Value-Driven Health Care

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

America has the greatest health care in the world. We have the best hospitals, doctors, and researchers. We lead in the development of new medicines, devices, and procedures. Our health care companies have the freedom to compete. But as good as our health care system is, it can be even better. A more transparent market can allow Americans to get better quality care, with fewer errors, for a lower cost.

Take the price of health care. Americans currently spend about $1.9 trillion on health care. That's 16% of our G.D.P.

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 are not always 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% of our G.D.P. on health care. Medicare alone accounts for about an estimated 3.2% of this year's G.D.P. and is projected to consume 11% of the G.D.P. by 2080.

A related problem is that quality of care can be uneven. In America, one can receive the finest medical care the world has ever known. Or one could be the victim of an easily preventable medical error. And the quality of care that one receives is not necessarily correlated to the price paid for that care.

America will not be able to remain the dominant economic power in the world if we continue to devote such a large percentage of our G.D.P. to one sector of the economy, while other leading powers spend half that. The system is far from perfect and must change. People divert resources from other desired expenditures into health care because of its high cost; they worry about the continuation of their health insurance; employers struggle under the weight of health care expenditures; our system doesn't deliver uniformly high quality care; there is no clear connection between cost and quality of health care provided; and in many cases mom and pop grocery stores use more efficient and up-to-date information technology than do our medical providers.

What's wrong with our system? We think it can be summarized with four basic truths: Our system is price blind, our system is quality silent, many of its incentives are in the wrong place, and the most expensive medical device in the American system is the pen in the hand of a doctor. We need to transform our system so people know what they are paying for health care, so they know whether they are getting good quality health care, and so they have a reason and ability to care.

How did we get here? This is obviously an oversimplification, but the problem is in many respects an outgrowth of two developments in the 1930's and 1940's in America: the development of health insurance by providers and World War II wage controls.

Before World War II, Americans paid cash for doctor visits, these visits were house calls, by the way, and if they had any insurance, it might be hospital indemnity insurance or sickness insurance against disability. Hospital insurance and sick insurance functioned as true insurance policy holders hedged their bets against their health risks. Employers didn't factor into the health care equation. Then Blue Cross and Blue Shield, thanks to special advantages many state and federal government officials gave them, began to dominate the market. And what Blue Cross and Blue Shield offered was less like true insurance and more like what we have today.

Blue Cross, for example, offered pre-paid health care, which is equivalent to insuring your car for gas and oil changes, but was a popular idea during the Great Depression and was obviously popular with the providers who owned the Blues. And legislation governing non-profit organizations, including both Blue Cross and Blue Shield, mandated that they make customers who consumed little health care subsidize those who consumed a great deal of health care by charging the same for both. They also paid hospitals on a cost-plus basis, rather than market-determined prices.

These practices were all incorporated into Medicare and Medicaid, and persist in many respects today.

In 1942, Congress and the Roosevelt administration made it a crime for employers to offer higher wages, except with special government permission. Under these wage controls, businesses suddenly couldn't compete for workers by offering better wages. But the market always finds work-arounds to controls like these. So employers resorted to non-wage forms of compensation, like medical insurance and prepaid health care, pensions, and paid vacations. Thus began our system dominated by employer-sponsored group health insurance.

On top of this, the Tax Code subsidized employers' purchases of health insurance for their employees. In 1942, the National War Labor Board ruled that employers didn't have to pay payroll taxes on their contributions to employee health plans, and that employees didn't have to pay income taxes on them either. In 1943, the tax court ruled that employer payments to commercial insurance companies for group medical and hospitalization premiums of employees were not taxable as employee income. The 1954 Internal Revenue Code codified this.

As any good economist will tell you, if you subsidize something, you will get more of it. As a result, those of us with employer-sponsored health insurance end up acquiring more health care coverage than we otherwise would if we were bearing the full cost of our purchasing decisions. In fact, what most of us have today isn't even health insurance. Insurance is for non-recurring, unpredictable events. But what we insure against are also recurring, predictable health care expenditures. That is prepaid health care, just like your cell phone plan and the early Blues plans. I have a much richer health insurance plan as a federal government employee than I would have if I were purchasing the insurance without the significant employee subsidy that I receive. As a result, if I stay in-network, I pay very little for any medical services or products. For instance, I pay only $15 for most doctor's office visits.

If you told someone that for $15, they could go into a grocery store and buy anything they wanted, they would walk out with the entire inventory of the store. This is normal human behavior. Well, this is exactly what our subsidized third-party payer health insurance system has created. We buy more insurance, both genuine insurance and prepaid health care, than we would if we were bearing the full cost of our decisions. This leads to more first dollar coverage of health care, which when combined with the lack of experience rating in pricing health insurance premiums to the individual in group plans, makes many of us often price insensitive as purchasers of health care.

As a result, our health system is simply not adapted to providing information to consumers about the prices of services or goods. Let me tell you a story, and I bet that everyone in this room has a similar one in their own life. I have a three-year old son, who has an amazing propensity to need stitches. He cut his eyebrow open, and we brought him to the emergency room. Because it was a wound on the face, the attending physician asked us if we wanted to have a plastic surgeon called in for the procedure. I then asked what would have been a perfectly normal question in any other segment of our economy. “How much more will that cost?” They looked at me as if I were from Mars, telling me that they, of course, had no way of telling me that. I never was quite clear if they truly didn't know and had no desire to find out, or if they knew, but had no interest in telling me. Then I asked another question that I naively thought was perfectly natural under the circumstances: “Would plastic surgery stitches be better than what the attending physician would do?” You see, while I am a health care regulator and am from a medical family, I am not quite up to speed on the latest in suture procedures. You can imagine the “response” that I got. Well, lacking all relevant information, we went the conservative route and had the plastic surgeon brought in, who, by the way, did a wonderful and professional job. But as we were leaving, a nurse mentioned in a rather off-hand way that the stitches were exactly what the attending physician would have done. And I can now answer the cost question; the cost difference was substantial. You've all had an experience or many experiences just like this. It is absurd to me that one of the largest segments of our economy is organized and operates in such a way that consumers have no real ability to learn about price or quality.

Imagine you're shopping for a new music player. You go into an Apple store and tell a clerk that you're interested in buying an iPod. She suggests you purchase one of the latest iPods. You examine it and like it, and want to find out how many songs it holds. You ask the clerk how long it lasts, how well it performs, and how happy other people are with it. But the clerk replies, “I'm sorry sir; you're not entitled to that information.” You really want that iPod, though, so you decide to purchase it, and ask her how much it costs. Again the clerk tells you, “I'm sorry sir; we can't tell you that either.”

We don't learn about price because with our subsidized third-party payer system incentivizing us to have close to first dollar coverage and our custom of purchasing prepaid health care, many of us rarely have the incentive to demand this information. So the system isn't built to provide it. And as F. A. Von Hayek said, “the price system [is] ... a mechanism for communicating information.” When you lack price information and price competition, you also impede one of the critical signals in an efficient market for communicating information about quality and efficiency. As a result we as consumers have no way other than word of mouth and referrals to gauge the quality of health care that we receive and to choose providers, and any statistician will tell you how poor measures anecdotes are. Providers don't even have the ability to see how their care measures up against competitors in terms of quality. To make matters worse, providers are not paid based on the quality of care they provide. The newly minted specialist right out of residency is often paid the same for a procedure as one of the world's leading practitioners. So all too often providers in our system have to maximize revenue not on quality results (although of course I am confident that our providers do strive to provide quality care as a matter of professional ethos, ethics, and reputation) but on maximizing the number of cases they can handle in a day.

And one of the greatest inefficiencies in our health care system is the lack of interoperable health records. How many times have you gone into the doctor's office and had to fill out a patient history questionnaire. I recently went to my internist, who I think is one of the best, and I have used for years, and I had to fill out my patient history form for what must be the seventh time. I did my best to remember my life's story, but as we all know, memory sometimes fails. In the course of talking through an issue with my doctor during the exam, I happened to mention something about one of my grandparents' health history. She responded, “Don't you think that was pretty relevant information to know?” Yes, it was. But while I most likely had put it down each of the 6 previous times I had filled out that form, I had forgotten this one time. Imagine a day when you only fill out that form once, and it is updated each time to go to a provider. The death of the registration form. Think of the errors to be avoided, and the efficiencies to be gained in all of our lives.

My father is a doctor. When I was in high school, my summer job one year was to convert his whole patient record system over from a straight last name, first name label system, to a fancy new color coded paper file system based on the first two initials of the last name of the patient, with another sticker for the last year the patient had been seen. Very cutting edge for the early 1980's. But that is still the system used in his office and almost every medical office in America. Why? In part because even decades into the computer and information age, he can't buy an electronic health record software program that he knows will communicate with and be interoperable with the E.H.R. programs that will be used by the hospitals and doctors and clinics he refers to or gets referrals from or the insurance companies with whom he does business.

What do I mean by interoperability? Each of you has a cell phone in your pocket. Many of them were made by different vendors and operate through different network providers, but they all work. That's interoperability.

Many of you also have an A.T.M. card in your pocket. You don't all use the same bank, but you are able to withdraw money from virtually any A.T.M. in the world and deal with any foreign currency. Banks compete aggressively for your business, and use the same system. That's interoperability.

Secretary Leavitt is currently leading a process to make this possible in health care by developing the interoperable standards that are needed for health information technology to work. The promise of health information technology will not be realized if we end up with a balkanized system where personal health information is not portable and accessible. We need standards for what information is to be included, what the fields are, etc. And we need a system for the certification of products that are interoperable under these standards. We are driving the process to develop these consensus standards and processes.

So, you can see that while our system does deliver the best, most innovative care in the world, there is much room for improvement. We're working on a number of critical initiatives:

• To allow risk to be pooled across state lines, with options such as association health plans,
• To bring about modern, prevention-oriented medicine,
• To reform medical liability to ensure prompt and reasonable compensation for medical injuries, and
• To focus on value-driven health care through the wide-spread adoption of interoperable health information technology, price and quality transparency, consumer-directed health care, and incentives for quality care delivery.

I would like to focus on the last of these, value-driven health care, for a moment. We have all had experiences with just how expensive medicine can be: emergency room visits, drugs and devices, tests and procedures, and they add up quickly. They also can add up differently based on if you're paying or if an insurance company is. As I have noted, unfortunately, right now there is no way to know exactly what you are going to be charged, or, even worse, if you are even getting the best quality care for the best price. It's a complicated and opaque system.

All consumers deserve to know the cost and quality of what they are purchasing. And health professionals deserve to be recognized and rewarded for the quality services they provide.

We need to correct incentives so that consumers and providers benefit by making good choices and carry part of the burden of bad choices. For example, when doctors take smart steps like investing in an effective electronic record system or providing personalized support for patients with chronic illnesses to prevent complications, Medicare ends up paying the doctor less. 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.

What we are calling for is a transformation in our health care system in the United States towards value-driven health care. But change is hard. There are many interests vested in the status quo. Many players are more interested simply in shifting costs from themselves to other participants in the system. Legislation is one way to change the system. But as Secretary Leavitt has said, “When it comes to health care, we don't have a lack of political will, we have too much.” This had led to the standoffs for 40 years in thinking about health system reform. Many well-meaning doctors, hospitals, employers, insurance companies, patient groups, and quality advocates have tried to push for the needed transformation. But they haven't been able to achieve change. What's been missing? The government hasn't been at the table. Between Medicare, Medicaid, the Veterans Administration, DOD's Tricare, and the Federal Employee Health Benefit Program, the U.S. Government directly or indirectly insures approximately 125 million people's health care, or 40% of those who are insured in the United States. What if we were to harness that market power to drive towards more efficient, effective, and consumer-focused change in our system? To enable and empower the free, competitive market with the kind of information that competitive markets needs to function efficiently?

That's why President Bush recently signed an historic Executive Order to empower Americans to find better value and better care by increasing the transparency of our health care system. The Executive Order directs federal agencies that administer or sponsor federal health insurance programs to:

• Encourage adoption of interoperable health information technology standards,
• Increase transparency in quality,
• Increase transparency in pricing, and
• Provide options that promote quality and efficiency in health care.

Health Information Technology: The Executive Order makes clear that we are committed to using the power of the federal government as a purchaser of health care to drive towards an interoperable system of health information technology. The Order requires federal government agencies that sponsor or subsidize health insurance as well as federal government contracting parties, as they adopt, update, or acquire health information technology, to incorporate interoperable health information technology.

Quality Transparency: We are funding 6 regional pilot quality collaboratives that bring together providers, insurers, employers, and consumers in an area to share information to aid in quality of care improvement. These initial efforts were good, but any individual insurer will see only a small slice of a provider's practice. It makes the extrapolation of quality results difficult, if not impossible. But if you add the weight of the federal government's health programs to that effort, you will get a much more complete picture of the quality of care delivered, making analysis, reporting, and quality improvement possible. We will begin with those 6 initial sites and expand to include other regional collaboratives. We will ask those who contract with or have agreements with our insurance programs to provide information to these collaboratives regarding the quality of care delivered. The federal government will not be setting the quality standards for our system. These standards must be standards that the providers themselves believe accurately reflect quality care. Thus, we will be working with provider groups who are developing consensus standards for both doctors�the Ambulatory Quality Care Alliance�and hospitals�the Hospital Quality Alliance. This collaborative approach is critical, since if the providers themselves don't buy into the quality standards, the system simply won't work.

Price Transparency: One of the reasons that useful price information is so hard to come by is that there's so many events in a single episode of healing�from the anesthesia before the surgery to the physical therapy sessions afterwards. Right now, all of the information on each part is often completely disaggregated or compiled inconsistently and hence cannot be compared even if it were made available to consumers. So that consumers can have a better sense of what they are actually expected to pay for, we're working with insurers to organize cost information in the same way, around the single total cost of an episode of care. Then we can ask that those who do business with us to provide average price information to their consumers regarding these bundled services. We will do this in a way that takes into account the concerns of providers and insurers regarding the sensitivity of the actual negotiated rates between them. Instead of seeing many nearly incomprehensible bills, consumers will be able to see their cost for a single healing event.

Medicare, Medicaid, the Department of Defense, and the Office of Personnel Management are compiling non-personalized claims information and will release that information to these collaboratives in sufficient detail to provide a statistically reliable foundation of transparent price and quality data to every hospital, doctor, and participant in the collaboratives that want to see them.

And HHS is now posting county-level, specific hospital payment range and volume information on 30 elective procedures and other common hospital admissions in Medicare. The new information will be posted on the Internet at cms.hhs.gov, and is a snapshot look at the range of the amounts that Medicare paid for a variety of treatments provided in 2005 to seniors and people with disabilities. In addition, in August, CMS released the prices that it pays to ambulatory surgical centers for common procedures. In the fall, CMS will release pricing information for physician and hospital outpatient procedures.

Efficiency and Quality: Finally, the Executive Order provides that we will develop and identify approaches that encourage and facilitate high-quality and efficient health care. We hope to be able to our programs to pay providers based on performance, and we will require those who do business with our federal health insurance programs to do the same. We will encourage Health Savings Account plans and other consumer-directed health plans, with higher deductibles and lower premiums so that consumers have the incentives to become knowledgeable consumers of their own health care.

We are using the power of the federal government as a purchaser of health care to generate this information and to bring about these changes. We are also working with major employers and asking them to make similar commitments in contracting with their own insurers and providers. Together we can truly transform the system.

What's the end game here? Our goal 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. Right now, consumers can track down all sorts of information on Google. They can use Travelocity to find cheap flights to anywhere in the world. They can trade all manner of goods via eBay. They have tremendous amounts of price and quality data on all sorts of things�except for health care. Our vision for health care is to fix that, and give Americans the tools they need to become educated consumers.

Within two years, we expect to measure pockets of quality against price, and to see value-based competition in several markets around the country on several procedures. Within five years, we believe the term value will have earned its place in the health lexicon of America, and that we will be using it on a regular basis. Within ten years, we hope that a system of value-based competition integrated with health information technology will have truly emerged.

As we create this pool of price and quality information, we see a day when a health care consumer planning a hip replacement will be able to go online to a website provided by their insurer or by some other private party. This website might tell them which hospitals in their area perform hip replacements, what distance they are, what quality rating each hospital has received through any number of private sector rating entities, how many hip replacements that facility has performed in the last year (a key indicator of quality), what the average total price range of a hip replacement is in that facility, and what that consumer could be expected to pay out of pocket given his or her health plan. These websites won't be run by the federal government. What the federal government is doing is generating the information to allow this market to work more efficiently, to empower consumers, to make the health care system value-driven, and more efficient.

Some may say that consumer empowerment can't work in health care, that the decisions are too complex. I beg to differ. When the distortions of government and the third party payer system aren't involved, the system actually works to create value-based competition that benefits consumers, the health care market responds to economic laws just as all other markets do. In a free market, where consumers make their own decisions, innovation in everything from capital structure to packaging to materials tends over time to drive real price down and quality up. Look at shoes, computers, and dishwashers, or face lifts, nose jobs, and LASIK. With all of these, providers are able to compete for business and people pay out of pocket. The technology and techniques rapidly improve. Quality rises and prices drop. Look at LASIK, between 1999 and 2004, the average price per eye dropped about 20%. In short, freedom fosters prosperity.

I have faith in Americans' ability to make the best choices about their own health care in a competitive marketplace. And by keeping that as our guiding principle, I believe that we can foster a health care system that is efficient and effective and help Americans live longer, healthier lives. Thank you.