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S. HRG. 112–876 

IMPROVING QUALITY, LOWERING COSTS: THE 

ROLE OF HEALTH CARE DELIVERY SYSTEM 

REFORM 

HEARING 

OF THE

COMMITTEE ON HEALTH, EDUCATION, 

LABOR, AND PENSIONS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

ON

EXAMINING THE ROLE OF HEALTH CARE DELIVERY SYSTEM REFORM, 

FOCUSING ON IMPROVING QUALITY AND LOWERING COSTS 

NOVEMBER 10, 2011 

Printed for the use of the Committee on Health, Education, Labor, and Pensions 

( 

Available via the World Wide Web: http://www.gpo.gov/fdsys/ 
COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS 

TOM HARKIN, Iowa, Chairman 

BARBARA A. MIKULSKI, Maryland 

JEFF BINGAMAN, New Mexico 

PATTY MURRAY, Washington 

BERNARD SANDERS (I), Vermont 

ROBERT P. CASEY, JR., Pennsylvania 

KAY R. HAGAN, North Carolina 

JEFF MERKLEY, Oregon 

AL FRANKEN, Minnesota 

MICHAEL F. BENNET, Colorado 

SHELDON WHITEHOUSE, Rhode Island 

RICHARD BLUMENTHAL, Connecticut 

MICHAEL B. ENZI, Wyoming 

LAMAR ALEXANDER, Tennessee 

RICHARD BURR, North Carolina 

JOHNNY ISAKSON, Georgia 

RAND PAUL, Kentucky 

ORRIN G. HATCH, Utah 

JOHN MCCAIN, Arizona 

PAT ROBERTS, Kansas 

LISA MURKOWSKI, Alaska 

MARK KIRK, Illinois 

DANIEL E. SMITH, Staff Director 

PAMELA SMITH, Deputy Staff Director 

FRANK MACCHIAROLA, Republican Staff Director and Chief Counsel 

(II) 
C O N T E N T S 

STATEMENTS 

THURSDAY, NOVEMBER 10, 2011 

Page 

COMMITTEE MEMBERS

Whitehouse, Hon. Sheldon, a U.S. Senator from the State of Rhode Island, 

opening statement ................................................................................................ 1 

Kirk, Hon. Mark, a U.S. Senator from the State of Illinois ................................. 3 

Franken, Hon. Al., a U.S. Senator from the State of Minnesota ......................... 57 

WITNESS—PANEL I 

Blum, Jonathan, Deputy Administrator and Director of the Center for Medicare, Centers for Medicare and Medicaid Services, Washington, DC .............. 5 

Prepared statement .......................................................................................... 7 

WITNESSES—PANEL II 

Koller, Christopher F., Commissioner, Office of the Health Insurance Commissioner, Providence, RI .................................................................................... 18 

Prepared statement .......................................................................................... 20 

Kaplan, Gary, M.D., FACP, FACMPE, FACPE, Chairman and CEO, Virginia 

Mason Medical Center, Seattle, WA ................................................................... 24 

Prepared statement .......................................................................................... 26 

Poulsen, Greg, Senior Vice President and Chief Strategy Officer, Intermountain Healthcare, Salt Lake City, UT ......................................................... 33 

Prepared statement .......................................................................................... 35 

Fendrick, A. Mark, M.D., Professor, Department of Internal Medicine and 

Department of Health Management and Policy, University of Michigan, 

and Co-Director, University of Michigan Center for Value-Based Insurance 

Design, Ann Arbor, MI ........................................................................................ 50 

Prepared statement .......................................................................................... 52 

ADDITIONAL MATERIAL 

Statements, articles, publications, letters, etc.: 

Senator Murray ................................................................................................ 66 

Response by Jonathan Blum to questions of: 

Senator Whitehouse .................................................................................. 67 

Senator Enzi .............................................................................................. 70 

Senator Roberts ......................................................................................... 72 

Response to questions of the HELP Committee by: 

Gary S. Kaplan, M.D., FACP, FACMPE, FACPE .................................. 73 

Greg Poulsen .............................................................................................. 75 

A. Mark Fendrick, M.D. ............................................................................ 75 

(III) 

(1) 

IMPROVING QUALITY, LOWERING COSTS: THE 

ROLE OF HEALTH CARE DELIVERY SYSTEM 

REFORM 

THURSDAY, NOVEMBER 10, 2011 

U.S. SENATE, 

COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS, 

Washington, DC. 

The committee met, pursuant to notice, at 1:30 p.m. in Room 

SD–430, Dirksen Senate Office Building, Hon. Sheldon Whitehouse, presiding. 

Present: Senators Whitehouse, Kirk, Bingaman, and Franken. 

OPENING STATEMENT OF SENATOR WHITEHOUSE

Senator WHITEHOUSE. I will apologize to everybody for what is 

going to be a somewhat uncoordinated hearing. It is perhaps ironic 

that in a hearing that is going to focus so much on improved coordination of care, we are going to have a hearing that is uncoordinated, but there are a whole array of votes that are beginning as 

early as 1:45, and so we will need to work through that. I think 

what we will probably try to do is to get through Mr. Blum’s testimony first, and then depart for the votes, and then reconvene 

shortly after the series of votes. So let me thank everybody for 

being here. 

Delivery system reform is sort of a passion of mine, and I think 

of some other of my colleagues as well. It may not get much public 

attention, but it is the way to lower costs and improve quality in 

our health care system. I have seen it in action dating back to the 

founding of the Rhode Island Quality Institute years ago to develop 

innovative health care processes in Rhode Island. 

Chairman Harkin has been a champion of prevention and primary care. Senator Mikulski has been a forceful advocate for quality improvement. She took the lead on the quality title of the Affordable Care Act, and so the HELP committee has been engaged 

in this for a while, as has the Finance committee under the leadership of Chairman Baucus. His Ready to Launch program, well before the health care bill, helped position us into the payment reform mode that the health care bill so much reflects. 

The hearing today is going to focus on the Affordable Care Act’s 

delivery system reform provisions, and the opportunities and challenges that we face in restructuring the delivery of care. We will 

hear about real life examples from those who are already realizing 

the potential of delivery system reform to transform our health 

care system. It is now one of the world’s least efficient, most com-
2 

plicated, and most frustrating systems for patients and providers, 

but it does not have to be. It can be the envy of the world. 

There is broad bipartisan agreement that the key driver of the 

national debt and deficit is health care. This year, Congressman 

Ryan said, ‘‘If you want to be honest with the fiscal problem and 

the debt, it really is a health care problem.’’ I may not agree much 

with Congressman Ryan, but on that, we do agree. 

And the facts bear it out, whether you are insured by Medicare 

or Medicaid, the VA or TRICARE, United or Blue Cross, in the last 

decade, you have seen costs across all insurers go through the roof. 

Secretary Gates recently said in reference to the defense budget, 

‘‘We’re being eaten alive by health care.’’ That ought to be a pretty 

strong signal that the problem is system-wide and that we need to 

act urgently to implement reforms to drive quality, value, and efficiency in our health care system. If we don’t, the alternatives are 

bleak. 

Gail Wilensky, who oversaw Medicare and Medicaid under President George H. W. Bush, said this April, ‘‘If we don’t redesign what 

we are doing, we can’t just cut unit reimbursement and think we 

are somehow going to get a better system.’’ Indeed, we will be left 

with painful decisions about limiting benefits, or shifting costs on 

to families, or on to States, or on to the private sector. 

The reforms we need fall into five key areas: prevention and primary care, improving and measuring quality, payment reform, administrative simplification, and health information technology. 

I look forward to hearing from Mr. Blum, our first witness, about 

CMS’s progress implementing the delivery system portions of the 

Affordable Care Act, and other initiatives that CMS is undertaking 

to improve our health care delivery system. 

The President’s Council of Economic Advisors estimated that 

over $700 billion a year can be saved out of our health care system 

without compromising health outcomes. Indeed, I would say probably improving health outcomes. The Institute of Medicine put this number at $765 billion a year. 

The New England Health Care Institute reported that it was $850 

billion a year, and the Lewin Group and former Bush secretary, 

Paul O’Neill, have estimated the savings at $1 trillion a year. 

When you look at the drastic variations, and cost, and quality 

that we see today in our health care system, a chart on that is in 

the testimony of one of our witnesses, we have to drive the highcost, low-performing States toward the States with high performance and lower costs. 

Thankfully, we are not alone in this fight. There is a veritable 

movement out there of doctors, hospitals, insurers, employers, even 

some States who have taken it upon themselves to experiment in 

ways to improve the quality, safety, and effectiveness of care. To 

pioneer new delivery systems that encourage providers to coordinate care, and to test safety practices to determine how caregivers 

can reduce adverse events and errors. 

The witnesses on the second panel fall into this category. I am 

proud of them and I look forward to hearing more about the work 

that they have accomplished. 

The urgent nature of our debt and deficit, the pressure that our 

rising health care costs create should impel us toward the promise 
3 

that health care delivery system reform holds to deliver the savings 

we need and to do so in the most humane way by improving the 

quality of care. 

I hope this hearing will further this purpose and I look forward 

to continuing this conversation with my colleagues. 

Senator Kirk. 

STATEMENT OF SENATOR KIRK

Senator KIRK. I thank the chairman for having this hearing, and 

it is very important, especially given what we are seeing now in the 

news. 

Health care is driving the deficit and debt debate in the Congress, and we are seeing a collapse of European socialism before 

our eyes, as there is a run on the Greek bond, a run on the Italian 

bond, and now apparently the French bond is under siege. 

Prime Minister Margaret Thatcher reportedly once said that, 

‘‘Socialists eventually run out of other people’s money.’’ And people 

are demonstrating now in Athens to somehow get foreigners to lend 

them more money so they don’t need to reform their State. 

We have seen the Greek State go from 300,000 employees to 

700,000 employees in just one generation. It is utterly 

unsustainable, and it is collapsing because no one will lend them 

more money. 

In this space, we have seen now the United States’ credit rating 

collapsing, so we have had one of three triple-A credit ratings collapse. It is likely the other two will be under siege, especially if the 

dire reports of the super committee prove true. I think if we don’t 

pass the Budget Control Act legislation, then it is likely that 

Moody’s and Fitch will also pull the triple-A credit rating of the 

United States. Much of that will not be because of patients or doctors, but because Congress, which has steadily expanded eligibility 

for various programs without an expanding economy or tax base to 

pay for it. 

I am particularly worried because we want to provide health 

care, and we want to provide health care for the low-income Americans, but what we are seeing now in Europe is that health care for 

Europeans is going to collapse because the State cannot borrow any 

more money to pay for it. We should avoid having overly expensive 

programs that would especially promise seniors benefits, and then 

not be able to borrow money from China to pay for it. 

Now I am very happy for our lead witness here. I will just note 

the real Ranking Member of this committee, Senator Enzi, 8 

months ago asked Secretary Sebelius questions, for the record on 

this, and he has been told or the staff tells me now, it took you 

guys 8 months to get back to him, which I think probably you can 

do a better job than that. 

The Center for Medicare and Medicaid Services spent $800 billion in 2010. The Medicaid expansion to the new health care law 

has increased spending by roughly $100 billion a year through 

2019. Obviously, this is completely unsustainable and this is partially to fuel Medicare fraud which, according to the Administration, is running at $60 billion a year. That is the equivalent of a 

trip to Mars and back three times a year in wasted money by the 

CMS system. 
4 

I am particularly concerned about your philosophy of pay and 

chase, which cannot be explained in Peoria or anywhere else in 

America for how you handle reimbursement under the system. 

I note here that the cost drivers are partially patients who have 

five or more chronic conditions a year and are seeing 14 different 

physicians on average. There does seem to be room for coordination, but the Government is totally incapable of doing that in any 

rational fashion. I would say that competition is able to do that. 

The Government is only capable of either spending money wildly, 

which is what Europe is underway and/or rationing care, which 

is—I used to live in Britain and I saw a rationed health care system—fairly shocking. 

Most Americans visit that country as tourists and obviously you 

don’t get on a plane for a European holiday unless you are healthy. 

But I was completely shocked at what I saw on the—especially the 

condition of Government health care and Government hospitals in 

that country. Especially taking a hospital like St. Bartholomew, I 

believe its name was, the oldest public hospital in Europe, 800 

years old, but after the Government took it over, it took only 40 

years to ruin that hospital and then bankrupt it under the NHS 

system. 

I am particularly worried that Chairman Enzi highlighted HHS’ 

claim on the Partnership for Patients, a new health care quality 

and safety initiative could, and this is your guy’s quote, ‘‘Would potentially save $35 billion across the health care system including 

$10 billion in Medicare savings over the next 3 years.’’ I have no 

way of backing that up. HHS has not conducted any actuarial estimate prior to releasing the savings estimate. No official estimate 

was prepared until Senator Hatch and Senator Enzi sent a letter 

in May to the Chief Actuary. 

At the Centers for Medicare and Medicaid Services, Mr. Richard 

Foster was requested to do this, and he responded to Senator Enzi 

in September saying, ‘‘No cost estimate is currently feasible,’’ and 

that’s your own guy who said that. 

Given these uncertainties, it does not appear that the Administration now can claim that this voluntary incentive program will 

achieve its goal of $10 billion in health care savings over the next 

3 years, or $50 billion in savings over the next 10. And that’s on 

top of the Ponzi scheme of the CLASS Act, which was intended to 

make the bill look like it was budget neutral, but everybody kind 

of got the joke of what was happening. And finally that effort collapsed, thankfully, when the Administration realized that they 

could no longer put up the charade that was going on there. 

I am particularly interested also in the view of the witnesses 

here, but I will say that overall there appears to be a cloud over 

American health care and that cloud is: who is going to be the 

president next year? It is increasingly likely that we have no idea 

who is going to be the president, but I would say if it is Mitt Romney, then all of this collapses, and it probably collapses by next August when the Act is repealed. If it is President Obama, on the 

other hand, we will have to suffer under this legislation, and go the 

European route until our creditors pull the plug. 

And so to me it seems that we have a very uncertain situation. 

I feel for you now because given that we have hundreds and hun-
5 

dreds of pages which, as a House member I can report, no one 

read, now trying to be implemented. Now, the No. 1 subject of the 

Presidential contest, of which no one knows how it will turn out, 

as a health care provider and most importantly as a patient, no one 

knows where this is going. And all of this uncertainty is hurting 

one-seventh of the economy, and all created not by the patient, not 

by doctors, but by this committee and this Congress. And with 

that, I have said enough. 

Back to you, Mr. Chairman. 

Senator WHITEHOUSE. I think we still have some time for the 

witness anyway, and I would be delighted to get to Mr. Blum’s testimony. 

He is the deputy administrator and director for CMS, the Center 

for Medicare and Medicaid Services, and is responsible for overseeing the payment of Medicare fee for service providers, and privately administered Medicare health plans, and the Medicare prescription drug program. 

He formerly served here in the Senate as an advisor to Senate 

Finance Committee members, and its current chairman, Senator 

Baucus. He has been a Medicare program analyst at the White 

House Office of Management and Budget, and was the vice president at Avalere Health overseeing its Medicaid and long-term care 

practice. 

He has a Master’s degree from the Kennedy School of Government, and a B.A. from the University of Pennsylvania. Mr. Blum, 

we are looking forward to your testimony. 

STATEMENT OF JONATHAN BLUM, DEPUTY ADMINISTRATOR 

AND DIRECTOR OF THE CENTER FOR MEDICARE, CENTERS 

FOR MEDICARE AND MEDICAID SERVICES, WASHINGTON, DC 

Mr. BLUM. Great. Chairman Whitehouse, Senator Kirk, thank 

you for the opportunity to talk about our work today to implement 

the Affordable Care Act to reduce Medicare costs and to change the 

delivery of care. 

The Medicare program faces many challenges. I think what was 

raised during the opening statements highlight those challenges. 

But by and large, most Medicare beneficiaries receive care through 

the traditional fee for service program. The traditional fee for service program varies wildly by quality across the country, varies 

wildly by cost across the country. And I believe that our greatest 

challenge is to bring more consistency to how fee for service benefits are provided throughout the country. 

More than a quarter of Medicare beneficiaries receive care 

through capitated health plans, Medicare Advantage plans. For the 

past several years, those plans have been paying more than the 

same services for traditional fee for service. And without great confidence, that Medicare beneficiary in capitated plans receive greater value for greater subsidies that were provided. 

We understand we have many challenges to address these concerns, but the Affordable Care Act has provided the Medicare program with many new tools to address those challenges. 

During my 5 minutes, I want to talk about some of the work to 

date, but also our priorities for the next 12 months. 
6 

In the past couple of weeks, CMS has put out some statistics 

that tell me that the program is moving in the right direction. We 

announced Part A, Part B, the MA, the Part D premiums for 2012. 

Across the board, Part A, the MA premiums, the Part D premiums 

are virtually flat for 2012, on average, relative to today. The Part 

B premium is growing much more slowly than previously projected, 

which tells us that we are seeing signs of lower spending growth 

and overall cost containment going on throughout the program. 

We have millions of Medicare beneficiaries who are accessing 

preventive benefits at no charge to them. And also more than 2.2 

million Medicare beneficiaries are saving dramatically out-of-pocket 

costs on their Part D drugs, brand name drugs provided during the 

so-called donut hole. This tells us that we are having more prevention, more compliance, focus on wellness. And the past couple of 

weeks have shown us very promising signs of a reformed Medicare 

program. 

The Affordable Care Act has given us new tools, new programs 

to implement, and I am pleased to report on their progress to date. 

Last month, CMS put out its final rule for the ACO, the Accountable Care Organization program, and we are very confident that 

this program will provide many new opportunities for health care 

providers, hospitals, physicians to come together to better coordinate care through the traditional fee for service program. 

CMS responded to more than 1,300 comments that came in to 

CMS, all giving us very strong suggestions about how to improve 

the ACO program and CMS put out final rules last month. CMS 

will begin to be taking in applications from ACO potential organizations starting January 1. The ACO program will allow organizations to share in savings for those that can demonstrate that quality has been improved, and overall costs Part A—Part B costs have 

been lowered that those organizations will be able to share in the 

savings. 

Earlier this year, CMS put out the final rules and the final program guidelines for the Hospital Value-Based Purchasing program. 

Starting in 2013, CMS will fundamentally change how it pays for 

inpatient hospital care to provide budget-neutral payment incentives for hospitals that improve their clinical performance and their 

overall patient’s care experience. This is a new way to pay for hospital care, and we are fulfilling the goal to shift our payment rates 

from purely paying for volume to paying for value and the overall 

clinical care experiences that Medicare beneficiaries experience 

starting in 2013. 

We have also changed fundamentally how we will pay for private 

capitated health plans starting in 2012. Using CMS’s five-star 

quality rating system, those plans that have higher performance— 

four-star, five-star—for example, will receive higher reimbursements that can, in turn, provide better benefit levels. That quality 

star rating system takes into a whole host of different measures, 

quality of care measures, patient’s care, and care satisfaction measures. We are already seeing more beneficiaries gravitate to higher 

quality plans that give us a positive sign for progress. 

The Center for Innovation has been in operation for more than 

12 months. They have put out a very strong policy agenda this 

year. Their focus has been in several areas. First, to complement 
7 

1http://www.cms.gov/apps/media/press/release.asp?Counter=4158&intNumPerPage=10& 

checkDate=&checkKey=&srchType=1&numDays=3500&sr. 2http://www.cms.gov/apps/media/press/release.asp?Counter=4158&intNumPerPage=10& 

checkDate=&checkKey=&srchType=1&numDays=3500&sr. 3http://www.hhs.gov/news/press/2011pres/03/20110322a.html. 4http://www.hhs.gov/news/press/2011pres/03/20110322a.html. 

the overall ACO program, the Innovation Center will announce 

later this year the final pioneer ACOs. These are organizations 

that can take on greater risk and be accountable for greater quality 

results than today’s ACO program. 

The Innovation Center has put out a call for response in four 

bundled payment models that will incorporate both the acute care, 

the physician care, the post-acute care to a single episode of payment to create much more stronger incentives for care to be coordinated, for care to be managed during an entire episode of hospital 

care. We have seen already a tremendous response from hospital 

and other organizations that wish to participate with that bundled 

payment model. 

[The prepared statement of Mr. Blum follows:] 

PREPARED STATEMENT OF JONATHAN BLUM

Chairman Harkin, Senator Whitehouse, Ranking Member Enzi, and distinguished 

committee members, thank you for inviting me to discuss the Centers for Medicare 

& Medicaid Services’ (CMS) initiatives to improve our Nation’s health care delivery 

system. 

In the 18 months since the Affordable Care Act became law, CMS has continued 

to strengthen the Medicare and Medicaid programs for the millions of Americans 

who rely on them, while implementing reforms that will ensure that we spend taxpayers’ money wisely, improve health care quality, and control health care cost 

growth. Over the past year and a half, CMS has unveiled a series of rules and initiatives that will change the way Medicare pays hospitals, doctors, and other health 

care providers, to ensure that they are providing the kinds of high-quality care 

beneficiaries expect and deserve, at a cost our Nation can afford. These changes will 

provide Americans with better health care by rewarding what works—such as improved care coordination—while also giving Medicare the tools to control costs over 

the long run—such as changing the way we pay doctors and other providers to reward efficient, quality care. We hope the entire health care system will adopt these 

new delivery system reform initiatives. 

We have made major progress in strengthening Medicare over the last 18 months 

while implementing the Affordable Care Act. At a time when other health care costs 

are rising faster than inflation, Medicare costs are stable. Following the implementation of the Affordable Care Act, growth in Medicare per capita spending has declined significantly. Overall, Medicare Part D, Medicare Advantage (MA), and Medicare Part A premiums will remain virtually the same for 2012 as in 2011, even as 

beneficiaries enjoy new benefits, and Medicare Part B premiums in 2012 will be 

lower than previously projected. Meanwhile, on November 4, 2011, CMS announced 

that so far this year, 22.6 million beneficiaries in fee-for-service Medicare have used 

preventive services that are now provided at no cost to them, including the new free 

Annual Wellness Visit.1 Additionally, more than 22 million beneficiaries have saved 

in total over $1.2 billion (an average of $550 per person) on their prescription drugs, 

thanks to a 50 percent discount on their covered brand name prescription drugs in 

the donut hole.2 For 2010, nearly 4 million seniors who reached the prescription 

drug donut hole received a $250 rebate check to help them afford the cost of their 

prescription drugs.3 Thanks to these benefits and the reforms in the law, a senior 

enrolled in the fee-for-service Medicare program could save more than $3,500 over 

the next 10 years.4

With the new provisions in the Affordable Care Act, CMS has the opportunity to 

work with both the public and private sectors to make real advancements in the 

Nation’s health care delivery system to improve the quality of life and quality of 

care for our beneficiaries and other Americans. With over 100 million people enrolled in Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP), 

CMS has an important role to play in improving the delivery of health care in our 

Nation. 
8 

5www.hospitalcompare.hhs.gov. 

OUR CURRENT DELIVERY SYSTEM IS FRAGMENTED AND EXPENSIVE

Our Nation has top-notch doctors and other health care providers, and leads the 

world in health care technology and cutting edge treatments. Yet the system in 

which these talented people work falls short far too often. Our delivery system is 

fragmented, leaving patients in the care of multiple doctors, each sometimes unaware of how the other is treating the patient. Medical errors can occur as a patient 

moves from one care setting to another, or is prescribed different medications that 

interact. For too long, our current system focused on caring for the sick, doing little 

to keep people healthy in the first place. As a result, our health care system is expensive and does not necessarily produce the best health care results. It is one of 

CMS’ top priorities to lead the transformation of the delivery of care, so that all our 

beneficiaries receive high-quality care that is coordinated among their doctors and 

specialists, and which also avoids errors and saves money. 

In order to achieve this goal, CMS has already established initiatives that encourage health care providers to deliver high-quality, coordinated care at lower costs. 

CMS is transforming from a passive payer of services into an active purchaser of 

high-quality, affordable care through these newly established initiatives. Since the 

passage of the Affordable Care Act, CMS has already rolled out many reforms that 

promote improved care, such as the Medicare Shared Savings Program, Hospital 

Value-Based Purchasing (VBP), and the strengthened Medicare Advantage 5-Star 

Rating program. Now that we have moved forward with these reforms, we expect 

further care improvements and cost savings over the next several years as these 

programs are implemented fully. Building on this work, CMS is focusing on the next 

set of priorities for reforming our care delivery system. Those priorities include new 

ways of rewarding efficiency and improving beneficiary care, investing in patient 

safety and care coordination, and improving the quality and lowering the cost of 

care for the millions of Americans enrolled in Medicare, Medicaid, and CHIP. 

SUCCESS AT CMS: REWARDING QUALITY AND COORDINATING CARE

Thanks to the Affordable Care Act, Medicare beneficiaries will enjoy better quality 

of care and a more innovative care delivery system designed to improve their health 

outcomes and reduce costs. Below are a few examples of the delivery system reforms 

we have initiated since the passage of the Affordable Care Act. 

Investing in Quality Care 

Hospital payments account for the largest share of Medicare spending, and Medicare is the largest single payer for hospital services. Earlier this year, CMS established the new Hospital Value-Based Purchasing (VBP) Program, which will change 

how CMS pays hospitals for inpatient acute care. This program, which ties payment 

to value, is expected to foster higher-quality care for all hospital patients across our 

country’s health system. 

In fiscal year 2013, CMS will implement the new budget-neutral, value-based incentive payments. These payments will reward hospitals based on their overall performance on a set of quality measures that are linked to clinical processes of care 

and patients’ experiences of care. National bodies of experts, including the National 

Quality Forum, have endorsed these measures, and CMS will post the hospitals’ 

scores related to those measures on the Hospital Compare Web site.5 The program 

aims to help patients receive higher-quality care and see better outcomes. 

Under the program, CMS will score hospitals based on their performance on each 

measure relative to other hospitals, as well as on how a hospital’s performance on 

each measure has improved over time. CMS will use the higher of a hospital’s improvement and achievement score on each measure to determine a total performance score, which will then be translated into an incentive payment. In addition to 

rewarding excellence, hospitals will be given an incentive for continuous improvement of care delivery. In the future, CMS plans to add new measures that focus 

on improved patient outcomes and prevention of hospital-acquired conditions. CMS 

may replace measures that reach very high compliance scores, continuing to raise 

the bar and spur quality improvements. This redirection of funds will provide a 

strong incentive for quality improvement, which we expect will result in significant 

savings for Medicare, taxpayers, and enrollees over time. 

Promoting Coordinated Care to Improve Care and Create Savings 

CMS has established initiatives to ensure that Medicare patients get the right 

care, in the right place, at the right time. A key part of CMS’ work in this area 

is a multi-part initiative built around Accountable Care Organizations (ACOs), 
9 

6http://www.ama-assn.org/ama/pub/news/news/final-aco-rule.page. 7http://www.amga.org/AboutAMGA/News/articlelnews.asp?k=534. 8http://www.naph.org/Main-Menu-Category/Newsroom/2011-Press-Releases/NAPH-Supports-Final-ACO-Rule-Changes.aspx. 9http://www.hhs.gov/news/press/2011pres/09/20110915a.html. 

which bring together doctors, hospitals and other health care providers to better coordinate care for patients. ACOs are an innovative service delivery model being used 

by CMS and in the private sector and communities across the country. If ACOs improve quality of care and lower costs, health care providers, as well as Medicare, 

can share in the savings. Those savings will help to shift payment incentives toward 

rewarding quality and value rather than volume of care. Provider participation in 

ACOs is purely voluntary, and beneficiaries will continue to have all their same benefits, including their ability to see any Medicare provider. 

CMS released the Medicare Shared Savings Program final rule (CMS–1345–F) on 

October 20, 2011. Under this program, providers who voluntarily form an ACO and 

meet quality standards based upon patients’ outcomes and care coordination, as well 

as other measures, may share in the savings they achieve for the Medicare program. 

ACOs that commit to share in savings and losses for the duration of the agreement 

may receive a higher share of any generated savings. 

The publication of this rule followed months of soliciting feedback and receiving 

comments from stakeholders across the country. Stakeholder groups have generally 

responded favorably to the newly published rule. For example, the American Medical Association (AMA) stated that they are pleased that ‘‘the final rule on Medicare 

ACOs includes many of the important changes recommended by the AMA to allow 

all interested physicians to lead and participate in these new models of care.’’ 6 The 

American Medical Group Association (AMGA) said that ‘‘AMGA is very pleased that 

CMS listened and responded with noteworthy changes. AMGA believes ACOs have 

the potential to improve quality of care while bending the cost curve.’’ 7 The National Association of Public Hospitals and Health Systems said that the rule ‘‘will 

allow hospitals and other providers to more easily participate in the program, and 

should add to the success of this initiative and future innovations in health care delivery system reform.’’ 8

In addition, CMS is using its new authorities through the Center for Medicare 

and Medicaid Innovation (the Innovation Center) to test alternative payment models 

and prepare organizations to provide accountable care. These initiatives include: • The Pioneer ACO Model, which is designed for health care organizations and 

providers with experience in coordinating care for patients across settings. The 

model will allow these provider groups to move more rapidly to a population-based 

payment model on a track consistent with, but separate from, the Medicare Shared 

Savings Program. The model is designed to work in coordination with private payers, multiplying the effectiveness of the program and aligning provider incentives. 

This has the potential to improve quality and health outcomes for patients across 

the ACO, and achieve cost savings for Medicare and patients. • The Advance Payment ACO Model, which will provide additional support to 

rural and physician-based ACOs who want to participate in the Medicare Shared 

Savings Program, but lack the startup resources to build the necessary infrastructure, such as new staff or information technology systems. The advance payments 

would be recovered from any future shared savings which ACO earns through performance. • The Accelerated Development Learning Sessions, which are available for 

providers interested in learning more about the steps necessary to become an ACO. 

The Innovation Center is holding these convenient and free sessions in a variety of 

cities, with some sessions available online. To date, the Innovation Center has 

hosted two sessions: 67 organizations attended the first session held in Minneapolis 

in June 2011 and 39 attended the second session in San Francisco in September 

2011. The Innovation Center will be hosting a third and final session on November 

17 and 18, 2011 at CMS Headquarters in Baltimore. 

Together, these initiatives provide a broad range of options and support that reflect the varying needs of providers embarking on delivery system reforms. 

Improving Transparency to Empower Beneficiaries 

Medicare Advantage 

Enrollment in the Medicare Advantage (MA) program continues to grow. In 2012, 

MA plans project that MA enrollment will increase by 10 percent.9 CMS is focused 

on strengthening and improving MA so that its plans provide good value to beneficiaries and the program remains robust. CMS has streamlined plan offerings so 
10 

10http://www.hhs.gov/news/press/2011pres/09/20110915a.html. 11http://www.healthcare.gov/news/factsheets/2011/02/Medicare02102011a.html. 12http://www.gpo.gov/fdsys/pkg/FR–2011–07–08/pdf/2011–16834.pdf. 13 Blanchfield, Bonnie, James Heffernan, Bradford Osgood, et. al. ‘‘Saving Billions of Dollars— 

And Physicians’ Time—By Streamlining Billing Practices.’’ Health Affairs. April 29, 2010. 

http://content.healthaffairs.org/content/early/2010/04/29/hlthaff.2009.0075.full. 

that beneficiaries have choices among plans that are meaningfully different from 

one another. In addition to improvements to the 5-star plan quality rating system, 

the Affordable Care Act allows CMS to deny a plan’s bid should the total cost to 

beneficiaries, including premiums and out-of-pocket costs, increase more than 10 

percent from the prior year. 

The results show that when CMS strengthens our oversight and management of 

MA plans, seniors and people living with disabilities will have clearer plan choices 

offering better benefits. In 2012, MA premiums are, on average, 4 percent lower 

than in 2011 and 11 percent lower than in 2010.10 As part of CMS’ national strategy 

for implementing quality improvement in health care, CMS is also working to create 

new incentives for all MA plans to improve the care they offer to Medicare beneficiaries. For the first time in 2012, CMS will reward those MA plans with higher 

quality scores, based on its 5-Star rating system. CMS is also allowing 5-Star MA 

and Part D plans to continuously market and enroll beneficiaries throughout the 

year. 

Our goal is for plans to improve their quality scores over the next several years 

and to encourage more beneficiaries to enroll in high-quality plans. In 2011, we 

have seen a 5 percent increase in enrollment among Medicare Advantage plans with 

a four- or five-star rating.11

Physician Quality 

As part of CMS’ broader strategy to encourage health care providers to adopt 

practices that can improve patient care, CMS is continuing to strengthen the Physician Quality Reporting System by rewarding physicians for reporting quality measurement data. The final physician fee schedule rule for 2012 (CMS–1524–FC) updates a number of physician incentive programs including the Physician Quality Reporting System, the e-Prescribing Incentive Program, and the Electronic Health 

Records Incentive Program. 

Freeing Doctors to Focus on Patients, Not Paperwork 

CMS and the Department of Health and Human Services (HHS) have also started 

work to help doctors begin using Electronic Health Records (EHRs) through the 

EHR Incentive Program. EHRs help providers communicate with each other about 

a patient’s care. EHRs make it easier for physicians, hospitals, and others to assess 

a patient’s medical status and make sure that care is appropriate. They can help 

doctors avoid redundant paperwork and ensure patients get the correct tests and 

medications. HHS also issued administrative simplification rules (CMS–0032–IFC) 

to improve the use of electronic standards to help eliminate inefficient manual processes. 

We estimate that these changes will save providers and health plans $12 billion 

over the next 10 years.12 More important, greater use of EHRs will free providers 

to spend more time with their patients. An April 2010 study in Health Affairs found 

that simplifying administrative systems could save 4 hours of professional time per 

physician and 5 hours of support staff time every week.13 This commonsense 

streamlining means fewer phone calls between physicians and health plans, lower 

postage and paperwork costs, and fewer denied claims. Overall, adoption of EHRs 

means physicians can cut through the red tape and spend more time and resources 

administering quality care to their patients. 

NEXT STEPS: INVESTING IN INNOVATION, IMPROVING CARE, AND SAVING MONEY

CMS has already made tremendous progress toward achieving the Affordable 

Care Act’s goals of lowering Medicare costs and improving care—and we are doing 

even more. With the established foundation detailed above, CMS is moving forward 

to employ other new tools made available by the Affordable Care Act to reform our 

Nation’s health care delivery system. The programs and initiatives described below 

will bring us closer to the goal we all share—a high-quality, affordable, patientcentered health care delivery system that effectively prevents or treats illness without waste or duplication. 
11 

Investing in Innovation to Deliver Quality Care 

The key to building a sustainable health care system in our country will come 

from innovations and improvements in how we deliver health care. CMS has started 

this work by changing our hospital payment systems and Medicare Advantage programs to reward quality care and coordination, instead of simply paying providers 

for offering more services. We also recognize that there is a great richness of innovation occurring in local communities and through multiple efforts underway to provide care for people, often at a lower cost. 

In section 3021 of the Affordable Care Act, Congress created the Innovation Center to test innovative payment and service delivery models to reduce program expenditures, while preserving or enhancing the quality of care for those entitled to 

Medicare and Medicaid. The health reform law gives the Innovation Center flexibility in selecting and testing innovative payment and service delivery models, enables it to work with Medicare, Medicaid, and CHIP programs to better serve beneficiaries and reduce costs, and provides $10 billion in direct funding for activities 

initiated in fiscal years 2011 through 2019 to support this mission. The Affordable 

Care Act also allows the Secretary of HHS to expand, through rulemaking, the scope 

and duration of models proven effective after evaluation, including implementation 

on a nationwide basis. In order to expand a model, the Secretary must determine 

that the model improves the quality of patient care without increasing spending or 

reduces spending without reducing the quality of care, and the CMS Actuary must 

certify that expanding the program will lower costs (or at least not increase costs). 

The following sections describe, in more detail, the Innovation Center’s initiatives. 

Bundling Payments to Promote Efficient, Quality Care 

Medicare currently makes separate payments to providers for each service related 

to an illness or course of treatment, often leading to fragmented care with minimal 

coordination across providers and health care settings. Under the Innovation Center’s Bundled Payments for Care Improvement initiative, CMS will test various 

models to link payments for multiple services that patients receive during an episode of care. For example, instead of a surgical procedure and followup care generating multiple claims from multiple providers, the entire team will be compensated 

with a ‘‘bundled’’ payment that provides incentives to deliver health care services 

more efficiently while maintaining or improving quality of care. Research has shown 

that bundled payments can encourage providers to collaborate to improve the patient’s experience of care during a stay in an acute care hospital and during postdischarge recovery. 

Bundling payment for services that patients receive across a single episode of 

care, such as heart bypass surgery or a hip replacement, is one way to encourage 

doctors, hospitals, and other health care providers to work together to better coordinate care for patients, both when they are in the hospital and after they are discharged. On August 25, 2011, CMS invited providers through a Federal Register notice (CMS–5504–N) to apply to test and develop four different models of bundling 

payments. Depending on the particular model, providers have flexibility in selecting 

conditions to include, developing the health care delivery structure, and determining 

how to allocate payments among participating providers. Because of the potential 

for reducing the cost of care through improvement, health care providers will be 

able to streamline and improve their coordination to provide savings to the Medicare 

Trust Funds. By giving providers the flexibility to determine which model of bundled payments works best for them, we believe it will be easier for health care providers of different sizes to participate in this initiative, thus encouraging more providers to test and develop innovative models to coordinate care and produce savings. 

Preventing Costly Conditions and Complications 

CMS launched the Partnership for Patients: Better Care, Lower Costs, a new public-private partnership, to improve the quality, safety, and affordability of health 

care for all Americans. More than 6,200 organizations, including over 2,800 hospitals, have joined the initiative. Partnership for Patients brings together leaders of 

major hospitals, employers, physicians, nurses, and patient advocates, along with 

State and Federal Governments, in a shared effort to make hospital care safer, more 

reliable, and less costly. 

The two goals of this new partnership are to: 

• Keep patients from getting injured or sicker. By the end of 2013, preventable hospital-acquired conditions would decrease by 40 percent compared to 2010. 

Achieving this goal would mean approximately 1.8 million fewer injuries to patients 

with more than 60,000 lives saved over 3 years. 

• Help patients heal without complication. By the end of 2013, preventable 

complications during a transition from one care setting to another would decrease 
12 

14http://www.healthcare.gov/compare/partnership-for-patients/index.html. 

so that hospital re-admissions would be reduced by 20 percent compared to 2010. 

Achieving this goal would mean more than 1.6 million patients would recover from 

illness without suffering a preventable complication requiring re-hospitalization 

within 30 days of discharge. 

It is our belief that achieving these goals will save lives and prevent injuries to 

millions of Americans. They have the potential to save up to $35 billion across the 

health care system, including up to $10 billion in Medicare savings, over the next 

3 years. Over the next 10 years, this partnership could reduce Medicare costs by 

about $50 billion and generate billions in Medicaid savings.14 These improvements 

will help put our Nation on the path toward a more sustainable health care system. 

Improving the Front Lines of Care 

In recent months, CMS has launched several new initiatives that seek to partner 

with our colleagues on the front lines of health care delivery. Through investments 

in primary care and medical homes, and seeking direct feedback from clinicians in 

the field, we will move our health care system into the 21st century. The Innovation 

Center’s current initiatives include: 

• The Comprehensive Primary Care (CPC) Initiative, which fosters collaboration between public and private health care payers to strengthen primary care. 

The CPC initiative will test two models simultaneously—a service delivery model 

and a payment model—to see how primary care practices coordinate care for their 

patients. 

• The federally Qualified Health Center (FQHC) Advanced Primary Care 

Practice Demonstration, which is operated by the Innovation Center in partnership with the Health Resources and Services Administration to test the effectiveness 

of teams of doctors and other health professionals working in community health centers to coordinate and improve care for up to 195,000 Medicare patients. Five hundred FQHCs in 44 States are participating in the demonstration, which will operate 

between November 2011 and October 2014. 

• The Innovation Advisors Initiative, which is currently accepting applications for up to 200 health professionals to undertake intensive efforts to expand 

their health systems skills and knowledge, apply what they learn in their organizations and areas, and work with CMS to test new models of care delivery in their 

own organizations and communities. Developing these innovation leaders expands 

the reach of the Innovation Center and has the potential to improve patient care 

and reduce costs. 

Expanding and Promoting Partnerships to Improve Care for Medicare-Medicaid 

Enrollees 

A top priority for CMS is improving the quality and lowering the cost of care for 

the 9 million Americans enrolled in both Medicare and Medicaid (known as ‘‘dual 

eligibles’’ or Medicare-Medicaid enrollees). The Affordable Care Act created the new 

Federal Coordinated Health Care Office, referred to as the Medicare-Medicaid Coordination Office, to more effectively integrate benefits between the two programs 

and to improve the coordination between the Federal Government and States for 

Medicare-Medicaid enrollees. Through our work and with our State partners, our efforts are advancing access to seamless, coordinated care programs for MedicareMedicaid enrollees. 

Beneficiaries who are dually enrolled in Medicare and Medicaid are typically lowincome seniors and people with disabilities. Although most have complex care needs, 

too often their care is fragmented, resulting in poor health outcomes and increased 

costs. These beneficiaries, their families, and their caregivers would be better served 

by improved coordination that ensures their complex care needs are met through 

seamless, person-centered approaches. To that end, the CMS Medicare-Medicaid Coordination Office has advanced new initiatives designed to align the two programs’ 

rules and policies and develop and test demonstrations across the country. 

Most recently, the Medicare-Medicaid Coordination Office announced a new opportunity for States to participate in demonstration projects designed to improve the 

quality of care for Medicare-Medicaid enrollees. These approaches provide States the 

opportunity to share in reduced costs that result from improved quality. CMS is 

pleased to report that 37 States and the District of Columbia have indicated interest 

in exploring ways to implement these demonstrations in their States. Across the 

country, States are proposing new ways to better serve their Medicare-Medicaid enrollees. These initiatives vary regionally and in their approach, ranging from using 

health homes that provide total care management to expanding existing programs 
13 

to meet all of an individual’s needs by incorporating behavioral health and longterm supports and services, as well as making current coordinated care models 

available to new populations. Over the next several months, CMS will work with 

States to identify the most appropriate proposals for implementation that are most 

likely to reduce costs while improving quality of care for vulnerable beneficiaries. 

LOOKING FORWARD

In a year and a half since the passage of the Affordable Care Act, CMS has made 

major progress in implementing its delivery system reforms. This effort is part of 

the Administration’s commitment to making the health care system better for millions of Americans. Before the Affordable Care Act, we included investments in 

health information technology, prevention, and research in the Recovery Act to lay 

the foundation for this type of system. And since enactment, we have proposed additional ideas as part of the President’s Plan for Economic Growth and Deficit Reduction. By strengthening our programs and making sure we are spending taxpayer 

dollars wisely, we are ushering in a new day for American health care consumers. 

We will continue to build on these reforms in the years to come. 

The many new services, initiatives, and reforms I have highlighted are important 

and immediate steps to improve the coordination and affordability of health care for 

all Americans. CMS has a responsibility to improve access, quality, and efficiency 

of care for all our beneficiaries, while protecting the fiscal integrity of our programs 

in the long term. We are committed to working with our partners in the private sector, States, and beneficiaries to improve care coordination, increase patient safety, 

offer beneficiaries more information and more control over their care, and achieve 

better outcomes at a lower cost. As we tackle care fragmentation, we are moving 

toward better-aligned incentives for higher-quality, integrated care. These efforts to 

improve the quality of care will provide real improvements for CMS’ beneficiaries 

and all Americans. 

Senator WHITEHOUSE. Since your time has expired—— 

Mr. BLUM. I’m sorry. 

Senator WHITEHOUSE. Let’s cut to questions—— 

Mr. BLUM. Sure. 

Senator WHITEHOUSE. If you don’t mind. This is one of my favorite exhibits about our Medicare system and I think it applies more 

generally to our health care system, it is the relative state-by-state 

ranking on quality and cost metrics. And it shows, first of all, enormous variation State by State, but also a distinct link between the 

lower cost States and higher quality; i.e., an inverse relationship 

between cost and quality. 

And when you have that broad of a discrepancy, it strikes me 

that there is a lot of room to have, let’s say, Texas and Louisiana, 

which are highest cost and lowest quality move more toward Hawaii and New Hampshire which are at the other end of the—I don’t 

think anybody thinks that Hawaii and New Hampshire are bad 

health care systems or that they are, frankly, significantly different 

than Texas or Louisiana. Yet, something is going on there that creates really massive cost discrepancies that the public pays for, not 

only with dollars, but also in the quality of care that they receive 

and with their lives. 

You are familiar with this? 

Mr. BLUM. Yes. 

Senator WHITEHOUSE. This is the Medicare piece of information? 

Mr. BLUM. Correct. 

Senator WHITEHOUSE. Does Medicaid track the same way, to 

your knowledge? 

Mr. BLUM. I believe that we see similar variation with States in 

cost on a per capita basis. Be careful to make the same comparisons to the chart you are showing. That is a fee for service chart 

and our benefits are consistent throughout the country in a fee for 
14 

service Medicare context. States have flexibility to provide benefits, 

but there is variation in State spending by State Medicaid programs. 

Senator WHITEHOUSE. So since Medicare is a standard program, 

by and large, with the Medicare Advantage program kind of set 

aside within it, how do you pursue—and let me add another caveat. 

So often health care reform at the delivery system level is a community effort. 

Mr. BLUM. Correct. 

Senator WHITEHOUSE. It is the doctors getting together with the 

hospitals, getting together with the insurance companies, getting 

together with the business community saying, ‘‘We’ve got to do 

something different there,’’ and getting to work on that. 

So how is it that you can use Medicare to try to get a State to 

step up? What are the ways that you can bring attention to Louisiana, Texas, California, Florida, New Jersey, Oklahoma, Mississippi, some of the real high cost low-performers when what you 

have to offer is a standard national benefit? 

Mr. BLUM. I think you need to look at each State, and the particular reasons why it is on the chart relative to where it is to the 

chart you presented. And I think an important consideration to 

keep in mind is while there is variation between States, there is 

as much variation within States. Meaning even in the low-cost 

States that you present, that you can see tremendous variation in 

use and spending by physicians, by hospitals. Even in the most efficient delivery systems, there is still variation within the care that 

is provided. 

I think, first and foremost is that we need to tie payment to the 

quality, not by State, not by hospital, by the individual service that 

is being provided given both the variation between States, but also 

the variation within States. 

Some of the spending difference that you present is due to fraud, 

and we need to have very strong strategies in some of the high-cost 

spending States that are driven by fraud and abuse. A lot of the 

very—— 

Senator WHITEHOUSE. Fraud varies dramatically by region as 

well, does it not? 

Mr. BLUM. Absolutely. A lot of the spending variation comes not 

from hospital care/physician care, but in post-acute care services: 

home health, durable medical equipment, skilled nursing facility 

stays need to have strategies that just don’t focus on the hospital 

care/physician care, but all the care that follows the patient once 

he or she leaves the hospital. But no one strategy, no one intervention will address that. We need to think of a wide variety and a 

wide mix, and—— 

Senator WHITEHOUSE. And is the affordable care organizations 

the primary vehicle for correlating from the national program down 

to the individual patient? 

Mr. BLUM. The Accountable Care Organization program that we 

are implementing that Congress authorized is but one strategy. We 

need to look at payment reform. We need to make sure that payment is tied to the value, not the volume of services. We need to 

have very strong fraud and abuse controls. 
15 

But I agree. For too long, the Medicare program has had a payand-chase mentality. That has changed within CMS. We are now 

being much more sophisticated and smart to how we think about 

data to stop fraud before it happens. 

Senator WHITEHOUSE. And too, my time is wrapped up, but just 

to Senator Kirk’s observation earlier that in the last round, it took 

8 months for questions for the record from Senators to get a response from CMS. We have had a discussion about this with your 

staff, and we have been informed that we will have as quick turnaround as your administrative process permits. I know it has to be 

cleared through OMB and things like that, but that we won’t see 

those kind of delays for two FRs for this hearing. Is that a correct 

understanding? 

Mr. BLUM. We will do our best to be as responsive as possible, 

and I will make sure that we are very responsive to the questions 

that come to us. 

Senator WHITEHOUSE. I appreciate that. 

Senator Kirk. 

Senator KIRK. Thank you. I just have three questions real quick. 

Will the CMS Office of the Actuary certify the estimates of expected savings from one of the new delivery system demonstrations? 

Mr. BLUM. Sorry, for which one? I am sorry, Senator. 

Senator KIRK. Let me repeat. Will your Office of Actuary certify 

the estimates of expected savings for one of the new delivery system demonstrations? 

Mr. BLUM. What the law requires the Office of the Actuary is 

that before any delivery reform can be expanded nationwide, a bundled payment, an ACO pilot test that the Actuary has to certify 

that it is budget neutral. To expand demonstrations are decisioned 

by the Secretary, but in order to take a pilot and expand it, the 

Office of the Actuary has to certify that it is at least budget neutral. 

Senator KIRK. So that is a yes. 

Mr. BLUM. I think it depends on kind of the situation. That it 

depends on whether or not—— 

Senator KIRK. Let me go through it again, now that you have 

given us the long wash. Will the CMS Office of the Actuary certify 

the estimates of expected savings in one of the delivery system 

methodologies? 

Mr. BLUM. I think the answer—I think the issue that you are 

probably going to is the Partnership for Patients where the Administration made estimates for what could be possible if certain outcomes are achieved. We have very high goals that can reduce preventable hospital re-admission—— 

Senator KIRK. I am kind of going for a yes or no here. 

Mr. BLUM. I think it depends. It depends. 

Senator KIRK. So you won’t back up your estimates with an actuary? 

Mr. BLUM. What our actuaries have said in correspondence to 

Senator Enzi is if we can achieve dramatic reductions in—— 

Senator KIRK. I am actually asking not what you think you can 

do. I am asking: are you going to direct the actuary to do this or 

not? 
16 

Mr. BLUM. The actuary is independent. They don’t serve 

from—— 

Senator KIRK. Are you going to ask them to do it? 

Mr. BLUM. What we have shared with the Actuary’s Office—— 

Senator KIRK. It is kind of a yes or no. You kind of want me to 

think maybe you are going to go with yes. Be a good answer, I’d 

recommend. 

Mr. BLUM. What the current baseline that the actuaries produce 

don’t include the savings that you cite. But they are not being double counted, but they are illustrations to what is possible. 

Senator KIRK. So we really shouldn’t trust what you say because 

you are not willing to back it up or even ask the actuary to do this. 

Mr. BLUM. What I am saying is that if we can achieve a—— 

Senator KIRK. I mean, we are talking about tens of billions of 

dollars here. You already waste $60 billion a year, according to 

your own estimate. So if you are going to make a big change like 

Partnership for Patients, don’t you think because the Government 

is already out of money, you might want to check with an actuary 

and report back to the Congress? 

Mr. BLUM. I think what we’re saying is that we have—— 

Senator KIRK. Wouldn’t it be kind of malpractice if you didn’t? 

Mr. BLUM. I don’t agree with that statement, Senator. 

Senator KIRK. So you don’t think you need to check with an actuary on this? 

Mr. BLUM. The Office of the Actuary produces—— 

Senator KIRK. No, I am not talking about the Office, I am talking 

about you, personally, Mr. Blum. Are you going to write a letter to 

the actuary saying, ‘‘I just got grilled in the Senate and perhaps 

we need to know how much this thing costs according to you,’’? 

Mr. BLUM. I stand by the estimates that are in our testimony 

and—— 

Senator KIRK. No, but you didn’t make the estimates. I mean, 

the actuary is saying to us, ‘‘I don’t have a back up for this.’’ 

Mr. BLUM. What I think the actuary—— 

Senator KIRK. Which means we shouldn’t believe what you say, 

and you are not even willing to send a letter to the actuary asking 

for them to back you up. 

Mr. BLUM. What I am saying is—— 

Senator KIRK. The correct answer is, ‘‘Senator, yes. I am willing 

to send a letter to the actuary asking for this.’’ 

Mr. BLUM. I am willing to consult with our actuary’s office regarding the estimates in the testimony, but I stand behind the—— 

Senator KIRK. Will you share the letter that you send to them 

asking for the back up so that we can see that you have requested 

an actuary estimate of the Partnership for Patients? 

Mr. BLUM. I am now committed to sending a letter, but I—— 

Senator KIRK. How about yes or no? Will you commit to this committee that you will get the actuary to look at your savings estimates for the Partnership for Patients? 

Mr. BLUM. We have shared our estimates with the Actuary’s Office. What they have told us—— 

Senator KIRK. But you will not even do that. You are talking 

about tens of billions of dollars of a government that doesn’t have 

enough money, and you are not willing to do that. 
17 

Mr. BLUM. I think what we are saying is that there are tremendous potential savings to be had if we can achieve—— 

Senator KIRK. But you are not willing to have an actuary back 

it up. 

Mr. BLUM. I think what the actuaries have said is that if we can 

achieve that outcome—— 

Senator KIRK. I can read you what the actuary told Senator Enzi, 

which is why I am hoping you are going to use this opportunity, 

now the fourth opportunity I have given you to say, ‘‘Yes, Senator. 

I am going to go back and I am going to check with the actuary 

and ask him for a formal estimate of the savings that I have 

claimed but they won’t back up.’’ 

Mr. BLUM. I will consult with the Actuary’s Office and—— 

Senator KIRK. Look. So you will send a letter to the actuary asking for an estimate and you will share that with the committee because tens of billions of dollars of taxpayer money depends on this. 

Mr. BLUM. Senator, with all due respect, I cannot commit to 

sending a letter—— 

Senator KIRK. No. Not that you cannot, that you will not commit. 

Mr. BLUM. OK. 

Senator KIRK. That’s kind of sad. Mr. Chairman, over to you. 

Senator WHITEHOUSE. We have 3 minutes left on the vote, so the 

hearing will stand in recess, subject to the call of the chair. 

Thank you, Mr. Blum, for your testimony. 

[Recessed.] 

Senator WHITEHOUSE [resuming the chair]. All right. The hearing will come back to order, after that unfortunate delay. I apologize to all of the witnesses, if we could take our seats. So welcome, 

Senator Franken, to the continued proceedings. Please, if the witnesses could take their seats. 

Thank you all for being here. This is really unfortunate about the 

timing here, but I appreciate so much the work that you all have 

done. 

We are going to begin with Chris Koller, who is Rhode Island’s 

Health Insurance Commissioner. It is a somewhat unique role, but 

Chris has done an exemplary job in it, and the office is now nationally recognized for its rate review process and its efforts, through 

that rate review process, to promote delivery system transformation. 

The office is also the State’s co-lead in planning for our health 

insurance exchange, which is an important piece of work. He is an 

adjunct professor of community health in the program in public 

health at Brown University. 

He is a member of the Institute of Medicine’s committee on essential health benefits. He serves in numerous national and State 

health policy advisory capacities. And prior to his current position, 

was the CEO of our neighborhood health plan in Rhode Island, and 

I welcome him. 

Mr. Koller, please proceed with your testimony. 
18 

STATEMENT OF CHRISTOPHER F. KOLLER, COMMISSIONER, 

OFFICE OF THE HEALTH INSURANCE COMMISSIONER, 

PROVIDENCE, RI 

Mr. KOLLER. Thank you very much, and thank you, members of 

the committee. 

I appreciate the opportunity to address you on this important 

topic. I want to take the opportunity to particularly thank Senator 

Whitehouse for his lead on this area, and also acknowledge the 

work of Senator Reed, who was a former member of this committee. We are privileged to have them as our servants. 

I want to cover three topics today regarding delivery system reform, the role of the health insurance commissioner, what work we 

are doing, and what some of our lessons have been. 

The office was established by law in 2004. It focuses specifically 

on commercial health insurance and it was established, in part, in 

recognition of the fundamentally different nature of health insurance from other types of insurance. I am the only health insurance 

commissioner in the country and I would call to note particularly 

the basis for our work is a couple of different statutory charges 

that we have. 

In addition to guarding the solvency of insurers and protecting 

the interests of consumers, my office is charged with ensuring the 

fair treatment of providers and seeing the health care system as a 

whole in directing insurers toward the policies that improve affordability. That has led us to use our capacities under rate review in 

very comprehensive ways to focus on delivery system reform. 

Specifically, our rate review system is comprehensive, it covers 

both small and large group products. It looks at rate factors, the 

underlying cost drivers, not just product prices, and it is simultaneous for all carriers, public and transparent. So we can get a picture of what really the system costs are in Rhode Island and what 

is driving them. For instance, what hospital price increases are, 

and what might be the reasons why, in our case, hospital price increases are going up at 7 or 8 percent while inpatient utilization 

is only at a point. 

So given this, we identified three facts coming out of this. That 

medical care costs are about 85 percent typical insurance premiums. That insurance, like Medicare, is looking at 8 to 10 percent 

annually, so the cost pressures are not unique to Medicare. We’ve 

talked about that before. 

And then insurers have limited tools to change those trends 

given the prevailing fee for service system, provide us with market 

powers who resist insurance changes, fragmented providers, and 

patients who have no incentives to choose better performing systems of care. 

With the help of my advisory council, a statutorily charged group 

of employers and providers, we developed four standards, or actions, that must be taken by commercial insurers in Rhode Island 

as a condition of receiving rates. These affordability standards represent the chance to take the theory of delivery system reform and 

put it into practice. 

So these four affordability standards in Rhode Island consist of— 

No. 1, health insurers must increase the portion of their medical 
19 

expenses going to primary care by 1 percentage a point for the next 

5 years. 

Primary care is the only part of our medical care system where 

the more we have, the lower our costs, and the better our community’s health. This is two-thirds of Dr. Berwick’s triple aim. But nationally, we only spend about 7 percent of our medical care on primary care. So why is that? The answer has to do with how Medicare sets rates and who has economic power in private contract negotiations. 

In Rhode Island, we set about to change these forces by telling 

insurers they have to invest in primary care on behalf of the community. 

Three years later into this experiment, we are seeing the results. 

Money is being spent on things like establishing patient center 

medical homes, and primary care doctors in Rhode Island are 

happier and better able to recruit, and to come here and work. We 

want to make Rhode Island the best place for primary care in the 

country. 

Our second affordability standard deals with health insurer support for the all-payer patient center medical home project. These 

are well publicized attempts to define what constitutes high-quality 

primary care capable of coordinating care for our most chronically 

ill patients. 

This is hard work, but it can be done. And it must come from 

insurer payments, and it must be coordinated to pay for the same 

things. Providers do not like being jerked around in different directions by conflicting demands and different carriers. 

So our all-payer initiative is 6 years old. It touches 70,000 patients and we have documented significant improvements in the 

quality of care provided, improved utilization, and a cadre of primary care leaders. Only possible because all of our insurers are 

asking the same thing of our primary care providers. 

The third standard has to deal with health plan investment, and 

health information technology, building on the significant Federal 

investments that have been made in general and in Rhode Island 

in particular, health plans are required to support that with their 

own money so that they are not freeloading on Medicare’s investment. 

And then the fourth and final affordability standard addresses 

hospital payment reform. We have not significant hospital payment 

reform in this State for various reasons, and we use the authority 

of the office to dictate six different conditions which must be included in hospital contracts with health plans. 

Specifically, we limit the rates of increase such as health—that 

hospitals can get from health insurers. We demand quality incentives to allow them to earn additional money. We require efficiencybased units of service, such as diagnosis-related groups or any of 

the proposed Medicare innovations. And we ask for standards related to administrative simplicity to transfers of care, and to public 

transparency of the information. 

A year into this, in spite of the fact that my office got sued for 

putting this forward, our ability to do it was upheld, and we are 

seeing those payment reforms being implemented by the insurers 

in their contracts with hospitals. 
20 

So what have we learned from this? I want to point to three lessons that I think are important for anyone who is taking on this 

work of delivery system reform. 

Mr. WHITEHOUSE. Mr. Koller, if you could summarize them fairly 

quickly. 

Mr. KOLLER. Sure. First is that delivery system reform must 

make primary care infrastructure a priority. Second, this will not 

happen without public oversight. And third, this must be coordinated across payers. We simply have too many payers to make this 

work across different providers. 

The implications for Congress? I think we have to make primary 

care a priority. We have to support Medicare payment innovation. 

We have to support multitier alignment. And we have to create incentives for patients to select high-value delivery systems. I think 

we have those opportunities in the Affordable Care Act. They bring 

good tools for the States to work with, and we continue to do that 

work in Rhode Island. Thank you. 

[The prepared statement of Mr. Koller follows:] 

PREPARED STATEMENT OF CHRISTOPHER F. KOLLER

SUMMARY

THE ROLE OF THE OFFICE OF THE HEALTH INSURANCE COMMISSIONER

The Office of the Health Insurance Commissioner was established by law in 2004 

in response to concerns about the behavior of Rhode Island health insurers and in 

recognition of the fundamentally different nature of health insurance from any other 

type of insurance. Statutorily, the Office is responsible for guarding the solvency of 

insurers, protecting the interests of consumers, assuring fair treatment of providers, 

and improving the affordability, accessibility and quality of the health care system. 

CURRENT WORK ON DELIVERY SYSTEM REFORM IN RI

Delivery system reform is essential to slowing the rate of health insurance premium increases. The Office’s primary tool for this work has been its annual rate 

review process, which has three components: 

1. It is comprehensive and covers small group and large group business for all 

carriers; 

2. It examines rate factors rather than product prices; and 

3. It is simultaneous for all carriers, public, and transparent. 

However, rate review alone will not reduce the rate of increase in commercial 

health insurance premiums. In order to address medical cost trends in the delivery 

system, the Office’s Health Insurance Advisory Council identified four Affordability 

Standards—expectations for health plan conduct as a condition of having rates approved. These Standards are: 

1. Increasing the portion of medical expenses going to primary care by 1 percentage point a year for 5 years; 

2. Health insurer support of RI’s all-payer, patient-centered medical home project; 

3. Health plan investment in and support for health information technology; and 

4. Hospital payment reform as demonstrated through six conditions to be included 

by insurers in their contracts with hospitals. 

LESSONS LEARNED AND FUTURE DIRECTION

Two years since the implementation of these Affordability Standards, health insurers are implementing these changes and delivery system reform is happening in 

Rhode Island—primary care is being revitalized, our IT infrastructure is being built 

and hospital contracts are changing. There remain obstacles to overcome: health insurance premiums continue to rise, evaluation and measurement efforts are incomplete, and interagency coordination can be improved. To date, the following lessons 

have been learned: 

• Delivery system reform must make primary care infrastructure development its 

first priority; 
21 

• Delivery system reform will not happen without public oversight; and 

• Delivery system reform must be coordinated across payers. 

In addition to the significant Federal investments being made in information technology, Congress can take the following actions to encourage further delivery system 

reform: 

• Make primary care a systematic priority—in loan forgiveness and education, 

Medicare payments, health services research and NIH funding, and HRSA budgets. 

• Support Medicare payment innovation in the ACA. 

• Support multi-payer alignment at the State and national level. 

• Create incentives for patients to select high-value delivery systems. 

Despite the significant challenges that the U.S. multi-payer system presents, the 

work being accomplished in Rhode Island demonstrates that delivery system reform 

is necessary for lower rates of increase in our premiums. And it is possible. 

Members of the committee, thank you for the opportunity to address you on this 

important topic. Thank you especially to Rhode Island’s Senate Delegation—Senators Reed and Whitehouse. Senator Reed, formerly a member of this committee, 

is a strong advocate for preserving and enhancing insurance coverage, and Senator 

Whitehouse has immersed himself in the critical topic we are discussing today. Both 

are committed public servants. Rhode Island is fortunate and privileged to be represented by them. 

In my address today, I want to cover three topics related to medical care delivery 

system reform: the role of the Office of Health Insurance Commissioner, our work 

on delivery system reform, and what some of our lessons learned have been. 

The Office of the Health Insurance Commissioner was established by law in 2004 

in response to concerns about the behavior of Rhode Island health insurers, and a 

recognition of the fundamentally different nature of health insurance from any other 

type of insurance. I have occupied the position since it was first filled in 2005. I 

am the only Health Insurance Commissioner in the country. Central to the Office 

are its statutory duties, which form the legal basis for our work. In addition to the 

customary insurance regulator responsibilities of guarding the solvency of insurers 

and protecting the interests of consumers are two broader and critical duties: 

• To assure fair treatment of providers; and 

• To see the Rhode Island’s healthcare system as a whole and to direct insurers 

toward policies which improve the affordability, accessibility and quality of the system. 

Although there is little statutory direction behind those stated duties, our actions 

in payment reform are firmly grounded in these standards. 

The Office’s primary tool for this work has been the annual review of rates of commercial insurers in the State. There are three components to that review: 

• It is comprehensive—covering small group and large group business for all carriers—and prospective—rates must be approved before being used. 

• It examines rate factors, not product prices. By rate factors we mean the carriers’ estimated inflation rates for price and utilization for five medical service categories—hospital inpatient, hospital outpatient, primary care, pharmacy and all 

other medical. In addition, we look at their estimated administrative costs and projected profits. 

• It is simultaneous for all carriers, public, and transparent. As a result, we can 

both educate the public about what is driving the increases in their health insurance premiums (documenting, for instance, last year’s attributed inpatient price increases of about 7 percent, while utilization was almost flat) and query carriers 

about significant variations between them in inflation rates and administrative 

costs. 

Rate review forms the basis for our systemic delivery system reform efforts. Specifically, after several years of this work, it became apparent to the Office’s Health 

Insurance Advisory Council, a statutorily charged group of employers, consumers 

and providers who advise the Office, that rate review alone would not reduce the 

rate of increase in commercial health insurance premiums; that the true costs were 

in the delivery system and insurers would need direction and coordination in this 

work. 

Specifically: transparent, comprehensive rate factor review highlighted that: 

• Medical costs constitute about 85 percent of the typical insurance premium. 

• Insurers were predicting medical cost increases of 8 to 10 percent annually, 

driven by increases in both price and utilization of services; and 
22 

• Insurers have limited tools to change those trends—given the prevailing fee for 

service payment system, medical providers with market power to resist insurer 

changes, fragmented providers who cannot coordinate care well, and patients who 

have no incentives to choose better performing systems of care. 

Given these facts, the Advisory Council then worked to identify four Affordability 

Standards—actions which must be taken by any commercial insurer in Rhode Island 

as a condition of receiving rates. In brief, these Standards consist of: 

1. Health insurers must increase the portion of their medical expenses 

going to primary care by 1 percentage point a year for 5 years. 

Primary care is the only part of our medical care system where the more we have, 

the lower our population costs and better a community’s health (two thirds of Dr. 

Berwick’s triple aim). But nationally we only spend about 7 percent of our medical 

expenses on it. Why is this? The answer has to do with how Medicare sets rates 

and who has economic power in private contract negotiations. We did not like that 

answer in Rhode Island and so we have set about to change it by telling health 

plans they must invest in primary care on behalf of the community. We are seeing 

the results 2 years later—the money is being spent on things like establishing 

patient-centered medical homes and primary care docs in Rhode Island are happier 

and better able to recruit peers to come here and work. 

2. Standard No. 2 deals with health insurer support of our all-payer, 

patient-centered medical home project. 

Patient-centered medical homes are a well-publicized attempt to define what constitutes high-quality primary care, capable of coordinating the care of our most expensive chronically ill patients. They work, but take money and time to be built. 

The money must come from insurer payments and must be coordinated to pay for 

the same things—providers hate being jerked in different directions by the conflicting demands of different carriers. Rhode Island’s Chronic Care Sustainability 

Initiative is 6 years old and touches 70,000 patients. We have documented significant improvements in the quality of care provided, have signs of improved utilization experience and built a cadre of primary care leaders. 

3. The third affordability standard coordinates health plan investment in 

and support for health information technology. 

Under the leadership of the Rhode Island Quality Institute and Senator Whitehouse, Rhode Island has used Federal ARRA money to make significant investments 

in Electronic Health Records adoption, a Health Information Exchange and—as a 

Beacon community—implementation of this work to improve the quality of care delivered. This Affordability Standard makes sure that your initial Federal investments in Rhode Island are matched and followed up by private insurer money as 

well, so we sustain this critical work. 

4. The final Affordability Standard addressed hospital payment reform. 

Work by my Office has documented private insurer payment variations of 100 percent to different hospitals for the same services. This difference appears to be driven 

only by hospital size and negotiating power. In addition, there is a marked gap between the theory of hospital payment reform and the practice in Rhode Island—with 

most payments occurring on a fee for service basis with little or no quality incentives. Given insurer inability or unwillingness to implement hospital payment reform, OHIC set forth six conditions which must be included in future health plan 

contracts with hospitals. These included limiting price increases to Medicare CPI, 

installing quality incentives, and facilitating efficiency-based payments such as Diagnosis Related Groups. One year in, and it appears insurers and hospitals are 

adopting these standards, and a recent court ruling upheld the Office’s ability to 

change health plan contract terms with hospitals. 

This is just a brief summary of the Office’s attempts to promote delivery system 

reform. And we make no claims of success, yet. Our premiums still continue to 

climb. Our evaluation and measurement efforts are incomplete. Our interagency coordination could be better. But I would offer these lessons from our work to date. 

1. Delivery system reform must make primary care infrastructure development its first priority. 

Every high performing health system in the world has a fundamental commitment to primary care and puts their money in this direction. The United States does 

not. Delivery system reform of course must extend beyond this, but at the core of 

integrated, accountable delivery systems must be primary care. 

Primary care is also the link or ‘‘hinge’’ to public health and the personal behaviors, which constitute a far greater driver of community health and community costs 

than the medical delivery system. 
23 

2. Delivery System Reform will not happen without public oversight. 

Commercial insurance rate review is a good start for this oversight but is not sufficient. We have to make it in the economic interests of providers to change behaviors. In Rhode Island, I had to survive a court suit to nullify a contract term between a market-dominant hospital and a local insurer, which would have explicitly 

shifted all self-determined losses for Medicaid and Medicare back to the insurer and 

commercial rate payers. This term was only possible because of the hospital’s market dominance. 

We must change the rules of success for providers, while respecting how difficult 

it is for large institutions to change. This is not merely about government price controls, but using government authority to promote new provider payment methods— 

such as bundled payments and carefully monitored capitation—that change the success rules and encourage providers to coordinate high-quality care together, not just 

produce more volume alone. 

3. Delivery system reform efforts must be coordinated across payers. 

An iron law of commerce is that behavior follows reimbursement. But in Rhode 

Island and elsewhere, commercial health insurance only constitutes 20 percent of 

the population and money in the system—Medicaid and Medicare—are worth 50 

percent, self-insured are worth 20 percent and the uninsured another 10 percent. 

As a result, in almost all instances, no payer by itself has enough economic influence to change provider behavior and promote delivery system reform and such efforts must be coordinated across payers. This is hard work, and involves changing 

contracting culture and providing antitrust protection. It also means coordinating 

with Medicare—no easy task. In Rhode Island, we are proud that our all-payer medical home effort has been selected by CMS to participate in the Medicare Advanced 

Primary Care Practice (MAPCP) demonstration project, and encourage expansion of 

this work. We are also looking for ways to coordinate commercial hospital contracting with the upcoming Medicare payment changes. 

Finally, based on these lessons, what are some actions Congress could take to encourage further delivery system reform? I offer four areas, all of which build on the 

significant Federal investments being made in information technology: 

1. Make primary care a systematic priority—in loan forgiveness and education, in 

Medicare payments, in health services research and NIH funding, in HRSA budgets. 

Our budgets are our values statements and the Federal Government does not value 

primary care. 

2. Support Medicare payment innovation. Although not directly in this committee’s jurisdiction, Medicare is a powerful force in delivery system reform. The ACA 

has numerous payment innovations and sets up structures for more. IPAB must be 

protected and the Center for Medicare and Medicaid Innovation encouraged, funded 

and allowed to put forth projects with long payoff estimates. 

3. Support multipayer alignment. 

• CMS must be directed to coordinate its efforts better across Medicaid and 

Medicare. 

• More directly in this committee’s responsibilities, States should be encouraged 

to expand rate review efforts to align commercial insurers with public payers. Finally, almost 30 percent of RI’s population is enrolled in self-insured plans, which 

can exempt themselves from all-payer efforts. The ERISA pre-emption clause is a 

major barrier to delivery system reform. 

4. Create incentives for patients to select high-value delivery systems. Because the 

costs of health insurance are subsidized by employers and the Government, individuals do not pay the full costs of wide provider choice, and undervalue the efficiencies 

and effectiveness of integrated delivery systems. Developing and standardizing effectiveness measures using resources such as the new Patient-Centered Outcome Research Institute, equalizing tax policies for health benefits, promoting individual 

purchase on exchanges, and designing Medicaid, Medicare and FEHBP benefits that 

promote price sensitivity will all create these incentives. 

Since we pay for technical procedures and specialists, we should not be surprised 

that we get a lot of volume and specialty care, and less value than other countries. 

The U.S. multipayer system makes it hard to change, but our work in Rhode Island 

shows that it can be done. Innovating States need the help of Congress in these efforts. 

Thank you again for the chance to address the committee. I look forward to answering your questions. 

Senator WHITEHOUSE. Thank you, Commissioner. 
24 

The next witness is Dr. Gary Kaplan, who has served as the 

chairman and CEO of the Virginia Mason Health System since 

2000. Virginia Mason is based in Seattle, WA, home State of our 

fellow HELP Committee Senator, Patty Murray, who sends her regards. 

Virginia Mason is one of the first health systems to transform 

health care using the principles of the Toyota production system, 

and it is a recognized national leader in reducing costs and increasing efficiency while improving the patient experience. 

Dr. Kaplan is a founding member of Health CEOs for Health Reform, and he practices internal medicine at Virginia Mason. He has 

been recognized nationally for his health care leadership, receiving 

awards from the National Quality Forum and the Joint Commission, as well as the medical group Management Association of the 

American College of Medical Practice Executives. We are delighted 

to have him here. 

Please proceed, Dr. Kaplan. 

STATEMENT OF GARY KAPLAN, M.D., FACP, FACMPE, FACPE, 

CHAIRMAN AND CEO, VIRGINIA MASON MEDICAL CENTER, 

SEATTLE, WA 

Dr. KAPLAN. Thanks very much. 

Good afternoon, Senator Whitehouse, Senator Franken, and 

members of the committee. I want to thank you for the opportunity 

to present the work of the Virginia Mason Health System, and our 

efforts to transform health care delivery. I hope this, my comments 

and our testimony, helps develop an understanding of what is truly 

possible. 

Founded in 1920, Virginia Mason combines a primary and specialty care group practice of nearly 500 physicians with a 336-bed 

acute care hospital. We also operate eight clinics in the Puget 

Sound region. In addition to my duties as chairman and CEO, I 

continue to practice internal medicine, although perhaps not as 

much as I used to. 

I am a product of American medicine and I am very proud of 

American health care. We produce some of the world’s best health 

care in spite of a fragmented financially unsustainable health care 

system. 

Although Virginia Mason has a longstanding reputation for innovation and clinical excellence, but our journey to design a better 

system of care actually began just over 10 years ago. It was 

prompted by a simple question from our board. Community leaders 

from companies like Microsoft, Starbucks, Boeing, they asked us, 

‘‘Who is your customer?’’ And of course, our immediate response, 

just like everybody in health care was, ‘‘Our patients.’’ But upon 

further reflection and challenge by our board, we realized that our 

systems were not designed for the safety and convenience of our 

patients, but based on the preferences of providers. 

An example would be waiting rooms, where patients hurry up to 

be on time, and then they wait for us. We build that into our facilities. They have really been designed around us. So we got very 

clear. 

And as you can see in this first poster here, this is our strategic 

plan. This was developed under the leadership of our board of di-
25 

rectors, and really is an iconic graphic depiction of our plan. All of 

the elements of this plan support Virginia Mason’s patients, who 

are at the top of the pyramid. The last decade has been about truly 

understanding what it means to put our patients first. 

Also in 2001, we realized that we would not transform health 

care unless we challenged the deep assumptions held by physicians 

in our organization. And so, we put our Physician Compact together, codifying and aligning expectations, what every physician 

had every right to expect from our physicians, and what our physicians had every right to expect from our organization. 

Our cultural transformation had begun, but we knew we needed 

a management method that supported high quality, safe care at a 

sustainable cost. And in our quest, we looked at other hospitals and 

institutions around the United States, and we didn’t find a management system that we believe would help us execute on this 

plan. 

Soon we discovered from our colleagues just down the street at 

the Boeing company what they have been doing with the Toyota 

production system over the past decade, taking the 737 construction from 22 days to 10 days. And in the process, improving quality, creating a safer product, and reducing the costs of production. 

We adopted their methods and we adapted it to health care in 

what we call the Virginia Mason Production System. By using the 

tools and methods of this system, we have seen tremendous benefits for our patients, our staff, and our organization. Through this 

work, we have demonstrated that the path to higher quality, safer 

care is the same path to lower costs. 

Since adopting the Virginia Mason Production System, we have 

saved millions of dollars in planned capital investment, we have 

dramatically reduced inventory costs, staff walking to some patient 

waiting, overtime labor costs. 

We have also reduced professional liability costs in a State with 

no tort reform, our liability premiums were reduced by 56 percent, 

and our self-insured retention funds have been reduced over the 

past 7 years by 70 percent. 

Because of our management system, we were able to find and fix 

problems before they translate into defects for our patients. We 

have, what we call, the Patient Safety Alert System, where every 

staff member is expected to be a safety inspector and stop the line, 

just like they do at Toyota. If a patient is at-risk, an investigation 

is launched immediately, not retrospectively. Since beginning the 

program, we have had over 20,000 PSAs, Patient Safety Alerts. I 

wish we had 30,000. 

We are pleased that last year when, as a result of our improvement efforts, the Leapfrog Group, which represents employers 

across the country, named Virginia Mason as one of the top two 

hospitals of the decade. What this shows here on the X-axis is the 

quality score; on the vertical axis, stewardship of resources or 

costs. We are the dot in the upper right quadrant. That shows you 

that it is possible to improve quality and be wise stewards of resources. 

We know that we can make these improvements, but just doing 

it on our own, we are going to sub-optimize in terms of our national 

delivery system. We need to partner with other organizations who 
26 

* Health care is hungry for something truly new—less a fad than a new way to be. We are 

staggering under the burden of too many defects, too much cost, and too much variation in care, 

all described with scientific rigor and social commitment a decade ago in the landmark Institute 

of Medicine reports, To Err is Human (1999) and Crossing the Quality Chasm (2001). Even one 

convincing example of a major health care organization that crossed the chasm might be enough 

to give us both the confidence and the template we need. Transformation, in that regard isn’t 

are proud to join other organizations like Intermountain in a highvalue health care collaborative. 

We believe that the market has a role to play in health care reform, and in 2004, we started working with some of our region’s 

largest companies: Boeing, Starbucks, Costco, Alaska Airlines. In 

the first year of our marketplace collaborative on back pain, we 

saw 2,000 patients and purchasers saved $1.7 million just on back 

pain in little old Seattle. 

As it turned out, the thought was we would lose money because 

the MRIs we eliminated were where we made money on back pain. 

But it turned out we increased throughput, it tripled in the same 

time the costs to deliver care was reduced. 

Right now, we are working with the Intel Corporation in Portland, showing that these methods are transportable to other markets. 

We know that to reach the full potential of these types of strategies requires realigning payment so that reimbursement is determined by value, not volume. We support approaches such as bundled payment, shared risk, capitated payment, and other pay for 

value programs. 

It is a commonly shared belief that the current self-health care 

system is unsustainable, but we do believe that with the passage 

of the Patient Protection Affordable Care Act, we can finally turn 

our attention to a health care financing model that rewards quality 

and stops rewarding quantity in a fragmented system. 

The law includes many provisions that will help us improve care 

delivery. Perhaps the most exciting component of this is the Center 

for Medicare and Medicaid innovation. Through our experience 

with the Virginia Mason Production System, we have demonstrated 

again that the path to better health and better health care is the 

same path to reduce costs. 

I would like to thank you both and other members of the committee, and colleagues on the panel today for your role in reforming 

America’s health care delivery systems. Sound legislation must 

support delivery system reform. That begins in our organizations 

and in our communities. Millions of Americans in our country are 

counting on us. They cannot wait any longer. 

I will be happy to take questions and thank you. 

[The prepared statement of Dr. Kaplan follows:] 

PREPARED STATEMENT OF GARY S. KAPLAN, M.D., FACP, FACMPE, FACPE, 

CHAIRMAN AND CEO, VIRGINIA MASON HEALTH SYSTEM

SUMMARY

ABOUT VIRGINIA MASON* 

Virginia Mason is a nonprofit health care organization founded in Seattle, WA, 

in 1920. An integrated system, Virginia Mason combines a primary and specialty 

care group practice of nearly 500 physicians with a 336-bed acute-care hospital. We 

also operate clinics in eight locations around the Puget Sound area. 
27 

vague at all; it refers to results, unprecedented performance in all important dimensions of care, 

at a cost we can embrace as sustainable. 

Virginia Mason Medical Center (VMMC) is not yet quite that beacon, but it has a better shot 

at becoming one than almost any other large health care organization in America today 

(Kenney, 2011, p. xii).—Donald M. Berwick, M.D., MPP, Administrator of the Centers for Medicare and Medicaid Services. 

ACHIEVING RESULTS WITH THE VIRGINIA MASON PRODUCTION SYSTEM

Virginia Mason’s costs are among the lowest in our market. We recognize skyrocketing cost escalation is a contributor to many of the problems associated with 

our health care system. We have worked hard to decrease our costs and, at the same 

time, increase the quality of care we provide to our patients. Our management 

methodology is based on principles of the Toyota Production System. We utilize the 

Virginia Mason Production System (VMPS) to identify and eliminate wasteful processes. 

VMPS also provides a consistent approach for measuring performance across the 

organization. Virginia Mason teams have achieved significant organizational and departmental improvements since adopting VMPS: 

• Saved $11 million in planned capital investment by using space more efficiently 

and freed an estimated 25,000 square feet of space using better space design. 

• Reduced inventory costs by $2 million through supply chain expense reduction 

and standardization efforts. 

• Reduced staff walking distance by 60 miles per day. 

• Reduced labor expense in overtime and temporary labor by $500,000 in just 1 

year. 

• Reduced professional liability insurance 56 percent from 2004 to 2010. 

• Reduced the time it takes to report lab test results to the patient by more than 

85 percent. 

• Reduced the time from when a patient first calls Virginia Mason’s Breast Clinic 

with a concern to receiving a diagnosis from 21 days to 3 days. Many patients receive their results on the same day. 

Through our experience with the Virginia Mason Production System, we have 

demonstrated that the path to higher quality care is the same path to lower costs. 

THE PATIENT PROTECTION AND AFFORDABLE CARE ACT

The health reform law includes many provisions that will undoubtedly improve 

care delivery including an emphasis on primary care, coordination and innovative 

models of care. 

An example of our experience with higher quality and lower cost in primary care 

is a pilot we began with Boeing in 2007. Virginia Mason worked with Boeing to reduce health care costs for their employees with the most expensive health conditions 

while improving their health status. The new model, intensive primary care, included detailed patient education, personal care plans, intensive and appropriate 

use of case managers, 24/7 phone and email access to providers, and the use of electronic medical records. Additionally, care was coordinated among primary care providers, specialists and the hospital. In partnership with Boeing, Virginia Mason reduced annual per capita claims by nearly 30 percent. 

Virginia Mason’s experience in delivery system improvement is a model 

for health care reform across the Nation. The patients in our communities 

deserve nothing less than high quality, safe care at an affordable cost. 

Good afternoon, Chairman Harkin, Ranking Member Enzi and members of the 

committee. I want to thank you for this opportunity to present the work of Virginia 

Mason Health System and our efforts to transform the delivery of health care. I am 

Dr. Gary Kaplan, chairman and CEO of Virginia Mason Health System in Seattle, 

WA. 

Virginia Mason was founded in 1920. Our founders came from the University of 

Virginia and the Mayo Clinic. Our organization is patterned after the Mayo model, 

combining a primary and specialty care group practice of nearly 500 physicians with 

a 336-bed acute-care hospital. We also operate clinics in eight locations around the 

Puget Sound area. 

In addition to my duties as chairman and CEO, I continue to practice internal 

medicine at Virginia Mason. I am a product of American medicine and I am proud 

of American health care. We produce some of the world’s best health care in spite 

of a fragmented, financially unsustainable health care system. 
28 

REDESIGNING CARE DELIVERY

Virginia Mason has a long-standing reputation for innovation and clinical excellence, but our journey to design a better system of care delivery began just over 10 

years ago. Our cultural transformation was prompted by a simple question from our 

Board, ‘‘Who is your customer?’’ Of course, our immediate response was ‘‘It’s the patient.’’ However, upon reflection we realized that our systems were not designed for 

the safety and convenience of our patients but based on the preferences of our providers and designed around us, the doctors, nurses, technicians, managers and those 

of us working in health care. An example would be waiting rooms where patients 

hurry to be on time and then wait for us! 

In 2001, Virginia Mason leadership developed a new strategic plan, accompanied 

by a graphic representation in the form of a pyramid. All of the elements of the 

plan, as depicted in the pyramid, support Virginia Mason’s patients who are at the 

top of the pyramid, signifying our intention to place our patients first in all we do. 

Also in 2001, Virginia Mason physician leadership developed a physician compact 

detailing the organization’s responsibilities to physicians and each physician’s responsibility to the organization, to each other and to their patients. 

Our cultural transformation had begun but we knew we needed a management 

method that supported high quality, safe care at a sustainable cost. In our quest, 

we looked at what other hospitals were doing—and we looked at the very best out 

there. Yet we didn’t find anything that we believed would truly transform health 

care. 

When we were willing to look at companies outside of the health care industry, 

we discovered that Boeing had adopted the Toyota Production System as their management methodology. They shortened the lead time to make a 737 from 22 days 

to 10 days and we soon found that this methodology is applicable to just about any 

work that involves complex processes and systems. 

So we adapted it to what we call the Virginia Mason Production System (VMPS). 

By using the tools and methods of VMPS, we’ve seen tremendous benefits for our 

patients, our staff and our organization. Patients benefit with greater safety, less 

delay in getting care, more timely results and treatment, and more time with their 

care providers. Our staff members benefit by having less rework and frustration, 

and greater opportunities and more time to care for patients; which, by the way, 

is the reason they chose health care as a profession in the first place. Virginia 
29 

Mason benefits by operating more efficiently, providing higher quality and safer 

care, at a lower cost. 

ACHIEVING RESULTS WITH THE VIRGINIA MASON PRODUCTION SYSTEM

Today, Virginia Mason’s costs are among the lowest in our market. We recognize 

skyrocketing cost escalation is a contributor to many of the problems associated 

with our health care system. We have worked hard to decrease our costs and, at 

the same time, increase the quality of care we provide to our patients. We utilize 

our management methodology to identify and eliminate wasteful processes. 

An example of waste is waiting. Waiting rooms by design are places patients, who 

are on time, go to wait for providers who are running behind schedule. Not only do 

patients wait in the waiting room, they wait in the exam room, they wait for test 

results, they wait for diagnosis and treatment, and they even wait to receive their 

bill. All of that after an initial wait to see the doctor after their appointment has 

been scheduled. 

VMPS also provides a consistent approach for measuring performance across the 

organization. Virginia Mason teams have achieved significant organizational and departmental improvements since adopting VMPS: 

• Saved $11 million in planned capital investment by using space more efficiently 

and freed an estimated 25,000-square feet of space using better space design. 

• Reduced inventory costs by $2 million through supply chain expense reduction 

and standardization efforts. 

• Reduced staff walking distance by 60 miles per day. 

• Reduced labor expense in overtime and temporary labor by $500,000 in just 1 

year. 

• Reduced professional liability insurance 56 percent from 2004 to 2010. 

• Reduced the time it takes to report lab test results to the patient by more than 

85 percent. 

• Improved medication distribution from physician order to availability for administration from 2.5 hours to 10 minutes, and reduced incomplete inpatient medication 

orders from 20 to 40 percent to less than 0.2 percent; both were achieved through 

process improvement and computer physician order entry (CPOE) implementation. 

• Reduced the time from when a patient first calls Virginia Mason’s Breast Clinic with a concern to receiving a diagnosis from 21 days to 3 days. Many patients 

receive their results on the same day. 

RECEIVING EXTERNAL RECOGNITION

Our efforts to provide higher quality, safer care at a lower cost have not gone unnoticed. Late last year, we were named one of two Top Hospitals of the Decade by 

the Leapfrog Group. The Leapfrog Group is a coalition of large employers who came 

together more than 10 years ago with the goal of influencing the quality and cost 

of health care. Today the Leapfrog Group produces the most respected indicator of 

efficiency and effectiveness in hospital care. 

Efficiency is a Leapfrog measure that combines scores for quality and resource 

use. Leapfrog’s 2010 data base contained 1,184 hospitals from 45 States. We know 

that better quality also means higher efficiency. Proving that rapid access to reliable 

systems delivering evidence-based care is less costly for all concerned. 

As this fall 2010 diagram illustrates, Virginia Mason ranks among the top 1 percent of all hospitals measured for both quality and efficiency, according to the Leapfrog Hospital Recognition Program. 
30 

APPLYING PRODUCTION SYSTEM PRINCIPLES TO FACILITY DESIGN

Another example of our success with adopting production system principles to 

health care is our new Emergency Department at our downtown Seattle location, 

which opened for the first time last week. 

People typically come to emergency rooms because they are acutely ill. Making 

them wait just makes them sicker. We used the Virginia Mason Production System 

to design the ideal process and flows so we can efficiently move our patients from 

arrival to assessment, treatment and either discharge or admission to the hospital. 

Then, using a 3P process (Production Preparation Process), we brought together the 

construction team, the architects, our doctors and nurses, paramedics and most importantly our patients, to design the ideal physical facility to support that flow. This 

inclusive process revealed that a large waiting room is unnecessary. 

A key to the efficiency of the new ED is the addition of what Virginia Mason calls 

the PACE unit—which stands for Patient Accelerated Care Environment. In most 

EDs, patients who are not acutely ill, but cannot be immediately discharged or admitted, are cared for in the ED as ‘‘observation’’ patients. 

At Virginia Mason, those patients are moved to the adjacent PACE unit, where 

they receive individualized care to efficiently move them toward either discharge or 

inpatient admission. This not only provides better care for the patient, but removes 

the bottleneck from the ED and makes those resources available for more acutely 

ill patients who might otherwise be forced to wait. 

As you may know, hospitals all over the country are spending millions of dollars 

to build huge emergency departments to cope with the rising demand for care—instead of putting resources into figuring out how to deliver the care that people need 

more efficiently. 

Through the application of production system principles and the broad participation from all of those involved in patient care, we built a unique facility. We rethought everything—from how to eliminate waiting to the way people, information 

and supplies move through the building. I genuinely believe the care we provide in 

this emergency department will be a model for the entire Nation. 
31 

PARTNERING TO DELIVER GREATER VALUE

We know that we can make many improvements on our own, but to transform 

our Nation’s health care delivery system, we need to partner with like-minded organizations. 

We are working with health care organizations that share our vision of a valuedriven system. In December 2010, Cleveland Clinic, Dartmouth-Hitchcock, Denver 

Health, Intermountain Healthcare, Mayo Clinic, and The Dartmouth Institute for 

Health Policy and Clinical Practice announced the formation of the High Value 

Healthcare Collaborative (HVHC) with the goal of improving care, lowering costs 

and sharing best practices nationally. On June 1, eight major health systems, including Virginia Mason, joined the Collaborative. 

The medical groups will share data on outcomes and clinical protocols for selected 

conditions and treatments to arrive at optimal care models, which can then be implemented by many other health care systems. The Collaborative aims to see these 

best practices replicated across the country. 

Currently, the HVHC is working together in nine areas that have wide variation 

in rates, costs and outcomes. These are total knee replacement, diabetes, asthma, 

hip surgery, heart failure, perinatal care, depression, spine surgery and weight loss 

surgery. In the future, the HVHC will expand their focus to additional high variation, high-cost conditions affecting diverse populations. The HVHC will determine 

best practices for delivering care for these conditions and will rapidly disseminate 

actionable recommendations to providers and health systems across the United 

States (Adams & Kimbell, 2011). We are hopeful that this work will ultimately be 

used by the Centers for Medicare and Medicaid Services to set Medicare payment 

rates. 

COLLABORATING WITH THE MARKETPLACE

We also believe that the market has a place in driving health care reform. In 

2004, we began working with some of our region’s largest employers. Through that 

collaboration, we improved patient satisfaction and provided care more quickly and 

cost-effectively, all while realizing ever-better medical outcomes. We started working 

with employer and health plan representatives forming Marketplace Collaboratives 

to identify and align our interests, with the goal of reducing variation in quality and 

access. 

We began by identifying the highest cost conditions; we developed quality measures, relied on evidence-based care and utilized VMPS. The collaborative developed 

five product specifications essentially defining quality from the customer/employer 

perspective: 

• Same-day access; 

• 100 percent patient satisfaction; 

• Evidence-based care; 

• Absence management; and 

• Affordable price for purchasers and providers—reimbursement must be aligned 

with value. 

In the first year of the back pain collaborative, we saw 2,000 patients and purchasers save $1.7 million. The time needed to complete care for back pain was reduced by 67 percent. Course of care went from 66 days to 12 days. We were very 

close to same-day access and increased available patient appointments from 500 to 

2,000. Importantly, patient satisfaction was 98 percent. 

We utilized evidence-based care, which we learned through this process, hadn’t always been the case. Ninety-six percent of Virginia Mason patients required no work 

loss (beyond the time needed to receive care); of those who did miss work they lost 

4.3 work days, compared to 9 work days lost for care delivered by other local providers. 

We committed to doing the right thing, even though in the short term we would 

likely lose money. As it turned out, the margin to Virginia Mason increased because 

throughput quadrupled at the same time the cost to deliver care was reduced. 

We also have value streams, in our marketplace collaborative work with employers, for breast nodules, headache, upper respiratory infection, screening and prevention, and shoulders, knees and hips. Payment for value, not volume, would accelerate this work across the country, allowing patients to receive better care, faster 

and more affordably. 

Working with Intel, we have expanded Marketplace Collaboratives into the Portland, OR area. Intel is collaborating with a payor and providers in Portland to use 

clinical value streams developed at Virginia Mason. Intel’s success is similar to ours 

and demonstrates that this methodology is portable and transferrable. 
32 

To reach the full potential of these types of strategies requires realigning payment 

so that reimbursement is determined by value not volume. Approaches such as bundled payment, shared risk, capitated payment and other pay-for-value programs are 

necessary in order to promote widespread, value-driven care innovations. 

PATIENT PROTECTION AND AFFORDABLE CARE ACT

In March 2010, the Patient Protection and Affordable Care Act, which was passed 

by Congress and signed by President Obama, became law. In addition to much-needed insurance industry reform, it incorporates incentives for delivery system reform. 

We can finally turn our attention from a health care financing model that rewards 

quantity in a fragmented system to one that encourages quality in a coordinated approach. The health reform law includes many provisions that will undoubtedly improve care delivery. 

EMPHASIZING PRIMARY CARE

As a practicing physician, I’ve known for more than three decades that to shift 

the paradigm from a system that treats illness to one that promotes health requires 

a sharp focus on primary care. 

Thankfully, the Patient Protection and Affordable Care Act requires incentive 

payments for primary care providers and reallocation of unused residency positions 

to primary care programs. 

An example of our experience with higher quality and lower cost in primary care 

is a pilot we began with Boeing in 2007. Virginia Mason worked with Boeing to reduce health care costs for their employees with the most expensive health conditions 

while improving their health status. The new model, intensive primary care, included detailed patient education, personal care plans, intensive and appropriate 

use of case managers, 24/7 phone and email access to providers, and the use of electronic medical records. Additionally, care was coordinated among primary care providers, specialists and the hospital. In partnership with Boeing, Virginia Mason reduced annual per capita claims by nearly 30 percent. 

The success of the Boeing project led to the implementation of the Virginia Mason’s Intensive Primary Care program at all of our primary care sites. To appropriately align incentives, contractual arrangements for this expanded program include a per member/per month stipend, a mechanism for shared savings and payment for achievement of quality metrics. 

ENSURING BETTER COORDINATION

Multi-specialty group practices and integrated delivery systems provide many of 

the attributes necessary for accountable patient care. Unfortunately fewer than 20 

percent of physicians practice in groups with 11 or more doctors. As a result, fragmented care leads to unnecessary tests and treatments, emergency department 

over-utilization and alarmingly high hospital re-admission rates (Washington Post, 

2010, p. 142). 

The health reform law will encourage care coordination in a framework not unlike 

an integrated delivery system. Accountable Care Organizations will be rewarded for 

keeping patients healthy and out of both emergency rooms and hospitals. Patients 

will benefit from additional services such as intensive education, monitoring and 

medication management. A bundled fee per patient will translate into shared savings for Medicare and for providers. 

My colleagues and I at Virginia Mason are pleased with the recently released 

ACO regulations and we are continuing to explore pursuit of an ACO designation 

for our organization. 

PROMOTING INNOVATIVE MODELS OF CARE

Perhaps the most promising component in the health reform law is the Center 

for Medicare and Medicaid Innovation (CMMI) with its mission of better health 

care, better health and reduced cost. 

Through our experience with the Virginia Mason Production System, we have 

demonstrated that the path to better health and better health care is the same path 

to reduced costs. As you might imagine, we are in conversation with CMMI regarding potential pilot projects. 

In conclusion, I’d like to thank each of the committee members and my colleagues 

on the panel today for your role in reforming America’s health care delivery system. 

Sound legislation must support delivery system reform that begins in each of our 

organizations, because our patients and communities are counting on us and can 

wait no longer. 
33 

I am happy to answer any questions. 

RESOURCES CITED

Adams, C.R. & Kimbell, D. (2011). Retrieved Nov. 5, 2011 from http:// 

www.dartmouth-hitchcock.org/news/newsdetail/59724/. Dartmouth-Hitchcock; 

The Dartmouth Institute for Health Policy and Clinical Practice. 

Kenney, C. (2011). Transforming Health Care: Virginia Mason Medical Center’s 

Pursuit of the Perfect Patient Experience. New York, NY: Productivity Press, Taylor & Francis Group. 

The Staff at the Washington Post (2010). Landmark: The Inside Story of America’s 

New Health-Care Law and What it Means for Us All. Philadelphia, PA: Public 

Affairs Press. 

Senator WHITEHOUSE. Thank you, Dr. Kaplan. We will continue 

with the witnesses first, and then we will do questions selectively 

at the end. 

Our next witness, Greg Poulsen, is the senior vice president for 

Intermountain Healthcare, which is based in Salt Lake City, UT, 

Senator Hatch’s home State. He joined Intermountain Healthcare 

in 1982, and in his current position, he shares responsibility for the 

operational and strategic issues of the organization. He has had direct responsibility for strategic planning, research and development, and marketing and policy for over 20 years. 

He is a Commissioner for the Commonwealth Fund in Washington, DC, focused on defining a high-performance health system 

for the United States. He has been a consultant and provided counsel on health policy development in other countries as well, and we 

are pleased to have him with us. 

Mr. POULSEN. 

STATEMENT OF GREG POULSEN, SENIOR VICE PRESIDENT 

AND CHIEF STRATEGY OFFICER, INTERMOUNTAIN HEALTHCARE, SALT LAKE CITY, UT 

Mr. POULSEN. Thank you very much for the opportunity to be 

with you. 

As you mentioned, Intermountain Healthcare is based in Salt 

Lake City. We have roughly 3,200 physicians, 23 hospitals, and are 

the largest insurer in the State. 

I think we have become particularly well-known nationally and 

internationally for identifying best clinical practices, and then applying them consistently in much the same way that Virginia 

Mason has. 

Dr. John Wennberg at Dartmouth summarized the results about 

a year and a half ago by saying, ‘‘Intermountain is the best model 

in the country of how you can actually change health care for the 

better.’’ 

If the Nation could reduce health care spending for acute and 

chronic illness by more than 40 percent if it practiced like Intermountain. However, we know that there remains much room for 

improvement at our organization and at others. The closer we look, 

the more we find areas where improvement can and must be made. 

I know that other leading organizations see it the same way we 

do; we just heard about that. The primary challenge for us, and the 

main reason more organizations don’t adopt high-value models discussed in this hearing is the underlying fee for service payment 

system, which predominates, of course, in the United States. 
34 

Intermountain and other organizations have shown that improving quality is compatible with lowering costs. And indeed, highquality care is generally less expensive than substandard care. Unfortunately, such high-quality, low-cost care generally leads to 

lower revenues and lower incomes for providers. To put it bluntly, 

the current payment system rewards disorganized, inefficient, and 

often unnecessary care. 

Experience demonstrates that effective, coordinated clinical practice can improve outcomes dramatically while reducing costs significantly. Let me give you a couple of examples. 

One relates to patients coming to emergency rooms with sepsis, 

which is a deadly whole body medical condition generally associated with blood infections. By applying a carefully organized series 

of best practices every time, consistency here is the key, Intermountain’s mortality rates have plunged to nearly 10-times lower 

than the national average, from roughly about 40 percent to about 

5 percent. Because of much more rapid recoveries and fewer complications, costs were much lower as well in both national norms 

and our previous experience. The reward? The revenue loss of more than $10 million per year 

to Intermountain hospitals and physicians, so a reward of a penalty, and if you will, for that kind of improvement. Similar results 

can occur with management of chronic diseases. 

At Intermountain and other places, we have developed a coordinated, evidenced-based approach to managing patients with diabetes, for example, and have applied it across our entire system. The 

results are much better health, many fewer complications, and 

much lower cost. Indeed, what we have seen is a dramatic reduction in amputations, lower ER visits, lower rates of heart disease 

and other hospital treatments, and roughly a reduction of $5 million per year; again, a loss of revenue. 

Sepsis care and diabetic care are just two examples of dramatic 

improvements that can be made to both costs and quality simultaneously. At Intermountain, we have seen the same dynamic play 

out in well over 100 other cases with services ranging from managing glucose in cardiac surgery, to defining the optimal time to induce labor for expectant mothers. 

The magnitude of our health care value problem, and opportunity, can be seen in the expense data from across the country. 

Even after adjusting for differences in input costs like labor and 

building expense, similar populations of individuals with similar 

diseases cost Medicare substantially more than twice as much in 

some locations than in others. Much as you pointed out, Senator 

Whitehouse, on that graph you showed at the first of the meeting. 

We even see huge variation within relatively small geographies 

like within Utah, or Washington, or Minnesota, or New York, even 

within New York City. And this variation does not correlate to 

quality of care. Indeed, the reverse is true. 

Improving care value is hard work, and it takes time, and it 

takes resources. We believe that it is unrealistic to expect most providers to do these hard things when their reward is a financial penalty. For this reason, we believe that health care payments should 

move rapidly toward a payment mechanism that rewards value 

rather than volume, as all of us here have said. 
35 

As the largest payer in the Nation by far, Medicare can catalyze 

this change. We believe bold movement toward comprehensive prepayment to provider groups has the potential to yield dramatic improvements. Really, changing health care delivery requires changing incentives. 

We believe that changing from fee for service to prepayment will 

be challenging, but the alternatives are much more difficult, and 

will not yield nearly the beneficial long-term results. 

We have submitted a white paper that outlines five principles 

that we believe would foster this type of change and put health 

care, and Medicare, on a sustainable and affordable trajectory. We 

hope you will find it useful. 

Thank you for the opportunity to be with you. 

[The prepared statement of Mr. Poulsen follows:] 

PREPARED STATEMENT OF GREG POULSEN

SUMMARY

Intermountain Healthcare is an integrated not-for-profit health system based in 

Salt Lake City, UT. Intermountain operates 23 hospitals in Utah and Idaho; more 

than 160 clinics; and an insurance plan, SelectHealth, which covers approximately 

500,000 lives in Utah. Intermountain’s Medical Group employs approximately 800 

physicians, and about 2,300 other physicians affiliate with Intermountain. 

Intermountain has become well-known nationally and internationally for identifying and consistently applying best clinical practices. Dr. John E. Wennberg of 

Dartmouth summarized the results, saying, ‘‘Intermountain is the best model in the 

country of how you can actually change health care for the better.’’ Dartmouth has 

estimated that if healthcare were practiced nationally in the way it is provided at 

Intermountain, ‘‘the Nation could reduce healthcare spending for acute and chronic 

illnesses by more than 40 percent.’’ 

Intermountain’s focus is on providing high-value healthcare. To that end, we: 

• Have developed and structured physician-led clinical programs so that medicine 

at Intermountain is practiced by collaborative teams, and is based on the best available data. 

• Establish specific clinical improvement goals, with accountability for accomplishing these goals reaching all the way to Intermountain’s governing board. 

• Have developed information technology that allows us to track, compare, and 

improve outcomes—and eliminate inappropriate variation. 

• View variation as an opportunity to improve, whether we find it in our clinical 

outcomes, or our supply chain. 

For example, by providing systematic, science-based treatment—prompted by good 

clinical decision support—to patients coming to Intermountain’s emergency rooms 

with deadly blood infections (sepsis), we achieved mortality rates that were about 

one-tenth of the national average, with dramatic cost savings. The reward? A revenue loss of more than $10 million per year to Intermountain physicians and hospitals. 

We know there remains much room for improvement; when we accurately measure our own performance, we consistently fall short. The primary challenge, and the 

main reason that more organizations don’t adopt the high-value models discussed 

in this hearing, is the underlying fee-for-service payment system that predominates 

in the United States. Put bluntly, the current payment system rewards disorganized, inefficient and often unnecessary care. 

We believe that healthcare should move rapidly toward a payment mechanism 

that rewards value rather than procedure volume. As the largest payer in the Nation—by far—Medicare can catalyze this change. We believe bold movement toward 

comprehensive prepayment to provider groups has the potential to yield dramatic 

cost and quality benefits to the Nation. 

Intermountain has submitted a white paper to the committee that discusses much 

more fully the key components that we believe could move healthcare in the United 

States to sustainably higher value. 
36 

Intermountain Healthcare appreciates the opportunity to discuss improving quality and lowering the costs of health care from the delivery system perspective. My 

name is Greg Poulsen, and I am senior vice president and chief strategy officer of 

Intermountain Healthcare in Salt Lake City, UT. Intermountain operates 23 hospitals in Utah and Idaho; more than 160 clinics; and an insurance plan, 

SelectHealth, which covers approximately 500,000 lives in Utah. Intermountain’s 

Medical Group employs approximately 800 physicians, and about 2,300 other physicians affiliate with Intermountain. 

Intermountain has become well-known nationally and internationally for identifying best clinical practices and applying them consistently. Dr. John E. Wennberg 

of Dartmouth summarized the results, saying, ‘‘Intermountain is the best model in 

the country of how you can actually change health care for the better.’’ Dartmouth 

estimated that if healthcare were practiced nationally in the way it is provided at 

Intermountain, ‘‘the Nation could reduce healthcare spending for acute and chronic 

illnesses by more than 40 percent.’’ 

Intermountain’s focus is on providing high-value healthcare. To that end, we: 

• Have developed and structured physician-led clinical programs so that medicine at Intermountain is practiced by collaborative teams, and is based on the best 

available data. 

• Establish specific clinical improvement goals, with accountability for accomplishing these goals reaching all the way to Intermountain’s governing board. 

• Have developed information technology that allows us to track, compare, and 

improve outcomes—and eliminate inappropriate variation. 

• View variation as an opportunity to improve, whether we find it in our clinical 

outcomes, or our supply chain. 

However, we know there remains much room for improvement at Intermountain; 

the closer we look, the more we find areas where we can be better. The primary 

challenge for us, and the main reason that more organizations don’t adopt the highvalue models discussed in this hearing, is the underlying fee-for-service payment 

system that predominates in the United States. Intermountain and other organizations have shown that improving quality is compatible with lowering costs—indeed, 

high-quality care is generally less expensive than substandard care. Unfortunately, 

such high-quality, low-cost care generally leads to lower revenues and lower incomes 

for providers. Put bluntly, the current payment system rewards disorganized, inefficient and often unnecessary care. 

Experience at Intermountain and elsewhere demonstrates that effective, coordinated clinical practice can improve outcomes dramatically while reducing costs significantly. One example relates to providing systematic, science-based treatment to 

patients coming to emergency rooms with sepsis (which is a deadly whole-body medical condition usually associated with blood infections). By applying a carefully organized series of best practices EVERY TIME—consistency is the key—Intermountain’s mortality rates plunged to nearly one-tenth of the national average (roughly 

40 percent mortality nationally vs. under 5 percent at Intermountain), and because 

of more rapid recoveries and fewer complications, costs were much lower than both 

national norms and our previous experience. The reward? A revenue loss of more 

than $10 million per year to Intermountain physicians and hospitals as a direct result of improving quality. This is a dramatic illustration of the need to retool payment systems to incentivize value. 

Similar results can occur with management of chronic diseases. Intermountain 

has developed a coordinated, evidence-based approach to managing patients with diabetes, and it is applied across our entire system. The results are much better 

health, many fewer complications like heart disease and amputations, and much 

lower cost; my friend, Dr. Denis Cortese, who recently retired as the CEO of the 

Mayo Clinic, told KARE TV in Minneapolis, ‘‘If I were ever diagnosed with diabetes, 

I would want to be treated by Intermountain Healthcare. They have the best outcomes in the country—and the lowest costs.’’ Again, unfortunately, the current payment system penalizes this success: our much lower rate of ER visits, amputations, 

heart disease and other hospital treatments costs Intermountain providers roughly 

$5 million in revenue per year. 

Sepsis care and diabetic care are just two examples of the dramatic improvement 

that can be made to both quality and cost. At Intermountain, we have seen this 

same dynamic play out in well over 100 other case types across the spectrum of 

care, from the timing of elective inductions of labor for pregnant women to the selection and administration of the most effective antibiotics. Intermountain develops 

these ‘‘best-practice’’ protocols for those procedures and case types that we perform 

most often, that are the most expensive, or that have the widest variation in their 

performance—and we do it both through careful analysis of actual outcomes data 
37 

available through our electronic medical records and through review of the latest 

and best scientific evidence. At Intermountain, our clinicians are not required to follow the protocols absolutely. Actual practices may vary somewhat because of patient 

preferences and values or because of clinicians’ best judgment. However, our clinicians have come to trust the data, and they rely on the decision support protocols 

as a valuable tool in the diagnosis and treatment of patients. And, it has been convincingly demonstrated that overall, both outcomes and costs improve. 

The magnitude of the problem caused by the perverse incentives in the fee-forservice payment system—and the opportunity—can be seen in the expense data 

from across the country; even after adjusting for differences in input costs—like 

nursing salaries and building costs—similar populations of individuals with similar 

diseases cost Medicare much more than twice as much in some locations compared 

to other locations in the country. We even see huge variation within relatively small 

geographies (within Utah or Washington, for example). And this variation does not 

correlate to quality of care—indeed the reverse is frequently true. Generally speaking, people living in areas with low quality of care cost CMS and other payers more 

than those in areas where high-quality care is provided. 

The perversity of our current payment system is also evident in the fact that we 

now have huge regulatory requirements built to prevent providers from succumbing 

to the enticements inherent in the fee-for-service payment system. Fraud and abuse, 

anti-kickback, RAC audits, re-admission tracking and many other regulatory instruments—which are hugely expensive for both the Government and providers—exist 

primarily to prevent providers from following the incentive to provide unnecessary 

care. 

Improving care value is hard work, and takes time and resources. We believe that 

it is unrealistic to expect most providers to do these hard things when their reward 

is a financial penalty. For this reason, we believe that healthcare payment should 

move rapidly toward a payment mechanism that rewards value rather than procedure volume. As the largest payer in the Nation—by far—Medicare can catalyze this 

change. We believe bold movement toward comprehensive prepayment to provider 

groups has the potential to yield dramatic cost and quality benefits to the Nation. 

We suggest five principles to foster this change: 

• First, of course, is the development of a mechanism to pay providers for meeting 

the health needs of individuals in the most clinically and financially efficient way 

possible. Various permutations of prepayment, coupled with effective quality and patient satisfaction measures are, in our view, the most effective mechanism to do 

this. 

• Second, we believe that government should require results—high quality at affordable cost—rather than requiring a given organization structure. Intermountain 

is structured differently than Virginia Mason, which is different than the Mayo 

Clinic, which is different than Geisinger, which is different than the medical community of Grand Junction Colorado, and so on. And yet, all of these have achieved 

dramatically better quality at lower cost than the Nation at large. It is often tempting to prescribe an approach—something that worked somewhere else, but it is 

much more effective to define and reward the desired outcome and unleash American creativity to achieve it. The best model may not have been tried yet. 

• Third, we believe that people using the healthcare system should have appropriate incentives to use the system wisely and to do their part in maintaining their 

own health. Individuals should have financial as well as literal skin in the game. 

• Fourth, the Federal Government generally, and CMS specifically, have huge 

amounts of information that can help providers of care to be more effective. One of 

Intermountain’s keys to success has been a very robust data base of information 

that helps us to see what works and what doesn’t. CMS could assist providers that 

lack our data capabilities to achieve similar benefits. 

• Fifth, and finally, there should be a substantial reward mechanism for providers making the major changes needed to provide high-value care. Specifically, organizations and localities that are currently high-cost should be given very strong 

incentives to do the hard work necessary to change paradigms from volume-based 

care to value-based care. This means less incentive and reward for organizations 

like Virginia Mason and Intermountain, but then, we don’t have to make as many 

hard changes. We believe that the benefits of giving substantial incentives to higher 

cost places to make the needed but difficult changes will provide dividends to the 

Nation for decades to come. 

We are including in this submittal a much more detailed white paper outlining 

our thinking on the key components that we believe would move healthcare in the 

United States to sustainably higher value. The document speaks directly to Medicare, because it is the country’s largest payer for health services, because it is di-
38 

1 Actually, the average person pays far less into Medicare than s/he will receive (which is at 

the heart of the current problem). This is in large measure due to increases in both longevity 

and healthcare costs that were never anticipated by the creators of Medicare. 

rectly under the purview of the Federal Government, and because it tends to set 

the direction for commercial payers. The ideas could be adapted to Medicaid and to 

commercial plans. 

Thank you for the opportunity to present on this important topic today. Questions 

may be directed to Intermountain’s Director of Federal Relations, Bill Barnes at 

bill.barnes@imail.org or at 801–442–3240. 

RECOMMENDATIONS TO CONGRESS FOR BUILDING SUSTAINABLE MEDICARE VALUE

INTERMOUNTAIN HEALTHCARE

INTRODUCTION

Projected expenditures in government healthcare programs are the largest Federal deficit issue facing this country. The imbalance between the number of people 

paying into Medicare versus recipients, as well as the escalating cost of care for 

beneficiaries, is growing in ways not predicted—or even imagined—by the creators 

of Medicare. There is consensus that the Medicare spending trajectory is 

unsustainable and, unless checked, will be the leading contributor to the deficit in 

the future. Real deficit reduction is virtually impossible in the absence of healthcare 

improvement. It will require brave leaders to take on this divisive but critical issue. 

MANY PROPOSED SOLUTIONS HAVE MAJOR CHALLENGES

Many less-than-ideal, insufficient, or politically unattractive alternatives to balancing the Medicare books have been proposed from all directions. The easiest option at the present is to ‘‘kick the can down the road’’ once more, opting to leave 

this issue out of the discussion entirely for the time being, but this would leave an 

ever-growing problem for the next generation of American citizens and leaders. We 

firmly hope that the necessity to finally address this problem substantively will be 

acknowledged. 

Of course, taxes could be raised to cover the predicted gap. However, a modest 

change in Medicare payroll taxes would have little impact. Eliminating the Medicare shortfall would require that the Medicare tax be raised several fold, and this 

would be disastrous economically, politically, and from a fairness perspective. Additionally, if healthcare costs continue to grow at their current rate, a tax increase 

today might only serve as another temporary solution. If either ignoring the issue 

or raising revenue to unprecedented levels is not palatable, the only alternative is 

to reduce the Medicare cost trajectory. 

Medicare spending could be reduced through reducing benefits, rationing services 

based on patient criteria, or queuing patients. While each of these options is used 

in other countries, they would currently be politically challenging to implement 

here. Opponents to these options, including most Americans, will respond that beneficiaries and their physicians, not the Federal Government, should be making medical (often ‘‘life or death’’) decisions for seniors. So, while we believe that evidence 

should impact how care is provided (and the Federal Government may well play a 

role in disseminating this evidence), we believe that more dramatic intrusions into 

care practice are likely to be very controversial. Spending could also be reduced by 

increasing the Medicare eligibility age to 67 or 70. Medicare benefits could be 

means-tested or tiered, with those who have higher incomes being made responsible 

for a larger percentage of their healthcare costs. All of these alternatives would likely result in public outcry, as Medicare was not initially constructed to be a safetynet program and those who have paid into it would feel they were not receiving 

what they have paid for.1

The most straightforward approach to reducing Medicare spending is to force 

across-the-board cuts to providers, such as the 2 percent reductions required if the 

Joint Select Committee and Congress cannot reach another solution. Although simple to impose and seemingly compatible with the need to reduce the overall cost of 

Medicare, this alternative would likely result in a cascade of negative consequences. 

Some providers that currently serve large Medicare patient populations and are unable to reduce their costs may be unable to survive on decreased margins and would 

eventually cease to exist. Other providers that have mixed practices may discontinue providing services to Medicare beneficiaries, resulting in access issues for 

America’s most vulnerable seniors (we have already seen this in some parts of the 

country). Additionally, this may lead some providers to simply shift costs to other 
39 

2 Health Expenditure Data, Health Expenditures by State of Residence, Centers for Medicare 

and Medicaid Services, Office of the Actuary, National Health Statistics Group. 3 Jonathan Skinner, Elliott Fisher, and John E. Wennberg, ‘‘The Efficiency of Medicare’’ in 

David Wise (ed.) Analyses in the Economics of Aging. Chicago: University of Chicago Press and 

NBER, 2005: 129–57. 4 Jonathan Skinner, et al., A New Series of Medicare Expenditure Measures by Hospital Referral Region: 2003–8, 21 June 2011. The Dartmouth Institute for Health Policy & Clinical Practice, http://www.dartmouthatlas.org/downloads/reports/PAlSpendinglReportl0611.pdf. 

payer categories, increasing commercial insurance premiums at a time of economic 

vulnerability. 

And perversely, the Nation’s most efficient, value-oriented providers would be disproportionately impacted by these cuts, since they simply have less ‘‘fat’’ to cut. Furthermore, since one way to be successful in a world of reduced per-use payments 

is to increase utilization of profitable but questionable services, some providers may 

simply attempt to ‘‘make it up on volume,’’ which would make a major problem 

worse. Any system, good or bad, will ultimately produce exactly the results it 

incentivizes. A payment system that continues to pay providers on a per-use basis, 

albeit at a reduced rate, is likely to result in an increase of per-person utilization 

in order to spread significant fixed costs over a larger pool. For this reason, we do 

not believe these cuts will necessarily result in meaningful deficit reduction in the 

intermediate and long term. 

A BETTER OPPORTUNITY

Intermountain believes there is another option, an alternative with a significant 

upside for the Nation. This option addresses cost by improving clinical quality and 

avoiding waste. Implementation of this option can begin as early as 2013 through 

relatively simple changes to the current CMS payment model. 

To understand the opportunity, it is important to recognize the massive variation 

in the way healthcare is provided within the United States—with per-capita cost differences of more than two-to-one among States for both Medicare beneficiaries and 

the rest of the population.2 Additionally, for decades, research conducted by the 

Dartmouth Institute for Health Policy and many others has highlighted even greater variation in utilization and cost of healthcare services among smaller geographic 

regions within the United States.3 Even after adjusting for age, sex, ethnicity, and 

local price variation, there is more than a threefold difference in cost per beneficiary.4 Interestingly, the quality of medical care does not increase with the higher 

costs of healthcare. As shown in the following graph, States with higher costs of 

healthcare tend to have lower quality of care. 
40 

5 John Wennberg, et al., Tracking the Care of Patients with Severe Chronic Illness; The Dartmouth Atlas of Healthcare 2008. 6 Based on price-adjusted Medicare spending per person, with a 4 percent growth in the aged 

population. 7 John Wennberg, et al., An Agenda for Change: Improving Quality and Curbing Health Care 

Spending (Lebanon N.H.: Dartmouth Institute for Health Policy and Clinical Practice, 17 Dec. 

2008). 

Those areas with higher quality yet lower costs have accomplished this through 

providing care with greater effectiveness and consistency. A good example is the 

Dartmouth study of care provided at the end of life; the overtreatment associated 

with fragmented care (unfortunately all too common in the United States) results 

in much higher costs and poorer outcomes for patients.5

Collectively, this enormous variation in virtually every type of care provided in 

the United States, and the overutilization it represents, has significant cost and 

quality implications—and provides an enormous opportunity for improvement in 

both cost and quality. For example, based on the most recent Medicare data available (2008), the average spending on the over–65 Medicare population was just over 

$9,000 per person (priced-adjusted by geography). If we could simply move the highest-cost States down to this national average, the country would save $17 billion annually (and $209 billion over 10 years) 6; if overall spending approached the performance levels demonstrated by the most cost-effective States ($7,000 per person), 

savings would be $94 billion per year and $1.13 trillion over 10 years. Of even greater note, if performance approached that demonstrated by high-performing organizations, including Intermountain Healthcare, savings would be $160 billion per year, 

with 10-year savings of $1.9 trillion.7 Furthermore, because these savings are modeled on organizations performing in the current environment of perverse incentives 

(providers largely being paid for volume, rather than value), we believe the opportunity estimated here is likely conservative. 

We call our proposed solution Shared Accountability. Shared Accountability requires partnerships and collaboration among all the important healthcare players: 

physicians, hospitals, other healthcare providers, and—critically—patients themselves. At the heart of the Shared Accountability concept is the alignment of incentives around the health of beneficiaries, rather than payment for the services they 

use. Shared Accountability payment models should move toward prepaid, outcomesbased arrangements as quickly as possible. 
41 

We believe this solution can be practically realized, because history has repeatedly 

shown that healthcare providers are highly adaptable (e.g., the implementation of 

DRGs in 1983, the managed care revolution in the late 1980’s, responses to even 

the possibility of reform in the first Clinton administration, alignment around EMR 

‘‘meaningful use’’ requirements, etc.). The healthcare industry has great capacity to 

learn and evolve rapidly when incentivized to do so. Additionally, while many components of the Patient Protection and Accountable Care Act stirred controversy in 

the provider community, there was widespread concurrence across the country supporting the concept of ‘‘accountable care.’’ Many healthcare providers throughout the 

United States now agree that changes in the delivery system are inevitable and necessary; the status quo is no longer a viable option. We need to change the regulatory 

and payment system to incentivize our intended outcomes (lower per-person expenditures and higher quality of care), something that across-the-board reductions in 

per-use payments will not accomplish. Only by fundamentally changing the system 

can we truly solve the Medicare deficit problem for future generations of Americans. 

Shared Accountability: Key Principles 

Through practical experience, Intermountain and other organizations have discovered and demonstrated a number of key principles that can deliver high-quality 

healthcare at the lowest appropriate cost. We believe that if Medicare and Medicaid 

programs align incentives in such a way as to be consistent with these principles, 

organizations across the country would be able to move healthcare in the United 

States to a much more effective paradigm. 

1. Medicare (and other payers) should move from paying providers for 

volume to paying for what Americans really want: healthy beneficiaries. 

We suggest that the Federal Government should move to full prepaid, outcomes-based arrangements for Medicare beneficiaries as rapidly as possible. 

The old cliche ́ that ‘‘you get what you pay for’’ has proven true in healthcare, but 

not in a beneficial way. For decades, American health providers have been paid for 

the volume of care they provide to their patients. It is not surprising, therefore, that 

studies have shown substantial overutilization in many areas and that more intensive (and remunerative) procedures are frequently chosen over less intensive, but 

equally effective, alternatives. In our experience, this impact is often subliminal: 

many providers don’t even recognize the incentive directly, but the very culture of 

care is impacted by it. We frequently adopted the mentality of ‘‘it probably won’t 

hurt; we might as well try it.’’ 

If the fundamental Medicare payment mechanism were rebuilt around value— 

quality and cost measured at the beneficiary level—the beneficial impact would be 

enormous. And because Medicare, which is by far the largest healthcare purchaser 

in the country, tends to establish the payment mechanisms that others adopt, we 

can reasonably expect that these benefits would accrue to the rest of the population 

as well. 

These general concepts have been proposed by both Democrats and Republicans, 

and there is much agreement that greater accountability, especially in the payment 

mechanism, is essential to making fundamental improvement in the way care is delivered. It makes sense from both a free-market and a social-conscience perspective. 

In spite of this, there has been little progress in this area. Currently, Medicare Part 

C is the only full prepayment arrangement for managing the totality of health for 

Medicare beneficiaries, and less than a quarter of Medicare beneficiaries are enrolled in this program. Additionally, because Medicare Advantage is designed primarily as an insurance program, most plans are not highly integrated with 

healthcare providers; so while the insurer is paid in a way that discourages unnecessary utilization among their beneficiaries, delivery systems and providers are still 

generally paid on per-use arrangements with few value-oriented incentives. 

We believe this situation should be fundamentally changed. Accountability for 

Medicare beneficiaries should move toward prepayment in a deliberate but expeditious fashion. The following principles discuss some of the key components of such 

a course. 

Congressional Action: Congress should make it clear that the current Medicare 

payment trajectory will be significantly reduced and that providers will become accountable for the total cost of care for the population they serve. Prepayment for the 

care of ‘‘traditional’’ Medicare beneficiaries should be made available to willing provider organizations beginning in 2013. 

2. The best results come about when healthcare providers behave in an 

organized, collaborative fashion. Whenever possible, make use of existing 

healthcare infrastructure and relationships, while encouraging growth in 

beneficial relationships over time. 
42 

8 Atul Gawande, ‘‘The Cost Conundrum,’’ The New Yorker (1 June 2009). 

Repeated studies and analyses have shown that organized care delivery systems 

can be much more effective in providing high-quality, efficient care than the more 

common fragmented amalgam of healthcare providers. The logic behind this is clear: 

A system can reduce duplication, coordinate the services of different specialties, provide the most effective diagnostics at the most effective time, and reduce the likelihood of conflicting treatments. It is also more able to identify and eliminate quality 

and cost problems and to take effective action to fix them. Systematic, coordinated 

care is more consistent, more efficient, and more attractive to patients. 

But while the benefits of systematic care are widely recognized, the question of 

how to move from our current fragmented approach to a coordinated system is still 

hotly debated. Some advocate moving entirely to organized systems with employed, 

salaried providers, while others advocate approaches that use independent practitioners. The collective experience of many high-value organizations suggests that if 

correct incentives are provided (as discussed above), many different organizational 

approaches have the potential to achieve dramatically improved performance. In a 

widely hailed article, well-known physician-teacher-author Atul Gawande pointed 

out sterling performance in coordinated care by two diametrically different organizational approaches: first, the Mayo Clinic, an organization with more than a century 

of history, a deep culture, and a very cohesive corporate structure, and, second, the 

medical community in Grand Junction, CO, which is constituted largely of independent physicians and an independent hospital that got together to create a virtually integrated system with a common electronic medical record, changed the payment structure, and put a coordinated focus on value improvement.8

High-value organizations across the Nation have come from markedly different 

communities, history, and culture, and yet have achieved national recognition for 

both quality and cost-effectiveness. We are convinced that many other existing and 

potential organizational types can also achieve great improvements in value. Therefore, we believe that any ‘‘reform’’ program that is rigidly prescriptive about organizational structure will miss an opportunity to make effective use of organizations 

that already exist, many of which have the potential to significantly improve 

healthcare value if appropriately incentivized. Furthermore, American ingenuity 

may develop beneficial structures and approaches that have not yet been envisioned. 

An inflexible design would push many willing and engaged participants out of the 

race before they even get to the starting line. What matters most is that existing 

or future healthcare organizations, regardless of their configuration, be rewarded for 

delivering on the promise of improved quality and reduced costs. 

Regulations must make it safe and feasible for physicians and other providers to 

work together in ways that improve value to the community through the provision 

of optimal care. They must be able to share information, coordinate incentives for 

quality and efficiency, and receive payment collectively from Medicare and other 

payers. Many of today’s regulations are designed to protect purchasers (the Federal 

Government in particular) from inappropriate utilization; for instance, extensive 

regulation is designed to prevent kickbacks from facilities to physicians for providing (potentially unnecessary) care at their institutions. Under a prepayment approach, however, this whole problem simply evaporates, since unnecessary utilization results in financial harm to the providers rather than to the payer (CMS in 

this case). Similarly, regulations should monitor competition among systems providing care, not among the individual providers within a system. Again, if CMS (and 

potentially others) prepay for all of an individual’s care, then the costs of the individual components become the concern and accountability of the coordinated system 

itself. Only at the system level can care be coordinated in a way that maximizes 

value to the purchasers and, ultimately, to the community. 

Congressional Action: For organizations that accept prepayment, provide relief 

from the regulations that are designed to prevent overutilization. If an organization 

accepts prepayment, overutilization harms the organization rather than CMS, rendering the regulations unnecessary (since the organization will be motivated to police 

itself). Relief from these regulations would save a great deal of money for both providers and the Government and would be an attractive inducement to participate in 

prepayment. 

3. Flexibility should be allowed for organizations to develop new models 

of care that are not constrained by the walls of a hospital or clinic. 

Government healthcare programs have, understandably, tended to regulate existing structures. The unintended consequence has been to entrench those structures, 

which often hinders trial and adoption of new and innovative care models. Historically, payment structures have reinforced traditional silos of care (e.g., physician 
43 

care, inpatient care, outpatient acute care, hospice care, homecare, etc.), an approach that ultimately works against the patient’s best interest. If organizations 

take on prepaid, outcomes-based arrangements with Medicare, they should be given 

the freedom to coordinate care in the way that best meets the needs of the beneficiaries they serve. For instance, innovative home-based and community-based models for advanced illness management and end-of-life care, including those that incorporate telemedicine and significant care management resources (which under current payment mechanisms are not compensated costs), are frequently just what the 

patient and family desire. Participating organizations should be given the flexibility 

to care for patients in the settings and with the approaches that best meet their 

individual patients’ needs. 

Congressional Action: Legislation should direct CMS to allow organizations that 

accept prepayment and accountability for the health of Medicare beneficiaries to deliver care outside of traditional silos. Legislation should also direct CMS to view results (cost, quality, and service) as the key performance metrics, and process measures should be used only when an outcome measure (result) is unavailable or inadequate in a given area. 

4. The patient-provider relationship should be seen as a healthcare partnership. Both parties must be given the tools and incentives to work together to efficiently maintain and improve beneficiary health. 

If either providers or Medicare beneficiaries feel they are being forced into a new 

Medicare program, even if evidence has shown such a program will improve quality 

and reduce costs, there will inevitably be backlash from the outset. Willingness to 

engage in a partnership and active participation of both parties will be critical. In 

our experience with innovative care models, we have seen that the majority of both 

patients and providers are agreeable to participation in something new when they 

are given the choice to do so, when the incentives (financial and otherwise) are 

aligned, and when they have the knowledge, skills, and tools they need to be successful. All three of these elements will be critical in building a viable program. 

Both providers and Medicare beneficiaries will need to initially be given the option to participate in the new model. Traditional Medicare should still be an alternative for both providers and seniors, but the premiums and benefits to beneficiaries 

and the per-use payments to providers in the traditional program should reflect the 

fact that it will be a less-efficient paradigm than the new model. If no alternative 

model is offered, premium, benefit, and provider payment changes are inevitable as 

a means to rein in the Federal debt; this new model provides an option to avoid 

those across-the-board changes. 

All Medicare beneficiaries opting for the new model will need to select a Shared 

Accountability Organization from which they will largely receive care, including a 

primary care provider or group of providers who will coordinate their care. This active and explicit selection process is necessary in order for Shared Accountability 

Organizations to identify the patients for whom they are accountable. This selection 

could be made easier for seniors if Medicare were to provide personalized information to beneficiaries about which Shared Accountability Organizations their existing 

providers participate in. To make this selection requirement politically palatable 

and to encourage competition among providers in an area, Medicare beneficiaries 

should be allowed to change their selection periodically if they are not pleased with 

the quality or service of the organization they have selected. 

All providers who opt for the new model will accept accountability for each beneficiary’s health and expense. It is not enough for providers to just consent to participate in a Shared Accountability Organization and continue to receive per-use payments for health services provided. The governing and organizing body of the 

Shared Accountability Organization will need to be required to build provider payments that incentivize high-value care, including maintaining beneficiary wellness 

and, when necessary, efficiently returning Medicare patients to health. This is critically important for the success of the program and to separate it from insuranceoriented programs that have not had the ability to motivate effective health-value 

improvement. So, while we don’t believe the Federal Government should specify the 

details of these arrangements or the organizational structure, we believe it should 

be clear that individual providers and/or provider organizations must have major 

participation in the quality and expense incentives. 

Similarly, while we believe individual organizations should be free to implement 

as they see fit, we believe tools for both physicians and beneficiaries that facilitate 

changing the conversations around care decisions will be important for successful 

programs. Shared Decision-Making is a good example. In Shared Decision-Making, 

patients are fully informed of the true risks and benefits of alternative courses of 

care, so they can play an active role in selecting the best treatment options to meet 
44 

their personal needs and values. (It is important to note that Shared Decision-Making tools work best when provider incentives are aligned around the health of beneficiaries, rather than the number and type of healthcare services provided, which 

is why both elements in concert need to be a part of the model.) Health literacy, 

price transparency, and other similar tools for both beneficiaries and providers will 

also likely be part of a comprehensive Shared Accountability model. 

Congressional Action: Beginning in 2014, Medicare beneficiaries should be given 

an incentive to enroll with a prepaid organization. This incentive should be small 

initially, but increase over the next 4 years (e.g., those opting out should pay increasingly higher premiums over that time). 

5. Accurate and timely data will need to be provided and used. Data are 

necessary for both managing the health of beneficiaries across the 

healthcare continuum and for holding Shared Accountability Organizations 

responsible for beneficiary health. 

There is currently a great need for improved sharing of data and information in 

the healthcare industry. In order for this new program to be successful, CMS will 

need to provide comprehensive data to those providers agreeing to take on accountability for the totality of beneficiary health. Without accurate information, it is very 

difficult to identify whether best care is being provided, both from a quality and an 

efficiency perspective. Timely feedback is also critical. Access to the information 

must be reasonably rapid to impact care patterns. Meaningful, complete, and timely 

data must be provided to individual physicians and organizations that are willing 

to take on accountability for patient care and outcomes. If patients are not willing 

to have their data shared with their Shared Accountability Organization, it is impractical for these Shared Accountability Organizations to be held responsible for 

managing the healthcare costs and quality of these beneficiaries. 

Additionally, providers (physicians, hospitals, homecare agencies, etc.) working in 

collaboration in a Shared Accountability Organization will need to be able to share 

data with one another. Currently, there are many barriers to data-sharing that need 

to be addressed before any successful programs can be built. Providers will need to 

be given license to share information with one another when the purpose is to improve beneficiary health. 

Quality and performance metrics will be necessary to ensure Shared Accountability Organizations are not reducing healthcare costs at the expense of long-term 

outcomes (one of the major criticisms of the managed care movement of the 80s and 

90s). Performance metrics should be consistent with those of other programs and 

payers. We are seeing a growing number of inconsistent (and sometimes incompatible) quality metrics being created by different oversight and purchaser organizations. Metrics need to be harmonized both in terms of what is measured and how 

success is achieved. We believe the greatest performance improvement will be 

achieved if a reasonable number of metrics (those validated as both actionable and 

important to individual and population health) are utilized across all government 

payers. The number of metrics required must be operationally feasible, which means 

a limited core measurement set. In order to motivate individuals and organizations, 

it is generally best to set goals upfront. Achievement thresholds, scientifically based 

on recent historical performance of organizations across the country, should be utilized for determining success within quality metrics. If goals are met, providers 

should logically be able to expect that rewards will follow. The consequences of 

achieving those goals should be clear. 

Congressional Action: Congress should designate one entity to develop a reasonable number of quality, service, and efficiency measures to reflect value provided to 

beneficiaries. These measures should be applied to all government programs (all 

forms of Medicare, Medicaid, FEHBP, CHAMPUS, etc.). This would not only reduce 

duplication and compliance costs but would also make improvement much more likely than in the current hodgepodge of different and occasionally conflicting measures. 

6. A successful program will give all participants the opportunity to succeed in the short-term, thereby cultivating trust and encouraging provider 

and public participation and acceptance. 

There has been an historical standoff between providers (and geographic regions) 

that have had high historical per-beneficiary medical expense and those that have 

had low medical expense. There is more than a two-to-one variation between highcost and low-cost providers (and regions), and much energy has been wasted in attempting to defend (or condemn) the performance of one by the other. Spokespersons 

for the low-cost organizations have argued that they deserve a bigger piece of the 

pie, while the high-cost organizations argue for defending the status quo. Of course, 

this leads to stalemate and, ultimately, continuation of traditional, unsustainable, 

cost increases. 
45 

9See Appendix 1 for a more detailed description of the recommended process. 

10 Appendix 2 suggests a legislative approach using the methods discussed under this item 

that might be useful to achieve short-term cost-saving while this more detailed plan is under 

discussion and development. 

We believe there is an approach that allows for a positive outcome for all participants who are willing (and able) to improve healthcare value, both for those who 

have had historically high cost and those with lower cost. 

We suggest that a single, affordable, nationwide, average per-beneficiary rate be 

defined (lower than the current average rate). That national target rate would then 

be adjusted to reflect legitimate differences in the underlying cost of providing care 

in different regions and organizations (which CMS does today for geographic variation in wages and teaching, for example). Of course, prepayment amounts should 

appropriately reflect differences in underlying risk factors for the specific beneficiaries in each organization. Thus, each organization would have a specific target 

derived from the national target adjusted to reflect specific differences associated 

with the region, organization, and the beneficiaries they serve. 

Then, over a period of years (5 to 7 seems reasonable), payment to an organization 

would move from their current per-beneficiary total payment to their organization’s 

target. If an organization is able to improve more rapidly than this ‘‘glide slope,’’ 

it can retain the entire difference in any given year. Of course, high-cost organizations and geographic regions have far more opportunity to improve than do low-cost 

organizations, so they have far more opportunity to receive major payments. On the 

other hand, they must work harder and make more changes in order to achieve 

these, and if changes are not made, they have a potential for significant downside. 

Low-cost providers, on the other hand, have much less opportunity to achieve large 

savings but are rewarded by not having to make as many difficult changes. (Appendix 1 has a step-by-step description of the recommended process.) 

At the end of this period, the Federal Government would pay a consistent rate 

across the Nation (with variation only for legitimate input cost differences), which 

would be significantly lower than the current trend. As discussed earlier, this new, 

lower rate (and lower growth rate) could dramatically improve the Medicare unfunded shortfall without the need for increased payroll taxes or cuts to benefits. 

Congressional Action: Congress should designate an entity to establish a reasonable nationwide per-beneficiary payment and to define specific cost-adjustment and 

risk-adjustment mechanisms to reflect legitimate differences among regions and organizations. Congress should enact a program that designates movement from current 

total pay to this target; the program should allow organizations that are able to accelerate savings beyond this pathway to retain the additional savings. (Savings to 

the Government will be defined by the targets.) 9

7. A transitional period will be necessary. 

Some organizations are ready to accept accountability for Medicare beneficiaries 

today. However, some communities don’t have any organization that is remotely prepared to undertake such a challenge. As we noted earlier, we believe that creating 

correct incentives will unleash tremendous creativity and development activity that, 

if supported by an appropriate regulatory environment, will lead to surprisingly 

rapid development of Shared Accountability Organizations. If these organizations 

are then allowed to keep a portion of the savings they earn (as noted in the previous 

section) while on the path to affordable care, we believe success is very likely. And 

for every year during the transition, CMS will spend less than it otherwise would 

have under the traditional system. 

This transitional period also can provide the motivation for providers to create the 

mechanisms necessary to accept shared accountability. Payment in a geographic 

area would move toward the target regardless of whether the providers in the area 

worked together to improve value, and CMS would withhold funds (from the feefor-service payments to all providers) equivalent to this amount. For example, if a 

2 percent reduction in spending is required during a year, then CMS would withhold 2 percent of all fee-for-service payments to providers. At the end of the year, 

if the providers had reduced unnecessary utilization by at least 2 percent, with resultant savings for CMS of at least 2 percent, then the per-use payment withhold 

would be returned. This would allow providers who reduce unnecessary utilization 

to avoid a reduction in payment for the services actually rendered. Of course, if utilization is not decreased by at least 2 percent, the withhold would be retained by 

CMS. In either case, CMS saves at least 2 percent over what it would otherwise have 

spent, either through reductions in utilization or reductions in per-use payments.10

Under this approach, providers are incentivized to reduce unnecessary utilization—regardless of their level of formal organization. However, this approach would 

motivate providers to work together (and to create Shared Accountability Organiza-
46 

tions of one form or another) so that they would have much better control of their 

joint performance. Either way, CMS is guaranteed to achieve targeted savings and 

over time would move toward the target rate. Providers would either have to make 

improvements in care patterns or simply be paid decreasing amounts based on the 

old metric. In the short term, this approach would also allow rapid congressional 

action that would be more strategic and beneficial than simple across-the-board cuts 

to all Medicare providers (but with the same beneficial impact on the Federal budget). 

Congressional Action: For next year, implement a withhold of 2 percent of payments for all Medicare providers across the country. If the providers in a given geographic region are able to reduce overall utilization by at least 2 percent relative to 

target, the withhold would be returned to the providers at the end of the year. If not, 

then the withhold would be retained by the Government. For future years, a targeted 

trajectory toward a national targeted per-beneficiary amount would be defined; this 

amount would be paid to organizations willing and able to accept prepayment. For 

those providers unwilling or unable to accept prepayment, this trajectory would be 

used to define a withhold percentage (which providers would receive if their utilization achieves equivalent savings). 

CONCLUDING THOUGHTS

This is a pivotal moment in our Nation’s history and for the path we must build 

for a sustainable future. Many important items are up for discussion and debate in 

the effort to reduce the deficit, but none is more critical in size or scope than 

healthcare spending. We believe the Nation needs a new approach that will 

incentivize spending in the right places and for the right things, with a promise of 

significant savings without harming beneficiaries for whom we have a mutual responsibility. We hope these recommendations serve to launch a new dialog, an exchange of ideas that is perhaps different from what has come before, and a discussion in which there may be a winning option for the Federal Government, Medicare 

beneficiaries, and the country as a whole. 

APPENDIX 1: A STEP-BY-STEP DESCRIPTION OF THE TRANSITION DESCRIBED

IN PRINCIPLES 6 & 7 

For the sake of clarity, we will examine the transition looking at two hypothetical, 

but representative communities: one is historically a high-utilizing community while 

the other is a low-utilizing community. Cost differences based on differences in 

input cost (e.g. wage differences) are adjusted. Exhibit 1 shows these communities 

and their cost to CMS on a per-beneficiary basis. 

1. Define a target level for an average, national, per-beneficiary expense. This 

should be a level that would result in a sustainable expense for the Federal Government into the future. 

2. Define adjustment factors that would accurately reflect legitimate differences 

in input costs of providing healthcare among geographic regions (similar to the adjusters to DRGs today). 

3. Define adjustment factors for medical risk (Johns Hopkins ACGs are an example) to reflect differences in patient populations: illness, age, etc. 
47 

4. For a geographic region or a Shared Accountability Organization, apply the cost 

adjusters and the medical risk factors. This becomes the target for that region or 

organization. See Figure 2. 

5. Over a defined period of time (we will use 2013 to 2017 as an example), the 

per-beneficiary paid amount would move from the current expense rate to the target. Figure 3 illustrates trajectories for both high and low utilizing communities (or 

organizations). 

6. If the geographic region does not develop capabilities to accept prepayment, 

then these targets would be applied to fee-for-service payment (to bring spending 

into line with the national target). This could be done using a withhold approach. 

If at the end of the year, the providers had achieved savings in expenditures 

through utilization, then some or all of the withhold (and, potentially, additional 

funds) would be distributed (in the following year) to the providers. In this way, 

CMS could be reasonably assured of meeting the target level, but the providers 

could also have some control of their income by reducing utilization (which, in our 

example, would bring utilization closer to national norms). 

7. This same example can be used to show how an organized provider group would 

be incentivized (as opposed to a non-organized geographic region as discussed in the 

previous step). An organized group could simply be (pre)paid the identified amount 

to care for those beneficiaries for whom they had accountability. If they are able to 

reduce expenses below that level, they would retain all of the savings. If they were 

able, through improvements in utilization (avoiding overtreatment, helping patients 

manage chronic disease, improving patient safety, reducing re-admissions, etc.), to 

achieve costs below the defined rate, the providers would retain the entire difference. This is a clear incentive to develop an organized mechanism to accept accountability for care of Medicare beneficiaries and to create mechanisms to provide 

care for those beneficiaries in an effective manner. And, of course, the highest cost 

areas of the country have the greatest opportunity to generate savings (and, therefore, 

make the most money during the transition). Figure 4 (which applies to both communities and organizations) shows the opportunity for providers in high-utilizing areas. 
48 

The shaded area shows potential opportunity, and this opportunity amounts to tens 

of billions of dollars—which should get the attention of providers. 

8. CMS would use consistent quality and satisfaction metrics to ensure that quality and efficiency were both being provided. These metrics would be used to generate either bonuses or penalties. 

9. While there are potentially billions of dollars available to providers that work 

hard to manage ineffective or noncontributory utilization and reduce unnecessary 

costs, the real saver is CMS (and ultimately, the taxpayer). Figure 5 shows the savings as the shaded areas, generated from both low and high utilizing areas and organizations, compared to the historical trend. By simply moving toward practice patterns already demonstrated by high-value localities and organizations, savings to 

the Government can very realistically approach $100 billion per year by 2017. Indeed, appropriately set national targets would produce savings sufficient to place 

Medicare on a sound actuarial basis. And shared accountability—with beneficial incentives—could create a new (and sustainable) trend for the future. 

10. In our example, by 2017, all parts of the Nation would have a consistent, fair, 

sustainable, and affordable rate for Medicare beneficiaries. And as a byproduct, this 

more effective care delivery would become the model for care provided to nonMedicare consumers as well. 

APPENDIX 2: A SHORT-TERM APPROACH TO COST REDUCTION FOR MEDICARE

We recognize that the approach discussed in this paper will require substantial 

analysis and discussion, and that creating both legislation and subsequent regulation is likely to take some time. With this in mind, we also suggest a short-term 

solution that could be rapidly adopted and that incorporates some of the components 

discussed in this paper. 
49 

If the target is a reduction in per-beneficiary expense, we believe the concepts described in Principle 7 will be more effective than a simple across-the-board cut in 

fee-for-service payment rates. The enormous and unwarranted variation in treatment volumes in the United States makes it clear that the most powerful way to 

create major cost savings is through elimination of ineffective and unnecessary utilization. Not only is overtreatment expensive; it is often risky to patients and frequently leads to poor medical outcomes. 

Therefore, we suggest that a target rate for per-beneficiary spending be set in 

each geographic region (based on historical expenditures in that region). Rather 

than simply lowering the fee-for-service payment rate across the board, we instead 

propose that CMS withhold a fixed percentage of total fee-for-service payments to 

physicians, hospitals, and other Medicare providers. 

Suppose that in 2012 the initial withhold rate is 2 percent. If the providers in 

the region keep overall utilization at least 2 percent under the target rate, then the 

withhold money is returned. If the target utilization is not met, CMS keeps the 

withhold money and returns it to the Treasury. In either case, CMS saves at least 

2 percent over what would otherwise have been spent. This proposal can therefore 

be scored by CBO without tenuous assumptions about behavioral responses to financial incentives. Indeed, there could be even greater savings (and shared saving with 

providers or consumers) if the region kept utilization further below the 2 percent 

target saving. With a little additional complexity, this same approach could be applied to specific institutions that care for large numbers of Medicare patients (rather 

than just to geographic regions). 

The key benefit to this approach is that it begins to incentivize providers of care 

to work together to reduce unnecessary utilization. This could effectively prepare 

them for the next step suggested in this paper: joining together to accept accountability for the health (and associated quality and cost) of a group of beneficiaries. 

USEFUL RESOURCES

Baicker, Katherine and Amitabh, Chandra. ‘‘Medicare Spending, the Physician 

Workforce, and the Quality of Health Care Received by Medicare Beneficiaries.’’ 

Health Affairs (April 2004): 184–97. 

Cutler, David M. Your Money or Your Life: Strong Medicine for America’s Health 

Care System. New York: Oxford University Press, 2004. 

Enthoven, Alain C. ‘‘Shattuck Lecture: Cutting Cost Without Cutting the Quality of 

Care.’’ New England Journal of Medicine 298:22 (1 Jun 1978): 1229–38. 

Fisher, Elliott S., David Wennberg, Therese Stukel, Daniel Gottlieb, F.L. Lucas, and 

Etoile L. Pinder. ‘‘The Implications of Regional Variations in Medicare Spending. 

Part 2: Health Outcomes and Satisfaction With Care.’’ Annals of Internal Medicine 138:4 (18 Feb 2003): 288–99. 

Fuchs, Victor R. ‘‘More Variation in Use of Care, More Flat-of-the-Curve Medicine.’’ 

Health Affairs (7 Oct 2004): Web Exclusive. 

Goodman, D., A. Esty, E. Fisher, and C. Chang. Trends and Variation in End-ofLife Care for Medicare Beneficiaries with Severe Chronic Illness. A Report of the 

Dartmouth Atlas Project. Lebanon, N.H.: Dartmouth Institute for Health Policy 

and Clinical Practice, 12 Apr 2011. 

Hirth, Richard A., Michael E. Chernew, Edward Miller, A. Mark Fendrick, and William G. Weissert. ‘‘Willingness to Pay for a Quality-Adjusted Life Year: In Search 

of a Standard.’’ Medical Decision Making 20:3 (2000): 332–42. 

Jencks, Stephen F., Edwin D. Huff, and Timothy Cuerdon. ‘‘Change in the Quality 

of Care Delivered to Medicare Beneficiaries, 1998–1999 to 2000–2001.’’ JAMA 

289:3 (15 Jan 2003): 305–12. 

Stukel, Therese A., F. Lee Lucas, and David E. Wennberg. ‘‘Long-term Outcomes of 

Regional Variations in Intensity of Invasive vs. Medical Management of Medicare 

Patients with Acute Myocardial Infarction.’’ JAMA 293:11 (16 Mar 2005): 1329– 

37. 

Wennberg, J., S. Brownlee, E. Fisher, J. Skinner, and J. Weinstein. An Agenda for 

Change: Improving Quality and Curbing Health Care Spending. A Dartmouth 

Atlas White Paper. Lebanon, N.H.: Dartmouth Institute for Health Policy and 

Clinical Practice, 17 Dec 2008. 

Senator WHITEHOUSE. Thank you so much, Mr. Poulsen. 

Our final witness is Dr. Mark Fendrick, professor in the Department of Internal Medicine and Health Management Policy at the 

University of Michigan. He is one of three University of Michigan 

faculty that developed and named the concept ‘‘value-based insur-
50 

ance design,’’ and co-founded the University of Michigan Center for 

Value-Based Insurance Design. 

He currently co-directs the Value-Based Insurance Design Center, which advocates for the development, implementation, evaluation of innovative health benefit plans. We are delighted to have 

him here. 

Thank you, Dr. Fendrick. 

STATEMENT OF A. MARK FENDRICK, PROFESSOR, M.D., DEPARTMENT OF INTERNAL MEDICINE AND DEPARTMENT OF 

HEALTH MANAGEMENT AND POLICY, UNIVERSITY OF MICHIGAN, AND CO-DIRECTOR, UNIVERSITY OF MICHIGAN CENTER FOR VALUE-BASED INSURANCE DESIGN, ANN ARBOR, 

MI 

Dr. FENDRICK. Good afternoon and thank you, Senator Whitehouse. Good afternoon and thank you, Chairman Whitehouse, Senator Franken, and other members of the committee. 

I am addressing you today not as a representative of the University of Michigan, but as a primary care physician, a medical educator, and a public health professional. I applaud you for holding this 

hearing because health care quality improvement and cost containment are among the most pressing issues for our national wellbeing and economic security. 

While there is little disagreement over the fact that there is 

enough money in the U.S. health care system, research shows that 

if we spent our medical dollars more frequently on services for 

which there is clear benefit for improving health, we could enhance 

quality and contain costs. 

Thus, instead of the focus on how much we spend, I suggest we 

shift our attention to how well we spend our health care dollars. 

Moving from this volume-driven to value-based system that the 

other panelists talked about requires a change in how we pay for 

care, but it also requires a change in how we engage consumers to 

seek care. All of these earlier testimonies focused on the critical importance of reforming care delivery and payment policies. Far less 

attention, however, has been directed at how we can alter patient 

behavior. Today I propose that clinically nuanced patient incentives 

are essential for us to bend the health care cost curve. 

Now most of us know that the most common approach to directly 

impact consumer behavior is cost shifting requiring all of us to pay 

more in the form of increased premiums, and also increased cost 

sharing at the point of service. Yet in every health plan across 

America, these cost sharing increases have been implemented in a 

one-size-fits-all way in that our patients are charged the same 

amount for every doctor visit, every diagnostic test, and every prescription drug. 

Does it make sense to you, Mr. Chairman, that my patients pay 

the same out-of-pocket to see a cardiologist after a heart attack as 

to see a dermatologist for mild acne I could barely see. They pay 

the same co-payment for a drug that could save a life from cancer 

or heart disease as a drug that will make toenail fungus go away 

or my hair grow back. 

As Americans are required to pay more and more to see all their 

clinicians and to fill all their prescription drugs, they use less, sig-
51 

nificantly less essential care. Realizing that this lack of clinical nuance was available in all the health plans, the private sector began 

to implement a concept our team developed known as Value-Based 

Insurance Design or V–BID. 

The central premise of V–BID is to reduce financial barriers to 

essential, high-value medical services. These are the services that 

I beg my patients to do such as recommended immunizations, preventive screenings, and critical treatments for chronic conditions 

that drive the vast majority of our health care spending. It must 

be stated clearly, though, that V–BID programs never determine 

what is covered and what is not. 

If we are serious about controlling costs and improving health, 

we must change the incentives for consumers as well as for the 

providers that we’ve heard very much about today. 

As a physician practicing in a medical home, I find it incomprehensible to realize that my patient’s insurance plan does not offer 

easy access for those exact same services for which I am 

benchmarked. Does it make sense that I personally am offered a 

financial bonus to get my patient’s diabetes under control when her 

benefit design makes it prohibitively expensive to fill her insulin 

prescription or afford the co-payment for her eye exam? 

Momentum for the V–BID concept is rapidly growing in the private sector. Hundreds of self-insured employers, public organizations, unions, and insurance plans have designed and implemented 

V–BID programs. The Federal Government should not erect barriers to the adoption of V–BID. And maybe more importantly, it 

should encourage the expansion of V–BID principles into both public and private programs. 

They could do this by avoiding rigid requirements for essential 

health benefit plans. By maintaining flexibility and benefit designs 

with respect to State health exchanges, revising Medicare’s onesize-fits-all cost sharing, and allowing innovation such as variable 

copayments in strained Medicaid programs. Details for these specific recommendations are provided in my written testimony. 

I will close by saying as a practicing clinician, I believe that the 

goal of our health care system is to produce health, not save 

money. 

I strongly concur that health care cost containment is absolutely 

critical to our Nation’s fiscal health. Importantly, the cost containment initiatives being considered by this panel should not produce 

reductions in quality of care. 

That said, the use of these clinically nuanced incentives to encourage both providers and patients is an important step toward a 

more effective and efficient health system. This common sense, feasible approach will ultimately produce more health at any level 

health expenditure; 10 percent more the same, or 10 percent less. 

I believe this is an opportunity that we can’t afford to miss. 

Thank you, Mr. Chairman, and I will take questions from the 

panel as well. 

[The prepared statement of Dr. Fendrick follows:] 
52 

PREPARED STATEMENT OF A. MARK FENDRICK, M.D. 

SUMMARY

Research shows that if America spent its health care dollars on services with solid 

evidence of clinical benefit, we could simultaneously enhance quality and reduce 

costs. Thus, instead of focusing on how much we spend on health care, we should 

consider how we allocate our scarce health care dollars in order to maximize the 

amount of health produced for the money spent. While the critical importance of 

payment reform is well-described, far less attention has been directed to how we can 

alter patient behavior to bring about a more effective and efficient delivery system.

The most common approach to directly impact consumer behavior is cost shifting: 

requiring beneficiaries to pay more in the form of premiums and increased costsharing for clinician visits, diagnostic tests and prescription drugs. To date, patient 

cost-sharing has been implemented in a ‘‘one-size-fits-all’’ way, in that patients are 

charged the same amount for every doctor visit, diagnostic test, and prescription 

drug. However, increases in patient cost-sharing lead to decreases in the use of both 

non-essential and essential care. Peer-reviewed studies show that when patients are 

asked to pay more for high-value screenings, clinician visits and potentially life-saving drugs, they buy significantly less. 

Realizing the lack of clinical nuance in available health plans, the private sector 

has driven the adoption of Value-Based Insurance Design, or V–BID, that simultaneously addresses quality improvement and cost containment—the two critical goals 

of health care reform. The central premise of V–BID is to reduce financial barriers 

to essential, high-value health services. A V–BID approach to benefit plans recognizes that different health services have different levels of clinical value. By reducing barriers to high-value treatments and discouraging low-value treatments, these 

plans result in better health at any level of health care expenditure. Studies show 

that when patient barriers are reduced, compliance goes up, and, depending on the 

intervention or service, total costs go down. If we are serious about ‘‘bending the 

cost curve’’ and improving health outcomes, we must change the incentives for consumers as well as those for providers. Any effort to control costs should include 

clinically nuanced, not price-driven, strategies such as V–BID.

V–BID is being widely implemented by health plans and employers; however, Federal Government programs are lagging far behind. The Federal Government should 

not erect barriers to the adoption of V–BID in the private market, and it should consider ways to expand V–BID in public programs. In particular, the Government 

should avoid rigid essential health benefit requirements that might have the unintended effect of prohibiting value-based principles. It should maintain flexibility and 

limit mandates in benefit designs with respect to State health exchanges. V–BID 

should be applied more broadly to include secondary prevention; allowing high-value 

secondary prevention services to be made available without patient cost-sharing 

would address the high costs of managing chronic disease—and could significantly 

impact aggregate medical spend. Finally, we should fix Medicare’s ‘‘one-size-fits-all’’ 

cost-sharing that dates back to the 1960’s and encourage the use of V–BID principles in Medicaid plans. 

The goal of health reform should be to improve Americans’ health and address 

rising costs. Approaches such as V–BID, that allow patient co-payments to vary 

based on whether an intervention is high-value or low-value, can help meet this 

goal. This is an opportunity we cannot miss. 

Good afternoon and thank you, Chairman Harkin, Ranking Member Enzi, and 

members of the committee. I am Mark Fendrick, Professor of Internal Medicine and 

Health Management & Policy at the University of Michigan. I am addressing you 

today, not as a representative of the University, but as a practicing primary care 

physician, a medical educator, and a public health professional. I have devoted 

much of the past two decades to studying the clinical and economic impact of health 

care innovation, and founded the University’s Center for Value-Based Insurance Design in 2005 to develop, implement and evaluate innovative health insurance designs to ensure efficient expenditure of health care dollars and maximize benefits 

of care. 

Mr. Chairman, I applaud you for holding this hearing on ‘‘Improving Quality, 

Lowering Costs: The Role of Health Care Delivery System Reform’’ because quality 

improvement and health care cost containment are among the most pressing issues 

for our national well-being and economic security. We are well aware that the 

United States spends far more per capita on health care than any other country, 

yet lags behind other nations, that spend substantially less, on key health quality 
53 

1Trivedi, A. N Engl J Med. 2010 Jan 28;362(4):320–8. 

metrics. However, research shows that if we spent our health care dollars wisely 

on services for which there is clear evidence for improving clinical outcomes, we 

could simultaneously enhance quality and reduce the amount we spend. Thus, instead of the unwavering focus on how much we spend—I suggest we shift our attention to how we spend our increasingly scarce health care dollars in order to maximize the amount of health produced for the dollar spent. 

FROM A VOLUME-DRIVEN TO VALUE-BASED SYSTEM

Moving from a volume-driven to value-based system requires a change in both 

how we pay for care (supply side initiatives) and how we engage consumers to seek 

care (demand side initiatives). Other testimonies today and at earlier committee 

hearings have focused on the critical importance of reforming care delivery and payment policies. Far less attention has been directed to how we can alter patient behavior to bring about a more effective and efficient delivery system. While you have 

heard about the potential of Accountable Care Organizations, Patient-Centered 

Medical Homes, bundled payments, and other initiatives to influence providers, 

today I propose that similarly aligned patient incentives are essential for each of 

these programs to accomplish their objectives and for us to really ‘‘bend the cost 

curve’’ for health care. 

Over the past few decades, payers have implemented multiple managerial tools 

to constrain health care cost growth. The most common approach to directly impact 

consumer behavior is cost shifting: requiring beneficiaries to pay more in the form 

of increased premiums and increased cost-sharing for clinician visits, diagnostic 

tests and prescription drugs. In nearly every health plan across America, cost-sharing has been implemented in a ‘‘one-size-fits-all’’ way, in that patients are charged 

the same amount for every doctor visit, diagnostic test, and prescription drug [within 

a specified formulary tier]. Cost-sharing increases are similarly passed on without 

any regard to clinical nuance. Does it make sense to you, Mr. Chairman, that my 

patients pay the same co-payment to see a cardiologist after a heart attack as a dermatologist for mild acne, or the same co-payment for a drug that could save a life 

from cancer or heart disease as a drug that would make toenail fungus go away or 

hair grow back? In the typical $5 generic drug tier available to most Americans, 

there are drugs so valuable I have often reached into my own pocket to help patients fill these prescriptions; while for the same price there are also drugs of such 

dubious safety and efficacy, I honestly would not give them to my dog. This ‘‘onesize-fits-all’’ system lacks any clinical nuance, and frankly, to me, makes no sense. 

Such an approach fails to acknowledge the well-documented differences in clinical 

value among medical interventions. 

As Americans are required to pay more to visit their clinicians and fill their prescriptions, a growing body of evidence demonstrates that increases in patient costsharing lead to decreases in the use of both non-essential and essential care. Peerreviewed studies reveal that when patients are asked to pay more for high-value 

cancer screenings, clinician visits and potentially life-saving drugs, they buy significantly less. A noteworthy example is a New England Journal of Medicine study that 

examined the effects of increases in copayments for doctor visits in Medicare Advantage plans.1 As expected, individuals who were charged more to see their physician 

went less often; however, these patients were hospitalized more frequently and their 

total medical costs increased. This seemingly counterintuitive effect simply demonstrates that the age-old aphorism, ‘‘penny-wise and pound-foolish,’’ applies to 

health care. 

VALUE-BASED INSURANCE DESIGN [V–BID]

Realizing the lack of clinical nuance in available health plans, more than a decade 

ago the private sector began to implement a concept our team developed known as 

Value-Based Insurance Design, or V–BID, that simultaneously addresses quality improvement and cost containment—the two critical goals of health care reform. The 

central premise of V–BID is to reduce financial barriers to essential, high-value 

health services. These are the services I beg my patients to do, such as recommended immunizations, preventive screenings, and critical medications and 

treatments for individuals with chronic disease such as asthma, diabetes and mental illness. 

A V–BID approach to benefit plans recognizes that different health services have 

different levels of value. It’s common sense—by reducing barriers to high-value 

treatments (through lower costs to patients) and discouraging low-value treatments 

(through higher costs to patients), these plans result in better health at any level 
54 

of health care expenditure. Studies show that when patient barriers are reduced, 

compliance goes up, and, depending on the intervention or service, total costs go 

down. 

To date, most V–BID programs have focused on lowering patient costs for highvalue services. For example, these programs make drugs and services for chronic 

conditions such as diabetes, asthma and heart disease that drive the vast majority 

of our health care spending, less expensive and more accessible. Though less common, some V–BID programs designed to discourage use of low-value services, such 

as unnecessary imaging and procedures, have also been implemented. It must be 

stated clearly that V–BID programs never determine what is covered and what is 

not. Instead of having all branded drugs cost $30 out-of-pocket for the patient, a 

V–BID formulary would, for example, provide certain high-value drugs such as 

statins for high cholesterol or insulin for diabetes for $10, with other drugs for $50. 

This clinically nuanced reallocation of services is a necessary component in order 

to move from a volume-driven to value-based system. 

IMPROVING QUALITY AND BENDING THE COST CURVE

Let me be clear, Mr. Chairman, I am not asserting that Value-Based Insurance 

Design is the solution to all of our health care system’s problems. But, if we are 

serious about ‘‘bending the health care cost curve’’ and improving health outcomes, 

we must change the incentives for consumers as well as those for providers. Any 

effort to control costs should include clinically nuanced, not price-driven, strategies 

such as V–BID. 

Your committee is currently examining many exciting, some unproven, supply 

side health reform initiatives such as bundled payments, pay for performance, Patient-Centered Medical Homes, and ACOs. If these initiatives provide incentives to 

clinicians to recommend the right care, it is of equal importance that incentives for 

the patients are aligned with these goals as well. As a physician practicing in a medical home, it is incomprehensible to realize that my patient’s insurance plan does 

not offer easy access for those exact services for which I am benchmarked. Does it 

make sense that I am offered a financial bonus to get my patient’s diabetes under 

control when the benefit design makes it prohibitively expensive to fill their insulin 

prescription or provide the co-payment for their eye examination? 

I’m pleased to tell you that the intuitiveness of the V–BID concept is driving momentum at a rapid pace in the private sector, and we are truly at a ‘‘tipping point’’ 

in its adoption. Hundreds of private self-insured employers, public organizations, 

non-profits, and insurance plans have designed and tested value-based programs. 

Just a few recent examples include the Connecticut State Employees’ Health Enhancement Program, UnitedHealth Group’s Diabetes Health Plan, and Blue Shield 

of California’s ‘‘Blue Groove’’ Plan, each of which provide incentives for individuals 

with chronic diseases to seek the right care at the right time, by the right provider. 

But, despite recent advances in the Federal Employee Health Benefits Programs, 

and the requirement that private plans provide selected primary preventive services 

with no patient cost-sharing in Section 2713 of the Patient Protection and Affordable Care Act [PPACA], Federal Government programs are lagging far behind. The 

Federal Government should not erect barriers to the adoption of V–BID in the private 

market, and it should consider ways to expand V–BID among public programs. 

Provided below are some potential policy approaches: 

1. Avoid Rigid Essential Health Benefit Requirements: As stated above, 

there is substantial movement in the private market toward greater adoption of 

V–BID. Setting uniform requirements for co-pays and deductibles can have the unintended effect of prohibiting value-based principles. The potential result of strict 

cost-sharing requirements without clinical nuance would be underuse of high-value 

services and overuse of low-value services. Additionally, as the Institute of Medicine 

(IOM) argued in its recent report, the essential health benefit package should evolve 

to promote more value over time. 

2. Maintain Flexibility and Limit Mandates in Benefit Designs with Respect to State Health Exchanges: Value-based designs generally raise the actuarial value of a plan, even though they may reduce health spending in the long run, 

because they lower the up-front cost and therefore lead to increased use of highvalue services. Under PPACA, plans in each tier—platinum, gold, silver and 

bronze—have corresponding limits in actuarial value. Consequently, States and the 

Federal Government should take care when mandating specific benefits and services 

for plans. Too many prescribed benefits will exclude value-based designs, especially 

for the bronze and silver plans, which will be sold to the very low-income populations who have the potential to benefit most from V–BID. 
55 

3. Expand Secondary Prevention: While the removal of patient cost-sharing 

for preventive services is commendable, the V–BID premise of reduced patient costsharing for high-value, evidence-based care has important implications beyond preventive services as mandated in section 2713. The definition of preventive services 

in PPACA is narrow, focusing on primary prevention. Evidence-based services for 

those with identified chronic diseases, such as eye examinations for those with diabetes, behavioral therapy for individuals with depression, and long-acting inhalers 

for asthma sufferers, offer as much or more value than those preventive services 

identified in section 2713. These services, often referred to as ‘‘secondary prevention,’’ are typically the foundation of quality improvement programs, such as pay for 

performance, disease management and health plan accreditation. Allowing highvalue secondary prevention services that would be made available without patient 

cost-sharing, similar to those primary prevention services selected in Section 2713, 

would be an important extension of the health enhancing and cost containment 

goals of health reform. 

4. Fixing Medicare’s ‘‘One-Size-Fits-All’’ Cost-Sharing: The Medicare ‘‘onesize-fits-all’’ approach to copayments dates back to its inception in the 1960s. The 

Medicare Payment Advisory Commission (MedPAC) has repeatedly advocated the 

use of V–BID as a long-run measure for improving quality and lowering spending. 

For example, in its 2010 Report to Congress, MedPAC wrote that V–BID could be 

used to tailor Part D cost-sharing requirements to individuals’ clinical needs. Additionally, Senators Stabenow and Hutchison introduced a bipartisan bill, S. 1040, 

‘‘Seniors’ Medication co-payment Reduction Act of 2009’’ to allow a demonstration 

of V–BID within Medicare Advantage plans. The Federal Government should remove the barriers to enable the implementation of this innovative approach. 

5. Encouraging Innovation in Medicaid: Finally, within Medicaid we see 

States, under pressure to cut Medicaid spending, raising copayments on an extremely cost-sensitive population without any regard to clinical nuance. Research 

demonstrates that these co-payment increases will cause some patients with chronic 

conditions to forgo care and end up in an emergency room or hospital, which could 

result in higher overall spending. 

CONCLUSION

It is my hope that as you consider changes to the delivery system, you will take 

the common-sense step of allowing co-payments to vary based on whether an intervention is high-value or low-value. As a practicing clinician, I believe that the goal 

of our health care system is to produce health, not to save money. That said, I 

strongly concur that health care cost containment is absolutely critical for our Nation’s fiscal health. The goal of health reform should be to improve Americans’ 

health and address rising costs by utilizing strategies that produce a more effective 

and efficient health system. Value-Based Insurance Design is one step toward reaching that promise. The use of clinically nuanced incentives (and disincentives) to encourage or discourage patient and provider behavior will ultimately produce more 

health at any level of health expenditure. This is an opportunity that we cannot 

miss. 

Thank you. 

Senator WHITEHOUSE. Thank you very much. I am really delighted that you all are here. We sometimes seem to be blundering 

through a cloud of mixed information here in Washington, and we 

are looking at the health care system as a real priority. 

Admiral Mullen, who is the Head of the Joint Chiefs of Staff has 

said that our national debt is the No. 1 threat to our national security. And if you look at what the reason is for our national debt 

and deficit, whether you are looking at Congressman Ryan or 

President Obama, they agree that, at its heart, it is health care. 

Solving this is a very short jump to recognize that solving the 

health care dilemma is vitally important to America’s national security. Through this cloud of information and misinformation, your 

organizations are showing the way, showing they can actually, 

practically be accomplished. And that what Dr. Kaplan described 

as, ‘‘The path to better health and long-term health care is the 

path to lowered cost,’’ is the secret. 
56 

We seem to have missed it. There is an awful lot of politics 

around this issue, as you may have noticed in Washington. But beneath all of that, there are some really practical solutions that you 

all are bringing to life. So it means a lot to me that you are here. 

Dr. Kaplan, in your testimony you used the phrase ‘‘cultural 

transformation,’’ about what happened at Virginia Mason, and I 

can appreciate that. One of the ways that you make cultural transformation happen is with extraordinary leadership and clearly you 

have shown that. 

But in order to sustain cultural transformation, it helps to have 

something that has been mentioned a lot in this hearing, which is 

incentives. The incentives have to be aligned and pointing in the 

direction that you want to proceed, otherwise it is just going to be 

a lot more difficult. 

We do our best here to try to figure out ways to realign those 

incentives, one of the problems that we face is that from your side, 

you face innumerable payers. The incentive signal gets confused by 

what private insurance companies, government programs, and 

other entities that are compensating you for care, or how they are 

sending those signals. 

Out of that complex cloud of payer confusion, the sort of Babel 

of the payers, what are some of the simplest and clearest ways that 

you think we, in Congress, could have an effect? Dr. Kaplan first, 

then Mr. Poulsen. 

Dr. KAPLAN. I think that the history of health care payment suggests that Medicare really does set the tone. It does more than set 

the tone, so that I believe it is, as Mr. Poulsen has suggested, that 

we do need to move much more expeditiously to modify a payment 

system in the public sector. 

I think that Medicare and our State governments who have similar economic challenges have an opportunity to, in a substantive 

way, modify payment. And we will see the commercial private sector move as well. 

But I think there is even a bigger issue and that has to do with 

transparency. We don’t have transparency in this country. We don’t 

actually—in health care. No other industry, as I see it, actually has 

the kind of veil or a camouflage between the buyer and seller of 

services that health care has today. 

So I believe that if we had transparency, the potential of the 

kind of All Care Act, as I see it, is one of the last chances of a market-based system that could actually lead to a market whether it 

was Medicare and Medicare Advantage as part of Medicare, or the 

commercial sector. That we would actually be able to understand 

what we are buying, what we are paying for it. 

Employers in this country are becoming increasingly noncompetitive in global economy because of, just like the Federal Government, line item health care costs. They don’t even know today that 

their health plans are paying some providers more for certain services than others, actually for the same service with perhaps even 

inferior quality. 

I think we need to use the power of the public sector, while also, 

whether it is mandates or whether it is some other vehicle to create more transparency. That it actually allows there to be an understanding between the buyer and seller of services, people paying 
57 

the bills, government, employers, and individuals increasingly understanding how much skin in the game they have, what they are 

paying, and what they are getting. And I think that will then drive 

a better alignment of incentives. 

Senator WHITEHOUSE. And do you agree with Commissioner 

Koller that having 6 or 7 cents out of every health care dollar being 

spent on primary care is a sign of something gone wrong? And that 

we need to raise the proportion of the health care dollar that is 

spent on primary care, so that it is lower than, say, insurance company overhead, which is higher than 6 or 7 cents out of every 

health care dollar right now? 

Dr. KAPLAN. Absolutely. I think that we need to take a look at 

what we are really spending our money on in this country, and 

where we are getting the benefit or not. And I think primary care 

is one of those areas that has been undervalued historically in the 

fee for service RVU-driven relative value unit-driven, procedurally 

driven, old economy of health care, which happens to be alive and 

well today. 

We need to flip that paradigm because that is where tremendous 

value accrues prevention, partnering with communities, schools, 

churches, and senior centers. That all happens as an extension of, 

what many call, an accountable medical home. And I think we need 

to help support those, and then we can rationally use what is wonderful specialty care and procedural care system in our country. 

But primary care is disproportionately disadvantaged today. 

Senator WHITEHOUSE. My time in this round has expired. I will 

turn to Senator Franken, but we will continue the discussion. 

Thank you. 

Senator Franken. 

STATEMENT OF SENATOR FRANKEN

Senator FRANKEN. Thank you, Mr. Chairman. My State of Minnesota has been a national leader in providing high quality, lowcost care, yet receives extremely low Medicare reimbursements. 

The average reimbursement for Texas, for example, is about 50 

percent more than in Minnesota per Medicare patient, but we have 

better outcomes. 

This isn’t about pitting Minnesota against Texas, but it is about 

incentivizing States to do the right things—the things that Minnesota has been doing and the right things that many hospitals 

have been doing. 

So the Affordable Care Act applied the Value Index to Physicians 

and Clinics only, but not hospitals. And it seems to me that that 

approach hurts hospitals that are providing high care, high-value 

care because it reduces their payments. 

Does anybody here have an opinion on that, Dr. Kaplan, Mr. 

Poulsen especially? Should hospitals be included in the value 

index? 

Mr. POULSEN. I would be happy to address that. Maybe slightly 

indirectly and suggesting we think that the answer ultimately 

should yield similar costs across the country in all communities for 

care of Medicare patients. 

Clearly, there are going to need to be adjustments for differences 

of input costs. It simply costs more to hire nurses, and build build-
58 

ings, and maintain property and equipment in Manhattan than it 

does in Salt Lake City. 

That said, the kind of discrepancies that you have discussed, we 

think, are best eliminated in the most effective way possible. We 

think that an effective way to do that over time is to reward the 

providers, all the providers, doctors and hospitals, for moving in 

the direction of most effective and efficient care. That is a slightly 

roundabout answer to the question, but that would clearly be our 

perspective. 

Dr. KAPLAN. I would agree. I think that on the one hand we are 

saying we want physicians and hospitals to work together 

seamlessly. I want our patients to get all the care they need and 

only the care they need. I want it to be given in the right venue. 

And when you create an uneven playing field between the physicians and their hospital partners, who should be their partners or 

colleagues, I think that it creates artificial barriers to accomplishing just what we are trying to do. 

I also think that it is important that we recognize that we, the 

providers—I am a physician and representing a hospital, a medical 

center—we have a big role to play. We have to do our part. We 

have to be willing to challenge our old assumptions, take out waste, 

change the way we think about our work, and redesign it, as I tried 

to describe, around patients, not around us. 

But to do so in an environment that has these barriers and these 

disincentives, and unevenness through the forces, it is hard not to 

think about how we are going to change our mindsets and the 

paradigms in our culture, the cultures and our institutions. And 

then to have the payment environment and regulatory environment 

conspiring against us instead of trying to facilitate that, I think it 

makes it ever more difficult. 

Senator FRANKEN. You are talking about the culture in a hospital 

where people are working together, right. And you have mentioned 

medical homes and how they work. I know that, for example—and 

Mayo is used maybe too often as an example from Minnesota because other hospitals in Minnesota do a very good job as well—but 

one thing Mayo does is its doctors are salaried. 

Dr. KAPLAN. Correct. 

Senator FRANKEN. So they don’t receive any benefit for ordering 

more procedures. It is health care and not sick care, is sort of the 

cliche ́, but it really is. I think I am running out of time, so I will 

go back to the Chairman, and we will continue this, I guess. 

Senator WHITEHOUSE. Absolutely. Chris, one of the things that 

Dr. Kaplan mentioned in his remarks just a moment ago about 

transparency was the different payments that are made to different 

providers for the actual same service. You have looked into that in 

Rhode Island. Could you let us know what you found? 

Mr. KOLLER. As we were trying to understand why we are looking at 8 to 10 percent increases that do not make my stakeholders, 

the employers who are buying health insurance, very happy, we 

were struck by the significant increase that health plans were requesting in payments for hospitals. Price increases of 7 to 8 percent, outpatient price increases of something less than that, but 

high utilization increases. And we also heard from hospitals who 

said, ‘‘We’re not getting enough money.’’ 
59 

So we used our power as the regulator to collect information from 

the insurers, actual claims information about what health plans get 

paid, and then we indexed it to Medicare because Medicare makes 

adjustments for teaching. They make adjustments for severity. 

They make adjustments for charity care. 

We found for inpatient medical surgical services, a subset, that 

there were some hospitals that were being paid by commercial insurers 80 percent of what Medicare would pay them. There were 

other hospitals that were being paid 160 percent of what Medicare 

would pay them. 

The only differences that we could attribute to that was their negotiating power, which leads us to believe—to Dr. Kaplan’s remarks about transparency—that to a certain extent, transparency 

should extend to pricing, particularly for those hospitals which 

have market power. The costs rise to the level of revenues that are 

capturable. 

And it is on the basis of that, that we tried to intervene in classical, public tradition where there are price controls in place, a 

price authority in place. That was the basis for our contracting 

standards. 

Mr. WHITEHOUSE. It is one of the strange things about the health 

care system that for most products, the customer actually brings 

the price with them. And the price is not found at the point of sale. 

If I go into a grocery store, then beans cost whatever they cost a 

pound, and they cost that much, and there is a sign that says, 

‘‘$1.99 a pound,’’ and that is what it costs, and it does not matter 

who you are. 

When I show up in the health care system, what it cost me to 

have a particular procedure, has a lot to do with what kind of insurance I have and that the pricing is very disconnected depending 

on who you are. 

Mr. KOLLER. We are inconsistent in our public policy. While on 

Medicare, we have a very deliberate public setting, rate setting policy with specific factors that we have agreed to. For the other half 

of the market, for the 50 percent that is private pay, we have a 

completely opaque system that rewards market dominance. 

Mr. WHITEHOUSE. Dr. Kaplan. 

Dr. KAPLAN. I just want to say that an unintended consequence 

of the Accountable Care Act and the movement to promote coordinated care has led to, as I am sure you know, a consolidation, a 

serious, a significant, what I would call serious, consolidation in 

many, many markets across the country. 

Consolidation happens for different reasons. It may happen, as I 

believe it does in Intermountain, to create better coordinated, lower 

cost, higher value care opportunities for communities that otherwise would not have them. 

But in many communities and Seattle, frankly, is no exception, 

Boston is much well-known for this, consolidation is occurring to 

create even greater market power. And I think there have been 

several studies done recently which document this, and just as Mr. 

Koller references, that spread is enormous. 

What that does to a hospital that is focused on execution, and on 

patient experience, and on lowering costs and delivering better 

value, is it creates an uneven playing field. Now, we are getting 
60 

paid less, so we have to manage things in a very different way from 

the neighbor down the street who is part of a 26-hospital system. 

That is a dangerous, unintended consequence of the Accountable 

Care Act, not legislated, but just market behavior, and I think we 

need to be vigilant as a society around this. 

Mr. WHITEHOUSE. Commissioner Koller talked about the employers of Rhode Island as being his constituents. And Dr. Kaplan, you 

described some of the ways in which Virginia Mason has reached 

out to significant employers in your area. And I know, Mr. Poulsen, 

from our discussions that you try to engage with the business community in this area. 

It has been a bit frustrating to find a really good model for business engagement on this issue. We have talked to our chambers of 

commerce in Rhode Island over and over again, and they sort of 

generally get it, but they have a lot going on. And to focus on this 

is sometimes more than they can bear. 

The Leapfrog Program is very helpful. Bruce Bradley from the 

Leapfrog Program, you may remember, is a former Rhode Islander. 

We are very proud of him. But it is built on really big employers 

who have really big market share and can dictate behavior. And if 

you don’t come from that environment, the Leapfrog model begins 

to slip in terms of its relevance. 

For those of us who really are believers in the potential of reform 

in our health care system to deliver better quality care, that lowers 

the cost of the system, and better coordinated care that serves people better, what is the best that you can think of for advice for how 

to get the business community involved in a helpful way and direct 

into that path? 

Mr. Poulsen. 

Mr. POULSEN. I think we believe that, again, incentives are at 

the heart of what has historically been wrong with the current 

health care system. So we would encourage businesses to become 

active in getting it right. 

As Dr. Kaplan said, Medicare certainly can lead the way. They 

are bigger than all of the commercial purchasers put together in 

most communities. So they can be a catalyst in doing this. 

Employers and employer groups, we believe, can take the appropriate following step which is to encourage or demand that they 

purchase in the same way. Which is, they purchase health through 

their individual employees and their families rather than purchasing MRIs, and surgeries, and visits. If they will do that, then 

you’ve got something that is truly comparable. 

One of the reasons that the current system is opaque is because 

there are thousands and thousands and thousands of items that 

nobody really understands outside of the medical community that 

are put together into an episode of care. And to try and tease that 

out is more difficult than trying to tease out the very detailed bill 

if you get your transmission replaced. And figure out, ‘‘Gee, did 

they really do that? Is that really necessary? Was that helpful? 

Could I have gotten it less somewhere else?’’ 

But all understand when we are feeling well, when we are 

healthy, when we are treated with respect, when we have good outcomes, and to be able to make a comparison at that level is vastly 
61 

easier. And therefore, vastly less likely that people will abuse the 

system and play games. 

Senator WHITEHOUSE. Dr. Kaplan, then Dr. Fendrick, then Mr. 

Koller. 

Dr. KAPLAN. I think that employers in this community need to 

ask the right questions, and I think they have been isolated in 

some ways, again, from the marketplace, whether it is through 

their health plans who would prefer they don’t talk to the providers. Or whether it is through the brokers, and intermediaries 

that see their role as packaging things in, all tied up with a nice 

bow, and giving it to the employer and says, ‘‘Your aggregate rate 

of increase this year will be 8 or 12 percent.’’ 

Employers have to ask some questions: what am I getting? What 

am I paying for? And what are you paying the provider community? 

As we sit down at the table, I mean, it sounds very, almost naive 

but it is about having a simple conversation. When you can actually engage with a CEO or employee benefits vice president, you 

come to understand how they see quality, what they really want 

for their workforce. 

In our marketplace, collaborative work was recently published in 

‘‘Health Affairs’’ in September of this year. The employer community itself gave us five product specifications: same day access, evidence-based medicine, 100 percent patient satisfaction, rapid return to full function, and affordability. 

Senator WHITEHOUSE. The article will be placed into the record 

of this proceeding by unanimous consent. 

[The online version of this article may be found at http://content.healthaffairs.org/content/30/9/1680.full.html]. 

Dr. KAPLAN. I just want to say they do have within their means, 

they have under-leveraged their power in the marketplace. And I 

think today, they are beginning to feel the pain enough so they are 

willing to take a look. 

And a company like Microsoft, 5 years, 10 years ago it was, 

‘‘I want to manage my health care costs, but I am competing 

with Cisco, and Dell, and Google, and I will educate my employees, but I am going to give them 100 percent coverage everywhere.’’ 

Today they are saying, 

‘‘We need to rethink how we manage our health care expenditures and whether we really want to give 100 percent open access to every single physician, every single hospital regardless 

of how much it costs.’’ 

We need to encourage them to be thinking differently. 

Senator WHITEHOUSE. Dr. Fendrick. 

Dr. FENDRICK. I think the reason why employers have been driving the value-based both supply and demand side systems is they 

finally realized that unlike any other sector, their business where 

they look at what they get for what they spend, for health care, 

they have historically looked at only what they spend. And they 

don’t think that way when they buy real estate, or when they buy 

cars, or when they buy computers. And this idea of the product 

they should be buying, which is health, as opposed to just that 
62 

number what they spend is really driving this transformation, at 

least on the demand side. 

Because of this narrow focus on health care costs alone, payers 

never really knew what the true value of the investment in health 

was to their firm. And now that we are starting to see these champion employers like Pitney Bowes, and Safeway, and Boeing, and 

Dell that understand that a healthier workforce doesn’t just reduce 

the amount of patients who go to the hospital emergency room. But 

they are on disability less. They are on absenteeism less. And, in 

fact, they provide these nonmedical benefits like retention and morale, which are really hard for academics like myself to measure. 

So the more the firms are starting to include these benefits, they 

are starting to realize the true value of their health care investments. And given that, if things go as planned, by 2014, many of 

these firms have to make a decision to stay in or stay out. Most 

of them don’t have the information to make an informed decision 

on the value of their medical spend. And thankfully, I think, the 

impetus by this committee and the national debate is bringing this 

discussion to the forefront. 

And the more we broaden the benefits in terms of what we get 

financially in health, in terms of the fiscal responsibility part, it 

will drive the value proposition that you described faster and higher. 

Senator WHITEHOUSE. Thank you, doctor. Mr. Koller. 

Mr. KOLLER. Yes, I would like to maybe get your question around 

how the Federal Government could address this. A couple points, 

one, the number of people who are getting their health insurance 

through their employers is decreasing. It is a steady decline. It is 

somewhere down south of 60 now, between 55 and 60 percent, and 

that number is not going back up. Once we have figured out—once 

the new players figure out how to operate without offering health 

insurance, they will continue to do so. 

From a financial standpoint, we need that remaining money to 

make this system work. So it is very important for us to retain that 

money in the system. 

In our work around developing a health insurance exchange in 

Rhode Island, we have gone and asked small businesses, ‘‘What do 

you want from an exchange? ’’ And the answer is very clear for 

them, and it is actually consistent with what has been discussed 

here. They want employee choice. Because it turns out that if you 

give employees the choice, they will accept less choice of provider 

for more comprehensive benefits. That works for a high-value delivery system. It works for Intermountain Healthcare. It works for 

Virginia Mason teamed with a couple of other folks. And if you give 

that choice to employees, they will make it because it is their 

money that they are bringing with that. 

So I think that the work around the design of the health insurance exchange will promote competition for high value. Any sort of 

individual purchase, employee purchase will make these guys more 

successful, which is exactly what we need. 

But there are barriers to that sort of employee choice. They exist 

deep within the recesses of IRS rulings around tax benefits, and 

taxation and benefits. And understanding what those barriers are 
63 

so that we can make more people want them, because that is what 

we need, will be very important. 

Senator WHITEHOUSE. One quick question, you talked about your 

Medicare Advanced Primary Care Practice initiative, and the problem you had going into it, to use your words, ‘‘Providers hate being 

jerked in different directions by the conflicting demands of different 

carriers.’’ And what you were able to do with the Medicare Advanced Primary Care Practice was to get all the different payers 

together on the same payment model, so that everybody was being 

dragged in the same direction. And Medicare agreed to do that 

itself, did it not? 

Mr. KOLLER. That is right. 

Senator WHITEHOUSE. How easy was it to get them to come in 

and participate? 

Mr. KOLLER. A heck of a lot easier post-Affordable Care Act. I 

think that Medicare has gotten a direction clearly from statute 

around the importance of, one, innovation. And two, innovation not 

just on their terms, but on collaborating with local States. 

Medicare, for all of its strength, is only 40 percent of the local 

market. Our common goal here is delivery system change. So what 

we had done specifically was to get a group of commercial payers 

together, implement changes for the patients at our medical home, 

and then take advantage of Medicare actually changing its rules. 

This was a real shift for Medicare. They came and said, ‘‘We will 

adopt to what’s being done in the community, rather than the community adopting to what we are saying.’’ You talk about a cultural 

shift, that is very significant. 

I think Medicare, frankly, needs to learn how to do more of that. 

They are working hard, but I think direction from Congress in general and the appropriate committee becomes very important, because the all payer alignment is critical. 

Senator WHITEHOUSE. Good, because part of why we are here 

today is to help send those messages. And one of the messages that 

I want to send is that I very much hope that the Administration 

will take a look at the delivery system reform elements in the Affordable Care Act, take a look at the implementation of them, the 

innovation center, the various ways in which they are moving forward. And come as quickly as they can to a target of savings that 

they are willing to point everybody at. 

I have said over and over again that I think if President Kennedy had said we were going to bend the curve of space exploration, we never would have gotten to the moon. It was because he 

put a hard target out there that the whole Federal Government 

swung toward that target. So every chance I get, I urge the Administration to do that, and I will continue to communicate with Administrator Blum about that. 

I know he got a hard time today for the difference between what 

an actuary can compute and what an administration goal is. But 

goal setting in every activity, whether it is a corporate activity or 

a family activity, setting clear goals is how you make yourself accountable for progress. I think that we need to set a lot clearer 

goals that bring this together. 

I take from this hearing three strong messages. No. 1, is that incentives are critical, that the fee-for-service program sends all the 
64 

wrong ones, and that we need to figure out the way to get off of 

that as quickly as possible. 

No. 2, that Medicare has a significant role in driving that behavior, just because of its size and scope, and because its billing system is the basis off of which a lot of other payors catch a free ride. 

So if you change that, they have to change as well as, I guess, payment reform. It boxes above its weight in payment reform because 

it is the baseline for so many other payers. 

And finally that there really, really is true significant potential 

here for better care to be delivered at a lower cost by coordinating 

it better and providing the right incentives. 

I sometimes bemoan how much I feel we are on the wrong track 

around here in our discussion of health care, which seems to be 

often more directed toward political benefit than to the realities of 

health care. 

I had a meeting with George Halvorson back in September. He 

is the CEO of Kaiser Permanente, which is one of the biggest 

health care systems in the country. Like I said, he is the CEO. This 

is not somebody whose opinion one should take lightly. And in our 

conversation he said this, and I had it transcribed because he was 

introducing me, and so we have a record of it. 

‘‘There are people right now who want to cut benefits, and 

ration care, and have that be the avenue to cost reduction in 

this country and that’s wrong. It’s so wrong, it’s almost criminal.’’ 

It’s an inept way of thinking about health care. And I will continue to call on it, I think it is really important. 

People like me, we can stand in Congress, and talk, and fight to 

pass laws all day long. Regulators can do what regulators can do. 

But it is Virginia Mason, it is Intermountain, it is Gundersen Lutheran, and Geisinger, and Kaiser, and Mayo, and all of these organizations that are actually moving on this that are the force that 

is really going to be convincing to people ultimately here in Washington. 

So I thank you very much for the time and the trouble you took 

to come here. The value of your testimony is considerable. The 

value of what you have accomplished is even more so. And I hope 

that you don’t mind if I continue to try to work you in every way 

possible to see to it that the message that you and other CEOs, and 

managers of health systems have your experience. 

The money you saved in addition to the lives you have saved 

from your sepsis changes. The money you saved as well as the lives 

you have saved from your diabetes treatment changes. The way 

you have worked with employers to bring their costs down. That 

is a message that is, frankly, not being heard in this town anywhere near enough. And if I can continue to drag you into hearings, and into forums, and to try and get you in front of the Administration, and to do whatever it takes to convince people that this 

is really a productive path to be going down, I want to do it. And 

if you have ideas for me, to help me do that, I would like to do that 

as well. 

It is 4 o’clock, and I want to let everybody get to their planes and 

on their way. So the hearing will stay open for purposes of any fur-
65 

ther comment or exhibits that anybody wants to add to the record 

for an additional week. 

The live hearing is now adjourned. 

[Additional material follows.] 
66 

PREPARED STATEMENT OF SENATOR MURRAY

I first want to thank both Senators Harkin and Whitehouse for 

holding and chairing for this hearing on how we can reform our 

health care delivery system. 

As I have said before, this is such an important issue—particularly now as we continue to implement the Affordable Care Act law 

passed this past year. We all know that health care costs play a 

substantial role in the greater discussion of our national debt and 

deficit. Fortunately, this landmark legislation contained a variety 

of provisions specifically intended to improve the quality and delivery of care while at the same time working to bend the cost curve. 

One of these provisions was the establishment of the Innovation 

Center at the Centers for Medicare and Medicaid Services, an 

agency tasked with researching, developing, testing, and expanding 

innovative payment and delivery arrangements in order to see how 

we can begin to reward quality not quantity of care in our health 

care system. 

We have already begun to see industry step up to the challenge. 

In my home State of Washington, the Virginia Mason Health System has been working hard to develop an innovative delivery system that tackles both the cost and quality of health care for its patients. I want to especially thank Dr. Gary Kaplan, chairman and 

CEO of Virginia Mason Health System, for his appearance today 

on the panel.

Founded in 1920, Virginia Mason serves as an example for hospitals across the country on how to develop systems of delivery that 

work to decrease costs and eliminate waste, while simultaneously 

maintaining high-quality care and patient safety. Through their 

Virginia Mason Production System (VMPS) management system, 

modeled after the Toyota Production System, they have achieved 

significant cost savings. For example, Virginia Mason has saved 

$11 million in capital investment by using their space more efficiently and reduced their inventory costs by $2 million through reductions in supply chain expenses and other standardization efforts. At the same time they have worked to reduce costs, Virginia 

Mason has seen an increase in the quality of care for their patients. They have reported an 85 percent reduction in the time it 

takes to report lab results, a decrease in the length of the course 

of overall care from 66 days to 12 days, and patient satisfaction increase to 98 percent. Virginia Mason also saw a reduction in the 

diagnosis time for patients at their Breast Clinic from 21 days after 

their initial call to just 3 days. In fact, Virginia Mason found that 

many of these Breast Clinic patients receive their results on the 

very same day of that initial call to the center. 

I want to thank you again, Senators Whitehouse and Harkin for 

holding this hearing as well as Dr. Kaplan and Virginia Mason 

Health System for their continued leadership in this field. We need 

to continue to discuss ways we can reform the way in which we deliver health care so that we can reduce overall costs not only to the 

government and individuals, but also how to streamline and improve care. I look forward to working with my colleagues on the 

HELP Committee on this issue. 
67 

RESPONSE BY JONATHAN BLUM TO QUESTIONS OF SENATOR WHITEHOUSE, SENATOR ENZI, AND SENATOR ROBERTS

QUESTIONS OF SENATOR WHITEHOUSE

Question 1. What was the process for drafting the final rule of section 3022 of the 

Affordable Care Act (the Medicare Shared Savings Program for Accountable Care 

Organizations)? How was input from relevant health care stakeholders sought prior 

to making the draft rule public? 

Answer 1. This Administration and CMS have been committed to a transparent 

process for implementing the Affordable Care Act that includes feedback from a 

wide range of stakeholders. We engaged the public and solicited comment and ideas 

on the Medicare Shared Savings Program regulation for more than a year. On October 5, 2010, we held a Workshop on Issues Related to ACOs that was co-hosted by 

the Federal Trade Commission and the Department of Health and Human Services’ 

Office of Inspector General. The workshop solicited public comments on the legal 

issues raised by various ACO models being considered by health care providers. On 

November 17, 2010, we published a Request for Information in the Federal Register 

to obtain comment on specific ACO issues, including beneficiary attribution and the 

special needs of small practices. Information from both of these activities was used 

to prepare the Shared Savings Program proposed rule. 

Published in the Federal Register on April 7, 2011, the proposed rule allowed for 

a 60-day public comment period. During that time we held a series of open-door forums and listening sessions to help the public understand what CMS proposed to 

do and to ensure that the public understood how to participate in the formal comment process.

We received over 1,300 comments on the proposed rule and we took all of these 

comments into consideration in drafting the final rule. Commenters were very helpful in suggesting ways to improve the Shared Savings Program policies, and we 

have revised many of our policies as a result of those comments. For example, in 

the proposed rule, ACOs could choose from two ‘‘tracks,’’ each of which has at least 

1 year of two-sided risk (the ACO would share in some portion of any savings but 

also be at risk for a portion of any spending over the target). We received comments 

that some ACOs were not ready to accept two-sided risk. In the final rule, ACOs 

may still choose from two tracks for their first agreement period; however, the first 

track does not include two-sided risk. This change encourages participation in the 

program for ACOs at different levels of readiness. 

In the proposed rule, we explained our plan to assess the quality of each ACO 

using 65 quality measures in 5 domains. Commenters urged us to focus on the most 

important quality measures and to reduce the number of quality measures. In the 

final rule, we streamlined the quality measurement to 33 measures in 4 domains 

to reduce the reporting burden and focus on the important measures. 

In the proposed rule, entities eligible to form ACOs independently were limited 

to the four groups specified by the statute as well as certain critical access hospitals. 

Commenters urged us to find a way to allow federally qualified health centers and 

rural health clinics to have a more significant role in ACOs, due to the importance 

of these providers in providing access to care in underserved areas. In the final rule, 

we were able to expand the entities eligible to form an ACO independently beyond 

the four groups specified in the statute and certain critical access hospitals to include federally qualified health centers and rural health clinics. We anticipate that 

this change will increase the participation in the Shared Savings Program. These 

are just a few of the changes we made to the final rule in response to public comment. We have greatly appreciated the robust engagement of the stakeholder community in the development of the Shared Savings Program, and we believe that engagement is reflected in the provisions of the final rule. 

Question 2. I have long advocated for the Administration to set a cost-savings goal 

and timeline for the delivery system reform provisions of the Affordable Care Act. 

Having specific, accountable goals will spur bureaucratic and regulatory efforts to 

implement, or even expand upon, the ACA’s delivery system reforms. Does the Administration have a cost-savings goal, patient outcomes target, or timeline for the 

implementation of the ACA’s delivery system reforms? If not, would the Administration consider setting such goals? 

Answer 2. The Administration is committed to reducing costs and improving care 

in our Nation’s health care system. This goal will not be reached all at once or with 

one single solution. Instead, agencies across the Administration are working to 

achieve this goal. CMS, with over 100 million people enrolled in our programs, is 

working to change the current incentives in Medicare, Medicaid and the Children’s 

Health Insurance Program. For example, we are introducing bundled payments so 
68 

that provider payments are based on quality, not quantity. We are also launching 

new initiatives using Accountable Care Organizations and targeted initiatives for 

Medicare-Medicaid beneficiaries to encourage more coordinated care. Other partners 

within HHS are focused on prevention, outreach, and performing cutting-edge 

research. 

Achieving delivery system reform requires multiple, simultaneous innovations because the current system is a complex arrangement that delivers a wide range of 

health care services over many types of settings. Therefore, CMS has not established one goal or target for all of these diverse initiatives. Nevertheless, we are 

committed to ambitious goals that will revolutionize how health care is delivered in 

this country where we are able to identify and quantify such goals. For example, 

CMS set aggressive goals for the Partnership for Patients initiative: a 40 percent 

reduction in preventable hospital-acquired conditions and a 20 percent reduction in 

unnecessary re-admissions to hospitals by the end of 2013.

Question 3. Your written testimony noted that following the implementation of the 

ACA, growth in Medicare per capita spending has declined significantly and Medicare Part D, Medicare Advantage, and Medicare Part A premiums will remain nearly the same for 2012 as 2011. Can this stabilization in cost growth be attributed, 

in any part, to the Centers for Medicare and Medicaid Services’ (CMS) implementation of the ACA’s delivery system reforms? 

Answer 3. While the reasons behind any change in Medicare cost growth can be 

complex, it is important to note that overall Medicare cost growth dropped from 7.9 

to 4.5 percent between 2009 and 2010; this slow-down occurred at the same time 

that many seniors with Medicare received cheaper prescription drugs. Many of the 

expected benefits and savings of delivery system reforms included in the Affordable 

Care Act have not yet been fully considered in this analysis. We expect that many 

of these reforms, including Accountable Care Organizations, bundled payment programs, and demonstrations launched by the Innovation Center, will save money for 

the health care system in the coming years. 

Question 4. Is CMS undertaking an analysis of the effect of the ACA’s delivery 

systems reform provisions on health care cost growth? How is the agency evaluating 

the effect of delivery system reform initiatives when they are implemented (aside 

from pilots and demonstrations where evaluation is required by statute)? And 

against what goals or benchmarks? 

Answer 4. The Independent Office of the Actuary in CMS annually produces projections for health care spending for multiple categories of National Health Expenditures, including private health insurance, Medicare, and Medicaid. These National 

Health Expenditures projections would capture any changes in health care cost 

growth that result from delivery system reforms. 

We agree that establishing benchmarks to gauge our progress toward improving 

the health care delivery system are crucial. Each component of delivery system reform has different goals, targets, and benchmarks to measure success based on the 

aims of each specific initiative. For example, the Partnership for Patients Initiative 

is seeking to achieve two goals: reducing preventable hospital-acquired conditions by 

40 percent and reducing hospital re-admissions by 20 percent between 2010 and 

2013. These goals are associated with specific cost reduction estimates. Further, 

CMS plans to measure quality across 4 domains in the Medicare Shared Savings 

program with 33 quality measures spanning Patient/Caregiver Experience, Care Coordination/Patient Safety, Preventative Health, and At Risk Population. CMS expects ACOs to generate estimated savings of up to $940 million over the first 3 performance years as they put in place the infrastructure and redesign processes to 

focus on coordinating care for populations proactively. 

Question 5. What are the Administration’s priorities for ACA delivery system reform that have not yet been fully implemented? 

Answer 5. The Center for Medicare and Medicaid Innovation (Innovation Center) 

is beginning to test a variety of different payment and service delivery models to 

improve health care quality and lower cost. In addition to Accountable Care Organization models, on August 23, 2011, the Innovation Center invited providers to apply 

to test and develop four different models on bundled payments. Depending on the 

model selected, providers have flexibility in the Bundled Payments for Care Improvement initiative in selecting conditions to bundle, developing the health care delivery structure, and determining how to allocate payments among participating 

providers. The Bundled Payments initiative is a key delivery system reform centered on improving quality and efficient care delivery, while reducing costs and increasing care coordination. The Innovation Center has also launched a Comprehensive Primary Care initiative, which is a new multi-payer initiative fostering collabo-
69 

ration between public and private health care payers to strengthen primary care. 

The CPC will test a comprehensive primary care model for service delivery as well 

as a payment model that includes a monthly care management fee paid to the selected primary care practices on behalf of their fee-for-service Medicare beneficiaries. 

In the last year alone, the Innovation Center has implemented a number of initiatives and models, including those described above as well as the Partnership for Patients, the State Demonstrations to Integrate Care for Dual Eligible Individuals, the 

Innovation Advisors Program, Federally Qualified Health Centers Advanced Primary Care demonstration, and the CMS Health Care Innovation Challenge. Naturally, as we learn from these early models and demonstrations, we will determine 

what other areas of research and innovation may be necessary to achieve the further reforms in our health care system. 

Question 6. At the hearing, several of the witnesses on the second panel recommend that CMS better coordinate its payment reform efforts across Medicare and 

Medicaid. Is CMS taking steps to align payment structures between Medicare and 

Medicaid? If so, what reforms have been undertaken to this end? 

Answer 6. CMS is committed to better coordinating care for individuals eligible 

for both Medicare and Medicaid. Better alignment of the administrative, regulatory, 

statutory, and financing aspects of Medicare and Medicaid promises to improve the 

quality and cost of care for this complex population. 

On May 11, 2011, the Medicare-Medicaid Coordination Office launched the Alignment Initiative, an effort to more effectively integrate benefits under the Medicare 

and Medicaid programs. The Alignment Initiative is not simply an effort to catalogue the differences between Medicare and Medicaid, nor is it an effort to make 

the two programs identical. Rather, it is an effort to advance beneficiaries’ understanding of, interaction with, and access to seamless, high-quality care that is as 

effective and efficient as possible. 

The first step in the Alignment Initiative was to identify opportunities to align 

potentially conflicting Medicare and Medicaid requirements. The Medicare-Medicaid 

Coordination Office compiled a list of opportunities for legislative and regulatory 

alignment, grouping ideas into the following broad categories: care coordination, feefor-service benefits, prescription drugs, cost-sharing, enrollment, and appeals. This 

list was published in the Federal Register on May 16, 2011, and the public comment 

period closed on July 11, 2011, bringing in over 100 responses from beneficiaries, 

advocates, professional health associations, plans, and States. In addition, CMS conducted local listening sessions, which were attended by over 500 stakeholders. 

The Medicare-Medicaid Coordination Office has also partnered with the Innovation Center on initiatives designed to improve care for people eligible for Medicare 

and Medicaid, awarding contracts of up to $1 million each to 15 States to design 

person-centered approaches to coordinate care across primary, acute, behavioral 

health, and long-term supports and services for Medicare-Medicaid enrollees. CMS 

provided information to States about the ‘‘State Demonstrations to Integrate Care 

for Dual Eligible Individuals’’ via an Informational Bulletin (http://www.cms.gov 

/CMCSBulletins/downloads/12–10–2010-Federal-Coordinated-Health-Care-Office 

.pdf) and contracts were awarded in April 2011. This initiative was designed to improve care and lower costs for Medicare-Medicaid beneficiaries and identify delivery 

system and payment integration models that can be rapidly tested and, upon successful demonstration, replicated in other States. 

CMS is also taking steps to test models to align payment structures between 

Medicare and Medicaid. In July 2011, the Medicare-Medicaid Coordination Office, 

in cooperation with the Innovation Center, advised States of a separate initiative 

that offers them the opportunity to test models to align financing between the Medicare and Medicaid programs while preserving or enhancing the quality of care furnished to Medicare-Medicaid enrollees (https://www.cms.gov/smdl/downloads/FinanciallModelslSupportinglIntegratedlCarelSMD.pdf). The purpose of the Financial Alignment Initiative is to develop, test, and validate fully integrated delivery system and care coordination models that can be replicated in other States. The 

Medicare-Medicaid Coordination office identified a capitated model and managed 

fee-for-service (FFS) model as the choices for States interested and committed itself 

to providing technical assistance to States that meet the minimum standards for 

participation. Interested States were required to submit a Letter of Intent to participate by October 1, 2011, and 38 States and the District of Columbia expressed interest. 
70 

QUESTIONS OF SENATOR ENZI

Question 1. What are the metrics CMS will use to evaluate new delivery system 

reform models, such as the Bundled Payments for Care Initiative? Specifically, how 

will you measure savings and quality improvements? 

Answer 1. We agree that establishing benchmarks to gauge our progress toward 

improving the health care delivery system is crucial. Each component of delivery 

system reform will have different goals, targets and benchmarks to measure success 

based on the aims of each specific initiative. 

For example, in the Bundled Payments for Care Improvement Initiative, CMS is 

allowing applicants to propose the quality measures by which their care will be 

tracked, though all applicants will be required to report current Hospital Inpatient 

Quality (IQr) measures at a minimum. CMS will ultimately establish a standardized 

set of measures that will be aligned to the greatest extent possible with measures 

in other CMS programs. Three of the models being tested under this initiative 

would involve a retrospective bundled payment arrangement, in which a target price 

for a defined episode of care is set based on applying a discount to total costs for 

a similar episode of care as determined by historical data. Each delivery system reform initiative will have unique metrics based on the characteristics of the model 

or initiative being tested. 

Question 2. How does CMS plan to expand implementation of coordinated care 

models that have demonstrated success at integrating care and lowering costs for 

the Medicare program? Does CMS have a national strategy to scale up successful 

models? 

Answer 2. CMS is committed to expanding successful models, and has a team of 

staff who can do outreach and spread information on new ideas. For example, CMS 

recently hosted several Advanced Development Learning Sessions to provide stakeholder organizations with knowledge about what it takes to become an Accountable 

Care Organization. These events were open to all interested provider organizations 

and the information is still available on the Innovation Center Web site. Similar 

learning opportunities will be available for each initiative the Innovation Center announces, and are an important component in CMS’ efforts to educate stakeholders 

and spread successful delivery system models. 

Question 3. Mr. Blum, in the final accountable care organization (ACO) rule, CMS 

chose to exclude indirect medical education and disproportionate share hospital payments from the calculation of a provider’s expenditures. However, it included additional payments made to rural providers in this calculation, which sets a higher bar 

for eligible providers who might want to participate or join an ACO in certain areas. 

Why did CMS elect to exclude some payments, but not others? Won’t this make it 

more difficult to form ACOs in rural areas? 

Answer 3. In both the proposed and final rules, we considered whether to include 

or exclude a number of different payments from the ACOs benchmark and performance year expenditures. We proposed not to make any adjustments to either the 

benchmark or expenditure calculations; however, we were persuaded by commenters 

who suggested that not adjusting for Indirect Medical Education (IME) and Disproportionate Share Hospital (DSH) payments had the potential to create an incentive for ACOs to avoid appropriate referrals to particular hospitals or providers, for 

example teaching hospitals. We were concerned that this could deter the provision 

of care in the most appropriate setting. Therefore, our final rule adjusts ACO benchmark and performance expenditures for IME and DSH payments. Unlike IME and 

DSH adjustments, however, we do not believe other payments that are included in 

Part A and B expenditures (such as geographic payment adjustments or other incentive payments) would result in a significant incentive to steer patients away from 

particular hospitals or providers since ACOs will be compared to their own historical 

expenditure benchmark that is updated by a national factor. Since each ACO is 

compared to its own historical expenditure benchmark, we do not believe including 

such payments will make it more difficult for ACOs to form in rural areas or deter 

participation of rural providers in ACOs. Furthermore, we announced our advance 

payment initiative that will provide the opportunity for organizations such as ruraland/or physician-only ACOs with limited revenue and access to capital to receive a 

portion of their anticipated shared savings up front as a way to encourage the development of ACOs with the infrastructure and expertise to improve and deliver highquality care while slowing the growth in health care spending. 

Question 4. Mr. Blum, does CMS have plans to extend the nationwide Medicare 

Advantage star demonstration program after 2014? How many other demonstration 

programs have CMS implemented that were started on a nationwide basis? 
71 

Answer 4. The Quality Bonus Payment (QBP) demonstration builds on the bonus 

payments authorized in the Affordable Care Act by providing stronger incentives for 

plans to improve their performance thereby accelerating quality improvements. This 

demonstration will begin in 2012 and will run for 3 years through 2014. Beginning 

in 2015, the current law provisions for computing QBP will be in effect. 

CMS initiated several demonstrations on a national basis since the passage of the 

Medicare Modernization Act of 2003. These include demonstrations to enhance the 

Part D program as well as Medical Savings Account (MSA) products. 

Question 5. Expatriate plans provide a valuable service to Americans living and 

working overseas. Often expatriate plans have a much greater administrative burden for the insurance company because there is the need for translation services as 

well as making overseas claims and setting up overseas networks. It would serve 

to logic then, that these plans be exempted from the Minimum Loss Ratio (MLR) 

requirement. 

While most expatriate plans have received a short-term MLR waiver, they have 

not received a permanent exemption. Several companies have contacted the Centers 

for Medicare and Medicaid asking them to permanently extend the MLR waiver. 

Without an extension many of these companies have said they will have to move 

their expatriate plans overseas, which, according to news reports, would result in 

over 1,100 U.S. jobs lost. 

This is not the time for the Federal Government to force regulations on businesses 

that result in lost jobs for Americans. What are the Centers for Medicare and Medicaid planning to do to ensure that those jobs remain in the United States? Will 

CMS provide for a permanent expatriate plan MLR exemption? If not, please elaborate. 

Answer 5. CMS does not have the statutory authority to exempt certain types of 

plans from the MLR standard. The statute, however, does allow CMS to take into 

account the special circumstances of smaller plans, different types of plans, and 

newer plans. In the interim final rule with comment period, CMS used this authority to implement a multiplier of 2.0 to the MLR numerator for expatriate policies; 

this adjustment acknowledges the higher administrative costs and volatility of experience in these plans when compared to typical insurance plans, as expatriate plans 

cover care in all parts of the world in a wide variety of health care systems. 

CMS believes that a multiplier of 2.0 is appropriate to ensure that issuers remain 

in the expatriate market. CMS also believes that the MLR requirements continue 

to allow U.S. issuers to offer expatriate policies to U.S. employers that want to provide their employees who are working abroad and their dependents with comprehensive health insurance that meets the unique needs of expatriates and provides benefits that are at a minimum comparable to the coverage of their U.S.-based employees. 

Question 6. Recent media reports have revealed that parents and other individuals who serve as caregivers for disabled individuals and receive Medicaid subsidies 

to provide care to these family members are classified as ‘‘public employees’’ by certain State agencies. This classification results in the State, in conjunction with the 

Service Employees International Union (SEIU), deducting a portion of the monthly 

Medicaid subsidy provided to these families as ‘‘union dues.’’ Is CMS aware of this 

practice? How many States operate this type or similar arrangements? Please describe CMS’ current oversight plan for State Medicaid agencies to ensure that Federal dollars are being spent appropriately on health care services and supports. 

Answer 6. CMS takes our Medicaid oversight responsibilities seriously, and works 

to ensure that Federal dollars are spent appropriately through our oversight and approval of State Medicaid plans, waivers, estimated and actual State expenditures, 

and other State actions.

The 1915(c) Home and Community Based Services (HCBS) waiver program allows 

for a State to make payment to ‘‘legally responsible’’ relatives (spouses, parents or 

legal guardians of minors) under specific circumstances per the terms of the State’s 

waiver application; however, this is an individual decision of each State. Federal 

Medicaid law and regulations impose certain restrictions or conditions that must be 

met for States to allow legally responsible relatives to be paid caregivers, which 

CMS enforces through the State Medicaid plan amendment and HCBS waiver approval processes. 

CMS does not keep statistics or otherwise become involved in issues related to the 

unionization of home care or other health care workers.

Question 7. How is the Administration planning to communicate actions the Secretary will take to establish and operate a Federal Exchange within States that do 

not create State exchanges? Is the Administration planning to initiate a rulemaking 
72 

or issue guidance pertaining to the Secretary establishing a Federal exchange? If 

so, when does the Administration anticipate publishing a proposed rule or guidance? 

Answer 7. When CMS operates an Exchange in a State that does not establish 

its own, the same regulations apply as for State-based Exchanges. The comment period on the Exchange proposed rules closed October 31, 2011. CMS is currently reviewing the comments received and is working toward finalizing the rules in the 

near future. We understand that States and issuers are anxious for information and 

we are diligently working to provide guidance and certainty to accommodate these 

concerns; we plan to release additional guidance on various topics over the next several months. 

Question 8. From what accounts has the Secretary funded the $52,294,545 con- tract with Booz Allen Hamilton for ‘‘Implementation Support’’ and the $55,744,081 

contract with CGI Federal for the ‘‘Federal Exchange? ’’ What is the anticipated 

value of the contract that the Administration is considering for the ‘‘data services 

hub’’ and from what account will that contract be funded?

Answer 8. The $55,744,081 million CGI Federal contract to build and support the 

information technology systems for the Federally Facilitated Exchange (FFE), and 

the tasks on the Booz Allen Hamilton contract for implementation support related 

to the FFE, were obligated from the Health Insurance Reform Implementation Fund 

and HHS General Departmental Management as the Booz Allen Hamilton contract 

supports other CMS initiatives in addition to the Exchanges. Approximately $30 

million is also obligated from these funds for the pending award for the data services hub contract. 

Question 9. Please provide a detailed accounting (e.g., expenditures by date, payee, purpose, etc.) of how the Administration has spent the $1 billion appropriated to the Health Insurance Reform Implementation Fund created in section 

1005 of Public Law 111–152. Do any funds remain in this account? 

Answer 9. We recognize that the committee is interested in understanding these 

figures and will provide them to the committee under separate cover. 

QUESTIONS OF SENATOR ROBERTS

Question 1. We have been made aware that there have been over 200,000 comments in response to the preventive regulations, these are the two regulations 

issued by HHS, Treasury, and Labor implementing section 2713 of the Public 

Health Service Act (one was issued last summer and one was issued in early August). Does the Administration plan to respond to these comments and if so when? 

Answer 1. Given the large volume of comments received, all three agencies are 

still working to review and understand them. When issued, the final rules will respond to the comments received. 

Question 2. Both preventive regulations were implemented through an interim 

final rule (IFR) process. Does the Administration plan to finalize these IFRs and if 

so what is the timeline for doing so? 

Answer 2. The Administration is working to meet the effective dates that are in 

the Affordable Care Act. The Administration continues to address comments received on IFRs and will finalize rules as appropriate. 

Question 3. Does the Administration plan to finalize any of the interim final rules 

that were put forth to implement the Patient Protection and Affordable Care Act 

and if so what is the timeline for doing so? 

Answer 3. Because of the timing of statutory deadlines, in some cases we issued 

interim final rules requesting public comment for 60 days. We have read the public 

comments that have been submitted and, where appropriate, we adopted the comments in sub-regulatory guidance. The Administration continues to address comments received on IFRs and will finalize rules as appropriate. We also note that recent agency rulemaking has utilized proposed rules, solicited comments, and finalized rules. 

Attachment 

Health Reform Implementation Fund—Obligations and Outlays as of September 30, 2011 

Fiscal year 2011 Through September 30, 2011 

Organization Obligations Outlays 

Internal Revenue Service ........................................................................................................ $188,861,953 $112,093,091 

Office of Personnel Management ........................................................................................... $1,855,701 $435,770 
73 

Health Reform Implementation Fund—Obligations and Outlays as of September 30, 2011— 

Continued 

Fiscal year 2011 Through September 30, 2011 

Organization Obligations Outlays 

Department of Labor ............................................................................................................... $1,640,450 $1,640,450 

Department of Health and Human Services .......................................................................... $242,617,622 $116,469,245 

Total Health Reform Implementation Fund ........................................................................ $434,975,726 $230,638,556 

RESPONSE BY GARY S. KAPLAN, M.D., FACP, FACMPE, FACPE TO QUESTIONS

OF THE HELP COMMITTEE

Question 1. Do you believe that a fee-for-service system is a sustainable model for 

delivering [financing] health care? 

Answer 1. A health care financing system based predominantly on a fee-for-service model is unsustainable. Three years ago, I was one of several chief executives 

of prominent health care organizations interviewed for a Washington Post article 

about the problems with our country’s health care system. The story’s headline 

summed up the CEOs’ opinions: ‘‘U.S. Not Getting What We Pay For.’’ Sadly, 3 

years later, Americans are still paying for a lot of things that aren’t necessary when 

it comes to health care. In fact, of the $2.6 trillion spent on health care in the 

United States, nearly half of it is waste that adds no value for patients and sometimes even causes harm. 

The current health care system is fraught with waste. A fundamental problem 

with the system is how providers of health care are paid. Under the current feefor-service model, there are few incentives to keep people out of doctors’ offices and 

hospitals. From the health care provider’s perspective, the more you do, the more 

money you make. More tests lead to more procedures, which can lead to mistakes, 

complications, misdiagnoses and the use of unproven therapies. 

Those picking up the skyrocketing tab include the Centers for Medicare and Medicaid Services (CMS), along with commercial payors and employers. Sadly, our patients pay the highest price as the recipients of substandard care. 

Although the fee-for-service model contributes to the ills of our current system, 

there may be limited small community or service-specific subsets in which it is appropriate. 

I hope and anticipate we will get to the point where the U.S. health care system 

pays providers to rely on the very best evidence, to deliver the right care at the 

right time, and only the care that is required to improve health. 

Question 2. How can we shift Federal health care delivery systems from systems 

that are based on volume to systems based on value? How can we realign incentives 

for care? 

Answer 2. The shift from volume to value starts with payment reform. At Virginia 

Mason Medical Center, we’re demonstrating now that health care organizations can 

provide the highest quality care to patients at the lowest cost. In our American culture, this is counterintuitive. We’re conditioned to believe that to get the best quality you have to pay top dollar. That’s not the case in health care. 

In their Health Affairs article, ‘‘Medicare Spending, The Physician Workforce, and 

Beneficiaries’ Quality of Care,’’ Katherine Baicker and Amitabh Chandra report: 

‘‘The quality of care received by Medicare beneficiaries varies across areas 

. . . States with higher Medicare spending have lower-quality care. This negative relationship may be driven by the use of intensive, costly care that crowds 

out the use of more effective care’’ (2004, W5–185). 

Our country can’t afford health care costs to continue escalating at current rates. 

Inevitably, advances in medicine and clinical technology contribute to the costs of 

care, but these increases in cost can be offset significantly by eliminating variation, 

including unnecessary and excessive testing, as well as treatments that lead to no 

benefit. 

As Virginia Mason’s experience demonstrates, higher quality care is associated 

with lower costs. In December 2011, Virginia Mason was named a Top Hospital by 

The Leapfrog Group for our accomplishments in the areas of patient safety and efficiency. Virginia Mason joined the University of Maryland Medical Center-Baltimore 

as the only two hospitals to receive Top Hospital distinction every year since the 

recognition program’s inception in 2006. For 2011, Virginia Mason is 1 of 52 hos-
74 

pitals in the country to meet Leapfrog criteria for highest performing urban hospitals. 

With approximately 1 percent of America’s hospitals meeting Leapfrog’s quality 

and resource use criteria, there is work to be done. An important first step is moving from a fee-for-service payment structure to evidence-based care financed by bundled payment, shared savings or provider risk-bearing approaches that require provider accountability for patient outcomes. 

The Physician Quality Reporting System, which was established in the 2006 Tax 

Relief and Health Care Act, was a move toward payment for value. This initiative 

benefits patients because it provides financial incentives to those providers who 

achieve the highest quality results. 

Further, the rollout of the Patient Protection and Affordable Care Act will include 

innovative payment approaches, such as bundled payments in preventive services, 

surgical episodes of care and chronic disease management. Additionally, delivery 

model innovations, such as Accountable Care Organizations, will promote hospital/ 

physician integration and coordinated patient care across the continuum. Similar 

models, including shared risk and shared savings, would support better care and ultimately better population health. Further, multi-payor demonstration projects that 

don’t allow cost shifting from CMS to commercial payors hold promise for realigning 

incentives for care. 

As a clinician, I know that my patients are vitally important and often underutilized members of their own care teams. Shared decisionmaking tools offer patients 

resources for a thorough understanding of treatment options. Additionally, patients 

who have the information to make informed decisions about their care are more 

likely to choose less care. 

David E. Wennberg, M.D., MPH; Amy Marr, Ph.D.; Lance Lang, M.D.; Stephen 

O’Malley, MSc; and George Bennett, Ph.D., in their article, ‘‘Randomized Trial of a 

Telephone Care-Management Strategy,’’ in the New England Journal of Medicine, 

stated: ‘‘Provider-based studies of preference-sensitive care have consistently shown 

that decision-making support results in fewer interventions than usual support’’ 

(2010). Not only is honoring patient preference the most respectful approach to patient care, it may well be less expensive. 

Shifting the delivery system focus from volume to value will require financial incentives, such as strict adherence to quality standards, as a condition of payment. 

It will also require delivery system reforms and patient engagement. 

Additionally, by using efficient, integrated providers as models to set the rates for 

reasonable cost and quality standards, we all can benefit from the experience of 

those organizations demonstrating that higher quality care at a lower cost should 

be the expectation. Finally and most importantly, we must listen to our patients and 

provide all the care they need and only the care they need. 

RESOURCES

Baicker, K. & Chandra, A. (2004). Medicare Spending, The Physician Workforce and 

Beneficiaries’ Quality of Care. Health Affairs. doi: 10.1377/hlthaff.w4.184. 

Centers for Medicare and Medicaid Services. Overview, Physician Quality Reporting 

System. CMS.gov. Retrieved December 12, 2011, from https://www.cms.gov/ 

PQRS/. 

Connelly, C. (2008). U.S. ‘‘Not Getting What We Pay For.’’ The Washington Post. Retrieved Dec. 12, 2011, from http://www.washingtonpost.com/wp-dyn/content/article/2008/11/29/AR2008112902182.html. 

Wennberg, D.E., Marr, A., Lang, L., O’Malley, S. & Bennett, G. (2010). A randomized trial of a telephone care-management strategy. New England Journal of Medicine. Retrieved Dec. 12, 2011, from http://www.nejm.org/doi/full/10.1056/ 

NEJMsa0902321#t=articleDiscussion. N Engl J Med 2010; 363:1245–55. 

INTERMOUNTAIN HEALTHCARE, 

SALT LAKE CITY, UT 84111–1486, 

December 5, 2011. 

Hon. TOM HARKIN, 

U.S. Senate, 

731 Hart Building, 

Washington, DC 20510. 

DEAR SENATOR HARKIN: Thank you for the opportunity to have Greg Poulsen, 

lntermountain Healthcare’s senior vice president and chief strategy officer, testify 

before the Health, Education, Labor, and Pensions Committee at the November 10, 
75 

2011 hearing entitled ‘‘Improving Quality, Lowering Costs: The Role of Health Care 

Delivery System.’’ We applaud the committee for tackling this critical issue and we 

look forward to further discussions with the committee about how best to transform 

the delivery system to incentivize high-value health care. 

Below are Greg Paulsen’s responses to the questions posed subsequent to the 

hearing. 

RESPONSE TO QUESTIONS OF THE HELP COMMITTEE BY GREG POULSEN

Question 1. Do you believe that a fee-for-service system is a sustainable model for 

delivering health care? 

Answer 1. No, the fee-for-service payment mechanism is at the heart of the problem, and any meaningful solution must reduce and ultimately eliminate fee-for-service in order to remove the inherent perverse incentives. 

Question 2. How can we shift Federal health care delivery systems from systems 

that are based on volume to systems based on value? How can we realign incentives 

for care? 

Answer 2. lntermountain Healthcare believes that additional pre-payment mechanisms should be made available as rapidly as possible. Medicare Advantage exists 

today, but is insurance-centric rather than provider-centric, and generally yields a 

fee-for-service payment to providers. Providers and beneficiaries should be encouraged to move to pre-payment with a combination of incentives (to develop care management capabilities and to accept prepayment) and penalties (lower fee-for-service 

payment rates). We spell this out in greater detail in the white paper entitled ‘‘Recommendations to Congress for Building Sustainable Medicare Value’’ that we submitted with our written testimony. 

Question 3. Mr. Poulsen, can you discuss in more detail the recommendations 

lntermountain would make to Congress for constructing a sustainable health care 

delivery system? How can we best pay for a system that delivers high-quality, lowcost outcomes? 

Answer 3. lntermountain’s white paper, referenced above, gives greater detail on 

this as well. The principles for ‘‘shared accountability’’ discuss in greater detail the 

way we think such an approach could be implemented. Ultimately, risk-adjusted 

per-beneficiary prepayment is the mechanism we believe would be most effective. 

And if we use this mechanism to rationalize regional differences in Medicare spending (as described in Appendix 1 on page 16), the savings could place Medicare on 

a solvent and sustainable footing for decades to come. 

Question 4. Mr. Poulsen, will Intermountain apply to be an accountable care organization? 

Answer 4. lntermountain is not planning to apply to be an accountable care organization at this time. There are significant structural barriers in the current ACO 

regulations that we view as highly problematic. lntermountain is concerned about 

issues of governance and compliance, and we have communicated these concerns to 

CMS. However, our greatest concern is in the area of attributing beneficiaries to 

ACOs. We believe that a small minority will be extremely unhappy with being attributed (without the opportunity to opt out, except by changing physicians—to one 

that doesn’t participate in ACOs). We have learned by sad experience that a small 

subset of outspoken people can do incalculable damage—in this case, both to the 

Government program, but also to the provider involved. lntermountain believes that 

participation must be voluntary, and that beneficiaries should be able to opt out (albeit, as we noted before, at a higher cost). 

We believe, based on our experience, that the potential exists for outspoken hostility disproportionate to the number of people with negative feelings. For these reasons, lntermountain Healthcare does not plan to apply to be an ACO at this time. 

Please let us know if you have any additional questions and please know that 

lntermountain stands ready to assist the HELP Committee as it continues this vital 

work. 

Sincerely, 

BILL BARNES, 

Director, Federal Government Relations. 

RESPONSES BY A. MARK FENDRICK, M.D. TO QUESTIONS OF THE HELP COMMITTEE

Question 1. Do you believe that a fee-for-service system is a sustainable model for 

delivering health care? 
76 

Answer 1. As we aim to create an efficient and effective system with a goal of 

optimizing health, I strongly believe that a fee-for-service system is not a sustainable model due to its lack of clinical nuance in the volume-based incentives it provides to clinicians. The current payment model is designed to encourage overuse of 

both high- and low-value services. While I believe alternative payment mechanisms 

need be explored, it is essential that we include patient engagement programs 

whose goals are clinically aligned with payment reform initiatives. While new payment models are being implemented and tested, we should reform the existing feefor-service system to include programs that provide incentives for providers— 

through quality bonuses, and patients—through value-based insurance design (V– 

BID) to increase the use of medical services for which there is strong evidence. For 

example, Medicare Advantage plans could easily replicate clinically nuanced incentive programs administered by private insurers that demonstrate improved clinical 

outcomes and lower disease-specific costs. Reforms to make Federal health spending 

more effective and efficient must not wait for dramatic changes in the payment system. Intuitive and feasible consumer engagement concepts such as V–BID that are 

proven successful should be included in future payment reform efforts. 

Question 2. How can we shift Federal health care delivery systems from systems 

that are based on volume to systems based on value? How can we realign incentives 

for care? 

Answer 2. Moving from a volume-driven to value-based system requires a change 

in both how we pay for care (supply side initiatives) and how we engage consumers 

to seek care (demand side initiatives). The well-documented differences in clinical 

value among medical interventions must be acknowledged. Thus, the incorporation 

of clinical nuance into supply and demand side reform initiatives is critical. To encourage providers to increase the use of high-value interventions requires a payment 

methodology that explicitly identifies specific services and quality metrics for which 

clinicians can be rewarded for their use. Consumer engagement activities, including 

shared decisionmaking programs and clinically nuanced benefit [V–BID] plans must 

be developed that encourage patients to use high-value services more often, and discourage those services that are harmful or unnecessary. 

Question 3. Dr. Fendrick, does a value-based insurance system penalize or disadvantage patients or beneficiaries in any way? Why don’t more organizations adopt 

this system? 

Answer 3. In public and private health plans across America, patient cost-sharing 

is implemented in a ‘‘one-size-fits-all’’ way, in that patients are charged the same 

amount for every doctor visit, diagnostic test, and prescription drug. As Americans 

are required to pay more to visit their clinicians and fill their prescriptions, a growing body of evidence demonstrates that increases in patient cost-sharing leads to decreases in the use of both non-essential and essential care. The resultant decreased 

use of potentially life-saving interventions leads to worse health outcomes and increased total costs in certain circumstances. This clinical and financial effect is amplified in chronic conditions that fuel a majority of medical expenditures. 

Instead of the status quo where plans implement indiscriminate cost-sharing increases without clinical nuance, V–BID programs remove patient barriers to highvalue services to mitigate decreased use secondary to patient out-of-pocket costs. 

Nearly all V–BID programs implemented to date reduce co-payments for certain 

preventive services and evidence-based treatments for chronic conditions (e.g., heart 

disease, depression, diabetes, asthma, etc.) For example, the University of Michigan 

and UnitedHealth Care implemented a V–BID program for individuals with diabetes; General Electric is among several organizations that offers free tobacco cessation services, and provides bonuses to employees for quitting smoking. Consumer 

response has been overwhelmingly positive, including those who are not using subsidized services. 

The ultimate goal of V–BID is to ensure that beneficiaries get more of the care 

they need, and less of the care they don’t. It must be noted that V–BID programs 

never determine what treatments are covered and those that are not—they simply 

provide a clinically nuanced approach to patient cost-sharing for services already offered by a health plan. A properly designed V–BID program will always include an 

appeals process and provide safe harbors for individuals with special circumstances. 

V–BID has received broad support from health care stakeholders from across the 

advocacy spectrum, including labor, employers, patient advocates, clinician groups, 

insurance plans, and policymakers on both sides of the aisle. We do not believe such 

a broad coalition would be possible if V–BID were in some way disadvantaging patients. 
77 

The interest in V–BID is growing rapidly as employers and insurers develop 

V–BID plans and published research confirms its clinical and economic merits. The 

prestigious New England Journal of Medicine recently published a trial demonstrating a V–BID program for patients with a history of heart attacks improved 

outcomes at no increased cost to the insurer. An accompanying editorial recommended that private plans should quickly adopt V–BIDs. Aetna, Blue Shield of 

California, and SeeChange Health have followed suit and announced new V–BID 

products. Additionally, the Governor of Connecticut and labor leaders recently 

agreed to adopt a health plan for State employees based on V–BID principles. While 

the private market has taken the lead, we believe that public programs should join 

the private sector to encourage V–BID and other innovations that will result in 

healthier Americans and a more efficient delivery system. We would look forward 

to opportunities to explore these possibilities with you, as outlined in my earlier testimony. 

[Whereupon, at 4:03 p.m., the hearing was adjourned.] 

Æ