Reform will boost health care costs, Indianapolis panel predicts

October 2, 2010
Easterday Easterday

Six months after health reform passed, the new law is redefining the worlds of health care, insurance and benefits. Six local experts discussed what the law means during IBJ’s Power Breakfast Sept. 10 at the Westin Indianapolis.

The panelists:

Tom Easterday, executive vice president, secretary and general counsel at Subaru of Indiana Automotive in Lafayette.

Heitzman Heitzman

Linda Heitzman, director at Deloitte Consulting, has consulted for nearly a dozen major pharmaceutical firms, including Indianapolis-based Eli Lilly and Co.

Rob Hillman, president of Anthem Blue Cross and Blue Shield of Indiana.

Eleanor Kinney, director of the Hall Center for Law and Health at the Indiana University School of Law in Indianapolis.

Hillman Hillman

Bryan Mills, CEO of the Community Health Network hospital system.

Bill Thompson, managing partner of Indianapolis law firm Hall Render Killian Heath & Lyman PC

IBJ reporter J.K. Wall moderated the discussion.

The following are edited excerpts:


Kinney Kinney

Impact: What are the key parts of the new health law that are going to have the biggest impact on your industry and your company?

HILLMAN: We are still navigating by the stars. We’re trying to anticipate what the government really wants. Essentially, we’re involved in redefining our industry, OK? I try to look at that as the cup’s half full in that there’s not too many people over the course of their career that get an opportunity to redefine their industry. But that’s really where we’re at right now.

Mills Mills

Whether it is benefits and how our benefits are administered or how we define our benefits or what benefits are covered or what is not covered, how we distribute our products, how we price our products, how we communicate in the marketplace, an entire new layer of regulation both at the federal level and at the state level. There’s really not much that’s not in this bill that doesn’t impact almost every single part of our industry. So, again, we’re redefining what the new business-as-usual is and trying to make sure that health care reform works for our customers.

Thompson Thompson

EASTERDAY: There are several impacts from the plan which will come into play in 2011, everything from the administrative burdens to things like mandatory coverage for clinical trial participation and elimination of lifetime maximums. We currently have a $5 million lifetime maximum; that’s eliminated.

But really the biggest impact for us is going to be the extension of coverage to dependents up to age 26. Right now, our plan covers dependents up to age 19 unless they’re full-time college students and then it covers them up to age 25. We estimate that starting next year we’ll have an impact between $1.2 million and $2.7 million per year just by that extension of the dependent coverage, primarily because our plan is so good for our associates that we’ll have a lot of dependents that will come back into our plan.

There are some other impacts down the road that we can’t measure. There’s certainly going to be impacts on our suppliers, which eventually will come back to us through pricing parts and things like that. And there’s also the unfunded mandate to Medicaid for the states. In Indiana, the Daniels administration says that’s about a $3 billion unfunded mandate. There are mechanisms supposedly in place to cover that, but down the road are those going to be effective and, if not, is that going to be an additional tax burden on employers?

MILLS: It’s a law, we need to comply, we need to understand it. It doesn’t matter what’s going to happen in November or what’s going to happen two Novembers from now. This is what we’re dealing with. It provides a sense of urgency. We probably could use a little dose of that.

We’ve talked forever about how we need to reduce health care costs, how we need to have more value. So what are we going to do to change that? Well, you know, it’s game on. It’s time to play ball. We should be done practicing.

We need to put together these accountable care organizations. A lot of that’s not quite defined, but that’s still where we’re headed. That’s a good thing. I could poll this audience and come up with responses that say, “I wait too long, the communication’s poor, why do I have to register 23 different times in the same building, why don’t you know what I just did yesterday?” We have to redesign our system based upon a patient-focused care model. We have to take upon the [information] systems, like Subaru and others have done, so we can adapt to this. We need to drive down the costs for what we do.

THOMPSON: The early analysis yields three areas of key impact. The first by far is the coverage of an additional 33 million or so Americans under some sort of plan. That obviously is going to strain our system. There’s already somewhat of a predicted shortage of primary care physicians. I think the primary care physician is going to play a key role in this, and there’s going to be a shortage of those given the number of additional insured [patients].

Hopefully there’ll be some payment for those additional insureds. But if it’s at Medicaid rates, right now that’s not even coming close to covering costs. So that provides even more economic pressures on [physician] practices that already believe they can’t sustain their economic model today.

Secondly, the law provides for essentially no co-pay to be paid by Medicare beneficiaries for preventive care and screenings, which I think is huge. So essentially the physician will get paid 100 percent of the fee schedule, and those screening services are free to the Medicare beneficiaries. I think that’s a positive step. I think it will hopefully in the long term have a positive impact on the health of that Medicare population.

Thirdly, the systemization of the practice of medicine, I think, is really a key impact. I think in order to respond to the health law, physicians have to be in some type of [larger health care] system. We’re seeing that happen more and more, either through employment models or other types of models. I think overall the physician community is wary but waiting, to hope that there’s going to be some positive effect that comes out of this.

HEITZMAN: There are absolutely some good things and bad things about this legislation for [the life sciences] industry at first blush. Certainly the expanded coverage means you have more customers out there who can buy your product, so that is a good thing. But we think that’s only probably a 1-percent gain from a revenue perspective.

And if you look at Medicaid and the [Medicare] Part D discounts and the other industry fees, you get in the hole pretty quickly. As we have done an analysis of the top 250 drugs that are prescribed in the U.S., as we look at the upcoming pricing pressures and formulary pressures and patent cliffs, we think there is potentially an 11-percent impact just on that.

So revenue over the next three to four years, if you add all of that up, we are seeing a negative 14-percent impact to the life sciences industry over the next few years. So what appeared to be at first blush reasonably good news, we think the indirect impact and the pressure on formulary and pricing is going to create a lot more stress in this market than people are expecting right now.

KINNEY: This effort of looking at the effectiveness of different treatments and making coverage decisions in the Medicare and Medicaid programs is going to be a real challenge because that’s where a lot of the cost consideration of the system is going—the rubber’s going to hit the road at that juncture.


Costs: Overall, as this law is fully phased in, do you expect it to slow down the cost growth that we experience in health care, to accelerate it, to basically keep us chugging along at the same pace we have been for a while?

HILLMAN: Without question, short term, there are negative pricing impacts in terms of premium. The insurance reform elements of the law actually do produce premium increases for a lot people. You’re looking at additional benefits that are now being mandated, and we all know more benefits mean more cost. Depending on which company you talk to, that cost is going to be somewhere probably between 2 to 3 percent, but that’s 2 to 3 percent on a pretty big number. So there’s a real impact in terms of cost to employers.

If nothing changes between now and 2014 in the state of Indiana, I would anticipate, particularly in the small group market, to see rate increases of 35 percent. Just because that’s the way the government now is requiring us to rate the business. So if you were a very healthy account who’s been doing all of the right things in terms of wellness and productivity within your group and you have benefited from state regulation which allowed us to give you a 35-percent discount because of that good work that you’ve done, that discount goes away.

Now, if you’ve done none of the things that we’ve asked you to do, you will benefit. Your rate would go down by 35 percent. So there are all kinds of pricing impacts that are going to affect individuals that don’t really even get to the underlying cost of care. These are just changes in the way we price our business given new government regulation.

But I do think we have a lump of clay here with health care reform that does provide us with an opportunity to collaborate to a much larger degree than what we have in the past with the medical community. And I can tell you that that collaboration is already gaining significant traction with all of the large [hospital] systems here in Indianapolis.

MILLS: Better than half of our patients are governmental patients. That means we’re either receiving payment from Medicare for the old or Medicaid for the poor. And those payments pay us less than our cost, not less than we charge but less than it costs us. So when you’re buying health insurance, you’re paying for the subsidy that the government doesn’t pay, the subsidy for what people who don’t have insurance pay. And that results in huge premium changes.

Well, as health reform comes in, we have more people that go into the government bucket. Plus, we have a very rapidly aging population as those baby boomers go to Medicare. So we’re getting a crunch on this commercial business. And we as employers can’t afford it.

So we have no choice but to find ways to dramatically change our cost structure. Over the past four months within our network, we’ve identified about $85 million of cost savings that we can do, without impacting patient care or safety and to do that without any significant layoff.

We believe those will be fully implemented by the middle of next year and at that point in time, I hate to say it, but we’ll start the next round. Because we have approximately 36 months—and that sand is flying through that hourglass as I speak—to get our cost structure in line that we can live on lower [payment] rates. Because we can’t expect to continue to have these premium increases passed on by the insurers to you.

HEITZMAN: Over the last two to three years, we’ve done more cost reduction projects across this industry than certainly we had in the 10 years before that. Whether it’s the supplier side of it or the provider side or the health plan, everybody has this tremendous pressure to cut costs in a way that they haven’t seen before.

But I also think that it’s a great opportunity because, you know, there have been a lot of good years in health care and organizations have done well. And any time you have a long period of time where organizations do well, you get a little self-satisfied and you don’t push yourself as much to pay attention to cost and pay attention to creativity. So I do think there’s an opportunity presented by this cost focus to really rethink how you do things. That has the opportunity to really help the industry leap forward and potentially really make an impact for patients and make health care better and eventually cheaper. But I don’t think it’s cheaper in the short run at all.

EASTERDAY: A lot of employers, unfortunately, are going to have to ask if it is going to be less costly for them to opt not to have health insurance or health care coverage provided to their employees and just pay the fine and maybe supplement through flexible spending accounts the ability for their employees to buy health care coverage through an exchange or through private insurance.

We have no intention of doing that. But we could save over $20 million a year if we opted out of having health care coverage and decided simply to pay the fine.

We’re going to continue our health care coverage. So we are looking, and a lot of other employers are looking at wellness initiatives that we’ve enacted over the past few years and making those even better. The bill has some limited incentives for wellness provisions and wellness initiatives and programs—not very good as far as I’m concerned, but it does have some in the bill. So that’s a positive.

The negative side is from the consumerism standpoint. The bill also contains a $2,500 cap starting in 2011 on the amount of money that an employee can put into their flexible spending account. So in that regard you’re limiting the consumerism which I think should be promoted more and that could drive down health care costs.

KINNEY: If history is our guide with respect to other coverage expansions in the past, we’ve always seen increases in costs and unexpected increases in costs. And I suspect that’s going to be the same situation here. People were blown away after the Medicare program was enacted in 1965 and implemented in 1967 at the huge increase in demand and the huge increase in costs that occurred. I suspect we’re going to see increases, particularly in the short term.

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