PharmExec Blog

The 'S' Word in Healthcare Reform

by Tom Norton

In little more than two years, the main elements of the HCR will take hold across the nation.  As implementation continues to ramp up, one of the more intriguing questions surrounding its activation is, is the “S” word being realized?…That is, “S” as in “savings.” Are the much publicized “savings” that were projected in early 2010 actually occurring as we head towards January 1, 2014?

The savings, according to the final 2010 CBO estimate, would provide a “net reduction in federal deficits of $143 billion…over the 2010–2019 period as result of changes in direct spending and revenues.”

Further, in August 2010, an NEJM article co-authored by Peter Orzag and Ezekiel Emanuel, MD, estimated that by 2030, total HCR savings would be up to $1 trillion.

Now, however, as various HCR elements meet the real world, many of the “savings” have proved illusory, if not completely unachievable.

To illustrate these difficulties, let’s take a look at the current status of “savings” in three key programs — Medicare Advantage, the CLASS Act, and ACOs.

Medicare Advantage

Most of us know the story of Medicare Advantage (MA).  Initially designed in the ‘90’s to provide managed care services in rural areas, the program was tapped by the Bush Administration to be dramatically expanded in 2003 under the Medicare Modernization Act.

However, because of higher premiums paid under the “new” MA, the program became a target of Congressional Democrats during the HCR debate. In the end, $136 billion of the $500 billion needed to start HCR’s expanded Medicaid program was sliced out of MA and credited as a “savings” in the final law.

All was well until last January when the first real “extractions” from MA services were scheduled to take hold.  Interestingly, the designated cuts didn’t occur.  In April, USA Today reported that rather than cutting MA premiums, HHS was actually “enhancing” them. Further, as pointed out by Kaiser Health News, more patients were signing up:

Despite predictions that last year’s healthcare law would doom Medicare’s private insurance plans, it’s not happening – at least not yet.  Enrollment in Medicare Advantage plans continues to grow at a brisk pace…

So, MA certainly doesn’t seem like a program scheduled for significant cuts by January of 2014.  And the projected CBO “savings” for HCR?  The “S” word for MA isn’t being discussed by HHS.


The concept of the accountable care organizations (ACOs), from the start, was predicated on projected “savings” that were to be driven by this new concept.  As Families USA stated in September of 2010:

If the accountable care organization delivers high-quality care at lower costs…This new payment approach will create an estimated $5 billion in savings for the Medicare program (by 2019).

Sounds pretty good.  However, problems with the ACO concept surfaced soon after HHS issued the first rules in April of this year.  The pushback from providers was intense and focused on three key points of contention:

First, what was an ACO?  An HMO, a PPO, or some other new medical delivery variant?

Secondly, what about liability for losses under ACOs?  According to HHS, providers would be responsible for any losses that might occur under the program.  Insurers and hospitals plans rejected this as they saw ACOs as “experimental” and as such, very risky business propositions.

Thirdly, how would ACOs save money?  Of particular concern was one section of the concept that stated ACO patients were free to be seen by any doctor.  The providers said if ACOs were going to save money, they would need to control patient access to medical care.

After a lot of discussion, HHS withdrew the initial rules and issued a new set in October. The new rules addressed the questions about liability (there is none); and to a degree, further defined an ACO.

But on the question of direct “savings”, nothing was settled.  That’s because it appears HHS is still not willing to impose HMO-like closed panels on patients, so patients can get care wherever they wish. How do you control medical costs, and generate “savings”, if you have no access control over your patients?

So will ACOs and their projected “savings” start as scheduled on January 1, 2012?  Not clear.  Realistically, though, the “S” word in ACOs is very much in question.


The final HCR “savings” question is cut and dried…Of all the aspects of the law that has missed on projected “savings”, the CLASS Act is clearly at the top of the list.  Why?  Because the prospective long-term care program for seniors went kaput in October when HHS designated the plan as “unsustainable”.  So, for the CLASS ACT, the “S” word is not an issue.  A cool $86 billion in savings is off the table. If you’re counting, that’s nearly 10% of the total 20 year “savings” projected in the noted NEJM article.

Vanishing “Savings”

We can all wonder why the CBO-certified HCR “savings” asserted in 2010 have begun to vanish. Some of these occurrences, however, do seem explainable:

First, let’s take the most obvious case: The CLASS Act

From the beginning, the actuarial theory that drove the alleged “savings” in the program was flawed: in 2009, Rick Foster, the Medicare Actuary, said the “savings” projected in the CLASS Act were illusory. It took HHS until this fall to finally agree.  In the meantime, $86 billion in “savings” has evaporated. The worrisome question is, will we find out other parts of HCR are equally “unsustainable?”

Second, we need to acknowledge that politics has entered into this “savings” picture. In the case of Medicare Advantage, someone at HHS apparently awakened to the fact that on January 1, 2011 the Administration was scheduled to take MA benefits away from nearly 10 million senior citizens.  Not a wise thing to do with a national election coming in 2012.  Solution? Don’t reduce MA in 2011.  To my point on politics in the “savings” equation, do we expect the 2011 MA enhancements to continue after November 2012?  I’ll leave that to you to ponder.

As for ACOs, I think it’s a similar case.  The only way to realize savings in the new ACO concept is to lock people into a single physician, under a closed panel of services.  Why hasn’t HHS done this?  Because a lot of people really don’t like a closed panel approach to care. My guess is the $5 billion in “savings” scheduled to begin accruing in January 2012 will remain a mirage until after November of 2012.

So where do things stand with the “S” word in HCR as we close out 2011?  Right now, the evidence of actual “savings” is rather murky.  Taking just these three important programs (MA, CLASS, ACOs), and the approximate $225 billion of the projected 10 year “savings” they are designated to drive, we find their “savings” are either off the table completely, or, at best, appear to be suspended until we get by the November 2012 elections.  Given that, the Administration’s anticipated overall savings of $143 billion for the period 2010–2019 would have to be charitably labeled as “behind schedule.”

That’s my point of view.  I would like to have your thoughts on the “S” word in HCR.

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  1. Posted December 20, 2011 at 3:16 am | Permalink

    In fact, under new health care reform your health insurance company will no longer be allowed to cancel your policy if you get sick, we should be doing this already! search online “Penny Medical” it is a good place to find insurance if you have illness like me.

  2. Posted December 22, 2011 at 12:49 pm | Permalink

    The savings story was transparent nonsense, political cover to expand access. In fact the “Affordable” Care Act will inevitably result in a massive increase in federal healthcare expenditures. There will be attempts to balance the books by cutting reimbursement rates to providers and constraining volume, but these will be overcome provider lobying using threats of reduced access. Whichever party is in the minority will demagoue cost containment with “death panel” rhetoric. The annual Medicare Sustainable Growth Rate recision is a perfect illustration of the shape of things to come.

  3. fred brown
    Posted December 23, 2011 at 12:01 pm | Permalink

    In fairness, the ACA is more about improving access than drastically reducing costs in the short term. Savings are backloaded, so I would not bet on savings not being achieved yet… 2014 will mark the transition to population based health and HVBP for our providers and exchanges for the payers and this structural shift will impact pharma – largely postively initially.
    In fact, through 2016, the investment of $80 million that pharma made to retain many positives in the US marketplace will pay off over 10:1 for the industry according to Ducker’s calculations. Longer term, in 2016, (if IPAB is implemented and funded) the pharma industry will likely begin to pay significantly savings from the ACA and the 2018 Cadillac disincentive is also poised to negatively impact the phama industry in the long term. These savings will be at our expense , so let’s not celebrate too soon…

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