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62–182—PDF 2009

S. HRG. 111–722

SCORING HEALTH CARE REFORM:

CBO’S BUDGET OPTIONS

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED ELEVENTH CONGRESS

FIRST SESSION

FEBRUARY 25, 2009

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

BILL NELSON, Florida

ROBERT MENENDEZ, New Jersey

THOMAS R. CARPER, Delaware

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

MICHAEL B. ENZI, Wyoming

JOHN CORNYN, Texas

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 3

WITNESS

Elmendorf, Douglas, Ph.D., Director, Congressional Budget Office, Washington, DC ............................................................................................................. 5

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Elmendorf, Douglas, Ph.D.:

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 39

Grassley, Hon. Chuck:

Opening statement ........................................................................................... 3

Prepared statement with attachments ........................................................... 71

(III)

(1)

SCORING HEALTH CARE REFORM:

CBO’S BUDGET OPTIONS

WEDNESDAY, FEBRUARY 25, 2009

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 10:09 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Rockefeller, Conrad, Wyden, Schumer,

Stabenow, Cantwell, Nelson, Carper, Grassley, Hatch, Snowe,

Crapo, Roberts, Ensign, and Enzi.

Also present: Democratic Staff: Bill Dauster, Deputy Staff Director and General Counsel; Elizabeth Fowler, Senior Counsel to the

Chairman and Chief Health Counsel; Alan Cohen, Senior Budget

Analyst; Shawn Bishop, Professional Staff Member; Chris Dawe,

Professional Staff Member and Senior Budget Analyst; and Lauren

Bishop, Intern. Republican Staff: Kolan Davis, Staff Director and

Chief Counsel; Mark Prater, Deputy Chief of Staff and Chief Tax

Counsel; and Mark Hayes, Republican Health Policy Director and

Chief Health Counsel.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The committee will come to order.

General George Marshall once said, ‘‘When a thing is done, it’s

done. Look forward to your next objective.’’ In the last few weeks,

the Finance Committee has done a lot: we helped to pass the Children’s Health Insurance bill, bringing health care to millions of

low-income children, and we helped to pass an economic recovery

bill, helping to bolster our Nation’s economy.

Now it is time to look forward to our next objective. Our next big

objective is health care reform. As President Obama said on Monday, ‘‘The rising cost of health care is the single most pressing fiscal challenge we face by far.’’ As OMB Director Orszag said on

Monday, ‘‘The path to fiscal responsibility must run directly

through health care.’’ And as President Obama said yesterday,

‘‘Health care reform cannot wait, it must not wait, and it will not

wait another year.’’

Comprehensive health reform is no longer simply an option, it is

an imperative. We cannot afford to delay health care reform. Delay

will make the problems that we face today even worse. If we delay,

millions more Americans will lose coverage. If we delay, premiums

will grow even farther out of reach. If we delay, Federal health

2

spending will absorb an even greater share of the Nation’s economy.

Delay will also make it harder to fix the problems. The problems

that exist today will continue to grow, and it will cost more to fix

them. Health care reform means making coverage affordable over

the long run, it means improving the quality of the care, and it

means expanding health insurance to cover all Americans.

We need fundamental reform in cost, in quality, and coverage.

We need to address all three objectives at the same time; they are

interconnected. Cost growth is unchecked because the system still

pays for volume, not quality. Quality indicators like life span and

infant mortality will remain low because too many Americans are

left out of the system. Families do not have coverage because

health care costs grow faster than wages. Each problem feeds on

the other problems. We, therefore, need a comprehensive response.

To prepare for this effort, the Finance Committee held 10 health

care hearings. Last June, we held a day-long health summit, and

in November I released my white paper on health reform to advance dialogue and present a path forward.

Meanwhile, the Congressional Budget Office has also worked

diligently to prepare two major health care reports: one volume

contains more than 100 budget options for changing Federal health

care spending in the Nation’s health insurance system; the other

volume analyzes the key issues that Congress should consider in

designing major health reform proposals, and it describes the key

assumptions that CBO would use in estimating the effects of those

proposals.

These reports are intense efforts by CBO to assist Congress up

front in developing health reform legislation. In keeping with the

CBO’s nonpartisan role, they do not offer recommendations for any

specific policy option; deciding what path to take is our job, working together with the new President.

We are grateful to CBO for the hard work that went into these

volumes, and we thank them in advance for the enormous effort

that will go into analyzing the health care reform legislation that

will come from this committee this year.

As our friends at CBO know, our consideration of health care reform will not be just business as usual, for this committee or for

CBO. CBO’s work will make or break this enterprise.

We need CBO to work with us to find a pathway to health reform. CBO has expertise to help design a bill that we can pass, and

President Obama can sign into law this year. I call on CBO to help

us find a way to make health reform work.

It’s a pleasure to welcome CBO’s new Director, Doug Elmendorf,

to the committee. We hope that this will be the beginning of a

beautiful friendship. So let us look forward to our next objective,

let us learn more about the cost and savings of health care options,

and let us begin in earnest the job of comprehensive health care

reform.

When we have a quorum, and I hope that is very soon, we have

a little bit of business to conduct. But before we get to that point,

I would now turn to Senator Grassley.

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OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. Thank you, Senator Baucus.

It is obvious we desperately need to improve our health care in

America. Our health care system is not a system. Our non-system

is a series of disconnected pieces with often perverse, dubious incentives. It costs too much. It is not as consistently high in quality

as it ought to be. It leaves tens of millions of Americans uninsured.

Every day we wait to do something to improve health care, we do

a disservice to the people who elect us to sit in these chairs. We

have an opportunity right now to make positive change. It is an opportunity we must take.

But we must also take a sober look at the difficulty of our situation. When our Chairman published his health care reform white

paper 3 months ago, I noted the fiscal challenges we face moving

forward with such reform. A few people treated me kind of like a

skunk at a picnic for raising those issues of reality. Well, I hate

to do it again, but everyone knows our fiscal situation has gotten

worse since November. Back then, I speculated that we might be

looking at a $300-billion stimulus package in the year 2009. I

missed that one, did I not? The stimulus package ended up costing

over $1 trillion, when interest on the debt is factored in. That debt

is growing rapidly.

Let us make sure that we put this in the proper perspective. It

has been rightly pointed out that the debt held by the public grew

during the 8 years of the last administration. Indeed, in the years

of 2001 to 2006, the debt grew, albeit by less than 1 percent per

year in terms of Gross National Product. I am going to put up a

series of charts, and I want everybody to know that I cannot equal

the Grand Pasha of charts that Senator Conrad is, but I am going

to attempt to illustrate a little bit.

[The charts appear in the appendix on p. 73.]

Senator GRASSLEY. We have a chart here that shows the national

debt. By the way, the greatest debt growth occurred in the last 2

years of that administration, when we had a Democrat-controlled

Congress. For all of the criticism that we heard of the marginal

rise in public debt in the period 2001 to 2006, what occurred during

the last Congress exceeds it altogether.

Moreover, with respect to deficits, again, we heard a lot of criticism of the widespread bipartisan tax relief of 2001 through 2006.

In fact, as the next chart shows, the deficit went down as tax relief

went into effect. The current administration inherited a $1-trillion

deficit, and they promptly added another $1 trillion to our national

debt with the stimulus bill.

That bill contains a number of entitlement expansions which, if

made permanent, would add another $2 trillion to the debt. And

our unfunded obligations for Social Security and Medicare are

$40 trillion over the next 75 years.

I have heard some say it is our moral responsibility to provide

health care coverage for all. We have an equal, if not greater,

moral responsibility to do so in a fiscally sustainable manner. I

would like to quote Peter Orszag, OMB Director now, as he was

quoted in yesterday’s Washington Post: ‘‘Let me be very clear:

4

health care reform is entitlement reform. The path of fiscal responsibility must run directly through health care.’’

For some, fiscal responsibility and health care reform do not usually go together, so it is good to hear the new Director of OMB, and

directly from the White House, making this connection. Getting

overall health care costs under control is an elusive goal, but, even

if it is achievable in the long term, it will not replace the need to

tackle the difficult job of slowing the growth in entitlement spending in the near term. If we do not, then we will not be living up

to the promise made to protect these important programs for future

generations. In their current state, these entitlements—and you obviously know that is Medicare and Medicaid—are not financially

sustainable.

But we must be very wary of the idea that we have to spend

more up front to reap savings down the road. I do not subscribe

to the exclusivity of that argument, but it is an argument that we

have to question. Too often with the Federal Government, the upfront spending happens but somehow long-term savings do not happen.

There is no question in my mind that, if we are not careful, Congress can make the situation worse. One could easily see how

spending more up front could make the financial problems facing

Medicare and Medicaid even worse than they already are today.

The President has an opportunity as he walks this razor’s edge

between a broken health care system and fiscal catastrophe. He

has the opportunity to move beyond the unfortunate partisanship

that the Children’s Health Insurance was. He has the opportunity

to set aside the fiscal alchemy that we have seen in prior budgets,

and set new standards of honest budgeting in health care.

I think last night when he said that he is in the process of going

through every program in the budget to review it, that that is an

important first step. But he also has the opportunity to move beyond the sound bites of campaign into the reality of funding health

care coverage in these fiscally challenging times. There is an opportunity here. With the budget tomorrow, the President can show us

the pathway to move forward with fiscally responsible health care

reform.

As I said on the floor at the end of the CHIP debate, I am willing

to move past the partisan politics that have dominated these first

few weeks of 2009 because the issue is critical to our constituents.

I know that a lot of people—most importantly the chairman of the

committee—want to move in that direction.

I am willing to help in that effort. But we clearly have our work

cut out for us. That is why I am pleased that we are having this

hearing today. The Congressional Budget Office plays a very central role in the reform debate. They are the official scorekeeper. We

are going to have to pay close attention to what the Congressional

Budget Office has to say about health care reform proposals. We

will have to examine closely the cost drivers of that system.

Rising costs put health care coverage out of reach for more people. We need to find ways to encourage more efficiency in the system, to reward providers who consistently deliver quality care, and

the Congressional Budget Office has done quite a lot to start this

5

conversation. So, that is why this important meeting builds on

that, Mr. Chairman. Thank you.

The CHAIRMAN. Thank you very much, Senator Grassley.

[The prepared statement of Senator Grassley appears in the appendix.]

The CHAIRMAN. Today we hear from Dr. Doug Elmendorf, the

new Director of the Congressional Budget Office. Welcome, Doug.

Your entire statement will be in the record. I just encourage you

to summarize, orally, your prepared statement.

STATEMENT OF DOUGLAS ELMENDORF, Ph.D., DIRECTOR,

CONGRESSIONAL BUDGET OFFICE, WASHINGTON, DC

Dr. ELMENDORF. Thank you, Chairman Baucus, Senator Grassley, members of the committee. I am honored to appear before you

today as the Director of the Congressional Budget Office, and we

look forward to helping all of you as we navigate these issues by

providing the technical information that you need to make your decisions.

I will be testifying this morning about the challenges and opportunities that Congress faces in pursuing two policy goals: expanding health insurance coverage and making the health care system

more efficient.

To assist the Congress in its deliberations, CBO has produced

two major reports, as the chairman mentioned. One, titled ‘‘Key

Issues in Analyzing Major Health Insurance Proposals,’’ examines

the principal elements of reform proposals on which we would base

our estimates of the effects on Federal costs, insurance coverage,

and other outcomes. The other, titled ‘‘Budget Options for Health

Care,’’ comprises 115 discrete options to alter Federal programs, affect the private insurance market, or both.

Drawing on these reports, my testimony today makes four key

points. First, proposals could achieve near-universal health insurance coverage only by combining three key features: mechanisms

for pooling risks, subsidies, and mandates or processes for facilitating enrollment.

Second, a substantial share of health care spending contributes

little, if anything, to the overall health of the Nation, but reducing

spending without also affecting services that do improve health is

challenging.

Third, despite this challenge, many analysts would concur with

the importance of several approaches, including providing stronger

incentives to patients and providers to trim costs and ensure value,

and generating and disseminating more information about the effectiveness of care.

Fourth, many steps that analysts would recommend might not

yield substantial budget savings or reductions in national health

spending within a 10-year window.

Let me discuss each of these points briefly, in turn. First, achieving near-universal health insurance coverage would require three

principal features. To start, mechanisms for pooling risks, both to

ensure that people who develop health problems can find affordable

coverage and to keep people from waiting until they become sick

to buy insurance.

6

Next, subsidies to make health insurance less expensive, particularly with people with low income who are most likely to be uninsured today. However, for reasons of equity and administrative feasibility, it is difficult for subsidy systems to avoid providing new

subsidies to people who already have insurance or who would buy

insurance anyway.

Lastly, either an enforceable mandate to obtain insurance or an

effective process to facilitate enrollment in a health plan. An enforceable mandate would generally have a greater effect on coverage rates, but without meaningful subsidies it can impose a substantial burden on many people. Without changes in policy, CBO

estimates that the average number of non-elderly people who are

uninsured will rise from perhaps 48 or 49 million this year to about

54 million a decade from now.

Second, as I noted, a substantial share of spending on health

care contributes little to our health, but reducing such spending

without also affecting services that do improve health is difficult.

As you know, spending on health care has grown much faster than

the overall economy for decades, with studies attributing the bulk

of that excess cost growth to the development of new treatments

and technologies. This imposes an increasing burden on the Federal Government for which the principal driver of the unsustainable budget outlook is health costs, not aging.

This also imposes an increasing burden on the private sector,

where the growth of health spending has contributed, importantly,

to slow growth in wages, because workers must give up other forms

of compensation to offset the rising cost of health insurance.

Third, there are a number of approaches for improving efficiency

and controlling costs about which many analysts would probably

concur. To start, many analysts would agree that payment systems

should move away from a fee-for-service design and should instead

focus on incentives to control costs and ensure value.

Exactly how to create these incentives is, unfortunately, less

clear. A number of alternative approaches could be considered, and

are discussed in our volumes, including fixed payments per patient,

bonus payments based on performance, or penalties for substandard care, but the precise effects of these alternatives is uncertain. Policymakers may want to test various options, for example,

using demonstration programs in Medicare.

Next, many analysts would agree that the current tax exclusion

for employment-based health insurance, which excludes most payments for such insurance from both income and payroll taxes,

dampens incentives for cost control because it is open-ended. These

incentives could be changed by replacing the tax exclusion or restructuring it in ways that would encourage workers to join health

plans with higher cost-sharing requirements and tighter management of benefits. Similarly, changes might be made in cost sharing

in Medicare to create stronger incentive for patients to work with

their provider to control costs.

In addition, many analysts would agree that more information is

needed about which treatments work best for which patients, and

about what quality of care is provided by different doctors and hospitals. But absent stronger incentives to improve value and efficiency, the effect of information alone will generally be limited.

7

Fourth, many steps that analysts would recommend might not

yield substantial budget savings or reductions in national health

spending within a 10-year window. There are a number of reasons

for this. In some cases, savings materialize slowly simply because

an initiative is phased in. For example, Medicare could reduce payments to hospitals with high rates of avoidable readmissions, but

would first have to gather information about readmission rates and

notify hospitals.

In other cases, initiatives that generate savings also have costs

to implement. For example, expanding the use of disease management can improve health and may be cost-effective, but may still

not generate net spending reductions because the number of people

receiving services is much larger than the numbers who ultimately

avoid expensive treatments.

In other cases, the Federal budget does not capture directly the

reductions in national health spending. For example, if the government provided a preventive service for free, national health spending might decline, but Federal costs could go up because many of

the payments would go to cover care that would otherwise have

been paid for privately.

In still other cases, incentives to reduce costs are lacking. For example, proposals to establish a medical home might improve health

care, but have little impact on spending if the primary care physicians who coordinate care are not given incentives to economize on

the use of services.

And very importantly, in many other cases only limited evidence

is available. Studies generally examine the effects of discrete policy

changes, but typically do not address what would happen if many

aspects of the very complicated health care system are changed at

the same time.

In sum, many analysts would agree about the direction in which

policies should go in order to make the health care system more

cost-effective. Patients and providers both need stronger incentives

to control costs, as well as more information about the quality and

value of the care that is provided, but much less of a consensus exists about crucial details regarding how those changes should be

made.

Similarly, many analysts would agree that expanding insurance

coverage significantly would require a combination of risk pooling,

subsidies, and tools to mandate or facilitate enrollment, but would

disagree about the emphasis to place on these three pieces.

Let me conclude by echoing Chairman Baucus and Ranking

Member Grassley about the urgency of health care reform. In contrast, with the situation in the economy and financial markets, our

system of delivering and paying for health care is not fundamentally different this year from last year.

However, the relatively gradual pace of change in health care is

rarely seen as an argument for deferring action. Our current health

system evolved over years and decades, and while coverage could

be substantially expanded in a few years, it could take many years,

or even decades, for the thorough-going changes needed to improve

the system’s efficiency to come fully to fruition. Because of the lead

times involved, nearly all analysts think that those changes should

begin now.

8

Thank you. I am happy to take your questions.

The CHAIRMAN. Thank you very much, Dr. Elmendorf.

[The prepared statement of Dr. Elmendorf appears in the appendix.]

[Whereupon, at 10:30 a.m., the committee was recessed, reconvening at 10:39 a.m.]

The CHAIRMAN. Thank you, Dr. Elmendorf.

The question I really have is, can you give us specific examples

of incentives from the CBO budget volumes that go beyond simply

cutting provider payments and increasing cost sharing? That is,

what ideas do you have to basically change provider incentives to

increase quality and reduce health spending? Just some examples,

especially on health delivery.

Dr. ELMENDORF. I will mention a few of a score that are in the

volume. One is to bundle payments for hospital care and post-acute

care. Currently, hospitals receive a single payment for a stay.

Medicare will pay separately for follow-up care out of the hospital.

If those payments were bundled, then it would be an incentive for

the providers to economize on the use of post-acute care, provide

only the care that really was important. In our estimate, that

would save a considerable amount of money.

A second example is to reduce Medicare payments to hospitals

with high readmission rates. Of course, in many cases patients end

up back in the hospital because of unavoidable medical complications, but in other cases patients end up back in the hospital because of errors, or at least inefficiencies in care in the hospital or

in post-acute care. If hospitals were penalized for unusually high

readmission rates, that would provide an incentive to be sure that

effective processes were being followed in the hospital and after patients leave the hospital.

A third example is to allow physicians to form what we call

Bonus-Eligible Organizations. They are sometimes called accountable care organizations. They are groups of providers that coordinate the care and, thus, can hopefully reduce unnecessary tests, reduce medical errors, and, by providing an incentive to these provider organizations in the form of bonuses if—and only if—their

care for patients meets high standards and they reduce expenditures, that again provides an incentive for those organizations to

economize unnecessary care. So those are three specific examples

of ways that would save the government money and ways that

would improve the quality of care.

The CHAIRMAN. Now, look at each of the three. I suppose there

are some costs involved with each of the three, too, in addition to

the potential savings. Can you give us some sense of which among

those three has the greatest cost savings?

Dr. ELMENDORF. I am reluctant to rank these policies because

there is a good deal of uncertainty about their effects, and because

for each of the policies there is really a dial that can be adjusted

in how stringent the policy is.

So, as we have calibrated these various policies in our volume,

the largest gains come from the bundling of payments. But, if one

were to provide larger bonuses or penalties for these Bonus-Eligible

Organizations and if one were to impose different-sized penalties

for unusually high readmission rates, then one could enhance the

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savings under those other options. So for a lot of these options

there is both the qualitative choice of what to focus on and a quantitative choice, which is just how big to make the penalties or bonuses.

The CHAIRMAN. What is your degree of confidence on the quality

measure? That is, some way to measure the degree to which a

bonus and/or a penalty should be imposed based upon quality and

how that quality is determined?

Dr. ELMENDORF. I think we are at an early point in measuring

the quality of health care. A lot of work is being done to improve

methods of measurement to design effective standards. We also

need to continue to work on ways to collect that information in an

efficient way. That is part of what health information technology

can do. So we are at an early point, but I think we are at a sufficient point where—and I think most analysts would judge—policies

could move forward that base financial rewards on measures of

quality.

The CHAIRMAN. If you look at the white paper I put out, if we

are going to work, logically, in areas that we have data and put off

to a little later areas where we are still gathering data, can you

give me a sense of what that schedule might be?

Dr. ELMENDORF. I think the aspects of health care reform where

there is the best evidence involves changes in the payment rates,

particularly—I talked about the effect of changing the tax exclusion. We have evidence about the way in which people’s out-ofpocket costs of health care affect the quantity of care that they demand and receive.

The CHAIRMAN. I am focused more on delivery.

Dr. ELMENDORF. In terms of the relatively less clear area——

The CHAIRMAN. To track payments to providers or trimming direct payments to providers. I am trying to get away from that.

That is a different subject. We may get there, but that is a different subject. I am talking, focusing right now on delivery.

Dr. ELMENDORF. So, within the delivery category, I think the

items that are clearer are those that provide financial incentives to

existing organizations that they can follow up on in their existing

structure. So, for example, penalizing hospitals for excess readmission rates, that can be done by the existing organizational structure. It would take longer and would be less clear to us what the

effects would be of encouraging these accountable care organizations, because that would require building these structures that do

not yet exist and seeing how they work.

The CHAIRMAN. We have a long ways to go. Thank you very

much.

Dr. ELMENDORF. Yes, sir.

The CHAIRMAN. Senator Grassley?

Senator GRASSLEY. With so many people here and with a vote at

11:30, I may only get one chance. So I would ask for short answers,

because I would like to get through three issues.

People often cite the need to focus on prevention, health care

costs, implement more health information systems, or comparative

effectiveness research to reduce costs. From your work on these

proposals, do you agree that more prevention, implementing health

10

IT systems, and doing comparative effectiveness research will result in significant health care savings?

Dr. ELMENDORF. I think it is clear that those sorts of changes

will result, if implemented correctly, in significant health improvements. The extent to which there are cost savings is more complicated. In terms of preventive care, when analysts look at this,

there are a range of sorts of services: some of them are very costeffective, some of them would be much less cost-effective. So the

cost savings depend crucially on exactly how or what circumventive

care is encouraged, what sort of comparative effectiveness results

are obtained, and how they are used. It is hard to make a blanket

statement.

Senator GRASSLEY. All right.

One reform that some have proposed involves creating a new

public plan to compete with private insurance in the private marketplace. If one assumes that this public plan would reimburse doctors, hospitals, and other providers at Medicare payment rates,

some analysts have predicted what this might do to the availability

of private coverage. That analysis has predicted that the belowmarket reimbursement rates for doctors and hospitals would result

in the government plan having artificially lower rates.

If this is the case, do you believe that over time a public plan

would crowd out some private coverage? If so, what portion of the

market would end up in a government-run plan, and how many

people would lose private coverage as a result?

Dr. ELMENDORF. Designing a system in which a public plan could

compete on a level playing field with private plans is extremely difficult. We are wrestling now with how we would model proposals

to try to do that. The provider payments that you highlighted are

certainly an important issue, but there are others: administrative

costs, what sort of risk pooling happens, whether the public plan

ends up with sicker patients or the private plans end up with the

sicker patients.

There are issues about the cost of capital between public and private plans. Private plans need to worry about the risk of the costs

exceeding the money they are taking in. One would have to decide

how a public plan would deal with that sort of risk, who is left

holding the bag, and think about how to calculate the cost of that.

So, there is a set of issues.

It is true that, if a public plan ends up paying lower provider

payments than private plans pay, that is certainly a leg-up for the

public plan. But these other issues are going to be very important

deciding whether that—that is not the only way, essentially, and

the other issues will be very important in deciding whether that

was the net effect or whether other things were working in different directions.

Senator GRASSLEY. All right.

Just, if I could put together a comprehensive health reform proposal this very day and I presented it to you this very day, how

long would it take to get a preliminary score?

Dr. ELMENDORF. It depends on the extent to which your plan

draws on elements that we have already thought hard about and

estimated, or elements that we have not yet thought hard about.

So, for all the volume of these volumes, not every issue is covered

11

here, and we are working as fast as we can to expand the set of

options that we have a sufficient grasp of, so that we can turn

around estimates quickly. Not everything is covered. We are not

there yet, to be honest, so the timetable depends an awful lot on

what the plan consists of.

Senator GRASSLEY. All right.

I should have probably been more precise. Let us just suppose

my plan included everything that you have had some intellectual

look at presented to you. How long would it take to get a preliminary cost?

Dr. ELMENDORF. So, I am not just trying to stall you, but I will

say that even then there is this complication that pieces of these

books are not additive, so there are a number of provisions that

would work against each other or with each other. So the interaction effects, which can be very, very important substantively—we

think about health IT and incentives to use information—can be

much more powerful together than separately.

So even to the extent of which we have all the pieces, the interactions would be important. So I am loathe to give you a specific

timetable, but I can just say we understand—and I started, as you

did, talking about the urgency of this—how vitally important it is

that we move quickly on the materials we have received from anybody here, and we will do our very best.

Senator GRASSLEY. Thank you.

Dr. ELMENDORF. Thank you, Senator.

The CHAIRMAN. Senator Rockefeller?

Senator ROCKEFELLER. Thank you, Mr. Chairman.

I particularly appreciate your answer to Senator Grassley because it was very direct, very logical, and very honest. I mean, everything is always a lump. Senators are always, when are you

going to get us the cost of this lump package, and it does not work

that way. It is broken down into pieces, some of which you have

studied, some of which you have not. I am just glad you said that.

In the Deficit Reduction Act in 2005, we greatly expanded the

flexibility of States to spend money on Medicaid. State waivers

came in, the rest of it. Let me just posit that to me, the most important part of health care in a person’s life is EPSDT, Early Periodic Screening, Diagnosis, and Treatment. I think that is where it

all begins. That is where all the patterns are set.

Now, the result is that Governors can now alter EPSDT, and in

fact a number of them have, and they have taken it right out of

circulation because they can put it somewhere else. That is their

right. I was against Medicaid waivers. I still am. So, that is the

fact.

So at the time back in 2005, CBO estimated that these changes

to Medicaid cost sharing and benefits would save $3.2 billion over

5 years, and $16 billion over 10 years. The practical impact of this

‘‘new flexibility,’’ however, has been just what I said, that a lot of

States have eliminated EPSDT. I think that is a disaster for health

reform substantively, that they have lost their Medicaid coverage

in respect to that.

So my question is this: when estimating benefit changes like

DRA changes to EPSDT, does CBO take into account the increased

costs associated with decreased access to care at that level? Quite

12

frankly, I do not know how you trail it on through life, but it sure

does trail: teeth, mental, dental, all the rest of it. For example,

there are a lot of children in West Virginia who have lost access

to mental health services because of this so-called flexibility that

we allowed in 2005, and of course this lack of access is what shows

up in CBO’s scoring sheet as savings.

I would like you to comment a little bit on that, because I do not

know whether CBO takes into account the increased costs that accrue as a result of the savings now and the increased costs later

because of such obvious effects of not paying attention to children

when they are young.

Dr. ELMENDORF. So, I am not familiar with that particular cost

estimate, Senator, but I can say as a general matter that we very

much take account of all of the interconnections in health care in

terms of people’s health and the financing of health care that we

can. For example, we have a very elaborate effort under way now

to track all the various channels through which policies that reduce

smoking can affect both public spending and private health care

spending, and that involves just the issues you have raised about

delayed effects over time, working through many channels of mothers, babies, adults and their behavior, different sorts of diseases,

different ways that care is paid for.

We are, as an example, working very hard to try to map as many

of those tentacles of this problem as we can. So it is certainly our

objective to always incorporate in-cost estimates and, in the qualitative discussion that accompanies the estimates, as many of these

effects on health just by itself, and then on health spending as we

can. As you understand, it is a very complicated business.

Senator ROCKEFELLER. It is.

Dr. ELMENDORF. I am not sure that we always get it right, but

we are always trying.

Senator ROCKEFELLER. I know that.

And I just want to add one more thing. It is one thing to talk

about smoking, because I would think that everybody sort of has

an idea of what that might be. But it is another thing to talk about

autism, or deafness, or cleft palates, or little baby teeth that come

in diseased, and therefore everything after that is much worse, and

it is too late by the time they are 6 or 7 years old and they get

bigger teeth. I really do not understand the process by which you

follow that through. I do not have enough time for you to answer

that fully, but could you take a quick shot at it? It is complicated

stuff.

Dr. ELMENDORF. So, I am not familiar, to be honest, with how

we model that. But let us get back to you, and we will explain what

we do and how we do it, and we will talk with you about ways that

we might be able to improve that.

Senator ROCKEFELLER. Thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Senator Roberts?

Senator ROBERTS. You surprised me, Mr. Chairman.

The CHAIRMAN. You are a hard one to surprise. I take that as

a compliment.

Senator ROBERTS. Thank you, sir.

13

Doctor, thank you for being here today, and thank you for all the

work that you do. It is an almost impossible task. And your predecessor, Dr. Orszag.

CBO does more than just estimate the cost of our policies. Your

office also guides policy. Inasmuch as you try to predict people’s reactions to our policy changes, that is almost impossible. I know this

is very difficult. None of us has a crystal ball to look into the future. Sometimes we crack that ball for you, and sometimes you end

up with a cracked ball, and that does not work very well either.

But I think we all appreciate that trying to predict the effects of

policy changes in the complex world of health care is very challenging. I understand that you have scores for 115 different proposals. That is rather amazing, that you have already done that

work.

I would like to suggest this fact: the enormous difficulty of predicting the effects, and sometimes the unintended consequences of

our policies, is just one of the many good reasons that we should

act very deliberately and with great restraint as we wade further

into the policies—note I said ‘‘wade;’’ I think we are diving headlong into about a foot-deep pool—that will have such a huge impact

on today’s, and future, generations.

Now, if the Grand Pasha of charts is Senator Conrad over here,

you are the imperial holder of the yardstick in regards to scores.

Lord knows how many times I have heard the Finance Committee

conference reports, being the chairman of the World Health Care

Coalition both in the House and the Senate, worried about a particular program that means the difference between good health

care or not, or rationing health care, the unique problems.

I would hear about something that would happen when one of

the members would have a burr under their saddle: use your score

and then come up with something that we were trying to protect,

or change something we were trying to protect or do away with it.

And we would say, how on earth did they do that?

Basically, somebody took a Lizzie Borden axe to a program that

we thought was absolutely vital, and then we ended up trying to

pull teeth—maybe one of the teeth that was referred to by Senator

Rockefeller that had become diseased—and that becomes almost

impossible. So I am making a longer statement than I should about

the law of unintended consequences, and I hope that we can address those issues.

Between the Children’s Health Insurance Program—that is

SCHIP 1 that was referred to by our Minority Leader, Senator

Grassley, and SCHIP 2, or what I called SCHIP ‘‘boo’’—and the

economic stimulus package, this Congress has already spent hundreds of billions of dollars on a range of health care reforms. I

doubt that too many members of this committee and their staffs—

staff probably has, but I am not too sure about us—have really

waded through all of that, and I commend you for your work on

it.

Some of these reforms I agree with, but the vast majority were,

in my opinion, rushed through this body far too quickly without

due diligence and debate that such important policies, and the

American people who will be affected by them, certainly deserve.

14

I was very disappointed by this hasty, and I think detrimental,

commencement to the 111th Congress.

Now, that being said, our distinguished chairman backed off of

30 reported statements when he made a statement at Monday’s

White House summit that the budget reconciliation process should

be used as a vehicle to rush through health care reform.

And so, Mr. Chairman, I do look forward to working, or working

together again, and to this committee returning to the bipartisan

and deliberative body that it has been in the past.

President Obama said last night, that particular portion of the

speech that I was very heartened by, where he was committed to

working with Republicans, the endangered species of the Congress,

and recognized that the government’s role is not to supplant private enterprise, but to catalyze it. I thought that was a very important word.

The health care sector already has some very useful models of

successful partnerships between the government and the private

sector—I am talking about Medicare Part D and the prescription

drug program—and I look forward to working with the President

and with this committee to apply the lessons that we have learned

from these successes for the benefit of all Americans.

I just have one quick question. I think I have 15 seconds, so I

apologize for this. As you know, the MMA and its creation of the

Part D prescription drug program included the non-interference

provision that prohibited the government from negotiating drug

prices, a big controversial subject on the committee and in the

health care debate.

Are your views consistent with the statements of Dr. Orszag and

Dr. Holtz-Eakin, that striking the non-interference clause would

have a negligible effect on the Federal budget, given that the CBO

has consistently lowered its baseline for total Part D expenditures—I think we ought to underline that about 6 times—since the

program was implemented? When comparing the same time periods, is there any basis for believing that government negotiation

would work better than the competitive market-based structure of

the program to hold down costs?

Dr. ELMENDORF. Senator, CBO’s views do not change with the director. We as an organization still believe that granting the Secretary of HHS additional authority to negotiate for lower drug

prices would have little, if any, effect on prices for the same reason

that my predecessors have explained, which is that the private

drug plans are already negotiating drug prices, and they are negotiating using the levers they have available, which are——

Senator ROBERTS. I do not mean to interrupt you, sir, but that

is the answer that I was looking for, so I am going to stop you right

there.

What would have to happen for any party to negotiate deeper

savings than already achieved in the program? Would they not

have to restrict the drug coverage? That is the danger of it. I apologize, Mr. Chairman.

Dr. ELMENDORF. The negotiating lever that is used to lower drug

prices is the threat of not allowing that drug to be prescribed, or

putting limitations on its being prescribed within that drug plan.

15

Senator ROBERTS. Which is already the challenge we face in

rural Montana, sir.

The CHAIRMAN. All right.

Dr. ELMENDORF. Might I just use 15 seconds, Senator——

The CHAIRMAN. Briefly.

Dr. ELMENDORF [continuing]. To agree with your point about unintended consequences? I think in this book of the effects of various

policy changes, we put down specific numbers to focus our thinking, other people’s thinking. But one should take many of the digits

with a certain grain of salt because we do not know. I think you

are absolutely right about that, sir.

The CHAIRMAN. Thank you, Senator. I might say, I do not think

at any time did I ever say that reconciliation would be used for

health care reform. I have not totally ruled it out, but my strong,

strong preference is we not have to go down that road. I am doing

everything I can to prevent us from going down that road.

Next, the Grand Chart Pasha from North Dakota. [Laughter.]

Senator CONRAD. Thank you, Mr. Chairman. The Grand Pasha.

I do not know what that means exactly. We do not use those terms

out in North Dakota that often. I guess down in Kansas, there is

a little different lingo.

Senator ROBERTS. Oh, we have great piles of it in our feed lots,

so we thought——

Senator CONRAD. Remember now, it is my turn. [Laughter.] You

know, for years I have counted you as a friend, and still do. And

still do.

First of all, Mr. Chairman, I want to thank you for your strong

and steady leadership of this committee on this issue, and conducting the business of this year. I mean, you have had an enormous load dumped on your shoulders, and I think all of us can say

you have really conducted yourself with distinction.

Let me try to put this in a budget perspective, because I serve

on that committee as well. Over the last 8 years, our debt has doubled. We are on course to double the debt again. If we do, we are

going to have a debt that is over 100 percent of the Gross Domestic

Product of this country. At the White House the other day at the

Fiscal Responsibility Summit, speakers there said the current

course is completely unsustainable, that over the next 40 years, if

we stay on the current course, we will hit a debt-to-GDP of 300

percent.

To put that in perspective, after World War II our debt was

about 125 percent of the Gross Domestic Product. If we look at the

major industrialized countries of the world, no one is even close to

a debt as much as 300 percent of GDP. I think the closest today

would be Japan, that is about 189 percent of GDP.

The consequences of a failure to change this cost trajectory, as

it has been described to the Budget Committee repeatedly in hearing after hearing last year and this year, would be catastrophic.

Allen Sinai, the distinguished economist, told us in a hearing just

weeks ago that if we do not get a hold of our long-term debt situation, our country will look like a banana republic. That point was

echoed by other economists of virtually every philosophical point of

view.

16

Health care, as the chairman has indicated, is the 800-pound gorilla. He is quite right, and the President is quite right, to make

that a top priority. The projections show that we are spending 16

percent of GDP now on health care, but we are headed on the current trend line, over the next 40 years, to 37 percent of GDP. That

would be more than 1 of every 3 dollars in the economy.

Now, so what do we do about it? First of all, it is very hard for

me to understand, when we are spending 16 percent of GDP, about

twice as much as any other country, why the answer is to put more

money into the system. I look at the analysis that was done comparing the Mayo system, the Mayo Clinic, with UCLA. The costs

at Mayo were roughly half the costs at UCLA—half—and the

health outcomes were better.

Now, can you help me understand how we substantially affect

this cost curve? The first question is, do you think it is sustainable

to go from 16 percent of GDP on health care to 37 percent, which

is what our current trend line would do?

Dr. ELMENDORF. No. Absolutely not.

Senator CONRAD. Senator Wyden has offered us a plan that is

about cost-neutral over 5 years. I would just tell you, from my perspective, from a budget perspective, it seems that we would be

going in the wrong direction to put more money into this system.

Is it possible, in the analysis that you have done, to avoid going

to a higher share of GDP in this system over the next 5 years?

Dr. ELMENDORF. It is a big ship. It is not moving that fast, but

it is very big, and it is very hard to turn. There is no doubt that

the sooner that you start and the more aggressively you shift incentives, the faster the ship will turn. I am loathe, sitting here, offhand, to predict exactly what could happen by certain dates. But

the difference that you have highlighted between the Mayo Clinic

and UCLA is very large. To be fair, I think UCLA has argued that

they have a sicker group of patients than the Mayo Clinic. I am

not an expert enough to judge that.

Experts who have studied the geographic variation observe patterns that differ across areas: the Mayo Clinic has fewer specialists

than UCLA; people stay in the hospital less time, they get fewer

tests. But knowing exactly what tests to stop and what specialists

to stop seeing is the challenge.

And I think that the incentives can move the system there, but

there will need to be thorough-going changes in incentives that will

need to involve substantial amounts of money because it will require a reorientation about the way that we structure health care

delivery.

Senator CONRAD. Thank you.

The CHAIRMAN. Senator Enzi, you are next.

Senator ENZI. Thank you, Mr. Chairman. Thank you, Doctor, for

your direct answers. Thank you, Mr. Chairman, for the great job

you are doing with putting together a task force with the ranking

member and the three committees that will be involved in it—Finance Committee, HELP, and Budget—to come up with some

health care reform and to do it in a relatively short period of time.

I appreciate the President’s emphasis in the economic summit on

the need for health care reform, and again last night in his speech.

I also appreciate Senator Daschle’s book. I am one of the biggest

17

promoters of that—I help keep it on the best-seller list—because it

has one of the best histories, I think, on health care reform and

what we have not gotten done before, and some ways to get something done. So, I do encourage everybody to read that.

To get to a question, the key issues in the ‘‘Analyzing Major

Health Insurance Proposals’’ report: CBO states, ‘‘Nearly 95 percent of individuals who are eligible to enroll in Medicare Part D do

so because of late enrollment penalties, penalties that are intended

to discourage eligible individuals from waiting to develop a health

problem before they enroll.’’

My question relates to the necessity of health care reform legislation including an individual mandate to purchase insurance coverage. Given the government’s experience with Medicare Part D enrollment, is there conclusive evidence that we can get to full coverage, or close to full coverage, without imposing an individual

mandate?

Dr. ELMENDORF. In our estimation, achieving what we termed

near-universal coverage requires, as I mentioned, a combination of

pooling mechanisms, which Medicare has, of subsidies, which Medicare has, and either of mandates or procedures that facilitate enrollment. The procedures can be quite important, so when one

turns a certain age one is enrolled in Medicare. One can opt out,

but one is, by default, enrolled. That can matter.

In Massachusetts, in an effort to enforce their mandate, they required a third-party—the insurance companies, essentially—to report on who has insurance. As you know from the tax code forms

of income where there is information provided from a third party,

we get very high compliance rates. In cases where there is not information provided like that, we get lower compliance rates.

So procedures that facilitate the flows of information, the ease of

enrolling, the social pressure—there are societal standards. People

pay taxes not just because they might get caught, but because they

think it is their role as a citizen. So all these other factors can be

very important in complementing a mandate or in doing some of

the work without a mandate.

Senator ENZI. Thank you.

As an advocate of the Small Business Health Pooling, I always

appreciate the comments about pooling, which I do think would

stimulate competition considerably and take care of a portion of

that problem.

Now, in your testimony, you mentioned that the current tax exclusion dampens incentives for cost control because it is openended. You expand by stating, ‘‘Those incentives could be changed

by replacing the tax exclusion or restructuring it in ways that

would encourage workers to join health plans with higher costsharing requirements and tighter management of benefits.’’

Could you expand a little bit on that statement?

Dr. ELMENDORF. Yes. The crucial issue is that, because health insurance has this exclusion, an individual, through their employer,

can essentially buy more health insurance, and then ultimately

more health care, at a discounted price. To buy a certain amount

of automobile, or clothing, or something else, one has to pay tax on

the income and then use the remaining money to buy the item.

18

For health insurance, by doing it without paying tax, you essentially get it at a lower price. That price is lower to the extent that

one’s tax rate is higher. So the current system provides the largest

incentives to people who have the highest tax rates, which are the

people who have the highest incomes and are most likely to have

insurance anyway.

So restructuring, from different analysts’ perspective, can accomplish several things. One is, by making somebody like me, say, who

faces a reasonably high tax rate, more sensitive to the cost of extra

insurance, something people call ‘‘gold-plated insurance’’—which

really just means insurance that covers more things with my having to pay less out of pocket—making me more sensitive to that,

so I am more inclined to want my employer to buy me a more

trimmed-down insurance package.

At the same time, a restructuring incentive could provide a bigger incentive to people with lower incomes who might then respond

to the greater subsidy by being more likely to take up insurance.

So the restructuring can accomplish things in terms of both costeffectiveness and coverage, depending on how you chose to do it.

Senator ENZI. Thank you, Mr. Chairman. My time has expired.

The CHAIRMAN. Senator Wyden?

Senator WYDEN. Thank you, Mr. Chairman.

I share Senator Conrad’s view: we have never gotten out of the

gate faster on this cause of health reform, and it is because of you

and your white paper. We are very appreciative of that leadership.

Last night, Dr. Elmendorf, the President delivered some very exciting news for the cause of health reform. In effect, he said, after

60 years of debate, he wants health reform enacted this year, that

it is time to stop stalling and to actually get it done.

Now, I share Chairman Conrad’s view with respect to the financing of health care. At a time when you are spending enough money

in this country this year to go out and hire a doctor for every seven

families and pay the doctor $235,000, hypothetically, to care for

seven families, Chairman Conrad is saying you ought to be careful

about spending more before you reform the system.

Now, in reading your budget books, there is not a single option,

as far as I can tell, other than this tax code that produces the savings quickly. I just want to review with you, because it is option

9, 10, and 11. I listened to your discussion about bundling reform.

I happen to think that is very important. Those are savings it

takes 10 years to realize.

So to start with, on the tax code—and let us just do this in theory—is it not possible to generate additional revenue that would be

progressive in nature—and you touched on it in your last answer—

and also serve as a disincentive to inefficient spending by reforming the Federal health tax rules?

Dr. ELMENDORF. Yes.

Senator WYDEN. And it would be possible to start generating

those savings if, through the leadership of the President, Chairman

Baucus, and Chairman Kennedy, you passed it this year. You could

start realizing those savings that you have identified as progressive

and a bar to inefficiency? You could start realizing those in the

first year, again, in theory?

Dr. ELMENDORF. Yes.

19

Senator WYDEN. Having established that, would it not be possible, in theory, to do that and still honor the pledges that the

President made in his campaign? The President said, two distinct

characteristics of the future of health care were important to him:

one, that everybody ought to be able to keep the coverage they

have—I think there is bipartisan support for that—and second, we

should not subject individuals, particularly the hard-working

middle-class folks, to new taxes. Would it not be possible to also

generate that revenue in the first year and keep the President’s

pledges?

Dr. ELMENDORF. I am not a theorist, so I am going to revert to

the numbers. The way that the changes in the tax exclusion that

we study in our book generate these savings is by having people

pay tax on this form of compensation on which they are not paying

tax today. So the money is not coming out of thin air, as it were.

It is not coming immediately from the enhancements in efficiency.

These options do lead to enhanced efficiency, as we have said.

Senator WYDEN. Right. But——

Dr. ELMENDORF. But one should not look at the number and say,

well, that is this many hundreds of billions of dollars of extra efficiency. A lot of that is just, I would pay higher taxes because I

have tacked on my——

Senator WYDEN. I understand that. I understand that, and I

share your view. What I am talking about, though, is tax reform.

My sense is, if you pick up on what Chairman Baucus has talked

about in the white paper and a number of us have had an interest

in, through tax reform you could give a very generous deduction,

$16,000, $17,000, at a time when the typical family of four spends

$12,600 on a basic package, and also come up with new revenue

in order to finance an expansion of coverage.

That is why I want to be sensitive. You cannot get involved in

these approaches that go to drafting a particular bill. But in theory, it seems to me you can honor the President’s pledges, both of

them, keep the coverage you have, and not clobber middle-class

people with new taxes.

My time is about up. I want to give you the last word.

Dr. ELMENDORF. Well, I think that maybe the last thing to say

is that changes in the tax treatment of health insurance have important distributional effects, as well as important efficiency effects. When we and the Joint Committee on Taxation analyze proposals that you might put to us about changing the tax code, we

will try to report on both of those because I am sure that both will

be of concern to you all.

Senator WYDEN. Fair enough.

Thank you, Mr. Chairman.

Dr. ELMENDORF. Thank you, Senator.

The CHAIRMAN. Senator Carper?

Senator CARPER. Thank you, Mr. Chairman. I feel very fortunate

to join all of you on this committee today, and this year, given the

challenges that we face on health care.

I have a son who is in college who is taking Chinese, and he has

taught me a few words. One of the things he tells me is that the

symbol in Chinese for danger or caution is also basically the same

for opportunity. When we look at the challenges with respect to the

20

cost of health care, the availability of health care, there are huge,

huge challenges. But there is also real opportunity here, and we

appreciate, Dr. Elmendorf, your helping us to identify that and to

cost it out.

I had the privilege of meeting with Dr. Elmendorf yesterday,

with Senator Collins. We talked a bit about postal issues. I was impressed by how knowledgeable you were. You are a very quick

study, and I am impressed, again, here today.

On the notion of counter-intuitiveness, I was at a breakfast conversation with somebody this morning, talking about how sometimes health policies that clearly lead to better outcomes cannot be

scored in a way that would reflect that, and this person said, with

tongue in cheek, if somehow we can inspire premature death, that

is one of the sure ways that CBO can score that as a savings.

[Laughter.] I do not think any of us wants to do that, but I thought

there was a little more than a grain of truth to that.

In all my conversations with health care experts and those who

have been immersed in this debate on health reform, they all seem

to agree with this statement. I will just read it: ‘‘Universal coverage does not, on its own, lead to a healthy America.’’ I just add,

if we are looking to truly reign in health care costs, we are going

to have to look at much more than just addressing the issue of the

uninsured and the under-insured.

With that said, let me just ask, do you agree with that statement

that I just read? If so, what policy options has CBO identified that

will reign in costs, while also creating a healthier America, with

healthier Americans?

Dr. ELMENDORF. I agree very strongly that the most important

things we can do for Americans’ health may well lie outside the

health care system, if one means by that doctors and hospitals. We

have, for example, greatly falling rates of smoking in this country,

which is good for our health. Roughly, the rate of smoking has fallen in half during my lifetime. But also during my lifetime, the rate

of obesity among adults has essentially doubled. That is not about

health care per se, that is about behavior.

Senator CARPER. Let me just interrupt you for a second to follow

up on that point.

Do you sense that one of the things that has happened in this

country in our lifetime, really in the last 10 or 20 years, is that

smoking has become almost socially unacceptable in a lot of circles?

Dr. ELMENDORF. Certainly it is harder to smoke in many public

places. There have been increases in taxes on smoking. I think

there have been a variety of policies.

Senator CARPER. What I am getting at is, I think what we have

to do is to sort of train our society or encourage our society to regard over-eating, to the effect that it makes us very large and

unhealthy, we have to almost do for obesity what we have done for

the use of tobacco, where people harm their health as well. I would

just offer that as a notion.

Dr. ELMENDORF. I think the challenge for you, in a sense, is the

extent to which public policy can affect these health trends. So

smoking, the dangers come from a rather specific set of products

that are controlled very heavily. Obesity and other health problems

stem from a whole variety of behaviors and products. So, although

21

I think there is little doubt it would improve health to be less

obese, how you move public policy to accomplish that is not so

clear.

Moreover, as you mentioned, the effect on spending is not so

clear. Saving people from a certain disease enables them to live

longer, which is obviously all to the good, but does not mean that

they will not get some other disease that will be expensive later.

That is the sort of general reason why improvements in health do

not always reduce health care spending. Obviously it is much better to live a long time and then get sick, but the cost of that will

still come to bear.

Senator CARPER. Like some of my colleagues, I like to work out

regularly and exercise. I stopped by the Central YMCA in Wilmington a couple of days ago to work out early in the morning before I came down here, and there is a fellow who lives in the

YMCA. There are about 150 people who live in the YMCA. This

guy is 86 years old. He followed me into the Y, into the work-out

room where I do all my exercises and all, which normally I do not

appreciate when people want to just dog me when I am trying to

work out. But I was patient with him; it was well-intended. He was

complaining about smoking. He said, I live here. I cannot smoke in

my room, I cannot smoke in the lobby, I cannot smoke in any part

of the building, I cannot smoke in the inner circle downstairs. I

cannot even smoke out on the front steps of this building anymore.

Plus, you have increased the cost of tobacco by enormous

amounts. I thought and said, well, that is one of the reasons why

people are smoking less. I said, my friend, I know you are 86, you

smoked all of your life, so I am not going to suggest you stop now,

but a lot of people have stopped because of the policies we have

adopted and put in place. We have to take similar kinds of, I think,

enlightened approaches with respect to obesity and getting people

to take better care of themselves.

Last question. In many ways our system is counter-intuitive—I

mentioned that before—in both the financing and delivery of health

care. We can see this in the payment rates for primary care doctors

versus specialists, as well as the current obstacles and disincentives for providers to coordinate care.

CBO highlights several policy options that would promote health

care coordination, including the Bonus-Eligible Organizations. This

concept seems to align with my belief that focusing more on a holistic approach to health care delivery in our country will enable our

doctors to provide a higher quality of care.

Here is my question.

The CHAIRMAN. We are waiting for the question, Senator.

Senator CARPER. All right. How to improve the quality of health

care and the budgetary impacts it could have. Thank you, Mr.

Chairman.

The CHAIRMAN. Thank you.

Senator CARPER. I got there.

The CHAIRMAN. All right.

Dr. ELMENDORF. So, I will be very brief. I think the general approach is to provide payments that reward quality of care, or to reward health outcomes rather than rewarding specific treatments

that are delivered. There are different mechanisms for doing that.

22

Some involve focus on primary care physicians as the gateway to

the health care system. Many in our book talk about ways to provide incentives to hospitals to focus on the quality of the outcome.

Some involve incentives for doctors who are now paid on a fee-forservice basis, and some of these options have been paid more on

a capitated basis, just to say per-patient, and then they do not have

at least a financial incentive to prescribe all the additional tests

they can.

The CHAIRMAN. Senator Stabenow?

Senator STABENOW. Thank you very much, Mr. Chairman. Thank

you for all of the thoughtful leadership on this.

Doctor, is it not true—I mean, health care is a unique situation

because it in some ways is counter-intuitive to other things that we

do, because the reality is that, the more people who are in the system, the more people who are covered, the more you can reduce

costs, which is different than other kinds of issues that we approach.

The reality that, if someone does not go to a doctor and instead

uses an emergency room, the most expensive way to receive their

care, that increases the cost of the system. So what we have, we

are spending a lot of money in a lot of different ways, but, because

we do not cover everyone and because someone cannot get primary

care and cannot get what they need on the front end, we actually

increase costs. So, it is an interesting system. In fact, just because

we cut services, it does not mean someone is not going to get sick,

or get cancer, or have an accident, and so on.

So, I wonder if you might just speak to that. Recently in Health

Affairs there was published an overview of the impact in Missouri

of sweeping Medicaid cuts that were made back in 2005, where

more than 100,000 people, because of the cuts in coverage, lost

their coverage, faced reduced benefits and higher costs, and they

ended up, in fact, seeing greater uncompensated care in the hospital, and, in fact, shortfalls in community health centers, which

meant they were paying more for community health centers in

State grants, and certainly we pay Federal dollars and so on.

So, I wonder if you might comment about the Missouri experience, if you are familiar with it, and the impact of just cutting programs instead of looking more broadly.

Dr. ELMENDORF. I apologize, Senator. I am actually not familiar

with the Missouri experience, but I will certainly go and become

more familiar now.

I think the general point I would make is that you are certainly

right that there are cases of people who, because they lack insurance, on having certain preventive services or tests done, that will

lead to greater expense later.

However, I think it would be a mistake to think of that as the

bulk of the story. Our estimates are that, on average, uninsured

people use about 60 percent as much care as the insured population today, 60 percent. If they were insured, we estimate that

they would use between 75 and 95 percent as much care as the insured population receives today. So, on balance, we think they will

be getting more care, and that will increase spending on their

health care. It will make them healthier. Again, this is a case

23

where the health effects and spending effects are not always

aligned.

Senator STABENOW. Right.

Dr. ELMENDORF. Getting better care will make them healthier.

That is why most people talk about trying to expand insurance coverage.

Senator STABENOW. Right.

Dr. ELMENDORF. But overall, we think that more spending will

be devoted to their health care than is the case today, and that is

a cost that the system will have to absorb in some form.

Senator STABENOW. You had spoken, though, in one of your

points, that the challenge was reducing cost, but at the same time

increasing the quality of care, essentially, that is being given. Is

that not really what you were talking about as well? I mean, it is

not just reducing costs, it is increasing quality and outcomes and

changing the costs as well. So it is prevention, it is EPSDT, as Senator Rockefeller was talking about, as opposed to someone getting

very, very sick and walking in to an emergency room.

Dr. ELMENDORF. Yes. I think that is exactly right. It is ultimately about health. It is not even always about cost savings, per

se, as cost effectiveness. The concern people have now is that we

are spending a lot of money and that we are not getting all that

we could from it. If we could make the system more efficient, then

we could get either more care, better health, or less spending, or

both in some combination, depending on the exact policies that you

put into place.

So, it is the potential to move on all those dimensions. But of

course, you do not get them all equally. There is a choice about how

much greater efficiency we would take in the form of better health

and how much in the form of money to use for other goods and

services.

Senator STABENOW. Right. Right. Thank you very much.

Dr. ELMENDORF. Thank you, Senator.

The CHAIRMAN. Thank you, Senator, very much.

Senator Nelson, you are next.

Senator NELSON. Thank you, Mr. Chairman.

I am curious. One analysis in your statement today talked about

the value of insurance risk pools. In the plan that is offered by Senator Wyden that I am a co-sponsor of, it organizes large pools of

insureds around States or, in the case of small States, several

small States could join together in order to get millions of lives

over which to spread the health risk, and therefore bring down the

insurance premium. Talk some more about that as a viable way of

bringing down health care costs.

Dr. ELMENDORF. Insurance markets are one of the topics they

give young economists to study because they are so interesting. Unlike other markets, free market insurance markets sometimes collapse altogether because the people most in need of the insurance

are the ones most likely to sign up for it. That increases the cost

of providing the insurance, then that higher cost drives out some

other people who would like it, but do not need it quite so badly.

The group that is left can be even sicker and even more expensive. This happens—it is called a ‘‘death spiral’’—for an insurance

plan. It does not always happen, but it emphasizes the importance

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of pooling people together. This is an important reason why large

employer-based plans work because it is a large group of people

brought together for reasons unrelated to health.

Senator NELSON. Sure. Absolutely.

So, on the basis of what you said, if you combine large insurance

pools with mandatory coverage for all the 44 million uninsured in

the country, now you have everyone in a pool, unless they elect to

stay with their employer-sponsored coverage, and therefore theoretically it ought to bring down the cost of that insurance, should

it not?

Dr. ELMENDORF. Yes. I mean, ensuring that people sign up and

are in an insurance plan before they get sick, that they are actually

insuring in the sense of paying premiums while they are healthy,

in the event of getting sick, would reduce the cost to people who

are in the plan otherwise. Absolutely.

Senator NELSON. All right.

Now, you answered the mandatory universal coverage question.

But I am trying to get at your earlier statement, that basically

small groups that get older and older and sicker and sicker, that

is not the way to offer affordable insurance coverage.

Dr. ELMENDORF. Right.

Senator NELSON. So the larger and larger that we can get these

pools of people to spread the health risk——

Dr. ELMENDORF. Yes.

Senator NELSON [continuing]. So that you are dealing with millions, not just, for example, a large company that might have

100,000 lives that they are insuring. So you can bring down the

cost of the insurance premium, can you not, with millions?

Dr. ELMENDORF. Larger pools will have lower costs than small

pools. Absolutely.

Senator NELSON. And, ergo, the larger the pool, the smaller the

cost?

Dr. ELMENDORF. Yes. Although once a pool gets to a certain size,

then the frequency of particular problems in that pool will settle

down to be pretty close to the national average. So I cannot do in

my head how much that matters, millions rather than hundreds of

thousands.

Another thing I would say about larger pools, they have lower

administrative costs often as well, depending on just how they are

structured. So, there can be a number of advantages.

Senator NELSON. All right.

Now, let us say we bring in the 46 million people who are uninsured, who do not have health insurance, but they get health care

and they get it now from the emergency room and so forth. Now,

is that going to cause a greater demand for physician services that

is going to give us heartburn about having enough physicians?

Dr. ELMENDORF. Our estimates are that insuring the currently

uninsured would raise national health spending by something

under 5 percent. So it would, by itself, lead to more demand for all

sorts of medical services. I think many of the proposals that have

been discussed also try to find ways to provide incentives to economize unnecessary services, so that pushes back against that. I do

not think that the shortage of providers is really a central issue in

considering the expansion of health insurance coverage.

25

Senator NELSON. All right.

Just one final, quick question. We got some extremist statements

that came out by some sectors of the body politic about the stimulus bill in that, in this comparative effectiveness research, that it

was going to cause a denial of medical treatments. You have heard

the extremist statements. So why do you not debunk that theory,

is the question?

Dr. ELMENDORF. Comparative effectiveness research is a way of

finding out what works and what does not. An important obstacle

to our deciding as a society what treatments people should get and

not get is that we in many cases do not know what treatments are

more or less effective. The variation in spending across regions of

the country is most intense in those areas where the least is

known, where in fact there is not clear guidance of what sorts of

diagnostic tests are most useful, what sorts of after-hospitalization

care is most useful. Learning about that, what works and what

does not, does not by itself change the care that is delivered.

It provides the information. The follow-up question, but it is a

separate question, is what doctors learn, how the information is

disseminated, and how doctors and hospitals respond to that, and

what incentives are provided for them to respond to that information. That is really a separate question. I think at this point the

comparative effectiveness discussion is about how to learn better

what works and what does not.

Senator NELSON. Thanks.

The CHAIRMAN. Thank you, Senator.

Senator Snowe?

Senator SNOWE. Thank you, Mr. Chairman. Thank you for your

leadership.

Welcome, Dr. Elmendorf.

Dr. ELMENDORF. Thank you.

Senator SNOWE. In previous testimony you did discuss, and you

did hear as well today, about the tax exclusion in employer-based

health care. I would like to discuss that because I well recall the

former Secretary of Health and Human Services Leavitt mentioned

and discussed this whole proposition, and putting a cap of $15,000,

which in a State like Maine, which is a high-cost State, obviously

would have serious impact. So, it would be inadequate in a highcost State. Maybe it would be inadequate in a low-cost State and

you could invite ways that they could meet up to that cap.

What would you suggest in this regard? Have you considered

those variations among States in terms of the cost of delivering

health care, and is there a better way to accomplish that under this

goal? Because obviously it is about achieving greater equity among

all States and the efficient use of taxpayers’ dollars, and subsidizing those health care systems. So, if you have a flat tax, so to

speak, and a uniform standard across all States that does not really adjust for the variations that exist, it may be beyond their control.

Dr. ELMENDORF. You are absolutely right, Senator, that establishing a national cap on the size of the tax exclusion would have

differential effects relative to current insurance costs in different

parts of the country. That is a feature, unfortunately, that pervades the tax code. I have friends who live in New York City who

26

cannot understand why they are being taxed at a higher rate as

if they were a ‘‘rich person,’’ when after all, in New York City,

given the cost of housing and everything else, they do not feel rich

at all.

So all these issues, all the places that the tax brackets change,

any sort of fixed-dollar amount, will have disproportionate effects

across the country. I do not know an effective solution to that, I

am afraid.

Senator SNOWE. Yes. So there are not any adjustments that

could be made with respect to the dollar amount that is suggested

for exclusion from taxation? I mean, pay coverage cost for the poverty level—are there any elements that we ought to be considering

in that regard?

Dr. ELMENDORF. If I were teaching an economics class, I would

write a formula on the blackboard that could relate that cap to the

cost of health care or something else. I do not know if that is at

all a practical strategy. There is a further issue, which is that to

some extent the costs vary for reasons, as you say, that are not

under people’s direct control.

But the other reason they vary is because certain parts of the

country have practice patterns in medicine that are more lavish

than other parts of the country, and the goal of the policy is essentially to lead the places that are spending more than they need to

to look to the places that are spending smaller amounts and learn

from them and move in that direction.

So, in terms of the effectiveness, one would not want, in a sense,

to have this policy—in terms of the effectiveness leading to health

care efficiency, you would not want the policy to bind equally various parts of the country. Health care spending is several times in

Florida what it is in Minnesota, and that is viewed as, that is the

source of the opportunity, essentially, in the savings, is to put more

pressure on Florida and places like it that have higher costs.

Senator SNOWE. On comparative practices and the effectiveness,

in evaluating comparative practices, I know that CBO gave a scoring of savings of $1.3 billion, as I understand it, over 10 years for

the comparative effectiveness study. Is that about right?

Dr. ELMENDORF. I believe so, yes.

Senator SNOWE. It seems like a very low number, given what

could be accomplished. I am wondering, is it the study that is at

fault, or is there something we should be doing to improve or modify the study that could increase the amount of savings that could

be derived from such comparisons?

Dr. ELMENDORF. I think the challenge is that information alone

is not enough. It is acting on the information.

Now, to some extent, when doctors and hospitals learn better

what works and what does not, they will naturally change their

practice patterns, and that will lead to some savings. But to generate larger savings, one would need, in legislation, to provide incentives or penalties for following or not following where that information leads. This particular legislation does not do that. That is

the second step I mentioned a moment ago, which is deciding how

to use that information.

That means getting the providers to change their practices, but

then on top of that, changing the reimbursement rules so that the

27

Federal Government would recapture those changes. So, it is both

parts. It is, they are doing the more cost-effective thing, and it is

changing the way Medicare pays them, to recapture those savings

for the Federal Government.

Senator SNOWE. So, in other words, we would require them to

adopt those practices once they were evaluated to be obviously effective methods of treatment, and also achieve cost savings.

Dr. ELMENDORF. Yes. I think the word ‘‘require’’ is complicated

because these studies do not prove—the efficacy of health care varies very much across individuals in certain situations, so the studies are not going to say, in general, this whole type of medicine is

completely worthless, or this whole type is completely useful. They

are much more nuanced than that, and that is part of the challenge

in creating the incentives for providers to do these things in the

cases where they are useful, and not where they are not. I think

we have options in this book that try to change the reimbursement

rates that can be used to recapture those savings, but I think that

is the piece which is not in the legislation, per se, that you have

described.

Senator SNOWE. Right. I think we have to determine whether or

not those practices are effective enough to achieve cost savings, and

then implement a mechanism for doing so. I am just wondering if

we should not have the Institute of Medicine or some other independent entity evaluating those practices so it can accelerate the

process. I mean, many of the obvious methods and practices that

should have been used, for example, have not been used. I mean,

there has been a 10-year lag period before they are commonly

adopted. That is problematic.

Dr. ELMENDORF. Right.

Senator SNOWE. And if the NIH is going to have a budget beyond

$30 billion, it seems to me we ought to be extracting a value from

that research. So I am just wondering what we can do to redesign

the process or create an independent entity that puts a value on

that practice once it is ascertained that it is the most effective

treatment and can achieve cost savings.

Dr. ELMENDORF. Most analysts would agree wholeheartedly that

more emphasis on that sort of research would be useful. But again,

the bigger cost savings for the government will require follow-up

steps to put that information into practice.

Senator SNOWE. I think, whatever kind of system we develop in

providing universal health care coverage is really going to be predicated on a very sustainable fiscal foundation, otherwise it cannot

be sustained for the long term.

Dr. ELMENDORF. Yes.

Senator SNOWE. So, I mean, I think that that is key. Thank you

very much for your contribution.

Dr. ELMENDORF. Thank you.

Senator SNOWE. Thank you, Mr. Chairman.

Dr. ELMENDORF. Thank you, Senator.

The CHAIRMAN. Thank you, Senator.

On that last point, Dr. Elmendorf, how do we lock in sustainable

policies that do not get too costly and out of hand? I mean, Congress does meet, and we could always ratchet back. But is there

some kind of institutional way, some systematic way that comes to

28

mind to make sure that these reforms actually accomplish their objectives and do not cost us and get out of hand?

Dr. ELMENDORF. I think there are several levers that you have.

Part is through the Federal health programs, and Medicare especially. By changing the rules of the game, you will directly affect

the care of Medicare patients, but indirectly affect care throughout

the health care system because, for example, hospitals that have IT

will use that not just for the Medicare patients, but for all of their

patients. Hospitals that are reorganized to provide the right kinds

of post-acute care for Medicare patients will do that for all of their

patients. So, Medicare is an important lever.

A second lever that you have is the tax exclusion, as I said,

which, if changed, could set in motion very strong private incentives, could catalyze the activities of the private sector for the insurance purchasers to push on the insurers, and then on the providers, to be more cost-effective.

Beyond that, of course, there is discussion about the role that a

national health board of some sort might play. I think the crucial

issues there are what powers exactly you and your colleagues

would devolve to the board. A number of health analysts would

argue that Medicare could function more efficiently if the Congress

gave CMS greater authority in running Medicare. Other people

would worry that that authority would not be used well and that

more fine-grained congressional oversight is helpful. But that is the

sort of issue that one would face in a very pronounced way in setting up a health board of some sort: what exactly is the board empowered to do?

The CHAIRMAN. I would like to ask you a little bit about aligning

incentives. In order to realign incentives for health care providers,

do you believe we need to put providers payments more at risk?

That is, do we need to create both a financial up side and also a

down side to providers based on the quality of care they deliver,

and is this a necessary element of delivery reforms to drive quality,

drive efficiency? What do you think?

Dr. ELMENDORF. Yes. I think most health analysts would agree

very strongly with that. There is this term ‘‘capitation,’’ which you

know, which means to pay providers a fixed amount per person.

There are risks in going to full capitation. If a provider gets a fixed

amount regardless of what he has done for the patient, then the

financial incentive is not to do anything. That can be dangerous.

On the other hand, a fee-for-service system is essentially the exact

opposite of that: whatever services are ordered up, the government

pays for.

So, moving somewhere along that continuum from this fee-forservice system that we use now in many ways in our health care

system toward a system of greater capitation would be a widely

shared objective. What that means, essentially, is that then providers—and we have some options like this in our volumes—then

bear some of the risk. But the flip-side of that is, they also receive

an incentive for providing only useful care.

These sorts of incentives are best if combined with measures of

quality. So, for example, in the option that we study for these

Bonus-Eligible Organizations of doctors, we assumed in the proposal that the bonuses would be payable if money was saved and

29

if certain standards of care were met. That is a way of making sure

that providers do not scrimp unduly on the care, while providing

them some incentive to take away the things that really are not

important.

The CHAIRMAN. What is your sense of how much of the solution

is in aligning payments with quality, where there are rewards and

where there are costs? I mean, how much is this part of the solution here?

Dr. ELMENDORF. I think the incentives are absolutely essential.

I think there are few analysts who would disagree with that. In almost every part of our private behavior, and in many parts of public policy, we weigh benefits and costs in deciding what to do—everything that you or I buy privately, but also in public policy, in

the ways we regulate, for example, pollutants. We do not drive dangerous pollutants down to nothing, we drive them down to a point

beyond which it seems like it is unreasonably costly to reduce them

and would deprive people of other goods that they want and need.

In health care, we have a system where there is very little of

that weighing of benefits and costs because of insurance and the

way insurance is structured: both publicly and privately, almost

anything that providers want to do, they can do. Now, there has

obviously been evolution in that over time. A very important factor

holding down the growth of health care cost in the 1990s was a

move toward greater management of benefits through managed

care.

So we are not in an absolute fee-for-service world by any means,

but we still have an awful lot of places where anything which is

prescribed is reimbursed for, and shifting to a world where both

the patients and the providers are trying to think about benefits

and costs is central to saving money without just arbitrarily slashing what gets done and what does not get done.

In a sense, if we do not save money intelligently, then we will,

through force of the numbers that you have described and that

Senator Conrad emphasized, ultimately cut something. The question I think that we face is whether we can develop the information

and the incentives now to make those choices wisely or whether we

are forced, ultimately, to take the meat axe to the system.

The CHAIRMAN. Right. Right.

So what is the most efficient way to find out the proper quality

measures? I mean, we can farm it out. CBO can do it. Private companies can have their own. How do we make more headway on this

question? This seems to be central, one of the central features of

health care reform.

Dr. ELMENDORF. Yes. Providers are working to develop some of

these standards, ways of keeping track of health outcomes and

sharing that information. Those that are focused on providing

value have moved in some of these ways themselves. There are

people in private organizations who are trying to coordinate that

activity. So my former Brookings colleague, Mark McClellan, who

was the Director of the Centers for Medicare and Medicaid Services, is doing some of that in his work now at Brookings.

I think a Federal role, though, is amply justified. Information

has a benefit that spills across people in the system, and often the

30

government has a useful role to play in funding the generation and

dissemination of that kind of information.

The summation, again, is important. It is not just a matter of

some group of very smart people in Washington have a list of what

works and what does not. The crucial thing is that a doctor sitting

at a patient’s bedside has that information at hand. So health IT

can play an important role in sort of both directions of information

flow, both in collecting information on what works and what does

not, and also sending it back to doctors and nurses and so on to

use in real time.

The CHAIRMAN. Right.

Some suggest we need to move much more toward evidencebased medicine. I mean, drilling down two or three different levels

of what works based on the evidence, not on someone’s opinion, as

much.

Dr. ELMENDORF. Right.

The CHAIRMAN. Your thoughts about that, and how important is

that? Do we have the data to get there, and how do we get the data

to get there if we do not currently have the data?

Dr. ELMENDORF. That is right. That is absolutely necessary. I

think anybody who has spent time with serious health problems

and has talked with doctors and nurses understands, for all of the

wondrous things that we can do in health care, ultimately how limited their knowledge is about the effect of certain treatments, certain procedures. Learning more is essential. That requires funding.

This is exactly the sort of information where, analysts would

argue, the government has an important role to play because it is—

people call it public good to have that information available. That

is what comparative effectiveness research is about. Then there is,

as I said, the dissemination of the information, and there is also

the incentive to use it.

So clearly, if a piece of research says that some procedure is of

absolutely no value or has a negative consequence on health outcomes, then all providers who know that will stop doing that. But

the harder cases are where something is unlikely to have any useful effect and it would be much better, more sensible, to try a different course of treatment than this one.

And, in those sorts of gray areas, it is very important for the providers and the patients to bear some of the risk, as you said, to

bear some of the costs of the more expensive, less useful choice.

The options that we talk about in our volumes about ways to penalize poor performance and reward good performance, as measured

by health outcomes, is the sort of incentive that would ensure that

providers would make use of this information when they have it.

The CHAIRMAN. What are the best lessons learned thus far from

reputedly good health organizations that are making a lot of headway in these areas? I am thinking of Mayo, maybe Kaiser, InterMountain, maybe Cleveland. What are some of the lessons learned

there that could be applied here?

Dr. ELMENDORF. Analysts do not know for sure. There are patterns that are very, I think, indicative. So at Mayo, for example,

there are fewer specialists who will see a patient with a given condition than at many other hospitals. There are fewer procedures

that are performed. People spend less time in the hospital. Those

31

look like areas where—particularly some of those areas where

there is very little knowledge about what actually works and what

does not. Thus, there is no firm standard. Some areas of the country have evolved in ways where they are——

The CHAIRMAN. They must seem to think it is working, if they

are going in those directions. They must think it works.

Dr. ELMENDORF. Well, but I think they do not have much information. So one of the fastest-growing areas of Medicare spending

is imaging, MRIs and the like. We do not know a lot—I mean, I

am not part of that profession. The medical profession does not

know a lot about in what cases that is particularly useful or not.

So without that kind of information, then it depends, I think, an

awful lot on what the doctor next to you is doing, and different regions of the country have evolved with different practice patterns.

The CHAIRMAN. Talk about that a minute. I mean, it is my understanding that practice patterns vary widely.

Dr. ELMENDORF. Yes.

The CHAIRMAN. What explains that, and what can be done about

that? For example—I do not know. I cannot remember the exact

date, but Uwe Reinhardt was sitting right there at the table a couple, 3, 4 months ago, talking about the different costs of end of life

among three different hospitals in New Jersey. I have forgotten the

variation, but it was stunning. He called each of the three hospitals, as I recall, and said, what in the world is going on here?

Why do you charge X times more than the other hospital? The answer is, that is just the way we do it. Then you look at the Jack

Wennberg geographic disparities studies.

Dr. ELMENDORF. Right.

The CHAIRMAN. So what is going on there, and what lessons do

we learn from that?

Dr. ELMENDORF. So you are exactly right about that. The greatest variation across regions tends to be, as I said, in these areas

where there is not much knowledge, so the variation is not so

much—if you walk into a hospital with a broken leg, it does not

matter much what hospital you walk into, they will do a pretty

similar thing because it is pretty evident what the right course of

action is.

But the areas where it is not so evident are the areas where——

The CHAIRMAN. They may charge a lot differently for this procedure, too. It is not just what they do, it is what they charge.

Dr. ELMENDORF. Well, that is true as well. Yes. So I think that

the key to—and again, it is not just ‘‘I think.’’ Analysts who have

studied this, with a very wide consensus, would tell you that the

key is to figure out better what works and what does not. So there

is a clear standard, not a sort of arbitrary, maybe this is good,

maybe it is not, and to establish that information and then to set

up a system that rewards people, providers, and patients for following that information and penalizes them for doing something

that does not appear to be justified by the evidence. So, it is the

information with the incentives.

The CHAIRMAN. But how do you get from here to there? Because,

if I remember a CBO study, there is about a 29-percent cost savings if the whole country were to practice medicine as in the areas

of the northern high plains States. Out of a $2.2- or $3-trillion cost

32

to the country, that is real money. That is about 30 percent of $2.3

trillion. We are getting $750-some billion in savings right there,

theoretically.

Dr. ELMENDORF. That is right.

The CHAIRMAN. And the cost is lower in those higher plains

States, and the outcome is better, according to CBO.

Dr. ELMENDORF. So, that is right. I mean, you said at the beginning of the hearing that this was the beginning of a beautiful

friendship, so you could invite me and others to come live in your

State, which does seem to do a pretty good job. That is probably

not a public policy solution for the hundreds of millions of us.

The CHAIRMAN. We would agree with that in Montana. [Laughter.]

Dr. ELMENDORF. You do not want us all there anyway, I know.

I do come and visit sometimes, but I know you are happy to see

me not clutter it up as well.

I think, again, the key to this is to not just keep paying for any

service that is provided in other parts of the country.

The CHAIRMAN. I know. But how do you do that? How do you just

not keep paying? How do we get there?

Dr. ELMENDORF. Oh. So, I think this is what our options are about. Now, the options do not save $700 billion a year. That figure

has been used, exactly. Maybe there is 30 percent, maybe. Nobody

is sure of that either. Maybe there is 30 percent of health care

spending that does not add much to health. Our options do not

weed out that much money, because the truth is, nobody knows

how to save all of that.

The CHAIRMAN. Well, if nobody knows, we cannot let perfection

be the enemy of the good here.

Dr. ELMENDORF. And I am not suggesting that.

The CHAIRMAN. We have to go with what we have. We have to

get moving here.

Dr. ELMENDORF. As I said at the very beginning, most analysts

agree very strongly that the time for action is now, particularly because we are not sure exactly which of these specific procedures

would work. But the things that we talked about: changing the tax

exclusion so that people and their employers have incentives to buy

leaner insurance policies, and changing cost-sharing in Medicare so

that patients have an incentive to be vigilant about what is being

done to them. The examples I started with: more bundling of payments so that there are fewer people who are each collecting for a

service and more coordinated decision-making about what should

be done. So the bundling, I think, is very important. Encouraging

providers to come together in what will be called Bonus-Eligible

Organizations, providing real financial incentives for that. That is

a step in that direction.

There is no single step that is likely to do this, and certainly

none that we are aware of. We are in areas that we do not have

experience with, and that is the problem that CBO finds in scoring

these changes. We know that there are incremental changes in

some existing policies, but these broader changes, we have not

tried.

The CHAIRMAN. It is my understanding that some countries overseas and some systems in the U.S. that are cost-effective and deVerDate 11-MAY-2000 14:06 Dec 02, 2010 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 62182.000 TIMD PsN: TIMD
33

liver high-quality care emphasize primary care. Your thoughts on

that? I vaguely recall some country that is 75 percent primary care

and about 25 percent specialists. I have forgotten what country

that is. We are about the opposite in this country. Is there anything to be learned from that?

Dr. ELMENDORF. Oh, yes, I think so. I think many analysts would

agree that providing a system in which primary care physicians do

not just pass off patients to specialists immediately would be a system that would improve health and save money. We analyze in our

book effective medical homes, for example, which is a way of giving

the primary care physician a more central role.

That alone does not save money, by our estimates, because the

primary care physician, as we have scored that particular option,

does not have an incentive of any sort not to keep sending patients

out to specialists. So the coordination—in our option, primary care

physicians are paid to play more of a coordinating role. That would

improve health. It does not, by itself, save money.

The CHAIRMAN. Do they play a more coordinated role in other

countries?

Dr. ELMENDORF. Yes. I think in other countries, you are right,

that there is—there is a wide variation across countries, of

course—less high-tech medicine employed in a number of other

countries. As I said before, one of the distinguishing features of the

Mayo Clinic and other places that seem to provide high-quality

care at low cost is greater emphasis on primary care and less on

specialists. That is not always true. Again, not every example lines

up perfectly on the line, there is a lot of variation, but that does

seem to be a common factor, a greater emphasis on primary care.

The CHAIRMAN. All right.

So what specific policies related to primary care have the greatest likelihood of bending the growth curve in health spending

system-wide?

Dr. ELMENDORF. The option that we analyzed for Bonus-Eligible

Organizations, or what Mark McClellan would call Accountable

Care Organizations, the way those options would tend to work—

and there are some examples of this being tried in the private sector—is that the primary care physician plays a more central role

and that there is more management of the care beyond that so that

people do not automatically get sent to specialists X, Y, and Z. So

it is a collection of doctors.

But the problem is, for hospitals, we can establish a single payment for an entire stay because it is one integrated organization.

For physicians, it is harder to do that. We are still, in Medicare,

stuck in a more purely fee-for-service world because physicians are

all independent. So what these Bonus-Eligible Organizations do is,

they pull the physicians together—it is a voluntary option, as we

model it—in a coordinated way, so it is a set of physicians with different specialties who are working together. It is just what managed care does. This is what effective HMOs do, like Kaiser Permanente.

The CHAIRMAN. And that is what Mayo does.

Dr. ELMENDORF. Right. And the studies have——

The CHAIRMAN. I mean, the doctors and hospital are all part of

the same system.

34

Dr. ELMENDORF. Right.

The CHAIRMAN. And they are salaried.

Dr. ELMENDORF. Yes. Exactly. The studies that have been done,

cases where doctors are paid a fixed salary and it is all one organization, have shown in some cases 30 percent less spending on

health than organizations where it is sort of lots of independent

players all jockeying for their piece of the action. So I think it is

undoubtedly providing incentives to pull providers into groups and

have those groups manage care that will be good for health

through fewer medical errors, less mistaken tests and so on, but

also good for spending.

The CHAIRMAN. All right.

Irrespective of the problems of rules 14 and 3, the scoring rules,

will you provide analysis of savings in your report on anti-fraud in

health reform, even though those savings would not be an official

score?

Dr. ELMENDORF. Wherever possible, meaning when our time and

knowledge allow, we will try to provide estimates of the effect of

administrative changes on benefit payments. As you know from the

scoring rule, it is not part of the official score but is information,

like coverage rates and everything else, that we will try to provide

you whenever we can.

The CHAIRMAN. I dislike the rule, but the rule is what it is. Intuitively it is clear: if you spend a little more money in anti-fraud and

in rooting out a lot of this waste—the President mentioned last

night the so-called fraud in Medicare. If we spend a little more

money trying to find it, you are going to have, on a net basis, very

significant savings. So, irrespective of rules 14 and 3, you will still

find ways to indicate——

Dr. ELMENDORF. We will try to inform you as best we can. As you

know, Senator, the responsibility for that rule lies above my pay

grade.

The CHAIRMAN. Well, Congress, I think, enacted it. Does that not

come out of some budget conference somewhere? I do not know.

Dr. ELMENDORF. So there is a set of rules—I presume there are

ones between 3 and 14, although I could not actually name them

for you—that are used to try to provide a little order in what is

already a very chaotic budget process, and in some cases they serve

that purpose effectively, and in other cases I understand they are

very frustrating. But those are rules that are the province of the

budget committees.

The CHAIRMAN. But you still are a smart person, and you can

still make some sense of what the savings would be.

Dr. ELMENDORF. Thank you, Senator. We do our best.

The CHAIRMAN. We want to keep this beautiful relationship.

[Laughter.]

Dr. ELMENDORF. Yes, I certainly do.

The CHAIRMAN. All right.

I have a lot of other questions, but I think I will not ask them

now, except to say that people talk a lot about prevention. We have

to have more preventive care, especially with respect to chronic

care, obesity and smoking, heart disease, and so forth. How do we

get at that so it is not just wasted preventive spending, but on that

basis is very positive?

35

Dr. ELMENDORF. There are a couple of issues in getting at that.

Part of it is defining public policy levers that actually lead to

healthier behavior. As I mentioned to Senator Carper, for smoking,

the bad stuff comes in only a few rather specific ways that have

been regulated, I think, pretty closely for a long time.

For obesity, one challenge is, if one imposed the tax, say, on

sugar-sweetened beverages, well, there are still a lot of snack foods

in the world. My daughters could tell you about an awful lot of different things they could eat or drink. So, it is a very difficult, very

broad-based set of factors that leads to obesity, and to a number

of other conditions. Influencing them all through public policy is in

some ways much more challenging, in fact, than tobacco. Even on

the tobacco side, that has been a decades-long policy effort to reduce smoking.

So the first problem is trying to find the policy levers to affect

health. The second issue is whether those changes in health status

show up as changes in Federal spending, and that depends on who

is paying and——

The CHAIRMAN. Right. I think we know all that. I am not asking

that question. I am asking you to drill down the next couple, three

levels. What are they? What are those levers that work?

Dr. ELMENDORF. I do not think analysts are very clear about

that.

The CHAIRMAN. Well, what is your best guess?

Dr. ELMENDORF. Decline in costs—relative cost of food over time

is viewed by analysts as an important factor in leading to more

consumption of food. That suggests that raising the costs of certain

kinds of food might reverse that. But the problem is, as I said, it

is a very broad set of foods and people need food for many useful

purposes, so taxing it is not maybe the most likely political outcome anyway.

I am sorry. Maybe it is my lack. If we get back to CBO and my

staff tells me I missed my opportunity, we will send you a more

complete answer. But I do not think that the analysts actually

know very clearly how to change behavior. There are bully pulpit

aspects and so on, but in terms of a direct, forceful way to change

some of those behaviors, I do not think analysts have the answer

to that question.

The CHAIRMAN. Well, is the solution not more primary care coverage? With universal coverage, everybody is seeing his or her primary care doctor in an early stage, early age, and it is consultations and so on and so forth, and the doctor will work with the patient and the parents a little more about, say, obesity, if that is it,

or heart disease? I do not know. It just seems to me that that can

be part of it.

Dr. ELMENDORF. I can see my doctor once a year and she gives

me heck about getting enough exercise. That has a little effect. So

I have to go, so getting people to go to the doctors helps, but I also

have to actually get up at 6 every morning and do it, and she is

not there to guide that. So some of it is going to see the doctor, and

some of it is just people learning what is important.

The other thing, of course, my doctor does is, she gives me a variety of tests on some frequency to try to detect problems early. In

some cases, more of that can be very beneficial for health and for

36

money savings, but not always. The problem with prevention is

that one ends up administering tests to a lot of people, a relative

number of people who actually would have a certain condition and

would, through this test, be saved from some worse, often terrible,

outcome.

The CHAIRMAN. But after a while, it seems to me, we are going

to get to the point where not every test is given to everybody. At

that time we are going to know more about people, we will know

it is not worth it in this person for various reasons, and for that

person it is high-risk.

Dr. ELMENDORF. Cost effectiveness is important there as well. I

mean, studies of specific forms of tests and other preventive care

find a very wide range of cost effectiveness, just as for treatments.

It does not really look any different. Some things we should do

more of because they are very cost-effective, and some things are

not very cost-effective. We can see this to some extent when groups

of physicians will advise certain sorts of tests for people over certain ages. There is some balancing act.

The CHAIRMAN. My guess is, as we move further along, between

the DNA curve and the human genome, that we are going to know

a lot more too about what works and does not work.

Dr. ELMENDORF. That is probably right. But I should say, that

is one of the factors that people worry about in terms of health

spending and in terms of health insurance coverage. So the more

than can be deduced from a piece of my DNA, the harder it might

be for me to get health insurance if it turns out that I have some

potentially expensive condition.

The CHAIRMAN. Well, we will deal with that.

Dr. ELMENDORF. There is that issue.

The CHAIRMAN. We will find ways to deal with that.

Dr. ELMENDORF. Well, but that is a very important matter because in the current insurance market that is not——

The CHAIRMAN. I understand. I understand. We will find a way

to deal with that.

Dr. ELMENDORF. And then I think the second issue is that some

of these things that we will discover will turn out to be—a part of

that will be development of new technologies, new treatments for

dealing with problems that are at a very, sort of a molecular level

that we do not have today that can be very, very beneficial, but

also could be very, very expensive.

The CHAIRMAN. Well, thank you very much, Dr. Elmendorf. I

have to tell you, we have a huge problem ahead of us. This is the

most difficult public policy undertaking I have experienced in my

Senate life here. I have been here 30 years. There is nothing as difficult as this, nothing as important as this. I cannot think of anything that depends so much on CBO as this, especially at a time

when it is new territory. We are not in the old situation where, as

even Senator Grassley once said, whatever CBO said, you are God.

In my judgment, you are not God.

Dr. ELMENDORF. Correct.

The CHAIRMAN. My judgment is, there is a whole new era. You

might be Moses, but not God. [Laughter.] But there is a whole new

era here.

37

Dr. ELMENDORF. I need to get you to talk to my kids, Senator.

[Laughter.]

The CHAIRMAN. As I said earlier, it is not too much of an overstatement to say CBO can make or break health care reform. I

mean that, because we have to go by your numbers, whatever you

come up with. And I do believe——

Dr. ELMENDORF. Senator, may I respectfully disagree?

The CHAIRMAN. And I do believe there are several different intellectually honest pathways to get from here to there. It is not just

one automatic. So, it means we have to be ever more creative to

find intellectually honest pathways to get the savings that we have

to have, practically as well as politically, to get health care reform.

Dr. ELMENDORF. Senator, I would like to just respectfully disagree with the ‘‘make or break’’ rule that you have assigned to us.

We will do our very best to provide you, and all members of this

committee and the rest of the members of Congress, with the technical information that you need, the best estimates that the knowledge in the world can provide about the effects of alternative policies, but as you understand, the hard decisions will be yours.

The CHAIRMAN. No, that is incorrect. The hard decisions will be

all of ours, both of us, you and me. You cannot pass the buck. The

hard decisions are here, and the hard decisions are yours, and the

hard decisions are all of ours in the country in trying to make this

work.

The hearing is adjourned.

[Whereupon, at 12:13 p.m., the hearing was concluded.]

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