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President Barack Obama
“I agree with Democrats and Republicans that the aging population and the rising cost of healthcare makes Medicare the biggest contributor to our deficit. I believe we've got to find ways to reform that program without hurting seniors who count on it to survive. And I believe that there is further unnecessary spending in government that we can eliminate. But we can't simply cut our way to prosperity.”

—President Barack Obama, at a
Jan. 1 news conference

More cliffs ahead

Providers brace for additional budgetary and regulatory challenges emanating from Washington

By Rich Daly and Jessica Zigmond
Posted: January 12, 2013 - 12:01 am ET

This year was anticipated as the final dash toward the 2014 rollout of the healthcare reform law's major provisions. But the healthcare industry is also coming to the realization that 2013 will probably be remembered for more fiscal fights and deep federal cuts.

Many of the prominent healthcare developments in the months ahead are expected to center around coming federal and state regulations that will provide final details for the major provisions of the Patient Protection and Affordable Care Act that finally take effect next year.

Several of those regulations are expected to clarify details of the coming state health insurance exchanges, a central pillar of the 2010 reform law that will provide insurance coverage for an estimated 25 million Americans by 2022, according to the latest projection from the Congressional Budget Office.

A key component of the exchanges is “essential health benefits,” or the package of required coverage and cost-sharing limitations for health insurance plans sold through those marketplaces. Proposed rules detailing the essential health benefits issued in November are drawing concerns from insurers that some provisions could sharply reduce the number of people seeking exchange-plan coverage because plans are required to include costly benefits and limit cost differences because of age.

“Unless coverage is affordable, younger and healthier people may choose to forgo purchasing insurance until they are sick or injured,” regardless of the penalties for not having insurance under the individual mandate provision, Daniel Durham, executive vice president for policy and regulatory affairs at America's Health Insurance Plans, wrote to HHS. “If that happens, costs will increase for everyone.”

Dan Mendelson, CEO of Washington-based Avalere Health, says he expects that a lot of energy in the health sector this year will focus on exchange health plans contracting with providers and drugmakers. The number of such contracts that have been completed is unknown, but so far those negotiations have surprised hospitals, he says, because the narrower profit margins expected for exchange plans have driven tough negotiations.

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“The health plans are trying to make them as competitive as possible so that they can keep their rates lower and so that they can attract customers with a low premium in a competitive marketplace,” Mendelson says.

This year also will see a range of operational rules from states that launch their own health insurance exchanges. Federal rules allow states to select a benchmark plan that covers all conditions and treatments required by state law. That is drawing concern from the American Medical Association, which says it could drive up plans' costs and thereby cut coverage expansions.

“The success of exchanges to a large extent will depend on ensuring the right balance between an appropriate package of benefits and the affordability of premiums and cost-sharing,” Dr. James Madara, executive vice president and CEO of the AMA, wrote in a Dec. 21 letter to the CMS on those proposed rules.

Meanwhile, many healthcare advocacy organizations are focused on lower-profile rules expected this year that could have an outsized impact on their members.

Pharmaceutical companies are anticipating the release of the final rule for the Physician Payment Sunshine Act, which will require disclosure of device and drug company funds flowing to clinicians. Ceci Connolly, managing director of PricewaterhouseCoopers' Health Research Institute, says many of the companies her firm represents have already implemented several of the changes included in proposed regulations for the law, such as tracking and publicly reporting details on their physician payments.

“We know they've already been moving in that direction and changing their practice for some time, so the final rule is probably a bit more of a detail,” she says.

Hospitals are focusing on rules that will detail the way the CMS will derive savings under the healthcare overhaul, which are independent of fiscal fights expected this year. Rules also will detail the implementation of hospital cuts required under a recent deal to delay for one year a cut in Medicare's physician payment formula. The annual inpatient prospective payment system update is expected to detail the health law's $11 billion shift in disproportionate-share hospital payments, based in part on changes in the definition of uncompensated care.

“It's very technical, but it's going to shift a lot of money around for our members,” says Ashley Thompson, vice president and deputy director of policy at the American Hospital Association.

Hospitals and other providers also are hopeful that 2013 will include the long-awaited release of Food and Drug Administration final regulations implementing the unique device identifier provision for medical implants. The AHA and Premier healthcare alliance wrote the FDA in November urging accelerated adoption of a proposed rule implementing the program, which was required under a 2007 law to identify most medical devices with a designated code.

Earlier implementation deadlines contained in the statute have been missed, but the proposed rule suggested a seven-year rollout. Hospitals hope that can be reduced in a final rule to three years.

It also remains possible that HHS could issue more regulations that the healthcare industry has not yet anticipated.

“We don't know how many rules are outstanding because of the way that the Affordable Care Act is written,” Connolly says about wide discretion the law gives to the HHS secretary.

On the chopping block

Senate Minority Leader Mitch McConnell (R-Ky.)
“The trustees of Medicare and Social Security say that Medicare is going to tank in 10 years. The question is, are we going to preserve these programs for future beneficiaries? The president should be leading, not being dragged to the table by Republicans who want to solve the biggest problem confronting the future of our nation.”

—Senate Minority Leader Mitch McConnell (R-Ky.),
Jan. 6, on NBC’s “Meet the Press”

Simultaneously, this year also will likely be known as a time of deep provider cuts.

Newly implemented Medicare hospital cuts could spawn layoffs as providers look to reduce costs in case uncompensated-care savings do not materialize next year, says Ken Perez, MedeAnalytics' director of healthcare policy. An estimated $36 billion in hospital cuts required by a combination of provisions of the reform law, one-year physician pay patch offsets and the specter of looming program changes—whether the federal sequester goes forward or is replaced—have already led about 20 large hospitals and health systems to cut at least 3,000 employees, mostly nurses, he says.

“It's an unintended consequence of the reimbursement cuts and then the delay in the (coverage) expansion not starting until a year later,” Perez says.

It's a trend he sees accelerating over the year as hospital finance officers analyze the new Medicare margins once program reductions go into effect.

“I would suggest that at the end of the first quarter there will be a wake-up call for a lot of health systems,” he says.

As the healthcare industry awaits—and eventually implements—the regulations, they face a federal legislative backdrop that promises more political divisiveness and a slew of intense budget battles expected to bring additional hits to federal healthcare programs.

“We fixed one of the fiscal cliffs, but there seems to be a series of more coming our way,” says the AHA's Thompson. “This causes a lot of uncertainty for our members. Are there going to be more cuts? What's going to happen?”

With the latest fiscal hurdle cleared on New Year's Day, the next round of budgetary skirmishes in Washington will surface almost immediately and more could extend throughout the year. Ilisa Halpern Paul, managing director of government relations at Drinker, Biddle & Reath, says she thinks of Washington's fiscal outlook this year as a mosaic, with each individual budget fight a separate tile in the full picture.

First up will be federal negotiations to raise the nation's federal debt ceiling so the U.S. can continue to meet its financial obligations. The nation reached its debt limit Dec. 31 and the Treasury Department has since relied on emergency borrowing authority. Just last week, the Bipartisan Policy Center, a Washington-based think tank, estimated the country will be unable to pay all of its bills as early as Feb. 15.

The debt-ceiling debate will run concurrently with discussions to address the sequester, the automatic federal spending cuts originally set to take effect Jan. 1 that Congress postponed for two months in its recent “fiscal cliff” compromise. During that time, Congress has the additional task of funding the government throughout the remainder of 2013, as a current resolution covering 12 spending bills is set to expire March 27.

“It's like walking, chewing gum, quoting Shakespeare and singing an aria,” Halpern Paul says of the financial puzzles Congress and the Obama administration will try to solve. She also emphasized that the the expiring continuing resolution often gets overlooked because of the larger debt-ceiling and sequester issues. But it shouldn't, given that government agencies won't receive funding unless Congress keeps the government running through Sept. 30.

“Unfortunately, in this environment, nothing is safe—even NIH, which has enjoyed broad, bipartisan support,” Halpern Paul says, referring to the National Institutes of Health. “Given the overarching deficit-reduction mentality, I think there is a philosophy of some that everybody has to give a little. I think nobody is going to be exempt from anteing into the pot,” she says. “Those of us who have long advocated for research and public health are particularly worried.”

Eric Zimmerman, a partner with McDermott Will & Emery, warns that the Medicare programs that were spared cuts in the recent fiscal-cliff deal—namely payments for bad debt, graduate medical education, critical-access hospitals and evaluation and management services—will resurface in the 2013 debt talks. E&M services generated interest as a cost-cutting measure especially after the Medicare Payment Advisory Commission suggested a reduction in those payments in the panel's March 2012 report to Congress. MedPAC recommended that Congress direct HHS to reduce payment rates for E&M office visits provided in hospital outpatient departments so that payment rates are equal whether the services take place in a physician's office or hospital outpatient department.

“I think E&M will be talked about a great deal” in upcoming negotiations, says Dan Boston, executive vice president and partner at Health Policy Source, a Washington-based consulting firm. And while he says hospitals were successful in maneuvering around this issue in the just-ended fiscal-cliff discussions, he thinks this payment area has implications beyond hospitals.

“It's not a hospital payment issue, but an integrated-delivery issue. If we're moving toward more integration and more coordination of care and holding folks accountable, you can't cut them for that,” he says. “What the federal government can do is make sure that the people receiving the benefit are meeting the criteria.”

Above the various budget discussions hangs the cloud of entitlement reform, a top priority for Republicans in Congress. New statistics from the federal government last week underscore why many lawmakers have pushed hard to address reforming Medicare: U.S. healthcare spending grew at a rate of 3.9% for the third consecutive year, and represented the lowest growth rate in the 52 years since the data have been reported. Meanwhile, Medicare spending grew at a rate of 6.2% in 2011, up from 4.3% in 2010.

“If nationally healthcare expenditures are at 3.9%, but Medicare is 6.2%, the government should be more efficient—or at least not as inefficient as 160% higher than healthcare spending,” Boston says.

Serious discussions about entitlements would consider larger, structural reforms to the decades-long Medicare program, such as raising the eligibility age to 67 from 65; expanding means-testing for beneficiaries; re-evaluating the premium and cost-sharing structure across parts A, B and D; and implementing a defined-contribution system like the premium-support, or voucher, model that House Republicans favor. But with Congress and the Obama administration so far apart politically, is it realistic to think 2013 will yield any substantive changes on this front?

“My view is that they are not there and it will take a crisis far more stark to get them to the table for these major reforms,” says Don Moran, founder of the healthcare consulting firm the Moran Co. and former executive associate director at the Office of Management and Budget during the Reagan administration.

Tom Scully, a former CMS administrator, says he expects lawmakers to come up with a deficit-reduction deal, but it won't be big. The larger, structural reforms to Medicare will take place, he surmises, only if Congress agrees on a massive deficit-reduction deal that includes tax reform.

“1990 and 1997 were giant budget deals—and that's what you're talking about,” says Scully, now a senior counsel at the law firm Alston and Bird. “I don't right now see that coming together, given the politics.”

TAKEAWAY: Fiscal deals still to be hashed out and the ramifications of any entitlement reforms enacted will add to provider anxiety.

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