trillion over ten years. that the inclusion of a public healthcare plan signifi- However, revisions to these proposals have reduced cantly expanded federal government responsibility this projection to slightly over $1 trillion over ten for health care costs in the long term—costs the CBO years, which would be paid for through a combina- Director termed unsustainable. tion of tax increases and cost savings. Criticism of the overall cost of the reform bills Proposed tax increases have come in various has led to various proposals to offset their cost. In an forms. The House bill proposes a surtax ranging effort to gain bipartisan support for healthcare between one and 5.4% on U.S. taxpayers earning reform, the Senate Finance Committee has labored more than $280,000 per year ($350,000 for those who to develop an alternative to the public option. One file jointly). However, other proposals to increase proposal under consideration is the creation of taxes have been suggested. The White House has pro- private-sector cooperatives. In these cooperatives, posed limiting the itemized deductions of individuals prospective subscribers with some direction and/or earning over $250,000 per year. Another proposal financial assistance from the federal government would would tax health benefit programs that exceed an join together to underwrite their healthcare and con- agreed cost with a possible carve-out for union health tract directly with providers on terms of payment. plans. This proposal may include a further limit on Senator Wyden has proposed in separate legisla- tax benefits available through employer-sponsored tion an alternative to the current health reform bills. flexible spending accounts. Under what Senator Wyden calls the Free Choice Costs savings are anticipated to come in the form proposal, health insurance exchanges would be open of Medicare payment reform, programs to improve to all individuals. Those employees dissatisfied with the efficiency and quality of healthcare delivery, and coverage offered through their employer would be programs to combat over-utilization, waste, fraud, entitled to cash out of their employer plan and would and abuse. With regard to the former, pharmaceutical receive a voucher to purchase coverage through a manufacturers have announced that they will find health insurance exchange. The amount of the voucher savings of $80 billion over ten years, and would be based upon the cost of the lowest level of have agreed to $155 billion in reimbursement cuts insurance offered by the exchange and the percentage over ten years. Some members of the Senate Finance of premium paid by the employer under its current Committee have called for similar concessions from health plan. There is concern, however, that the pro- insurers or have suggested imposing fees on health- posed legislation would leave employer-based plans care insurers. Other savings are anticipated from a burdened with older and sicker beneficiaries. Senator reduction in payment levels to Medicare managed Wyden argues that a risk of adverse selection can be care plans and a new payment system tied addressed through a system of risk adjustment. to growth in the Gross Domestic Product. It is inter- esting, and perhaps unprecedented, that a coalition of

3 physician groups, including the American Medical also result in a healthcare system, which over the Association at the national level, has announced sup- long-term is economically sustainable. port of healthcare reform generally and the public The healthcare reform initiative addresses the option specifically. issue of sustainability in two ways. First, healthcare Finally, the White House has sent a proposal that reform makes the assumption that a healthier public would replace the Medicare Payment Advisory will consume fewer healthcare resources and prove Commission (MedPAC) with an independent advisory less costly to treat. The healthcare reform proposals, council. Unlike MedPAC which only advises Congress therefore, put an emphasis upon wellness and preven- on issues affecting the Medicare program, this new tion. For example, the HELP bill provides for a council would have authority to set Medicare reim- voluntary insurance program for services bursement rates subject to the approval of the that will encourage those with certain to President. Congress could overturn action of the continue to live independently and avoid the more council only upon joint resolution. costly alternative of home care and the indi- Cost savings from programs to combat over- gency that “spending-down” for Medicaid eligibility utilization, waste, fraud, and abuse are more difficult often entails. to quantify. For example, it is anticipated that cost The second way that the healthcare reform initia- savings would be realized as a result of the uninsured tive seeks sustainability is through encouraging quality having access to lower cost, healthcare provider set- and efficiency in healthcare delivery. Under the tings and no longer relying upon emergency current healthcare system, most healthcare informa- rooms for treatment. However, these savings are diffi- tion is not compiled mechanically or in a manner cult to quantify, and it is possible that any savings that makes it readily accessible. As a result, the abili- would be offset by an increase in utilization as a result ty to share healthcare information, even information of the additional coverage afforded as a result of that is not specific, is limited. For example, healthcare reform. coordinating care among healthcare providers can be There has been some discussion of the increased difficult without an ability to share readily a patient’s cost that comes from “defensive ” practiced medical record. It is also very difficult under the pres- as a result of the tort system that exists among the ent system to evaluate one modality of care over states. Tort reform proposals have not been included another. This, in turn, precludes studies that evaluate in the healthcare reform proposals. efficacy and cost. Similarly, it is very difficult to Sustainability explain why the cost of healthcare varies among different geographic regions of the country. The third principal issue in healthcare reform is The first step in remedying the current situation sustainability. As noted earlier, some studies have was contained in the American Recovery and shown that the U.S. healthcare system is more costly Reinvestment Act of 2009 (the Economic Stimulus), and less effective in terms of life expectancy and other which provides federal funds for research to compare measures of good health than the healthcare systems the effectiveness and quality of alternative modalities of other developed countries. More importantly, of care and further encourages healthcare providers to ongoing increases in the cost of U.S. healthcare are convert to systems of electronic medical records. The not sustainable. The challenge of healthcare reform, healthcare reform initiative continues this effort therefore, is two-fold. First, it must provide sources of with provisions designed to lead to efficiencies, cost funding and cost savings that, in time, improve access savings, and quality improvements that, in turn, will and affordability. Second, healthcare reform must

4 make the U.S. healthcare system as envisioned under the healthcare reform initiative must address payment the healthcare reform initiative sustainable. Toward reform as well as efficiency, quality, wellness, and pre- this end, the Senate HELP Committee bill provides vention. Concerns expressed by the and for the establishment of a Center for Health Intermountain Health are especially noteworthy. Outcomes Research and Evaluation within the Their manner of healthcare delivery, which has been Agency for Healthcare Research and Quality. The termed the accountable care model, relies upon coor- purpose of the Center is to foster research with dinating a patient’s care among various providers respect to comparing healthcare outcomes, effective- compensated on a salaried or similar basis as opposed ness, and appropriateness of healthcare services and to a fee for each service, and has been held up as the procedures in order to identify the most effective healthcare delivery model through which cost sav- manner of prevention, diagnosis, treatment, and clin- ings, efficiency, and high quality will be realized ical management of and disorders. under healthcare reform. It is unclear, however, whether the healthcare Finally, there is Massachusetts, which three reform initiative does enough to reduce the cost of years ago enacted a healthcare reform plan that healthcare within the U.S. and thereby ensure sus- included universal access through subsidies and tainability. As mentioned earlier, Douglas Elmendorf, employer and employee mandates. Despite reform, the director of the CBO, has noted that the proposals healthcare costs in Massachusetts have continued to of the House and the HELP Committee may not real- rise at an annual rate of 6-9%. To remedy this situa- ize the projected cost savings and may not reign in tion, a commission appointed by the Massachusetts the cost of healthcare within the U.S.. legislature has recommended payment reform that Well respected medical providers such as the would eliminate reimbursement on the basis of a fee Mayo Clinic and Intermountain Healthcare also have for service, and would replace it with a global pay- expressed concern about the House and HELP ment that is similar to monthly capitation payments healthcare reform proposals. They have made the in an HMO. The lesson from Massachusetts is that point that to achieve a sustainable healthcare system, for healthcare reform to be sustainable, it must include provisions that address payment reform as well as quality, efficiency, wellness, and prevention. In sum, the healthcare reform initiative is historic in its significance. It has the potential to fundamen- tally impact how we deliver, pay, and insure for healthcare as well as affording, for the first time, near- universal access to U.S. citizens. Identifying funding and savings is an additional goal of the healthcare reform initiative. Finally, it is important that the healthcare reform initiative leads to a system that is sustainable over the long term. To do so, payment reform as well as an emphasis upon quality, efficiency, wellness, and prevention will be required. — By Lewis J. Hoch

For additional information, please contact: Lewis J. Hoch 215.569.5542 • [email protected]

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