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S. HRG. 110–1087

HEALTH CARE REFORM:

AN ECONOMIC PERSPECTIVE

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

NOVEMBER 19, 2008

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

JOHN E. SUNUNU, New Hampshire

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

(III)

C O N T E N T S

OPENING STATEMENTS

Page

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

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

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

Rockefeller, Hon. John D., IV, a U.S. Senator from West Virginia ..................... 5

WITNESSES

Seidenberg, Ivan G., chairman and chief executive officer, Verizon Communications, Inc., New York, NY ............................................................................. 6

Stern, Andy, president, Service Employees International Union, Washington,

DC .......................................................................................................................... 8

Reinhardt, Uwe E., Ph.D., James Madison professor of political economy,

Woodrow Wilson School of Public and International Affairs, Princeton University, Princeton, NJ .......................................................................................... 10

Chandra, Amitabh, Ph.D., assistant professor of public policy, John F. Kennedy School of Government, Harvard University, Cambridge, MA ................. 13

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

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

Chandra, Amitabh, Ph.D.:

Testimony .......................................................................................................... 13

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

Response to a question from Senator Stabenow ............................................ 41

Grassley, Hon. Chuck:

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

‘‘State and Local Fiscal Challenges: Rising Health Care Costs Drive Longterm and Immediate Pressures,’’ GAO statement by Stanley J. Czerwinski, November 19, 2008 .......................................................................... 44

Reinhardt, Uwe E., Ph.D.:

Testimony .......................................................................................................... 10

Prepared statement with attachments ........................................................... 58

Rockefeller, Hon. John D., IV:

Opening statement ........................................................................................... 5

Seidenberg, Ivan G.:

Testimony .......................................................................................................... 6

Prepared statement with attachments ........................................................... 83

Response to a question from Senator Stabenow ............................................ 190

Stern, Andy:

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 191

COMMUNICATIONS

AARP ........................................................................................................................ 197

American Legacy Foundation ................................................................................. 202

American Nurses Association ................................................................................. 206

National Association of Chain Drug Stores ........................................................... 209

Physicians for a National Health Program ........................................................... 213

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HEALTH CARE REFORM:

AN ECONOMIC PERSPECTIVE

WEDNESDAY, NOVEMBER 19, 2008

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

The hearing was convened, pursuant to notice, at 10:08 a.m., in

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

(chairman of the committee) presiding.

Present: Senators Rockefeller, Bingaman, Wyden, Stabenow,

Salazar, Grassley, Hatch, and Snowe.

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

Chairman and Chief Health Counsel; Yvette Fontenot, Professional

Staff; Shawn Bishop, Professional Staff; Renee Carter, Fellow; and

Elise Stein, Detailee. Republican Staff: Mark Hayes, Health Policy

Director and Chief Health Counsel; Kristin Bass, Health Policy Advisor; and Jason Foster, Investigator.

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

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The committee will come to order.

Before we begin our hearing today, I would like to make an announcement and also commend one of the smartest, most intelligent persons who has served in the Senate, not as a colleague, but

as a member of staff, and that is Bill Dauster.

Today marks Bill’s 20 years of service in the Senate. Bill Dauster

is sitting behind me. He started his Senate career when he joined

the Senate Budget Committee staff on December 22, 1986, and

served a decade as Chief Counsel to that committee, then went on

to be the Democratic Staff Director. Bill has also served as Democratic Chief of Staff for the Labor Committee and as Legislative Director for Senator Russ Feingold.

For the past 51⁄2 years, Bill has served as Deputy Staff Director

and General Counsel here at the Finance Committee. Bill is the expert, the Senate expert, on budget law and trade law procedures.

He literally wrote the book on both. So, Bill, I congratulate you

today on your 20 years of service in the U.S. Senate. [Applause.]

Those of you who know Bill know that that is no idle statement:

he is that good.

In Washington, people often present choices between alternatives, between option A and option B, and it is often the case

that the right choice between option A and option B is neither, but

‘‘yes.’’ The right choice is often to reject the false choice. We can

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often, I think, in LBJ’s famous phrase, ‘‘Walk and chew gum at the

same time.’’

We are clearly facing, today in America, a significant recession.

That economic challenge commands a significant investment of government resources. Some say that we will have to choose between

fixing the economy and enacting comprehensive health reform. I reject that false choice. I say we can, and should, do both. We can

walk and chew gum at the same time—not only can we, but we

have to.

Health care reform is not a distraction from addressing the economy. Health care reform is central to restoring America’s economy.

The costs of inaction, both in human terms and in financial terms,

are greater than the costs of reform.

The Nation’s economy is hurting. Since January, we have lost

more than 1.2 million jobs. That is the highest number in 14 years.

The unemployment rate has soared to 6.5 percent; it was 4.4 percent just a year ago. The number of Americans who cannot find

enough work jumped to 6.7 million, its highest level since 1993.

Some industries have been hit especially hard: manufacturing,

construction, and retail trades have shed the most jobs. The unemployment rate in construction is now close to 11 percent, double

what it was a year ago. It is clear that the economy is in a recession. Some economists even believe that we are headed for a deep

recession. The question for Congress should no longer be whether

to pass another stimulus bill, but how much, and what kind of

stimulus is needed to get the economy on the right path.

This moment in history is not unlike the one faced by Franklin

Roosevelt and the New Deal generation. Now, as then, solving

America’s economic challenges will require us to go forward with

bold efforts. It will require a multi-faceted response. Comprehensive health reform legislation must be part of any successful economic recovery plan.

Last week, I released a white paper that calls on Congress to act

on meaningful health care reform in 2009 that achieves coverage

for all Americans, while also addressing the underlying problems

of cost and quality. We need immediate action on health care reform. Health care costs and the economy are linked. The key challenges of our health care system are high costs, low quality, and

insufficient access. Those challenges have a direct effect on family

budgets. They have a direct effect on American businesses and

American businesses’ ability to compete, and they have a direct effect on government spending.

Americans’ anxiety about the economy is connected to the concerns about health care. Health care costs have grown 5 times faster than wages over the last decade. Since 2001, real wages and

household income have been flat. The economic downturn means

more individuals could lose health care coverage for themselves

and their families, and that is at a time when savings are low and

credit card debt and medical costs are high. Medical bills could

force a growing number of families into bankruptcy.

We need to reform the health system. First, we must ensure

meaningful coverage and care to all Americans. Second, we must

emphasize higher quality, greater value, and less costly care.

Third, reform should contain an absolute commitment to weed out

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waste, eliminate overpayments, and design sustainable financing

that works for taxpayers as well as the Nation’s recipients and providers of health care. We all need to be in this together. This has

to be a solution where all Americans participate, all bear responsibility. That is the only way this is going to work.

Yes, reforming health care will cost money, but investments now

will reap savings a decade from now. Spending now will also provide needed stimulus for the economy as well. I hope that my paper

offers a starting point, a starting point for the dialogue that we will

have on health reform next year. I intend to work with Senator

Grassley, my colleagues on this committee, as well as members of

the HELP Committee to craft a bipartisan bill we can send to the

President next year. We all must work together.

A recently released report from the New America Foundation

states it well. It says, ‘‘We must reform our struggling health system not in spite of our economic crisis, but rather because the impact health care has on the American economy. The economic and

social impact of inaction is high and will only rise over time.’’

Today’s hearing will examine the need for health care reform

from an economic perspective. Is health care reform an economic

imperative? What are the economic costs of inaction? If current

health care trends continue, can we remain competitive?

Today’s hearing is the tenth in a series on health care reform

this committee has held this year. It is my hope that these hearings will help to prepare the committee for the hard work we will

do next year.

And so let us reject false choices. Let us show that we can walk

and chew gum at the same time. Let us rebuild the economy and

bring affordable, meaningful health coverage to all Americans.

Senator Grassley?

OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. Thank you, Senator Baucus, for holding this

hearing. Because of your leadership over the last year we have

done a lot of work in this committee on this issue and a lot of other

issues, so we are well-positioned to make real progress on health

care reform in 2009. As we have examined our health care system

this year, it has become even clearer how much our system needs

fixing. I look forward to working with you to get that job done.

Health care reform will be a test of our will and our ability to

make tough choices. Those tough choices have become much more

challenging as we have seen our economy falter. Right now, we already have a deficit of at least $400 billion for the coming year,

and that is before the $700 billion bail-out and the economic downturn are factored in.

Congressional leaders have also discussed another economic

stimulus package that may be taken up next year that would add

several hundred billion dollars more. Rising health care costs,

record deficits, and the growing liability of Social Security, Medicare, and Medicaid create big challenges for the financing of health

care reform. It is hard to paint a very rosy scenario. In post-World

War II history, the deficit has never been above 6 percent of the

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economy. It seems like we are heading towards a deficit that might

be 10 percent of the economy.

Increasing access for the uninsured is not going to come cheaply,

and it is clear to me that our economy cannot stand much further

deficit spending. We also must acknowledge the problem that spiraling increases in health care spending create for our economy, because it is having that impact that the chairman has spoken about,

and the relationship is very definitely there.

Rising health care costs affect family budgets because costs of

that care are rising much faster than inflation. Rising health care

costs affect jobs when employers struggle to cope with the cost of

providing health coverage to workers, and those costs affect our

competitiveness internationally when health costs here make products produced in the U.S. more costly, making us uncompetitive

with foreign competition.

The rising cost of health care is also a threat to State budgets,

as we are hearing now from Governors. More and more State budget dollars are going for health care, and just for their current obligations, not new obligations. In fact, when it comes to the States,

very soon States are going to reach a point where paying for increased health care costs, maintaining infrastructure, and providing post-secondary education simply cannot all be done by most

of the States.

Senator Baucus and I requested testimony from the Government

Accountability Office that speaks to this point, which will be submitted for this record.

[The prepared statement from the Government Accountability

Office appears in the appendix on p. 44.]

Senator GRASSLEY. The recent Medicaid Actuary’s Report showed

the costs of that program doubling over the next 10 years, and rising health costs are affecting the Federal budget, as has been

pointed out so many times.

According to the most recent trustees’ report, the Medicare trust

fund begins deficit spending this year and funds will be completely

exhausted in 2019. Federal spending for Medicare alone is projected to double, from about 3 percent of the economy today to 6

percent by 2030. It is clear, then, that the growing cost of health

care is already an untenable burden for both the Federal and State

Governments, so obviously doing nothing is not an option. We must

find ways to address health care costs and we must do it soon, and

we must do that while also making coverage accessible and affordable for more.

As I said before, we face difficult choices. We have an economy

in distress. Increasing record-breaking deficits is not a legitimate

option. Ignoring the burden inefficient spending in health care

places on our economy is also not an option. We must find ways

to address these difficult problems, and soon.

So I hope we have adequately responded to the chairman’s request for a bipartisan consensus, working towards that. We have

had meetings already, we will have other meetings, and we will

have innumerable meetings. We may spend all of our time meeting

on health care. [Laughter.] I am very much looking forward to the

testimony of our witnesses as we start down this very difficult

road.

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Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator.

Senator Rockefeller would now like to make a brief statement.

OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV,

A U.S. SENATOR FROM WEST VIRGINIA

Senator ROCKEFELLER. Mr. Chairman, I thank you for this courtesy. It has been 15 years since we tried doing comprehensive

health care reform, and there are all kinds of ways to blame why

it did not happen. The point is, it did not happen. We have become

a Congress of incrementalists since then.

It is simply not debatable, the substantial burden that health

care has become for individuals, families, businesses, and the economy as a whole without the absence of this broad reform which we

now have to pledge ourselves to, and do.

Our current health care system simply does not work, and it is

time for a major overhaul. I have been working on health care policy for more than 25 years, and I have never been more hopeful

about the prospect of reform or more convinced of the overwhelming need for reform than I am now. The current economic

crisis, as the chairman has indicated, is also a crisis of health care.

They are one and the same.

Stabilizing our health care system is a critical component of putting our economy back on track. Leading economists have all

agreed that our costly and inefficient health care system is perhaps

the biggest threat to the Nation’s budget. So, health care is not just

health care, it is 47 million uninsured people, all kinds of others

who are underinsured, and it is also, as I say, stability for our

country.

It is long past time for the Federal Government, in my judgment,

to make the investment necessary to achieve comprehensive health

care reform. If the government must intervene to do that, then the

government is going to intervene to do that. That is my view. We

have to do this, we have to do it all, and we have to do it soon.

I say that not in spite of the current economic crisis, again, as the

chairman said, but because of the economic crisis.

I believe there are three broad goals of comprehensive health

care reform: increasing coverage and affordability; improving quality; and also eliminating unnecessary health care spending, which

is a very broad statement but nevertheless is rich with text.

While each of these goals must be undertaken in earnest, the

foundation of comprehensive reform is coverage for the 47 million

Americans, including nearly 9 millon children and, as we so often

forget to say, more than 2 million veterans who are uninsured. I

have been chairman of the Subcommittee on Health Care for a

while. I look forward to working actively with the House and Senate leadership, the House and Senate committees of jurisdiction,

and, importantly, the Obama administration to avoid the pitfalls of

the early 1990s. We could do it this time because we have experienced failure and hopefully learned from it, so we can finally realize the goal of comprehensive health care reform. We have to do

it.

Mr. Chairman, I thank you.

The CHAIRMAN. Thank you, Senator.

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Now I welcome our witnesses to the hearing. First, we will hear

from Ivan Seidenberg, chairman and chief executive officer of

Verizon. Next, Mr. Andy Stern, our second witness, is president of

the Service Employees International. Welcome, Mr. Stern. The

third witness is Dr. Uwe Reinhardt, the James Madison professor

of political economy from the Woodrow Wilson School of Public and

International Affairs at Princeton University. Uwe, thank you for

making the extraordinary effort to be here today. I understand you

flew from halfway around the world, arriving at about 3 a.m. this

morning just for this hearing. We deeply appreciate that. Finally,

we will hear from Amitabh Chandra, assistant professor of public

policy at the John F. Kennedy School of Government at Harvard

University.

Mr. Seidenberg, why don’t you begin?

STATEMENT OF IVAN G. SEIDENBERG, CHAIRMAN AND CHIEF

EXECUTIVE OFFICER, VERIZON COMMUNICATIONS, INC.,

NEW YORK, NY

Mr. SEIDENBERG. Chairman Baucus, Senator Grassley, members

of the committee, thank you very much for the opportunity to be

here to discuss health care reform. I am very heartened by all of

your positive statements about the need to focus on this particular

urgent need for our country.

For the business community, the stakes for an affordable and

sustainable health care system are important. As you said, health

care costs are the number-one cost pressure for the Business

Roundtable CEO, the number-one cost issue that all of us talk

about when we get together.

Escalating cost increases for health care mean we are paying a

lot more but getting less value. These increased costs, as you know,

inhibit job creation, damage our competitiveness, and impose a

major strain on household incomes. With most Americans’ health

benefits tied to their jobs, people clearly worry that they will not

be able to afford coverage for their families, move to a new job, try

to start a new business, or, in the worst case, how they pay for

health care if they are unemployed. That is why we are grateful

for your leadership in keeping this issue at the forefront of the congressional agenda.

We also encourage the Congress not to lose focus on medical liability reform and hope, Mr. Chairman, that you will reintroduce

S. 1481, the Fair and Reliable Medicare Justice Act, with Senator

Enzi.

Now, at the Business Roundtable, we have devoted considerable

time to studying the health care reform issue. We have learned a

lot. In September, we released a plan containing many suggestions

that are somewhat similar to Chairman Baucus’s proposal. As you

well know, when it comes to scientific advances, medical technology, and the quality of our doctors and hospitals, we believe that

American health care—not the system, but health care—is really

the gold standard for the world. We know how to take care of people.

But it is beyond the reach of an increasing number of Americans,

and this is the problem. From our perspective, the problem with

the current health care market is that it does not really function

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as an integrated market. It leaves major consumer needs unmet,

costs unchecked by competition, and basic practices untouched by

the productivity revolution that has transformed every other sector

of the economy.

So our plan is based on four pillars.

(1) Creating greater consumer value and efficiency through use

of health information technology, value purchasing, and medical liability protection. We can drive efficiency by doing those things.

(2) Providing more affordable health insurance options for all

Americans by tackling insurance reform. We need more products in

the marketplace to cover more people.

(3) Placing an obligation on all Americans to have health insurance coverage and encouraging widespread participation in prevention and chronic care programs. We have come to the point where,

when you are born until you die, you need to be participating in

the system so we can take care of you in a fashion that drives efficiency and quality of coverage through your lifetime.

(4) Lastly, offering assistance to uninsured low-income families to

meet their participation in the plan.

Now, our written testimony discusses these pillars in more detail. As you will see, Chairman Baucus, some of our fundamental

assumptions mesh with many elements in your plan, such as greater use of health IT, more transparency on cost, and quality to create greater efficiencies.

In our judgment, the key to finding a practical solution to health

care reform is to fix what is broken while preserving what is working. So, in that spirit, the Business Roundtable strongly urges Congress to reinforce the existing employer-based system through

which most Americans currently receive health benefits.

The Federal ERISA statute gives employers the flexibility to design and finance plans that meet their employees’ needs, a successful system that makes coverage widely available to our workers.

Tampering with this law at this time, in our view, is just unnecessary. For many uninsured, the problem of obtaining coverage is not

just financial, it is also the inadequate structure of the health care

market.

To fix that, we must also have a functional competitive private

insurance market with affordable options. Our plan would restructure the private insurance market and, we believe, create a more

rational insurance system with a wider variety of products to meet

the different needs of the uninsured.

While it is obvious we may differ on some mechanics of how to

achieve our objectives, the Business Roundtable stands united with

this committee in our commitment to finding solutions to the

American health care challenge that we are all facing. We firmly

believe that by mobilizing the power of the market and 21stcentury information technology, we can drive down costs, drive up

quality, and improve access to health care for everyone.

We are committed to working with you and all interested stakeholders in achieving meaningful reform. In fact, we are doing so

today. For example, the Business Roundtable has joined forces with

AARP, with Mr. Stern and the SEIU, and the NFIB in a coalition

called Divided We Fail to build bipartisan support for health care

reform.

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In our company, Verizon, we agreed with our two unions, the

CWA and IBW, to work together to achieve comprehensive health

care reform that covers every American, controls costs, shares the

responsibility of paying for coverage, and improves quality. These

are big steps for the business community.

There are many facets to this problem and many perspectives

that must be taken into account, but we believe that any real solution to health care reform must emerge from the uniquely American principles that drive our economy: innovation, choice, competition, and a marketplace that serves everyone.

Now, if I could just beg your indulgence, I need to say just a

word about pension funding. The sudden and unexpected decline in

the markets, combined with the current credit crunch, has put defined benefit plan sponsors in a very tough spot. At a time when

most companies need cash to grow, we are getting hit with unexpected pension funding that is far in excess of our most conservative forecasts and budgets.

We would like the Congress to act now, this year, to give business a little breathing room. We need to be able to smooth out the

recent asset decline so that the losses are replaced over a more reasonable period, and we need a little bit more transition into tougher funding rules and some flexibility on how those rules are applied. Companies are making budgeting decisions for 2009 and

2010, and they need to know they are going to get some breathing

room, otherwise many of those companies are going to have to

make some painful cuts in jobs and benefits.

Senator, thank you very much.

The CHAIRMAN. Thank you, Mr. Seidenberg. In fact, I have been

meeting with Senator Grassley on just that second issue, smoothing pension provisions and other asset provisions and the dates by

which plans have to be funded, given the problems facing the economy. I think there is a decent chance we will get that enacted this

week.

Mr. SEIDENBERG. Oh, that would be great.

The CHAIRMAN. Yes, it would be great.

[The prepared statement of Mr. Seidenberg appears in the appendix.]

The CHAIRMAN. Mr. Stern?

STATEMENT OF ANDY STERN, PRESIDENT, SERVICE

EMPLOYEES INTERNATIONAL UNION, WASHINGTON, DC

Mr. STERN. It would be great. Good morning, Mr. Chairman,

Senator Grassley, members of the committee. On behalf of the 2

million members of SEIU, including more than a million who went

to work in hospitals, nursing homes, and peoples’ homes, I thank

you for the invitation.

Our members recognize there are many economic challenges that

you need to deal with that face our country, but we believe there

is now a once-in-a-lifetime chance to finally address a strategic economic challenge that has been unsolved for too long, and that is to

solve our health care crisis.

The facts for workers in health care are very clear: 8 of the 10

uninsured go to work every day; premium growth has now doubled

or quadrupled the size of wage growth, as you said, Mr. Chairman;

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and U.S. businesses are spending twice as much per person as

their OECD competitors, and that is not good for American workers.

But those are facts for the head. To get to the heart of the matter, there are people like Paula Hall, a child care provider in Spokane, WA. In 2001, Paula’s husband was hurt working in a machine shop, lost his job, could not afford COBRA, did not qualify

for State aid because they made too much, so they played Russian

roulette and went, like so many Americans, without health insurance.

Four years later, after open-heart surgery, three angioplasties, and $250,000 in health care bills, they spent their savings, spent

their child’s college fund, lost their home, went bankrupt, and then

finally got on State aid so they had health care again because they

had so little income.

It seems ridiculous, in the richest country on earth, to have to

go bankrupt, or be foreclosed, or get a lower income in order to

have a path for health care. We believe, as all of the speakers said,

if we are going to solve today and tomorrow’s economic crises for

working people and for our country, it is time right now to fix the

health care system. Whether it is the economic impact of medical

debt—and we should all appreciate as we deal with this debt crisis,

there are now 72 million Americans struggling with medical debt,

many of them who thought they had insurance that protected

them.

Another study says that medical debt will be the cause of half

of the future bankruptcies in this country. But more importantly,

if people do not have a sense of health care security, they are not

going to begin to purchase at the levels we need to revive consumer

spending, and when we look at what happened in retail where it

dropped an astounding 2.8 percent in sales just last month, we

need people to be secure and feel like they can spend.

With these kinds of choices facing working people today, it is

hard to argue that health care is not tied to the immediate economic crisis. If we do nothing, health care will only continue to fuel

the economic crisis for years to come. We know, as you said, that

the typical employer-based family health insurance plan will rise

84 percent, to more than $24,000, in 2016. That will collapse businesses, health care plans, as well as employees’ budgets.

If we do nothing, we know, as you said, that we will double, from

$2 trillion to $4 trillion, national expenditures on health care,

which is unsustainable. As you said, Federal spending on Medicare

and Medicaid, now 4 percent of our economy, will grow to 6 percent

by 2030, and 12 percent by 2050. This cannot continue.

The single most important way to dramatically improve our economic and fiscal outlook is to take steps now to put health care

spending on a growth rate more closely aligned with the overall

economic growth.

Now, here is the good news. As opposed to, as Senator Rockefeller said, in 1993, I think there is a unique window of opportunity

here. The voters have spoken clearly about the need for change.

Businesses, consumers, unions, the insurance and pharmaceutical

industries, I think, are all ready to participate in a process of real

change.

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I think everyone now understands this is not a Democratic problem or a Republican problem, this is an American problem, for families and for our businesses. Just like GM, if we fail to live up to

our responsibilities and see the problems and deal with them

quickly and responsibly, we will see the collapse of our health care

system as well.

We have begun to participate, as Ivan Seidenberg said, in many

coalitions with many people we do not usually agree with, but on

this issue we totally agree. Whether it is the Business Roundtable,

NFIB, Wal-Mart, Intel, Manpower, or the pharmaceutical industry,

we believe the time has come to solve this health care crisis.

That is why, Mr. Chairman, your call to action last week was so

timely, so bold, and such an important step to move this forward.

We were especially pleased to see strong support for accessing coverage, including a public option; strategies for cost containment;

payment and delivery system reform; transparency; and more options for long-term care. The only way to fix this problem is not incremental, but fundamental, focusing on access, quality, and cost

all at one time.

Senator Grassley, we appreciate your long record of supporting

policies that ensure coverage for all Americans. I am proud to work

with you on transparency and long-term care. Senators Rockefeller

and Hatch have shown great commitment to these issues. Senator

Wyden has obviously been a leader as well. President Obama has

promised us all that he will reach across the aisle. Now is the time

to solve this problem. It is within our reach and can be done, we

believe, in the first 100 days.

Finally, let me just say, when it comes to the health care crisis,

we have to take a lesson from the economic crisis: the longer we

wait, the less we do, the worse it gets. There are those who will

say we cannot afford to reform our health care system, but I say

we cannot afford not to.

Thank you very much.

The CHAIRMAN. Thank you very much, Mr. Stern. I deeply appreciate that.

[The prepared statement of Mr. Stern appears in the appendix.]

The CHAIRMAN. Dr. Reinhardt?

STATEMENT OF UWE E. REINHARDT, Ph.D., JAMES MADISON

PROFESSOR OF POLITICAL ECONOMY, WOODROW WILSON

SCHOOL OF PUBLIC AND INTERNATIONAL AFFAIRS, PRINCETON UNIVERSITY, PRINCETON, NJ

Dr. REINHARDT. Mr. Chairman, Senator Grassley, members of

the committee, thank you very much for inviting me to this important meeting. I would also like to congratulate you, Senator Baucus, for this fine document. As I mentioned, I will use it in my

course on health policy as an opening and say the aim is that you

should be able to write a document this good. [Laughter.] So, you

have made a contribution to Princeton University.

The CHAIRMAN. Thank you very much.

Dr. REINHARDT. It is indeed a window of opportunity at the moment. My wife and I were part of a group of foreigners who went

to Taiwan in the early 1990s to help them move to universal coverage, and they did it in 1995, as we failed. They had all the ingreVerDate 11-MAY-2000 14:05 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 61827.000 TIMD PsN: TIMD
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dients: a demand for it among the populace, among the business

community; there was a legislature enlightened to be receptive; and

there was strong presidential leadership. This president was passionately committed to the cause, as I hope and believe Presidentelect Obama will be. So, this is a great window of opportunity.

My statement falls into four sections. The first one is a reaction

specifically to the proposal you have, and it may seem like pandering when I say I wholeheartedly support the design parameters,

but I had a proposal I had sketched out 15 years ago, and I had

very similar ideas. I called it the All-American Plan, because this

plan does not undo what there is; whatever you have, you can keep

it. It is not a government take-over, it is just filling in the gaps

with intelligent additions.

I like the mandate. I do believe you cannot have community rating and guaranteed issue, and then allow people to go without insurance when they are healthy and throw themselves on the mercy

of a community rate when they are sick. If you belong to a club of

people who look after each other when they are sick, you have to

pay your dues into the club. So, I obviously favor a mandate.

The insurance exchange is often decried as a government takeover—and you will hear that again—of health care. But Governor

Romney put one in in Massachusetts. The way I would look at it

is, a big business like General Motors has an employee benefit department that organizes the market for insurance. Small businesses do not have that, and the exchange is a substitute for their

personnel department. So, it is a private sector thing; it is not a

government take-over.

The point I would say, in your testimony, that needs a little more

work would be the subsidies for small businesses. To an economist,

the issue is not small; the issue is the size of the wage base, the

donkey that has to carry this load. So, if you had a small firm of

architects or lawyers with 20 people, they might not have trouble

paying for health insurance, but if you had a larger firm, 200 employees, all with a very low wage base, they would have a problem.

So size is not the issue, but wage base.

Which brings me to the second section of my testimony. We are

sailing into a perfect storm. While on the one hand the gross wage

base that has to pay for all the fringes—whether a check is written

by the employer or employee—for all the take-home pay and for

health insurance, that wage base is growing at 3 percent per year,

if we are lucky.

If you look at the Milliman Index, it now costs $15,000 for a typical family of four, if you include health insurance premiums and

out-of-pocket spending, and that will be $35,000 10 years from now,

while the wage base—I use an example of a family with a $60,000

wage base that will be $80,000 in 2016. So in 2018, 47 percent of

the wage base of this family will be chewed up just by health care.

So, that will not happen, and they will be uninsured.

That puts us—or you—into a nasty situation: either higherincome people have to pay more taxes to subsidize, to be their

brothers’ and sisters’ keepers in the bottom third of the income distribution, or we have to run a multi-tier health system where the

health care experience varies by the income of the people.

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I have a long section on cost containment. It is imperative that

we do cost control. You have a beautiful section on it, starting with

the Wennberg variation. I will not have time to go into it, but the

one point I do address is, in years past we have always said, let

us do cost control first and then we can afford to cover more people.

That puts the cart before the horse. I think we need to have universal coverage first and then, parallel, do cost containment. But

that takes much longer. It is a big, big wrestling match. Of course,

there is Alfred E. Newman’s cosmic equation which says every dollar of health care spending is someone’s health care income, including fraud, waste, and abuse. So when you get at that, you are cutting into people’s income, and there could be very powerful opponents. So that will take a little longer, that battle, to fight, but the

insurance can be done more quickly.

Just some additional points. I applaud you for addressing, at

least for discussion, the tax preference accorded employer-provided

health insurance. I think Republicans and Democrats alike realize

that this is an inequitable and inefficient subsidy that could be

harvested. We are talking $300 billion. There are ways—you

sketched them out yourself—that, instead of taking it away right

away, you could cap it or limit it by income. For example, if you

make more than $200,000, all employer-provided premiums will be

added to the W–4, but if you make $40,000, none would. There are

easy, imaginative ways to do it. Technology assessment—I think

we will have it sooner or later, because we are the only country

that really does not.

Then I thought, in the Medicare Modernization Act, you missed

a great opportunity. You gave the private insurance industry a tip,

12 percent, on top of what regular Medicare costs, but you asked

nothing in return. Usually when I tip, I ask for something. What

you could have asked for is what the Germans did. They told the

insurers, we will pay you extra but you have to come to us with

a fully specced-out disease management program, with a network

of doctors.

Everything has to be in there. You do that. I think you hint at

it in your report. I would go that way. If you want the subsidy,

then you have to manage care, which probably would, for a lot of

these plans, mean they either lose it or they have to get busy really

addressing the issue of disease management.

Thank you very much.

The CHAIRMAN. Thank you very much, Professor. I might say on

the small business, we attempt to deal with the question you

raised, namely not just the size and number of employees, but also

the income. For example, the difference between Jiffy Lube and a

law firm, for example.

Dr. REINHARDT. Yes.

The CHAIRMAN. We tried to address that in this paper. But I

must say, too, in listening to you, you sound like a professor grading this white paper. [Laughter.] It kind of sounds like you gave

us a pretty decent grade, and I deeply appreciate that.

Dr. REINHARDT. You should see it. [Laughter.]

The CHAIRMAN. Thank you very much. It is like a tutorial here.

Thank you very much.

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

The CHAIRMAN. Dr. Chandra?

STATEMENT OF AMITABH CHANDRA, Ph.D., ASSISTANT PROFESSOR OF PUBLIC POLICY, JOHN F. KENNEDY SCHOOL OF

GOVERNMENT, HARVARD UNIVERSITY, CAMBRIDGE, MA

Dr. CHANDRA. Senator Baucus, Senator Grassley, members of the

committee, thank you for inviting me to Washington today.

My first point this morning is to note that cost growth in health

care has reduced wages and increased the numbers of the uninsured. My second point is that the Medicare program encourages

the adoption of new medical technologies, some of dubious marginal

value. It also rewards the full utilization of existing capacity. Yet,

because physicians treat their over-65 and under-65 patients similarly, Medicare’s incentives encourage the intensive treatment of

the under-65, which raises their premiums. My third goal is to

elaborate on reform options.

Let me start by discussing the effects of cost growth in health

care on labor markets. Despite what is commonly believed, workers

who receive health insurance benefits are paying for them in the

form of lower wages, and that means less money for gasoline, food,

and holiday presents. Recognizing this trade-off, some workers decline health insurance.

But firms have limited ability to offset increases in the price of

health insurance through lower wages. They certainly cannot do it

for workers who are retired. For employees whose compensation

cannot be reduced, firms will reduce employment or move workers

into part-time jobs without health benefits.

Dr. Katherine Baicker and I estimate that a 20-percent increase

in health insurance premiums, which is less than a third of what

they have grown since 2000, has resulted in an employment loss

of 3.5 million workers, and an additional 3 to 4 million workers

have been moved from full-time to part-time jobs without benefits.

Firms may also respond by moving to the areas of the United

States where there is less cost growth. For workers in other areas,

there will be no jobs and no health insurance.

Because of our peculiar choice of tying health benefits to employment, Americans lose insurance when they lose their jobs. Some respond by being more reluctant to switch jobs because they do not

want to lose their insurance and be exposed to the threat of a medical bankruptcy, but such switching is key to revitalizing our economy.

All this said, there is no reason to believe that, simply because

something is expensive, it is not worth it. But we now know that

30 percent of medical spending in the United States confers no

medical or therapeutic benefit. The United States spends over $2.1

trillion a year on health care, and 30 percent of that is $700 billion.

This is a number that has particular significance today. It is surely

possible to offer more affordable health insurance policies that do

not cover this 30 percent of wasteful spending.

So what can we do? In the short run, Congress may consider increasing the portability of insurance and the expansion of existing

programs. I urge you to do so, but these will be very costly. PermaVerDate 11-MAY-2000 14:05 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 61827.000 TIMD PsN: TIMD
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nent, large-scale insurance expansions will increase providers’ incentives to expand capacity, which will then be fully utilized in

other Americans, driving up their premiums further.

Expansions will also encourage some employers to drop coverage,

thereby increasing costs and reducing the realized coverage gains.

Permanent expansions will also weaken the Federal budget situation. Reforming the individual health insurance market through

regulatory reform is another coverage option and one that will

eventually pave the way for decoupling insurance from employment. I will be happy to share my thoughts on such reforms with

you later.

We should acknowledge that efforts to insure the uninsured will

not check subsequent premium growth. Moreover, insuring the uninsured will give them access to the sort of care that everyone else

receives, which is a combination of valuable care, the over-use of

costly care with unproven benefit, and the under-use of some vitally important therapies.

Chairman Baucus, as you have noted, fundamental health care

reform will have many, many components. The more challenging

idea to simultaneously consider is to address cost growth in health

care. This is not a uniquely American phenomenon, but our Medicare program’s perverse incentives aggravate the situation by encouraging the adoption of innovations that are beneficial in some

patients, but offer tremendous scope for over-use in others.

Physicians do not practice medicine in a vacuum. Because of malpractice and practice norms, how they treat Medicare patients is

how they will treat non-Medicare patients. Medicare reforms that

promote value-based reimbursement will spill onto everyone, thereby extending the reach of both public and private dollars.

Private insurers will be able to offer more affordable policies if

they know that they do not have to cover the 30 percent of useless

spending that Medicare currently covers. Indeed, cost savings from

Medicare reform could be used to finance other health reform efforts.

How exactly to reform Medicare is a topic for another hearing,

but I have many ideas that I would be delighted to share with you

at that time. The key to Medicare reform is the realization that we

must measure all costs and not only costs at the level of discrete

episodes of illness. We must reimburse for value and ensure that

the care that patients receive is congruent with their preferences.

The accountable care organizations championed by the Dartmouth

Institute offer the greatest promise, but they need to be more rigorously tested.

In summary, addressing cost growth in health care will increase

wage growth and consumption, reduce the number of the uninsured

and unemployment in general, and encourage voluntary turnover.

It might revitalize our economy. It will prevent Medicare from taking over the entire Federal budget, and it will have the bonus effect

of improving the Nation’s health. There is no better time to initiate

such reform.

Thank you.

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

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

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The CHAIRMAN. What strikes me, as Senator Rockefeller has

said, and so many others have said, is that the time has come. So

many groups, people, stakeholders, providers, and consumers want

to work together to find a solution now. It really has risen to the

next level above partisanship. As you said, Mr. Stern, it is truly an

American phenomenon, and clearly the time has come. I think the

stars are aligned where we can get this all put together in a very

meaningful way.

One question we are going to face, though, is, you have done a

good job, all of you, of explaining the costs of inaction. Inaction is

just intolerable. But the question we are going to face is, how much

will the up-front investments be to accomplish our objective, whether it is health IT, comparative effectiveness, and on down the line.

We run into this difficult question in the Congress of pay-fors,

that is, the degree to which the costs initially are going to be a hindrance as we try to realize the benefits from those costs. That is,

the costs are really investments, but we have this archaic budget

system here that is going to make that a bit difficult.

So I would like you to address the importance of these initial investments and what you think the consequence of the failure of

making those investments might be as we try to achieve meaningful reform here. I will just go down the line here and start with

you, Mr. Seidenberg.

Mr. SEIDENBERG. All right. Senator, there is no magic answer to

that. You have mentioned before, we sit in meetings. I know in our

company and at the Business Roundtable, we listen to experts on

this all the time. So the short answer to your question is, you

should look at the categories where we could make the system

more efficient—evidence-based treatment, disease management,

health IT, transparency of data, and wellness practices. In my company this is nothing more than looking at a return on investment

of some initial dollars.

So, if we can create accountability around these areas, and we

can get this system to pay for itself over a 3-, 4-, or 5-year period,

cash in/cash out that looks pretty stable, there should not be any

reason why the Congress could not provide the seed money to get

it going. But every time I hear this debate, what we talk about is

all this money on the front end and there is never any discussion

about what the accountability is on the back end.

The CHAIRMAN. Right.

Mr. SEIDENBERG. So my view is, it is what it is. But, if we can

create the accountability around these well-established ideas for efficiency and savings, then the economy should step up and seed the

program necessarily, and make sure this gets back into accountability.

The CHAIRMAN. Thank you.

Mr. Stern?

Mr. STERN. I just think we all appreciate what is going to happen, if we do not do this, to the Federal budget, I think, as someone

said earlier. I think there are questions of our willingness to try

to, in some ways, legislate a cap on Federal expenditures over some

time that starts to cut the cost of growth in out-years, because, if

we do make an investment, there should be a return. I do not know

legislatively how one would do that, but we have to cut this cost

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curve. I think, if the investment does not do that, it is a bad investment. The good news is, this is an investment that has paid off in

many other places around the world. Businesses have shown treating chronic disease, doing things early in terms of prevention, actually saves money. I think the question is, how do we build that into

the legislative thinking?

The CHAIRMAN. Right.

Dr. Reinhardt?

Dr. REINHARDT. If you look at page 10 of my testimony, I show

there a table which I had asked for as chair of the Commission on

New Jersey Health Care that shows in one hospital area, in the

last 3 years of life, Medicare spends 3 times as much as in another

hospital area in the same State of New Jersey. I asked the hospital

executives to justify this to me, and they said, well, we are just

open workshops. Doctors come in here and tell us what to spend

and we have to spend it, and we have no control over them.

So I proposed in this commission report there exists software

that can track every order entry of every doctor, for every patient,

by every input. It already runs. I think it has been used in Albuquerque, at Lovelace, where that was tried. So that allows you to

build profiles of what doctors spend to do certain procedures.

As a first step, it would be good to get the doctors in a hospital

in a room and have them justify, what gives? This is how Wennberg’s variation could be addressed. We also can link that to output

data. That software is cheap because it basically exists. It is easy

to run. It would be the first investment, because most allocation decisions in health care flow over the pen of a doctor, and that is

where you would have to start: justify what you do.

The other thing is leverage. If you do sharing—say business, the

Congress, and providers share in IT on the condition that it is

interoperable, that it meets certain specs—you could get a lot of

dollars where everyone benefits, and yet you get the commonality

that it is interoperable. Those things are not all that expensive, I

think, but that is where you would start.

The CHAIRMAN. Well, I appreciate that. Those points are recognized in the white paper. We are going to have to move to dot some

i’s and cross some t’s as we go down the road here. My thought is,

as with e-prescribing, there have to be some incentives and rewards for providers that implement IT. We have to develop those

standards. I think those standards, interoperable standards, can

be, and must be, addressed.

I also think, to your other point, Dr. Wennberg’s study, we could

get at that problem—Dr. Chandra, you alluded to it in your testimony—with delivery reform and with transparency, which also is

addressed in the white paper, so that people can compare. It makes

no sense, the disparity you talk about in New Jersey, and the

Wennberg findings make no sense. Clearly, there are areas there,

I think, for great savings with more transparency and disclosure,

which will, I think, root out a lot of the waste that otherwise occurs.

My time is up. Senator Grassley had to briefly step out.

Senator Rockefeller, you are next.

Senator ROCKEFELLER. Dr. Reinhardt, you made many presentations over the years to the Alliance for Health Reform. In one of

17

those you referred to the cover story of the September 25, 2006

issue of Business Week magazine. The cover story was entitled,

‘‘What Is the Real Propping Up of the Economy?’’ Now, this precedes the disaster of recent months, which has gone on a long time.

The byline read, ‘‘Since 2001, the health care industry has added

1.7 million jobs; the rest of the private sector, none.’’

Now, obviously I am trying to set up economic recovery and what

health care can do. The article goes on to say that health care has

become the main American job program for the 21st century, replacing, at least for the moment, all the industries that are vanishing from the landscape. Health care is highly labor-intensive, so

therefore most of the $2 trillion in health care spending ends up

in the pockets of workers.

My question to you: there is an undeniable link, obviously. Can

you talk about the importance of the health care sector to job creation, and hopefully verify what I am trying to say and will ask

you in another question, and what comprehensive reform could

mean, therefore, for our economy?

Dr. REINHARDT. This was an editorial which, alas, the Washington Post chose not to print, where I compared universal coverage versus tax cuts. The problem with a tax cut is, you do not

know how the people who get it will spend it. Will they put it into

offshore mutual funds? Will they buy a Ferrari? You have no control. But, if you put it into health care, it will, in fact, create American jobs, because we do not import health care.

Now, I would not advocate putting it in anywhere where it is

wasted, but my theory is, and I think the facts show that, if you

spend more on the uninsured, you are actually buying high-value

health care. You will insure a child and, therefore, if the child gets

asthma treatment and will not be hospitalized, that is high-value

output. So I am not arguing digging ditches and filling them in, but

it is a fact that the health sector is the American locomotive in the

economy.

So, if you were to move to universal coverage, that, incidentally,

would also be a good part of the stimulus package. It just simply

works out that way. I think, therefore, I did not put that into my

testimony in the statement, but it is a fact. You saw in Business

Week, Michael Mandel took that further and looked at the numbers. It turns out health care is the job machine in the U.S. In particular, if you target it on under-served areas, I think you will get

high value for the dollar.

Senator ROCKEFELLER. Does anybody else want to comment?

Mr. STERN. I think it is an enormous opportunity, not just for

universal health care, but I think one of our untapped industries

continues to be our pharmaceutical, life science, and bio science opportunities to develop jobs. I just would say that, as we think about

this, we need to think about workforce development. We do not

have enough family physicians, we do not have enough nurse practitioners. I know that Pfizer and others have talked about this. I

think there is both a training/upgrading as well as job creation opportunity that will be really good for America.

Senator ROCKEFELLER. But, if we do all of what you suggest, the

money is all going into the pockets of American workers. I mean,

that is the point I am trying to make.

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Mr. STERN. It is all American workers, and it is all American

jobs. It could not be much better than that.

Senator ROCKEFELLER. Yes.

Thank you, Mr. Chairman.

The CHAIRMAN. Thanks.

Senator Hatch is next. Dr. Reinhardt, one point. You mentioned

that health care is a locomotive. It is interesting to note that the

only two sectors where there was job growth in October were in the

mining industry and in the health care industry.

Senator Hatch?

Senator HATCH. Well, thank you, Mr. Chairman. I appreciate you

holding this hearing, and I particularly appreciate this very eminent panel of witnesses that we have here today.

Mr. Seidenberg, you mentioned there were some ideas in Chairman Baucus’s proposal that may need to have further discussion

about the costs and impact on the workforce. Could you just elaborate a little bit more on what some of those ideas are?

Mr. SEIDENBERG. I think, Senator, the places that we are working through the issue, not to use sort of forbidden Washington

words, but the Business Roundtable believes that we have reached

a point where universal participation is a good idea, so getting people into the system early in life, through their lives, and practicing

good health care mechanisms are good. So, how you incent and pay

for that is one of the things that we need to work through.

Now, the health IT exchange is a good thing. The thing we want

to make certain is that it is equitable, there is personal responsibility in there so that people have to buy insurance, they have to

shop for it, they have to drive appropriate behaviors. We also have

to make sure on the back end of that that insurance companies can

construct new products that incent wellness, and that incent disease management.

So I think, Senator, we are more focused now on the debate as

to how we sort of blend in good, sound business practice with the

idea that we want everybody to participate in the system, and then

we want to make sure we do not come up with simple answers, because sometimes a simple answer has a lot of unintended consequences. So those are just two examples, sir, of what we are talking about.

Senator HATCH. Well, thanks. We would appreciate more, if you

can write to us.

Mr. SEIDENBERG. Yes. We have a whole group of expert staff people here who love to talk about this who will do that.

Senator HATCH. All right.

Mr. Stern, I appreciate your interest in this area, very much.

You have been one of the prescient labor leaders in this country,

as far as I am concerned. Now, with health care costs rising at

more than twice the rate of GDP, everybody knows we are a Nation

on the road to fiscal insolvency if we cannot solve that. Within the

next decade, health care costs alone are going to take 20 percent

of GDP unless we can find some way around that. An important

step in ensuring that all Americans have access to quality and affordable health care is some way of bringing down these unaffordable costs or out-of-control costs.

19

Now, in your testimony you mentioned that we need to take

steps to ‘‘put health care spending on a growth rate more closely

in line with overall economic growth.’’ Could you elaborate on that,

how you propose to help us to get there?

Mr. SEIDENBERG. We have a couple of thoughts, and I think Dr.

Reinhardt mentioned a couple. I would just take a couple of big categories. So, as a businessman, I cannot figure out every line item

of every single one of these bills, but there are two or three major

categories that we have focused on. So we know that in Medicare,

no matter what study you look at, 30 percent of the costs go to the

last year of life. We need to get disease management. In Medicare,

we have all sorts of programs geared to paying for activity rather

than output, so we need to get after that.

Health IT is a no-brainer to us. There is not an industry in this

country where, if you put a healthy dose of IT into it that, over the

course of 3 years, you are going to get 20 to 25 percent savings.

You can look at almost any industry. So these are some examples

of how you can bring down that 11 percent premium rate that we

have been paying, on average, down closer to GDP rate, and maybe

even lower it for a couple of years. But from a business standpoint,

it is just inconceivable that we cannot apply health IT and sound

business practice and create accountability that will arrest the

curve of these costs.

Senator HATCH. Mr. Stern, the same question.

Mr. STERN. I just do not know, Senator, because I am not skilled

in this area, how you would actually begin to place a cap on the

overall Federal expenditures.

Senator HATCH. I do not know that you can place a cap.

Mr. STERN. And I do not know either. But I think that is what

you have to, conceptually, at least, deal with: how are we going to

drive disease management and all these changes into the system?

I think we know lots of answers now. We just seem unable to drive

the change into the system. We have lots of anecdotal experience,

as we like to point out, that this company or this hospital did it.

But a lot of them can be scaled up, I believe. I do not know how

to drive it in, but I think we know the answers. Now where is the

financial incentives and the political will to get them done?

Senator HATCH. Well, thank you.

One last question to you, Dr. Reinhardt. In your testimony, you

identify that allowing small businesses to join larger risk pools will

help alleviate the pressures that discourage them from offering coverage. Bipartisan small business health plan legislation allowed

small businesses to pool across State lines to form larger risk pools.

According to the nonpartisan Congressional Budget Office, nearly

750,000 more Americans would have private health insurance and

three out of four small business employees would pay lower premiums. So, give us your thoughts on that approach as well.

Dr. REINHARDT. Yes. Whatever works is fine. The problem I identified is that, when you have a small business firm and that pool

of employees becomes the experience rated pool and one of them

has cancer or some serious illness, it immediately drives up premiums. That is why, when you meet small business people, they

say my premium went up 30 percent. It could have been one employee who caused that. So whatever large risk pool you can conVerDate 11-MAY-2000 14:05 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 61827.000 TIMD PsN: TIMD
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figure. And what is important is that it remain stable so businesses

do not go in and out depending on the premium. It has to be stable

over time. Whatever works is fine, as long as it is large.

Senator HATCH. Thank you.

The CHAIRMAN. Next, Senator Bingaman.

Senator BINGAMAN. Thank you very much for having the hearing. Thank you all for being here.

My impression is, the overall subject of the hearing is health care

reform, and we are all impressed with the proposal that has been

put forward by the chairman which provides a critical framework

for the Nation to undertake comprehensive reform.

Dr. Chandra’s testimony, a lot of it, focuses on Medicare reform,

not just health care reform, but more specifically how can we reform Medicare and, through that device, get to some significant reform of the overall health care system. I gather from what you

said, Dr. Reinhardt, that you see serious problems with Medicare

as well.

I guess I would start with you, Dr. Reinhardt. How do we interface these two attempts: overall health care reform with more specific Medicare reform, particularly in light of your testimony regarding Alfred E. Newman’s cosmic health care equation? You

point out correctly that bringing greater cost-effectiveness to health

care is a monumental challenge, and we know that, and I agree

with that.

It seems as though, if we take on the job that Dr. Chandra is

recommending we take on, we are doing just that, we are bringing

this cost-effectiveness to health care. How do you see the two interfacing? Do you just go full speed ahead on both or do you try to

do some of the reforms of Medicare that Dr. Chandra is recommending as a prelude?

Dr. REINHARDT. Well, the first thing is that almost no economist

will talk about cost control or expenditure control, but costeffectiveness, by which we mean spending per unit of output,

whether it is lowering blood pressure or quality-adjusted life

gained, or the flip side, which is value for the dollar. We feel we

are not getting value for the dollar in Medicare, and that needs to

be addressed.

But it also has the dimension—and that needs to be said—in

general we spend about twice as month for elderly in the Sun Belt

than in the Wheat Belt. If you were to bring them all to Mayo Clinic standards, that would have a tremendous income impact on the

southern area.

So one has to proceed slowly, not with a meat-axe overnight approach. But as Dr. Chandra says, we need to calibrate where, over

time, the growth in the high-cost areas is slower. In your Call for

Action paper, you have some ideas of having blended rates that

would, over time, gradually get you there. This, I think, would be

a 10-, 15-year program before you could actually do it. If you look

at Dade County in Florida, if overnight you said you are not going

to get more than Minnesota, you would devastate their medical

community.

In almost all areas in health care, Medicare policy has become,

in part, an incomes policy, because people rely on that as a mainstay. One has to withdraw that very carefully. But to not do anyVerDate 11-MAY-2000 14:05 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 61827.000 TIMD PsN: TIMD
21

thing—we have talked about this when I was on the Physician

Payment Review Commission in the early 1990s. Let us start now

gradually ratcheting down the growth of health spending in the

Sun Belt areas and let the other States come up. But that never

had political traction. At some point, it must.

Senator BINGAMAN. Dr. Chandra, how do you see the timing of

bringing about the reforms in Medicare that you are advocating?

Do you agree this is a 10- or 15-year effort we need to involve ourselves in?

Dr. CHANDRA. Absolutely. I think that private health insurance

does not operate in isolation of Medicare, so, when a new costeffectiveness study comes out and says that a particular procedure

generates no clinical value, no improvement in patient satisfaction,

as long as Medicare continues to support it, as long as Medicare

continues to cover it, private insurance has to do the same thing.

So I do not think we should think about two separate sets of reforms.

We have to think about cost growth more generally, because

what is happening in Medicare does spill over into the insurance

products that private insurers are offering their beneficiaries,

which is something that is then strengthened by the fact that doctors do not treat differently insured patients differently. If you go

back to the variations that Dr. Reinhardt put up, you can look at

bypass rates for Medicare patients in a hospital and correlate that

with bypass rates for non-Medicare patients in a particular hospital, and they line up beautifully.

When doctors have extra capacity lying around, they become aggressive. So when we think about Medicare reform, I do not think

we should just think of it as a means to put the long-term Federal

budget situation problem in order. I think we have a real opportunity here to reform health care for the rest of us. But it will take

time. I do think that we need to spend more money, as Dr. Baucus

suggested in his Call to Action.

The CHAIRMAN. Is that a promotion? [Laughter.]

Dr. CHANDRA. Sorry, Senator. Well, I thought you did very well.

[Laughter.]

We need to understand. We are learning a lot from the physician

group practice demonstrations. We are learning a lot from accountable care organizations and bundled payments. Even though I am

a champion of these institutions, I am still not willing to say that

we know all the answers. We need a few more demonstration

projects. But demonstration projects are cheap, and we learn the

answers from demonstration projects in 4 to 5 years.

Senator BINGAMAN. Thank you.

The CHAIRMAN. Thank you, Senator.

Senator Wyden?

Senator WYDEN. Thank you, Mr. Chairman. First, Mr. Chairman,

let me say I do not think the Finance Committee has ever gotten

out of the gate faster on this health reform issue and been more

committed to getting to the finish line, and I just want to commend

you for that white paper last week.

The CHAIRMAN. Thank you. Thank you.

Senator WYDEN. For the witnesses, my own view is that one of

America’s biggest hurdles in these tough economic times is that

22

much of our health care system comes from the 1940s, when America was under wage and price controls. Nineteen forties health care

was pretty much all right then because workers stayed at their jobs

for decades and employers competed against people down the

street.

But now the typical worker changes their job 11 times by the

time they are 40, and the workers want coverage that is portable,

and the employers need cost relief or they are not going to be able

to offer coverage, or they are just going to have to keep cutting

back benefits.

Now, the fact is, there is nobody outside this building driving

around in an automobile from the 1940s, and I think we have to

modernize the system. That is where I want to start with you, Mr.

Stern, and you, Mr. Seidenberg. Largely at the request of Mr.

Seidenberg and business groups, we now have 17 U.S. Senators on

an actual piece of legislation that says that employers can continue

to keep doing exactly what they are doing, but we are also going

to have more choices for workers. We are going to have more cost

containment because workers get to share in their savings, and

coverage will be portable.

My question to you is, divorced from any bill, Mr. Stern—the

Healthy Americans Act, Senator Baucus has a lot of the same ideas

in his proposal—how important is it to you that the system be

modernized, that the employer/employee system be modernized and

at least brought into the relevant century rather than be a creature

of 60 years ago?

Mr. STERN. First of all, I constantly say that America has not

come to grips with the fact that we are living through the third

economic revolution. And where the agricultural revolution took

3,000 years, the industrial took 300 years, this is taking only 30

years. I think many of our systems, including our health care and

employment, have not been modernized up until where we are. My

son, who is 22, will have 9 to 12 jobs by the time he is 35. It is

not a one-job-in-a-lifetime economy. So, I clearly believe in pension

plans that are employer-sponsored. They are just going to be very

complicated to maintain in a globally competitive world.

So I think the question is, as Dr. Reinhardt was saying, we sort

of need to figure out where we want to go and figure out what are

the steps to get there. We cannot do certain dramatic things about

health care in Miami, FL because they have unintended consequences. So I would say we absolutely need to modernize how we

think about health care, pensions, jobs, training completely. I think

where we are on health care is what Senator Baucus has proposed

and is a huge step forward that allows us to keep having that discussion about where we want to go. But in the end, we cannot stay

where we are.

Senator WYDEN. Let me ask you about this kind of situation, Mr.

Seidenberg. This is something I want to work with the Roundtable

on. You are 57 or 58 years old and you are laid off in Oregon or

Michigan where there is tremendous hurt. You are going to just go

out into a marketplace where you cannot afford this COBRA program. You are going to get your head handed to you in the individual market because there is discrimination if you have had any

kind of illness.

23

I think that is one of the real textbook cases why we have to

have portability in our health care system. That person has to have

portable coverage. They have to have it in a group so that they

have bargaining power. We have, in the Healthy Americans Act, an

actual, concrete, budget-neutral solution for that person who is 57

or 58 who gets laid off next week in this tough economy. What is

the thinking at the Business Roundtable and large business organizations about how—again, divorced from any bill—you would modernize the system so that coverage would be portable for people

who get laid off in this tough economy?

Mr. SEIDENBERG. Well, it is a difficult question, as you know. But

I think that, first of all, we believe that, when a worker still of

working age is laid off from a job because of technology, competition, or something else, the issue is a bridge to finding a new job.

It is not a bridge to have permanent coverage from the government

for the rest of your life.

Senator WYDEN. We are talking about private sector coverage

where there is personal responsibility for the individual and the individual is a part of a group where they can get their value for

their dollar.

Mr. SEIDENBERG. Yes. So when we say ‘‘portability of health

care’’—I mean, today we talk about portability of pensions. That is

a different question. But when you talk about portability of health

care, I am not so sure that what we are talking about is taking the

Verizon plan to our competitor. I do not think it works that way.

I think what we are talking about is that we are not locking in our

employees to 30 years of work because all the actuarial assumptions based on our pricing of health care is based on staying with

us that long.

So I think what we have to say is, portability needs to be there

because the employee cannot assume that all businesses have some

sort of health care program, and where the businesses do not have

it, there is some sort of default case where they can purchase some

insurance. So I guess portability, in the case of health care insurance, is a different question than when people talk about it in the

case of pensions. It is a different issue. We do not price our health

care to make it portable.

The CHAIRMAN. Thank you, Senator.

Senator Stabenow, you are next.

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

much for the work that you have done in putting out an excellent

white paper, and I look forward to working with Senator Rockefeller, who has such long-term passion and has been such a leader

on this, as well as Senator Wyden, who has been spending a tremendous amount of time on this issue.

I wanted to talk, just as a follow-up to Senator Wyden, more specifically about options, but first I do want to make a note that, coming from Michigan, we have been able to see direct job loss as it

relates to health care costs going up. You can literally look across

the Detroit River into Canada and see plants that have been built

with the same wages, auto worker wages, the same environmental

standards or greater. The plant was moved because of health care.

So, we are the poster child, I think, for looking at what has hapVerDate 11-MAY-2000 14:05 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 61827.000 TIMD PsN: TIMD
24

pened, and certainly there are many, many other stories about

that.

When we look at health care reform, I am struck by the fact that,

first of all, about 45 percent of health care is already paid for by

the public sector in some way—Medicare, Medicaid, providing public health insurance through employers, and so on.

But then we also have this piece that we do not talk about,

which is taxpayer subsidies for private employers. We essentially

are paying for, in some way, all of health care, whether it is

through tax preferences or directly through Medicare and Medicaid.

Speak about your thoughts—I would welcome anyone on the

panel—about changing that tax preference or about using the dollars that are there in a different way to provide universal coverage—which certainly is part of Senator Wyden’s plan—as we

struggle, and certainly coming from a State where many people

currently have insurance through their employer and those who

have insurance have relatively good insurance, although it is going

down and the premiums are going up every year.

But speak about how people can keep their insurance, while at

the same time we address what is a publicly funded part of this

which goes to the employer. We as taxpayers publicly subsidize the

tax preferences for employers right now. So how would you change

that, or would you change that? Would you just build on the current system or take the dollars right now and restructure it?

Mr. SEIDENBERG. I think your question is great. I do not want

to sound like I am hostile to these ideas, because I am not, but I

want to respond to a couple of things. Your first point—and this

goes to the question before about Medicare—government is the

largest purchaser of health care, so, if you do not tackle Medicare,

it does not matter what you do in the private marketplace, because

you are not going to get the efficiencies out of it. So in my view,

one of the things we need to do is engage the government, as the

purchaser, to get a lot more efficient.

Now, your question about taxpayer subsidies. Theoretically, you

are correct. If I take a health care dollar I spend in wages and take

it as a deduction, to some extent, that is a tax issue. But it is working. We are covering 132 million people. They are not complaining.

They are not writing you letters. I think to throw them in a pool

because of the people not covered, to me is not the right thing to

do at this time.

So my answer to your question is, we need more options so those

who do not have coverage can get it. The insurance market today

is providing State plans; they are not providing new national plans,

so we need a vehicle similar to some of the items discussed in not

just Senator Baucus’s plan, but in other ideas. Give incentives and

create a structure for the insurance companies to provide new

plans. For example, a catastrophic plan that covers the whole

Southeast, or a plan that has certain standards built into it that

covers the Midwest. Of course, you would still have the States license the plans.

Now, I would make one point. Our health care costs are exactly

the same as for General Motors, and we have managed them down

over the course of time because we have closed old plants down and

25

we have created new businesses. So, it can be done. But I think

the issue we need is a transition to help businesses and industries

that are trapped to get to a new place.

But in the long term, our view is, if the consumer is not part of

the decision-making process, we will never get the efficiency in it.

So I am very concerned that throwing all the money back into a

tax pool is going to recreate what we have in a slightly different

form, and we are going to be back here talking about the same

thing in the future. Unfortunately, that is where we are.

Senator STABENOW. Anyone else? Yes, Dr. Reinhardt?

Dr. REINHARDT. This tax subsidy that you talk about, or preference, has been a thorn in the eyes of economists for 20 years, because it is regressive. I am fortunate to be a high-income American.

I benefit a lot more from that than a janitor at Princeton. That is

highly regressive.

Now, there has always been opposition to removing this subsidy, which is now $300 billion, and it came from the National Association of Manufacturers, the Business Council, and the unions, and

therefore, it became something you did not touch. But I am glad

that we are at least raising the possibility of harvesting some of it.

Again, as I proposed, if you are earning more than $200,000, perhaps you just should not get that at all. If you make $40,000, we

will leave it in place for you. So I think you should be able to get $100 billion from that. If you

ask any group of health policy analysts, they will say, if we had

to do it over again, we would never have the employment-based

system that we have now. We might have something like the

Wyden-Bennett bill where business contributes, but you would

have portable insurance.

But I think, Senator Baucus, this proposal is really not antithetical to yours. Yours is more a long-run vision, where we could end

up. What I like about your proposal is that there is a parallel system into which people who lose employer-provided coverage can

tumble, this public plan or any private plan so, at some point way

down the pike, these plans could merge.

The Committee of Economic Development also posted a plan last

November, Alain Enthoven designed that, and theirs is somewhat

similar. So those are options. I think what is good about this plan

is it can be done fast. This, and President-elect Obama’s ideas, can

be put in place very fast. Your proposal is really quite revolutionary, and God knows what that would trigger. That is how I see

it.

The CHAIRMAN. Thank you, Senator.

Senator Snowe?

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

leadership on this critical question that is certainly long overdue

for addressing by Congress and the President.

There are obviously a lot of disparities in the health care system,

and we have had a series of hearings before the Finance Committee regarding cost, and getting more value for our health care

dollars, and duplicative practices, comparative practices.

I am wondering, as we tackle health care in general and providing particularly for the uninsured, should we not, in conjunction

with that, be required to address health care costs and reducing

26

the burdens on the system where we know that there are some serious inequities and disparities? For example, we talked about comparative practices. There are protocols and best practices that have

yet to be adopted by doctors and hospitals across this country that

have been in place for the better part of a decade, for example.

Is there a way of addressing that, and should there be a prerequisite to be part of it? Obviously what we can do in Medicare

might have an impact on the private system as well.

Dr. Chandra?

Dr. CHANDRA. I just wanted to say that I agree with the spirit

of your comments completely. What is really interesting to note is

that the plans that are more likely to comply with the best quality

indicators that we have are actually cheaper plans. So to get providers to be in compliance with HEDIS quality measures, or whatever quality measures, does not actually require us to spend any

more money. We also have the technology to measure provider

compliance on a host of different dimensions today. It is software

that is already up and running.

The people up at the Dartmouth Institute are certainly able to

do that. So I am very optimistic that, through the initiatives that

CMS has begun to take, we can kind of do more. But there are two

caveats. First is, we need to do a better job of communicating that

information to the public, because I think we should not underestimate the ability of embarrassment in the marketplace to get providers to do better.

The second problem that I have with how we are measuring

things right now is that we are measuring things at the level of

technical process of care measures, which are things like, did you

give someone a flu shot, did you do the beta-blockers for someone

who had a heart attack? This is a wonderful first step. Ultimately

we have to go to the next level, where we actually ask: did this patient survive for 5 years after their heart attack? It is not enough

to know that they just got their beta-blockers at the time of discharge.

Senator SNOWE. Thank you.

Dr. Reinhardt?

Dr. REINHARDT. Yes. In your Call to Action, Senator Baucus, you

mentioned bundling. Payment reform is really at the heart of a lot

of this. The idea of bundling is an old idea. Most policy people

would support it. The idea there is that all the services going into

a standard treatment like coronary bypass will be bundled and

there will be one bundled payment.

The Robert Wood Johnson Foundation granted $6 million to a

company called Prometheus Payment, Inc. They are, in fact, experimenting and having doctors and hospitals work together to do coordinated care and charge one price for that. That should be based

on evidence-based medicine, in other words, not just what they

want, but the price will be pegged on cost-effective care. That is

really the hope. That will take a while, but I believe, as I look 10

years down the pike, we will reimburse a substantial fraction of

American health care that way, and that will get at the issue of

cost.

27

The problem is, as I think we all agree, it needs to be done, and

we should start now. Victory there will take a lot longer than victory on universal coverage, which could be had first.

Senator SNOWE. Any other comments? Yes?

Mr. STERN. I want to say two things. One is, I want to subscribe

to the ‘‘tip’’ theory that Dr. Reinhardt mentioned. If you think that

the tax subsidy is a tip, and Medicare Advantage is a tip, and we

have 40 percent of our money being spent by the Federal Government, the question is: what do we get for that?

I just think if we have best practices—and I think that goes to

the whole question of whether Congress is in the best position to

make all those decisions or there should be someone else—but once

we decide, I think the question really becomes, if you are giving

people something, do you demand that they use the best practices,

whether they are in the private sector or the public sector, when

we know things work? If we do not drive the cost savings into the

system, we can invent them all we want but it will not do us any

good.

Mr. SEIDENBERG. Senator, just very quickly, I am in agreement

with where you are. I guess if I had some sage advice, which probably is not worth anything, it is this: when Congress finishes

changing this, this should not just apply to the insiders, the medical industry, the corporations. Every household has to know something changed: either you now have access to something you never

had access to or you have to sit down and shop and learn more

about your health care.

So I think the answer to your question is, if you do not attack

the quality and the efficiency and the personal involvement, you

can make all the changes you want, and the average person is not

going to behave differently. So I am in favor of wholesale focus on

the issue of efficiency, quality, and all those kinds of things, because it gets the household in the game.

Senator SNOWE. Thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

Senator Grassley?

Senator GRASSLEY. Thank you. I also thank Mr. Stern for bringing up our working together with your organization on the Kerry

bill on the one hand, and the Kohl bill on the other. If you had not

brought it up, I was prepared to thank you anyway. I had a chance

to thank the members of your staff yesterday. I really appreciate

that.

Dr. Chandra, we need to have you give us a bottom line here. Would it be good for the economy to add up to $1 trillion or more

on long-term unfunded health care spending to the Federal deficit?

Dr. CHANDRA. Are you going to reform Medicare at the same

time?

Senator GRASSLEY. That has to be a part of this issue of our total

overall health care reform.

Dr. CHANDRA. Senator Grassley, I am not opposed to adding

more money to the Federal deficit. What I worry about is, what is

the value that we get for the trillion dollars that we added to it,

because that is a trillion dollars that our children are going to have

to pay back in the form of higher taxes.

28

So, if we can convince ourselves that the value that we got in

terms of the reductions in uninsurance, the reductions in medical

bankruptcies, the improvements in health were more than enough

to offset the trillion dollars, then I think it is a trillion dollars well

spent.

Senator GRASSLEY. In your testimony, Dr. Chandra, you say

‘‘now is a good time to deal with health care costs.’’ Question: If you

had to say which would give us the biggest bang for the buck,

which would it be—bending the cost growth curve or getting everyone insurance? In your opinion, can we do both?

Dr. CHANDRA. I think we can absolutely do both. If the question

is framed in terms of what is going to change, then going after

costs will bend the cost growth curve more than dealing with the

uninsurance problem. But I do not see any tension between insuring the uninsured and reducing cost growth, because I believe that

the reason people are uninsured is because insurance is currently

unaffordable. So, if we made it more affordable, we would be spending less on health care and we would be insuring more Americans.

Senator GRASSLEY. Also, Dr. Chandra, in your testimony you say

that some health reforms may help so long as they are not ‘‘fiscally

expansive.’’ Would you explain what you mean by that and tell us

a little more about what reforms would weaken and which would

not weaken, or might even strengthen, the economy?

Dr. CHANDRA. What I worry about, Senator Grassley, is that, if

we take our current insurance programs and expand them without

any other interventions to inject accountability and improve value,

I do not think that it is good value for the dollar because I think

that we have many problems in health care that go beyond the

problem of the uninsured. The uninsured would not necessarily,

with few exceptions, get very high quality health care. So that is

what I worry about a lot.

I also worry that people think of the fact that we have 47 million

uninsured and, if we brought them into a pool, what is it going to

cost us? It is going to cost us $5,000 a person or more. That is the

way that this calculation is usually done. They forget what happens when you bring that many people into the pool of insured.

One of the first things that happens is that providers respond by

expanding capacity. The minute they expand capacity, they increase or change the threshold at which they readmit. So a lot

more gets done not only to those uninsured people, but to everybody else in the economy.

So I am definitely—and I have been in my testimony—in favor

of expanding insurance as long as we are thinking long and hard

about these broader problems about how to deal with capacity and

how to deal with the effectiveness of the health insurance that is

being offered to the uninsured. I do not know if that answered all

the components of your question.

Senator GRASSLEY. It touches every point. If we have a followup, we will ask for answer in writing.

The last question that I would have for you, Dr. Chandra, is,

some have suggested that Congress must act quickly to resolve our

health care crisis. You have suggested an incremental reform, as

we know from the law of medicine, ‘‘First Do No Harm.’’

29

Question: When presented with a problem with the complexity of

the health care system in America, and in an effort to do no harm

to those millions of Americans who want to keep the health insurance they have, what economic risks do we assume by undertaking

immediate and comprehensive change in our health care system?

Dr. CHANDRA. Senator, this is the reason why I believe that we

should not, overnight, jettison the employer-provided health insurance system, even though I am not a fan of the system at all. I believe that we need to first reform the individual insurance market,

and only—only—when that is absolutely functioning well can we

think about reforms in the employer-provided health insurance

market. So I think we have to do this in steps, but I think the opportunity to undertake those steps is now.

Similarly, when we are talking about Medicare reform, I am not

in favor of capitation at all. I am in favor of designing accountable

care organizations where providers are rewarded on the basis of

the value that they created. That is not something that we are

going to be able to do in 6 months or 1 year. My most optimistic

guess is that we will be able to do this 5 to 10 years from now.

Senator GRASSLEY. Thank you.

Dr. CHANDRA. Thank you.

Senator GRASSLEY. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

The employer-based tax exclusion has come up here. I think

there is a lot of agreement that that has to be addressed. Dr.

Reinhardt, you have mentioned it. Senator Wyden has mentioned

it often. I think there is some agreement, if we were to finance our

health care system all over again, it would be different than what

we now have. But we have what we have. We are where we are.

My view is, and I know you agree, Mr. Seidenberg, to eliminate the

current tax provisions. I think we have to address it in some way

because it is regressive, and it has to be a part of the solution here.

Second, I do believe that another part of that same issue on the

question of portability can be solved various ways. The way we attempt to solve it in our white paper is to make sure that adequate,

good, solid, meaningful health insurance is available for everybody.

So keeping health insurance at your current place of employment

is not a disincentive for taking a different job someplace else. Job

lock is a bit of an issue today. There is no doubt about it. But our

goal here is to eliminate job lock by making sure that health insurance is available for all Americans.

Add to that, too, there clearly is an individual’s responsibility

here. Individual Americans have to step up as well in various

ways. I believe that that is a critical part of the equation here, and

we will try to find a way to help accomplish that.

I am also struck that there is a lot of agreement here at the witness table—in fact, much more agreement than disagreement. I am

just urging all of us in the country to keep an open mind, suspend

judgment, do not knee-jerk Republican reactions, or Democratic reactions, or business, or consumer, or whatnot. The issue is so important and we are in such a crisis today, it is imperative that we

work together.

Sometimes I think Congress really does not do much unless there

are two conditions. One is, we are in a national crisis. Sputnik, put

30

a man on the man, Depression, Pearl Harbor. The other condition

is there is extraordinary political leadership. Frankly, I think we

are at a time in American history where we are in a crisis in

health care reform, and I do think we are in a time where, with

the election of Barack Obama, and with the Congress working with

him—I will not say extraordinary political leadership—but I will

say there is a tremendous commitment to go the extra mile to put

this together in a very meaningful way.

I know I speak for everybody on the committee, and I say that,

and other groups I talk with have been saying that. It is my goal

just to keep us all working together, keep us all having an open

mind, because we all know what the problems are. We tend to

know what the solutions are. It is now in the execution, it is dotting the i’s and crossing the t’s, and we just have to keep that positive attitude, and we are going to go a long way. So, I just want

to thank all of you very much for adding so much to the equation

here.

Senator Rockefeller?

Senator ROCKEFELLER. Thank you, Mr. Chairman. I would heartily agree with that, but expand on it just a bit. I think that President-elect Obama is profoundly committed to this, and not to do it

incrementally, but to do it all within a measurable and responsible

period of time. I do not mean to make that seem too long.

Words are important. Dr. Chandra, you said two things using

two sets of words which gave entirely different reactions. One was

that, I am not in favor of raising debt levels with respect to what

the effect would be on our children and grandchildren. But then

you turned around and said, well, in response to a Medicare question, yes, I would be willing to see Medicare increased in the size

of its amount, provided that quality and efficiency and other matters were being addressed at the same time.

Well, if you say it one way, people get one impression, if you say

it the other way, where you mean exactly the same thing in both

cases but you say it differently, it is very, very important. I think

it is part of what our chairman is talking about, that this really

is a time for us to do it. Therefore, we have to in some sense step

back from our traditional roles and be highly flexible. Now, that

was not my question.

Mr. Seidenberg, the Business Roundtable proposal for health

care reform mentions coverage and assistance to low-income uninsured individuals and families. That is something that, if you come

from the State of West Virginia or from the State of Montana—in

the State of West Virginia, 50 percent of our babies are born under

Medicaid, paid for by Medicaid, so we tend to think about that fairly clearly.

But the only suggestion on the Business Roundtable’s proposal is

that low-income folks be allowed to go out on the individual market. Even going back to the 1993–1994 argument is a fatally flawed

argument, in that there is no possible way. I mean, back then we

used to talk about $5,000, and now we are talking about $16,000

if you include premiums and all the rest of it, up to $16,000. There

is no way they could possibly do that.

So I strongly believe that health care reform should be based, in

part, upon our current system. It seems to me that the Business

31

Roundtable supports that viewpoint in the area of employer coverage, but noticeably absent from your proposal is a discussion of

public program expansions. It is a huge, huge point. I believe Medicare, Medicaid, and CHIP should be improved and expanded as

part of health care reform, even as we might be doing what Dr.

Chandra is talking about, and that is making them work better,

cutting out inefficiencies. But you fail to mention that in the Business Roundtable model, and I am sort of curious as to why.

Mr. SEIDENBERG. Yes. First of all, I agree with you. But here is

the thing we are trying to avoid. If we get down to the number of

people who need public assistance, I think you will find the Business Roundtable will be very cooperative in figuring out whatever

the public mechanisms are to do that. When we talk about 47 million—we did not get into it today—a large number of those people

are opting out because of structural problems in the system, not because they cannot afford it.

Our testimony was not as specific about how to deliver the

health care to the groups that need it, but we are open to make

sure that works. Our belief is pretty simple, that, if we take the

inefficiencies out of the system, it will more than pay for the 10 to

15 million American households that need the assistance.

Senator ROCKEFELLER. But in the report—not your testimony but

in the report—it did not mention that.

Mr. SEIDENBERG. Yes.

Senator ROCKEFELLER. When you put out a report, you have to

assume that it is a fairly formal document. So you are revising the

report right here before us?

Mr. SEIDENBERG. I do not think I am revising it, but we will

make sure that we address the point that you just raised.

Senator ROCKEFELLER. I thank you.

Mr. SEIDENBERG. All right.

Senator ROCKEFELLER. Thank you, Mr. Chairman.

The CHAIRMAN. Senator Wyden?

Senator WYDEN. Thank you, Mr. Chairman.

Mr. Chairman, let me echo your admonition there a couple of

minutes ago. This is going to be critically important to stay flexible

and be open. I just want you to know that, as a sponsor of a bill

with 17 sponsors, it is my desire to do exactly what you just described, which is to be open and to work with all concerned.

I just have a couple of additional questions. I am going to start

with you, Dr. Reinhardt, of course, known as a champ on reform

for so many of us for many years. I want to get your sense about

a theory that Dr. Ezekiel Emanuel has offered up, and it is one

that I largely subscribe to. That is that bold reform actually generates more cost savings than going at this incrementally. I think

we saw that with the Congressional Budget Office report on our

legislation on the Healthy Americans Act.

But Dr. Emanuel essentially says, well, if you do all these things

that are largely supported individually—electronic medical records,

comparative effectiveness, prevention—you are going to have to

spend some money to get some savings. But, if you go at this boldly, as Senator Baucus talks about in his white paper, as we are trying to do in the Healthy Americans Act, that that actually generates more savings more quickly. It is kind of contrarian that

32

doing more and being bold actually saves money. But what are

your thoughts on that?

Dr. REINHARDT. Well, unfortunately it is true. I just was up in

Canada. If you chart health spending in Canada until 1970, the

U.S. and Canada were on almost identical tracks in spending. Then

you could see us keep going and the Canadians taper off. I wish

my wife were here, because she is an expert on the Taiwan health

system. I think, Ms. Fowler, you have seen her work. There, too,

when they introduced overnight national health insurance, there

was 1 year of a big bump in health spending, but thereafter they

have actually kept health spending as a percent of GDP at 6 percent, and before it was something like 5.7. That is true.

These countries, however, have parliamentary systems where

bold things are very easily done because there is party discipline,

et cetera. We have a more complex system of government. I think

those of us who are a little bit timid on this have been impressed

over time with how hard it is and what political entrepreneurship

it takes to get anything done.

Most of us, in fact, at the level of theory would completely agree

with that, that if you put a new system in place, you could control

costs better. If you really ask yourself, why do we spend so much

more than other nations, one of them is, we spend infinitely more

on administration. I personally believe it is just inexcusable, how

much we blow on administration.

But in addition, we have so fragmented the demand side that it

is weak. It is chronically weak relative to the supply side. In all

other countries that manage to control costs, the demand side is

stronger, they can bargain over rates as they do in Germany. So

those are issues that really involve political structure. You have political scientists here that could explain to you why these bold

things are so difficult to do. Unless you are in a real calamity—

Ezekiel’s co-author, Victor Fuchs, says, you can do bold things in

a depression and war, and some others say a pandemic, if we had

it. Well, I hope not.

Senator WYDEN. Let me see if I can ask you one other question.

Dr. Orszag was here recently, the CBO director, now the head of

OMB. I asked him the following. He has been talking about the inefficiencies in the system, and they are so pervasive. He has essentially said in response to my question that only two things will actually bend the cost curve downward. I mean, that was his response. One, making sure workers see what they are losing out on

in terms of take-home pay. Two, giving them a financial incentive

for making a cost-effective purchase. Would you largely agree with

that?

Dr. REINHARDT. I think, first of all, to inform workers of the wellknown economic theory that it is really they who pay out of lower

take-home pay. Traditionally, workers thought this was a free

lunch. They thought it came from shareholders. But every economist and every business executive knows it actually gets shifted

back, certainly over the long run, into the wages, telling workers

that—I quote Douglas Frazier, the leader of the UAW, and he understood it, absolutely fully understood that it really came under

take-home pay. That would be the first thing.

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Now, the business executives have never seen any reason why

they should inform workers of this. It is much easier to tell workers we are giving you something for nothing. So that is a teaching

job. The other one is to give people an incentive to choose prudently

as long as that ultimately does not turn into a rationing by income

class, unless you want that, of course.

Senator WYDEN. No. No, of course not.

Dr. REINHARDT. I am just an economist.

Senator WYDEN. I am with you.

Dr. REINHARDT. If you do not want to ration by income class,

then the incentives have to be modulated so that you do not get

poor people just getting bare bones and generics and never a specialty drug, and rich people get plans that offer that. But definitely

even just telling people—the Employee Benefit Research Institute

puts out a beautiful graph that shows total compensation and takehome pay, and the gap is basically health insurance.

Senator WYDEN. Thank you.

The CHAIRMAN. I would like to ask a different point here. That

is—and you touched on it, Dr. Reinhardt, and Mr. Seidenberg, you

may have a little different point of view—the administrative costs

in the U.S. system, which are 18, 19 percent, something like that,

3 or 4 times higher than the next most expensive country.

One reason may be because of the complexity of plans. Medicare

is supposed to have much lower administrative costs. But you, Mr.

Seidenberg, suggested, if I heard you correctly—implied, at least—

more options, that the health insurance industry be able to tailor

more. I just wonder the degree to which that makes sense, because

in the white paper we have essentially delegated to the exchange,

and also to—it is not an institute, but the outfit, the Board of Governors over the exchange, to begin to look at ways to simplify insurance applications and to also begin to boost benefits, to have a

minimum benefit package. Also, to some degree, to start to make

it easier for people to choose apples from apples, that is, trying to

reduce some of the complexity rather than to increase some of the

complexity. I just do not know if I heard you say different things

or not there.

Mr. SEIDENBERG. May I answer that? Actually, if I can address

both your points, one of the reasons that I am spending so much

of my time on health care is that we have been down the road of

doing exactly what some of you might want us to do. We have explained to our employees what they are missing out in terms of

why their wages are going up at a slower level than the benefits

that we are paying in health care. We publish this information.

They can look it up in their own accounts and they can see the effects.

We have created an enormous number of financial incentives

working with the insurance carriers to see if we can drive costs

down around what we can control. But what I have found is that

employees then say, so, Ivan, what you are doing is you are putting

all the burden on us, when the fact is, you should be down in

Washington helping to change the structure of this process. So now

you get into your question of, what is bold?

I think the modern employee gets on the Internet and they do

not see more plans as being more complex. They say, I am smart

34

enough to figure out which products and services I want to buy.

These are the same people who go out and look at 275 different

versions of cell phones. They do that pretty well.

So I think we need to fix the structure, which is creating a lot

of the things that both of our economists here on the panel have

explained so well. I do not think more plans means more complexity. I think it simplifies the delivery of product, and I think

each person is very capable of making those choices. We need more

product to make sure that people are not trapped in either a job

because their employer provides a plan, or, if they leave it, they

cannot get some sort of assistance. So I do think it is inconsistent.

The CHAIRMAN. Dr. Reinhardt?

Dr. REINHARDT. Yes, if I may respond to that. You have to look

at the other side of it. Recently we had a conference at Johns Hopkins, and Bill Brody, the president, said Hopkins’ health system

deals with 700 distinct managed-care contracts, each with its own

rules on drugs and payment. I serve on the board of the Duke

Health System, and we consolidated all our billing. We had 900

clerks, and we have 900 beds. I am sure we have a nurse per bed,

but we have a billing clerk per bed. I think we have probably

worked this down maybe a little, so do not hold me to that number.

But that borders on the obscene.

Mr. SEIDENBERG. No, I agree with that.

Dr. REINHARDT. It clearly does.

Mr. SEIDENBERG. But what happens is, you will end up reducing

all the State plans.

Dr. REINHARDT. But there is this notion that we have, and we

economists are guilty in propagating it: the more choice, the better.

Well, mortgages are much simpler than health insurance, and we

saw how beautifully the average American picked mortgages. So, if

you like the way we do mortgages and you like the complexity

there, you will like complexity in health insurance.

I remember when you simplified the Medigap policies.

The CHAIRMAN. That is right.

Dr. REINHARDT. It was chaos before.

The CHAIRMAN. It was.

Dr. REINHARDT. Now, it is a much, much better thing.

The CHAIRMAN. Yes.

Dr. REINHARDT. That is exactly what we need.

The CHAIRMAN. Thank you very, very much. This has been a very

good hearing, and I thank you all for participating. This is exciting.

We are going to go places here. Thank you.

The hearing is adjourned.

[Whereupon, at 12:02 p.m., the hearing was concluded.]

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