CALL TO ACTION

HEALTH REFORM 2009

SENATE FINANCE COMMITTEE CHAIRMAN MAX BAUCUS (D-MONT.) 

November 12, 2008

U.S. Senator Max Baucus (D-Mont.)

Chairman, Senate Finance Committee

CALL TO ACTION HEALTH REFORM 2009

www.fi n a n c e . s e n a t e . g ov • Te l : 2 0 2 - 2 2 4 - 4 5 1 5 
REFORMING AMERICA’S HEALTH CARE SYSTEM: 

A CALL TO ACTION

It is the duty of the next Congress to reform America’s health care system. In 2009, 

Congress must take up and act on meaningful health reform legislation that achieves 

coverage for every American while also addressing the underlying problems in our health 

system. The urgency of this task has become undeniable. 

In preparing to act, I led the U.S. Senate Finance Committee in holding nine hearings on 

health care reform this year and hosted a day-long health summit in June 2008 to explore 

in greater depth the problems plaguing our health system. I have spent a good deal of time 

talking to colleagues on both sides of the aisle and to stakeholders in the health care 

industry to get their perspectives on the issues that matter. And perhaps most importantly, 

in listening sessions across the state of Montana, I have heard from many Americans about 

the challenges so many patients and families face in getting access to affordable health 

coverage and paying medical bills. 

This paper — this Call to Action — represents the next step. It is not intended to be a 

legislative proposal. Nor is it an exhaustive exploration of every health care issue that 

should or needs to be addressed, or that will be considered. Rather, it details my vision for 

health care reform. The plan outlined here addresses health care coverage, quality, and 

cost. Many components would require an initial investment but, over time, would vastly 

improve the quality of the health care that Americans receive and reduce the cost of that 

health care, ultimately putting our system on a more sustainable path. The policies in this 

paper are designed so that after ten years the U.S. would spend no more on health care than 

is currently projected, but we would spend those resources more efficiently and would 

provide better-quality coverage to all Americans. 

The health system is so complex that any solution will demand time and attention to make 

sure that we get it right. This plan is most certainly a work in progress. But this Call to 

Action is intended to encourage constructive input by policymakers, stakeholders, and 

health policy thought leaders to move us forward. I look forward to discussing this plan 

with President-Elect Obama, with my colleagues in Congress, and with stakeholders in the 

health care system, working collaboratively with all to enact effective health reform. 
Americans who care deeply about the future of our health system and our economy must 

take up the fight together for comprehensive health care reform. My door is open and I 

seek partners with “can do” spirits and open minds. I believe — very strongly — that 

every American has a right to high-quality health care through affordable, portable, 

meaningful health coverage. And I believe that Americans cannot wait any longer. 

Max Baucus 

Chairman 

U.S. Senate Committee on Finance 

2
TABLE OF CONTENTS 

EXECUTIVE SUMMARY ......................................................................... iii 

CHAPTER I THE CASE FOR REFORM.......................................... 1 

ACCESS⎯MILLIONS OF AMERICANS LACK COVERAGE............................................... 1 

COST⎯ GROWTH IN HEALTH CARE SPENDING IS UNSUSTAINABLE FOR 

FAMILIES, BUSINESSES, AND THE FEDERAL GOVERNMENT ......................................... 3 

QUALITY⎯ POOR RETURN ON OUR HUGE INVESTMENT.............................................. 6 

WHAT AMERICANS WANT FROM THEIR HEALTH CARE SYSTEM ................................ 7 

BAUCUS PRINCIPLES: THE VISION FOR OUR HEALTH CARE SYSTEM ......................... 8 

CHAPTER II BAUCUS PLAN: INCREASING ACCESS TO 

 AFFORDABLE HEALTH COVERAGE ................. 13 

A. INDIVIDUAL RESPONSIBILITY.............................................................................. 15 

B. STRENGTHENING THE EMPLOYER-BASED SYSTEM.............................................. 16 

C. GUARANTEED ACCESS TO AFFORDABLE COVERAGE FOR INDIVIDUALS 

AND SMALL BUSINESSES..................................................................................... 17 

D. STRENGTHENING PUBLIC PROGRAMS.................................................................. 21 

E. FOCUSING ON PREVENTION AND WELLNESS ....................................................... 28 

F. ADDRESSING HEALTH DISPARITIES..................................................................... 30 

CHAPTER III BAUCUS PLAN: IMPROVING VALUE BY 

 REFORMING THE HEALTH CARE

 DELIVERY SYSTEM ................................................. 36 

A. STRENGTHENING THE ROLE OF PRIMARY CARE AND CHRONIC 

 CARE MANAGEMENT .......................................................................................... 37 

B. REFOCUSING PAYMENT INCENTIVES TOWARD QUALITY .................................... 41 

i
C. PROMOTING COLLABORATION AND ACCOUNTABILITY ....................................... 48 

D. HEALTH CARE INFRASTRUCTURE........................................................................ 55 

CHAPTER IV BAUCUS PLAN: FINANCING A MORE 

EFFICIENT HEALTH CARE SYSTEM.................. 65 

A. FRAUD, WASTE, AND ABUSE............................................................................... 66 

B. INCREASED TRANSPARENCY ............................................................................... 69 

C. MEDICAL MALPRACTICE REFORM ...................................................................... 74 

D. PRIVATE INSURANCE PLANS IN MEDICARE ......................................................... 76 

E. LONG-TERM CARE SERVICES AND SUPPORTS ..................................................... 78 

F. TAX INCENTIVES FOR HEALTH COVERAGE ......................................................... 80 

CONCLUSION ........................................................................................... 87 

ii
EXECUTIVE SUMMARY 

The link between health care costs and the economy is undeniable. Reforming the health 

care system is essential to restoring America’s overall economy and the financial security 

of our working families. 

The case for reform is strong. The U.S. is the only developed country that does not 

guarantee health coverage for all its citizens, with 46 million uninsured and another 25 

million underinsured. As a result, families are struggling to keep up with out-of-pocket 

costs for medical care. American businesses are straining to absorb rising health care costs 

while staying competitive at home and around the world. Despite high levels of spending 

on health care, research documents poor quality of care received by patients in the U.S. 

Studies show, for example, that adults receive recommended care for many illnesses only 

55 percent of the time. Children fare even worse. 

Americans are acutely aware of problems in the country’s health care system, and they are 

ready for change. They are not alone. The nation’s health care stakeholders — consumers, 

businesses, labor, providers, plans, manufacturers, and state and local governments — are 

signaling that they are ready and willing to engage in serious and comprehensive reform of 

a health system in crisis. They recognize that the status quo of high costs, unacceptable 

numbers of the uninsured and underinsured Americans, and far less than optimal quality 

and value is unsustainable and intolerable. And, notably, the nation’s economists concur 

that system reform is not only necessary to rationalize our health care system, but to 

sustain our economy, our ability to compete internationally and, over the long haul, to deal 

with our long-term fiscal challenges. 

A high-performing health care system would guarantee all Americans affordable, quality 

coverage no matter their age, health status, or medical history. Today, the costs of care for 

the uninsured are largely borne by those with insurance; providers charge higher prices to 

patients with private coverage to make up for uncompensated care, and these costs are 

passed on to consumers in the form of increased premiums. Requiring all Americans to 

have health insurance will help end the shifting of costs from the uninsured to the insured. 

Covering all Americans would also ensure that the insurance market functions effectively. 

Insurance works because policyholders pay into their plans when healthy, and have their 

medical bills paid when they are sick. If a significant portion of Americans does not 

purchase coverage until sick, then premiums for all enrollees will increase to cover insurer 

outlays, and the problem of unaffordable coverage will persist. Finally, covering all 

Americans is essential to effective prevention and wellness efforts and managing chronic 

illnesses. Efforts to guard against and better manage illness are an effective tool to 

improve health and contain costs but, without every American in the system, those efforts 

will fall short of their full potential. 

In a high-performing health care system, employers, individuals, health providers and 

plans, as well as government would all bear responsibility and contribute to fulfilling the 

goal of covering all Americans. Wellness and prevention would be prioritized. And 

iii
increased quality would result in lower costs so that employers could afford to continue to 

offer health coverage and still compete in a global marketplace. Our public health 

programs would be on a more fiscally sustainable path. Ensuring that every American has 

coverage would make health care truly portable, so that Americans are no longer locked 

into a job based on a need to retain their health coverage. This Call to Action outlines a 

vision for creating that high-performing health care system. 

Like a sturdy stool, the Call to Action has three equally important legs: (1) a policy that 

ensures meaningful coverage and care to all Americans; (2) an insistence that any such 

expansion be coupled with an emphasis on higher quality, greater value, and — over time 

— less costly care; and (3) an absolute commitment to weed out waste, eliminate 

overpayments, and design a sustainable financing system that works for taxpayers as well 

as for the nation’s recipients and providers of health care. 

Ensuring Health Coverage for All Americans. The Baucus plan would ensure that 

every individual can access affordable coverage by creating a nationwide insurance pool 

called the Health Insurance Exchange. Those who already have health coverage could 

keep what they have. But for those who need affordable, guaranteed coverage, the 

Exchange would be a marketplace where Americans could easily compare and purchase 

the plans of their choice. Private insurers offering coverage through the Exchange would 

be precluded from discrimination based on pre-existing conditions. Premium subsidies 

would be available to qualifying families and small businesses. By making health care 

more affordable and universally available to all Americans, the Baucus plan would take a 

major step toward eliminating racial and ethnic health disparities. 

While the Exchange is being created, the Baucus plan would make health care coverage 

immediately available to Americans aged 55 to 64 through a Medicare buy-in, and it would 

begin to phase-out the current two-year waiting period for Medicare coverage for 

individuals with disabilities. The plan would provide every American living below the 

poverty level with access to Medicaid. This policy is consistent with the original intent of 

Medicaid, and it is the quickest and most cost-effective way to cover every American 

living in poverty. The Baucus plan would also ensure that all states use the State 

Children’s Health Insurance Program (CHIP) to cover children at or below 250 percent of 

the Federal poverty level, putting help within reach for more needy children. Finally, 

recognizing that America cannot keep its promise to provide care to Native Americans and 

Alaska Natives with the current level of Indian Health Service (IHS) funding, the Baucus 

plan calls for additional funding for IHS. 

Once affordable, high-quality, and meaningful health insurance options are available to all 

Americans through their employers or through the Exchange, individuals would have a 

responsibility to have health coverage. This step is necessary for insurance market reforms 

to function properly and to end the cost shifting that occurs within the system. It is 

expected that the vast majority of American employers would continue to provide coverage 

as a competitive benefit to attract employees. Except for small firms, employers that 

choose otherwise must contribute to a fund that would help cover those who remain 

uninsured. 

iv
The Baucus plan would immediately refocus our health care system toward prevention and 

wellness, rather than on illness and treatment. Those who are uninsured ― and therefore 

less likely to receive preventive care and treatment for major conditions ― would be given 

a “RightChoices” card that guarantees access to recommended preventive care, including 

services like a health risk assessment, physical exam, immunizations, and age and genderappropriate cancer screenings recommended by the U.S. Preventive Services Task Force. 

Individuals without private coverage and not eligible or enrolled in a public health 

coverage program, but whose RightChoices screening detected and diagnosed one or more 

of the most common, costly chronic conditions, would qualify to receive treatment on a 

temporary basis until viable coverage options are available under the Health Insurance 

Exchange. Current Medicare, Medicaid, and CHIP beneficiaries would receive 

recommended preventive services with little or no co-payment. Preventive services would 

be covered by all insurance options offered through the Health Insurance Exchange. 

Improving Health Care Quality and Value. Recognizing that any attempt to cover the 

uninsured and reduce health care spending must address the perverse incentives fostered by 

current payment systems, the Baucus plan includes delivery system reforms that would 

improve quality and, over time, lower costs. The plan strengthens the role of primary care 

and chronic care management. Primary care is the keystone of a high-performing health 

care system. Increasing the supply and availability of primary care practitioners by 

improving the value placed on their work is a necessary step toward meaningful reform. 

The plan would refocus payment incentives toward quality and value. Today’s payment 

systems reward providers for delivering more care rather than better care. A redefined 

health system would realign payment incentives toward improving the quality of care 

delivered to patients. Fixing the unstable and unsustainable Medicare physician payment 

formula is a necessary step in this process. The plan would promote accountability and 

coordination among providers by encouraging providers in different settings — physician 

offices, inpatient hospitals, post-acute care settings, and others — to collaborate and 

provide patient-centered care in a way that would improve quality and save money. 

To facilitate the proposed delivery system reforms, the Baucus plan would improve the 

health care infrastructure by investing in new comparative effectiveness research and 

health information technology (IT). Health IT is needed for quality reporting and 

improvement and to give providers ready access to better evidence and other clinical 

decision-support tools. Reinvesting in the training of a twenty-first century health care 

workforce is necessary for many delivery system reform goals to be realized. 

Achieving Greater Efficiency and Sustainable Financing. The U.S. spends $2.3 trillion 

per year on health care, and economists warn that rising health care costs represent a 

serious threat to our long-term fiscal security. According to the Congressional Budget 

Office, up to one-third of that spending — more than $700 billion — does not improve 

Americans’ health outcomes. Excess spending must be eliminated and dollars put to better 

use, not only to correct the imbalances of the current health care system, but to offset the 

high costs of much-needed comprehensive reform. 

v
Beyond measures to refocus the system on primary care, reward quality care, and invest in 

critical research and technology, the Baucus plan would endorse direct steps in five 

additional areas to curb excess health care spending. The plan would invest more to detect 

and eliminate fraud, waste, and abuse in public programs. The plan would address 

overpayments to private insurers in the Medicare Advantage program. The plan would 

increase transparency of cost and quality information and would require disclosure of 

payments and incentives to providers by drug or device makers that may lead to biased 

decision-making. The plan also considers careful reforms of medical malpractice laws that 

could lower administrative costs and health spending throughout the system, while 

ensuring that injured patients are compensated fairly for their losses. 

Long-term care services and supports are both a significant share of national health 

expenditures and a driver of cost. Considering policies to shift the focus from institutional 

care to services provided in the home and community could improve the quality of care 

delivered and reduce costs. Finally, the plan would explore targeted reforms of the tax 

code to make incentives more efficient, distribute benefits more fairly, and promote 

smarter spending of health care dollars by consumers themselves. 

Conclusion. I believe it is the duty of the next Congress to reform America’s health care 

system. In 2009, Congress must take up and act on meaningful health reform legislation 

that achieves coverage for all Americans while also addressing the underlying problems in 

our health system. The urgency of this task has become undeniable. 

In the short term, health care reform would cost taxpayers more than the government can 

achieve in savings from all reforms and financing changes. Congressional leaders and the 

public must be realistic about the timeframe in which the fiscal success of reform is 

measured. If we fail to act, however, we will double our current national expenditure on 

health care from $2 trillion to $4 trillion, continue to witness the plight of tens of millions 

of our citizens without health insurance cost shifting to those who do, continue to tolerate 

poor quality that leads to nearly 100,000 deaths a year, and watch our businesses become 

less competitive and our nation go further into debt. In short, we all must realize that the 

costs of inaction, both in human and financial terms, will eventually be far greater than any 

initial outlays. We must choose to invest now in a health care system that will richly repay 

the nation with greater health and economic stability in the long term. 

 

vi
CHAPTER I THE CASE FOR REFORM 

At a day-long health reform summit hosted by the Senate Finance Committee this year, 

Federal Reserve Chairman Ben Bernanke said, “Improving the performance of our healthcare system is without a doubt one of the most important challenges that our nation 

faces.”1

 With a world financial crisis demanding a significant investment of government 

resources, some have asked whether the time is right for a large — and likely expensive — 

effort at comprehensive health care reform in the United States. But the link between 

health care costs and the economy is incontrovertible. Health care reform is not a 

distraction from addressing our economic challenges; health care reform is an essential part 

of restoring America’s overall economy and the finances of our working families. 

Health care concerns are closely tied to economic anxiety. Sixty-two percent of voters in the 

2008 elections agree that it is more important than ever to take on health care reform in light 

of the economic downturn.2

 This moment in history is not unlike that faced by President 

Franklin D. Roosevelt and the New Deal generation as they sought a path out of the Great 

Depression. Now, as then, solving America’s economic challenges will require a 

multifaceted response. Reforming the nation’s health care system will be an essential part of 

shoring up the nation’s long-term economic strength. 

The key challenges facing our health care system are lack of access to care, the cost of 

care, and the need for better-quality care. Each of these challenges has a direct effect on 

family budgets, on U.S. businesses, on government spending, and on the country’s ability 

to compete globally. A better understanding of each of these key issues demonstrates the 

need for immediate action by the next Congress. 

ACCESS⎯MILLIONS OF AMERICANS LACK COVERAGE

3 The U.S. is the only developed country without health coverage for all of its citizens. An 

estimated 45.7 million Americans, or 15.3 percent of the population, lacked health insurance 

in 2007 — up from 38.4 million in 2000.4

 Those without health coverage generally 

experience poorer health and worse health outcomes than those who are insured. Twentythree percent forgo necessary care every year due to cost. And a number of studies show that 

the uninsured are less likely to receive preventive care or even care for traumatic injuries, 

heart attacks, and chronic diseases.5, , , 6 7 8

 The Urban Institute reports that 22,000 uninsured 

adults die prematurely each year as a direct result of lacking access to care.9

A majority of the uninsured has low or moderate incomes (see Figure 1.1). About twothirds have family incomes less than twice the Federal poverty level (FPL).10,11 Only one 

in ten have incomes higher than four times the Federal poverty level. 

12 Eight in ten of the uninsured come from working families. But these workers are either 

not offered coverage by their employer and cannot access it through a family member, or 

they do not qualify for employer-offered coverage. For example, they might not be eligible 

because they work part-time. 

1
Figure 1.1. Uninsured by Federal Poverty Level 

100-199% FPL

29%

200-299% FPL

17%

300-399% FPL

8%

400%+FPL

10% <100% FPL

37%

Source: KCMU/Urban Institute analysis of March 2008 CPS. 

In addition to the uninsured, 

another 25 million Americans are 

“underinsured,” without enough 

coverage to keep their medical 

bills manageable. According to a 

recent study by The 

Commonwealth Fund, 

REAL PEOPLE, REAL REASONS FOR REFORM: 

13 In 2006, Lisa Kelly was diagnosed with acute leukemia. 

She had insurance―an AARP Medical Advantage plan, 

underwritten by UnitedHealth Group Inc. with a monthly 

premium of $185. Unfortunately, the policy had a $37,000 

annual limit. And due to the flimsy coverage provided by 

her policy, the hospital, M.D. Anderson Cancer Center, 

79 million Americans are unable 

to pay their medical bills

requested an up-front cash payment of $105,000 before it 

14 would start providing chemotherapy treatment. — and 

of those, more than 47 million 

were insured when the expenses 

were incurred.

Ms. Kelly enrolled in a high-risk insurance plan 

administered by Blue Cross Blue Shield of Texas in 

15 February 2007, with a monthly premium of $633. Since her Despite their 

insurance coverage, medical debt 

keeps these Americans from 

feeding their families, paying their 

rent, or heating their homes. 

Medical debt contributes to half of 

all filed bankruptcies, and affects 

approximately two million people 

a year.

cancer was a pre-existing condition, she had to wait one 

year for the new plan to cover her treatment. Although 

Blue Cross started paying her new hospital bills earlier this 

year, Ms. Kelly is still personally responsible for more than 

$145,000 in bills incurred before February 2008, and she 

is paying $2,000 each month for those bills. In June, she 

learned that after being in remission for more than a year, 

her leukemia has returned. 

16 

2
COST⎯ GROWTH IN HEALTH CARE SPENDING IS UNSUSTAINABLE FOR FAMILIES,

BUSINESSES, AND THE FEDERAL GOVERNMENT

American families are struggling to keep up with out-of-pocket costs for health care. 

American businesses are straining to absorb rising health care costs while staying 

competitive at home and around the world. Federal and state budgets — as well as 

taxpayers — are bearing an ever-increasing burden as entitlement programs such as 

Medicare and Medicaid consume a larger share of public expenditures. 

Failure to address problems in the health care system could undermine current efforts to 

restore the economy. Ultimately, Congress cannot help American families’ finances or 

address America’s economic woes in a lasting, meaningful way without health care reform. 

Even before the current economic crisis, working families and individuals found their 

health care in jeopardy as the cost of employer-sponsored coverage rose beyond the means 

of businesses — particularly small businesses — and workers alike. As Figure 1.2 shows, 

health insurance premiums have increased faster than wages and inflation for most years 

between 1988 and 2007. Premiums have increased 117 percent for families and 

individuals and 119 percent for employers between 1999 and 2008. 

Figure 1.2. Illustrations of Health Insurance Premium Increases 

$1,543

$3,354

$4,247

$9,325

1999 2008

Employer Contribution

Worker Contribution

12%

18%

14%

9%

1%

5%

8%

11%

6%

8%

9%

11%

14% 13%

1988

1989

1990

1993

1996

1999

2000

2001

2002

2003

2004

2005

2006

2007

Health Insurance Premiums

Overall Inflation

Workers' Earnings

Increases in Health Insurance Premiums

Compared to Other Indicators, 1988-2007

Average Health Insurance Premiums and 

Worker Contributions for Family Coverage, 

1999–2008

$5,791

$12,680

119%

increase

117%

increase

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2008; KPMG Survey of EmployerSponsored Health Benefits, 1993, 1996; The Health Insurance Association of America (HIAA), 1988, 1989, 1990; 

Bureau of Labor Statistics, Consumer Price Index, U.S. City Average of Annual Inflation, 1988-2007; Bureau of Labor 

Statistics, Seasonally Adjusted Data from the Current Employment Statistics Survey, 1988-2007. 

Why are premiums rising so fast? A recent synthesis of studies found that greater use of 

medical technology is a driving force — contributing between 38 and 65 percent to health 

care cost increases.17 Other factors, including obesity, demographics, and productivity, 

also contribute to growth in the cost of health care. 

3
Additionally, hospitals and clinics provide an estimated $56 billion in uncompensated care 

every year to people without health insurance,18 and those who have health coverage pay 

the bill through higher health care costs and increased premiums. A study of this “hidden 

tax” estimated that ten percent of California health care premiums are attributable to cost 

shifting due to the uninsured.19

Even if workers can afford their portion of a premium, employers may not be able to afford 

the rest. Because employers are the principal source of health insurance in the U.S., 

providing health benefits for more than 158 million people,20 erosion in employersponsored coverage is a serious problem. 

Small business owners have 

increasingly been forced to decide 

among several painful options to offset 

increasing health care costs — raising 

health insurance premiums, limiting 

raises or reducing bonus pay, 

eliminating family health benefits, or 

providing less-than-comprehensive 

health coverage. 

REAL PEOPLE, REAL REASONS FOR REFORM: 

 Phoenix Products, Inc., an Ohio firm, has operated for 

31 years, growing from a youthful start-up company 

into an established business with 47 employees. As 

recently as 2003, Phoenix Products could afford to 

provide a comprehensive health plan at a reasonable 

cost. But as its employees grew older and health costs 

increased, the company had to dramatically alter the 

health plan benefit structure to keep providing any 

coverage at all. The company moved away from 

comprehensive benefits to a limited catastrophic 

coverage plan. Even then, premiums increased ten The story of Phoenix Products (left), 

relayed to the Senate Finance Committee 

at a June 2008 hearing,

percent each year from 2003 to 2007.

Renewing coverage in 2008 cost the company 35 21 is far too 

common in the U.S. In 2000, 68 percent 

of small to mid-size businesses (3-199 

workers) offered health benefits, but 

today that figure is 62 percent.

percent more than in 2007; the maximum increase 

allowed under Ohio law. Quotes from other plans were 

21⁄2 times higher than the current rate. The company is 

on the verge of losing its ability to offer insurance.

22

As rising health care costs threaten the stability and competitiveness of American 

businesses, they threaten to destabilize the fiscal health of the country itself. Peter Orszag, 

Director of the Congressional Budget Office, has appropriately noted that rising health care 

costs represent the “single most important factor influencing the Federal Government’s 

long-term fiscal balance.”23 The U.S. spends more than 16 percent of our gross domestic 

product (GDP) on health care — a much greater share than other industrialized nations 

with high-quality systems and coverage for everyone. By 2017, health care expenditures 

are expected to consume nearly 20 percent of the GDP (see Figure 1.3), or $4.3 trillion 

annually.24 Spending for Medicare and Medicaid, due to many of the same factors found 

in the private sector, is projected to increase by 114 percent in ten years.25 Over the same 

period, the GDP will grow by just 64 percent. 

4
Figure 1.3. Health Care Spending Poses Long Term 

Challenges for U.S. Economy and Federal Budget 

16.3%

20.5%

37.0%

43.0%

2007 2050 2007 2050

Health Care Spending

as % of GDP

Medicare & Medicaid

as % of Total Federal Budget

Sources: Keehan, “Health Spending Projections Through 2017”; CBO, 

The Long Term Budget Outlook (Dec. 2007) 

States face fiscal challenges ALSO. On average, states already spend 22 percent of their 

budgets on Medicaid.26 One effect of rising unemployment rates will be increased 

eligibility for and enrollment in Medicaid. Many state governments are struggling to meet 

balanced budget requirements.27 In response, at least 29 states have already taken action to 

reduce their budget deficits for fiscal year 2009.28 States face limited choices in trying to 

meet budget shortfalls; they can raise taxes or cut spending on Medicaid and other vital 

services. 

Finally, in the 21st century, when the economies of the world are ever more interconnected, 

the strength of our health care system is increasingly important. Our international 

competitiveness depends on the health of our workforce. Although polls show that many 

Americans believe the U.S. health care system is better than other industrialized nations,29

the numbers do not demonstrate this to be true. 

As mentioned, the U.S. spends a greater percent of GDP and almost twice as much per 

person on health care compared to other major industrialized countries (see Figure 1.4).30

In a study of global health care systems, journalist and author T.R. Reid found startling 

cost differences with the U.S. In Japan’s largely private system, the cost for magnetic 

resonance imaging (MRI) is less than $100, compared to $1,200 in the U.S. In 

Switzerland, home to profitable insurance companies and influential pharmaceutical 

companies, administrative costs represent 5.5 percent of total costs, compared to about 22 

percent for coverage purchased in the private insurance market in the U.S.31 While there 

must be a uniquely American answer to the question of containing health care costs, other 

countries demonstrate the possibility of success. 

5
Figure 1.4. Total Health Expenditures Per Capita, 

U.S. and Selected Countries, 2006 

$2,824

$6,714

$2,760

$4,311

$3,202

$4,250

$3,391

$4,303

$2,474

$2,614

$3,082

$3,371

$3,449

$2,668

$3,349

$3,678

$3,488

$3,606

$2,999

OECD Average

United States

U.K.

Switzerland

Sweden

Norway

Netherlands

Luxembourg

Japan

Italy

Ireland

Germany

France

Finland

Denmark

Canada

Belgium

Austria

Australia

Amounts in U.S.D. Source: Organisation for Economic Co-operation and Development, OECD Health 

Data 2008, updated August 26, 2008. http://www.oecd.org/health/healthdata.

QUALITY⎯ POOR RETURN ON OUR HUGE INVESTMENT

Despite high levels of spending on health care, the U.S. ranks last out of 19 industrialized 

countries in unnecessary deaths.32 America ranks 29th out of 37 countries for infant 

mortality — tied with Slovakia and Poland, and below Cuba and Hungary.33 The United 

States has almost double the infant mortality rate of France or Germany.34 A recent study 

by the Institute of Medicine concluded that the current health care system is not making 

progress toward improving quality or containing costs for patients or providers.35 

Research documenting poor quality of care received by patients in the U.S. is shocking. A 

2003 RAND Corporation study found that adults received recommended care for many 

illnesses only 55 percent of the time. Needed care for diabetes was delivered only 45 

percent of the time and for pneumonia only 39 percent of the time. Patients with breast 

cancer fared better, but still did not receive recommended care one-quarter of the time. 

6
The same researchers at RAND found that children received recommended care only 47 

percent of the time.36 Recommended preventive services were provided just 41 percent of 

the time, and children with chronic illnesses received about 53 percent of needed services. 

Even more disturbing is the finding that all patients are at risk for poor quality care —

gender, age, race, income, and insurance status do not provide any advantage. Although 

many patients do receive excellent care, many more receive uncoordinated, fragmented 

care, are unable to access care when needed, or obtain care through hospital emergency 

departments after their condition has worsened due to lack of timely intervention. Beyond 

the known medical risks that low-quality care poses for individual Americans, the lack of 

quality across our health care system contributes to the problem of rising costs. 

In short, Americans are not getting their money’s worth when patients receive services of 

little or no value37,38 — such as hospitalizations that could have been prevented with 

appropriate outpatient treatment, duplicate tests, or ineffective tests and treatments. Yet 

the current system does little to steer providers toward the right choices. Even though 

more care does not necessarily mean better care, Medicare and most other insurers 

continue to pay for more visits, tests, imaging services, and procedures, regardless of 

whether the treatment is effective or necessary, and pay even more when treatment results 

in subsequent injury or illness.39 Providers are not consistently encouraged to coordinate 

patients’ care or to supply preventive and primary care services, even though such actions 

can improve quality of care and reduce costs. Rewarding providers that furnish better 

quality care, coordinate care, and use resources more judiciously could reduce costs and, 

most importantly, better meet the health care needs of millions more American patients.40

WHAT AMERICANS WANT FROM THEIR HEALTH CARE SYSTEM

Americans are acutely aware of problems in the country’s health care system, and ready 

for change. Polling repeatedly demonstrates that Americans want and deserve better 

access to care, better quality care, and better value from their health care system. More 

than 70 percent of Americans rate our health care system as “fair” or “poor.”41 When 

asked whether our health system needs a complete overhaul, major repairs, or minor 

tinkering, 90 percent of Americans respond that the system should be “completely rebuilt” 

or that “fundamental changes” are needed.42

At the same time, those who currently have health coverage do not want to lose those 

benefits. Many people are satisfied with their personal providers or their current coverage 

and do not want to jeopardize those connections to the system. 

The majority of Americans also believes that coverage should be provided for the 

uninsured, calling the issue of the uninsured a very serious problem.43 Americans also 

want relief from rapidly rising premiums and medical debt. Sixty-five percent of those 

polled admit that it is “somewhat” or “very difficult” for them to afford health care and 

health insurance.44 Three out of four say that, over the past five years, the amount of 

money that they have paid out of pocket for their own health care has increased.45 

7
Despite widespread agreement on the need for reform, the task remains difficult because 

Americans do not necessarily agree on how to achieve it (see Figure 1.5). Although a 

majority of respondents would support a mandate on employers to provide coverage, a 

“Medicare-for-all” single-payer option, or a mandate that all individuals purchase 

coverage, opposition to each of these options is also somewhat substantial. Moreover, 

some of this support erodes when respondents are asked whether they would be willing to 

have more government responsibility or higher taxes — though half of all surveyed in 

2007 said they would support reform even under these circumstances.46

Figure 1.5. Lack of Consensus on Reform Options 

44%

51%

53%

62%

45%

39%

36%

31%

Tax Breaks to

Make Insurance

More Affordable

Individual

Mandate

Medicare-for-All

Employer

Mandate

Support Oppose

Source: Los Angeles Times/Bloomberg poll, Oct 19-22, 2007 

Policymakers need to sift through the options and combine the best of American’s desires 

for a new health care system to ensure health coverage for every American, increase the 

quality of care for all, and reduce costs to make our system sustainable for the future. 

BAUCUS PRINCIPLES: THE VISION FOR OUR HEALTH CARE SYSTEM 

While there may be differences of opinion on the solutions, most Americans agree on the 

principles that health reform should embrace. These principles form the foundation of this 

Call to Action. 

There is widespread agreement that every American should have health coverage. This 

does not mean that a government program should provide the coverage. Such a system 

may not be viable in a country that values individuality, choice, and a preference for 

market-based solutions. A mix of public and private solutions must be found to keep our 

system from leaving millions of Americans behind. 

There is also agreement that our health care system must do a better job of containing 

costs. Any serious health reform proposal must include policies that will slow the rate of 

growth in health spending over time. The sustainability of the nation’s public programs, 

America’s businesses — and the economy — depend on it. Along with efforts to rein in 

8
health spending, the quality of care must improve, and payment systems should better align 

incentives to foster a focus on providing better care rather than more care. Our system 

must also encourage wellness and the prevention of disease through early detection, 

modification of risk factors, and encouragement of healthy lifestyle choices. When illness 

cannot be prevented, the focus should be on care coordination. 

Another critical principle in health reform is the recognition that health care is a shared 

responsibility. Employers, individuals, and government all have a role to play — and a 

contribution to make — to the system. Employers should contribute toward health 

insurance choices and financing. Individuals have the responsibility to get coverage, to 

take better care of their own health, and to play a larger role in health care treatment 

decisions. Providers should improve their performance to ensure consistent, high-quality 

health care. Society, through state and Federal governments, should help those who lack 

the means to buy insurance on their own and ensure that the insurance market is fair and 

transparent. 

With these principles in mind, it is possible to envision a high-performing health care 

system in the future. Such a system would guarantee Americans the choice of a health 

plan that they can afford. Employers, individuals, and government would all bear 

responsibility and contribute toward fulfilling that goal. Wellness and prevention would be 

encouraged. The costs of health care would be more manageable so that employers could 

afford to offer coverage to their employees and still compete in a global marketplace. Our 

public health programs would be on a more fiscally sustainable path than they are today. 

Providing coverage to all Americans would make health care truly portable and allow 

Americans to change jobs when they wanted, rather than remaining locked in by their need 

for health coverage. This Call to Action represents a vision for creating that highperforming health care system. 

The system envisioned here guarantees access to affordable coverage for every American. 

To ensure that affordable options are available to all, assistance must be provided to small 

businesses, families, and individuals who currently struggle to find and afford health 

coverage. This approach will allow every American to be enrolled in some form of health 

care plan, either private or public. Those who like their current coverage arrangements 

could keep what they have. Others, including the uninsured, would have options, and all 

Americans would gain the ability to leave a job or start a new business without worrying 

about prospects for future coverage. Providing coverage to all Americans would lower 

costs by including the healthiest individuals in the risk pool to offset the costs of the 

sickest individuals — and maintaining wellness rather than treating illness. 

The system envisioned here would ensure that every individual could access affordable 

coverage by creating a nationwide insurance pool, precluding discrimination by insurers 

based on health status, and providing subsidies to low-income families. It also aims to 

lower costs by improving the quality of the care that all Americans receive, promoting 

better value for our dollar, and reforming the delivery system. 

9
The passage and implementation of comprehensive health care reform will not happen 

overnight. The health system is so complex that any solution will demand time and 

attention to make sure that we get it right. But Americans without health insurance — as 

well as those in need of better coverage or in danger of losing their coverage — need the 

process to start now. 

 

1

 Ben S. Bernanke, “Challenges for Health-Care Reform” (Testimony before the Senate Committee on 

Finance Health Care Summit, U.S. Senate, June 16, 2008). 

http://finance.senate.gov/healthsummit2008/Statements/Chairman%20Bernanke’s%20Remarks.pdf. 

2

 Henry J. Kaiser Family Foundation, “Kaiser Health Care Tracking Poll: Election 2008,” The Kaiser Family 

Foundation, http://www.kff.org/kaiserpolls/upload/7832.pdf. 

3

 “Coverage for all”, in this context, means that every citizen in the country has health care coverage. It does 

not necessarily mean that this coverage is financed by government spending. While many developed 

countries finance health care primarily through government funds, others finance coverage through a mix of 

public and private spending. 

4

 U.S. Census Bureau, “Income, Poverty, and Health Insurance Coverage in the United States: 2007,” U.S. 

Census Bureau, http://www.census.gov/prod/2008pubs/p60-235.pdf. 

5

 John Z. Ayanian et al., “Unmet Health Needs of Uninsured Adults in the United States,” Journal of the 

American Medical Association, 284, no.16 (2000): 2061-9. 

6

 Richard G. Roetzheim et al, “Effects of Health Insurance and Race on Colorectal Cancer Treatments and 

Outcomes,” American Journal of Public Health 90, no.11 (2000): 1746-54. 

7

 Jack Hadley, “Insurance Coverage, Medical Care Use, and Short-term Health Changes Following an 

Unintentional Injury or the Onset of a Chronic Condition,” Journal of the American Medical Association,

297, no.10 (2007): 1073-84. 

8

 John G. Canto et al., “Payer Status and the Utilization of Hospital Resources in Acute Myocardial 

Infarction,” Archives of Internal Medicine, 160, no.6 (2000): 817-23. 

9

 Stan Dorn, “Uninsured and Dying Because Of It: Updating the Institute of Medicine Analysis on the Impact 

of Uninsurance on Mortality,” The Urban Institute, (2008), http://www.urban.org/publications/411588.html.

10 Henry J. Kaiser Family Foundation, “Five Basic Facts on the Uninsured,” The Kaiser Family Foundation, 

(2008), http://www.kaiserfamilyfoundation.org/uninsured/upload/7806.pdf.

11 In 2008, 100 percent of the Federal poverty level for a family of three is $17,600 and for a family of four it 

is $21,000. Two hundred percent of the Federal poverty level for a family of three is $35,200 and $42,400 

for a family of four. 

12 Henry J. Kaiser Family Foundation, “Five Basic Facts on the Uninsured,” The Kaiser Family Foundation, 

(2008), http://www.kaiserfamilyfoundation.org/uninsured/upload/7806.pdf.

13 Lisa Kelly, “47 Million & Counting: Why the Health Care Marketplace is Broken,” (Testimony before the 

Senate Committee on Finance, U.S. Senate, June 10, 2008). 

14 Karen Davis, “Health of the Private Health Insurance Market,” (Testimony before the House Committee 

on Ways and Means, Subcommittee on Health, U.S. House of Representatives, September 23, 2008). 

15 Karen Davis, “Shifting Health Care Financial Risk to Families Is Not a Sound Strategy: The Changes 

Needed to Ensure Americans’ Health Security,” The Commonwealth Fund, (2008). 

16 David Himmelstein et al., “Illness and Injury as Contributors to Bankruptcy,” Health Affairs no. 24 (2005): 

5-70. 

10
 17 Sarah Goodell and Paul B. Ginsburg, “High and Rising Health Care Costs: Demystifying U.S. Health Care 

Spending,” The Robert Wood Johnson Foundation, (2008), 

http://www.rwjf.org/files/research/101508.policysynthesis.costdrivers.brief.pdf. 

18 Jack Hadley, John Holahan, Teresa A. Coughlin, and Dawn Miller, “Covering the Uninsured In 2008: 

Current Costs, Sources Of Payment, and Incremental Costs,” Health Affairs, 27, no. 5, (2008): 399-415. 

19 Peter Harbage and Len Nichols, “A Premium Price: The Hidden Cost All Californians Pay in Our 

Fragmented Health Care System,” The New America Foundation, (2006), 

http://www.newamerica.net/files/HealthIBNo3.pdf. 

20 Kaiser Family Foundation and Health Research and Educational Trust, “Employer Health Benefits Survey, 

2008,” The Kaiser Family Foundation, http://ehbs.kff.org/pdf/7790.pdf. 

21 Raymond Arth, “47 Million & Counting: Why the Health Care Marketplace is Broken” (Testimony before 

the Senate Committee on Finance, U.S. Senate, June 10, 2008). 

22 Kaiser Family Foundation and Health Research and Educational Trust, “Employer Health Benefits Survey, 

2008,” The Kaiser Family Foundation, http://ehbs.kff.org/pdf/7790.pdf. 

23 Peter Orszag, “The Overuse, Underuse, and Misuse of Health Care,” (Testimony before the Senate 

Committee on Finance, U.S. Senate, July 17, 2008). 

24 Sean Keehan, et.al., “Health Spending Projections Through 2017: The Baby-Boom Generation Is Coming 

to Medicare,” Health Affairs 27, no.2 (2008): 145-155. 

25 Peter Orszag, “The Budget and Economic Outlook: Fiscal Years 2008 to 2018,” (Testimony before the 

Senate Budget Committee, U.S. Senate, January 24, 2008). 

26 National Association of State Budget Officers, “The Fiscal Survey of States” National Association of State 

Budget Officers, (2008), 

http://www.nasbo.org/Publications/PDFs/Fiscal%20Survey%20of%20the%20States%20June%202008.pdf. 

27 National Conference of State Legislators, “State Balanced Budget Requirements,” NCSL, (2003). 

http://www.ncsl.org/programs/fiscal/balreqs.htm. All States, except Vermont, are constitutionally bound to 

balance their budgets. 

28 Iris J. Lav, Jason Levitis, and Edwin Park, “House Plan Effectively Targets Fiscal Relief to States,” The 

Center on Budget and Policy Priorities, (2008), http://www.cbpp.org/9-26-08sfp.pdf: 2. 

29 Harvard University School of Public Health/Harris Interactive. “Americans’ Views on the U.S. Health 

Care System Compared to Other Countries,” Harvard University/Harris Interactive, (2008). 

30 The Commonwealth Fund, “Why Not the Best? Results from the National Scorecard on the U.S. Health 

System Performance” The Commonwealth Fund, (2008), 

http://www.commonwealthfund.org/usr_doc/StateScorecard.pdf?section=4039. 

31 PBS, Frontline, “Sick Around the World,” www.pbs.org/wbgh/pages/frontline/sickaroundtheworld. 

32 Ellen Nolte and C. Martin McKee, “Measuring the Health of Nations: Updating an Earlier Analysis,” 

Health Affairs, 27, no. 1, (2008): 58-71. 

33 Marian F. MacDorman and T.J. Mathews, “Recent Trends in Infant Mortality in the United States,” 

Centers for Disease Control and Prevention, (2008). 

34 Organization for Economic Co-Operation and Economic Development. “OECD Health Data 2008,” 

OECD, (2008). 

35 Committee on Quality of Health Care in America, “Crossing the Quality Chasm: A new Health System for 

the 21st Century,” Institute of Medicine, (2001). 

36 Rita Mangione-Smith, et al., “The Quality of Ambulatory Care Delivered to Children in the United States,” 

New England Journal of Medicine, no. 357 (October 11, 2007): 1515-23. 

11
 37 Elliot S. Fisher et al., “The Implications of Regional Variations in Medicare Spending, Part 1: The Content, 

Quality, and Accessibility of Care,” Annals of Internal Medicine 138, no. 4 (2003): 283. 

38 Ibid., 293. 

39 Committee on Quality of Health Care in America, “Crossing the Quality Chasm: A new Health System for 

the 21st Century,” Institute of Medicine, (2001): 1-335. 

40 Donald Berwick et al., “The Triple Aim: Care, Health and Cost,” Health Affairs 27, no. 3 (2008): 768. 

41 Robert J. Blendon, “Lessons for the Next Debate: Understanding the Public on the Health Care 

Costs/Uninsured Issue,” Harvard School of Public Health, and Kennedy School of Government. 

42 CBS/NYT Poll (Conducted February 23-27, 2007), 

http://www.cbsnews.com/stories/2007/03/01/opinion/polls/main2528357.shtml. 

43 NPR/Kaiser Family Foundation/Harvard School of Public Health, “The Public on Requiring Individuals to 

Have Health Insurance,” NPR/Kaiser Family Foundation/Harvard School of Public Health, (2008), 

http://www.npr.org/programs/morning/features/2008/feb/insurance/summary.pdf

44 Kaiser Family Foundation, The Washington Post/Harvard University, “Low-Wage Workers Survey” The 

Kaiser Family Foundation, (2008), http://www.kff.org/kaiserpolls/upload/7804.pdf. 

45 Ibid. 

46 CBS/NYT Poll (Conducted February 23-27, 2007), 

http://www.cbsnews.com/stories/2007/03/01/opinion/polls/main2528357.shtml. 

12
CHAPTER II BAUCUS PLAN: INCREASING ACCESS TO 

AFFORDABLE HEALTH COVERAGE 

Achieving health coverage for every American has proven an elusive goal for decades, 

dating back to the first attempt at national health reform in the early 1900s by the 

Progressive Party.1

 That effort failed, as did the Wagner-Murray-Dingell bill and attempts 

by President Truman in the 1940s, the plan proposed by President Nixon in the 1970s, and 

the Health Security Act proposed by President Clinton in 1993. Each was unsuccessful for 

its own unique reasons. 

Over the years, the U.S. health system has become very complex, with deeply entrenched 

interests. Significant changes will take time to approve and implement. But the series of 

changes and reforms envisioned in this Call to Action can eventually remake the current 

system to ensure every American has access to high-quality health care through affordable, 

portable, and meaningful health insurance. 

The Baucus plan incorporates six important elements as it moves towards covering all 

Americans: 

• Individual Responsibility. Covering all Americans means the enrollment of every 

individual in some form of health care plan, private or public. But the principle of 

individual responsibility can be applied only when affordable options are available 

to all. 

• Strengthening the Employer-Based System. We must ensure the continued 

viability of the employer-based system — the principal source of health coverage 

for most Americans — to allow workers to keep the insurance that they currently 

have and value. Eliminating employer-based coverage, as some have proposed, 

would upend health care for more than half the American people — 158 million in 

all.2 This plan envisions a role for employers to contribute to employees’ access to 

health care. 

• Guaranteed Access to Affordable Coverage for Individuals and Small 

Business. Additional assistance must be available to families, individuals, and 

small businesses who currently struggle to find and afford health insurance. A 

mechanism must be established to allow health care consumers to find and obtain 

health coverage that best meet their needs. 

This mechanism — the Health Insurance Exchange — will connect individuals and 

employers to insurance offered at local, state, regional, or national levels. Insurers 

offering coverage through the Exchange would need to meet certain requirements 

established by a new Independent Health Coverage Council. 

Reforms enacted through the Exchange could improve access to health coverage 

for all. In order to make insurance affordable, the existing insurance market must 

be reformed. The lack of appropriate standards and regulation in certain markets 

13
fails far too many Americans who need health care. Requirements of the Exchange 

would be extended to improve fair price and quality competition in the insurance 

market as a whole so that coverage would be more affordable and available to more 

Americans. 

Creation of the Exchange would take time, but more immediate steps could provide 

relief to Americans most in need of health coverage and begin to improve the 

health of the country overall. 

• Strengthening Public Programs. Existing public programs represent an effective 

and efficient way to increase access to coverage and decrease the number of 

uninsured. Offering individuals approaching age 65 the chance to buy into 

Medicare early and eliminating the requirement that disabled individuals wait two 

years to enroll in Medicare would ensure coverage to populations that the private 

market is under-serving. Improving Medicaid and the State Children’s Health 

Insurance Program (CHIP) could provide coverage quickly to additional lowincome Americans while serving current beneficiaries better. Increased attention 

and funding for the Indian Health Service (IHS) could improve care for Native 

American and Alaska Native populations. We can strengthen public health care 

programs promptly, though the impact on state and Federal budgets must also be 

considered. 

• Focusing on Prevention and Wellness. Increased access to preventive care and 

wellness is another step that could be accomplished in the short term. Increasing 

the availability and effectiveness of primary care coverage could create a national 

focus on maintaining wellness, rather than treating illness — which would improve 

quality and reduce costs across the health care system. 

• Addressing Health Disparities. In our current health care system, racial and 

ethnic minorities disproportionately lack ready access to high-quality medical care. 

This gives rise to differences in both health status and health care among various 

groups in our diverse population. Our system also prohibits certain legal 

immigrants from getting health care for five years. Though medical advances 

benefit much of the population, health disparities continue to worsen for others. 

These disparities must be addressed and ultimately eliminated. Americans want and 

deserve a system that provides equal access to health coverage and health care for 

all — regardless of age, race, ethnicity, or income — and that is what this Call to 

Action would give them. 

These six elements combine to give every American a role and a responsibility in 

reforming our health care system to ensure coverage for every individual. The remainder 

of this chapter provides additional detail on these elements. 

14
A. INDIVIDUAL RESPONSIBILITY

Once affordable, high-quality, and meaningful health insurance options are available to all 

Americans, it will be each individual’s responsibility to have coverage. This step is 

necessary to make the entire health care system function properly. 

Today, the costs of care for 46 million Americans without health insurance are largely 

borne by those with insurance; providers charge higher prices to patients with private 

coverage to make up for uncompensated care, and these costs are passed along to 

consumers in the form of increased premiums.3

 The cost of that uncompensated care is 

also unnecessarily inflated because patients without insurance often wait to receive care 

until they have to go to the emergency room. Requiring all Americans to have health 

coverage will help end the shifting of costs of the uninsured to the insured. 

Requiring all Americans to have health coverage would also ensure that the insurance 

market functions effectively. Insurance works because policyholders pay into their plans 

when healthy, and have their medical bills paid when they are sick. If a significant portion 

of Americans does not purchase coverage until sick, then premiums for all enrollees will 

increase to cover insurer outlays, and the problem of unaffordable coverage will persist. 

Finally, covering all Americans is essential to effective prevention and wellness efforts and 

managing chronic illnesses. Efforts to guard against and better manage illness are an 

effective tool to contain costs, but without every American in the system, those efforts will 

fall short of their full potential. 

Implementation of a responsibility for all individuals to have coverage would be fair as 

long as every consumer has a reasonable avenue to find and purchase affordable health 

care coverage. The Exchange envisioned in this plan, described more fully below, would 

be the primary path for those shut out of or underserved by today’s health care system. 

The Exchange would provide standardized information and a single, standard, simple form 

for enrollment in a plan of the consumer’s choice. Available to all, the Exchange would 

also allow individuals to enroll in health care plans in various convenient locations, 

including physicians’ offices, local hospitals or schools, Departments of Motor Vehicles, 

and local Social Security Offices. 

The responsibility for all Americans to obtain coverage would be enforced possibly 

through the U.S. tax system or some other point of contact between individuals and the 

government. Every individual would receive a certificate of coverage from their insurer to 

demonstrate that they are meeting their responsibility. 

Enforcement of a responsibility to have health care through the tax system has advantages. 

The biggest advantage is that most Americans already have contact with the IRS through 

the annual filing of a tax return. Monitoring health insurance coverage through the tax 

code would take advantage of this existing relationship. One issue to be addressed, 

however, is how to deal with individuals who do not file a tax return due to their low tax 

liability. If a premium subsidy for health care was administered through the tax code, the 

15
non-filer issue would be significantly decreased because a number of current non-filers 

would voluntarily file in order to get the assistance. 

The Commonwealth of Massachusetts has had success with this approach. In the first year 

of Massachusetts’ individual insurance requirement, 98.6 percent of taxpayers required to 

file insurance information with their tax returns complied.4 In fact, the health care reform 

effort in Massachusetts generally has been extremely popular even with the requirement 

for individual coverage. At the end of 2007, the majority of working-age adults in 

Massachusetts — 71 percent —supported the state’s health reform efforts.5

B. STRENGTHENING THE EMPLOYER-BASED SYSTEM 

American employers, large and small, are instrumental in providing meaningful insurance 

coverage to million of workers and their families. Employer involvement in the purchase 

of health insurance provides many distinct advantages. The average employer contributes 

84 percent of premiums for individual coverage and 73 percent of premiums for family 

coverage.6

 Health insurance also costs less when purchased through an employer rather 

than in the individual market, because employers provide a natural mechanism for pooling 

risk by covering healthy and less healthy workers.7 And because employers pool coverage 

for an entire group, economies of scale can reduce administrative costs. Employers may 

also have greater negotiating power with insurance companies and more sophistication in 

evaluating benefits. 

Besides lower premiums, participants in employer-based coverage enjoy other advantages. 

Current law prevents them from being disqualified for pre-existing conditions or charged 

higher premiums based on their medical histories. Standards already in Federal law 

govern certain aspects of their insurance, as well as provide opportunities to remain 

covered after losing group coverage. Additionally, the ability to pay premiums through 

payroll deduction provides an easy and convenient way to purchase coverage. 

The Baucus plan proposes to extend and build on the tradition and success of employersponsored insurance. In a recent Gallup poll, 67 percent of Americans said that they were 

either completely or somewhat satisfied with the health insurance benefits that their 

employer offered.8

 

To strengthen the connection of insurance to the workplace, all except the smallest 

employers would offer a Section 125 plan under the Baucus plan. Section 125 plans allow 

employees to pay their health insurance premiums through their employer’s payroll 

deduction and with pre-tax dollars. Premiums paid with pre-tax dollars are not subject to 

Federal and state taxes. By offering Section 125 plans, employers would make it easier 

and cheaper for their workers to purchase insurance. 

Large employers — especially firms paying high wages — have the greatest capability to 

provide coverage to their employees. The vast majority of American employers in this 

category would probably continue to provide coverage as a competitive benefit to recruit 

employees. If these employers choose not to provide coverage, under the Baucus plan they 

16
would have to contribute to a fund that would help to cover those who remained uninsured. 

The contribution would likely be based on a percentage of payroll that took into account 

the size and annual revenues of each firm. Mid-sized and small employers would also 

have the option of providing adequate coverage or paying into the general coverage fund, 

but the required contribution would be less for them than that for larger firms. 

Businesses with the fewest workers and the lowest wages would be offered a new tax 

credit to purchase health insurance for their employees (described below), and would be 

exempt from contributions to the general coverage fund if they were still unable to offer 

insurance to employees. 

Workers prefer the support of employers and the convenience that employer-sponsored 

health coverage provides. Health care reform must enable employers large and small to 

continue providing coverage to workers, and to share the responsibility of maintaining a 

healthy, productive, globally competitive workforce. 

C. GUARANTEED ACCESS TO AFFORDABLE COVERAGE FOR INDIVIDUALS AND 

SMALL BUSINESSES

Individuals and small businesses seeking health insurance on their own frequently 

encounter serious challenges in obtaining coverage. For small businesses, the primary 

obstacle is the cost of offering coverage to employees. For individuals, cost is also the 

most significant factor, but individuals with pre-existing conditions may be denied 

coverage at any price. 

The Baucus plan envisions that the Health Insurance Exchange would offer a new 

opportunity for individuals and small businesses to easily compare private coverage 

options and a public plan and to purchase the policy that would work best for them. 

Eligible individuals and small businesses would receive subsidies to make sure that 

coverage would be affordable. Insurance companies would be prohibited from denying 

coverage due to pre-existing conditions and from discriminating against individuals solely 

due to their health status. 

Health Insurance Exchange. The Baucus plan would establish the Health Insurance 

Exchange through which individuals and small businesses in the market for insurance 

could obtain affordable health care coverage. The Exchange would be an independent 

entity, the primary purpose of which would be to organize affordable health insurance 

options, create understandable, comparable information about those options, and develop a 

standard application for enrollment in a chosen plan. 

Participating employers must enroll all employees through the Exchange — not only the 

sickest and most costly to insure. 

Insurance plans participating in the Exchange could operate nationally, regionally, statewide, or locally. So that plans could be easily compared, qualifying insurers would have to 

offer products that could be classified as high-, medium- or low-benefit options. Benefit 

17
packages could differ within reason, but all structures would have to be actuarially 

equivalent within benefit categories in order to prevent insurers from using benefit design 

to discourage enrollment by people with health conditions. Differences in premiums 

between packages would be due to the difference in benefits and not the differences in 

expected risk. Participating insurers would have to charge the same price for the same 

products inside and outside the Exchange. 

Plans participating in the Exchange would be subject to oversight by states with regard to 

consumer protections (e.g., grievance procedures, external review, oversight of agent 

practices and training, market conduct). In addition, participating private plans would be 

subject to state regulation related to solvency, reserve requirements, and premium taxes. 

The Exchange would have authority to implement mechanisms to ensure that plans 

enrolling sicker-than-expected people would not suffer a financial disadvantage compared 

to those enrolling healthier people. Offsetting some of the potential risk to insurance plans 

is intended to limit plans’ incentives to enroll only the healthiest individuals. 

All plans participating in the Exchange would be subject to the same rating rules included 

in the insurance market reforms described later in this chapter. 

The Exchange would also include a new public plan option, similar to Medicare. This 

option would abide by the same rules as private insurance plans participating in the 

Exchange (e.g., offer the same levels of benefits and set the premiums the same way). 

Rates paid to health care providers by this option would be determined by balancing the 

goals of increasing competition and ensuring access for patients to high-quality health care. 

A number of options could be considered to determine who runs the plan, who is eligible 

for it, and how to ensure that the public-private insurance competition lowers costs and 

improves quality. The Independent Health Coverage Council, described below, would 

inform these decisions. 

Federal funds would be needed to start up the Exchange, but it would be self-sustaining 

within a few years. One option for making it so is a small assessment on premiums to fund 

activities of the Exchange, as done today by the authorizing board of the Commonwealth 

Connector in Massachusetts. Insurers would include the assessment as part of their 

premiums and could remit it on a monthly or quarterly basis. Keeping insurance premiums 

in the Exchange affordable must be the guiding principle in setting any assessment. 

Independent Health Coverage Council. Reforming the health care system to cover all 

Americans through a mix of private and public means involves complex decisions that 

must be responsive to rapid changes in the health system. Such a system would require 

oversight, but Congress cannot make all necessary decisions to guide it. For that reason, 

the Baucus plan authorizes a board of directors — called the Independent Health Coverage 

Council — to inform decisions that would help to guarantee that affordable health 

insurance options were available. The President would appoint members of the Council 

with the advice and consent of the Senate for set, staggered terms. The President would 

choose Council members who were geographically diverse and have expertise in 

18
insurance, health benefit design, actuarial science, economics, medicine, business, and 

consumer protections. 

The new Independent Health Coverage Council would define key terms in a reformed 

health system. For example, it would define what “coverage” and “affordability” mean. In 

doing so, it would, among other activities, consult with the Institute of Medicine and 

review existing state laws. The Council would ensure that coverage would be affordable, 

clinically appropriate, provide access to necessary health services, and protect enrollees 

against high health care expenses. Specifically, the Council would ensure appropriate, 

income-related annual limits on out-of-pocket costs so that families were not at risk of 

bankruptcy by their medical expenses. The Council would also play a major role in 

ensuring that the public plan option meets its goals of delivering high-quality and costeffective care. 

The Independent Health Coverage Council would also set standards for chronic care 

management and quality reporting. Insurers in the Exchange would collect and report on 

the performance of providers in their networks. The Council would make care 

management and quality reporting requirements consistent with those used by Medicare to 

the extent practicable. Consistent measures of quality would make performance rating 

more robust and better able to help Americans make decisions about their own care. 

Input by the Independent Health Coverage Council would keep the activities of the 

Exchange on track and insulated from the political process. The Council and the Exchange 

would both be subject to regular reviews and oversight by the Comptroller General, 

however, so that Congress—and the public—can closely monitor their activities. 

Insurance Market Reforms. Currently, insurance companies can discriminate against 

older and sicker patients by charging significantly higher premiums or denying coverage 

altogether. Individuals with pre-existing conditions such as cancer, heart disease, and 

asthma are at particular risk of being denied coverage by insurance companies or being 

offered a policy that is unaffordable. In fact, a recent Commonwealth Fund study found 

that insurance companies turned down one out of every five people who applied for 

individual coverage due to pre-existing conditions.9 

While states have the authority to restrict this type of discrimination, very few have used 

that authority. Under the Baucus plan, insurance companies could not deny coverage to 

any individual nor discriminate against individuals with pre-existing conditions. Rules for 

rating insurance policies — which have to do with how an insurer can determine a 

policyholder’s premium based on various criteria such as age, tobacco use, previous 

illness, or factors that encourage healthy lifestyles — will be specified in statute after 

consultation with the National Association of Insurance Commissioners, consumer 

advocates, plans and others. The ability of insurance companies to rate on age would also 

be limited. In order to avoid severe adverse selection — a scenario under which the sickest 

patients gravitate toward one part of the insurance market — the rating rules for the 

Exchange would apply in the Exchange as well as in private non-group and small group 

markets. 

19
Small Business Tax Credit. As health care coverage becomes more expensive, many 

small businesses simply cannot bear the additional cost of providing health coverage for 

their employees. And for this reason, the number of small businesses offering their 

employees health care coverage is declining. To help small businesses, the Baucus plan 

would provide a targeted tax credit that small firms could use towards the cost of 

purchasing health care coverage. 

There are a number of ways that such a tax credit could be structured. One option is to 

make the tax credit available to any small business, for both individual and family 

coverage. Initially, the credit would be available to qualifying small businesses that 

operate in states with patient-friendly insurance rating rules. After the initial 

implementation, the tax credit would be available to small businesses that purchase 

coverage for all of their employees in the Health Insurance Exchange and make a 

meaningful contribution towards the cost of the premium for their employees’ health 

care.10 

In order to target the tax credit most efficiently, the credit would be based on a firm’s size 

and earnings per employee. The smallest firms with the lowest average earnings will be 

eligible to receive a credit equal to half of the average total premium cost for employersponsored insurance in the firm’s state. This credit will be phased down as firm size and 

average earnings increase. The employee and earnings phase-outs work together, until the 

credit is fully phased-out. 

Premium Subsidies. In order to make health coverage affordable for all Americans, 

refundable tax credits would be available to individuals and families with incomes at or 

below four times the Federal poverty level. These tax subsidies would be available to 

individuals and families who purchased coverage through the Health Insurance Exchange. 

The Independent Health Coverage Council would define what an “affordable” premium is, 

taking into account the reasonable percent of income to be spent on health care coverage. 

The premium subsidy would make up the difference between the amount suggested by the 

Council and the premium amount charged by the plan. The amount of the subsidy could 

be based on a benchmark that would be equal to a locally adjusted, average premium in the 

Exchange. This construct would encourage individuals to be prudent purchasers of health 

care policies. 

D. STRENGTHENING PUBLIC PROGRAMS 

Medicaid and the State Children’s Health Insurance Program (CHIP) represent 

cornerstones of America’s health care system. These programs provide access to health 

care for approximately 67 million low-income Americans. Both programs have an 

important role to play in health care reform, so the Baucus plan envisions specific 

improvements to Medicaid and CHIP that ensure these programs function effectively and 

efficiently in a reformed health care system. The Baucus plan also would improve 

Medicare by providing an option to buy into the program for individuals who are near but 

20
not yet 65, and who lack other insurance. The plan also would allow disabled individuals 

access to Medicare without a waiting period. Finally, the plan would increase funding for 

the Indian Health Service. 

Medicare Buy In. The Baucus plan would make health care coverage immediately 

available to Americans aged 55 to 64 through a Medicare buy-in. People in this age group 

face greater risk of illness than their younger counterparts. And while they may require 

increased access to medical care, they continue to have fewer and fewer affordable 

insurance options as retiree health care coverage erodes and pre-existing conditions make 

private insurance prohibitively expensive or impossible to obtain altogether.11

In 2007, over four million people aged 55 to 64 were uninsured, or about 12 percent of the 

total population in that age group.12 This figure represents an increase of one million since 

2000. While this age group tends to be one of the least likely to be uninsured, those who 

do not have employer-sponsored benefits or retiree coverage through a former employer, 

have fewer options for coverage than other age groups. 

The individual insurance market can provide a source of coverage for this population, but 

health insurance offerings in that market are often unaffordable — or even unavailable to 

those with pre-existing health conditions. The average annual premium for those aged 60 

to 64 was more than $5,000 for single coverage and $9,200 for family coverage in the 

individual market in 2006-2007.13 By contrast, coverage for a person aged 18 to 24 was 

$1,360 for single coverage in the individual market and $2,850 for family coverage. 

Declining health status and lack of affordable health insurance affect not only the health 

and wellbeing of Americans aged 55 to 64, but also their pocketbooks. Nearly 12 percent 

of those aged 55 to 64 report annual medical expenditures of more than $10,000.5

Uninsured individuals in this age group find it increasingly difficult to cover their medical 

bills as declining health can affect their ability to work and earn income. Uninsured 

Americans aged 55 to 64 are twice as likely as their insured counterparts to report having 

to delay seeking medical care, including needed surgeries.14 

To fill this gap in coverage, the Baucus plan would allow individuals aged 55 to 64 to buy 

Medicare coverage. The option would be available to any individual in this age group who 

otherwise did not have access to health coverage through a public plan or a group health 

plan. The benefits would be the same as those available to current Medicare beneficiaries. 

This new Medicare buy-in option is temporary. It would be available until the Health 

Insurance Exchange was established. Once that new infrastructure is in place, Americans 

55 to 64 years old who had not obtained coverage through the Medicare buy-in would be 

able to buy insurance in the new marketplace. Those already enrolled in the Medicare buyin would have the option to remain in Medicare. 

Medicare would charge enrollees electing the buy-in option an annual premium. The 

premium amount would be calculated so that the total costs for the buy-in population 

21
would be budget neutral. Thus, this option would not create new costs for the Medicare 

program or for taxpayers. 

Providing immediate assistance to the Americans aged 55 to 64 would benefit not only 

individuals in this age group, but the Medicare program overall. An option for those 55 to 

64 to buy into Medicare could enable individuals to remain healthy and continue working, 

prevent disabling conditions, and provide protection from catastrophic medical costs.15 It 

would also help to ensure that individuals would not experience a break in coverage during 

this age period, which could lead to improved health status upon Medicare eligibility at age 

65. The Medicare program might also benefit through reduced costs for this population 

relative to what might have been spent if these individuals were uninsured in the decade 

prior to becoming Medicare eligible.16

Phase Out of Disability Waiting Period. In 1972, the Congress expanded Medicare 

eligibility to include people with disabilities.17 At that time, Congress created a “Medicare 

waiting period,” which requires people with disabilities to receive Social Security 

Disability Insurance (SSDI) for 24 months prior to becoming eligible for Medicare 

coverage. As a result of the 24-month Medicare waiting period, an estimated 400,000 

Americans with disabilities are uninsured and many more are underinsured.18 Forcing 

Americans with disabilities to wait two years for Medicare coverage results in these people 

having inadequate health care, falling into poverty or, ultimately, in death. 

 

The Baucus plan would begin to phase-out the current two-year waiting period for 

Medicare coverage for people with disabilities. It is anticipated that people with 

disabilities would also eventually be able to purchase coverage in a reformed health 

insurance market. 

Medicaid. Established in 1965, Medicaid is a program intended to serve low-income 

Americans and those with serious health conditions or disabilities. The Federal 

government and the states share responsibility for funding and administration of Medicaid. 

Medicaid currently covers approximately 61 million Americans19 and is the source of 

health insurance for 14 percent of non-elderly Americans (age 64 and below).20 A 

modernized Medicaid program is an essential component of health reform. 

Federal law establishes certain categories of beneficiaries to which states must offer 

Medicaid benefits as a condition for Federal financial participation. The mandatory 

beneficiary populations are: 

 Children under age six who are in families below 133 percent of the poverty level; 

 Children over age six in families below 100 percent of the poverty level; 

 Pregnant women with incomes below 133 percent of the poverty level; 

 Elderly and poor individuals who receive cash assistance from the Supplemental 

Security Income (SSI) program; 

 Families who meet financial requirements of the former Aid to Families with 

Dependent Children (AFDC) cash assistance program.21

22
States have discretion to cover populations beyond those that Federal law mandates. In 

fact, all states provide Medicaid benefits to optional populations.22 Medicaid enrollment in 

2007 is displayed in Table 2.1 below. 

Table 2.1. Medicaid Enrollment in 2007 

Number enrolled Percent of 

Population (in millions) total Medicaid 

enrollment 

Children 29.2 48.0 

Adults 16.2 26.6 

Blind/Disabled 9.5 15.6 

Elderly 6.0 9.9 

Total 60.9 100 

23 Source: Center for Medicare and Medicaid Services (CMS).

Federal law does not require states to cover adults under Medicaid, unless they are 

disabled, elderly, or pregnant — regardless of income. Many states cover adults as an 

optional population, though coverage is very limited. Twenty-seven states have eligibility 

levels for non-working adults with incomes below the poverty level and 26 states have 

eligibility levels less than the poverty level for working adults. All states except Alaska 

and Connecticut have eligibility levels for disabled optional populations of less than the 

poverty level.24 Thus in most states, Medicaid coverage is limited to very low-income 

Americans. 

Medicaid is a vital source of coverage for low-income Americans, but existing state 

Medicaid programs have not reached everyone living below the poverty level. The Baucus 

plan aims to solve that problem by extending Medicaid eligibility to every American living 

in poverty. Reducing the number of uninsured by increasing Medicaid enrollment has 

been embraced by a diverse coalition, including the Commonwealth Fund25 and the 

insurance industry.26 Making this change would provide at least 7.1 million low-income 

people with access to health coverage.27 

Providing Medicaid to everyone below the poverty level is both consistent with the 

original intent of Medicaid, and the easiest and quickest way to provide insurance to those 

living in poverty. Building on the existing Medicaid program is also efficient. Moreover, 

those at the bottom of the income scale are least likely to be able to purchase coverage on 

their own, least likely to have employer-sponsored coverage, and if such coverage is 

offered, least likely to be able to afford it. 

Establishing a national eligibility minimum of 100 percent of the Federal poverty level 

would help to streamline Medicaid. States currently have dozens of eligibility categories, 

many with different poverty levels.28 Determining eligibility under the Baucus plan would 

be much easier than in the categorical eligibility system currently in place. This would 

result in more equitable treatment for all Americans living in poverty. 

23
Additional efforts to streamline Medicaid eligibility and enrollment are also part of the 

plan. Uniform and simplified verification and renewal rules should be established to help 

minimize the “churning” that typically occurs within Medicaid. States should get help 

from the Federal government to engage in outreach to potentially eligible individuals and 

to modernize their eligibility and enrollment data systems because the current systems are 

so antiquated that they are unable to meet today’s data demands. Simplifying eligibility 

would expedite and lower the costs associated with states’ eligibility determination 

processes. 

Existing mandatory eligibility populations would be unaffected by this plan. The same is 

true for optional populations that states have elected to cover — because states would be 

required to maintain current eligibility levels (even those above 100 percent of the poverty 

level). Current Federal matching rates and other policies consistent with this policy would 

remain intact for any population with income eligibility that exceeds 100 percent of the 

poverty level. No one currently eligible would lose access to Medicaid. 

The financial responsibility shared by the Federal and state governments is carried out 

through a matching system, called the Federal Medical Assistance Percentage, or FMAP, 

in which the Federal government and the state government each pay a certain percentage of 

total Medicaid expenses. Each state’s FMAP rate is based on the state’s per capita income 

level, thereby giving states with lower-than-average income levels a higher FMAP rate and 

thus a higher Federal percentage match. According to Federal law, FMAP rates range from 

50 percent to 83 percent and there is no cap on the total Federal financial participation. 

Currently, 13 states receive the minimum 50 percent match, but the highest FMAP rate is 

73 percent.29 

The goal of covering all Americans is an opportunity for the Federal government to partner 

with states to reduce the number of low-income uninsured Americans. The Baucus plan 

would invest new Federal resources to help states, and is committed to finding ways for the 

Federal government and the states to share responsibility for the costs associated with 

increased Medicaid enrollment. 

The Baucus plan includes an additional improvement to the Medicaid program. Medicaid 

must be strong and stable so that eligible individuals can rely on it, especially in times of 

economic distress. In order to strengthen and stabilize Medicaid, states require help 

managing the costs associated with unanticipated increases in Medicaid enrollment. When 

the national economy experiences a downturn, state revenues decrease and Medicaid rolls 

increase, as people lose jobs and health insurance. Every one-percent increase in the 

national unemployment rate, for example, results in an additional one million people 

enrolling in Medicaid.30 One million new Medicaid beneficiaries increase state Medicaid 

spending by $1.4 billion.31

32 As all states (except Vermont) are constitutionally bound to balance their budgets, the 

strain caused by decreased revenues and greater Medicaid participation forces states to 

reduce spending — often cutting back safety net programs like Medicaid at a time when 

they are needed most.33 

24
To ensure that Medicaid is a reliable component of a reformed American health care 

system, this plan would increase FMAP rates when a predetermined combination of 

circumstances measuring the timing, duration, and depth of an economic downturn occurs. 

Creating this mechanism to maintain Medicaid’s stability during nationwide economic 

slumps or significant downturns for individual states builds on recent success in addressing 

tough economic situations. In 2003, as part of the Jobs and Growth Tax Relief 

Reconciliation Act, Congress temporarily increased FMAP rates by 2.95 percent, so long 

as states agreed not to cut benefit options during the FMAP increase.34 A study by 

Families USA found that for “every million dollars a state invests in Medicaid [it] will 

generate, on average, $3.35 million in new state business activity . . . $1.23 million in new 

wages, . . . and an average of 33.76 new jobs per state.”35

The details of an economic indicator-based trigger and the level of assistance must be 

responsible without being too rigid or too lax. In a 2006 report, the Government 

Accountability Office (GAO) recommended consideration of two factors — the number of 

states experiencing an increase in unemployment and the magnitude of that increase — in 

setting a trigger.36 Determining the specific trigger requires careful construction in order 

to ensure that state economic distress is measured reliably and accurately. Similarly, the 

amount and duration of the FMAP increase must be calibrated to provide states with 

enough support for the right amount of time. 

State Children’s Health Insurance Program (CHIP). When the Children’s Health 

Insurance Program (CHIP) was created as part of the Balanced Budget Act of 1997, it was 

the largest expansion of health insurance coverage for American children in more than 30 

years.37 CHIP was intended to provide health insurance to children whose families cannot 

afford to purchase health insurance in the private market, but earn too much to qualify for 

Medicaid. 

Like Medicaid, CHIP is financed jointly by the state and Federal governments. The 

Federal government pays a higher percentage of the total program costs for CHIP than for 

Medicaid, averaging about 70 percent nationally.38 Because CHIP is financed through a 

block grant to states, the total Federal financial participation in CHIP is capped regardless 

of rising costs or increased numbers of eligible children. 

In its first ten years, CHIP helped to reduce the number of uninsured children by about 

one-third overall, from 23 percent to 14 percent.39 CHIP has reduced by one-quarter the 

number of uninsured children with effective family incomes between 100-200 percent of 

the poverty level.40 41 In 2006, more than 6.5 million children were covered through CHIP. 

Despite this progress, more than one in ten children remains uninsured. 42

25
Figure 2.1. Impact of CHIP on Uninsured Children 

Source: Improving Children’s Health, Center on Budget and Policy 

Priorities, 2007

CHIP gives states flexibility in establishing eligibility criteria, benefit structure, and costsharing. States have used this flexibility to craft programs responsive to their unique 

needs.43 

The original intent behind CHIP was to provide access to health insurance for all lowincome families who make too much to qualify for Medicaid, but not all CHIP programs 

have met that goal. The Baucus plan would require states to use CHIP to cover all children 

at or below 250 percent of the poverty level and who are not Medicaid eligible, putting 

help within reach for more needy Americans. States that currently cover children above 

250 percent of the poverty level would continue to do so. Existing matching and other 

policies not inconsistent with a responsibility to have health coverage would remain in 

place for states with income eligibility that exceeds 250 percent of the poverty level. 

With an expansion of CHIP, the Federal government and states would join together to 

reduce the number of uninsured children in America. Currently, capped Federal allotments 

to states combined with expanded eligibility lead some states to exhaust available Federal 

funding before the end of the fiscal year. In 2007, 14 states faced Federal funding 

shortfalls, and as many as 37 states were expected to face similar financial challenges for 

fiscal year 2008.44 Under these financial constraints, some states are forced to cut back 

their CHIP programs by freezing enrollment, enforcing longer waiting periods, or lowering 

the income eligibility thresholds.45 

The Baucus plan would help states with the costs associated with increased CHIP 

enrollment. The Federal government has several options to consider in helping the 

states.46 

In addition, as our health care delivery system is modernized to improve quality and access 

to care, similar efforts should be encouraged in Medicaid and CHIP to assure that our 

26
nation’s most vulnerable populations receive the same high-quality care that is available to 

those with Medicare or private insurance. 

Health Care for Native Americans and Alaska Natives. The Indian Health Service (IHS) 

currently provides health care services to an estimated 1.5 million Native Americans and 

Alaska Natives who belong to more than 562 federally recognized tribes in 35 states.47 

IHS provides free health care to eligible Native Americans and Alaska Natives, with the 

exception of certain urban programs or in circumstances where a tribe chooses to charge its 

members for health care.48

In a series of treaties and agreements forged with the tribes as sovereign nations, the U.S. 

government promised to provide health care to Native Americans. Currently, the IHS is 

responsible for making sure that promise is kept. IHS, however, is not the sole source of 

health care for Native Americans. Tribal members are eligible for, among other programs, 

Medicare, Medicaid, and CHIP. Native Americans also may have private insurance. 

Native American and Alaska Native populations have unique health care concerns. Native 

Americans are three times more likely to die from diabetes. And Native Americans suffer 

from tuberculosis at a rate that is six times higher than the non-Indian population.49 Many 

members of these populations also live in physically remote areas, making the delivery of 

care difficult and hindering the ability to recruit and retain health care professionals. 

Additionally, cultural concerns must be respected in providing health care for Native 

Americans and Alaska Natives. 

The IHS health care delivery system is organized around 12 regional offices and 163 local 

service units, and provides various medical services, including inpatient and outpatient 

services, ambulatory, emergency, dental, and preventive health care.50 In 2007, IHS 

provided approximately 58,000 inpatient admissions and over ten million outpatient 

visits.51 IHS also contracts for medical services from local providers through what is 

known as contract health services. 

Funding for IHS consistently falls short of the amount needed to provide care for the 

populations it serves. In fiscal year 2008, total funding for IHS was $4.3 billion, about 48 

percent of estimated need. Current spending levels pale in comparison to those of other 

Federal health care programs such as the Bureau of Prisons, Department of Veterans 

Affairs and the Federal Employees Health Benefit Program (FEHBP).52 

The IHS itself has stated that its funding does not allow it to provide all the needed care for 

eligible Indians. As a result, some services are “rationed,” with the most critical care given 

first. IHS regulations require that, when resources or funds are insufficient, the agency 

must set priorities for both direct and contract health care based on “relative medical 

need.”53 The reality of this underfunding is that money for contract health services does 

not last the entire year, forcing IHS to limit services to circumstances involving a “loss of 

life or limb” circumstance. This predicament is so common in Indian Country that many 

tribal members fear that if they need care after June, they will be forced to go without. 

27
IHS desperately needs additional funding. It is impossible to keep America’s promise to 

provide care to Native Americans and Alaska Natives with the current level of IHS 

funding. The Baucus plan would increase funding for IHS, as well as encourage 

enrollment in other programs like Medicare, Medicaid, and CHIP for those who are 

eligible to defray the costs borne by IHS directly. 

E. FOCUSING ON PREVENTION AND WELLNESS 

Chronic diseases — such as heart disease, stroke, cancer, and diabetes — are the most 

prevalent and preventable of all health problems and also the most costly. Nearly half (45 

percent) of Americans suffer from one or more chronic conditions,54 and chronic disease 

accounts for 70 percent of all deaths (more than 1.7 million people).55 In addition, 

increased rates of obesity and chronic disease are the primary cause of disability and 

diminished quality of life. 

The economic impact of chronic disease in the U.S. is staggering. A Milken Institute study 

found that treatment of the seven most common chronic diseases, coupled with 

productivity losses, costs the U.S. economy more than $1 trillion annually.56 About 78 

percent of the nation’s total health care spending is due to chronic illness.57 Further, the 

number of Americans who have become obese has doubled since 1987, accounting for 

nearly 30 percent of the rise in health care spending between 1987 and 2005.

58 Despite the 

human and economic cost of chronic disease, the U.S. health system does little to address 

the underlying health problems that lead to these conditions. 

For the sake of Americans’ health, and to truly change the economics of our health care 

system, the U.S. must dramatically shift its health care focus toward preventing chronic 

disease. An estimated 80 percent of heart disease, stroke, and type-2 diabetes, and 40 

percent of cancers, could be prevented if Americans stopped smoking, adopted healthy 

diets, and became more physically active.59 Despite evidence that preventive services such 

as smoking cessation work,60 our health system continues to emphasize expensive 

treatments. This approach is further complicated by a fractured delivery system in which 

individuals with chronic conditions often see more than one provider and take multiple 

medications. 

Prevention must become a cornerstone of the health care system rather than an 

afterthought. This shift requires a fundamental change in the way individuals perceive and 

access the system as well as the way care is delivered. The system must support clinical 

preventive services and community-based wellness approaches at the Federal, state, and 

local levels. With a national culture of wellness, chronic disease and obesity will be better 

managed and, more importantly, reduced. 

Guaranteed Access to Clinical Preventive Services and Referral to Community 

Resources. Those who are uninsured — and therefore less likely to receive preventive 

care and even treatment for major conditions — must be given a means to begin 

safeguarding and improving their health. This plan proposes “RightChoices,” a temporary 

program to provide the uninsured with immediate access to a set of proven preventive 

28
services such as a health risk assessment, physical exam, immunizations, and age and 

gender appropriate cancer screenings recommended by the U.S. Preventive Services Task 

Force. Based on a patient’s risk, a care plan would be developed to maintain good health, 

and reduce the medical risks and costs of poor health. The RightChoices card would also 

provide referral to community resources such as smoking cessation and nutrition programs 

that have demonstrated success in changing and supporting healthy lifestyle choices. 

Any individual eligible for RightChoices who is not eligible for or enrolled in a private 

plan or public program such as Medicaid or Medicare, but whose RightChoices screening 

detects and diagnoses one or more of the most common, costly chronic conditions would 

qualify to receive treatment for those conditions. Treatment would be provided on a 

temporary basis until viable coverage options are available under the Health Insurance 

Exchange. Individuals with incomes below 200 percent of the Federal poverty level could 

receive treatment at no cost. 

To cover the cost of this care, states would receive a three-year capped allotment based on 

factors such as the percentage of uninsured and the prevalence of these chronic illnesses. 

These grants could also support the development of models to better manage, monitor, and 

treat these chronically ill individuals such as certified community care teams.61 It could 

also be used for outreach to eligible, uninsured Americans. 

Coverage for Prevention in Federal Health Programs and Private Plan Options. 

Evidence suggests that 96 cents of every Medicare dollar and 83 cents of every Medicaid 

dollar are used to treat chronic diseases.62 Federal health programs must prioritize 

prevention to ensure that taxpayer dollars are used more efficiently and effectively. The 

Baucus plan would make prevention and wellness a priority in Medicare, Medicaid, and 

CHIP. 

The Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) took a step 

in this direction. MIPPA gave the Secretary of Health and Human Services the authority 

to identify new preventive services recommended by the U.S. Preventive Services Task 

Force for coverage under Medicare. The Baucus plan would do more, by reducing or 

eliminating co-payments for recommended preventive services under Medicare. New 

payment methodologies, combined with expanded use of health information technology, 

would increase appropriate use of these recommended preventive services and better 

manage the care of chronically ill beneficiaries. 

Medicaid and CHIP beneficiaries would receive recommended preventive services without 

co-payments. Medicaid enrollees subject to cost sharing of even a one dollar co-pay per 

service used fewer physician services and received fewer preventive services including 

immunizations (a 45 percent decrease) and pap smears (a 21.5 percent decrease) compared 

to those not subject to a co-payment.63

In addition, Congress should explore evidence-based approaches for obesity prevention 

and treatment through demonstration projects in Medicare, Medicaid, and CHIP. 

29
Demonstrations should test approaches that have shown clinical value in functioning 

settings. 

The Health Insurance Exchange created under the Baucus plan would require participating 

plans to include certain preventive services in its benefit package. Such coverage would be 

based on recommendations by appropriate entities such as the U.S Preventive Services 

Task Force, the Advisory Committee on Immunization Practices, National Institutes of 

Health, Centers for Disease Control and Prevention, and Institute of Medicine. 

A National Focus on Wellness. The plan would provide grants to states or communities 

to implement innovative, evidence-based prevention and wellness programs at the local 

level. The programs would employ best practices identified by the Department of Health 

and Human Services, the Institute of Medicine (IOM), and the Task Force on Community 

Preventive Services. 

Grants would encourage local governments, employers, schools, health care systems, other 

community organizations, and individuals to work together and support healthy 

lifestyles.64 Communities would be empowered and encouraged to identify and overcome 

barriers to healthy choices for all residents, regardless of health status, race or 

socioeconomic status. Interventions that could improve and maintain the health of preMedicare eligible individuals aged 55 to 64 would be explored. This investment makes 

sense. Healthier older Americans require less expensive care; and evidence suggests that 

this investment could result in less spending on future Medicare beneficiaries.65 

The plan would also support efforts by small businesses to create healthier work 

environments with tax credits or other subsidies for proven wellness programs.66 The 

support provided by targeted tax credits or other subsidies and community challenge grants 

would help lead individuals to make positive choices for their own health. 

Finally, Congressional proposals have called for a more coordinated national strategy to 

prevent chronic disease and reduce obesity.67 The health of Americans is affected by 

access to insurance, nutritious food and safe places to exercise among other factors. 

Congress should authorize a study to identify the various federal programs that can help 

prevent the development of chronic disease and suggest options to more effectively 

coordinate efforts going forward. 

F. ADDRESSING HEALTH DISPARITIES

Racial and ethnic health disparities are characterized by persistent gaps in both health 

status and health care for minority populations. Disparities in the health status involve 

increased rates of mortality, level of chronic disease burden, and perception of one’s 

health. For example, a larger share of African Americans has diabetes, high blood pressure, 

and heart disease than whites.68 One of the most glaring differences in health status is 

reflected in infant mortality. African American infants die at a rate of 13.6 per 1000 live 

births — a rate that is higher than any other racial or ethnic group and twice that of 

30
69 whites. The African-American infant mortality rate is even higher than that of Slovenia, 

Poland, Kuwait, and Russia.70 

Disparity in health care is characterized by differences in the quality of medical care that is 

provided and its availability to diverse populations. The landmark 2003 Institute of 

Medicine (IOM) study, Unequal Treatment, demonstrated significant quality gaps in the 

health care provided to African Americans and Latinos.71 African Americans are 13 

percent less likely to receive coronary angioplasty as whites.72 African Americans are 

more likely to undergo leg amputation related to diabetes and to have complications 

following surgery.73 In addition, Asians are less likely to receive timely antibiotic therapy 

while hospitalized.74 

Lack of access is also a major factor affecting health care provided to racial and ethnic 

minority groups. Barriers to health care can result from lack of health insurance coverage, 

geographic location, language and cultural differences, and high cost. While only one-third 

of the U.S. population is made up of racial and ethnic minorities, they represent over half 

of the uninsured — over 30 percent of these two racial and ethnic groups are without 

health care coverage.75 Medicare and Medicaid cover most of those insured among 

communities of color. 

Language compatibility is also essential to ensuring quality health care for ethnically and 

racially diverse groups. The ability for patients to communicate their needs to a provider is 

critical. A lack of communication can mean an increased likelihood of medical errors and 

patients not adhering to a treatment plan. Latinos and Asians report having poor 

communication with their provider at a higher rate than other groups.76

The Baucus plan would make health care affordable and universally available to all 

Americans, a major step toward eliminating racial and ethnic health disparities. Subsidies 

for low-income individuals and families, in particular, would be critical to make health 

care obtainable by everyone. Currently, legal immigrant children and pregnant women are 

subject to a five-year waiting period before they can become eligible for Medicaid or 

CHIP. Not only does this exacerbate health disparities, but it increases the number of 

uninsured. The waiting period should be eliminated and eligible legal immigrants should 

have access to Medicaid and CHIP.77

Addressing access to health insurance coverage is not the only step in addressing 

disparities. Social determinants of health must also be addressed in the effort to eliminate 

health disparities. Lack of adequate housing, living wages, appropriate education, and 

clean environments adversely affect health status and well-being. All federal agencies that 

have jurisdiction over these types of social programs should collaborate together to 

improve the health and well-being of our communities. 

The effort to document the extent of health disparities in the U.S. will require standard 

methods of collecting data. Data collection must also be more reflective of the target 

community from which data is gathered. Information must be reflected at the 

subpopulation level. The Baucus plan would require participating plans in the Exchange to 

31
collect and report data based on race, ethnicity, and gender. The plan also proposes to 

include appropriate levels of funding to Federal agencies responsible for this type of data 

collection, such as the National Health Interview Survey (NHIS) and the National Health 

Care Survey (NHCS). 

 

1

 Anne-Emanuelle Birn, et al., “Struggles for National Health Reform in the United States,” American 

Journal of Public Health, 93, no.1 (2003): 86-91. 

2

 Kaiser Family Foundation and Health Research and Educational Trust, “Employer Health Benefits Survey, 

2008,” The Kaiser Family Foundation, http://ehbs.kff.org/pdf/7790.pdf. 

3

 Jack Hadley, John Holahan, Teresa A. Coughlin and Dawn Miller, “Covering the Uninsured In 2008: 

Current Costs, Sources Of Payment, And Incremental Costs,” Health Affairs, 27, no. 5, (2008). Some 

literature suggests that public payments also cover much of the costs associated with uncompensated care. 

4

 Department of Revenue News Release, “Most Taxpayers in Massachusetts Have Health Insurance,” The 

Commonwealth of Massachusetts, (2008.) 

5

 Sharon K. Long, “On the Road to Universal Coverage: Impacts of Reform in Massachusetts at One Year,” 

Health Affairs, 27, no. 4, (2008). 

6

 Kaiser Family Foundation and Health Research and Educational Trust, “Employer Health Benefits Survey, 

2008,” The Kaiser Family Foundation, http://ehbs.kff.org/pdf/7790.pdf: 71. 

7

 Paul B. Ginsburg, “Employment-Based Health Benefits Under Universal Coverage,” Health Affairs, 27, no. 

3 (2008): 675-685. 

8

 Survey was conducted by Gallup Organization, August 13-16, 2007 and based on telephone interviews with 

a national adult sample of 1,019. 

9

 The Commonwealth Fund, “Nearly Nine of Ten Who Seek Individual Market Health Insurance Never Buy 

a Plan”, The Commonwealth Fund, (2006). 

10 For example, S. 2795, the Small Business Health Options Program, introduced by Senators Durbin and 

Snowe, requires that employers cover at least 60 percent of their employees’ premium in order to qualify for 

the tax credit. 

11 Employee Benefit Research Institute, “Health Insurance Coverage of the Near Elderly, 1994−2005,” EBRI 

Notes, 28. no.1 (2007), http://www.ebri.org/pdf/notespdf/EBRI_Notes_01-20071.pdf. 

12 U.S. Census Bureau, “Income, Poverty, and Health Insurance Coverage in the United States,” U.S. Census 

Bureau, (2007), www.census.gov/hhes/www/hlthins/historic/hihistt2.xls. 

13 America’s Health Insurance Plans, “Individual Health Insurance 2006-2007: A Comprehensive Survey of 

Premiums, Availability, and Benefits,” AHIP, (2007), 

www.ahipresearch.org/pdfs/Individual_Market_Survey_December_2007.pdf. 

14 John Holahan, (2004). “Health Insurance Coverage for the Near Elderly,” The Kaiser Family Foundation, 

(2004), http://www.kff.org/uninsured/upload/Health-Insurance-Coverage-of-the-Near-Elderly-Report.pdf. 

15 Ibid. 

16 Jack Hadley and Timothy Waidmann, “Health Insurance and Health at Age 65: Implications for Medical 

Care Spending on New Medicare Beneficiaries [Abstract],” Health Services Research: The Global Journal 

for Improving Health Care Delivery and Policy, 41, no.2 (2006): 429-451. 

17 The Social Security Amendments of 1972, P.L. 92-603 

18 Stacy Berg Dale and James M. Verdier, “Elimination of Medicare’s Waiting Period for Seriously Disabled 

Adults: Impact on Coverage and Costs,” The Commonwealth Fund, (2003), 

http://www.commonwealthfund.org/usr_doc/660_Dale_elimination.pdf?section=4039

32
 19 Center for Medicare and Medicaid Services, “Data Compendium,” CMS, (2008), 

http://www.cms.hhs.gov/DataCompendium.

20 Henry J. Kaiser Family Foundation, “Medicaid’s Optional Population: Coverage and Benefits,” The Kaiser 

Family Foundation, (2005): 2. 

21 Henry J. Kaiser Family Foundation. “Medicaid: An Overview of Spending on ‘Mandatory’ vs. ‘Optional’ 

Populations and Services,” The Kaiser Family Foundation, (2005): 1. 

22 Henry J. Kaiser Family Foundation. “Medicaid’s Optional Population: Coverage and Benefits,” The Kaiser 

Family Foundation, (2005): 2.

23 Centers for Medicare and Medicaid Services (CMS). “Data Compendium,” CMS, (2008), 

http://www.cms.hhs.gov/DataCompendium. 

24 Henry J. Kaiser Family Foundation, “Medicaid’s Optional Population: Coverage and Benefits,” The Kaiser 

Family Foundation, (2005), 

http://www.kff.org/medicaid/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=51052: 2. 

25 Joel S. Weissman, Alan M. Zaslavsky, Robert E. Wolf, John Z. Ayanian, “State Medicaid Coverage and 

Access to Care,” Journal of Health Care for the Poor and Underserved, 19, no. 1, (2008): 307-19. 

26 Robert Pear, “Health Insurance Industry Urges Expansion of Coverage,” The New York Times, November 

4, 2006. 

27 John Holahan and Alan Weil, “Toward Real Medicaid Reform,” Health Affairs 26, no. 2 (2007): 260-261 

28 Henry J. Kaiser Family Foundation, “The Medicaid Resource List,” The Kaiser Family Foundation, 

(2003): 5-6. 

29 Henry J. Kaiser Family Foundation, “State Health Facts Online,” The Kaiser Family Foundation, (2008) 

www.statehealthfacts.org. 

30 Henry J. Kaiser Family Foundation, “Impact of Unemployment Growth on Medicaid and SCHIP and the 

Number Uninsured,” The Kaiser Family Foundation, (2008) http://facts.kff.org/chart.aspx?ch=360. 

31 Ibid. 

32 National Conference of State Legislators, “State Balanced Budget Requirements,” NCSL, (2003) 

http://www.ncsl.org/programs/fiscal/balreqs.htm. 

33 Government Accountability Office, “Medicaid: Strategies to Help States Address Increased Expenditures 

During Economic Downturns,” GAO, (2006), www.gao.gov/cgi-bin/getrept?GAO-07-97. 

34 Public Law 108-27.

35 Families USA, “Medicaid: Good Medicine for State Economies,” Families USA, (2004): 3-4. 

36 Government Accountability Office, “Medicaid: Strategies to Help States Address Increased Expenditures 

During Economic Downturns,” GAO, (2006), www.gao.gov/cgi-bin/getrept?GAO-07-97. 

37 Centers for Medicare and Medicaid Services, “State Children’s Health Insurance Program Summary,” 

CMS, http://www.cms.hhs.gov/MedicaidGenInfo/05_SCHIP%20Information.asp. 

38 Henry J. Kaiser Family Foundation, “State Children’s Health Insurance Program (SCHIP): Reauthorization 

History,” The Kaiser Commission on Medicaid and the Uninsured, (2008) 

http://www.kff.org/medicaid/7743.cfm. 

39 Center on Budget Policy and Priorities, “Issue in Focus: Expanding Children’s Health Coverage,” CBPP, 

(2008) http://www.cbpp.org/pubs/health.htm. 

40 Peter Orszag, “Covering Uninsured Children: The Impact of the August 17 CHIP Directive,” (Testimony 

before the Senate Committee on Finance, U.S. Senate, April 9, 2008). 

33
 41 Centers for Medicare and Medicaid Services, “SCHIP Enrolled In Year,” CMS, (2007), 

http://www.cms.hhs.gov/NationalSCHIPPolicy/downloads/SCHIPEverEnrolledYearGraph.pdf. 

42 Henry J. Kaiser Family Foundation, “Health Insurance Coverage of Children,” The Kaiser Family 

Foundation, (2008), 

http://facts.kff.org/uupload/relatedtable/Health%20Insurance%20Coverage%20of%20Children,%202006.xls. 

43 Henry J. Kaiser Family Foundation, “Medicaid/SCHIP: Low Income Families,” The Kaiser Family 

Foundation, (2008), http://www.kff.org/medicaid/lowincome.cfm. Some States have used this flexibility to 

cover adults, the vast majority of whom are not CHIP eligible unless they have incomes below 100 percent of 

the Federal poverty level and minimal assets. 

44 Henry J. Kaiser Family Foundation, “Foundation Resources on the State Children’s Health Insurance 

Program and Reauthorization,” The Kaiser Family Foundation, (2007), 

http://www.kff.org/medicaid/schipresources.cfm. 

45 Edwin Park and Matthew Broaddus, “Fourteen states face SCHIP shortfalls this year totaling over $700 

million,” Center on Budget and Policy Priorities, (2007). 

46 See, for example, H.R.976, Children's Health Insurance Program Reauthorization Act of 2007; H.R.3963, 

Children's Health Insurance Program Reauthorization Act of 2007; H.R.3162, Children's Health and 

Medicare Protection Act of 2007; and S.1893, Children's Health Insurance Program Reauthorization Act of 

2007. 

47 Indian Health Service, “Indian Health Service Introduction,” IHS, (2008) 

http://www.ihs.gov/PublicInfo/PublicAffairs/Welcome_Info/IHSintro.asp. 

48 Congressional Research Service, “Indian Health Service: Health Care Delivery, Status, Funding, and 

Legislative Issues,” CRS, (2008): 1. 

49 Ibid., 10. 

50 Ibid., 2-3. 

51 Indian Health Services, “IHS Fact Sheets,” IHS, (2008), http://info.ihs.gov/Profile08.asp. 

52 Congressional Research Service, “Indian Health Service: Health Care Delivery, Status, Funding, and 

Legislative Issues,” CRS, (2008): 14-16. 

53 42 CFR §§136.11(c), 136.23(e). 

54 Chronic Disease Prevention and Health Promotion, “Chronic Disease Overview,” CDC, 

http://www.cdc.gov/nccdphp/overview.htm. 

55 Centers for Disease Control and Prevention, “Chronic Disease Prevention and Health Promotion,” CDC, 

(2004), http://www.cdc.gov/mmwr/preview/mmwrhtml/rr5311a1.htm. 

56 Ross DeVol and Armen Bedroussian, “An Unhealthy America, The Economic Burden of Chronic 

Disease,” The Milken Institute, (2007). 

57 Robert Mollica and Jennifer Gillespie, “Care Coordination for People with Chronic Conditions,” 

Partnership for Solutions, (2003): 3. 

58 Kenneth E. Thorpe et al., “The Impact of Obesity on Rising Medical Spending,” Health Affairs, (2004), 

(published online 20 October, 2004; 10.1377/hlthaff.w4.480). 

59 Robert Beaglehole, World Health Organization’s Director of Chronic Diseases and Health Promotion, 

(Keynote Address before the Philip Hauge Abelson Advancing Science Seminar, December 8, 2005). 

60 Task Force on Community Preventive Services, “Community Guide,” (2008), 

http://www.thecommunityguide.org/about/. 

61 Kenneth E. Thorpe, “Reforming Medicare: A New Focus on Primary Prevention and Chronic Care 

Management: working paper,” Emory University, (2008). These community care teams would include social 

34
 and mental health workers, care coordinators and other community resources that would work with primary 

care provider practices to prevent and manage chronic disease. 

62 Kenneth E. Thorpe, (Testimony before the House Appropriations Subcommittee on Labor, Health and 

Human Services, Education and Related Agencies, U.S. House of Representatives, February 14, 2008). 

63 Julie Hudman and Molly O’Malley, “Health Insurance Premiums and Cost Sharing: Findings from the 

Research on Low-Income Populations,” The Kaiser Commissions on Medicaid and the Uninsured, (2003), 

http://www.kff.org/medicaid/upload/Health-Insurance-Premiums-and-Cost-Sharing-Findings-from-theResearch-on-Low-Income-Populations-Policy-Brief.pdf.. 

64 Partnership to Fight Chronic Disease, “Roadmap to Successful Program Development,” (2008), 

http://promisingpractices.fightchronicdisease.org/uploads/roadmap.pdf. 

65 Jack Hadley, and Timothy Waidmann, “Health Insurance and Health at Age 65: Implications for Medical 

Care Spending on New Medicare Beneficiaries [Abstract],” Health Services Research: The Global Journal 

for Improving Health Care Delivery and Policy, 41, no. 2, (2006): 429-451. 

66 The Centers for Disease Control and Prevention has identified elements of successful evidence-based 

workplace wellness programs. Senator Tom Harkin has proposed providing a tax credit for qualified 

wellness programs in the Healthy Workforce Act of 2007 (S.1753). 

67 S.3674, The 21st Century Wellness Trust Act, introduced by Senator Hilary Rodham Clinton; S.3584, The 

Obesity Prevention, Treatment and Research Act of 2008, introduced by Senator Jeff Bingaman. 

68 Henry J. Kaiser Family Foundation, “Key Facts: Race, Ethnicity, and Medical Care,” The Kaiser Family 

Foundation, (2007) http://www.kaiserfamilyfoundation.org/minorityhealth/upload/6069-02.pdf. 

69 Ibid. 

70 CIA, “The World Fact Book,” CIA, (2008) https://www.cia.gov/library/publications/the-worldfactbook/rankorder/2091rank.html. 

71 Brian D. Smedley, Adrienne Y. Stith, and Alan R. Nelson, Unequal Treatment: Confronting Racial and 

Ethnic Disparities in Health Care, (Institute of Medicine, 2003): 29-30. 

72Agency for Healthcare Research and Quality, “Health Disparities Report,” AHRQ, (2008) 

http://www.ahrq.gov/qual/nhdr07/nhdr07.pdf. 

73 Ibid. 

74 Ibid. 

75 Henry J. Kaiser Family Foundation, “Key Facts: Race, Ethnicity, and Medical Care,” The Kaiser Family 

Foundation, (2007) http://www.kaiserfamilyfoundation.org/minorityhealth/upload/6069-02.pdf. 

76 Agency for Healthcare Research and Quality, “Health Disparities Report,” AHRQ, (2008) 

http://www.ahrq.gov/qual/nhdr07/nhdr07.pdf. 

77 S.764, Proposed provision in the Legal Immigrant Children’s Health Improvement Act (ICHIA) 2007, 

introduced by Senator Hillary Clinton. 

35
CHAPTER III BAUCUS PLAN: IMPROVING VALUE BY

REFORMING THE HEALTH CARE DELIVERY

SYSTEM 

Ensuring access to meaningful health coverage is a fundamental goal of health care reform, 

but there are also other vital priorities we must pursue. Among them is the critical need to 

improve the value of care provided in our health care system. We must take steps to 

ensure patients receive higher quality care, and do so in a way that reduces costs over the 

long-run. In short, the U.S. must get better value for the substantial dollars spent on health 

care. 

Our nation’s health care providers — physicians, nurses, hospitals, and others — work 

hard to provide life-saving and life-improving care to millions of Americans. The level of 

care provided is often excellent, but it has become increasingly evident that the way care is 

delivered and paid for in our health system does not always encourage the right care at the 

right time for each and every patient. 

The Baucus plan includes initiatives to reorient America’s health care delivery system 

toward services and activities that improve patient care and “bend the curve” of growth in 

national health care spending. At the same time, the plan invests in the health care 

infrastructure that is necessary for delivery reform to succeed. Many of the proposals in the 

plan are based in the Medicare program because of its unique ability to lead the way for 

system-wide changes. The expectation, however, is that public and private insurers will 

follow and continue to innovate as well. The Baucus plan considers delivery system 

reform with four key goals in mind: 

 Strengthening the role of primary care and chronic care management. 

Primary care is the keystone of a high-performing health care system. Access to 

primary care that successfully manages and coordinates patient care, particularly 

for the chronically ill, is a proven determinant of high-quality, cost-effective care. 

Yet America’s current system undervalues primary care relative to specialty care. 

This has caused fewer medical students to choose careers in primary care, and has 

created access problems that will only worsen as more Americans get health care 

coverage. Increasing the supply of primary care practitioners and redefining their 

role in the health system — by using Federal reimbursement systems and other 

means to improve the value placed on their work — is a necessary step toward 

meaningful reform.

 Refocusing payment incentives toward quality. Today’s payment systems 

reward providers for delivering more care rather than better care. Under the current 

system, the more visits, tests, images and services providers deliver, the more they 

are paid — regardless of the quality or the health outcomes of the patient. The 

health system should refocus payment incentives toward improving the quality of 

care patients receive. Movement toward quality-based payment must start with 

fixing the unstable and unsustainable Medicare physician payment formula. The 

36
current Sustainable Growth Rate (SGR) formula is fatally flawed and must be 

replaced. 

 Promoting provider collaboration and accountability. Delivery system reform 

should also encourage providers in different settings — physician offices, inpatient 

hospitals, post-acute care settings, and others — to collaborate and provide patientcentered care in a way that improves quality and saves money. Under current 

payment systems, hospitals, physicians, and other health care providers are not 

encouraged to work together to improve patient care throughout the course of a 

patient’s illness. In fact, they may be penalized financially — through lower 

revenues — if they successfully help patients avoid the need for additional health 

services. Congress should modify current payment systems to encourage — rather 

than discourage — collaboration and accountability among health care providers 

across treatment settings and sites of care.

 Improving the health care infrastructure. Efforts to improve the health care 

delivery system cannot succeed without taking other steps to modernize our 

system. These steps include investing in new research and tools, as well as the 

health care workforce. A national approach to comparative effectiveness research 

can help provide systematic, unbiased information about what treatments, 

technologies, and procedures work best. Health information technology (IT) can 

put comparative effectiveness research and other clinical decision-support tools at 

providers’ fingertips in real time, as well as improve the delivery of care across 

settings and help providers to better coordinate patient care. Health IT can also 

facilitate initiatives to improve quality performance and data collection and 

aggregation. But gains from new research and health IT will be shallow unless we 

reinvest in the training of a 21st century health care workforce. 

Like many other reforms, changes to the health care delivery system will take time. 

Moreover, these efforts will require continuing evaluation as the health system — and the 

health care needs of Americans — evolve. 

A. STRENGTHENING THE ROLE OF PRIMARY CARE AND CHRONIC CARE 

MANAGEMENT

A strong emphasis on primary care is a common element of high-performing health 

systems.1 International systems, and even parts of our own country, that deliver costefficient, high-quality care tend to have robust access to and use of primary care 

services.2,3

 Among other things, primary care practitioners should provide preventive 

care, help patients make informed medical decisions, and serve a critical care management 

and coordination role — especially for those with multiple chronic conditions who are the 

least healthy and most costly to our system. Yet today’s payment systems place higher 

value on specialty care than primary care. 

4 Strengthening the role of primary care will require a multi-pronged approach. To this 

end, the Baucus plan includes several initiatives to improve our primary care system: 

37
ensuring accurate prices for primary care services in Medicare, providing an add-on bonus 

payment for primary care services, and encouraging further testing and implementation of 

the medical home model. The plan would also ensure the viability of community health 

centers and rural health clinics that provide vital safety net functions and serve as a true 

medical home for thousands of patients across the country. 

Ensuring Accurate Payments for Primary Care Services. Payments for primary care 

physician visits are undervalued, particularly compared to procedures and services 

furnished by specialists. In fact, the overvaluation of procedures in the Medicare physician 

fee schedule has both created financial incentives to provide unnecessary services and 

served as a disincentive for physicians to become primary care physicians. Primary care 

physicians are not trained in — and do not have the opportunity to bill for — procedures 

that generate extensive revenues for non-primary care physicians.5

In 1989, Congress enacted Medicare physician payment reform, which required a fee 

schedule based on relative values for approximately 7,000 services covered by the 

program. Private insurers often adopt the relative values set by Medicare, although they 

may use different payment rates for determining actual fees paid. The 1989 law also 

required periodic review — at least every five years — to ensure that the payment system 

reflects changes in the relative resources involved in furnishing physician services. 

Adjustments to relative values reflect changes in medical practice, coding changes, 

experience with new procedures, and other variables. Rapid growth in the volume of a 

service provided often represents evidence that the relative value for that service should be 

reviewed. 6

 

The Centers for Medicare and Medicaid Services (CMS) has relied heavily on 

recommendations from the American Medical Association (AMA) Relative Value Update 

Committee (RUC) to determine needed changes to the value of services in the physician 

fee schedule. The RUC process has resulted in changes that have increased relative values 

in many areas but decreased values in very few. This result has worked against primary 

care services because primary care physicians bill for a relatively smaller and more static 

set of codes than non-primary care physicians. A recent increase in the relative values for 

primary care services by the RUC was a step in the right direction. The Baucus plan 

would seek a continued focus on the high value of primary care-related services, with 

corresponding reductions in relative values for overvalued services. Fee schedule rates 

must accurately reflect priorities that the health care system must adopt to bend the health 

care cost curve and improve quality over time. 

Additional Payments for Primary Care Providers. The undervaluation of primary care 

services might also be addressed by the Baucus plan with increases in Medicare payments 

for services furnished by practitioners focused on delivering primary care.7

 Payments 

must be well-targeted, starting with careful identification of the list of services that qualify 

as primary care services — primarily evaluation and management visits. A second step 

involves identification of Medicare providers, including physician and non-physician 

practitioners, who truly focus on delivering primary care. Using claims history — rather 

than self-identification — is a more accurate approach to identifying appropriate providers. 

38
In addition, bonus payments should also take into account the complexity of the provider’s 

patient panel to ensure that underserved populations are not left behind. Finally, the task 

of setting a threshold for these services is best left to CMS, which can collaborate with 

stakeholders and other experts to strike the right balance. 

To avoid cost inflation, this proposal should be made budget-neutral. Budget-neutral 

changes to Medicare payments mean that any increase to primary care providers requires a 

corresponding cut to specialist services. This approach has the potential to create 

significant controversy among physicians, however. Any reforms along these lines must 

be crafted in collaboration with the entire physician community and other practitioners to 

ensure appropriate valuation of, and access to, primary care services. Other means of 

redefining the value that the health system places on primary care, such as revisions to the 

SGR formula, are discussed below. 

Patient-Centered Medical Home. Expanding Medicare’s role in testing the medical home 

model — in which practitioners are paid explicitly for comprehensive care management 

services — is another way that the Baucus plan would promote quality and efficiency. A 

growing body of evidence suggests that medical homes may improve patient health and 

reduce costs.8,9 In 2006, Congress required CMS to establish a demonstration program to 

test the medical home model in fee-for-service Medicare.10 More recently, Congress 

provided additional funding for this demonstration and granted CMS authority to expand 

the program if quality and cost targets are met.11

Medical home expansions in Medicare should focus only on providers who are committed 

to ensuring that patients truly receive the primary care and care management services that 

the medical home is designed to deliver. Providers seeking to participate in a Medicare 

medical home expansion program should meet a set of stringent service and capacity 

criteria in order to qualify, such as those proposed by MedPAC,12 and be willing to have 

additional payments based in part on the quality of care they deliver. The National 

Committee for Quality Assurance (NCQA) has also developed an assessment tool that tiers 

medical homes based on the implementation of particular capacities and patient services.13 

In addition, careful consideration should be paid to the role of non-physician providers, 

such as nurse practitioners and home health aides, in the medical home model. Medical 

home expansions should also target the patient populations most in need of comprehensive 

care management and coordination, particularly those with multiple chronic conditions. 

As with other components of the medical home, though, these tools and criteria will evolve 

as results from ongoing demonstrations and input from patients, providers, other 

stakeholders, and experts are received and incorporated into the medical home model. 

This plan would expand the medical home model by requiring collaboration between 

Medicare and ongoing demonstration sites that include private payers and Medicaid. 

Aligning incentives created by disparate payment models — for example, private payers 

and public programs — is crucial to achieving significant delivery system reform. 

39
Building a qualified medical home may not be feasible for all providers, however. The 

required medical home criteria (particularly the necessary investments in infrastructure and 

staffing) can be challenging for the 36 percent of physicians who work in solo or very 

small-group practices, many of which are located in rural areas. One option is to invest in 

community health teams that include nurses, nutritionists, and social and mental health 

workers. These teams could link primary care practices with additional resources that 

would allow small or rural offices to participate in the medical home. The state of North 

Carolina has achieved preliminary success with the community health team model in its 

state Medicaid program.14 Going forward, Medicare could join with other payers 

(Medicaid, private plans) in funding states to develop this capacity throughout the state, or 

in conjunction with other states in their region. Financial assistance for smaller primary 

care practices to adopt health information technology would also provide a strong incentive 

to collaborate with community health teams. Another option is to explore alternative 

payment models that do not require specific practice improvements but instead offer 

shared-savings bonuses for meeting aggressive cost and quality benchmarks. 

In addition to the medical home, Medicare should test other primary care models that 

promote comprehensive care management and coordination, particularly for the 

chronically ill. Recent proposals to focus on caring for the sickest patients in their home, 

or those that rely on a geriatric assessment to qualify patients for comprehensive care 

coordination programs, show promise and should be examined in more detail.15

Vendor-based disease management programs, which typically involve phone-based care 

planning and follow-up by nurses, have found some success in the private market but have 

not fared as well in recent Medicare demonstrations.16,17 While these approaches should 

not be jettisoned without consideration of new evidence from state and private payer 

programs, it remains an open question whether Medicare should make direct payments to 

vendors outside of a comprehensive care management model, such as the medical home. 

The medical home and other care management concepts are works in progress, and the 

involvement of patient groups is critical to ensuring that these models remain patientcentered. A true medical home should serve as a central resource for a patient’s ongoing 

care. Care management expansions under the Baucus plan will require ongoing evaluation 

to ensure they are truly patient-centered. And to encourage patient participation, copayments for services provided in medical homes, for instance, could be reduced or 

eliminated. These models will only improve health care quality and efficiency if patients 

find that they provide needed health services in a consumer-friendly way. 

Community Health Centers and Rural Health Clinics. Efforts to reestablish primary care 

as the backbone of the health care system should build on existing systems that work. For 

example, community health centers, which serve low-income and medically underserved 

populations, perform well on quality indicators, provide efficient care, and have in many 

cases implemented critical components of the medical home model.18 

To shore up this important component of our nation’s safety net, the Baucus plan would 

modernize the outdated Medicare system for paying Federally Qualified Health Centers 

40
(FQHCs). The Baucus plan would establish a prospective payment system for qualifying 

FQHCs, mirroring the successful model that the Medicaid program uses for paying these 

centers and expand the role of health centers in providing preventive services. To qualify 

for PPS payments, FQHCs will be required to report on quality metrics and make 

investments in the infrastructure necessary to qualify as a medical home. 

Mechanisms for compensating rural health clinics (RHCs) also are deficient and should be 

improved. In Montana and across the country, these facilities are instrumental in meeting 

the needs of patients when other access points to care are unavailable or inadvisable — for 

example, reliance on an emergency department. For these reasons, health reform should 

include policies that bolster community health centers, RHCs, and FQHCs as part of the 

larger effort to improve patient access to critical primary care services. 

B. REFOCUSING PAYMENT INCENTIVES TOWARD QUALITY 

Efforts to restructure provider payment systems to improve quality also represent a critical 

component of delivery system reform. Many private and public organizations have echoed 

the need to re-direct the health care system to reward higher quality and more efficient 

care. In its landmark 1999 report, To Err is Human: Building a Safer Health Care System, 

the Institute of Medicine (IOM) urged a heightened focus on quality initiatives.19 

Subsequent reports called for increasing payments for providers offering high-quality 

care20 and the establishment of a national system for performance measurement and 

reporting.21 MedPAC has also made multiple recommendations to Congress regarding the 

need for payment incentives based on quality for hospitals, physicians, home health 

providers, Medicare Advantage plans, and outpatient dialysis providers.22,23

Based on these recommendations, Congress and CMS have enacted and implemented 

policies to increase the focus on quality in the Medicare payment systems, particularly in 

the areas of inpatient hospital care and physician services. The Baucus plan will build on 

these efforts by establishing a pay-for-performance program for hospitals in Medicare and 

further strengthening physician programs that are focused on quality improvement. The 

plan will also encourage efforts to test pay-for-performance models related to home health 

and nursing home care, as well as bring pay-for-performance to the Medicare Advantage 

program. 

Hospital Quality Reporting and Next-Generation Quality-Based Payment Reforms. 

In 2003, Congress set the Medicare program on a path toward quality improvement by 

establishing a hospital pay-for-reporting program.24 As part of this effort, Congress asked 

hospitals to track and report to CMS their performance on a set of ten defined quality 

measures, such as how frequently a heart attack patient received aspirin upon admission. 

To encourage participation, Congress provided higher payments to hospitals that reported 

this information, and penalized those that did not. Ninety-eight percent of hospitals chose 

to participate.25 

41
In 2005, Congress permanently extended the reporting program, directed CMS to 

incorporate additional performance measures into the initiative, 26 and increased penalties 

for non-participating hospitals.27

By most accounts, the Medicare hospital pay-for-reporting program has been an important 

first step in improving the quality of care provided to Medicare beneficiaries in the 

inpatient hospital setting. It provides better insight into the quality and performance of 

America’s hospitals for policymakers and patients alike. 

Alongside the Medicare pay-for-reporting program, CMS has been testing a more 

aggressive move to a “pay-for-quality” model. In October 2003, CMS contracted with 

Premier, Inc., a nationwide alliance of not-for-profit hospitals and health systems, to 

conduct a demonstration linking payment to the achievement of quality goals. This project, 

the Hospital Quality Incentive Demonstration (HQID), has involved more than 260 

hospitals across the nation28. Under the demonstration, hospitals were asked to report 

process and outcome measures in five clinical areas related to heart attack, heart failure 

and pneumonia. Hospitals in the top 20 percent in each clinical area received a financial 

incentive payment. 

Results from the HQID project demonstrate dramatic quality improvements in every 

measured clinical area, with an 11.8 percent average quality improvement among 

participating facilities over two years. These statistics translate into actual results for 

patients: 1,284 fewer heart attack deaths for patients who received more clinically 

appropriate care29. Based on these results, the HQID demonstration was extended for 

another three years (through 2009) and will be expanded to test other innovative pay-forperformance models. 

The next step in quality-based payment reform is the adoption of a value-based purchasing 

(VBP) program in the hospital inpatient setting. In its November 2007 Report to Congress, 

CMS provided a roadmap for moving Medicare from pay-for-reporting to pay-forperformance.30 In establishing a pay-for-performance program, providers would not only 

be rewarded for reporting quality activities, but their payment would also be increased or 

decreased depending on how well they perform on these quality measures. 

Building on these recommendations and the other efforts outlined above, the Baucus plan 

includes provisions to improve quality care in the inpatient hospital setting through 

establishing a hospital pay-for-performance program, which is sometimes also referred to 

as value-based purchasing, in Medicare. The Baucus plan uses the following principles to 

guide this effort: 

 Transitions to value-based purchasing should be gradual. Linking payments to 

performance represents a major shift in how Medicare pays for services. The plan 

would phase in value-based purchasing so that the amount of payment at risk would 

gradually increase to no more than two percent of base hospital operating 

payments. 

42
 A value-based purchasing program should build on the current reporting 

program. A hospital value-based purchasing program should start with a set of 

quality measures that hospitals have already been reporting on through the pay-forreporting program. Over time, the quality reporting program should continue to be 

a testing ground for evaluating new measures before they are subjected to pay-forperformance rules. 

 Quality measures should be endorsed by relevant stakeholders. All measures 

must be evidence-based, statistically valid, and field-tested to ensure that they 

represent the best practices in improving quality. Measures should be selected 

through rulemaking and endorsed or considered by consensus-building 

organizations whenever possible. 

 Rewards should be provided to hospitals that achieve quality goals as well as 

to those that make significant improvements. The value-based purchasing 

program should reward facilities that meet quality benchmarks and those who have 

made substantial quality gains in performance relative to prior years. 

 Every effort must be made to align hospital and physician quality goals. As 

new quality measures for hospital and physician performance continue to be 

developed, every effort must be made to encourage providers to work together 

toward common quality improvement goals.

 Safety net, low-volume, and rural hospitals should be given special 

consideration. The hospital value-based purchasing program must be structured in 

a way that would allow smaller, rural facilities to participate and include 

protections for safety net hospitals that may face unique challenges in meeting the 

requirements of a value-based purchasing program. 

 Quality performance and the process to reward hospitals must be transparent.

Hospital performance in the value-based purchasing program should be publicly 

reported and available to consumers. The CMS methodology for determining 

hospital performance scores and calculating payments for facilities must also be 

transparent and public. 

 The value-based purchasing program should be subject to ongoing monitoring 

and evaluation. The Secretary, GAO, MedPAC, and others should help Congress 

monitor the value-based purchasing program and provide specific input on any 

unintended consequences of the program. 

These principles would serve as guideposts for efforts to establish a hospital value-based 

purchasing program in Medicare and are a key component of this plan. 

Physician Quality Reporting Initiative. As Congress seeks to reward hospitals that 

provide high-quality care, steps must also be taken to improve quality and resource 

efficiency in the Medicare physician payment systems. To further improve patient care, 

43
the Baucus plan would build on the Physician Quality Reporting Initiative (PQRI) and the 

provider feedback program as a next step in improving patient care. 

Despite substantial concerns regarding PQRI, the program is on its way to achieving the 

goals set by Congress when the program was enacted in 2006: engaging clinicians and 

other health care stakeholders in developing meaningful quality metrics to evaluate care; 

putting Federal resources on the table to promote and partially fund quality improvement 

activities; and expediting the development of data collection processes that will lead to 

meaningful and actionable information flowing to providers, patients, and payers. 

The first round of PQRI was executed in the second half of 2007. More than 100,000 

clinicians attempted to participate in the program, and performance results and incentive 

payments were delivered to participants this summer. At the same time, considerable 

confusion lingers regarding the reporting mechanism, and reports indicate delays in the 

delivery of incentive payments and difficulty in accessing feedback reports. 

Congress and CMS have recently acted to address these technical challenges and expand 

provider outreach and education programs so that the foundation of this program remains 

strong, and physicians are not discouraged from participating. Reforms enacted in MIPPA 

permit physicians to report on condition-specific groups of measures, such as those 

addressing diabetes and heart failure, permitting more comprehensive analysis of a 

physician’s ability to care for patients with these chronic illnesses. 

In addition, MIPPA requires the establishment of a pathway for physician groups to report 

quality information on an aggregated basis, reducing administrative burdens and fostering 

clinician-to-clinician sharing of expertise that will be much more effective in improving 

quality than purely governmental interventions. 

Finally, Congress required CMS to expedite approval of clinical registries to which 

physicians report performance data. These registries, such as the National Cardiovascular 

Data Registry spearheaded by the American College of Cardiology, are often operated by 

clinician groups or medical boards and are capable of collecting richer data sets than can 

be accessed through claims forms. And physician recognition programs like those 

sponsored by NCQA are also important conduits for quality reporting. Under MIPPA, 

registries and recognition programs — once they are approved by CMS — will now be 

able to submit data to CMS on behalf of participants. 

Medical boards in particular are striving to meet the professional needs of physicians while 

also fostering gains in quality of care. Boards such as the American Board of Internal 

Medicine (ABIM) are including some quality reporting in their maintenance of 

certification process. In order to retain ABIM certification every ten years, physicians 

must not only pass a traditional exam testing their knowledge, judgment, and analytical 

skills, but they also must participate in at least one quality reporting program. Going 

forward, PQRI should work in conjunction with medical boards to encourage more 

frequent and more aggressive recertification processes, including those that go beyond 

quality reporting to focus on how physicians actually perform. 

44
Before Medicare can transition from pay-for-reporting to pay-for-quality, physicians must 

be able to successfully participate in PQRI and receive appropriate incentives to do so. 

The reforms in MIPPA demonstrate a commitment by Congress to keep PQRI a flexible 

program that responds to provider feedback and capitalizes on developments outside of 

Medicare (e.g., clinical registries). 

Ultimately, Medicare must put physicians on a similar course as the plan described above 

for hospitals and transition PQRI to a true value-based purchasing program. As a next 

step, the Baucus plan focuses on improving the clinical importance and validity of the 

measures that physicians report to PQRI. The program may also require that physicians 

report the results of patient experience surveys in order to receive a full bonus. Finally, 

once the recent program improvements are fully implemented, the Baucus plan calls for the 

current positive financial incentives for physician participation in PQRI to eventually be 

matched with payment penalties for those who do not report. A report from CMS, required 

in MIPPA, will give Congress additional guidance on how best to reinvent the Medicare 

physician payment system from one that rewards quantity to one that focuses financial 

incentive on high-quality, evidence-based care, and healthy outcomes for patients. 

Provider Feedback Program and Episode Groupers. Congress also recently required 

CMS to begin providing feedback to practitioners regarding their resource use. CMS is 

authorized to explore different methods, including evaluating resource use on a per capita 

basis or using episode grouper technology. The per capita method — which essentially 

examines physician resource use per beneficiary — can be particularly helpful in 

identifying outliers whose practice patterns fall outside an acceptable “bell curve” of 

variation.31 However, this method is less effective in giving providers actionable 

information by which to change their practice patterns and improve their care for specific 

patients and particular diagnoses.32 

An alternative methodology that may hold greater promise, particularly for specialists who 

tend to perform discreet procedures for a specific illness, is the use of episode grouper 

software. This technology evaluates the resources used to treat a patient during a specific 

episode of illness, which may encompass multiple interventions over a period of time and 

care furnished by multiple providers.33 While most versions of this technology rely strictly 

on insurance claims, eventually they could be adapted to include clinical data generated 

from electronic health records and other sources. 

Ultimately, episode groupers could give providers and payers more specific, actionable 

information that could lead to meaningful reductions in inappropriate care patterns. 

Medicare should develop its own open-source technology platform that includes 

information on both episodes of care and per-capita resource use. This will help ensure 

that episodes of care are both necessary and efficient. Finally, Medicare’s physician 

feedback program should include information regarding quality of care — the health 

outcomes of patients should not be compromised by efforts to reduce costs in treating 

specific illnesses. 

45
Quality Improvement for Other Providers and Private Plans. As Congress moves 

forward on efforts to improve the quality of care provided by hospitals and physicians, 

efforts to strengthen quality in other care settings must not be left behind. 

CMS is currently developing a pay-for-performance demonstration project aimed at home 

health and nursing home care. For home health care, CMS proposes to test a pay-forperformance model in seven states using quality measures based on the Outcome and 

Assessment Information Set (OASIS) that agencies have been using to report quality 

activities since 2000. For nursing homes, CMS is also working to develop a demonstration 

project that would offer financial incentives to facilities that meet certain conditions for 

providing high-quality care. This project would be tested in five states. Both of these 

projects must move forward to help CMS and Congress gain much needed information on 

how to appropriately increase the focus on quality in the home health and nursing home 

settings. 

Congress should also explore a pay-for-performance requirement for private plans that 

participate in Medicare. Health plans in the Medicare Advantage program have been 

reporting a standard set of valid performance measures to CMS for over a decade. CMS 

should move health plans beyond reporting so that payments reflect plan performance. 

Additionally, CMS should provide for the development of valid performance measures for 

prescription drug plans and begin to bring pay-for-performance to these plans, too. 

As these efforts to collect, report, and appropriately pay for quality and efficiency move 

forward, provider concerns regarding the number of methodologies, metrics, and 

misaligned payment incentives must also be addressed. Clinicians are often subject to 

several pay-for-performance programs that use different quality measures for similar 

patients and require different data collection approaches. While significant efforts are 

underway at the National Quality Forum (NQF) and other quality alliances and industry 

groups to achieve uniformity, more work needs to be done to standardize measures and 

administrative approaches and to minimize the burden on providers. 

Congress provided substantial funding to NQF in MIPPA to facilitate the endorsement of 

standardized measure sets and bring stakeholders together to agree on priorities for 

performance measurement.34 But Congress can go further by fostering, through the 

Independent Health Coverage Council, alignment among the insurance plans participating 

in the Health Insurance Exchange. 

Reforming the Sustainable Growth Rate Formula. Moving toward a more value-driven 

physician payment system in Medicare must start with reform of the current system used to 

update physician payments. Enacted as part of the Balanced Budget Act of 1997, the 

Sustainable Growth Rate (SGR) was designed to control spending for physician services 

provided under Medicare Part B.35 The statutory formula sets a target amount for 

spending for certain services including physician services, lab tests, imaging, and 

physician-administered drugs that are furnished in connection with physician services. If 

overall spending exceeds the target set by the SGR, payments under the fee schedule are 

46
automatically adjusted downward. If overall spending is less than the target, then 

payments are adjusted upward. 

Since 2002, the formula has called for automatic reductions in the payment update, but 

Congress has enacted legislation to override the formula each year. These legislative 

overrides, as CBO has observed, suggest that the current SGR formula is not a viable 

mechanism to control spending for physician services.36 However, Congress has struggled 

to find a viable alternative to the SGR. 

The most immediate obstacle to reforming the SGR is budgetary. The flawed formula 

which is the basis of the SGR, combined with multiple years of Congressional 

intervention, has left a nearly $300 billion discrepancy over ten years between what 

physicians are projected to be paid under the formula and what a modest inflationary 

update over those years would provide.37 

These projected reductions in physician reimbursement are unrealistic and, if implemented, 

may have disastrous consequences for the Medicare program. They could likely cause 

physicians to exit the program and Medicare beneficiaries to lose access to needed care. 

The now-yearly cycle of Congressional intervention to block these SGR cuts consumes 

attention and resources that should be directed to other challenges posed by Medicare and 

other Federal programs. And, because the timing of Congressional action is often 

unpredictable, it also puts enormous pressure on physician practices across the country as 

they try to set budgets and meet payroll each month. 

As Congress takes steps to resolve the budgetary shortfall posed by the SGR, CMS should 

use its discretion to define the items and services that are included in the SGR formula’s 

calculations. CMS should use its administrative authority to remove physicianadministered drugs, for which payment is based on the average sales price methodology, 

from the formula in a shared effort to reverse the annual cycle of fixing the SGR. 

In addition to the massive budgetary shortfall, there are also substantive obstacles to SGR 

reform. The fundamental flaw of the SGR is that the behavior of an individual physician, 

even a large group practice, cannot affect a formula driven by the practice habits of more 

than 800,000 providers who are paid under the physician fee schedule. 

When MedPAC presented its analysis of the substantive options for reforming the SGR in 

March 2007, it identified two paths: (1) jettison the expenditure target approach and focus 

on proposals that encourage higher quality care at lower cost; or (2) pursue value-based 

payment reforms while replacing the SGR with a new expenditure target system for all 

Medicare providers based, for example, on geographical location or type-of-service.38

The first path would explicitly reorient physician payment toward high-value care. It 

would also avoid further investment of Federal resources in a target-based formula that 

may not influence individual physician behavior as Congress intends. Applying 

expenditure targets to other aspects of Medicare — as MedPAC’s second path suggests — 

could create additional administrative burdens without ensuring payment stability. 

47
Eliminating the expenditure target altogether would likely exacerbate the SGR’s budgetary 

shortfall and some in Congress have asserted a strong interest in revising the SGR 

formula.39 As we attempt to move beyond the ongoing SGR predicament, it may be 

necessary to replace it with an alternative expenditure target approach. 

One such approach would be the development of a revised SGR formula that creates 

multiple expenditure targets based on sub-sets or categories of services. This has the 

advantage of reallocating resources from high-growth, potentially overpaid aspects of 

health care to underutilized, potentially more valuable services such as primary care and 

prevention. Careful attention must be paid to appropriately clustering services so that new 

prices generated by the SGR do not produce excessive increases or reductions in any 

particular service. Consideration should also be given to whether GDP growth should 

remain the short-term basis of SGR expenditure targets as medical inflation is expected to 

outpace GDP growth at least until the reforms proposed in this paper take full effect. 

Finally, in constructing a fee schedule based on multiple targets, careful consideration 

must be given to ensure that the price outputs of the formula apply to the practitioners 

responsible for the rate of growth of particular services. For example, in the case of a 

separate target based on utilization and growth in imaging services, physicians who refer 

patients for imaging services usually do not receive payment for the performance or 

interpretation of those services. 

Nonetheless, SGR reform should closely examine the growing costs to the Medicare 

program of advanced imaging utilization and fees. A recent report by GAO found that the 

significant recent growth in imaging costs is attributable in large part to physicians 

increasingly providing imaging services in their offices as a means for revenuegeneration.40 MedPAC analysis points to imaging utilization as a factor in the significant 

regional variation of cost and quality discussed elsewhere in this paper; according to their 

report, regional use of imaging services can vary by as much as three times.41 Physician 

payment reform should pay particular attention to the cost and quality implications of the 

growing practice of physicians self-referring for diagnostic imaging services. Medicare 

should also consider establishing a process for the identification and surveillance of highgrowth services. If the evidence suggests that prices are distorting physician behavior, 

then modest reductions in prices that can elicit desirable behavioral changes without 

impacting beneficiary access could be pursued administratively. 

C. PROMOTING COLLABORATION AND ACCOUNTABILITY

While we take steps to improve the quality of care provided to patients, we must also 

provide new incentives that encourage health care providers to work together to offer 

patients the best possible care. Today, hospitals, physicians and other health care 

providers are each paid separately, which creates little incentive for them to work together 

to effectively manage patient care. Lack of collaboration can have a particularly 

detrimental impact on patients with chronic or multiple illnesses who can most benefit 

48
from well-coordinated care. Medicare should use payment incentives to drive more 

collaboration among physicians, hospitals, and other health providers. 

The disadvantages of care fragmentation are particularly evident for patients who 

experience a hospitalization. Discharge from a hospital is a particularly critical and 

vulnerable time for patients. In many cases, hospital patients are abruptly transitioned to 

home or post-acute care, and discharges that occur over a weekend mean patients are 

suddenly expected to assume a self-management role for their recovery with little support 

or preparation.42 In addition, the physicians who treat a patient during their hospital stay 

are often not the same physicians who see the patient once they leave the hospital. 

Payment systems, including the Medicare program, do not encourage these providers to 

communicate or work together to ensure patients receive the proper medication and other 

follow-up that is necessary post-hospitalization. 

While lack of care coordination around a hospitalization episode can have a detrimental 

impact on patients’ health and well-being, it also has a significant financial impact, 

particularly on the Medicare program. According to some estimates, 18 percent of 

Medicare hospital admissions result in readmissions within 30 days post discharge. These 

readmissions accounted for $15 billion in spending in 2005, and according to MedPAC, 

$12 billion of this spending is potentially avoidable.43 Not only can a reduction in 

readmissions result in Medicare savings, but it could also reduce geographic variations in 

health spending. The 30-day readmission rate for Medicare beneficiaries ranges from 14 

percent in some states to 22 percent in others.44 New Medicare payment policies should 

encourage hospitals and other providers to work together to provide the best possible care 

to hospital patients both during and immediately following their hospital stay. 

As we work to improve patient care around hospitalizations, we must take steps to 

encourage further collaboration among multi-specialty physicians who treat patients in the 

community. In the Medicare program, physicians who are paid on a fee-for-service basis 

have little financial incentive to work together to improve the quality and efficiency of care 

provided to patients. Any savings they achieve through better care coordination accrue not 

to their practice but to Medicare. A Medicare demonstration project, called the Physician 

Group Practice demonstration, is succeeding at slowing cost growth and improving quality 

by allowing physician groups to share in savings from reduced health spending and should 

be expanded. 

Delivery system reforms should also encourage innovative organizational models that 

allow for patient care across the treatment spectrum. Health care delivery systems that 

treat patients throughout the continuum of care — from primary care to hospitalization to 

post-acute rehabilitation — should be paid in a way that rewards them for improved 

quality and efficiency. One model that should be tested in this area, and is described in 

more detail below, is the concept of accountable care organizations (ACOs), which 

encourage health care providers across the treatment setting to work together to improve 

patient care. 

49
Reducing Hospital Readmissions. Discouraging unnecessary readmissions by 

restructuring Medicare payments is good policy. It is better for patients and better for 

taxpayers. The Baucus plan would take a three-step approach to reduce hospital 

readmissions and improve care coordination for patients who have experienced a 

hospitalization. 

First, the plan requires CMS to provide confidential feedback to hospitals and physicians 

regarding resource use for select hospitalization episodes. This data would need to be 

detailed enough to help providers understand spending and resource consumption, 

particularly for higher-cost beneficiaries. Once providers better understand how they 

perform relative to their peers, they could begin to address problem areas. The plan would 

then require hospital-specific information on readmissions be made available to the public. 

Second, the plan would create new financial incentives in Medicare to encourage providers 

to take greater responsibility for the coordination of care for hospital inpatients. Under 

current law, Medicare pays the same for hospital stays regardless of whether it is a 

patient’s first inpatient stay or a readmission for the same condition. The plan would adopt 

MedPAC recommendations as a starting point for creating new financial incentives to 

reduce hospital readmissions in the Medicare program. These changes would mean 

reduced payment rates for hospitals with readmission rates above a certain benchmark. 

This benchmark will need to be defined, but ideas that have been put forward include 

setting the benchmark as the average readmission rate across similar hospitals or using a 

higher standard that ties the benchmark to the top performing facilities. In the initial years, 

this plan would focus on reducing re-hospitalizations for a limited number of conditions 

that are known to have a high rate of readmissions, such as congestive heart failure, 

chronic obstructive pulmonary disease (COPD), and coronary artery bypass graft. But 

over time, the program would be expanded. In circumstances where a readmission is 

unavoidable, hospitals would not be penalized. 

Bundled Payments. The third step will involve testing other models to improve patient 

care related to hospitalizations. One concept that offers promise for greater efficiency and 

care coordination is the idea of allowing Medicare to pay bundled or global payments for 

all services provided to a patient during hospitalization and for some amount of time post 

discharge. 

Using its administrative authority, CMS has taken steps toward bundled payments by 

establishing the Medicare Acute Care Episode (ACE) demonstration. Currently under 

development at CMS, this demonstration project would allow hospitals and physicians to 

receive a global payment for services provided to patients who receive certain cardiac and 

orthopedic procedures. In the first year, this bundled payment would cover all hospital and 

physician services provided during a patient’s hospital stay. At this point, it does not 

appear that the demonstration will include services provided post-hospitalization. The 

project is expected to be implemented early next year and would involve up to 15 

demonstration sites. Medicare beneficiaries who receive care as part of the demonstration 

would receive a partial refund on their Part B premium for agreeing to participate in the 

project. 

50
A similar project, the Medicare Participating Heart Bypass Center demonstration, was 

tested in the early 1990s. Under this demonstration, Medicare paid a bundled rate for 

hospital and physician services around hospitalizations for cardiac bypass graft surgery. In 

this demonstration, the bundled payment included services provided during the hospital 

stay as well as services provided immediately following the hospitalization. Results 

showed increased efficiency and reduced Medicare spending. In particular, CMS found 

that most participants were able to achieve reduced lab, pharmacy, and intensive care unit 

spending. Spending on post discharge care also decreased, while quality remained high.

45,46 

More recently, bundled payment initiatives have been tested in the private sector, 

specifically at the Geisinger Health System. Glenn Steele, Geisinger’s President and CEO, 

discussed the ProvenCareSM 47 program at a Finance Committee hearing in September. The 

program offers a bundled payment for the package of services provided to patients 

receiving cardiac bypass graft surgery. This bundled payment covers the first physician 

visit that determined surgery was necessary, all hospital costs for the surgery, and all costs 

for related care post surgery, including cardiac rehabilitation. As long as all care was 

provided at Geisinger, the patient pays only one charge for this set of services. 

The results of the ProvenCareSM initiative have been impressive. Within three months of 

instituting the program, roughly 86 percent of patients were receiving all recommended 

best practices related to cardiac surgery care.48 Based on this success, Geisinger recently 

expanded this model to other high-volume procedures, such as hip replacement, cataract 

surgery, obesity surgery, care for babies, and heart catheterization. 

Building on these efforts, the Baucus plan would develop and test other models for 

bundled payments. As part of this effort, the plan would allow the current CMS bundling 

demonstration to expand to other sites and to focus on other clinical conditions if certain 

criteria are met. In addition, this plan would encourage CMS to include services that are 

provided post-hospitalization as part of the bundling payment model. 

Moving toward bundled payments is a complex process that would require time and 

resources. The Baucus plan would seek to limit unintended consequences, such as 

inappropriate reductions in care to increase profit. In addition, bundling models must also 

include appropriate risk adjustment to ensure health care providers are not penalized for or 

discouraged from treating sicker patients. Finally, this plan would work to ensure that 

efforts to expand payment bundling for hospital and physician services is done in way that 

is workable for non-integrated and smaller health care providers. 

Physician Group Practice Demonstration and Accountable Care Organizations. 

A reformed delivery system should also do a better of job of rewarding providers, 

particularly physicians, who work together to offer high-quality, cost-effective care to 

patients. The Medicare program is currently testing a project in this area, called the 

Physician Group Practice (PGP) demonstration. Now in its fourth year, the PGP 

demonstration includes ten large physician groups that receive enhanced payments for 

51
improving the quality and efficiency of the care delivered to Medicare beneficiaries. 

Groups that meet quality targets and achieve cost reductions beyond a two percent 

threshold are permitted to share in the savings that they generate to Medicare. In the 

second year, all participants demonstrated improvements in quality and achieved belowaverage growth in costs; four were awarded with incentive payments for reducing costs 

significantly.49

Preliminary results from the demonstration and reports from participants suggest that the 

program has achieved its goals of better coordination of care for the chronically ill, careful 

attention to hospital discharge processes, expanded role for non-physician providers, and 

investments in IT.50 While some design challenges of this demonstration remain — 

including the identification of a control group for cost comparison purposes, selection of 

meaningful quality measures, and timely generation of feedback to participants — the 

results to date merit expansion. The Baucus plan calls for CMS to establish a framework 

for reforming and expanding the PGP demonstration after its fifth year, which would end 

in March 2010. The plan for expansion should give providers a pathway toward 

accountability and shared savings, but should not restrict beneficiary choice. This effort is 

consistent with other delivery system reforms proposed in this paper, including expansion 

of the medical home, greater adoption of health IT, and transparency regarding provider 

quality and costs. 

While the current PGP demonstration focuses on large physician group practices, 

considerable work has been done to explore the possibility of accelerating broader delivery 

system integration by expanding the PGP model to encourage provider collaboration and 

accountability on a larger scale.51 

Ideal candidates for expansion are organizations that span the continuum of care in a 

community. Integrated health systems, such as Billings Clinic in Montana, InterMountain 

in Utah, and Geisinger in Pennsylvania, offer patients access to a range of providers and 

settings, including hospitals, post-acute, facilities, and the local physician community. 

Due in large part to their innovative organizational model, these systems are providing 

high-quality integrated care that is more cost-effective than their competition. 

The term accountable care organizations (ACOs) has been used to describe these and other 

provider groups that are optimal candidates for payment based on improvements in quality 

and savings achieved through improved care processes. 52 Based on the results from the 

current PGP demonstration, the Baucus plan would create a new Medicare pilot program to 

test the cost and quality opportunities of value-based payments to ACOs. 

 

Organizations eligible to participate in this new project should include integrated delivery 

systems, hospitals that employ their own physician staff, academic medical centers and 

their affiliated faculty practices, multispecialty group practices, physician hospital 

networks or independent practice associations, and primary care physician groups able to 

identify the other providers from whom their beneficiaries receive their care. The new 

ACO pilot should be implemented in part in communities and regions where meaningful 

integration does not yet exist — such as in rural areas and small group practices. 

52
As part of this project, ACOs would be subject to group level reporting on a list of quality 

measures endorsed by the National Quality Forum (NQF). CMS would establish a 

timeline to phase in reporting on these measures, so that within five years, participating 

ACOs would be reporting on at least the following classes of measures: (a) risk-adjusted 

health outcomes and improvement on specified ambulatory chronic conditions as well as 

common inpatient chronic conditions, and (b) patient experience measures for both 

ambulatory and inpatient care. CMS would establish benchmarks for achievement and 

improvement that ACOs would have to meet in order to qualify for incentive payments. 

ACOs that successfully report on measures in a manner consistent with the Physician 

Quality Reporting Initiative (PQRI) would qualify for the incentive payment under that 

program as well, as is the case for existing PGP demonstration participants. 

To determine whether ACOs are successfully controlling costs, CMS would establish a 

formula that would allow current and future years’ per beneficiary spending at the ACO to 

be estimated as accurately as possible using Medicare Part A and Part B claims for the 

beneficiaries it treats. Using multiple prior years of data would allow more accurate and 

stable estimates of current year spending. 

An issue to be resolved with input from stakeholders and other experts would be how to 

establish cost trend targets for participating ACOs.53 Several approaches to developing the 

targets should be considered, balancing the following interests: encouraging providers in 

both high- and low-cost regions to participate and receive shared savings payments; 

reducing unwarranted geographic variations in per-beneficiary spending; and promoting 

regional and ACO-level equity in the amount of increases in per-beneficiary spending 

permitted under the shared savings program. Perhaps a middle ground would be to begin 

with a formula using regional trends that would slowly phase in a national element to more 

aggressively reduce cost growth over time. 

Incentive payments would be awarded to ACOs that reduce spending significantly below 

the target rate set by the formula. A threshold savings amount should be set — such as the 

two percent mark used in the PGP demonstration — to avoid incentive payments being 

made to ACOs based on natural variations in their year-to-year spending. Savings should 

be based on real system improvements and not accidents. 

The plan also calls on CMS to develop a formula for distributing shared savings payments 

that would give providers a strong incentive to participate in the program, while ensuring 

that a substantial share of the savings would accrue to the Medicare Trust Fund as the 

magnitude of savings increases. The PGP demonstration allows participating provider 

groups to recoup 80 percent of the cost reductions that they achieve beyond the two 

percent threshold, with a cap on incentive payments of five percent of total Medicare 

spending. An alternative approach would distribute 100 percent of first three percent of 

additional savings beyond the threshold to the ACO, with the share of savings diminishing 

above the five percent mark and continuing to decline up to a maximum threshold set by 

CMS. 

53
The development of a shared savings program building on the success of the PGP 

demonstration should proceed as rapidly as possible. To achieve this goal, CMS should 

implement ACO pilots on as broad a scale as is feasible, which could permit testing 

variations of the model. As is the case with other areas, CMS could also use existing 

authority to align payment models in specific regions or states to support similar initiatives 

led by private payers and state Medicaid programs. 

Gainsharing. As part of delivery system reforms, the Baucus plan would also take steps to 

break down existing barriers that keep health care providers from improving patient care 

through increased collaboration. Successful implementation of new payment and delivery 

models to promote coordination and value-based purchasing may require changes to the 

regulatory structure governing provider collaboration. For example, the Stark and antikickback laws — which appropriately protect against financial conflicts-of-interest 

between hospitals and physicians — have come to broadly prevent hospitals from offering 

financial incentives to physicians who appropriately use imaging services or prevent 

readmissions through disease management protocols. 

Allowing providers to share among themselves savings from improved efficiency and 

quality — also known as gainsharing — is one potential strategy to encourage provider 

collaboration.54 CMS conducted demonstration projects in the 1990s that allowed 

participating hospitals to experiment with gainsharing arrangements. While these projects 

proved successful at reducing costs and improving patient outcomes, subsequent decisions 

by the HHS Office of the Inspector General (OIG) have significantly dampened 

gainsharing efforts by allowing only limited projects to move forward.55

More recently, Congress directed CMS to conduct two demonstration projects that would 

examine whether physician-hospital collaboration is an effective method for promoting 

quality and constraining costs. CMS is conducting a pair of multi-year programs that will 

allow up to 24 hospitals to share with their physician partners a portion of any savings to 

the Medicare program that are generated from improved quality and efficiency of care 

delivered to Medicare beneficiaries. In particular, one demonstration will focus on 

tracking patients beyond their hospital stay, to determine whether provider collaboration 

can save money and generate efficiencies across multiple clinical episodes and settings.56 

While promising, neither demonstration has officially launched to date. Once underway, 

these projects should provide valuable information on which modern gainsharing strategies 

work and which do not, as well as any unintended consequences associated with provider 

collaboration. 

Concerns about unfettered gainsharing that does not ensure patient safety are warranted. 

Therefore, the Baucus plan would strive to work with CMS, the HHS OIG, and interested 

stakeholders to develop gainsharing proposals that strike the appropriate balance between 

thoughtful incentives for coordination of care and careful protections against financial 

conflicts-of-interest that could harm quality of care. 

54
D. HEALTH CARE INFRASTRUCTURE

A health system that performs to its potential — providing high value care for every dollar 

invested — requires adequate infrastructure to support it. The reforms outlined in this plan 

would require new investments in our health care infrastructure. Priorities for 

infrastructure investment include: comparative effectiveness research, health information 

technology (IT), and the health care workforce. 

Comparative Effectiveness Research. The U.S. produces some of the most 

technologically advanced medical care in the world. Yet patients and their physicians can 

face a daunting task choosing among treatment options. This plan envisions a national 

approach to conduct and promote comparative effectiveness research, which would 

ultimately improve the ability of providers to deliver the right care at the right time for 

each and every patient. Such an effort would likely lower costs too, as the Congressional 

Budget Office has signaled that national health spending could be significantly reduced if 

more unbiased data were available and used widely by providers and patients.57

The rapid development of medical technology and medical treatments in the U.S. poses a 

challenge for our health system: can it produce evidence regarding what treatments work 

best in a timely fashion? Experts agree that the U.S. lacks sufficient capacity to produce 

unbiased information to compare existing treatments to determine which ones are more 

effective and for which patients.58, , , , 59 60 61 62 Providers have more diagnostic tests and 

treatment options to choose from than ever before, but too often they lack knowledge as to 

whether one works better, or if several lead to similar outcomes. 

On a limited scale, organizations like the Technology Evaluation Center funded by the 

Blue Cross and Blue Shield Association and the Veteran Administration’s Center for 

Health Care Evaluation conduct research that compares the effectiveness of different 

medical treatments. The National Institutes of Health (NIH) as well as the Agency for 

Healthcare Research and Quality (AHRQ) have also conducted seminal research 

comparing one or more medical interventions. 

Despite these efforts, current funding for effectiveness research in the U.S. is inadequate to 

keep pace with medical innovation. Public and private research efforts are also highly 

fragmented and poorly coordinated. 

Several well-respected panels—including the Institute of Medicine (IOM), the Medicare 

Payment Advisory Commission (MedPAC), and the Congressional Budget Office 

(CBO)—have called on Congress to create a national entity charged with conducting this 

type of research. 

The Baucus plan answers these calls. As first suggested in the Comparative Effectiveness 

Research Act of 2008,63 introduced earlier this year, this plan would create a new institute 

charged with identifying the most pressing gaps in clinical knowledge that prevent the 

health system from delivering the best outcomes for patients. 

55
The Health Care Comparative Effectiveness Research Institute envisioned in the 

Comparative Effectiveness Research Act of 2008 would be a private, nonprofit corporation 

with a Board of Governors appointed from the public and private sectors by the U.S. 

Comptroller General. The Institute would be created as an independent entity to remove 

the potential for political influence on the development of national research priorities. 

Comparative effectiveness research would be more credible, and more useful, if it 

remained free from political influence and reflected broad stakeholder input. 

In addition to setting national priorities, a new institute should provide for the conduct of 

the studies that would meet its priorities. The Institute should not just recommend areas of 

inquiry; it should produce the vital information needed. It should be able to contract with 

experienced Federal agencies, like NIH, and AHRQ, that have robust research networks in 

place and that can be put to good use here. The Institute must also have flexibility to meet 

its priorities by contracting directly with private researchers as appropriate. 

The comparative effectiveness Institute would need to assess the full spectrum of clinical 

interventions, including pharmaceuticals, medical devices, procedures, services, and other 

therapies, which have the greatest gaps in evidence and variations in practice patterns. A 

broad scope would provide better evidence for existing diagnostics, treatment, prevention, 

and management of health conditions. Importantly, the research should meet the goal of 

helping patients, providers, and payers of health care to make more informed clinical 

decisions. 

In addition, the Institute would also need to disseminate its research findings to the public. 

It could work in concert with government agencies (such as the Centers for Disease 

Control and Prevention and AHRQ), medical societies, and patient networks. Its reports 

should serve both clinical and general audiences. 

Activities of the Institute should be open to public input and transparent in order to 

maintain integrity of the research. For example, the Institute should publish its charter, 

rules, proceedings, and reports and make them available on a public Internet site. Its 

meetings should be open to the public. It should also provide for public comment periods 

at key stages—including the development of research priorities and study designs—in 

addition to holding public forums on controversial or complex topics. 

Most importantly, the Institute should be subject to rigorous oversight of its finances and 

mission in order to maintain the public trust. The Comptroller General should perform 

regular audits of its activities to ensure that the Institute meets its statutory mission in a 

fair, open, and credible manner. 

These new endeavors would need an adequate and stable source of funding. Public funds 

would be the best option to get the Institute up and running. But the information produced 

by such an Institute would benefit all Americans—those who receive health care through 

public and private sources—so it makes sense for a small assessment on private health 

insurers to be included. A mix of public and private resources is the best long-term 

56
framework for funding, and more reflective of the composition of the Institute and its 

broad reach. 

America must make a greater investment to generate information about what works in 

health care. In the absence of sound evidence, clinical guidelines and protocols can vary 

widely. Knowing more about the effect of different health interventions would help to 

reduce the variability in treating disease, help to better manage and prevent illnesses, and 

help to lower health costs for everyone. 

Health Information Technology. Most providers in the health care system collect and 

transmit information on paper, over the phone, and via fax machines. More advanced 

health information technology (IT) offers tools to streamline and support the process of 

collecting and analyzing the data needed to provide the best and most efficient care 

possible. Clinical IT comprises multiple applications that can support different functions 

in health care, such as: 

 Tracking patient care; 

 Allowing physicians to order medications, lab work, and other tests electronically, 

and then access test results; 

 Reporting to chronic disease registries; and 

 Providing evidence-based decision support to physicians. 

Encouraging more rapid adoption and use of health IT systems will improve health care 

quality and make our health care system more efficient.64,65 Automating the collection of 

clinical data will also be a vital component of better quality performance measurement and 

reporting.66 Technology can facilitate richer data sets for comparative effectiveness 

research,67 and help providers use comparative effectiveness findings in their own clinical 

practices. The Baucus plan provides Federal-level leadership to spur the modernization 

necessary to support a truly patient-centered delivery system. 

Health IT adoption by providers has been low to date, especially for physicians in smallgroup practices.68 Providers, particularly physicians, cite as obstacles the cost of 

purchasing and implementing systems, a fear of investing in systems that may soon be 

obsolete, as well as a lack of a clear return on investment.69,70 Some providers, especially 

in smaller settings, lack the resources or expertise to navigate the large and complex 

market of health IT products or to maintain such a system over time. Implementing health 

IT also requires changes in office organization, processes, and culture that clinicians and 

office staff may resist. Safeguards must be put in place to ensure that patient privacy is 

protected. And existing payment incentives discourage health IT adoption. Reductions in 

office visits, hospital admissions, and other services that could be achieved through the use 

of health IT would accrue to the benefit of payers and patients but not to providers 

themselves. 

Despite these challenges, there is a growing consensus among patient advocates, providers, 

and payers that a path forward that drives adoption and protects patient privacy must be 

found. 

57
Consistent with recommendations made by MedPAC and others, the Baucus plan proposes 

three strategies to encourage the adoption and use of health IT: (1) financial incentives, (2) 

assistance to providers in navigating the health IT market and implementing systems, and 

(3) promotion of information sharing among providers. 

Direct grants, loans, and financial incentives provided through Medicare pay-forperformance initiatives could promote adoption of health IT. Congress recently 

established bonus payments in Medicare for physicians using qualified e-prescribing 

systems. These bonus payments phase down over five years and become a requirement 

(enforced through payment reductions). A similar model could be employed to encourage 

the use of electronic health records if other obstacles are addressed. 

Helping providers navigate the health IT market and implement qualified systems could 

also aid widespread adoption. The Baucus plan will accelerate efforts to certify software 

products by setting a deadline for the establishment of harmonized interoperability 

standards; if the private sector does not find timely consensus, then the Office of the 

National Coordinator for Health IT would immediately promulgate standards. The plan 

also calls for additional technical assistance to help providers assess products, understand 

their needs, and manage implementation and ongoing maintenance. 

Promoting the sharing of information among providers also would improve coordination of 

care and efficiency, getting more out of health IT. Efforts at the community level to 

increase this exchange have seen limited success in some areas, but stronger leadership at 

the Federal level will be necessary to initiate nationwide adoption of advanced, 

interoperable health IT systems. 

Health Care Workforce. Today, health care workers represent roughly 12 percent of the 

American labor force.71 While these workers strive to provide high-quality care and make 

important contributions, there are growing concerns that the U.S. does not have a sufficient 

supply of health care professionals to meet the demands of a changing and aging 

population. 

Various studies suggest that the country is facing a health professional shortage. 

According to the American Association of Medical Colleges (AAMC), there have been at 

least 35 studies published since 2002 demonstrating current or future physician workforce 

needs.72 Among these is a report by the Health Resources and Services Administration 

(HRSA), which predicts that demand for physician services will exceed supply by 2020.73

Other studies by HRSA warn of a nursing shortage in the coming years.74

As the population continues to age, a shortage of health care workers will become 

increasingly problematic. Between 2005 and 2020, the number of Americans over age 65 

is projected to increase by 50 percent.75 During the same period, the number of physicians 

is projected to grow only 16 percent.76 An inadequate physician supply will not only 

affect the elderly, but also the 20 percent of Americans who live in underserved 

communities and already struggle to obtain access to medical care. 

58
The Federal government plays a key role in training future health care professionals 

through the Medicare Graduate Medical Education (GME) program. Included in the 1965 

legislation that created Medicare, the GME program provides subsidies to help teaching 

hospitals and other entities cover the direct costs associated with medical training in 

accredited teaching programs. The program has served as a major funding source for 

medical training for most teaching hospitals. In 2007, Medicare spent roughly $8.8 billion 

on GME activities. 

While the Medicare GME program has provided essential resources for training America’s 

physicians, it needs to be reexamined. In recent years, the AAMC and other stakeholders 

have raised concerns about rules in the current Medicare program that place a cap on the 

number of medical residency slots that can be supported by the GME program. The 

residency cap was established as part of the Balanced Budget Act of 1997 in response to 

what many considered an oversupply of physicians in the pipeline.77 Since this rule took 

effect, the landscape of physician supply relative to demand has shifted, and roughly 6,500 

medical training positions have been created that do not receive support from Medicare.78

Also of concern has been the question of whether the Medicare GME program should 

place a greater emphasis on providing training in critical focus areas, such as primary care, 

geriatrics, and preventive services. There is also discussion about allocating GME funds 

toward nurse practitioners and physician assistants who also play a role in managing 

patients’ primary care needs. In addition, others have recommended that training programs 

place a greater emphasis on preparing providers to practice in an organized delivery system 

or team-based environment.79 Similarly, GME funding should be used to train residents 

outside traditional hospital settings, such as in community-based primary care offices.80

These policies represent a shift in the structure and focus of the GME program, but are 

worth serious Congressional consideration. 

In addition to direct payments for GME, Medicare also subsidizes the indirect costs of 

patient care associated with graduate medical training. Indirect medical education (IME) 

payments under Medicare are based on the ratio of residents to beds — the higher the ratio, 

the higher the payment. These payments are not well targeted and are set at a level that is 

twice as high as what can be justified empirically. According to MedPAC, more than $3 

billion in extra payments are made to teaching hospitals with no accountability for how 

these funds are used.81 Congress should increase accountability around how these and 

other GME funds are spent. 

As we work to strengthen graduate medical education programs, we must also take steps to 

increase the number of racial and ethnic minorities who enter our health workforce. 

Minorities are underrepresented among our nation’s health care workers. Among 

physicians, African-American and Latino physicians comprise only three and a half and 

five percent, respectively, of the physician workforce compared to 11 and 13 percent, 

respectively, of the general population. Native Americans/Alaska Natives comprise only 

two percent of the physician workforce. The same degree of disparity is also evident in the 

59
area of nursing care. Racial or ethnic minorities represent only 14 percent of the nursing 

workforce while they represent 34 percent82 of the general population. 

Strategies to improve the racial and ethnic diversification of our health workforce include 

increasing the number of pipeline education programs at the high school and college level 

and providing funding for scholarship and loan programs that support racial diversification 

among health workers and medical faculty. Many of these programs, such as Title VII and 

Title VIII of the Public Health Service Act, merit re-examination as we work to improve 

our health care infrastructure. Loan assistance and forgiveness programs for caregivers 

who choose to practice in underserved areas should also be expanded to make sure that 

patient needs are met, especially as we expand access to insurance for millions of 

Americans. 

 

Significant work must be done in these areas, and Congress must dedicate the time and 

attention to graduate medical education that it deserves. Policy solutions in this area 

should be considered as part of health care reform. Next steps could include: 

 Evaluating whether changes are needed to the number of allowable GME training 

slots; 

 Exploring options to increasing the residency cap for certain specialty areas; 

 Determining ways to modernize the GME benefit through policies to allow training 

in other treatment settings and encouraging a focus on care coordination; 

 Increasing accountability of indirect medical education (IME) funding; and 

 Working with the Senate Health, Education, Labor and Pensions (HELP) 

Committee to address workforce shortages and support increased racial and ethnic 

diversity within the health care workforce by strengthening public health programs 

in these areas. 

These efforts are critical if we are to place our nation’s workforce on sound footing to 

address the health care needs of current and future generations. 

 

1

 Barbara Starfield, Leiyu Shi, and James Macinko, “Contribution of Primary Care to Health Systems and 

Health,” Milbank Quarterly 83, no. 3 (2005): 457-502. 

2

 Katherine Baicker and Amitabh Chandra. 2004, “Medicare Spending: The Physician Workforce, and 

Beneficiaries’ Quality of Care,” Health Affairs, no. 10 (2004):184-196 (published online 7 April, 2004; 

10.1377/hlthaff.w4.184). 

3

 Barbara Starfield, Leiyu Shi, and James Macinko, “Contribution of Primary Care to Health Systems and 

Health,” Milbank Quarterly 83, no. 3 (2005): 457-502. 

4

 Medicare Payment Advisory Commission, “Report to Congress: Reforming the Delivery System,” (2008). 

5

 Ibid. 

6

 Medicare Payment Advisory Commission, “Report to Congress: Reviewing the Work Relative Values of 

Physician Fee Schedule Services,” (2008): 135. 

7

 Medicare Payment Advisory Commission, “Report to Congress: Reforming the Delivery System,” (2008) 

8

 Richard J. Baron and Christine K. Cassell, “21st-Century Primary Care: New Physician Roles Need New 

Payment Models,” Journal of the American Medical Association, 299, no. 13, (2008): 1595-1597. 

60
 9

 Stephen Wilhide and Tim Henderson, “Community Care of North Carolina: A Provider-Led Strategy for 

Delivering Cost-Effective Primary Care to Medicaid Beneficiaries,” American Academy of Family 

Physicians, (2006). 

http://www.aafp.org/online/etc/medialib/aafp_org/documents/policy/state/medicaid/ncfull.Par.0001.File.tmp/

ncfullreport.pdf

10 The Tax Relief and Health Care Act of 2006, Public Law 109-432. 

11 The Medicare Improvements for Patients and Providers Act of 2008, Public Law 110-275. 

12 Criteria for provider participation in the medical home program should, at minimum, include the 

following: Provision of primary care services (including coordinating appropriate preventive, maintenance, 

and acute health services); active care management; use of health information technology for active clinical 

decision support; implementation of a formal quality improvement program; implementation of a rapid 

access, 24-hour patient communication system; ability to maintain up-to-date records of beneficiaries’ 

advance directives; and a maintenance of a written understanding with each beneficiary designating the 

provider as a medical home. 

13 National Committee for Quality Assurance, www.ncqa.org

14 Stephen Wilhide and Tim Henderson, “Community Care of North Carolina: A Provider-Led Strategy for 

Delivering Cost-Effective Primary Care to Medicaid Beneficiaries,” American Academy of Family 

Physicians, (2006). 

http://www.aafp.org/online/etc/medialib/aafp_org/documents/policy/state/medicaid/ncfull.Par.0001.File.tmp/

ncfullreport.pdf

15 S.3613, the Independence at Home Act, introduced by Senator Ron Wyden, September 2008, and S.1340, 

the Geriatric Assessment and Chronic Care Coordination Act, introduced by Senator Blanche Lincoln, May 

2007. 

16 RTI International, “Report to Congress: Evaluation of Phase I of Medicare Health Support (Formerly 

Voluntary Chronic Care Improvement) Pilot Program Under Traditional Fee-for-Service Medicare,” (2007). 

17 Mathematica, “Third Report to Congress on the Evaluation of the Medicare Coordinated Care 

Demonstration,” (2008). 

18 National Association of Community Health Centers, “Access For All America Quality of Care Statistics”, 

NACHC, www.nachc.org/aaa-statistics.cfm

19 Institute of Medicine, “To Err is Human: Building a Safer Health Care System,” National Academy Press, 

(1999). 

20 Institute of Medicine, “Crossing the Quality Chasm: A New Health System for the 21st Century,” National 

Academy Press, (2001). 

21 Institute of Medicine, “Performance Measurement: Accelerating Improvement,” National Academy Press, 

(2006). 

22 Medicare Payment Advisory Commission, “Report to the Congress: New Approaches in Medicare,”

(2004). 

23 Medicare Payment Advisory Commission, “Report to the Congress: Medicare Payment Policy,” (2005). 

24 Medicare Prescription Drug, Improvement and Modernization Act of 2003 (P.L. 108-173), section 501(b). 

25 Congressional Research Service, “Report to Congress: Pay-for-Performance in Health Care,” CRS, (2006): 

18. 

26 Deficit Reduction Act (P.L. 109-171), section 5001 (a). 

27 Centers for Medicare and Medicaid Services, “Medicare Fact Sheet, Fiscal Year 2009 Quality Measure 

Reporting for 2010 Payment Update,” CRS, http://www.cms.hhs.gov/apps/media/fact_sheets.asp. 

61
 28 Premier, “Value-based Purchasing: HQID and Premier’s P4P Leadership,” Premier, 

http://premierinc.com/quality-safety/tools-services/p4p/index.jsp. 

29 Premier, “CMS/Premier Hospital Quality Incentive Demonstration: Year 2 results,” Premier, (2007), 

http://www.premierinc.com/about/news/jan-07/hqid-year2.jsp

30 Centers for Medicare and Medicaid Services, “Report to Congress: Plan to Implement a Medicare Hospital 

Value-Based Purchasing Program,” CMS, (2007). 

31 Government Accountability Office, “Focus on Physician Practice Patterns. Can Lead to Greater Program 

Efficiency,” GAO, (2007). 

32 Medicare Payment Advisory Commission, “Report to Congress: Assessing Alternatives to the Sustainable 

Growth Rate System,” (2007). 

33 Mark C. Hornbrook et al., “Health Care Episodes: Definition, Measurement, and Use,” Medical Care 

Review, 42, no. 2, (1985): 163. 

34 Medicare Improvements for Patients and Providers Act of 2008 (P.L. 110-275), section 183. 

35 Balanced Budget Act of 1997, Public Law 105-33. 

36 Congressional Budget Office, “The Sustainable Growth Rate Formula for Setting Medicare’s Physician 

Payment Rates,” CBO, (2006). 

37 Congressional Budget Office, “Estimated Changes in Net Federal Outlays from Alternative Proposals for 

Changing Physician Payment Rate,” CBO, (2008). 

38 Medicare Payment Advisory Commission, “Report to Congress: Assessing Alternatives to the Sustainable 

Growth Rate (SGR) Formula,” (2007). 

39 H.R.3162, Children’s Health and Medicare Protection Act of 2007, introduced by Congressman John 

Dingell, July 2007. 

40 Government Accountability Office, “Medicare Part B Imaging Services: Rapid Spending Growth and Shift 

to Physician Offices Indicate Need for CMS to Consider Additional Management Practices,” GAO, (2008). 

41 Medicare Payment Advisory Commission, “Report to Congress: Assessing Alternatives to the Sustainable 

Growth Rate System,” (2007). 

42 Eric A. Coleman, and Robert A. Berenson, “Lost in Transition: Challenges and Opportunities for 

Improving the Quality of Transitional Care,” Annals of Internal Medicine 141, no. 7 (2004): 533-536. 

43 Medicare Payment Advisory Commission, “Report to Congress: Reforming the Delivery System,” (2008). 

44 The Commonwealth Fund, “Why Not the Best? Results from the National Scorecard on the U.S. Health 

System Performance” The Commonwealth Fund, (2008), 

http://www.commonwealthfund.org/usr_doc/StateScorecard.pdf?section=4039. 

45 Jerry Cromwell et al., “Medicare Participating Heart Bypass Demonstration: Final Report,” Waltham, MA: 

Health Economics Research, Inc., (1998). 

46 Medicare Payment Advisory Commission, “Report to Congress: Reforming the Delivery System,” (2008): 

90. 

47 Glenn Steele, “Aligning Incentives: The Case for Delivery System Reform,” (Testimony before Senate 

Committee on Finance, U.S. Senate, September 16, 2008). 

48 Ibid. 

49 Centers for Medicare and Medicaid Services, “Medicare Demonstrations,” 

http://www.cms.hhs.gov/DemoProjectsEvalRpts/MD/itemdetail.asp?filterType=none&filterByDID=-

99&sortByDID=3&sortOrder=descending&itemID=CMS1198992&intNumPerPage=2000

62
 50 Michael Trisolini et al., “The Medicare Physician Group Practice Demonstration: Lessons Learned on 

Improving Quality and Efficiency in Health Care,” The Commonwealth Fund, (2008). 

51 Elliot S. Fisher et al., "Creating Accountable Care Organizations: The Extended Hospital Medical Staff," 

Health Affairs, 26, no. 1 (2007). 

52 Stephen M. Shortell and Lawrence P. Casalino, “Health Care Reform Requires Accountable Care 

Systems,” Journal of the American Medical Association, 300, (2008): 95-97. 

53 The PGP demonstration program uses a control group to evaluate whether participants are reducing 

spending. While this approach has some strengths and some weaknesses, it is not feasible to implement on a 

national scale and thus should not be employed in the next iteration of the PGP approach. 

54 Gail R. Wilensky, Nicholas Wolter, and Michelle M. Fische, “Gain Sharing: A Good Concept Getting A 

Bad Name?” Health Affairs 26, no. 1, (2007): 58-67. 

55 Ibid. 

56 The Centers for Medicare and Medicaid Services, “Details for DRA 5007 Medicare Hospital Gainsharing 

Demonstration,” CMS, 

http://www.cms.hhs.gov/demoprojectsevalrpts/md/itemdetail.asp?filterType=none&filterByDID=0&sortByD

ID=3&sortOrder=descending&itemID=CMS1186805&intNumPerPage=10. 

57 Congressional Budget Office, “Research on the Comparative Effectiveness of Medical Treatments,” CBO, 

(2007), http://www.cbo.gov/ftpdocs/88xx/doc8891/12-18-ComparativeEffectiveness.pdf. 

58 Gail Wilensky, “Developing A Center For Comparative Effectiveness Information,” Health Affairs, 25, no. 

6 (2006): 572-585. 

59 Kathy Buto and Peter Juhn, “Can A Center For Comparative Effectiveness Information Succeed? 

Perspectives From A Health Care Company,” Health Affairs, no. 6 (2006): 586-588. 

60 IOM Roundtable on Evidence-Based Medicine, “Learning What Works Best,” (2007). 

61 Medicare Payment Advisory Commission, “Report to Congress: Reforming the Delivery System,” (2008). 

62 Paul B. Ginsburg, “Rising Costs, Low Quality in Health Care: The Necessity for Reform,” (Testimony 

before the Senate Committee on Finance, U.S. Senate, June 2, 2008). 

63 S.3408, The Comparative Effectiveness Research Act of 2008, Introduced by Senator Baucus and Senator 

Conrad. 

64 Richard Hillestad, James Bigelow, Anthony Bower, Federico Girosi, Robin Meili, Richard Scoville, and 

Roger Taylor, “Can Electronic Medical Record Systems Transform Healthcare? An Assessment of Potential 

Health Benefits, Savings, and Costs,” Health Affairs, 24, no. 5, (2005): 1103-1117. 

65 Medicare Payment Advisory Commission, “Report to Congress: New Approaches in Medicare,” (2004). 

66 Richard Hillestad, “The Right Care at the Right Time: Leveraging Innovation to Provide Quality Care for 

All Americans,” (Testimony before the Senate Committee on Finance, U.S. Senate, July 17, 2008). 

67 Gail Wilensky, “The Right Care at the Right Time: Leveraging Innovation to Provide Quality Care for All 

Americans,” (Testimony before the Senate Committee on Finance, U.S. Senate, July 17, 2008). 

68 David Gans et al., “Medical Groups’ Adoption of Electronic Health Records and Information Systems,” 

Health Affairs, 24, no. 5, (2005): 1323. 

69 Medicare Payment Advisory Commission, “Report to Congress: New Approaches in Medicare,” (2004). 

70 Richard Hillestad, “The Right Care at the Right Time: Leveraging Innovation to Provide Quality Care for 

All Americans,” (Testimony before the Senate Committee on Finance, U.S. Senate, July 17, 2008). 

71 Health Resources and Services Administration, “The United States Health Workforce Profile,” HRSA, 

(2006), http://bhpr.hrsa.gov/healthworkforce/reports/#medicine. 

63
 72 Edward Salsberg, “Healthcare Workforce Issues for the Future,” (Testimony before the Committee on 

Health, Education, Labor and Pensions, U.S. Senate, February 12, 2008). 

73 Health Resources and Services Administration, “Physician Supply and Demand: Projections to 2020,” 

HRSA, (2008), 

http://bhpr.hrsa.gov/healthworkforce/reports/physiciansupplydemand/default.htm. 

74 Health Resources and Services Administration, “Towards a Method for Identifying Facilities and 

Communities with Shortages of Nurses,” HRSA, (2007), ftp://ftp.hrsa.gov/bhpr/nursing/nurptsummary.pdf. 

75 Health Resources and Services Administration, “The United States Health Workforce Profile,” HRSA, 

(2006), http://bhpr.hrsa.gov/healthworkforce/reports/#medicine. 

76 Ibid. 

77 The Balanced Budget Act of 1997 (P.L 105-33, Chapter II). 

78 John K. Iglehart, “Health Policy Report: Medicare, Graduate Medical Education, and New Policy 

Directions,” New England Journal of Medicine 359, no. 6 (2008): 645. 

79 The Commonwealth Fund, “Organizing the U.S. Health Care Delivery System for High Performance,” The 

Commonwealth Fund, (2008). 

80 Edward Salsberg, “Healthcare Workforce Issues for the Future,” (Testimony before the Committee on 

Health, Education, Labor and Pensions, U.S. Senate, February 12, 2008). 

81 Medicare Payment Advisory Commission, “Report to Congress: Reforming the Delivery System,” (2008). 

82 U.S. Census Bureau, “Nation’s Population One-Third Minority,” U.S. Census Bureau, (2006),

http://www.census.gov/Press-Release/www/releases/archives/population/006808.html. 

64
CHAPTER IV BAUCUS PLAN: FINANCING A MORE EFFICIENT 

HEALTH CARE SYSTEM 

The U.S. spends $2.3 trillion a year — more than 16 percent of the U.S. economy — on 

health care, and economists warn that rising health care costs represent a serious threat to 

our long-term fiscal security.1,2

 We spend more than any other country on health care — 

both per capita and as a percentage of gross domestic product — yet the Congressional 

Budget Office (CBO) estimates that up to one-third of that spending does not improve 

Americans’ health outcomes.3

 That means we spend over $700 billion more than we need 

to get the outcomes that we receive today. Clearly, excess spending must be eliminated 

and dollars put to better use — not only to correct the imbalances of the current health care 

system, but to offset the high costs of much-needed comprehensive reform. 

 

Americans deserve a health care system in which everyone has affordable coverage, no 

matter their age, income, employment, or health status. This will require an investment. 

Some experts predict that a health system covering all Americans would necessitate $100 

billion to $150 billion in new Federal spending per year.4 5

 But savings from the reforms 

proposed earlier in this Call to Action and the financing mechanisms in this section can 

make the net cost of reform much smaller. 

National spending on health care can be lowered, and quality improved, by realigning the 

health care system toward prevention and primary care, rewarding providers that deliver 

quality, evidence-based care, and investing in critical research and health information 

technology that can lead to higher-value care. Beyond these measures, the Baucus plan 

endorses even further, more direct steps in these five areas to curb excess health care 

spending. 

 Fraud, Waste, and Abuse. New initiatives should be implemented immediately to 

better detect and eliminate financial fraud and abuse in our public programs. 

Taxpayer dollars should cover needed benefits and not fraudulent medical claims. 

 Increased Transparency. Public reporting of the costs and quality of care — as 

well as the relationships between providers and drug or device makers that may 

lead to biased decision-making — can encourage providers to pursue better 

outcomes and help patients choose better, more efficient providers and treatments 

when they are able to do so. Information about the full value of employersponsored health care could help employees make better coverage decisions for 

themselves and their families. Greater transparency in these areas can help 

eliminate waste and drive better value throughout the health system. 

 Medical Malpractice. Careful reforms of medical malpractice laws can lower 

administrative costs and health spending throughout the system, while ensuring that 

injured patients are compensated fairly for their losses. 

 Private Insurance Plans in Medicare. If private insurers participate in Medicare, 

they must bring value to the program and beneficiaries. Overpayments to private 

65
insurers in the Medicare Advantage program must be eliminated so that spending is 

put on a level playing field with traditional Medicare. Payments should also be 

modified to promote the best of what plans have to offer beneficiaries, without 

financial giveaways to insurers. Price discounts for prescription drugs of the dualeligibles in Medicare’s prescription drug plans should reflect discounts in 

Medicaid. 

 Long-Term Care Services and Supports. The current long-term care system is 

expensive, fragmented, and does not encourage the delivery of high-quality care. 

Further expanding home and community-based care, testing new models of care 

delivery and coordination, and better supporting family caregivers are essential to 

improving the quality and efficiency of the system. These ends cannot be 

accomplished without a stronger investment in a more robust workforce. 

 Tax Incentives for Health Coverage. Congress should also explore targeted 

reforms of the tax code to make incentives work better within the current system. 

Since the mid-1950s, tax incentives for employer-sponsored health benefits have 

made employer coverage more affordable for millions of workers. Similar but 

smaller tax incentives increase access to coverage for the self-employed and ease 

the burden of health expenses for people with no employer coverage. Such tax 

provisions have been and will continue to be the main tool used to foster employerbased health insurance coverage in the U.S. But it is time to explore ways in which 

tax incentives can be modified to distribute benefits more fairly and effectively. At 

the same time, targeted reforms can promote smarter, more efficient spending of 

health care dollars by consumers themselves. 

In the short term, health care reform will likely cost taxpayers more than the government 

can achieve in savings from all reforms and financing changes. Much of the savings from 

reforms, such as comparative effectiveness research and malpractice reform, would not 

accrue until policies have been in place for several years. 

Congress and the public must be realistic about the timeframe in which the fiscal success 

of reform is measured. If we fail to act, however, the current national expenditure on 

health care will double from over $2 trillion to $4 trillion, tens of millions will continue to 

be uninsured, poor quality will continue to contribute to nearly 100,000 deaths each year, 

and the nation’s entitlement programs will consume a greater portion of the Federal 

budget. In short, the costs of inaction, both in human and financial terms, would 

eventually be far greater than any initial outlays. America must choose to invest now in a 

health care system that will richly repay the nation with greater health and economic 

stability in the long term. 

A. FRAUD, WASTE, AND ABUSE

Fraud, waste, and abuse cheat the taxpayer, can harm beneficiaries, and threaten the 

financial integrity of essential Federal health care programs. Many payment errors are the 

result of honest mistakes unrelated to providers or suppliers trying to take advantage of 

66
Medicare, Medicaid, and CHIP. However, some providers and suppliers purposefully 

manipulate these programs for financial gain. 

There are clear differences between fraud, waste, and abuse. Fraud and abuse connote 

some level of culpability in that they involve billing practices or behaviors that include 

misrepresentation of or overcharging for services delivered. Fraud is willful or intentional, 

and abuse is a deviation from acceptable business and medical standards. Both lead to 

unnecessary costs to the payer.6

 

In 1994, the Health and Human Services Inspector General, June Gibbs Brown, said in 

testimony before the Senate Appropriations Committee that, “Fraud is the obtaining of 

something of value through intentional misrepresentation or concealment of material facts. 

Abuse is any practice that is not consistent with the goals of providing patients with 

services which (1) are medically necessary, (2) meet professionally recognized standards, 

and (3) are fairly priced. Waste is the incurring of unnecessary costs as a result of deficient 

practices, systems, or controls.”7

The full magnitude of health care fraud, waste, and abuse cannot be determined with 

precision, but evidence of the problem is everywhere. For instance, the U.S. spends more 

than $2 trillion on health care every year. Of that amount, the National Health Care AntiFraud Association estimates conservatively that at least three percent — or more than $60 

billion each year — is lost to fraud. The Secretary of Health and Human Services (HHS), 

acting through the Department’s Office of Inspector General (OIG), and the Attorney 

General, run the Health Care Fraud and Abuse Control (HCFAC) program, which 

coordinates Federal, state, and local law enforcement activities to prevent health care fraud 

and abuse. In the ten years since its inception, HCFAC has returned over $10.4 billion to 

the Medicare Trust Fund alone.8

 

The amount of money wasted on billing errors and other mistakes is also staggering. Last 

year, the Medicare program reported a fee-for-service payment error rate of 3.9 percent, 

which means that Medicare paid over $10.8 billion incorrectly.9 Many of the 

improvements to the delivery system discussed in the preceding chapter would help reduce 

wasteful spending. Better alignment of incentives and value-based purchasing in particular 

would reduce waste because they will cut down on instances in which Medicare pays for 

something beneficiaries do not need. 

While the efforts to fight fraud, waste, and abuse have been commendable, we need to do 

more. Outlays for Medicare and Medicaid almost doubled between 2000 and 2008, but the 

outlays for fighting fraud and abuse in these programs have not kept pace. We can provide 

more and better care for our beneficiaries if we do more to reduce fraud, waste, and abuse. 

Medicare, Medicaid, and CHIP must have flexibility to quickly deliver high-quality, lowcost services while minimizing providers’ administrative burdens. More can be done to 

combat unnecessary spending. The Baucus plan, which includes ideas articulated by HHS 

OIG,10 would focus on preventing fraud, waste, and abuse before they happen, and 

aggressively detecting them when prevention fails. A five-part strategy will effectively 

67
fight fraud, waste, and abuse, while allowing the programs to effectively serve 

beneficiaries. 

First, the government must do a better job of screening those allowed to become providers 

and suppliers in Medicare, Medicaid, and CHIP. Ensuring that only well-intentioned and 

law-abiding people and companies have the privilege of providing health care items and 

services to beneficiaries is an important initial step. For example, in January of 2005, an 

individual arrived in Miami-Dade County from Cuba and soon thereafter enrolled as a 

Medicare provider. From April until June, his new company billed over $4.1 million in 

fraudulent claims and was paid $1.65 million. He has since disappeared. This person 

should never have been allowed to become a supplier. 

 

Second, government payment methodologies should discourage, rather than encourage, 

providers or suppliers from engaging in fraud, waste, or abuse. For example, in 2006, 

Medicare allowed an average $7,215 for rental of a piece of durable medical equipment 

that costs about $600 to purchase new.11 As a result of these excessive fees, beneficiaries 

also incurred $1,443 in coinsurance charges for this equipment. The competitive bidding 

program for durable medical equipment, prosthetics, and orthotics has been temporarily 

delayed. Competitive bidding is a proven method for saving money and reducing fraud in 

this area, however, and the program should move forward.12 

Third, working with providers and suppliers to promote compliance with program 

requirements and quality and safety standards could actually increase it. Most health care 

providers and suppliers intend to act in accordance with program requirements, but need 

help doing so. The same is true for quality and safety standards applicable in Medicare, 

Medicaid, and CHIP. 

Fourth, the Federal government has an absolute duty to conduct vigilant oversight of 

Medicare, Medicaid, and CHIP and continuously monitor for evidence of fraud, waste, and 

abuse. Improvements and enhancements in the collection and review of data, 

establishment of internal controls, investigation of providers and suppliers, mandated 

reporting of violations, and penalties and sanctions would enable better detection and 

punishment of inappropriate or unlawful behavior. 

Finally, responses to detected fraud must be swift and strong. Punishments must be 

sufficient to deter others from considering the same behavior. Program vulnerabilities that 

are revealed by the fraudulent conduct must be remedied to prevent repeated abuse. For 

example, Florida’s Miami-Dade County is home to many companies that claim to be 

durable medical equipment suppliers, infusion clinics, and other Medicare providers and 

suppliers. In May 2007, the Department of Justice and HHS OIG created a strike force 

whose primary goal was to attack the fraud problem by decreasing the amount of time 

between the government’s detection of a fraud scheme and the arrest and prosecution of 

the offenders. That effort has lead to over 76 convictions and criminal fines and civil 

recoveries in excess of $140 million. 

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Success demands that the resources devoted to fighting fraud, waste, and abuse be 

sufficient to respond to this growing problem. The Baucus plan would invest much needed 

resources to carry out this fight because it takes time, manpower, and money to effectively 

monitor and detect fraudulent, wasteful, or abusive practices. Effective elimination of 

fraud provides a significant return on investment. According to the Office of Management 

and Budget, the HHS OIG demonstrated a return on investment of 16:1 for these efforts.13 

Watchdog and advisory agencies like the HHS OIG, Government Accountability Office, 

state Medicaid Fraud Control Units, the Medicare Payment Advisory Commission, and law 

enforcement agencies must be provided with the resources that they need to combat fraud, 

waste, and abuse. We also need to work with the HHS and CMS program managers 

responsible for protecting and effectively managing these programs. 

B. INCREASED TRANSPARENCY

Making more information available to health care providers and consumers would remove 

much of the mystery that currently shrouds our health care system. It is often too difficult 

for Americans to understand what services they receive or why they receive them, what 

they pay for relative to their insurer, or what their insurer is charged — not to mention 

what a service actually costs. Providers suffer from some of this same confusion. This 

lack of understanding leads to frustration. 

Increasing transparency — providing more and better information — would improve the 

level of understanding. With better information, consumers, providers and payers would 

gain a better understanding of how the system works and would be able to see how health 

care dollars are spent. Providing meaningful and useful information would alleviate much 

of the frustration and suspicion. 

The Baucus plan focuses on three areas that would benefit from greater transparency: 

physician-industry relationships, physician self-referral, and cost and quality information. 

Physician-Industry Relationships. Harvard’s Eric Campbell told the Finance Committee: 

“A physician-industry relationship exits whenever a physician accepts anything from a 

pharmaceutical or device company such as dinners at fancy restaurants, pens, drug 

samples, lunches, trips and paid consultancies.”14 Though these relationships may lead to 

advancements in medical technology and a better understanding of medical procedures, 

“this practice likely results in substantial increases in the costs of health care.”15 These 

higher costs occur because industry gifts, “may also result in physicians prescribing higher 

priced, brand-name drugs instead of cheaper, equally effective alternatives.”16 These types 

of relationships are common throughout the physician community. 

According to a Harvard Medical School study, “most physicians (94 percent) reported 

some type of relationship with the pharmaceutical industry, and most of these relationships 

involved receiving food in the workplace (83 percent) or receiving drug samples (78 

percent). Thirty-five percent received reimbursement for costs associated with 

professional meetings or continuing medical education, and more than one quarter (28 

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17 percent) received payments for consulting, giving lectures, or enrolling patients in trials.” 

In 2005, pharmaceutical companies spent $7 billion on sales representative visits to 

physicians and provided $18 billion worth of free samples.18

To dissuade inappropriate relationships, both the American Medical Association (AMA) 

and the Pharmaceutical Research and Manufacturers of America (PhRMA) adopted or 

revised their codes of conduct involving industry relationships. The AMA “allows 

physicians to accept gifts as long as the gifts primarily benefit patients and are not of 

substantial value.”19 The PhRMA code states such relationships “are intended to benefit 

patients and to enhance the practice of medicine,” and should be used, “solely on each 

patient’s medical needs.”20 Though these updated guidelines are a step in the right 

direction, “there is also evidence that interactions prohibited by voluntary codes continue 

to occur.”21

Four states (Minnesota, Vermont, Maine, and West Virginia) and the District of Columbia 

have enacted laws that require drug manufacturers to report any cash and in-kind payments 

made to physicians.22 Many advocate more detailed reporting of gifts between industry 

and physicians on a national level. National legislation has been introduced that would 

require drug and device companies to disclose all gifts of $25 or more to physicians and 

other medical providers.23

A recent MedPAC report to Congress outlined several advantages of such a requirement. 

It may discourage inappropriate arrangements between physician and industry, allow the 

media to explore potential conflicts of interest, enable payers to examine physician 

practices that may be influenced by particular relationships, and highlight those physicians 

who have decided not to take part in inappropriate relationships.24

Unfortunately, data collection alone may not prevent inappropriate relationships. 

However, once national, system-wide data is available, the extent of industry influence and 

the wasteful spending that it leads to can be better determined. With this information, 

stronger enforcement can be put into place, so that regardless of provider relationships, we 

can be sure physicians are recommending and performing medical care based on sound 

medical science rather than heavy-handed industry influence. 

For these reasons, the Baucus plan would require disclosure of gifts and other transfers of 

value made by drug and device companies to physicians and other health care 

professionals. Only with this information can potential bias be known. And the 

requirement to disclose may deter inappropriate behavior. Disclosure is the only way to 

know if there are inappropriate influences on the delivery of care and use of taxpayer 

dollars. 

Physician Self-Referral. Physicians, like most professionals, expect to get paid for the 

work that they perform. Some physicians, however, have found a way to game the system 

so that, in addition to getting paid, they reap additional financial benefits from the 

provision of certain health care services. Physicians can accomplish this by having 

ownership or other financial interests in equipment or facilities — such as an MRI machine 

70
or a hospital — that provide health services. When those physicians refer their patients for 

services from which the physician reaps the additional financial benefits — a practice 

known as self-referral — there is reason to be concerned about the physician’s motives. 

Physician self-referral is generally prohibited by Federal law when the patient is covered 

by Medicare or Medicaid.25 Self-referral creates conflicting incentives for physicians, 

because the financial incentive to increase utilization of the financially-rewarding services 

may conflict with otherwise sound medical and professional judgment. Ultimately, this 

practice often results in an “increased use of services and higher payments from third party 

payers.”26 

Congress has enacted several laws to confront this problem. In 1972, Congress enacted the 

Anti-Kickback Statute, which “broadly prohibits the purposeful offer, payment, or receipt 

of anything of value to induce the referral of patients from services reimbursable by a 

federal health care program.”27 Few prosecutions occurred, however, and referrals to 

imaging facilities or medical laboratories were not deterred.28

In 1989, Congress enacted the Ethics in Patient Referrals Act (known as Stark I), which 

prohibits physicians from “referring Medicare or Medicaid patients for clinical laboratory 

services to labs with which the physician has a financial relationship...unless the 

relationship fits within a specified exception.”29 In 1993, Congress enacted amendments 

(known as Stark II) expanding the prohibited services to “physical and laboratory therapy, 

radiology, radiation, home health care, hospital, outpatient prescription drugs, and many 

types of medical equipment and supplies.”30

The Baucus plan would scrutinize physician self-referral to ensure that physicians are not 

engaged in financial arrangements that place financial interests ahead of the needs of 

patients and the American taxpayer. Physicians deserve fair pay for providing services, 

but they should not be able to game the system unfairly. Increased transparency to both 

patients and payers in the form of disclosure of physicians’ financial interests is first step. 

One example is physician ownership of hospitals. There is concern that physician 

ownership of hospitals leads to cherry-picking the patients who are healthiest and most 

able to pay, while leaving the patients who are sickest and least able to pay for community 

hospitals to treat, often without much compensation, if any. This cherry-picking only 

exacerbates the cost shifting to those Americans with insurance. This concern is 

heightened by the fact that the patient often is unaware of a physician’s financial interest in 

providing services at a hospital in which he or she has an ownership interest. 

Physician-owned hospitals are often smaller and more specialized than community 

hospitals. They tend to focus on lucrative lines of service. Community hospitals, on the 

other hand, tend to provide all service lines, including emergency departments. 

Community hospitals find it difficult to compete with their more cash-rich physicianowned counterparts. Over time, the trend of increasing physician ownership of hospitals 

jeopardizes the continued viability of community hospitals. 

71
The issue of self-referral must be reviewed in light of how health care is and will be 

delivered. No serious effort at reform can ignore the potential gaming that financial 

conflicts may create. 

Cost and Quality Transparency. Rising health care costs have fueled an interest in greater 

public availability of price and quality information. Public reporting and transparency can 

aid patients in making more informed decisions about their treatment options. Such 

information could also spur providers to make improvements by benchmarking their 

performance against their peers. And health care price and quality information can be used 

by private health plans and public programs to reward quality and efficiency. 

The demand for more transparent price and quality information has been driven primarily 

31 by employers and health plans. But consumers believe they have much to gain from 

greater transparency, too. A recent survey, for example, found that 84 percent of 

32 Americans want hospitals, physicians, and pharmacies to publish their prices. 

Additionally, 90 percent of health care consumers want to partner with their physician in 

making health care decisions, and more than 60 percent claim to have searched for 

33 information to help make health care decisions.

Public programs have also embraced greater transparency. An August 2006 Executive 

Order directed Federal health programs ― including the Federal Employees Health Benefit 

Program, Medicare, programs operated by the Indian Health Service, and TRICARE ― to 

make quality and pricing information available to beneficiaries and enrollees by January 1, 

34 2007. 

Pursuant to this order, and building on existing programs, Medicare currently posts 

hospital quality measures online at the Hospital Compare website. Hospital-specific 

process measures include those related to heart failure and heart attack care, pneumonia 

care, and surgical care improvement. Information is also available for risk-adjusted 

mortality rates and patient satisfaction. The Centers for Medicare and Medicaid Services 

(CMS) has also started making available comparative price information for common 

outpatient procedures, such as wrist fracture pinning, colonoscopy, and hernia repair. 

While public availability of Medicare price information is novel and has been hailed as a 

first step, the information is based on an average, and it is not current or hospital-specific. 

In addition, the price and quality information is not linked, which undermines the value of 

any comparison by patients and beneficiaries. 

At the state level, recent legislation has required public reporting of hospital retail charges. 

Most experts agree, however, that this information is too detailed and not meaningful, 

35 because it contains unit prices rather than episodes of care. Trying to estimate a hospital 

stay based on charge data is “like shopping for a car by adding up the prices suppliers 

36 charge for all the nuts and bolts that go into one.”

The value and usefulness of cost and quality information may be limited by practical 

factors. Decisions about health care are often involuntary — made under emergency 

72
conditions or emotional distress. Patients also may not have the opportunity to choose 

among hospitals if a referring physician is not on staff at the preferred hospital. Even for 

non-urgent elective procedures like LASIK vision-correction surgery, variation in quality, 

misleading advertising, and inconsistent bundling of services that makes apples-to-apples 

37 price comparisons difficult, all contribute to imperfect market conditions.

Medicare’s recent experience with making cost and quality information available online, 

combined with real-life examples from the private sector, provide valuable lessons for 

making information meaningful. Some of these lessons, also described in recent 

38 congressional testimony by the Commonwealth Fund, include: 

 Information currently available is inadequate. Although progress has been 

made even in the past two years, cost and quality information is rarely available to 

patients, and physicians lack comparative information on the quality of the care 

they provide or the care provided by physicians to whom they refer their patients. 

 Price and quality information should be provided together. Information on the 

price of a specific health care service provides little value. Knowing the total cost 

of caring for a condition is more meaningful, particularly if combined with 

information on the quality or outcomes of the care. 

 Transparency alone is not likely to transform health care. Shopping for the 

best physician or hospital is impractical for very sick patients and patients with 

chronic conditions, particularly when care is sought under emergency conditions. 

Yet, these patients incur most health care costs. Moreover, purchasers, payers, and 

providers — not patients — are in a better position to demand greater quality and 

efficiency. And providing price information without a clear use could lead to 

collusion instead of competition. 

To promote greater transparency in ways that would be meaningful and reliable to 

consumers and providers, the Baucus plan would leverage Medicare’s ability to play a 

leading role. Medicare can and should release more information about the price and 

quality of covered services. For example, the current price information available for 

outpatient procedures should be paired with information on quality measures and expanded 

to other sites of care. 

Medicare should also make its data more widely available, with significant regulation of its 

use, so that it can be combined with similar data from other payers (such as health plans 

that serve employers and Medicaid) to build more robust profiles of clinicians’ care that 

are based on a broad spectrum of their patients. The Department of Health and Human 

Services has started down this path by initiating Charter Value Exchanges in select 

communities. These initiatives allow stakeholders in a community to combine their data 

with Medicare data with the goal of releasing a single set of cost and quality measures for 

the entire community. To access the Medicare data, stakeholders must agree on a common 

set of performance measures. 

73
With appropriate privacy protections, Medicare data can be instrumental in promoting 

greater cost and quality transparency within the health system. This data must be used in 

ways that build consistency around cost and quality measures, however, as done through 

the Charter Value Exchanges.39 While the prospect of data sharing generates concern 

among clinicians, Medicare data can be used to generate more meaningful, accurate and 

consistent information across the health system so that, ultimately, reporting is acceptable 

and less burdensome for the provider community. 

This plan also would require health plans offered through the Health Insurance Exchange 

to provide uniform cost and quality metrics. The Independent Health Coverage Council 

would work with health plans and purchasers to develop consistent definitions and 

principles. Plans would also be encouraged to incorporate this information into pay-forperformance systems. 

As a further step in greater transparency of health care costs, information about the full 

cost of employer-provided health care should be transparent to employees. Currently, 

employers must inform employees of the amount of wages paid by the employer, along 

with the taxes withheld from such wages during the calendar year. The information, 

provided on the Form W-2, must be given to each employee by January 31 of the 

succeeding year. But no such requirement exists for the amount an employer pays for 

health insurance coverage. Some employers voluntarily report the value of the health 

benefits they provide, either in an annual statement to their employees or in box 14 of the 

Form W-2. This plan would require employer health costs to be fully disclosed to all 

employees. Better educating workers about the full cost of their health care coverage 

could encourage them to seek or demand lower premiums, which in turn could help 

contain growth in spending. 

The push for increased transparency highlights the need for greater adoption of health 

information technology (IT) and evidence-based medicine. This plan proposes to invest in 

health IT and comparative clinical effectiveness research. Taken together, these tools can 

help drive the U.S. health system toward greater efficiency and increased engagement in 

health care decision making among consumers. 

C. MEDICAL MALPRACTICE REFORM

Medical malpractice insurance premiums have risen steadily over recent decades, at times 

increasing an average of 15 percent a year.40 Some states have seen even more dramatic 

increases. Pennsylvania, for example, experienced increases ranging from 26 to 73 percent 

in 2003.41 While the Government Accountability Office has found that access to medical 

care is not “widely affected” by large premium increases,42 and malpractice costs account 

for less than two percent of health costs,43 physicians and other health care providers 

contend that the current legal environment leads to the practice of defensive medicine. 

Ordering more tests, procedures, or visits primarily to avoid liability rather than to benefit 

patients may contribute to unnecessary health care spending. 

74
A serious effort at comprehensive health care reform, then, should address medical 

malpractice. 

Reducing malpractice premiums alone would not have a substantial effect on overall health 

spending. CBO estimates that a 25 to 30 percent reduction in malpractice costs “would 

lower health care costs by only about 0.4 to 0.5 percent, and the likely effect on health 

insurance premiums would be comparably small.”44 But helping patients and providers to 

cooperate rather than participate in time-consuming and expensive legal battles may help 

to shift America’s health care system away from the costly practice of defensive medicine 

and toward the best quality care and adherence to standards of care. 

The current litigation system does not do a good job of compensating victims of 

malpractice or of reducing the occurrence of medical malpractice. In fact, “research 

typically shows Americans rarely take their disputes to court. Of every one hundred 

Americans injured in an accident, only ten make a liability claim, and only two file a 

lawsuit.”45 Yet, the large number of malpractice claims filed still overwhelms the legal 

system, and only 30 percent of claims filed result in payments to victims of medical 

malpractice.46 Alternatives to civil litigation need to be utilized so that administrative 

costs associated with litigation, which account for 60 percent of malpractice premiums,47

can be reduced, while simultaneously allowing credible claims to be compensated fairly 

and quickly. 

Malpractice reform could address money and time spent on litigation, as well as improve 

patient and provider satisfaction with the resolution of complaints or grievances. 

Additionally, changes made as part of reforming the health care system would affect 

medical malpractice. For example, damages awarded for care necessary as a result of 

malpractice would be reduced because the cost of care would decrease across the board. 

Also, improvements in preventive care and care coordination would reduce the likelihood 

of risky procedures that are a source of malpractice claims. 

The Fair and Reliable Medical Justice Act, introduced in the 109th Congress and again in 

the current Congress, includes ideas for ensuring safe and effective medical care, while 

working to limit malpractice insurance premiums.48 This legislation would provide grants 

to states to create alternatives to current tort litigation in an effort to increase access to 

recovery for patients with low-dollar value claims and improve satisfaction with claims 

resolution for patients and provides. States would have flexibility in developing 

alternatives to civil litigation, with three specific models outlined in the bill: (1) the early 

disclosure and compensation model, (2) the administrative determination of compensation 

model, and (3) the health court model. 

The early disclosure model offers health care providers tort liability immunity after an 

offer, in good faith, to pay compensation to any patient injured or harmed as a result of 

care. The compensation would have to include any economic loss to the patient, noneconomic damages (as determined by the state) and reasonable attorney fees. The 

University of Michigan Health System (UMHS) implemented this system in 2002 with 

astounding results. Three years after the program was established, UMHS had reduced its 

75
annual litigation costs by $2 million and reduced the number of lawsuits, as well as the 

time it took to resolve the suits, by more than half.49 That is one of the goals of the early 

disclosure model. Fostering communication about medical errors and awarding 

appropriate compensation in a non-adversarial setting are the hallmarks of this approach. 

By increasing communication about medical errors, and doing so in a non-adversarial 

setting, the collection of medical error data will increase, leading to improved patient 

safety. Data collection is essential to preventing errors by enabling providers to better 

understand how errors occur. “Accurate information also provides a baseline measurement 

for further assessment of the effectiveness of the changes made.”50 Unfortunately, under 

the current system, data collection remains limited because of the lack of incentives. 

Alternatives to litigation, such as early disclosure, provide incentives to disclose medical 

errors, while continuing to protect the provider and improve patient safety. 

The second approach, the administrative determination of compensation model, calls for 

the establishment of an administrative board to designate classes of avoidable injuries. 

Based on these classes, the board would determine the level of compensation awarded to 

the patient. An appeals process would also be established to review decisions made by the 

board. 

Under the third alternative, a specialized health court would be established. The court 

would be presided over by judges with expertise in health care with the ability to hire 

outside experts. The judges’ decisions regarding compensation would be binding but 

subject to an appeals process. 

The Fair and Reliable Medical Justice Act serves as a foundation for an important element 

of this health reform plan. Like the legislation, the Baucus plan would call on states to 

take the opportunity to develop alternatives for resolving conflicts and compensating 

patients who are the victims of medical errors. In addition to receiving Federal assistance 

to establish an alternative model, states would also receive assistance to collect data about 

medical errors, which would help keep patients better informed and create an opportunity 

for providers to learn from each other. In fact, the systems developed by the Department 

of Defense and the Veterans Health Administration that successfully track such data could 

serve as models. Patients and providers should have the chance to cooperate, rather than 

participate in a time-consuming and expensive legal battle. This plan would help achieve 

that important objective. 

D. PRIVATE INSURANCE PLANS IN MEDICARE 

Medicare beneficiaries can obtain benefits through the traditional fee-for-service program 

or by enrolling in private insurance plans that are approved to offer Medicare benefits. 

Private insurance plans are paid a monthly amount by the government for each beneficiary 

whom they enroll. In return, insurers agree to provide coverage for the range of Medicare 

benefits that their enrollees need. The program allowing private insurers to serve Medicare 

beneficiaries is called Medicare Advantage (MA). 

76
The Medicare Payment Advisory Commission (MedPAC) estimates that Medicare Advantage 

(MA) insurers are currently paid 13 percent more than the amount Medicare would pay if the 

same beneficiaries remained in the traditional fee-for-service program.51 Current estimates 

indicate that these excess payments will total $62 billion over the next five years, and $169 

billion over the next ten years. 

52 MedPAC has called for Medicare Advantage payments to be set equal to traditional Medicare. 

The health insurance industry defends these payments by pointing to extra benefits that lowincome MA enrollees receive relative to traditional Medicare, like eyeglasses, dental coverage, 

and lower copayments. But delivering these extra benefits through Medicare Advantage is not 

as efficient as delivering them directly through traditional Medicare. Moreover, MedPAC 

reports that MA plans are less efficient at delivering Medicare Part A and B benefits than the 

traditional fee-for-service program.53 Private insurers’ higher overhead and added 

administrative costs — including profits — mean that fewer benefits are passed along to 

beneficiaries. CBO and the U.S. Comptroller General estimate the administrative costs of 

private plans serving Medicare beneficiaries are in the range of 11 to 13 percent, compared to 

estimates of 2 to 5 percent for the traditional Medicare program. 54, , , 55 56 57 

The majority of Medicare beneficiaries have multiple chronic conditions that could be treated 

more effectively through interdisciplinary care teams, and the insurance industry contends that 

private plans better coordinate care and improve quality oversight in the Medicare program. 

There is no solid evidence that supports this assertion. Not all Medicare Advantage plans are 

designed to integrate or coordinate care across the spectrum of providers, and not all use 

electronic medical records to better manage care. Even so, all Medicare Advantage payments 

are based on the same rates — whether or not the plan uses advanced methods of coordinating 

and delivering care. 

Congress must act to level the playing field between traditional Medicare and Medicare 

Advantage payments and the Baucus plan would do so. Enacted in July 2008, MIPPA took 

modest steps to reduce overpayments to private plans beginning in 2010. There are a number of 

ways to complete this. One is to set MA payments on par with traditional Medicare in every 

county in the country. However, Medicare costs can be low in some areas of the country and 

extraordinarily high in others. Simply setting MA payments equal to traditional Medicare could 

maintain overpayments in some areas and create severe underpayments in other areas relative to 

insurers’ costs. 

The Baucus plan would seek to better understand how insurers’ costs differ by region of the 

country in designing new policies to eliminate the remaining excess spending in the Medicare 

Advantage program. MIPPA has already directed MedPAC to compare Medicare and private 

insurance costs and develop alternative ways of setting MA payments. MA payments should be 

reformed to achieve neutrality with traditional Medicare at the national level. But the 

benchmarks against which MA plans are paid should have more to do with plans’ own costs.58 

One option is to base MA payments on a blend of local and national Medicare costs, reducing 

MA payments in high-use areas and increasing payments in low-use areas. 

77
Alternatively, insurers’ payments could be based on a blend of their own costs per enrollee with 

Medicare’s costs per beneficiary at the local or national level. Competitive bidding is another 

option that could be considered or tested for MA plans. At a minimum, Congress should repeal 

the “premium support” demonstration included in the MMA of 2003 because it unfairly ties Part 

B premiums to how much insurers’ costs differ from traditional Medicare. Finally, Congress 

must seek ways to eliminate excess spending that results from differences in the ways MA plans 

and traditional Medicare code diagnoses in patients’ medical records. 

In addition to determining and adopting mechanisms to reduce overpayments, Congress 

should consider paying Medicare Advantage plans for delivering coordinated, costeffective care to beneficiaries with the highest risk of complications and spending. One 

option is to pay MA plans more if they meet medical home criteria defined by NCQA and 

specific performance measures. If MA plans do not meet these criteria, their payments 

would be reduced over a defined period of time. As with proposals involving traditional 

fee-for-service Medicare, paying MA plans for such care could increase the quality of care 

provided to beneficiaries in MA plans and could possibly lower Medicare spending by 

reducing complications from chronic illnesses. 

Private insurance plans also deliver Medicare’s prescription drug benefit and are paid by 

the government for each beneficiary they enroll. Insurers in the program contract with 

pharmacies to dispense drugs, and they negotiate with drug manufacturers for discounted 

prices. Current law allows insurers to use their own formularies to negotiate prices with 

manufacturers and to manage the quality of the drug benefit. Recent studies suggest that 

the price breaks negotiated by Medicare prescription drug plans are not as high as those 

legislated through the Medicaid drug rebate program.59 This means Medicare pays more 

than Medicaid for the prescriptions of the dual-eligible population, which was switched 

from Medicaid to the Medicare drug benefit in 2006. 

Congress should consider extending the Medicaid price discounts to the drugs consumed 

by the dual-eligible population in the Medicare program in order to maintain the previous 

price breaks. Insurers would continue to negotiate prices on behalf of the other 

beneficiaries who enroll in their plans. Congress should also be apprised of Medicare’s 

price breaks in the aggregate, relative to Medicaid and other sectors, in order to gauge the 

performance of the prescription drug program. 

E. LONG-TERM CARE SERVICES AND SUPPORTS

Long-term care differs from other types of health care in that the goal is not to cure an 

illness, but to provide patients with the highest level of functioning possible and improve 

quality of life. The need for long-term care affects individuals of all ages: children born 

with disabling conditions, working-age adults with inherited or acquired conditions ―

many of whom are able to work ― and the elderly with chronic illnesses. Care for these 

individuals is most often provided by informal caregivers ― family or friends ― who 

provide care with little or no compensation. More than 50 million informal caregivers 

currently tend to the needs of individuals and family members of all ages.60 

78
Today, about 9.4 million adults, five percent of the adult population, receive long-term 

care services in the community or in institutions;61 and about 1.1 million children living in 

the community have long-term care needs.62,63 An estimated 69 percent of people turning 

65 years old will need some form of long-term care assistance before they die.64 

The current system for delivering long-term care is expensive, inefficient, and does not 

encourage the delivery of high-quality care. In 2005, national spending on long-term care 

was estimated to be nearly $207 billon.65 States and the Federal government are the 

largest payers of these services. Medicaid alone accounts for as much as 49 percent of 

long-term care spending ― most of which was provided in an institutional setting.66 

Medicare covers a limited amount of post-acute care in skilled nursing facilities and in the 

home for certain beneficiaries. And Medicare benefits are not coordinated with Medicaid 

― even though the Federal government bears much of the cost for these programs. 

Likewise, conflicting incentives may increase costs and diminish the quality of care.67 

Divergent characteristics, program goals, eligibility requirements, and covered services for 

Medicare and Medicaid programs often lead to uncoordinated care and a fractured delivery 

system for individuals needing long-term care and assistance. 

The cost for nursing home care is extremely expensive, about $70,000 per year on average. 

Without financial assistance from Medicaid or private insurance, most people simply 

cannot afford extended nursing home care.68 Home or community-based care is more 

cost-effective,69 and most patients would prefer care in these settings to institutional 

care.70,71 

In recent years, Congress has taken some steps to reform the long-term care system. The 

Deficit Reduction Act of 2005 provided new flexibility for states to offer home and 

community-based long-term care services in Medicaid.72 Despite this progress, the 

program maintains a strong bias toward institutional care due to payment and access rules. 

Congress has considered innovative, alternative approaches to institutional care,73 but 

reform has remained elusive due to a lack of consensus on both policy and financing. 

Home and Community Based Services (HCBS) have become a popular way to support 

individuals who want to remain in their own homes and communities. HCBS options are 

generally provided through Medicaid waivers, but beneficiaries must have a significant 

level of disability to qualify.74 And even those who qualify often have difficulty accessing 

care; by 2005 there was a waiting list of more than 207,000 Medicaid beneficiaries for 

HCBS waiver services.75 

The Baucus plan would consider options to further expand access to HCBS in Medicaid. 

These options include providing states with new tools and incentives to make them more 

available to more beneficiaries and exploring options to better coordinate care for dualeligible individuals under Medicare and Medicaid. 

The plan would also encourage states to explore new options that improve access to longterm care services and supports to prevent the progression of disability and to help 

79
individuals remain in their own homes. By intervening earlier with targeted assistance, 

states can help prevent or delay costly institutionalizations and provide a more patientcentered benefit. In addition, exploring inefficiencies and conflicting incentives within 

Medicare and Medicaid could improve the quality of care and decrease costs. 

Providing support for family caregivers should also be an important part of any reform 

plan. The plan would provide assistance to individuals, families and caregivers in 

navigating the complex and fractured long-term care services and supports system. With 

this help, individuals in need of care and their families would be better able to make the 

most appropriate care choice. 

Family caregivers cannot be expected to fill all the gaps in our current system. Long-term 

care reform should include options to recruit, train, and retain a robust workforce that can 

ensure high-quality care. One concept that has been put forward to address these shortages 

is providing educational and training opportunities to adults who are participating in the 

Temporary Assistance for Needy Families (TANF) program, who represent a pool of more 

than 900,000 individuals who could provide an important resource in meeting our nation’s 

workforce needs. 

Institutional or residential care is appropriate in some cases; however, it should be a choice 

for individuals and families. This plan would pilot new models of institutional care, such 

as the Green House model,76 that has shown promise for both improving the quality of life 

and care in these settings. In addition, this plan incorporates several options to reform the 

delivery system to provide better care coordination and chronic disease management. 

Others may include investment in aging and disability resource centers (ADRCs) and 

programs that limit secondary disabilities by promoting nutrition, exercise and fall 

prevention. Because almost 25 percent of deaths occur in long-term care settings, ways to 

provide the best quality care at the end of life should be considered.77 

In the long run, fundamental reform of the long-term care system will be necessary. 

Achieving ultimate success will require both public and private solutions. While we 

consider options to improve the care in our public programs, we should also explore 

policies that make quality long-term care insurance products more affordable and 

accessible. 

F. TAX INCENTIVES FOR HEALTH COVERAGE

Tax breaks for health insurance premiums and other health expenses are among the largest 

tax expenditures in the Federal budget. In 2007, the total value in foregone revenue for 

health tax benefits was more than $300 billion.78 Congress should explore ways to 

restructure the current tax incentives to encourage more efficient spending on health and to 

target our tax dollars more effectively and fairly. 

Current tax law favors individuals who receive health insurance through their employer. 

The employer’s contribution to health care and premiums is excluded from an individual’s 

income for both income and payroll tax purposes. In addition, an employee’s share of the 

80
premium cost can be excluded if it is made through what is called a cafeteria benefit plan. 

This means workers are not taxed on the value of their health premiums, even though the 

premiums are part of the worker’s total compensation package. There is no limit on the 

amount of premiums that can be excluded from wages. The tax exclusion fosters 

employment-based health coverage, because it lowers the cost of buying insurance through 

an employer. 

In addition to the employee exclusion, other incentives to purchase health care and health 

coverage are available through the tax code. An employee’s pre-tax contributions for 

health insurance or medical expenses through a Flexible Spending Account (FSA) are 

excluded from income and therefore not subject to tax. There are no limits on the amount 

of wages an employee can contribute on a pre-tax basis to an FSA. For individuals who 

qualify to contribute to a Health Savings Account (HSA) by enrolling in a high-deductible 

health plan, up to $2,900 of those contributions for individuals and $5,800 for families are 

deductible in tax year 2008. 

Self-employed individuals can deduct the cost of health insurance premiums for 

themselves, their spouse, and their dependents for income tax purposes, but they must pay 

self-employment tax on these amounts. This is less favorable treatment than employerprovided health insurance. And finally, those who purchase health insurance through the 

individual market, and those who have out-of-pocket medical expenses, may deduct their 

spending to the extent that it exceeds 7.5 percent of their adjusted gross income and they 

itemize their deductions. 

Most economists argue there are problems with the current set of tax incentives for heath 

care. 79, , , 80 81 82 First, they argue that the incentives are inequitable because the amount of 

tax benefit received differs based on how health coverage is received: those covered 

through their employers are rewarded with the largest tax breaks, while those who must 

obtain coverage on the individual market receive a much smaller tax break, or none at all. 

Current incentives are also regressive because they are, for the most part, more valuable to 

taxpayers who are subject to higher marginal rates. As such, they give larger subsidies to 

higher-income workers, instead of to the lower-income Americans who need more help 

buying insurance. 

Second, many economists argue that the unlimited employee tax exclusion leads to 

increased health spending. The unlimited tax benefit for the exclusion encourages workers 

to purchase more expensive coverage to avoid co-payments and deductibles. This lower 

cost sharing can lead to higher use of services that are considered non-urgent and 

discretionary. Additionally, employees who have different health insurance options from 

which to choose may spend health care dollars unnecessarily to simply buy the most 

expensive plan they can afford, instead of looking at the amount of coverage that they 

actually need. 

Some have proposed eliminating the current tax exclusion for employer-based health 

insurance premiums and converting the benefit to a tax deduction or tax credit.83,84 This 

approach goes too far because it could cause widespread disruption in employer-based 

81
health benefits. Reform should not endanger coverage for the more than half of all 

Americans who now have health insurance through an employer. 

More targeted reforms of the exclusion might make the incentive more equitable and 

reduce spending in the health care system. One option for reform is to cap the amount of 

health care premiums that can be excluded from employee wages for income and payroll 

tax purposes. This could be done by limiting or capping the tax exclusion based on the 

value of health benefits or, as an alternative, based on a person’s income — or both. 

Employees could be allowed to exclude, for example, up to a specific dollar amount in 

health benefits from their wages each year. If they purchase health plans with greater 

benefits, the difference between a more generous plan and the cap could be subject to 

Federal and state income taxes. Alternatively, the exclusion could be available on a sliding 

scale based on income: people with low wages could be allowed to exclude 100 percent of 

the premiums offered through their employers, with the percent allowed phasing down or 

out with income.85

Tax incentives can be an effective way of subsidizing the cost of health insurance. New 

tax incentives for small businesses and low-income individuals were discussed earlier in 

this plan. Current tax policies for health coverage must promote efficient uses of care and 

distribute subsidies fairly. We must also balance any tax reforms in this area with the 

desire of Americans to maintain employer-based health coverage. 

 

 

1

 Centers for Medicare and Medicaid Services, “National Health Expenditure Data,” CMS, 

http://www.cms.hhs.gov/NationalHealthExpendData/02_NationalHealthAccountsHistorical.asp. 

2

 C. Eugene Steuerle and Randall R Bovbjerg, “Health And Budget Reform As Handmaidens,” Health 

Affairs 27, no. 3, (2008): 633-644. 

3

 Peter R. Orszag, “Increasing the Value of Federal Spending on Health Care,” (Testimony before the 

Committee on the Budget, U.S. House of Representatives, July 16, 2008). The CBO estimate is based on an 

estimate of spending variation in Medicare and the costs that could be saved — without any negative effect 

on health outcomes — if high- and medium-cost areas were reduced to the level in low-cost areas. In 2007, 

that potential savings in Medicare is $129 billion. 

4

 The Commonwealth Fund, “New Analysis: Congressional Health Care Proposals Would Cover All 

Uninsured, and Reduce Total U.S. Health Spending by Up to $61 Billion,” The Commonwealth Fund, 

(2007). 

5

 John Sheils and Randall Haught, “Cost and Coverage Analysis of Ten Proposals to Expand Health 

Insurance Coverage,” The Lewin Group, (2003), 

http://www.lewin.com/content/publications/CoveringAmerica.pdf. 

6

 Government Accountability Office, “Health Insurance: Vulnerable Payers Lose Billions to Fraud and 

Abuse,” GAO, (1992) http://archive.gao.gov/t2pbat6/146547.pdf. 

7

 June Gibbs Brown, (Testimony before the Senate Appropriations Committee, U.S. Senate, April 22, 1994). 

8

 The Department of Health and Human Services and Department of Justice, “Health Care Fraud Abuse 

Control Program Annual Report for FY 2006”, HHS & DOJ, (2007), 

http://oig.hhs.gov/publications/docs/hcfac/hcfacreport2006.pdf. 

9

 Centers for Medicare and Medicaid Services, “2007 Improper Medicare FFS Payments,” CMS, (2007), 

http://www.cms.hhs.gov/CERT/CR/itemdetail.asp?filterType=none&filterByDID=-

99&sortByDID=1&sortOrder=descending&itemID=CMS1205324&intNumPerPage=10. 

82
 10 Department of Health and Human Services, Office of the Inspector General, “OCIG Official Unveils FivePoint Strategy to Help the Next Administration Combat Fraud”, Report on Medicare Compliance, HHS-OIG, 

(2008): 1-3. 

11 Department of Health and Human Services, Office of the Inspector General, “Medicare Home Oxygen 

Equipment: Cost and Servicing,” HHS-OIG, (2006), http://oig.hhs.gov/oei/reports/oei-09-04-00420.pdf. 

12 Department of Health and Human Services, “Final Report to Congress: Evaluation of Medicare’s 

Competitive Bidding Demonstration for Durable Medical Equipment, Prosthetics, Orthotics, and Supplies,” 

(2004). 

13 ExpectMore.gov, “Health Care Fraud and Abuse Control,” 

http://www.whitehouse.gov/omb/expectmore/detail/10000292.2002.html#performanceMeasures. 

14 Eric Campbell, “Aligning Incentives: The Case for Delivery System Reform,” (Testimony before the 

Senate Committee on Finance, U.S. Senate, September 16, 2008). 

15 Ibid. 

16 Ibid. 

17 Eric Campbell, et al., “A National Survey of Physician-Industry Relationships,” New England Journal of 

Medicine 356, no. 17: 1742. 

18 Julie Donohue et al., “A Decade of Direct-to-Consumer Advertising of Prescription Drugs,” New England 

Journal of Medicine 357, no.7: 673-681. 

19 American Medical Association, “Gifts to Physicians from Industry,” AMA, (1998). 

20 Pharmaceutical Research and Manufacturers of America, “PhRMA Code on Interactions with Health Care 

Professionals,” (2004), http://www.phrma.org/files/PhRMA%20Code.pdf: 3. 

21 David Blumenthal, “Doctors and Drug Companies,” New England Journal of Medicine 351, no. 18: 1885-

1890. 

22 Medicare Payment Advisory Commission, “Report to the Congress: Reforming the Delivery System,” 

(2008): 153. 

23 S.2029, The Physician Payments Sunshine Act of 2007, introduced by Senators Chuck Grassley and Herb 

Kohl, September 6, 2007. 

24 Medicare Payment Advisory Commission, “Report to the Congress: Reforming the Delivery System,” 

(2008): 154-155. 

25 Jean Mitchell, “The Prevalence of Physician Self-Referral Arrangements After Stark II: Evidence From 

Advancing Diagnostic Imaging,” Health Affairs 26, no. 3 (2007): 415. 

26 Ibid. 

27 Medicare Payment Advisory Commission, “Report to the Congress: Physician-Owned Specialty 

Hospitals,” (2005): 11. 

28 Ibid. 

29 Medicare Payment Advisory Commission, “Report to the Congress: Physician-Owned Specialty 

Hospitals,” (2005): 12. 

30 Ibid. 

31 National Quality Forum, “Draft Background Paper on Hospital Cost and Price Transparency: Usable, 

Audience-Specific Information on Hospital Costs and Prices,” (2007), 

http://www.qualityforum.org/pdf/projects/transparency/txpricetranspforcommentJun12.pdf. 

32 The Council for Affordable Health Insurance, “Memorandum: Results from Nationwide Poll on Price 

Transparency,” (2006), http://www.cahi.org/cahi_contents/resources/pdf/CAHIPollResults042806.pdf. 

83
 33 Consumer-Purchaser Disclosure Project, “Building Health Care Value By Providing Consumers With 

Better Information To Make Good Decisions,” (2007), 

http://healthcaredisclosure.org/docs/files/DisclosureFactSheetsConsumerTools10-10-07.pdf. 

34 Executive Order 13410, “Promoting Quality and Efficient Health Care in Federal Government 

Administered or Sponsored Health Care Programs,” (2006), 

http://www.whitehouse.gov/news/releases/2006/08/20060822-2.html. 

35 National Quality Forum, “Background Paper on Hospital Cost and Price Transparency: Usable, AudienceSpecific Information on Hospital Costs and Prices,” NQF, (2007), 

http://www.qualityforum.org/pdf/projects/transparency/txpricetranspforcommentJun12.pdf. 

36 Ibid., 13. 

37 Ha T. Tu, (Testimony before the Subcommittee on Health of the House Committee on Ways and Means, 

U.S. House of Representatives, July 18, 2006). 

38 Sara Collins, “Transparency in Health Care: the Time Has Come,” (Testimony before the Subcommittee 

on Health of the House Committee on Energy and Commerce, U.S. House of Representatives, March 15, 

2006). 

39 S. 1507, and act that would establish a framework for the release and use of Medicare data, introduced by 

Senators Grassley and Baucus, May 24, 2007. 

40 Congressional Budget Office, “Limiting Tort Liability for Medical Malpractice,” CBO, (2004): 4. 

41 Kenneth E. Thorpe, “The Medical Malpractice ‘Crisis’: Recent Trends and the Impact of State Tort 

Reforms,” Health Affairs (2004): 4-25 (published online 21 January 2004; 10.1377/hlthaff.w4.20) 

42 Government Accountability Office, “Implications of Rising Premiums on Access to Health Care,” GAO, 

(2009): preface. 

43 Congressional Budget Office, “Limiting Tort Liability for Medical Malpractice,” CBO, (2004): 6. 

44 Ibid. 

45 Thomas Burke, “Lawyers, Lawsuits, and Legal Rights: The Battle Over Litigation in American Society,” 

University of California Press, (2004): 3. 

46 David M. Studdert et al., “Claims, Errors, and Compensation Payments in Medical Malpractice Litigation,” 

The New England Journal of Medicine, 354, no. 19, (2006): 2024-2033. 

47 Kenneth E. Thorpe, “The Medical Malpractice ‘Crisis’: Recent Trends and the Impact of State Tort 

Reforms,” Health Affairs (2004): 4-25 (published online 21 January 2004; 10.1377/hlthaff.w4.20) 

48 S.1481, The Fair and Reliable Medical Justice Act, introduced by Senator Max Baucus and Senator 

Michael Enzi, 110th Congress; S.1337, The Fair and Reliable Medical Justice Act , introduced by Senator 

Mike Enzi and Senator Max Baucus, 109th Congress. 

49 Hillary Clinton and Barack Obama, “Making Patient Safety the Centerpiece of Medical Liability Reform,” 

New England Journal of Medicine, 354, no. 21 (2006): 2208. 

50 Joanne Stow, “Using Medical-Error Reporting to Drive Patient Safety Efforts,” AORN Journal, (2006), 

http://findarticles.com/p/articles/mi_m0FSL/is_/ai_n27000693, (accessed November 4, 2008). 

51 Medicare Payment Advisory Commission, “Report to the Congress: Medicare Payment Policy,” (2008). 

52 Ibid. This estimate is for plan year 2008 and does not take into account the effect of MIPPA of 2008. 

53 Glenn M. Hackbarth, “An Examination of Medicare Advantage,” (Testimony before the Senate Committee 

on Finance, U.S. Senate, April 11, 2007). 

54 Congressional Budget Office, “Designing a Premium Support System for Medicare,” CBO, (2006): 1-56. 

84
 55 Centers for Medicare and Medicaid Services, “National Health Expenditure Data, Tables 11 and 12,” 

CMS, (2008) http://www.cms.hhs.gov/NationalHealthExpendData/downloads/tables.pdf. 

56 Merrill Mathews, “Medicare’s Hidden Administrative Costs: A Comparison of Medicare and the Private 

Sector,” Council for Affordable Health Insurance, (2006): 1-16. 

57 Government Accountability Office, “Medicare Advantage Organizations: Actual Expenses and Profits 

Compared to Projections for 2005,” GAO, (2008): 1-14. 

58 Robert A. Berenson, “From Politics To Policy: A New Payment Approach In Medicare Advantage,” 

Health Affairs, (2008): 156, (published online 4 March, 2008; 10.1377/hlthaff.27.2.w156). 

59 Richard G. Frank and Joseph P. Newhouse, “Mending the Medicare Prescription Drug Benefit: Improving 

Consumer Choices and Restructuring Purchasing,” The Brookings Institute, (2008), 

http://www.brookings.edu/papers/2007/04useconomics_frank.aspx. 

60 The Department of Health and Human Services, “Informal Caregiving: Compassion in Action,” HHS, 

(1998), http://aspe.hhs.gov/daltcp/Reports/carebro2.pdf. 

61 S. Rogers and H. Komisar, “Who Needs Long-Term Care? Fact Sheet, Long-Term Care Financing 

Project,” Georgetown University Press, (2003). Most but not all individuals were over 65 years of age, 6.3 

million; the remaining 3.7 million were younger 

62 Achintya N. Dey, Jeannine. S. Schiller, and Diane A. Tai, “Summary Health Statistics for Children: 

National Health Interview Survey, 2002,” National Center for Health Statistics, Vital and Health Statistics, 

10, no. 221, (2004). 

63 Forum on Child and Family Statistics, http://www.childstats.gov/. 

64 Peter Kemper, Harriet L. Komisar, and Lisa Alecxih, “Long Term Care Over An Uncertain Future: What 

Can Current Retirees Expect?” Inquiry, 42, (2005-06): 335-350. 

65 Georgetown University Long-Term Care Financing Project, “National Spending for Long-Term Care,” 

Georgetown University, (2007). 

66 Ibid. 

67 David Grabowski, “Medicare and Medicaid: Conflicting Incentives for Long-Term Care,” Milbank 

Quarterly, 85, no. 4, (2007). 

68 MetLife, “The MetLife Market Survey of Nursing Home and Home Care Costs,” MetLife, (2006), 

http://www.metlife.com/WPSAssets/1875695828115945575V1F2006NHHCMarketSurvey.pdf. In 2006, 

annual costs for 24 hour care in a nursing home ranged from about $67,000 for a semi-private room to about 

$75,000 for a private room, or from $183 a day to $206 a day for a private room. 

69 Carol O’Shaughnessy, Julie Stone, Thomas Gabe, Laura B. Shrestha “Long-Term Care: Consumers, 

Providers, Payers, and Programs,” CRS Report for Congress, (2007). 

70 Enid Kassner, “Medicaid and Long-Term Services and Supports for Older People: Fact Sheet,” AARP 

Public Policy Institute, (2005). 

71 Nancy A. Miller, Charlene Harrington, Elizabeth Goldstein, “Access to Community-Based Long-term 

Care: Medicaid’s Role,” Journal of Aging and Health, 14, no. 1, (2002): 138-59. 

72 Public Law 109-171 

73 S.1758, The Community Living Assistance Services and Supports Act or CLASS Act, introduced by 

Senator Edward Kennedy, July 2007; S.3779, the Community Choice Act of 2007, introduced by Senator 

Tom Harkin, March 2007; S.3227, The Empowered at Home Act of 2008, introduced by Senator John Kerry 

and Senator Charles Grassley, July 2008. 

74 Cynthia Shirk, “Rebalancing Long-Term Care: The Role of the Medicaid HCBS Waiver Program,” George 

Washington University National Health Policy Forum, (2006). Individuals must meet a level of functional 

need that qualifies them for a nursing home. 

85
 75 Ibid. 

76 The Green House Model creates a small community for a group of elders and staff. They differ from 

traditional skilled nursing homes and assisted living facilities, by altering size, interior design, staffing 

patterns, and methods of delivering skilled professional services. Its primary purpose is to serve as a place 

where elders can receive assistance and support with activities of daily living and clinical care, without the 

assistance and care becoming the focus of their existence. Developed by Dr. William Thomas and rooted in 

the tradition of the Eden Alternative, it is a model for cultural change within nursing facilities, 

http://www.ncbcapitalimpact.org/default.aspx?id=148. 

77 Pedro L. Gozalo and Susan C. Miller, “Hospice Enrollment and Evaluation of its Causal Effect on 

Hospitalization of Dying Nursing Home Patients,” Health Services Research, 42, (2007): 2. 

78 Edward D. Kleinbard, “Tax Expenditures for Health Care,” (Testimony before the Senate Committee on 

Finance, U.S. Senate, July 31, 2008). For a comprehensive list of current health tax benefits for health 

expenses, see Appendix A of this testimony. 

79 Many economists in the public and private sector have analyzed and commented on problems with current 

tax health incentives. A few examples are: Jonathan Gruber, “Subsidies to Employee Health Insurance 

Premiums and the Health Insurance Market,” National Bureau of Economics Research, (2007), 

http://papers.nber.org/papers/w9567.pdf. 

80 Kate Baicker, “Making Health Insurance More Affordable Through Health Insurance Finance Reform,” 

Business Economics, 42, no. 3, (2007), 

https://commerce.metapress.com/content/f67110210634770k/resourcesecured/?target=fulltext.pdf&sid=05mdup55rn1nd055gl0gfx55&sh=www.springerlink.com. 

81 Jason Furman, “Health Reform Through Tax Reform: A Primer,” Health Affairs, 27, no. 3, (2008): 622-

632. 

82 Edward D. Kleinbard, “Tax Expenditures for Health Care,” (Testimony before the Senate Committee on 

Finance, U.S. Senate, July 31, 2008). 

83 S.334, The Healthy Americans Act, introduced by Senator Wyden, January 18, 2007. 

84 Budget of the United States Government, Fiscal Year 2009, submitted by President George W. Bush to the 

U.S. Congress on February 4, 2008. 

85 Certain data collection issues would need to be addressed in order to implement an income cap. 

86
CONCLUSION 

The case for health reform is undeniable. Improving the U.S. health system is one of the 

most important challenges we face as a nation, and the inability to achieve comprehensive 

health reform will undermine any efforts to secure economic recovery. Health reform is an 

essential part of restoring America’s overall economy and maintaining our competitiveness 

at home and around the world. 

Health care reform is also necessary to protect the finances of our working families. Nearly 

46 million Americans lack health coverage and another 25 million are underinsured. Rising 

health care costs and mounting medical bills have become a pocketbook issue for too many 

families, becoming one of the biggest factors in personal bankruptcy filings. 

Each of the key challenges facing our health care system ― lack of access to care, the cost 

of care, and the need for better-quality care ― must be addressed in concert. Covering 

millions of uninsured through a broken health system will be fiscally unsustainable. 

Attempting to address the inefficiencies plaguing our system and the perverse incentives in 

the delivery system without covering the uninsured will fail to alleviate the burden of 

uncompensated care and cost shifting. The time for incremental improvements has passed; 

health care reform must be comprehensive in scope. 

This Call to Action provides a starting point for the upcoming health care reform debate. It 

is a vision and not a legislative proposal. It is comprehensive but not an exhaustive 

exploration of every health care issue that can or should be considered. 

As a first step toward consideration of health care reform, Congressional leaders and the 

public must understand that reform will likely require an initial investment. In the short 

term, health care reform will cost more than can be achieved in savings from all the quality 

improvement initiatives and financing changes. But these changes will improve the quality 

of the health care that Americans receive and reduce the cost of that health care, ultimately 

putting our system on a more sustainable path. More importantly, the costs of inaction, 

both in human and financial terms, are greater than any initial outlays. 

The next crucial step is a constructive dialog on policy priorities among policymakers, 

stakeholders, health policy thought leaders and the public. Consensus will be difficult to 

achieve, but common ground from which to build can and must be found. 

87
APPENDIX 

LIST OF ABBREVIATIONS 

AAMC – American Association of Medical Colleges 

ABIM – American Board of Internal Medicine 

ACE – Acute Care Episode 

ACO – Accountable Care Organizations 

AFDC – Aid to Families with Dependent Children 

AHRQ – Agency for Health Care Research and Quality 

AMA – American Medical Association 

ARDC – Aging and Disability Resource Center 

BBA – Balanced Budget Act of 1997 

CBO – Congressional Budget Office 

CDC – Centers for Disease Control and Prevention 

CHIP – State Children’s Health Insurance Program 

CMS – Centers for Medicare and Medicaid Services 

COPD – Chronic Obstructive Pulmonary Disease 

EHR – Electronic Health Record 

FEHBP – Federal Employees Health Benefit Program 

FMAP – Federal Medical Assistance Percentage 

FPL – Federal Poverty Level 

FQHC – Federally Qualified Health Center 

FSA – Flexible Spending Account 

GAO – Government Accountability Office 

GDP – Gross Domestic Product 

GME – Graduate Medical Education 

HCBS – Home and Community Based Services 

HCFAC – Health Care Fraud and Abuse Control 

HELP – Senate Committee on Health, Education, Labor, and Pensions 

HHS – Department of Health and Human Services 

HIT – Health Information Technology 

HQID – Hospital Quality Incentive Demonstration 

HRSA – Health Resources and Services Administration 

88
HSA – Health Savings Account 

IHS – Indian Health Services 

IME – Indirect Medical Education 

IOM – Institute of Medicine 

IRS – Internal Revenue Service 

MA – Medicare Advantage 

MedPAC – Medicare Payment Advisory Commission 

MIPPA – Medicare Improvements for Patients and Providers Act of 2008 

MRI – Magnetic Resonance Imaging 

NCQA – National Committee for Quality Assurance 

NHCS – National Health Care Survey 

NHIS – National Health Interview Survey 

NIH – National Institutes of Health 

NQF – National Quality Forum 

OASIS – Outcome and Assessment Information Set 

OIG – Office of the Inspector General 

OMB – Office of Management and Budget 

PGP – Physician Group Practice 

PhRMA – Pharmaceutical Research and Manufacturers of America 

PHSA – Public Health Service Act 

PQRI – Physician Quality Reporting Initiative 

RHC – Rural Health Center 

RUC – Relative Value Update Committee 

SGR – Sustainable Growth Rate 

SSDI – Social Security Disability Insurance 

SSI – Social Security Income 

TANF – Temporary Assistance for Needy Families 

UMHS – University of Michigan Health System 

VBP – Value Based Purchasing 

89