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Eric  Hargan, Acting Deputy Secretary of Health and Human Services


Memorial Sloan Kettering Medical Center


Tuesday, June 05, 2007

Improving Health through Empowering Consumers

Good day. Thank you for that warm introduction. I’m delighted to be here to talk with you about what President Bush and Secretary Mike Leavitt are doing to transform our health care system.  

Let me start with a statement that I think is undeniable:  America has the greatest health care in the world. We have the best hospitals, doctors, and researchers. We lead the world in the development of new medicines, devices, and procedures.

Not coincidentally, health care companies have the freedom to compete. But we have two broad problems in our health care system — affordability and accessibility.

On affordability: Americans currently spend about $1.9 trillion on health care. That’s 16 percent of our G.D.P. Almost 7 percent of our G.D.P. is spent by states and the federal government – which is about the same amount that the Canadian government spends on Canadians’ health care.  Taxpayers in America are clearly not as parsimonious or hardhearted when it comes to spending on others’ health care as some allege.  But what is problematic about this is that health care spending is growing at a rate that poses challenges to the rest of our economy. It is growing more rapidly than the general rate of inflation, for reasons that we think are not intrinsically related to the value delivered by the system. In nominal terms, health care spending is growing three times faster than wages, for example. And by 2015, it looks as though we will be spending 20 percent of our G.D.P. on health care.

Medicare alone — one single program — consumes 3.2 percent of the G.D.P.  New York State’s Medicaid program alone consumes a total of about 0.35 percent of the entire U.S. G.D.P. While the percentage of the economy spent on health care is an arbitrary number — who knows if it would be the amount people would choose to spend in a completely free economy — what matters is what kind of value consumers are actually getting for their dollars, and whether the incentives built into the system create unproductive over-provision of some kinds of health care.

And on accessibility: In America today, one estimate says that 45 million Americans lack health insurance at any given point in the year. As many as 34 million lack health insurance for an entire year.

This group is composed of several categories. For example, millions of the uninsured are eligible for Medicaid but have not enrolled. Millions more could obtain coverage through employer sponsored plans if they chose to participate. Many people are uninsured for short periods in between jobs. But millions of Americans lack insurance because its cost — often caused by heavy regulation — is simply prohibitively high for them.

There are two broad, competing philosophies on how to insure those Americans who cannot afford health insurance. One philosophy would have the government insure health care and run the system. This would mean fewer choices, longer waits, lower satisfaction, higher taxes, and more onerous restrictions on providers.

The other philosophy would allow the market to cut costs through competition to make health care more affordable for all. And if we have learned anything from the twentieth century, it is that the marketplace beats government in delivering goods and services. And while many people forget this, health care is also composed of goods and services.

Because these two philosophies are still the subject of heated debates between politicians, many pundits see little opportunity for any substantial changes to our health care system. Congress is split, and it is almost time for the Presidential election. But we cannot wait until a new President takes office. We have real problems that demand our immediate attention.

There is a great deal that must be accomplished. And with your support and insights, there is a great deal that we can accomplish.

President Bush’s health care agenda for 2007 has a number of parts. I would like to touch briefly on each, and then take your questions. Under the President’s plan, we will:

1.   Continue the successful implementation of Medicare Part D — and resist attempts to weaken it,

2.   Control unrestrained entitlement spending,

3.   Re-authorize SCHIP,

4.   Expand access to health care, and

5.   Introduce the concept of value in health care.

Medicare Part D

There is no better example of the effectiveness of competition in health care than in Medicare Part D, which gets seniors the life-saving drugs they need.

Part D has been criticized by some for the prominent role competition plays in the program. For many people in this debate, health care is a unique good. They try to avoid the marketplace by claiming that health care is an example of market failure — that health care goods are unique and the need for them so intense that the market cannot balance supply and demand. Yet even for prescription drugs, we have found no evidence of so-called market failure.

On the contrary, through implementing competition among Part D plans, we have shown that the marketplace works, even in the area of providing life-saving drugs. Part D’s bidding process has worked superbly in its first two years to lower the costs per plan.

Before the program began last year, actuaries estimated that premiums would cost about $38 per month. But plans competed with each other, offering incentives to increase their market share. They offered lower premiums and extended coverage. The result was that the average premium fell to $25 per month. This year, premiums have fallen again to about $22 per month. Seniors are also saving an average of $1,200 per year from what they were paying before Part D was implemented.

Now, more than 75 percent of seniors tell us they are happy with their plans — high praise indeed for any government program.

Some have complained of complexity in the plan offerings. Even Saturday Night Live humorously mocked the Part D enrollment system for its complexity. But is the simplest solution the best solution?  Some think the government should offer a single plan. That would be very simple, of course.  Nothing more so:  but while a single, one-size-fits-all, government-run drug plan would be the simplest solution, it would also be the least flexible. For example, Congress specified a basic plan to be offered as part of Part D.

And over 90 percent of Part D enrollees chose plans that offered them a different benefit structure than the basic Part D requirements. Less than 10 percent went with Congress’s idea of a plan.

If Congress had allowed only their plan, 90 percent of seniors’ preferences would not have been met, and we would have been slow to learn that. Information would have come through the cumbersome political process rather than the market.  Change would have occurred slowly, if at all, and would have required an act of Congress and a Presidential signature. Instead, we allowed competition, and those 90 percent chose other plans with other options, such as lower deductibles, extended coverage, different formularies, and generics utilization. The result is that the ten-year cost estimate for the program has fallen by almost $200 billion since its passage in 2003.  Lower cost, more choice, less government:  these are all good things. 

The Medicare Advantage program also shows how competition adds value. Medicare Advantage plans allow participants to opt for private insurance over Medicare’s basic fee-for-service structure. If they choose expensive plans, they pay the cost above Medicare’s benchmark rate. If they choose less expensive plans, they save money. And even though they are saving money, Medicare Advantage enrollees are getting better benefits — and the benefits they want — at lower prices than those offered under Medicare’s fee-for-service. In fact, the average Medicare Advantage beneficiary receives more than $1,000 in additional benefits annually compared to fee-for-service Medicare.

More and more Medicare beneficiaries like having that choice. Since Congress revitalized Medicare in 2003, membership in Medicare Advantage has jumped from 4.7 million enrollees to 8.3 million. In rural areas, enrollments grew fourfold. The program has proven especially attractive to low-income and minority enrollees, thanks to its more affordable costs and better benefits.

Something many have thought unlikely is actually happening: Consumers are becoming active participants in their health care as they shop around for the best value. They are comparing costs and weighing benefits.

But in spite of the manifest successes of competition among Part D and Medicare Advantage plans, some in Congress still want the government to replace the market. They want bureaucrats to make decisions for millions of consumers, all of whom have different wants and needs. They want the federal government to set prices and choose formularies in Medicare Part D. They want to cut funding for Medicare Advantage.

They also want so called “Medicare for all.”  But Medicare already consumes 3.2 percent of the G.D.P. All government expenditures on health care run our total up to 6.8 percent of the G.D.P. already.  And Medicare covers only half of seniors’ health care expenses as it is a basic, stripped-down program.  Expanding Medicare into a universal-coverage program would mean making it several times larger, clearly an unworkable proposal.  

This is not simply a debate over negotiating drug prices for Medicare beneficiaries, however. This is a debate over government control of health care. And when governments choose, patients lose.

Controlling Unrestrained Entitlement Spending

The second part of the President’s health plan is controlling unrestrained entitlement spending. This spring, the Medicare Trustees issued for the second time a funding warning. A funding warning is required by Congress when Medicare spending in a year will receive more than 45 percent of its total support from general revenues. That projection happened last year and it happened again this year. As a result, the Trustees issued a funding warning, which calls on the President and Congress to take steps next year to consider legislation on an expedited basis to bring Medicare spending back under the 45 percent trigger.

The report also shows that Medicare alone as is will consume an increasing percentage of America’s gross domestic product, rising to 7.3 percent of GDP in less than 30 years.

The Trustees also acknowledged that their report was modeled assuming present law. As you are probably aware, present law includes a 10 percent cut in physician payments beginning on January 1 of next year.

The situation is even more dire, though. As the law is now written, and given present spending trends, every year for the next nine years, the Secretary of Health and Human Services will be required to reduce the rates by 5 percent per year.

After 10 years, the cumulative effect would be a 41-percent reduction in physician reimbursement rates.  You and I both know that this is highly unlikely to happen. In five of the past six years, present law called for a reduction in physician payments and Congress legislatively overrode the requirement. There is no reason to believe that this year will be any different.

But fixing the doctor payment formula means that the funding warning will almost surely be triggered again in next year’s Trustees report. So these facts, combined with the coming retirement of the baby boom generation, paint a very sobering picture, and one with which we are forced to wrestle at HHS.

There is some good news in the trustees’ report, however. I mentioned it earlier:  the cost of part D is now expected to be $200 billion less over the next ten years than when the program’s costs were originally estimated in 2003. We have no reason to believe that the costs won’t continue to decline in the years ahead. Why?  Because competition works. And the Part D competitive model can be a model for the traditional, fee-for-service Medicare program.

Last year’s report calculated that Medicare would become insolvent in 2018. Now it’s 2019, a one-year reprieve. That’s not much, but the reasons for the one-year delay are intriguing. The first is, as I have mentioned, that expenditures for Medicare Part D were lower than expected.

The second is that hospitalization rates fell, for reasons we don’t yet understand. We hope there’s a correlation between those two reasons. Maybe there are some heart operations that we would have paid for in the last year that weren’t needed because seniors are now getting the prescription drugs they need. We just don’t yet know, but we continue to watch and analyze. We’ll see if the trend continues or not.

The President’s proposed 2008 budget would bring Medicare spending under the 45 percent threshold for at least the next ten years. The Administration had urged Congress to pass the President’s budget, because the budget resolution that was passed by Congress last week does not bring Medicare spending back under the threshold.

State Children’s Health Insurance Program

SCHIP, the state children’s health insurance plan, is another program that has been generating debate. SCHIP was designed to increase the number of children with health insurance coverage without resulting in large numbers of children moving from free market coverage to government coverage. It was intended to fill the gap between Medicaid and employment-based coverage. It was never intended to be the sole provider of health coverage for all children living in the United States not on Medicaid. SCHIP was meant for children in families earning less than twice the federal poverty level — which works out to $41,300 for a family of four.

SCHIP is up for reauthorization right now, however, and some politicians want to raise the eligibility level to 400 percent of the federal poverty level — which is $82,600 for a family of four. That raised ceiling would mean that 71 percent of all American children would be eligible for public assistance. Some politicians would even expand this children’s program to cover adults, as fourteen states are already doing, thanks to the program’s over-funding.

All of these proposed expansions are unapologetic moves toward the goal of universal, government-run health care. Instead, President Bush proposed reauthorizing SCHIP for the people it was meant to serve — low-income children — while using other platforms to help expand adults’ access to health care.

Why should we all be concerned at the prospect of expanding SCHIP?  SCHIP is a government-subsidized insurance program. The more people it covers, the more it crowds out free market insurance, due to the tax payer subsidy. And the more that the government controls the health care market, the more it has to ration. It has to ration which procedures people are allowed to have, what drugs doctors are allowed to prescribe, and even what your salaries would be. And no bureaucrats — even well-trained and highly-skilled bureaucrats — can effectively allocate scarce goods to the millions of people consuming health care. On the other hand, Medicare’s Part D program, as I discussed earlier, demonstrates how allocation done by the multiplicity of private organizations subject to market forces is tremendously more effective, being both less costly and more responsive to patients needs.

Expanding Access to Health Care

The next part of the President’s proposal would level the playing field for individuals who want to purchase health insurance in the individual, non-group market. It would rectify a structural problem in our health care system by eliminating the World War II-era distortion in the tax code that biases our health insurance system toward employer-purchased health care.   

Right now, most Americans receive their health insurance through their workplace as part of their compensation, and the government helps employers provide health insurance with a tax break.

In fact, this tax break has enabled the development of a private health insurance market in this country that provides good coverage to the majority of Americans. The fact that there is a private health insurance market in America is a good thing, and certainly is preferable to the alternative of government-run health care that so many other countries have embraced and are now desperately attempting to abandon. But in subsidizing the purchase of insurance benefits, the tax code results in an incentive to over-insure with often uneconomic first-dollar insurance coverage.

Thus, we find ourselves faced with a problem of fundamental fairness. Most Americans can get insurance through their employer, thanks to the tax break.

Millions of Americans can’t, however. Their employer might not — or cannot — offer insurance. Or they might be self-employed. These people — waitresses and construction workers, students and day care workers, small business owners and self-employed entrepreneurs — have to buy health insurance on their own.

It is indefensible that a person who buys insurance through an employer is treated better than a person who buys as an individual. The President’s proposal would ensure that whether you buy health insurance through your workplace or buy it on your own, you get the same tax treatment.

Specifically, the President’s proposal would allow every taxpayer with health insurance meeting certain basic criteria to deduct $15,000 for families or $7,500 for individuals from their income for health insurance. It would substitute this deduction for the current uneconomic and unlimited exclusion for employer-provided health insurance.

Since the President’s State of the Union address, Secretary Leavitt has met with 42 governors and has spoken with the remaining eight. He has looked at states like Massachusetts, which enacted an individual mandate, reformed its non-group market, and developed an insurance connector model to make it easier for individuals to purchase insurance.

He has looked at states like California, which also wants to impose an individual as well as an employer mandate to achieve universal coverage. Other states such as Michigan, Indiana, Texas, and Tennessee are also attempting to develop basic affordable health insurance plans.

One thing that all of these states have in common is that they are of course constrained by their budget limitations. They may not be able to subsidize fully the purchase of a basic, affordable, private health insurance plan for low-income individuals. So they have to come up with creative work-arounds.

Some states — like Massachusetts — came up with sufficient funds by reallocating their Medicaid disproportionate share hospital dollars, from subsidizing uncompensated care to subsidizing the purchase of basic, affordable health insurance plans. The hospitals are still being compensated for their services, of course, but the funds are now being channeled through the more effective insurance markets and are coming with the patients rather than as a grant from the state.

Other states, however, do not have sufficient Medicaid DSH funds to make similar plans work. So the President has proposed that Congress authorize Secretary Leavitt to make grants available to states to assist in the purchase of private health insurance.

These funds, which we’re referring to as affordable choices grants, when combined with re-allocated Medicaid DSH funds and the President’s tax proposal, would enable every state to make available a basic, affordable health insurance plan to every uninsured person in the state with income under 150 percent of the federal poverty level.

Value-Driven Health Care

The last component of the President’s health care agenda for 2007 involves enabling our health care sector to reward value instead of volume. We want an even more competitive system of value-driven health care that includes price and quality transparency, consumer-directed health care, incentives for quality care delivery, and the wide-spread adoption of interoperable health information technology. Most of these initiatives involve creating a useful pool of information for health care consumers. It is scandalous that people have more information available for an iPod purchase than a major surgery.

People have a right to choose their providers and their insurance coverage. But at the moment, they simply don’t have enough information to exercise those rights fully and in an informed manner. And health professionals deserve to be recognized and rewarded for the quality services you provide. The value-driven health care initiatives are oriented toward helping patients receive the highest quality at the lowest cost. They are about fixing the incentives in the system so that consumers direct their own care and everyone benefits from good choices and carries part of the burden of bad choices. For example, right now, doctors are not rewarded for taking smart steps like investing in an effective electronic record system or providing support for patients to prevent chronic illnesses from developing complications.

The right incentive would pay more for better care. But to do that, consumers, payers, and providers need to know how quality is defined and who provides quality care.

How will we move toward a more efficient, effective, and consumer-focused health care system?  By enabling and empowering the free, competitive market with the kind of information that competitive markets need to function efficiently

To this end, last August, President Bush signed an Executive Order that committed the federal government to the principles of value-driven health care.

It required federal government sponsors of health care programs — the VA, DoD’s TriCare, Medicare, and OPM — to do four things:

  • First, to commit to interoperable electronic health technology. We need to move away from a paper-based recordkeeping system to an electronic recordkeeping system; and do so with interoperable health IT.
  • Second, to commit to principles of cost transparency. Consumers of health care should know the true costs of health care. In the case of the Medicare program, we now post the prices that Medicare pays for the most common medical procedures. 
  • Third, to commit to principles of quality transparency. Consumers of health care should know that about the quality of care you and other health care providers deliver. Groups such as the Ambulatory Quality Alliance and the Hospital Quality Alliance are developing consensus-based measures of quality on which providers can report. Federal government agencies should only contract with providers that agree to report these quality measures.
  • And fourth, to give consumers and providers reasons and incentives to care. One way to give consumers an incentive to care is to ensure the widespread availability of health savings accounts and high-deductible health plans.

One way to give providers an incentive to care is to transition our payment systems away from those that reward providers for doing multiple procedures toward those that reward providers for practicing high quality care — first by pay for reporting, and eventually by pay for performance.

Our aim is to enable Americans to access basic information about the health care they consume, so that they can become more engaged, savvier purchasers. And as consumers become increasingly savvy and engaged, they expect more choices, more responsibility, and more control in every aspect of their lives.

These programs constitute a bold and broad health care agenda, but by working with Congress, state governments, and all of you to implement them, we will achieve better quality, lower costs, and more widely available health care for all Americans. Thank you.

Last revised: March 13, 2008