United States: Health Care Undergoes Major Surgery In 2012

It is going to be a busy year in the health care industry. A decision on the constitutionality of the Patient Protection and Affordable Care Act ("Act") is not expected until June, but many of the Act's initiatives will begin before the Supreme Court decides. From implementation of electronic medical records to development of integrated care models, these new initiatives will affect all facets of the industry. Regardless of the outcome of the constitutional decision, these developments will mean major surgery for the health care industry and the many businesses that rely on it.

1. Prognosis for Health Care Reform is Uncertain

No event will have a greater impact on health care delivery in the United States than the Supreme Court's decision on the constitutionality of the Act. The opinion is expected to play a major role in the 2012 elections. Briefs have been filed by the Obama administration in support of the Act, and by Florida and 25 other states in opposition to what they call "Obamacare." Five and one‐half hours have been scheduled for the oral arguments, set to begin in March.

2. Birth of Accountable Care Organizations

This year will be the beginning of the Medicare Shared Savings Program ("SSP"). Under this program, entities known as Accountable Care Organizations ("ACOs"), will attempt to coordinate care among health care providers to improve the quality of care for Medicare Fee‐For‐Service beneficiaries and reduce unnecessary costs. If the ACOs are successful, they will share in some of the savings to the Medicare program. Applications for participation in the program must be submitted by January 20, 2012 for an April 1, 2012 start date and by March 30, 2012 for the July 1, 2012 start date.

For those entities already prepared to implement ACO operations, the administration has established the Pioneer ACO demonstration project. Thirty‐two entities have been chosen by the U.S. Department of Health and Human Services ("HHS") to participate in this demonstration project. The Pioneer ACO program is similar to the SSP program, but it is intended for ACOs that are already operational. The first performance period of the Pioneer ACO program began January 1, 2012.

The commercial market is already developing ACO models and will continue to refine the process throughout 2012.

3. Retraction of Sunshine Act Deadline

In December 2011, the Centers for Medicare and Medicaid Services ("CMS") released a proposed rule on implementation of the Physician Payments Sunshine Act, another product of the Act. The proposed rule delayed implementation of the requirement that pharmaceutical and medical device manufacturers report gifts and payments to physicians and teaching hospitals. Reporting was to begin on January 1, 2012, but the proposed rule delays data collection requirements and reporting until a final rule is published, likely to be later this year. Under the proposed rule, payments less than $10 will not have to be reported, unless the total payments to a physician exceed $100 per year. CMS proposes that a report of partialyear data be required by March 30, 2013. Once the data is collected and aggregated by CMS, physicians and teaching hospitals will have a 45‐day period to review and comment on the results. CMS proposes that the results be made public by September 30, 2013.

4. Diagnosis of Data Security

Pursuant to a requirement in the Health Information Technology for Clinical Health Act ("HITECH"), the HHS Office of Civil Rights ("OCR") will begin periodic auditing of "covered entities" and "business associates" to ensure compliance with privacy, security, and breach notification standards of the Health Information Portability and Accountability Act of 1996 ("HIPAA"). The OCR intends to audit a wide a range of types and sizes of covered entities: covered individual and organizational providers of health services, health plans of all sizes and functions, and health care clearinghouses will all be considered for an audit. Entities selected for an audit will be informed by the OCR of their selection and asked to provide documentation of their privacy and security compliance efforts. The audits are intended to be a "compliance improvement activity," but for serious compliance issues, the OCR may initiate a "compliance review" to address the problem. The OCR intends to complete the audits in this pilot phase by December 30, 2012.

5. Probe of Provider Advertising by FDA

The U.S. Food and Drug Administration ("FDA") is reaching beyond the medical device and pharmaceutical industry and addressing provider advertising. The FDA recently sent warning letters to health care organizations and to a firm that markets gastric weight loss band devices in California. The FDA claims the ads of these organizations fail to fully explain the risks and complications of the procedures. The FDA's warnings may elicit similar action by state regulators.

6. Bandages for Reimbursement Cuts Continue

A 27 percent reduction in Medicare reimbursement for physicians was scheduled to take place January 1, 2012, but it was deferred for two months by legislation signed by the President in December. The temporary moratorium on the reimbursement cut leaves physicians uncertain of whether the cut will be extended beyond the two‐month period.

7. Critical Quality Measurement

A proposed rule published in the Federal Register (76 Fed. Reg. 2454, January 13, 2012) provided guidance on the Medicare Hospital Inpatient Value‐Based Purchasing Program. This program provides incentive payments to hospitals based upon their performance on quality measures, such as readmission rates and hospital‐acquired conditions. Under the proposed rule, the program will begin in federal fiscal year 2013 and apply to payments for hospital discharges occurring on or after October 1, 2012.

8. Progress Noted in Transition to Electronic Health Records

Incentives offered through the Medicare and Medicaid programs are intended to encourage physicians and hospitals to transition to electronic recordkeeping. The incentives can be as much as $44,000 (through Medicare) and $63,750 (through Medicaid) for an individual physician. The incentives are offered in stages, requiring the demonstration of "meaningful use" of the technologies at each stage. Stage one began in 2011 with additional stages to occur in 2012 and beyond. According to the Centers for Disease Control and Prevention, in 2001, 57 percent of all office‐based physicians in the United States used an electronic medical record, and 52 percent of physicians intended to apply for meaningful use incentives.

9. Pressure Applied through Medical Loss Ratios

Beginning in 2012, individual and small group health insurers must spend 80 percent of premiums on patient care and quality improvements. Eighty‐five percent collected must be spent by large group insurers. If a health plan fails to meet this requirement, it must provide rebates to enrollees. The rebates are to begin in June 2012.

10. Pain of W‐2 Reporting Delayed for Small Employers

The Act includes a requirement that the cost of employersponsored health insurance coverage be reported on an employee's W‐2 tax form. Reporting is optional for small employers for the 2012 tax year, but employers filing 250 or more W‐2s will be required to report this information for the 2012 tax year on the W‐2s provided to employees in January 2013.

If the Court determines that the individual mandate is unconstitutional, it must then decide whether parts of the Act will stand. Until that decision, however, the health care industry remains under the scalpel. While we do not know whether the outcome for health care will be positive or negative, we do know that it is getting a radical facelift.

Julie Simer is a Shareholder in the firm's Health Care Practice Group in the Orange County office.

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