[Senate Hearing 112-876]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 112-876
 
  IMPROVING QUALITY, LOWERING COSTS: THE ROLE OF HEALTH CARE DELIVERY 
                             SYSTEM REFORM 

=======================================================================

                                HEARING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS

                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   ON

 EXAMINING THE ROLE OF HEALTH CARE DELIVERY SYSTEM REFORM, FOCUSING ON 
                  IMPROVING QUALITY AND LOWERING COSTS

                               __________

                           NOVEMBER 10, 2011

                               __________

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

      Available via the World Wide Web: http://www.gpo.gov/fdsys/


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          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

                       TOM HARKIN, Iowa, Chairman

BARBARA A. MIKULSKI, Maryland              MICHAEL B. ENZI, Wyoming
JEFF BINGAMAN, New Mexico                  LAMAR ALEXANDER, Tennessee
PATTY MURRAY, Washington                   RICHARD BURR, North Carolina
BERNARD SANDERS (I), Vermont               JOHNNY ISAKSON, Georgia
ROBERT P. CASEY, JR., Pennsylvania         RAND PAUL, Kentucky
KAY R. HAGAN, North Carolina               ORRIN G. HATCH, Utah
JEFF MERKLEY, Oregon                       JOHN McCAIN, Arizona
AL FRANKEN, Minnesota                      PAT ROBERTS, Kansas
MICHAEL F. BENNET, Colorado                LISA MURKOWSKI, Alaska
SHELDON WHITEHOUSE, Rhode Island           MARK KIRK, Illinois
RICHARD BLUMENTHAL, Connecticut
                                       

                    Daniel E. Smith, Staff Director

                  Pamela Smith, Deputy Staff Director

     Frank Macchiarola, Republican Staff Director and Chief Counsel

                                  (ii)



                            C O N T E N T S

                               __________

                               STATEMENTS

                      THURSDAY, NOVEMBER 10, 2011

                                                                   Page

                           Committee Members

Whitehouse, Hon. Sheldon, a U.S. Senator from the State of Rhode 
  Island, opening statement......................................     1
Kirk, Hon. Mark, a U.S. Senator from the State of Illinois.......     3
Franken, Hon. Al., a U.S. Senator from the State of Minnesota....    57

                            Witness--Panel I

 Blum, Jonathan, Deputy Administrator and Director of the Center 
  for Medicare, Centers for Medicare and Medicaid Services, 
  Washington, DC.................................................     5
    Prepared statement...........................................     7

                          Witnesses--Panel II

Koller, Christopher F., Commissioner, Office of the Health 
  Insurance Commissioner, Providence, RI.........................    18
    Prepared statement...........................................    20
Kaplan, Gary, M.D., FACP, FACMPE, FACPE, Chairman and CEO, 
  Virginia Mason Medical Center, Seattle, WA.....................    24
    Prepared statement...........................................    26
Poulsen, Greg, Senior Vice President and Chief Strategy Officer, 
  Intermountain Healthcare, Salt Lake City, UT...................    33
    Prepared statement...........................................    35
Fendrick, A. Mark, M.D., Professor, Department of Internal 
  Medicine and Department of Health Management and Policy, 
  University of Michigan, and Co-Director, University of Michigan 
  Center for Value-Based Insurance Design, Ann Arbor, MI.........    50
    Prepared statement...........................................    52

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    Senator Murray...............................................    66
    Response by Jonathan Blum to questions of:
        Senator Whitehouse.......................................    67
        Senator Enzi.............................................    70
        Senator Roberts..........................................    72
    Response to questions of the HELP Committee by:
        Gary S. Kaplan, M.D., FACP, FACMPE, FACPE................    73
        Greg Poulsen.............................................    75
        A. Mark Fendrick, M.D....................................    75

                                 (iii)

  


  IMPROVING QUALITY, LOWERING COSTS: THE ROLE OF HEALTH CARE DELIVERY 
                             SYSTEM REFORM

                              ----------                              


                      THURSDAY, NOVEMBER 10, 2011

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 1:30 p.m. in Room 
SD-430, Dirksen Senate Office Building, Hon. Sheldon White-
house, presiding.
    Present: Senators Whitehouse, Kirk, Bingaman, and Franken.

                Opening Statement of Senator Whitehouse

    Senator Whitehouse. I will apologize to everybody for what 
is going to be a somewhat uncoordinated hearing. It is perhaps 
ironic that in a hearing that is going to focus so much on 
improved coordination of care, we are going to have a hearing 
that is uncoordinated, but there are a whole array of votes 
that are beginning as early as 1:45, and so we will need to 
work through that. I think what we will probably try to do is 
to get through Mr. Blum's testimony first, and then depart for 
the votes, and then reconvene shortly after the series of 
votes. So let me thank everybody for being here.
    Delivery system reform is sort of a passion of mine, and I 
think of some other of my colleagues as well. It may not get 
much public attention, but it is the way to lower costs and 
improve quality in our health care system. I have seen it in 
action dating back to the founding of the Rhode Island Quality 
Institute years ago to develop innovative health care processes 
in Rhode Island.
    Chairman Harkin has been a champion of prevention and 
primary care. Senator Mikulski has been a forceful advocate for 
quality improvement. She took the lead on the quality title of 
the Affordable Care Act, and so the HELP committee has been 
engaged in this for a while, as has the Finance committee under 
the leadership of Chairman Baucus. His Ready to Launch program, 
well before the health care bill, helped position us into the 
payment reform mode that the health care bill so much reflects.
    The hearing today is going to focus on the Affordable Care 
Act's delivery system reform provisions, and the opportunities 
and challenges that we face in restructuring the delivery of 
care. We will hear about real life examples from those who are 
already realizing the potential of delivery system reform to 
transform our health care system. It is now one of the world's 
least efficient, most complicated, and most frustrating systems 
for patients and providers, but it does not have to be. It can 
be the envy of the world.
    There is broad bipartisan agreement that the key driver of 
the national debt and deficit is health care. This year, 
Congressman Ryan said, ``If you want to be honest with the 
fiscal problem and the debt, it really is a health care 
problem.'' I may not agree much with Congressman Ryan, but on 
that, we do agree.
    And the facts bear it out, whether you are insured by 
Medicare or Medicaid, the VA or TRICARE, United or Blue Cross, 
in the last decade, you have seen costs across all insurers go 
through the roof.
    Secretary Gates recently said in reference to the defense 
budget, ``We're being eaten alive by health care.'' That ought 
to be a pretty strong signal that the problem is system-wide 
and that we need to act urgently to implement reforms to drive 
quality, value, and efficiency in our health care system. If we 
don't, the alternatives are bleak.
    Gail Wilensky, who oversaw Medicare and Medicaid under 
President George H. W. Bush, said this April, ``If we don't 
redesign what we are doing, we can't just cut unit 
reimbursement and think we are somehow going to get a better 
system.'' Indeed, we will be left with painful decisions about 
limiting benefits, or shifting costs on to families, or on to 
States, or on to the private sector.
    The reforms we need fall into five key areas: prevention 
and primary care, improving and measuring quality, payment 
reform, administrative simplification, and health information 
technology.
    I look forward to hearing from Mr. Blum, our first witness, 
about CMS's progress implementing the delivery system portions 
of the Affordable Care Act, and other initiatives that CMS is 
undertaking to improve our health care delivery system.
    The President's Council of Economic Advisors estimated that 
over $700 billion a year can be saved out of our health care 
system without compromising health outcomes. Indeed, I would 
say probably improving health outcomes.
    The Institute of Medicine put this number at $765 billion a 
year. The New England Health Care Institute reported that it 
was $850 billion a year, and the Lewin Group and former Bush 
secretary, Paul O'Neill, have estimated the savings at $1 
trillion a year.
    When you look at the drastic variations, and cost, and 
quality that we see today in our health care system, a chart on 
that is in the testimony of one of our witnesses, we have to 
drive the high-cost, low-performing States toward the States 
with high performance and lower costs.
    Thankfully, we are not alone in this fight. There is a 
veritable movement out there of doctors, hospitals, insurers, 
employers, even some States who have taken it upon themselves 
to experiment in ways to improve the quality, safety, and 
effectiveness of care. To pioneer new delivery systems that 
encourage providers to coordinate care, and to test safety 
practices to determine how caregivers can reduce adverse events 
and errors.
    The witnesses on the second panel fall into this category. 
I am proud of them and I look forward to hearing more about the 
work that they have accomplished.
    The urgent nature of our debt and deficit, the pressure 
that our rising health care costs create should impel us toward 
the promise that health care delivery system reform holds to 
deliver the savings we need and to do so in the most humane way 
by improving the quality of care.
    I hope this hearing will further this purpose and I look 
forward to continuing this conversation with my colleagues.
    Senator Kirk.

                       Statement of Senator Kirk

    Senator Kirk. I thank the chairman for having this hearing, 
and it is very important, especially given what we are seeing 
now in the news.
    Health care is driving the deficit and debt debate in the 
Congress, and we are seeing a collapse of European socialism 
before our eyes, as there is a run on the Greek bond, a run on 
the Italian bond, and now apparently the French bond is under 
siege.
    Prime Minister Margaret Thatcher reportedly once said that, 
``Socialists eventually run out of other people's money.'' And 
people are demonstrating now in Athens to somehow get 
foreigners to lend them more money so they don't need to reform 
their State.
    We have seen the Greek State go from 300,000 employees to 
700,000 employees in just one generation. It is utterly 
unsustainable, and it is collapsing because no one will lend 
them more money.
    In this space, we have seen now the United States' credit 
rating collapsing, so we have had one of three triple-A credit 
ratings collapse. It is likely the other two will be under 
siege, especially if the dire reports of the super committee 
prove true. I think if we don't pass the Budget Control Act 
legislation, then it is likely that Moody's and Fitch will also 
pull the triple-A credit rating of the United States. Much of 
that will not be because of patients or doctors, but because 
Congress, which has steadily expanded eligibility for various 
programs without an expanding economy or tax base to pay for 
it.
    I am particularly worried because we want to provide health 
care, and we want to provide health care for the low-income 
Americans, but what we are seeing now in Europe is that health 
care for Europeans is going to collapse because the State 
cannot borrow any more money to pay for it. We should avoid 
having overly expensive programs that would especially promise 
seniors benefits, and then not be able to borrow money from 
China to pay for it.
    Now I am very happy for our lead witness here. I will just 
note the real Ranking Member of this committee, Senator Enzi, 8 
months ago asked Secretary Sebelius questions, for the record 
on this, and he has been told or the staff tells me now, it 
took you guys 8 months to get back to him, which I think 
probably you can do a better job than that.
    The Center for Medicare and Medicaid Services spent $800 
billion in 2010. The Medicaid expansion to the new health care 
law has increased spending by roughly $100 billion a year 
through 2019. Obviously, this is completely unsustainable and 
this is partially to fuel Medicare fraud which, according to 
the Administration, is running at $60 billion a year. That is 
the equivalent of a trip to Mars and back three times a year in 
wasted money by the CMS system.
    I am particularly concerned about your philosophy of pay 
and chase, which cannot be explained in Peoria or anywhere else 
in America for how you handle reimbursement under the system.
    I note here that the cost drivers are partially patients 
who have five or more chronic conditions a year and are seeing 
14 different physicians on average. There does seem to be room 
for coordination, but the Government is totally incapable of 
doing that in any rational fashion. I would say that 
competition is able to do that. The Government is only capable 
of either spending money wildly, which is what Europe is 
underway and/or rationing care, which is--I used to live in 
Britain and I saw a rationed health care system--fairly 
shocking.
    Most Americans visit that country as tourists and obviously 
you don't get on a plane for a European holiday unless you are 
healthy. But I was completely shocked at what I saw on the--
especially the condition of Government health care and 
Government hospitals in that country. Especially taking a 
hospital like St. Bartholomew, I believe its name was, the 
oldest public hospital in Europe, 800 years old, but after the 
Government took it over, it took only 40 years to ruin that 
hospital and then bankrupt it under the NHS system.
    I am particularly worried that Chairman Enzi highlighted 
HHS' claim on the Partnership for Patients, a new health care 
quality and safety initiative could, and this is your guy's 
quote, ``Would potentially save $35 billion across the health 
care system including $10 billion in Medicare savings over the 
next 3 years.'' I have no way of backing that up. HHS has not 
conducted any actuarial estimate prior to releasing the savings 
estimate. No official estimate was prepared until Senator Hatch 
and Senator Enzi sent a letter in May to the Chief Actuary.
    At the Centers for Medicare and Medicaid Services, Mr. 
Richard Foster was requested to do this, and he responded to 
Senator Enzi in September saying, ``No cost estimate is 
currently feasible,'' and that's your own guy who said that.
    Given these uncertainties, it does not appear that the 
Administration now can claim that this voluntary incentive 
program will achieve its goal of $10 billion in health care 
savings over the next 3 years, or $50 billion in savings over 
the next 10. And that's on top of the Ponzi scheme of the CLASS 
Act, which was intended to make the bill look like it was 
budget neutral, but everybody kind of got the joke of what was 
happening. And finally that effort collapsed, thankfully, when 
the Administration realized that they could no longer put up 
the charade that was going on there.
    I am particularly interested also in the view of the 
witnesses here, but I will say that overall there appears to be 
a cloud over American health care and that cloud is: who is 
going to be the president next year? It is increasingly likely 
that we have no idea who is going to be the president, but I 
would say if it is Mitt Romney, then all of this collapses, and 
it probably collapses by next August when the Act is repealed. 
If it is President Obama, on the other hand, we will have to 
suffer under this legislation, and go the European route until 
our creditors pull the plug.
    And so to me it seems that we have a very uncertain 
situation. I feel for you now because given that we have 
hundreds and hundreds of pages which, as a House member I can 
report, no one read, now trying to be implemented. Now, the No. 
1 subject of the Presidential contest, of which no one knows 
how it will turn out, as a health care provider and most 
importantly as a patient, no one knows where this is going. And 
all of this uncertainty is hurting one-seventh of the economy, 
and all created not by the patient, not by doctors, but by this 
committee and this Congress. And with that, I have said enough.
    Back to you, Mr. Chairman.
    Senator Whitehouse. I think we still have some time for the 
witness anyway, and I would be delighted to get to Mr. Blum's 
testimony.
    He is the deputy administrator and director for CMS, the 
Center for Medicare and Medicaid Services, and is responsible 
for overseeing the payment of Medicare fee for service 
providers, and privately administered Medicare health plans, 
and the Medicare prescription drug program.
    He formerly served here in the Senate as an advisor to 
Senate Finance Committee members, and its current chairman, 
Senator Baucus. He has been a Medicare program analyst at the 
White House Office of Management and Budget, and was the vice 
president at Avalere Health overseeing its Medicaid and long-
term care practice.
    He has a Master's degree from the Kennedy School of 
Government, and a B.A. from the University of Pennsylvania. Mr. 
Blum, we are looking forward to your testimony.

 STATEMENT OF JONATHAN BLUM, DEPUTY ADMINISTRATOR AND DIRECTOR 
 OF THE CENTER FOR MEDICARE, CENTERS FOR MEDICARE AND MEDICAID 
                    SERVICES, WASHINGTON, DC

    Mr. Blum. Great. Chairman Whitehouse, Senator Kirk, thank 
you for the opportunity to talk about our work today to 
implement the Affordable Care Act to reduce Medicare costs and 
to change the delivery of care.
    The Medicare program faces many challenges. I think what 
was raised during the opening statements highlight those 
challenges. But by and large, most Medicare beneficiaries 
receive care through the traditional fee for service program. 
The traditional fee for service program varies wildly by 
quality across the country, varies wildly by cost across the 
country. And I believe that our greatest challenge is to bring 
more consistency to how fee for service benefits are provided 
throughout the country.
    More than a quarter of Medicare beneficiaries receive care 
through capitated health plans, Medicare Advantage plans. For 
the past several years, those plans have been paying more than 
the same services for traditional fee for service. And without 
great confidence, that Medicare beneficiary in capitated plans 
receive greater value for greater subsidies that were provided.
    We understand we have many challenges to address these 
concerns, but the Affordable Care Act has provided the Medicare 
program with many new tools to address those challenges.
    During my 5 minutes, I want to talk about some of the work 
to date, but also our priorities for the next 12 months.
    In the past couple of weeks, CMS has put out some 
statistics that tell me that the program is moving in the right 
direction. We announced Part A, Part B, the MA, the Part D 
premiums for 2012. Across the board, Part A, the MA premiums, 
the Part D premiums are virtually flat for 2012, on average, 
relative to today. The Part B premium is growing much more 
slowly than previously projected, which tells us that we are 
seeing signs of lower spending growth and overall cost 
containment going on throughout the program.
    We have millions of Medicare beneficiaries who are 
accessing preventive benefits at no charge to them. And also 
more than 2.2 million Medicare beneficiaries are saving 
dramatically out-of-pocket costs on their Part D drugs, brand 
name drugs provided during the so-called donut hole. This tells 
us that we are having more prevention, more compliance, focus 
on wellness. And the past couple of weeks have shown us very 
promising signs of a reformed Medicare program.
    The Affordable Care Act has given us new tools, new 
programs to implement, and I am pleased to report on their 
progress to date.
    Last month, CMS put out its final rule for the ACO, the 
Accountable Care Organization program, and we are very 
confident that this program will provide many new opportunities 
for health care providers, hospitals, physicians to come 
together to better coordinate care through the traditional fee 
for service program.
    CMS responded to more than 1,300 comments that came in to 
CMS, all giving us very strong suggestions about how to improve 
the ACO program and CMS put out final rules last month. CMS 
will begin to be taking in applications from ACO potential 
organizations starting January 1. The ACO program will allow 
organizations to share in savings for those that can 
demonstrate that quality has been improved, and overall costs 
Part A--Part B costs have been lowered that those organizations 
will be able to share in the savings.
    Earlier this year, CMS put out the final rules and the 
final program guidelines for the Hospital Value-Based 
Purchasing program. Starting in 2013, CMS will fundamentally 
change how it pays for inpatient hospital care to provide 
budget-neutral payment incentives for hospitals that improve 
their clinical performance and their overall patient's care 
experience. This is a new way to pay for hospital care, and we 
are fulfilling the goal to shift our payment rates from purely 
paying for volume to paying for value and the overall clinical 
care experiences that Medicare beneficiaries experience 
starting in 2013.
    We have also changed fundamentally how we will pay for 
private capitated health plans starting in 2012. Using CMS's 
five-star quality rating system, those plans that have higher 
performance--four-star, five-star--for example, will receive 
higher reimbursements that can, in turn, provide better benefit 
levels. That quality star rating system takes into a whole host 
of different measures, quality of care measures, patient's 
care, and care satisfaction measures. We are already seeing 
more beneficiaries gravitate to higher quality plans that give 
us a positive sign for progress.
    The Center for Innovation has been in operation for more 
than 12 months. They have put out a very strong policy agenda 
this year. Their focus has been in several areas. First, to 
complement the overall ACO program, the Innovation Center will 
announce later this year the final pioneer ACOs. These are 
organizations that can take on greater risk and be accountable 
for greater quality results than today's ACO program.
    The Innovation Center has put out a call for response in 
four bundled payment models that will incorporate both the 
acute care, the physician care, the post-acute care to a single 
episode of payment to create much more stronger incentives for 
care to be coordinated, for care to be managed during an entire 
episode of hospital care. We have seen already a tremendous 
response from hospital and other organizations that wish to 
participate with that bundled payment model.
    [The prepared statement of Mr. Blum follows:]
                  Prepared Statement of Jonathan Blum
    Chairman Harkin, Senator Whitehouse, Ranking Member Enzi, and 
distinguished committee members, thank you for inviting me to discuss 
the Centers for Medicare & Medicaid Services' (CMS) initiatives to 
improve our Nation's health care delivery system.
    In the 18 months since the Affordable Care Act became law, CMS has 
continued to strengthen the Medicare and Medicaid programs for the 
millions of Americans who rely on them, while implementing reforms that 
will ensure that we spend taxpayers' money wisely, improve health care 
quality, and control health care cost growth. Over the past year and a 
half, CMS has unveiled a series of rules and initiatives that will 
change the way Medicare pays hospitals, doctors, and other health care 
providers, to ensure that they are providing the kinds of high-quality 
care beneficiaries expect and deserve, at a cost our Nation can afford. 
These changes will provide Americans with better health care by 
rewarding what works--such as improved care coordination--while also 
giving Medicare the tools to control costs over the long run--such as 
changing the way we pay doctors and other providers to reward 
efficient, quality care. We hope the entire health care system will 
adopt these new delivery system reform initiatives.
    We have made major progress in strengthening Medicare over the last 
18 months while implementing the Affordable Care Act. At a time when 
other health care costs are rising faster than inflation, Medicare 
costs are stable. Following the implementation of the Affordable Care 
Act, growth in Medicare per capita spending has declined significantly. 
Overall, Medicare Part D, Medicare Advantage (MA), and Medicare Part A 
premiums will remain virtually the same for 2012 as in 2011, even as 
beneficiaries enjoy new benefits, and Medicare Part B premiums in 2012 
will be lower than previously projected. Meanwhile, on November 4, 
2011, CMS announced that so far this year, 22.6 million beneficiaries 
in fee-for-service Medicare have used preventive services that are now 
provided at no cost to them, including the new free Annual Wellness 
Visit.\1\ Additionally, more than 22 million beneficiaries have saved 
in total over $1.2 billion (an average of $550 per person) on their 
prescription drugs, thanks to a 50 percent discount on their covered 
brand name prescription drugs in the donut hole.\2\ For 2010, nearly 4 
million seniors who reached the prescription drug donut hole received a 
$250 rebate check to help them afford the cost of their prescription 
drugs.\3\ Thanks to these benefits and the reforms in the law, a senior 
enrolled in the fee-for-service Medicare program could save more than 
$3,500 over the next 10 years.\4\
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    \1\ http://www.cms.gov/apps/media/press/
release.asp?Counter=4158&intNumPerPage=10&
checkDate=&checkKey=&srchType=1&numDays=3500&sr.
    \2\ http://www.cms.gov/apps/media/press/
release.asp?Counter=4158&intNumPerPage=10&
checkDate=&checkKey=&srchType=1&numDays=3500&sr.
    \3\ http://www.hhs.gov/news/press/2011pres/03/20110322a.html.
    \4\ http://www.hhs.gov/news/press/2011pres/03/20110322a.html.
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    With the new provisions in the Affordable Care Act, CMS has the 
opportunity to work with both the public and private sectors to make 
real advancements in the Nation's health care delivery system to 
improve the quality of life and quality of care for our beneficiaries 
and other Americans. With over 100 million people enrolled in Medicare, 
Medicaid, and the Children's Health Insurance Program (CHIP), CMS has 
an important role to play in improving the delivery of health care in 
our Nation.
        our current delivery system is fragmented and expensive
    Our Nation has top-notch doctors and other health care providers, 
and leads the world in health care technology and cutting edge 
treatments. Yet the system in which these talented people work falls 
short far too often. Our delivery system is fragmented, leaving 
patients in the care of multiple doctors, each sometimes unaware of how 
the other is treating the patient. Medical errors can occur as a 
patient moves from one care setting to another, or is prescribed 
different medications that interact. For too long, our current system 
focused on caring for the sick, doing little to keep people healthy in 
the first place. As a result, our health care system is expensive and 
does not necessarily produce the best health care results. It is one of 
CMS' top priorities to lead the transformation of the delivery of care, 
so that all our beneficiaries receive high-quality care that is 
coordinated among their doctors and specialists, and which also avoids 
errors and saves money.
    In order to achieve this goal, CMS has already established 
initiatives that encourage health care providers to deliver high-
quality, coordinated care at lower costs. CMS is transforming from a 
passive payer of services into an active purchaser of high-quality, 
affordable care through these newly established initiatives. Since the 
passage of the Affordable Care Act, CMS has already rolled out many 
reforms that promote improved care, such as the Medicare Shared Savings 
Program, Hospital Value-Based Purchasing (VBP), and the strengthened 
Medicare Advantage 5-Star Rating program. Now that we have moved 
forward with these reforms, we expect further care improvements and 
cost savings over the next several years as these programs are 
implemented fully. Building on this work, CMS is focusing on the next 
set of priorities for reforming our care delivery system. Those 
priorities include new ways of rewarding efficiency and improving 
beneficiary care, investing in patient safety and care coordination, 
and improving the quality and lowering the cost of care for the 
millions of Americans enrolled in Medicare, Medicaid, and CHIP.
        success at cms: rewarding quality and coordinating care
    Thanks to the Affordable Care Act, Medicare beneficiaries will 
enjoy better quality of care and a more innovative care delivery system 
designed to improve their health outcomes and reduce costs. Below are a 
few examples of the delivery system reforms we have initiated since the 
passage of the Affordable Care Act.
Investing in Quality Care
    Hospital payments account for the largest share of Medicare 
spending, and Medicare is the largest single payer for hospital 
services. Earlier this year, CMS established the new Hospital Value-
Based Purchasing (VBP) Program, which will change how CMS pays 
hospitals for inpatient acute care. This program, which ties payment to 
value, is expected to foster higher-quality care for all hospital 
patients across our country's health system.
    In fiscal year 2013, CMS will implement the new budget-neutral, 
value-based incentive payments. These payments will reward hospitals 
based on their overall performance on a set of quality measures that 
are linked to clinical processes of care and patients' experiences of 
care. National bodies of experts, including the National Quality Forum, 
have endorsed these measures, and CMS will post the hospitals' scores 
related to those measures on the Hospital Compare Web site.\5\ The 
program aims to help patients receive higher-quality care and see 
better outcomes.
---------------------------------------------------------------------------
    \5\ www.hospitalcompare.hhs.gov.
---------------------------------------------------------------------------
    Under the program, CMS will score hospitals based on their 
performance on each measure relative to other hospitals, as well as on 
how a hospital's performance on each measure has improved over time. 
CMS will use the higher of a hospital's improvement and achievement 
score on each measure to determine a total performance score, which 
will then be translated into an incentive payment. In addition to 
rewarding excellence, hospitals will be given an incentive for 
continuous improvement of care delivery. In the future, CMS plans to 
add new measures that focus on improved patient outcomes and prevention 
of hospital-acquired conditions. CMS may replace measures that reach 
very high compliance scores, continuing to raise the bar and spur 
quality improvements. This redirection of funds will provide a strong 
incentive for quality improvement, which we expect will result in 
significant savings for Medicare, taxpayers, and enrollees over time.
Promoting Coordinated Care to Improve Care and Create Savings
    CMS has established initiatives to ensure that Medicare patients 
get the right care, in the right place, at the right time. A key part 
of CMS' work in this area is a multi-part initiative built around 
Accountable Care Organizations (ACOs), which bring together doctors, 
hospitals and other health care providers to better coordinate care for 
patients. ACOs are an innovative service delivery model being used by 
CMS and in the private sector and communities across the country. If 
ACOs improve quality of care and lower costs, health care providers, as 
well as Medicare, can share in the savings. Those savings will help to 
shift payment incentives toward rewarding quality and value rather than 
volume of care. Provider participation in ACOs is purely voluntary, and 
beneficiaries will continue to have all their same benefits, including 
their ability to see any Medicare provider.
    CMS released the Medicare Shared Savings Program final rule (CMS-
1345-F) on October 20, 2011. Under this program, providers who 
voluntarily form an ACO and meet quality standards based upon patients' 
outcomes and care coordination, as well as other measures, may share in 
the savings they achieve for the Medicare program. ACOs that commit to 
share in savings and losses for the duration of the agreement may 
receive a higher share of any generated savings.
    The publication of this rule followed months of soliciting feedback 
and receiving comments from stakeholders across the country. 
Stakeholder groups have generally responded favorably to the newly 
published rule. For example, the American Medical Association (AMA) 
stated that they are pleased that ``the final rule on Medicare ACOs 
includes many of the important changes recommended by the AMA to allow 
all interested physicians to lead and participate in these new models 
of care.'' \6\ The American Medical Group Association (AMGA) said that 
``AMGA is very pleased that CMS listened and responded with noteworthy 
changes. AMGA believes ACOs have the potential to improve quality of 
care while bending the cost curve.'' \7\ The National Association of 
Public Hospitals and Health Systems said that the rule ``will allow 
hospitals and other providers to more easily participate in the 
program, and should add to the success of this initiative and future 
innovations in health care delivery system reform.'' \8\
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    \6\ http://www.ama-assn.org/ama/pub/news/news/final-aco-rule.page.
    \7\ http://www.amga.org/AboutAMGA/News/article_news.asp?k=534.
    \8\ http://www.naph.org/Main-Menu-Category/Newsroom/2011-Press-
Releases/NAPH-Supports-Final-ACO-Rule-Changes.aspx.
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    In addition, CMS is using its new authorities through the Center 
for Medicare and Medicaid Innovation (the Innovation Center) to test 
alternative payment models and prepare organizations to provide 
accountable care. These initiatives include:
     The Pioneer ACO Model, which is designed for health care 
organizations and providers with experience in coordinating care for 
patients across settings. The model will allow these provider groups to 
move more rapidly to a population-based payment model on a track 
consistent with, but separate from, the Medicare Shared Savings 
Program. The model is designed to work in coordination with private 
payers, multiplying the effectiveness of the program and aligning 
provider incentives. This has the potential to improve quality and 
health outcomes for patients across the ACO, and achieve cost savings 
for Medicare and patients.
     The Advance Payment ACO Model, which will provide 
additional support to rural and physician-based ACOs who want to 
participate in the Medicare Shared Savings Program, but lack the 
startup resources to build the necessary infrastructure, such as new 
staff or information technology systems. The advance payments would be 
recovered from any future shared savings which ACO earns through 
performance.
     The Accelerated Development Learning Sessions, which are 
available for providers interested in learning more about the steps 
necessary to become an ACO. The Innovation Center is holding these 
convenient and free sessions in a variety of cities, with some sessions 
available online. To date, the Innovation Center has hosted two 
sessions: 67 organizations attended the first session held in 
Minneapolis in June 2011 and 39 attended the second session in San 
Francisco in September 2011. The Innovation Center will be hosting a 
third and final session on November 17 and 18, 2011 at CMS Headquarters 
in Baltimore.

    Together, these initiatives provide a broad range of options and 
support that reflect the varying needs of providers embarking on 
delivery system reforms.
Improving Transparency to Empower Beneficiaries
                           Medicare Advantage
    Enrollment in the Medicare Advantage (MA) program continues to 
grow. In 2012, MA plans project that MA enrollment will increase by 10 
percent.\9\ CMS is focused on strengthening and improving MA so that 
its plans provide good value to beneficiaries and the program remains 
robust. CMS has streamlined plan offerings so that beneficiaries have 
choices among plans that are meaningfully different from one another. 
In addition to improvements to the 5-star plan quality rating system, 
the Affordable Care Act allows CMS to deny a plan's bid should the 
total cost to beneficiaries, including premiums and out-of-pocket 
costs, increase more than 10 percent from the prior year.
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    \9\ http://www.hhs.gov/news/press/2011pres/09/20110915a.html.
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    The results show that when CMS strengthens our oversight and 
management of MA plans, seniors and people living with disabilities 
will have clearer plan choices offering better benefits. In 2012, MA 
premiums are, on average, 4 percent lower than in 2011 and 11 percent 
lower than in 2010.\10\ As part of CMS' national strategy for 
implementing quality improvement in health care, CMS is also working to 
create new incentives for all MA plans to improve the care they offer 
to Medicare beneficiaries. For the first time in 2012, CMS will reward 
those MA plans with higher quality scores, based on its 5-Star rating 
system. CMS is also allowing 5-Star MA and Part D plans to continuously 
market and enroll beneficiaries throughout the year.
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    \10\ http://www.hhs.gov/news/press/2011pres/09/20110915a.html.
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    Our goal is for plans to improve their quality scores over the next 
several years and to encourage more beneficiaries to enroll in high-
quality plans. In 2011, we have seen a 5 percent increase in enrollment 
among Medicare Advantage plans with a four- or five-star rating.\11\
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    \11\ http://www.healthcare.gov/news/factsheets/2011/02/
Medicare02102011a.html.
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                           Physician Quality
    As part of CMS' broader strategy to encourage health care providers 
to adopt practices that can improve patient care, CMS is continuing to 
strengthen the Physician Quality Reporting System by rewarding 
physicians for reporting quality measurement data. The final physician 
fee schedule rule for 2012 (CMS-1524-FC) updates a number of physician 
incentive programs including the Physician Quality Reporting System, 
the e-Prescribing Incentive Program, and the Electronic Health Records 
Incentive Program.
Freeing Doctors to Focus on Patients, Not Paperwork
    CMS and the Department of Health and Human Services (HHS) have also 
started work to help doctors begin using Electronic Health Records 
(EHRs) through the EHR Incentive Program. EHRs help providers 
communicate with each other about a patient's care. EHRs make it easier 
for physicians, hospitals, and others to assess a patient's medical 
status and make sure that care is appropriate. They can help doctors 
avoid redundant paperwork and ensure patients get the correct tests and 
medications. HHS also issued administrative simplification rules (CMS-
0032-IFC) to improve the use of electronic standards to help eliminate 
inefficient manual processes.
    We estimate that these changes will save providers and health plans 
$12 billion over the next 10 years.\12\ More important, greater use of 
EHRs will free providers to spend more time with their patients. An 
April 2010 study in Health Affairs found that simplifying 
administrative systems could save 4 hours of professional time per 
physician and 5 hours of support staff time every week.\13\ This 
commonsense streamlining means fewer phone calls between physicians and 
health plans, lower postage and paperwork costs, and fewer denied 
claims. Overall, adoption of EHRs means physicians can cut through the 
red tape and spend more time and resources administering quality care 
to their patients.
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    \12\ http://www.gpo.gov/fdsys/pkg/FR-2011-07-08/pdf/2011-16834.pdf.
    \13\ Blanchfield, Bonnie, James Heffernan, Bradford Osgood, et. al. 
``Saving Billions of Dollars--And Physicians' Time--By Streamlining 
Billing Practices.'' Health Affairs. April 29, 2010. http://
content.healthaffairs.org/content/early/2010/04/29/
hlthaff.2009.0075.full.
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 next steps: investing in innovation, improving care, and saving money
    CMS has already made tremendous progress toward achieving the 
Affordable Care Act's goals of lowering Medicare costs and improving 
care--and we are doing even more. With the established foundation 
detailed above, CMS is moving forward to employ other new tools made 
available by the Affordable Care Act to reform our Nation's health care 
delivery system. The programs and initiatives described below will 
bring us closer to the goal we all share--a high-quality, affordable, 
patient-
centered health care delivery system that effectively prevents or 
treats illness without waste or duplication.
Investing in Innovation to Deliver Quality Care
    The key to building a sustainable health care system in our country 
will come from innovations and improvements in how we deliver health 
care. CMS has started this work by changing our hospital payment 
systems and Medicare Advantage programs to reward quality care and 
coordination, instead of simply paying providers for offering more 
services. We also recognize that there is a great richness of 
innovation occurring in local communities and through multiple efforts 
underway to provide care for people, often at a lower cost.
    In section 3021 of the Affordable Care Act, Congress created the 
Innovation Center to test innovative payment and service delivery 
models to reduce program expenditures, while preserving or enhancing 
the quality of care for those entitled to Medicare and Medicaid. The 
health reform law gives the Innovation Center flexibility in selecting 
and testing innovative payment and service delivery models, enables it 
to work with Medicare, Medicaid, and CHIP programs to better serve 
beneficiaries and reduce costs, and provides $10 billion in direct 
funding for activities initiated in fiscal years 2011 through 2019 to 
support this mission. The Affordable Care Act also allows the Secretary 
of HHS to expand, through rulemaking, the scope and duration of models 
proven effective after evaluation, including implementation on a 
nationwide basis. In order to expand a model, the Secretary must 
determine that the model improves the quality of patient care without 
increasing spending or reduces spending without reducing the quality of 
care, and the CMS Actuary must certify that expanding the program will 
lower costs (or at least not increase costs). The following sections 
describe, in more detail, the Innovation Center's initiatives.
Bundling Payments to Promote Efficient, Quality Care
    Medicare currently makes separate payments to providers for each 
service related to an illness or course of treatment, often leading to 
fragmented care with minimal coordination across providers and health 
care settings. Under the Innovation Center's Bundled Payments for Care 
Improvement initiative, CMS will test various models to link payments 
for multiple services that patients receive during an episode of care. 
For example, instead of a surgical procedure and followup care 
generating multiple claims from multiple providers, the entire team 
will be compensated with a ``bundled'' payment that provides incentives 
to deliver health care services more efficiently while maintaining or 
improving quality of care. Research has shown that bundled payments can 
encourage providers to collaborate to improve the patient's experience 
of care during a stay in an acute care hospital and during post-
discharge recovery.
    Bundling payment for services that patients receive across a single 
episode of care, such as heart bypass surgery or a hip replacement, is 
one way to encourage doctors, hospitals, and other health care 
providers to work together to better coordinate care for patients, both 
when they are in the hospital and after they are discharged. On August 
25, 2011, CMS invited providers through a Federal Register notice (CMS-
5504-N) to apply to test and develop four different models of bundling 
payments. Depending on the particular model, providers have flexibility 
in selecting conditions to include, developing the health care delivery 
structure, and determining how to allocate payments among participating 
providers. Because of the potential for reducing the cost of care 
through improvement, health care providers will be able to streamline 
and improve their coordination to provide savings to the Medicare Trust 
Funds. By giving providers the flexibility to determine which model of 
bundled payments works best for them, we believe it will be easier for 
health care providers of different sizes to participate in this 
initiative, thus encouraging more providers to test and develop 
innovative models to coordinate care and produce savings.
Preventing Costly Conditions and Complications
    CMS launched the Partnership for Patients: Better Care, Lower 
Costs, a new public-private partnership, to improve the quality, 
safety, and affordability of health care for all Americans. More than 
6,200 organizations, including over 2,800 hospitals, have joined the 
initiative. Partnership for Patients brings together leaders of major 
hospitals, employers, physicians, nurses, and patient advocates, along 
with State and Federal Governments, in a shared effort to make hospital 
care safer, more reliable, and less costly.
    The two goals of this new partnership are to:

     Keep patients from getting injured or sicker. By the end 
of 2013, preventable hospital-acquired conditions would decrease by 40 
percent compared to 2010. Achieving this goal would mean approximately 
1.8 million fewer injuries to patients with more than 60,000 lives 
saved over 3 years.
     Help patients heal without complication. By the end of 
2013, preventable complications during a transition from one care 
setting to another would decrease so that hospital re-admissions would 
be reduced by 20 percent compared to 2010. Achieving this goal would 
mean more than 1.6 million patients would recover from illness without 
suffering a preventable complication requiring re-hospitalization 
within 30 days of discharge.

    It is our belief that achieving these goals will save lives and 
prevent injuries to millions of Americans. They have the potential to 
save up to $35 billion across the health care system, including up to 
$10 billion in Medicare savings, over the next 3 years. Over the next 
10 years, this partnership could reduce Medicare costs by about $50 
billion and generate billions in Medicaid savings.\14\ These 
improvements will help put our Nation on the path toward a more 
sustainable health care system.
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    \14\ http://www.healthcare.gov/compare/partnership-for-patients/
index.html.
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Improving the Front Lines of Care
    In recent months, CMS has launched several new initiatives that 
seek to partner with our colleagues on the front lines of health care 
delivery. Through investments in primary care and medical homes, and 
seeking direct feedback from clinicians in the field, we will move our 
health care system into the 21st century. The Innovation Center's 
current initiatives include:

     The Comprehensive Primary Care (CPC) Initiative, which 
fosters collaboration between public and private health care payers to 
strengthen primary care. The CPC initiative will test two models 
simultaneously--a service delivery model and a payment model--to see 
how primary care practices coordinate care for their patients.
     The federally Qualified Health Center (FQHC) Advanced 
Primary Care Practice Demonstration, which is operated by the 
Innovation Center in partnership with the Health Resources and Services 
Administration to test the effectiveness of teams of doctors and other 
health professionals working in community health centers to coordinate 
and improve care for up to 195,000 Medicare patients. Five hundred 
FQHCs in 44 States are participating in the demonstration, which will 
operate between November 2011 and October 2014.
     The Innovation Advisors Initiative, which is currently 
accepting applications for up to 200 health professionals to undertake 
intensive efforts to expand their health systems skills and knowledge, 
apply what they learn in their organizations and areas, and work with 
CMS to test new models of care delivery in their own organizations and 
communities. Developing these innovation leaders expands the reach of 
the Innovation Center and has the potential to improve patient care and 
reduce costs.
Expanding and Promoting Partnerships to Improve Care for Medicare-
        Medicaid 
        Enrollees
    A top priority for CMS is improving the quality and lowering the 
cost of care for the 9 million Americans enrolled in both Medicare and 
Medicaid (known as ``dual eligibles'' or Medicare-Medicaid enrollees). 
The Affordable Care Act created the new Federal Coordinated Health Care 
Office, referred to as the Medicare-Medicaid Coordination Office, to 
more effectively integrate benefits between the two programs and to 
improve the coordination between the Federal Government and States for 
Medicare-Medicaid enrollees. Through our work and with our State 
partners, our efforts are advancing access to seamless, coordinated 
care programs for Medicare-Medicaid enrollees.
    Beneficiaries who are dually enrolled in Medicare and Medicaid are 
typically low-income seniors and people with disabilities. Although 
most have complex care needs, too often their care is fragmented, 
resulting in poor health outcomes and increased costs. These 
beneficiaries, their families, and their caregivers would be better 
served by improved coordination that ensures their complex care needs 
are met through seamless, person-centered approaches. To that end, the 
CMS Medicare-Medicaid Coordination Office has advanced new initiatives 
designed to align the two programs' rules and policies and develop and 
test demonstrations across the country.
    Most recently, the Medicare-Medicaid Coordination Office announced 
a new opportunity for States to participate in demonstration projects 
designed to improve the quality of care for Medicare-Medicaid 
enrollees. These approaches provide States the opportunity to share in 
reduced costs that result from improved quality. CMS is pleased to 
report that 37 States and the District of Columbia have indicated 
interest in exploring ways to implement these demonstrations in their 
States. Across the country, States are proposing new ways to better 
serve their Medicare-Medicaid enrollees. These initiatives vary 
regionally and in their approach, ranging from using health homes that 
provide total care management to expanding existing programs to meet 
all of an individual's needs by incorporating behavioral health and 
long-term supports and services, as well as making current coordinated 
care models available to new populations. Over the next several months, 
CMS will work with States to identify the most appropriate proposals 
for implementation that are most likely to reduce costs while improving 
quality of care for vulnerable beneficiaries.
                            looking forward
    In a year and a half since the passage of the Affordable Care Act, 
CMS has made major progress in implementing its delivery system 
reforms. This effort is part of the Administration's commitment to 
making the health care system better for millions of Americans. Before 
the Affordable Care Act, we included investments in health information 
technology, prevention, and research in the Recovery Act to lay the 
foundation for this type of system. And since enactment, we have 
proposed additional ideas as part of the President's Plan for Economic 
Growth and Deficit Reduction. By strengthening our programs and making 
sure we are spending taxpayer dollars wisely, we are ushering in a new 
day for American health care consumers. We will continue to build on 
these reforms in the years to come.
    The many new services, initiatives, and reforms I have highlighted 
are important and immediate steps to improve the coordination and 
affordability of health care for all Americans. CMS has a 
responsibility to improve access, quality, and efficiency of care for 
all our beneficiaries, while protecting the fiscal integrity of our 
programs in the long term. We are committed to working with our 
partners in the private sector, States, and beneficiaries to improve 
care coordination, increase patient safety, offer beneficiaries more 
information and more control over their care, and achieve better 
outcomes at a lower cost. As we tackle care fragmentation, we are 
moving toward better-aligned incentives for higher-quality, integrated 
care. These efforts to improve the quality of care will provide real 
improvements for CMS' beneficiaries and all Americans.

    Senator Whitehouse. Since your time has expired----
    Mr. Blum. I'm sorry.
    Senator Whitehouse. Let's cut to questions----
    Mr. Blum. Sure.
    Senator Whitehouse. If you don't mind. This is one of my 
favorite exhibits about our Medicare system and I think it 
applies more generally to our health care system, it is the 
relative state-by-state ranking on quality and cost metrics. 
And it shows, first of all, enormous variation State by State, 
but also a distinct link between the lower cost States and 
higher quality; i.e., an inverse relationship between cost and 
quality.
    And when you have that broad of a discrepancy, it strikes 
me that there is a lot of room to have, let's say, Texas and 
Louisiana, which are highest cost and lowest quality move more 
toward Hawaii and New Hampshire which are at the other end of 
the--I don't think anybody thinks that Hawaii and New Hampshire 
are bad health care systems or that they are, frankly, 
significantly different than Texas or Louisiana. Yet, something 
is going on there that creates really massive cost 
discrepancies that the public pays for, not only with dollars, 
but also in the quality of care that they receive and with 
their lives.
    You are familiar with this?
    Mr. Blum. Yes.
    Senator Whitehouse. This is the Medicare piece of 
information?
    Mr. Blum. Correct.
    Senator Whitehouse. Does Medicaid track the same way, to 
your knowledge?
    Mr. Blum. I believe that we see similar variation with 
States in cost on a per capita basis. Be careful to make the 
same comparisons to the chart you are showing. That is a fee 
for service chart and our benefits are consistent throughout 
the country in a fee for service Medicare context. States have 
flexibility to provide benefits, but there is variation in 
State spending by State Medicaid programs.
    Senator Whitehouse. So since Medicare is a standard 
program, by and large, with the Medicare Advantage program kind 
of set aside within it, how do you pursue--and let me add 
another caveat. So often health care reform at the delivery 
system level is a community effort.
    Mr. Blum. Correct.
    Senator Whitehouse. It is the doctors getting together with 
the hospitals, getting together with the insurance companies, 
getting together with the business community saying, ``We've 
got to do something different there,'' and getting to work on 
that.
    So how is it that you can use Medicare to try to get a 
State to step up? What are the ways that you can bring 
attention to Louisiana, Texas, California, Florida, New Jersey, 
Oklahoma, Mississippi, some of the real high cost low-
performers when what you have to offer is a standard national 
benefit?
    Mr. Blum. I think you need to look at each State, and the 
particular reasons why it is on the chart relative to where it 
is to the chart you presented. And I think an important 
consideration to keep in mind is while there is variation 
between States, there is as much variation within States. 
Meaning even in the low-cost States that you present, that you 
can see tremendous variation in use and spending by physicians, 
by hospitals. Even in the most efficient delivery systems, 
there is still variation within the care that is provided.
    I think, first and foremost is that we need to tie payment 
to the quality, not by State, not by hospital, by the 
individual service that is being provided given both the 
variation between States, but also the variation within States.
    Some of the spending difference that you present is due to 
fraud, and we need to have very strong strategies in some of 
the high-cost spending States that are driven by fraud and 
abuse. A lot of the very----
    Senator Whitehouse. Fraud varies dramatically by region as 
well, does it not?
    Mr. Blum. Absolutely. A lot of the spending variation comes 
not from hospital care/physician care, but in post-acute care 
services: home health, durable medical equipment, skilled 
nursing facility stays need to have strategies that just don't 
focus on the hospital care/physician care, but all the care 
that follows the patient once he or she leaves the hospital. 
But no one strategy, no one intervention will address that. We 
need to think of a wide variety and a wide mix, and----
    Senator Whitehouse. And is the affordable care 
organizations the primary vehicle for correlating from the 
national program down to the individual patient?
    Mr. Blum. The Accountable Care Organization program that we 
are implementing that Congress authorized is but one strategy. 
We need to look at payment reform. We need to make sure that 
payment is tied to the value, not the volume of services. We 
need to have very strong fraud and abuse controls.
    But I agree. For too long, the Medicare program has had a 
pay-and-chase mentality. That has changed within CMS. We are 
now being much more sophisticated and smart to how we think 
about data to stop fraud before it happens.
    Senator Whitehouse. And too, my time is wrapped up, but 
just to Senator Kirk's observation earlier that in the last 
round, it took 8 months for questions for the record from 
Senators to get a response from CMS. We have had a discussion 
about this with your staff, and we have been informed that we 
will have as quick turnaround as your administrative process 
permits. I know it has to be cleared through OMB and things 
like that, but that we won't see those kind of delays for two 
FRs for this hearing. Is that a correct understanding?
    Mr. Blum. We will do our best to be as responsive as 
possible, and I will make sure that we are very responsive to 
the questions that come to us.
    Senator Whitehouse. I appreciate that.
    Senator Kirk.
    Senator Kirk. Thank you. I just have three questions real 
quick. Will the CMS Office of the Actuary certify the estimates 
of expected savings from one of the new delivery system 
demonstrations?
    Mr. Blum. Sorry, for which one? I am sorry, Senator.
    Senator Kirk. Let me repeat. Will your Office of Actuary 
certify the estimates of expected savings for one of the new 
delivery system demonstrations?
    Mr. Blum. What the law requires the Office of the Actuary 
is that before any delivery reform can be expanded nationwide, 
a bundled payment, an ACO pilot test that the Actuary has to 
certify that it is budget neutral. To expand demonstrations are 
decisioned by the Secretary, but in order to take a pilot and 
expand it, the Office of the Actuary has to certify that it is 
at least budget neutral.
    Senator Kirk. So that is a yes.
    Mr. Blum. I think it depends on kind of the situation. That 
it depends on whether or not----
    Senator Kirk. Let me go through it again, now that you have 
given us the long wash. Will the CMS Office of the Actuary 
certify the estimates of expected savings in one of the 
delivery system methodologies?
    Mr. Blum. I think the answer--I think the issue that you 
are probably going to is the Partnership for Patients where the 
Administration made estimates for what could be possible if 
certain outcomes are achieved. We have very high goals that can 
reduce preventable hospital re-admission----
    Senator Kirk. I am kind of going for a yes or no here.
    Mr. Blum. I think it depends. It depends.
    Senator Kirk. So you won't back up your estimates with an 
actuary?
    Mr. Blum. What our actuaries have said in correspondence to 
Senator Enzi is if we can achieve dramatic reductions in----
    Senator Kirk. I am actually asking not what you think you 
can do. I am asking: are you going to direct the actuary to do 
this or not?
    Mr. Blum. The actuary is independent. They don't serve 
from----
    Senator Kirk. Are you going to ask them to do it?
    Mr. Blum. What we have shared with the Actuary's Office----
    Senator Kirk. It is kind of a yes or no. You kind of want 
me to think maybe you are going to go with yes. Be a good 
answer, I'd recommend.
    Mr. Blum. What the current baseline that the actuaries 
produce don't include the savings that you cite. But they are 
not being double counted, but they are illustrations to what is 
possible.
    Senator Kirk. So we really shouldn't trust what you say 
because you are not willing to back it up or even ask the 
actuary to do this.
    Mr. Blum. What I am saying is that if we can achieve a----
    Senator Kirk. I mean, we are talking about tens of billions 
of dollars here. You already waste $60 billion a year, 
according to your own estimate. So if you are going to make a 
big change like Partnership for Patients, don't you think 
because the Government is already out of money, you might want 
to check with an actuary and report back to the Congress?
    Mr. Blum. I think what we're saying is that we have----
    Senator Kirk. Wouldn't it be kind of malpractice if you 
didn't?
    Mr. Blum. I don't agree with that statement, Senator.
    Senator Kirk. So you don't think you need to check with an 
actuary on this?
    Mr. Blum. The Office of the Actuary produces----
    Senator Kirk. No, I am not talking about the Office, I am 
talking about you, personally, Mr. Blum. Are you going to write 
a letter to the actuary saying, ``I just got grilled in the 
Senate and perhaps we need to know how much this thing costs 
according to you,''?
    Mr. Blum. I stand by the estimates that are in our 
testimony and----
    Senator Kirk. No, but you didn't make the estimates. I 
mean, the actuary is saying to us, ``I don't have a back up for 
this.''
    Mr. Blum. What I think the actuary----
    Senator Kirk. Which means we shouldn't believe what you 
say, and you are not even willing to send a letter to the 
actuary asking for them to back you up.
    Mr. Blum. What I am saying is----
    Senator Kirk. The correct answer is, ``Senator, yes. I am 
willing to send a letter to the actuary asking for this.''
    Mr. Blum. I am willing to consult with our actuary's office 
regarding the estimates in the testimony, but I stand behind 
the----
    Senator Kirk. Will you share the letter that you send to 
them asking for the back up so that we can see that you have 
requested an actuary estimate of the Partnership for Patients?
    Mr. Blum. I am now committed to sending a letter, but I----
    Senator Kirk. How about yes or no? Will you commit to this 
committee that you will get the actuary to look at your savings 
estimates for the Partnership for Patients?
    Mr. Blum. We have shared our estimates with the Actuary's 
Office. What they have told us----
    Senator Kirk. But you will not even do that. You are 
talking about tens of billions of dollars of a government that 
doesn't have enough money, and you are not willing to do that.
    Mr. Blum. I think what we are saying is that there are 
tremendous potential savings to be had if we can achieve----
    Senator Kirk. But you are not willing to have an actuary 
back it up.
    Mr. Blum. I think what the actuaries have said is that if 
we can achieve that outcome----
    Senator Kirk. I can read you what the actuary told Senator 
Enzi, which is why I am hoping you are going to use this 
opportunity, now the fourth opportunity I have given you to 
say, ``Yes, Senator. I am going to go back and I am going to 
check with the actuary and ask him for a formal estimate of the 
savings that I have claimed but they won't back up.''
    Mr. Blum. I will consult with the Actuary's Office and----
    Senator Kirk. Look. So you will send a letter to the 
actuary asking for an estimate and you will share that with the 
committee because tens of billions of dollars of taxpayer money 
depends on this.
    Mr. Blum. Senator, with all due respect, I cannot commit to 
sending a letter----
    Senator Kirk. No. Not that you cannot, that you will not 
commit.
    Mr. Blum. OK.
    Senator Kirk. That's kind of sad. Mr. Chairman, over to 
you.
    Senator Whitehouse. We have 3 minutes left on the vote, so 
the hearing will stand in recess, subject to the call of the 
chair.
    Thank you, Mr. Blum, for your testimony.
    [Recessed.]
    Senator Whitehouse [resuming the chair]. All right. The 
hearing will come back to order, after that unfortunate delay. 
I apologize to all of the witnesses, if we could take our 
seats. So welcome, Senator Franken, to the continued 
proceedings. Please, if the witnesses could take their seats.
    Thank you all for being here. This is really unfortunate 
about the timing here, but I appreciate so much the work that 
you all have done.
    We are going to begin with Chris Koller, who is Rhode 
Island's Health Insurance Commissioner. It is a somewhat unique 
role, but Chris has done an exemplary job in it, and the office 
is now nationally recognized for its rate review process and 
its efforts, through that rate review process, to promote 
delivery system transformation.
    The office is also the State's co-lead in planning for our 
health insurance exchange, which is an important piece of work. 
He is an adjunct professor of community health in the program 
in public health at Brown University.
    He is a member of the Institute of Medicine's committee on 
essential health benefits. He serves in numerous national and 
State health policy advisory capacities. And prior to his 
current position, was the CEO of our neighborhood health plan 
in Rhode Island, and I welcome him.
    Mr. Koller, please proceed with your testimony.

STATEMENT OF CHRISTOPHER F. KOLLER, COMMISSIONER, OFFICE OF THE 
         HEALTH INSURANCE COMMISSIONER, PROVIDENCE, RI

    Mr. Koller. Thank you very much, and thank you, members of 
the committee.
    I appreciate the opportunity to address you on this 
important topic. I want to take the opportunity to particularly 
thank Senator Whitehouse for his lead on this area, and also 
acknowledge the work of Senator Reed, who was a former member 
of this committee. We are privileged to have them as our 
servants.
    I want to cover three topics today regarding delivery 
system reform, the role of the health insurance commissioner, 
what work we are doing, and what some of our lessons have been.
    The office was established by law in 2004. It focuses 
specifically on commercial health insurance and it was 
established, in part, in recognition of the fundamentally 
different nature of health insurance from other types of 
insurance. I am the only health insurance commissioner in the 
country and I would call to note particularly the basis for our 
work is a couple of different statutory charges that we have.
    In addition to guarding the solvency of insurers and 
protecting the interests of consumers, my office is charged 
with ensuring the fair treatment of providers and seeing the 
health care system as a whole in directing insurers toward the 
policies that improve affordability. That has led us to use our 
capacities under rate review in very comprehensive ways to 
focus on delivery system reform.
    Specifically, our rate review system is comprehensive, it 
covers both small and large group products. It looks at rate 
factors, the underlying cost drivers, not just product prices, 
and it is simultaneous for all carriers, public and 
transparent. So we can get a picture of what really the system 
costs are in Rhode Island and what is driving them. For 
instance, what hospital price increases are, and what might be 
the reasons why, in our case, hospital price increases are 
going up at 7 or 8 percent while inpatient utilization is only 
at a point.
    So given this, we identified three facts coming out of 
this. That medical care costs are about 85 percent typical 
insurance premiums. That insurance, like Medicare, is looking 
at 8 to 10 percent annually, so the cost pressures are not 
unique to Medicare. We've talked about that before.
    And then insurers have limited tools to change those trends 
given the prevailing fee for service system, provide us with 
market powers who resist insurance changes, fragmented 
providers, and patients who have no incentives to choose better 
performing systems of care.
    With the help of my advisory council, a statutorily charged 
group of employers and providers, we developed four standards, 
or actions, that must be taken by commercial insurers in Rhode 
Island as a condition of receiving rates. These affordability 
standards represent the chance to take the theory of delivery 
system reform and put it into practice.
    So these four affordability standards in Rhode Island 
consist of--No. 1, health insurers must increase the portion of 
their medical expenses going to primary care by 1 percentage a 
point for the next 5 years.
    Primary care is the only part of our medical care system 
where the more we have, the lower our costs, and the better our 
community's health. This is two-thirds of Dr. Berwick's triple 
aim. But nationally, we only spend about 7 percent of our 
medical care on primary care. So why is that? The answer has to 
do with how Medicare sets rates and who has economic power in 
private contract negotiations.
    In Rhode Island, we set about to change these forces by 
telling insurers they have to invest in primary care on behalf 
of the community.
    Three years later into this experiment, we are seeing the 
results. Money is being spent on things like establishing 
patient center medical homes, and primary care doctors in Rhode 
Island are happier and better able to recruit, and to come here 
and work. We want to make Rhode Island the best place for 
primary care in the country.
    Our second affordability standard deals with health insurer 
support for the all-payer patient center medical home project. 
These are well publicized attempts to define what constitutes 
high-quality primary care capable of coordinating care for our 
most chronically ill patients.
    This is hard work, but it can be done. And it must come 
from insurer payments, and it must be coordinated to pay for 
the same things. Providers do not like being jerked around in 
different directions by conflicting demands and different 
carriers.
    So our all-payer initiative is 6 years old. It touches 
70,000 patients and we have documented significant improvements 
in the quality of care provided, improved utilization, and a 
cadre of primary care leaders. Only possible because all of our 
insurers are asking the same thing of our primary care 
providers.
    The third standard has to deal with health plan investment, 
and health information technology, building on the significant 
Federal investments that have been made in general and in Rhode 
Island in particular, health plans are required to support that 
with their own money so that they are not freeloading on 
Medicare's investment.
    And then the fourth and final affordability standard 
addresses hospital payment reform. We have not significant 
hospital payment reform in this State for various reasons, and 
we use the authority of the office to dictate six different 
conditions which must be included in hospital contracts with 
health plans.
    Specifically, we limit the rates of increase such as 
health--that hospitals can get from health insurers. We demand 
quality incentives to allow them to earn additional money. We 
require efficiency-based units of service, such as diagnosis-
related groups or any of the proposed Medicare innovations. And 
we ask for standards related to administrative simplicity to 
transfers of care, and to public transparency of the 
information.
    A year into this, in spite of the fact that my office got 
sued for putting this forward, our ability to do it was upheld, 
and we are seeing those payment reforms being implemented by 
the insurers in their contracts with hospitals.
    So what have we learned from this? I want to point to three 
lessons that I think are important for anyone who is taking on 
this work of delivery system reform.
    Mr. Whitehouse. Mr. Koller, if you could summarize them 
fairly quickly.
    Mr. Koller. Sure. First is that delivery system reform must 
make primary care infrastructure a priority. Second, this will 
not happen without public oversight. And third, this must be 
coordinated across payers. We simply have too many payers to 
make this work across different providers.
    The implications for Congress? I think we have to make 
primary care a priority. We have to support Medicare payment 
innovation. We have to support multitier alignment. And we have 
to create incentives for patients to select high-value delivery 
systems. I think we have those opportunities in the Affordable 
Care Act. They bring good tools for the States to work with, 
and we continue to do that work in Rhode Island. Thank you.
    [The prepared statement of Mr. Koller follows:]
              Prepared Statement of Christopher F. Koller
                                summary
      the role of the office of the health insurance commissioner
    The Office of the Health Insurance Commissioner was established by 
law in 2004 in response to concerns about the behavior of Rhode Island 
health insurers and in recognition of the fundamentally different 
nature of health insurance from any other type of insurance. 
Statutorily, the Office is responsible for guarding the solvency of 
insurers, protecting the interests of consumers, assuring fair 
treatment of providers, and improving the affordability, accessibility 
and quality of the health care system.
              current work on delivery system reform in ri
    Delivery system reform is essential to slowing the rate of health 
insurance premium increases. The Office's primary tool for this work 
has been its annual rate review process, which has three components:

    1. It is comprehensive and covers small group and large group 
business for all carriers;
    2. It examines rate factors rather than product prices; and
    3. It is simultaneous for all carriers, public, and transparent.

    However, rate review alone will not reduce the rate of increase in 
commercial health insurance premiums. In order to address medical cost 
trends in the delivery system, the Office's Health Insurance Advisory 
Council identified four Affordability Standards--expectations for 
health plan conduct as a condition of having rates approved. These 
Standards are:

    1. Increasing the portion of medical expenses going to primary care 
by 1 percentage point a year for 5 years;
    2. Health insurer support of RI's all-payer, patient-centered 
medical home project;
    3. Health plan investment in and support for health information 
technology; and
    4. Hospital payment reform as demonstrated through six conditions 
to be included by insurers in their contracts with hospitals.
                  lessons learned and future direction
    Two years since the implementation of these Affordability 
Standards, health insurers are implementing these changes and delivery 
system reform is happening in Rhode Island--primary care is being 
revitalized, our IT infrastructure is being built and hospital 
contracts are changing. There remain obstacles to overcome: health 
insurance premiums continue to rise, evaluation and measurement efforts 
are incomplete, and interagency coordination can be improved. To date, 
the following lessons have been learned:

     Delivery system reform must make primary care 
infrastructure development its first priority;
     Delivery system reform will not happen without public 
oversight; and
     Delivery system reform must be coordinated across payers.

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

     Make primary care a systematic priority--in loan 
forgiveness and education, Medicare payments, health services research 
and NIH funding, and HRSA budgets.
     Support Medicare payment innovation in the ACA.
     Support multi-payer alignment at the State and national 
level.
     Create incentives for patients to select high-value 
delivery systems.

    Despite the significant challenges that the U.S. multi-payer system 
presents, the work being accomplished in Rhode Island demonstrates that 
delivery system reform is necessary for lower rates of increase in our 
premiums. And it is possible.
                                 ______
                                 
    Members of the committee, thank you for the opportunity to address 
you on this important topic. Thank you especially to Rhode Island's 
Senate Delegation--Senators Reed and Whitehouse. Senator Reed, formerly 
a member of this committee, is a strong advocate for preserving and 
enhancing insurance coverage, and Senator Whitehouse has immersed 
himself in the critical topic we are discussing today. Both are 
committed public servants. Rhode Island is fortunate and privileged to 
be represented by them.
    In my address today, I want to cover three topics related to 
medical care delivery system reform: the role of the Office of Health 
Insurance Commissioner, our work on delivery system reform, and what 
some of our lessons learned have been.
    The Office of the Health Insurance Commissioner was established by 
law in 2004 in response to concerns about the behavior of Rhode Island 
health insurers, and a recognition of the fundamentally different 
nature of health insurance from any other type of insurance. I have 
occupied the position since it was first filled in 2005. I am the only 
Health Insurance Commissioner in the country. Central to the Office are 
its statutory duties, which form the legal basis for our work. In 
addition to the customary insurance regulator responsibilities of 
guarding the solvency of insurers and protecting the interests of 
consumers are two broader and critical duties:

     To assure fair treatment of providers; and
     To see the Rhode Island's healthcare system as a whole and 
to direct insurers toward policies which improve the affordability, 
accessibility and quality of the system.

    Although there is little statutory direction behind those stated 
duties, our actions in payment reform are firmly grounded in these 
standards.
    The Office's primary tool for this work has been the annual review 
of rates of commercial insurers in the State. There are three 
components to that review:

     It is comprehensive--covering small group and large group 
business for all carriers--and prospective--rates must be approved 
before being used.
     It examines rate factors, not product prices. By rate 
factors we mean the carriers' estimated inflation rates for price and 
utilization for five medical service categories--hospital inpatient, 
hospital outpatient, primary care, pharmacy and all other medical. In 
addition, we look at their estimated administrative costs and projected 
profits.
     It is simultaneous for all carriers, public, and 
transparent. As a result, we can both educate the public about what is 
driving the increases in their health insurance premiums (documenting, 
for instance, last year's attributed inpatient price increases of about 
7 percent, while utilization was almost flat) and query carriers about 
significant variations between them in inflation rates and 
administrative costs.

    Rate review forms the basis for our systemic delivery system reform 
efforts. Specifically, after several years of this work, it became 
apparent to the Office's Health Insurance Advisory Council, a 
statutorily charged group of employers, consumers and providers who 
advise the Office, that rate review alone would not reduce the rate of 
increase in commercial health insurance premiums; that the true costs 
were in the delivery system and insurers would need direction and 
coordination in this work.
    Specifically: transparent, comprehensive rate factor review 
highlighted that:

     Medical costs constitute about 85 percent of the typical 
insurance premium.
     Insurers were predicting medical cost increases of 8 to 10 
percent annually, driven by increases in both price and utilization of 
services; and
     Insurers have limited tools to change those trends--given 
the prevailing fee for service payment system, medical providers with 
market power to resist insurer changes, fragmented providers who cannot 
coordinate care well, and patients who have no incentives to choose 
better performing systems of care.

    Given these facts, the Advisory Council then worked to identify 
four Affordability Standards--actions which must be taken by any 
commercial insurer in Rhode Island as a condition of receiving rates. 
In brief, these Standards consist of:

    1. Health insurers must increase the portion of their medical 
expenses going to primary care by 1 percentage point a year for 5 
years.

    Primary care is the only part of our medical care system where the 
more we have, the lower our population costs and better a community's 
health (two thirds of Dr. Berwick's triple aim). But nationally we only 
spend about 7 percent of our medical expenses on it. Why is this? The 
answer has to do with how Medicare sets rates and who has economic 
power in private contract negotiations. We did not like that answer in 
Rhode Island and so we have set about to change it by telling health 
plans they must invest in primary care on behalf of the community. We 
are seeing the results 2 years later--the money is being spent on 
things like establishing 
patient-centered medical homes and primary care docs in Rhode Island 
are happier and better able to recruit peers to come here and work.

    2. Standard No. 2 deals with health insurer support of our all-
payer, 
patient-centered medical home project.

    Patient-centered medical homes are a well-publicized attempt to 
define what constitutes high-quality primary care, capable of 
coordinating the care of our most expensive chronically ill patients. 
They work, but take money and time to be built. The money must come 
from insurer payments and must be coordinated to pay for the same 
things--providers hate being jerked in different directions by the 
conflicting demands of different carriers. Rhode Island's Chronic Care 
Sustainability Initiative is 6 years old and touches 70,000 patients. 
We have documented significant improvements in the quality of care 
provided, have signs of improved utilization experience and built a 
cadre of primary care leaders.

    3. The third affordability standard coordinates health plan 
investment in and support for health information technology.

    Under the leadership of the Rhode Island Quality Institute and 
Senator Whitehouse, Rhode Island has used Federal ARRA money to make 
significant investments in Electronic Health Records adoption, a Health 
Information Exchange and--as a Beacon community--implementation of this 
work to improve the quality of care delivered. This Affordability 
Standard makes sure that your initial Federal investments in Rhode 
Island are matched and followed up by private insurer money as well, so 
we sustain this critical work.

    4. The final Affordability Standard addressed hospital payment 
reform.

    Work by my Office has documented private insurer payment variations 
of 100 percent to different hospitals for the same services. This 
difference appears to be driven only by hospital size and negotiating 
power. In addition, there is a marked gap between the theory of 
hospital payment reform and the practice in Rhode Island--with most 
payments occurring on a fee for service basis with little or no quality 
incentives. Given insurer inability or unwillingness to implement 
hospital payment reform, OHIC set forth six conditions which must be 
included in future health plan contracts with hospitals. These included 
limiting price increases to Medicare CPI, installing quality 
incentives, and facilitating efficiency-based payments such as 
Diagnosis Related Groups. One year in, and it appears insurers and 
hospitals are adopting these standards, and a recent court ruling 
upheld the Office's ability to change health plan contract terms with 
hospitals.

    This is just a brief summary of the Office's attempts to promote 
delivery system reform. And we make no claims of success, yet. Our 
premiums still continue to climb. Our evaluation and measurement 
efforts are incomplete. Our interagency coordination could be better. 
But I would offer these lessons from our work to date.

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

    Every high performing health system in the world has a fundamental 
commitment to primary care and puts their money in this direction. The 
United States does not. Delivery system reform of course must extend 
beyond this, but at the core of integrated, accountable delivery 
systems must be primary care.
    Primary care is also the link or ``hinge'' to public health and the 
personal behaviors, which constitute a far greater driver of community 
health and community costs than the medical delivery system.

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

    Commercial insurance rate review is a good start for this oversight 
but is not sufficient. We have to make it in the economic interests of 
providers to change behaviors. In Rhode Island, I had to survive a 
court suit to nullify a contract term between a market-dominant 
hospital and a local insurer, which would have explicitly shifted all 
self-determined losses for Medicaid and Medicare back to the insurer 
and commercial rate payers. This term was only possible because of the 
hospital's market dominance.
    We must change the rules of success for providers, while respecting 
how difficult it is for large institutions to change. This is not 
merely about government price controls, but using government authority 
to promote new provider payment methods--such as bundled payments and 
carefully monitored capitation--that change the success rules and 
encourage providers to coordinate high-quality care together, not just 
produce more volume alone.

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

    An iron law of commerce is that behavior follows reimbursement. But 
in Rhode Island and elsewhere, commercial health insurance only 
constitutes 20 percent of the population and money in the system--
Medicaid and Medicare--are worth 50 percent, self-insured are worth 20 
percent and the uninsured another 10 percent. As a result, in almost 
all instances, no payer by itself has enough economic influence to 
change provider behavior and promote delivery system reform and such 
efforts must be coordinated across payers. This is hard work, and 
involves changing contracting culture and providing antitrust 
protection. It also means coordinating with Medicare--no easy task. In 
Rhode Island, we are proud that our all-payer medical home effort has 
been selected by CMS to participate in the Medicare Advanced Primary 
Care Practice (MAPCP) demonstration project, and encourage expansion of 
this work. We are also looking for ways to coordinate commercial 
hospital contracting with the upcoming Medicare payment changes.

    Finally, based on these lessons, what are some actions Congress 
could take to encourage further delivery system reform? I offer four 
areas, all of which build on the significant Federal investments being 
made in information technology:

    1. Make primary care a systematic priority--in loan forgiveness and 
education, in Medicare payments, in health services research and NIH 
funding, in HRSA budgets. Our budgets are our values statements and the 
Federal Government does not value primary care.
    2. Support Medicare payment innovation. Although not directly in 
this committee's jurisdiction, Medicare is a powerful force in delivery 
system reform. The ACA has numerous payment innovations and sets up 
structures for more. IPAB must be protected and the Center for Medicare 
and Medicaid Innovation encouraged, funded and allowed to put forth 
projects with long payoff estimates.
    3. Support multipayer alignment.

      CMS must be directed to coordinate its efforts better 
across Medicaid and Medicare.
      More directly in this committee's responsibilities, 
States should be encouraged to expand rate review efforts to align 
commercial insurers with public payers. Finally, almost 30 percent of 
RI's population is enrolled in self-insured plans, which can exempt 
themselves from all-payer efforts. The ERISA pre-emption clause is a 
major barrier to delivery system reform.

    4. Create incentives for patients to select high-value delivery 
systems. Because the costs of health insurance are subsidized by 
employers and the Government, individuals do not pay the full costs of 
wide provider choice, and undervalue the efficiencies and effectiveness 
of integrated delivery systems. Developing and standardizing 
effectiveness measures using resources such as the new Patient-Centered 
Outcome Research Institute, equalizing tax policies for health 
benefits, promoting individual purchase on exchanges, and designing 
Medicaid, Medicare and FEHBP benefits that promote price sensitivity 
will all create these incentives.

    Since we pay for technical procedures and specialists, we should 
not be surprised that we get a lot of volume and specialty care, and 
less value than other countries. The U.S. multipayer system makes it 
hard to change, but our work in Rhode Island shows that it can be done. 
Innovating States need the help of Congress in these efforts.
    Thank you again for the chance to address the committee. I look 
forward to answering your questions.

    Senator Whitehouse. Thank you, Commissioner.
    The next witness is Dr. Gary Kaplan, who has served as the 
chairman and CEO of the Virginia Mason Health System since 
2000. Virginia Mason is based in Seattle, WA, home State of our 
fellow HELP Committee Senator, Patty Murray, who sends her 
regards.
    Virginia Mason is one of the first health systems to 
transform health care using the principles of the Toyota 
production system, and it is a recognized national leader in 
reducing costs and increasing efficiency while improving the 
patient experience.
    Dr. Kaplan is a founding member of Health CEOs for Health 
Reform, and he practices internal medicine at Virginia Mason. 
He has been recognized nationally for his health care 
leadership, receiving awards from the National Quality Forum 
and the Joint Commission, as well as the medical group 
Management Association of the American College of Medical 
Practice Executives. We are delighted to have him here.
    Please proceed, Dr. Kaplan.

 STATEMENT OF GARY KAPLAN, M.D., FACP, FACMPE, FACPE, CHAIRMAN 
      AND CEO, VIRGINIA MASON MEDICAL CENTER, SEATTLE, WA

    Dr. Kaplan. Thanks very much.
    Good afternoon, Senator Whitehouse, Senator Franken, and 
members of the committee. I want to thank you for the 
opportunity to present the work of the Virginia Mason Health 
System, and our efforts to transform health care delivery. I 
hope this, my comments and our testimony, helps develop an 
understanding of what is truly possible.
    Founded in 1920, Virginia Mason combines a primary and 
specialty care group practice of nearly 500 physicians with a 
336-bed acute care hospital. We also operate eight clinics in 
the Puget Sound region. In addition to my duties as chairman 
and CEO, I continue to practice internal medicine, although 
perhaps not as much as I used to.
    I am a product of American medicine and I am very proud of 
American health care. We produce some of the world's best 
health care in spite of a fragmented financially unsustainable 
health care system.
    Although Virginia Mason has a longstanding reputation for 
innovation and clinical excellence, but our journey to design a 
better system of care actually began just over 10 years ago. It 
was prompted by a simple question from our board. Community 
leaders from companies like Microsoft, Starbucks, Boeing, they 
asked us, ``Who is your customer?'' And of course, our 
immediate response, just like everybody in health care was, 
``Our patients.'' But upon further reflection and challenge by 
our board, we realized that our systems were not designed for 
the safety and convenience of our patients, but based on the 
preferences of providers.
    An example would be waiting rooms, where patients hurry up 
to be on time, and then they wait for us. We build that into 
our facilities. They have really been designed around us. So we 
got very clear.
    And as you can see in this first poster here, this is our 
strategic plan. This was developed under the leadership of our 
board of directors, and really is an iconic graphic depiction 
of our plan. All of the elements of this plan support Virginia 
Mason's patients, who are at the top of the pyramid. The last 
decade has been about truly understanding what it means to put 
our patients first.
    Also in 2001, we realized that we would not transform 
health care unless we challenged the deep assumptions held by 
physicians in our organization. And so, we put our Physician 
Compact together, codifying and aligning expectations, what 
every physician had every right to expect from our physicians, 
and what our physicians had every right to expect from our 
organization.
    Our cultural transformation had begun, but we knew we 
needed a management method that supported high quality, safe 
care at a sustainable cost. And in our quest, we looked at 
other hospitals and institutions around the United States, and 
we didn't find a management system that we believe would help 
us execute on this plan.
    Soon we discovered from our colleagues just down the street 
at the Boeing company what they have been doing with the Toyota 
production system over the past decade, taking the 737 
construction from 22 days to 10 days. And in the process, 
improving quality, creating a safer product, and reducing the 
costs of production.
    We adopted their methods and we adapted it to health care 
in what we call the Virginia Mason Production System. By using 
the tools and methods of this system, we have seen tremendous 
benefits for our patients, our staff, and our organization. 
Through this work, we have demonstrated that the path to higher 
quality, safer care is the same path to lower costs.
    Since adopting the Virginia Mason Production System, we 
have saved millions of dollars in planned capital investment, 
we have dramatically reduced inventory costs, staff walking to 
some patient waiting, overtime labor costs.
    We have also reduced professional liability costs in a 
State with no tort reform, our liability premiums were reduced 
by 56 percent, and our self-insured retention funds have been 
reduced over the past 7 years by 70 percent.
    Because of our management system, we were able to find and 
fix problems before they translate into defects for our 
patients. We have, what we call, the Patient Safety Alert 
System, where every staff member is expected to be a safety 
inspector and stop the line, just like they do at Toyota. If a 
patient is at-risk, an investigation is launched immediately, 
not retrospectively. Since beginning the program, we have had 
over 20,000 PSAs, Patient Safety Alerts. I wish we had 30,000.
    We are pleased that last year when, as a result of our 
improvement efforts, the Leapfrog Group, which represents 
employers across the country, named Virginia Mason as one of 
the top two hospitals of the decade. What this shows here on 
the X-axis is the quality score; on the vertical axis, 
stewardship of resources or costs. We are the dot in the upper 
right quadrant. That shows you that it is possible to improve 
quality and be wise stewards of resources.
    We know that we can make these improvements, but just doing 
it on our own, we are going to sub-optimize in terms of our 
national delivery system. We need to partner with other 
organizations who are proud to join other organizations like 
Intermountain in a high-value health care collaborative.
    We believe that the market has a role to play in health 
care reform, and in 2004, we started working with some of our 
region's largest companies: Boeing, Starbucks, Costco, Alaska 
Airlines. In the first year of our marketplace collaborative on 
back pain, we saw 2,000 patients and purchasers saved $1.7 
million just on back pain in little old Seattle.
    As it turned out, the thought was we would lose money 
because the MRIs we eliminated were where we made money on back 
pain. But it turned out we increased throughput, it tripled in 
the same time the costs to deliver care was reduced.
    Right now, we are working with the Intel Corporation in 
Portland, showing that these methods are transportable to other 
markets.
    We know that to reach the full potential of these types of 
strategies requires realigning payment so that reimbursement is 
determined by value, not volume. We support approaches such as 
bundled payment, shared risk, capitated payment, and other pay 
for value programs.
    It is a commonly shared belief that the current self-health 
care system is unsustainable, but we do believe that with the 
passage of the Patient Protection Affordable Care Act, we can 
finally turn our attention to a health care financing model 
that rewards quality and stops rewarding quantity in a 
fragmented system.
    The law includes many provisions that will help us improve 
care delivery. Perhaps the most exciting component of this is 
the Center for Medicare and Medicaid innovation. Through our 
experience with the Virginia Mason Production System, we have 
demonstrated again that the path to better health and better 
health care is the same path to reduce costs.
    I would like to thank you both and other members of the 
committee, and colleagues on the panel today for your role in 
reforming America's health care delivery systems. Sound 
legislation must support delivery system reform. That begins in 
our organizations and in our communities. Millions of Americans 
in our country are counting on us. They cannot wait any longer.
    I will be happy to take questions and thank you.
    [The prepared statement of Dr. Kaplan follows:]
   Prepared Statement of Gary S. Kaplan, M.D., FACP, FACMPE, FACPE, 
             Chairman and CEO, Virginia Mason Health System
                                summary
                         about virginia mason*
    Virginia Mason is a nonprofit health care organization founded in 
Seattle, WA, in 1920. An integrated system, Virginia Mason combines a 
primary and specialty care group practice of nearly 500 physicians with 
a 336-bed acute-care hospital. We also operate clinics in eight 
locations around the Puget Sound area.
---------------------------------------------------------------------------
    * Health care is hungry for something truly new--less a fad than a 
new way to be. We are staggering under the burden of too many defects, 
too much cost, and too much variation in care, all described with 
scientific rigor and social commitment a decade ago in the landmark 
Institute of Medicine reports, To Err is Human (1999) and Crossing the 
Quality Chasm (2001). Even one convincing example of a major health 
care organization that crossed the chasm might be enough to give us 
both the confidence and the template we need. Transformation, in that 
regard isn't vague at all; it refers to results, unprecedented 
performance in all important dimensions of care, at a cost we can 
embrace as sustainable.
    Virginia Mason Medical Center (VMMC) is not yet quite that beacon, 
but it has a better shot at becoming one than almost any other large 
health care organization in America today (Kenney, 2011, p. xii).--
Donald M. Berwick, M.D., MPP, Administrator of the Centers for Medicare 
and Medicaid Services.
---------------------------------------------------------------------------
      achieving results with the virginia mason production system
    Virginia Mason's costs are among the lowest in our market. We 
recognize skyrocketing cost escalation is a contributor to many of the 
problems associated with our health care system. We have worked hard to 
decrease our costs and, at the same time, increase the quality of care 
we provide to our patients. Our management methodology is based on 
principles of the Toyota Production System. We utilize the Virginia 
Mason Production System (VMPS) to identify and eliminate wasteful 
processes.
    VMPS also provides a consistent approach for measuring performance 
across the organization. Virginia Mason teams have achieved significant 
organizational and departmental improvements since adopting VMPS:

     Saved $11 million in planned capital investment by using 
space more efficiently and freed an estimated 25,000 square feet of 
space using better space design.
     Reduced inventory costs by $2 million through supply chain 
expense reduction and standardization efforts.
     Reduced staff walking distance by 60 miles per day.
     Reduced labor expense in overtime and temporary labor by 
$500,000 in just 1 year.
     Reduced professional liability insurance 56 percent from 
2004 to 2010.
     Reduced the time it takes to report lab test results to 
the patient by more than 85 percent.
     Reduced the time from when a patient first calls Virginia 
Mason's Breast Clinic with a concern to receiving a diagnosis from 21 
days to 3 days. Many patients receive their results on the same day.

    Through our experience with the Virginia Mason Production System, 
we have demonstrated that the path to higher quality care is the same 
path to lower costs.
             the patient protection and affordable care act
    The health reform law includes many provisions that will 
undoubtedly improve care delivery including an emphasis on primary 
care, coordination and innovative models of care.
    An example of our experience with higher quality and lower cost in 
primary care is a pilot we began with Boeing in 2007. Virginia Mason 
worked with Boeing to reduce health care costs for their employees with 
the most expensive health conditions while improving their health 
status. The new model, intensive primary care, included detailed 
patient education, personal care plans, intensive and appropriate use 
of case managers, 24/7 phone and email access to providers, and the use 
of electronic medical records. Additionally, care was coordinated among 
primary care providers, specialists and the hospital. In partnership 
with Boeing, Virginia Mason reduced annual per capita claims by nearly 
30 percent.
    Virginia Mason's experience in delivery system improvement is a 
model for health care reform across the Nation. The patients in our 
communities deserve nothing less than high quality, safe care at an 
affordable cost.
                                 ______
                                 
    Good afternoon, Chairman Harkin, Ranking Member Enzi and members of 
the committee. I want to thank you for this opportunity to present the 
work of Virginia Mason Health System and our efforts to transform the 
delivery of health care. I am Dr. Gary Kaplan, chairman and CEO of 
Virginia Mason Health System in Seattle, WA.
    Virginia Mason was founded in 1920. Our founders came from the 
University of Virginia and the Mayo Clinic. Our organization is 
patterned after the Mayo model, combining a primary and specialty care 
group practice of nearly 500 physicians with a 336-bed acute-care 
hospital. We also operate clinics in eight locations around the Puget 
Sound area.
    In addition to my duties as chairman and CEO, I continue to 
practice internal medicine at Virginia Mason. I am a product of 
American medicine and I am proud of American health care. We produce 
some of the world's best health care in spite of a fragmented, 
financially unsustainable health care system.
                       redesigning care delivery
    Virginia Mason has a long-standing reputation for innovation and 
clinical excellence, but our journey to design a better system of care 
delivery began just over 10 years ago. Our cultural transformation was 
prompted by a simple question from our Board, ``Who is your customer?'' 
Of course, our immediate response was ``It's the patient.'' However, 
upon reflection we realized that our systems were not designed for the 
safety and convenience of our patients but based on the preferences of 
our providers and designed around us, the doctors, nurses, technicians, 
managers and those of us working in health care. An example would be 
waiting rooms where patients hurry to be on time and then wait for us!
    In 2001, Virginia Mason leadership developed a new strategic plan, 
accompanied by a graphic representation in the form of a pyramid. All 
of the elements of the plan, as depicted in the pyramid, support 
Virginia Mason's patients who are at the top of the pyramid, signifying 
our intention to place our patients first in all we do.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Also in 2001, Virginia Mason physician leadership developed a 
physician compact detailing the organization's responsibilities to 
physicians and each physician's responsibility to the organization, to 
each other and to their patients.
    Our cultural transformation had begun but we knew we needed a 
management method that supported high quality, safe care at a 
sustainable cost. In our quest, we looked at what other hospitals were 
doing--and we looked at the very best out there. Yet we didn't find 
anything that we believed would truly transform health care.
    When we were willing to look at companies outside of the health 
care industry, we discovered that Boeing had adopted the Toyota 
Production System as their management methodology. They shortened the 
lead time to make a 737 from 22 days to 10 days and we soon found that 
this methodology is applicable to just about any work that involves 
complex processes and systems.
    So we adapted it to what we call the Virginia Mason Production 
System (VMPS). By using the tools and methods of VMPS, we've seen 
tremendous benefits for our patients, our staff and our organization. 
Patients benefit with greater safety, less delay in getting care, more 
timely results and treatment, and more time with their care providers. 
Our staff members benefit by having less rework and frustration, and 
greater opportunities and more time to care for patients; which, by the 
way, is the reason they chose health care as a profession in the first 
place. Virginia Mason benefits by operating more efficiently, providing 
higher quality and safer care, at a lower cost.
      achieving results with the virginia mason production system
    Today, Virginia Mason's costs are among the lowest in our market. 
We recognize skyrocketing cost escalation is a contributor to many of 
the problems associated with our health care system. We have worked 
hard to decrease our costs and, at the same time, increase the quality 
of care we provide to our patients. We utilize our management 
methodology to identify and eliminate wasteful processes.
    An example of waste is waiting. Waiting rooms by design are places 
patients, who are on time, go to wait for providers who are running 
behind schedule. Not only do patients wait in the waiting room, they 
wait in the exam room, they wait for test results, they wait for 
diagnosis and treatment, and they even wait to receive their bill. All 
of that after an initial wait to see the doctor after their appointment 
has been scheduled.
    VMPS also provides a consistent approach for measuring performance 
across the organization. Virginia Mason teams have achieved significant 
organizational and departmental improvements since adopting VMPS:

     Saved $11 million in planned capital investment by using 
space more efficiently and freed an estimated 25,000-square feet of 
space using better space design.
     Reduced inventory costs by $2 million through supply chain 
expense reduction and standardization efforts.
     Reduced staff walking distance by 60 miles per day.
     Reduced labor expense in overtime and temporary labor by 
$500,000 in just 1 year.
     Reduced professional liability insurance 56 percent from 
2004 to 2010.
     Reduced the time it takes to report lab test results to 
the patient by more than 85 percent.
     Improved medication distribution from physician order to 
availability for administration from 2.5 hours to 10 minutes, and 
reduced incomplete inpatient medication orders from 20 to 40 percent to 
less than 0.2 percent; both were achieved through process improvement 
and computer physician order entry (CPOE) implementation.
      Reduced the time from when a patient first calls Virginia 
Mason's Breast Clinic with a concern to receiving a diagnosis from 21 
days to 3 days. Many patients receive their results on the same day.
                     receiving external recognition
    Our efforts to provide higher quality, safer care at a lower cost 
have not gone unnoticed. Late last year, we were named one of two Top 
Hospitals of the Decade by the Leapfrog Group. The Leapfrog Group is a 
coalition of large employers who came together more than 10 years ago 
with the goal of influencing the quality and cost of health care. Today 
the Leapfrog Group produces the most respected indicator of efficiency 
and effectiveness in hospital care.
    Efficiency is a Leapfrog measure that combines scores for quality 
and resource use. Leapfrog's 2010 data base contained 1,184 hospitals 
from 45 States. We know that better quality also means higher 
efficiency. Proving that rapid access to reliable systems delivering 
evidence-based care is less costly for all concerned.
    As this fall 2010 diagram illustrates, Virginia Mason ranks among 
the top 1 percent of all hospitals measured for both quality and 
efficiency, according to the Leapfrog Hospital Recognition Program.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        applying production system principles to facility design
    Another example of our success with adopting production system 
principles to health care is our new Emergency Department at our 
downtown Seattle location, which opened for the first time last week.
    People typically come to emergency rooms because they are acutely 
ill. Making them wait just makes them sicker. We used the Virginia 
Mason Production System to design the ideal process and flows so we can 
efficiently move our patients from arrival to assessment, treatment and 
either discharge or admission to the hospital. Then, using a 3P process 
(Production Preparation Process), we brought together the construction 
team, the architects, our doctors and nurses, paramedics and most 
importantly our patients, to design the ideal physical facility to 
support that flow. This inclusive process revealed that a large waiting 
room is unnecessary.
    A key to the efficiency of the new ED is the addition of what 
Virginia Mason calls the PACE unit--which stands for Patient 
Accelerated Care Environment. In most EDs, patients who are not acutely 
ill, but cannot be immediately discharged or admitted, are cared for in 
the ED as ``observation'' patients.
    At Virginia Mason, those patients are moved to the adjacent PACE 
unit, where they receive individualized care to efficiently move them 
toward either discharge or inpatient admission. This not only provides 
better care for the patient, but removes the bottleneck from the ED and 
makes those resources available for more acutely ill patients who might 
otherwise be forced to wait.
    As you may know, hospitals all over the country are spending 
millions of dollars to build huge emergency departments to cope with 
the rising demand for care--instead of putting resources into figuring 
out how to deliver the care that people need more efficiently.
    Through the application of production system principles and the 
broad participation from all of those involved in patient care, we 
built a unique facility. We rethought everything--from how to eliminate 
waiting to the way people, information and supplies move through the 
building. I genuinely believe the care we provide in this emergency 
department will be a model for the entire Nation.
                  partnering to deliver greater value
    We know that we can make many improvements on our own, but to 
transform our Nation's health care delivery system, we need to partner 
with like-minded organizations.
    We are working with health care organizations that share our vision 
of a value-driven system. In December 2010, Cleveland Clinic, 
Dartmouth-Hitchcock, Denver Health, Intermountain Healthcare, Mayo 
Clinic, and The Dartmouth Institute for Health Policy and Clinical 
Practice announced the formation of the High Value Healthcare 
Collaborative (HVHC) with the goal of improving care, lowering costs 
and sharing best practices nationally. On June 1, eight major health 
systems, including Virginia Mason, joined the Collaborative.
    The medical groups will share data on outcomes and clinical 
protocols for selected conditions and treatments to arrive at optimal 
care models, which can then be implemented by many other health care 
systems. The Collaborative aims to see these best practices replicated 
across the country.
    Currently, the HVHC is working together in nine areas that have 
wide variation in rates, costs and outcomes. These are total knee 
replacement, diabetes, asthma, hip surgery, heart failure, perinatal 
care, depression, spine surgery and weight loss surgery. In the future, 
the HVHC will expand their focus to additional high variation, high-
cost conditions affecting diverse populations. The HVHC will determine 
best practices for delivering care for these conditions and will 
rapidly disseminate actionable recommendations to providers and health 
systems across the United States (Adams & Kimbell, 2011). We are 
hopeful that this work will ultimately be used by the Centers for 
Medicare and Medicaid Services to set Medicare payment rates.
                   collaborating with the marketplace
    We also believe that the market has a place in driving health care 
reform. In 2004, we began working with some of our region's largest 
employers. Through that collaboration, we improved patient satisfaction 
and provided care more quickly and cost-effectively, all while 
realizing ever-better medical outcomes. We started working with 
employer and health plan representatives forming Marketplace 
Collaboratives to identify and align our interests, with the goal of 
reducing variation in quality and access.
    We began by identifying the highest cost conditions; we developed 
quality measures, relied on evidence-based care and utilized VMPS. The 
collaborative developed five product specifications essentially 
defining quality from the customer/employer perspective:

     Same-day access;
     100 percent patient satisfaction;
     Evidence-based care;
     Absence management; and
     Affordable price for purchasers and providers--
reimbursement must be aligned with value.

    In the first year of the back pain collaborative, we saw 2,000 
patients and purchasers save $1.7 million. The time needed to complete 
care for back pain was reduced by 67 percent. Course of care went from 
66 days to 12 days. We were very close to same-day access and increased 
available patient appointments from 500 to 2,000. Importantly, patient 
satisfaction was 98 percent.
    We utilized evidence-based care, which we learned through this 
process, hadn't always been the case. Ninety-six percent of Virginia 
Mason patients required no work loss (beyond the time needed to receive 
care); of those who did miss work they lost 4.3 work days, compared to 
9 work days lost for care delivered by other local providers.
    We committed to doing the right thing, even though in the short 
term we would likely lose money. As it turned out, the margin to 
Virginia Mason increased because throughput quadrupled at the same time 
the cost to deliver care was reduced.
    We also have value streams, in our marketplace collaborative work 
with employers, for breast nodules, headache, upper respiratory 
infection, screening and prevention, and shoulders, knees and hips. 
Payment for value, not volume, would accelerate this work across the 
country, allowing patients to receive better care, faster and more 
affordably.
    Working with Intel, we have expanded Marketplace Collaboratives 
into the Portland, OR area. Intel is collaborating with a payor and 
providers in Portland to use clinical value streams developed at 
Virginia Mason. Intel's success is similar to ours and demonstrates 
that this methodology is portable and transferrable.
    To reach the full potential of these types of strategies requires 
realigning payment so that reimbursement is determined by value not 
volume. Approaches such as bundled payment, shared risk, capitated 
payment and other pay-for-value programs are necessary in order to 
promote widespread, value-driven care innovations.
               patient protection and affordable care act
    In March 2010, the Patient Protection and Affordable Care Act, 
which was passed by Congress and signed by President Obama, became law. 
In addition to much-needed insurance industry reform, it incorporates 
incentives for delivery system reform. We can finally turn our 
attention from a health care financing model that rewards quantity in a 
fragmented system to one that encourages quality in a coordinated 
approach. The health reform law includes many provisions that will 
undoubtedly improve care delivery.
                        emphasizing primary care
    As a practicing physician, I've known for more than three decades 
that to shift the paradigm from a system that treats illness to one 
that promotes health requires a sharp focus on primary care.
    Thankfully, the Patient Protection and Affordable Care Act requires 
incentive payments for primary care providers and reallocation of 
unused residency positions to primary care programs.
    An example of our experience with higher quality and lower cost in 
primary care is a pilot we began with Boeing in 2007. Virginia Mason 
worked with Boeing to reduce health care costs for their employees with 
the most expensive health conditions while improving their health 
status. The new model, intensive primary care, included detailed 
patient education, personal care plans, intensive and appropriate use 
of case managers, 24/7 phone and email access to providers, and the use 
of electronic medical records. Additionally, care was coordinated among 
primary care providers, specialists and the hospital. In partnership 
with Boeing, Virginia Mason reduced annual per capita claims by nearly 
30 percent.
    The success of the Boeing project led to the implementation of the 
Virginia Mason's Intensive Primary Care program at all of our primary 
care sites. To appropriately align incentives, contractual arrangements 
for this expanded program include a per member/per month stipend, a 
mechanism for shared savings and payment for achievement of quality 
metrics.
                      ensuring better coordination
    Multi-specialty group practices and integrated delivery systems 
provide many of the attributes necessary for accountable patient care. 
Unfortunately fewer than 20 percent of physicians practice in groups 
with 11 or more doctors. As a result, fragmented care leads to 
unnecessary tests and treatments, emergency department over-utilization 
and alarmingly high hospital re-admission rates (Washington Post, 2010, 
p. 142).
    The health reform law will encourage care coordination in a 
framework not unlike an integrated delivery system. Accountable Care 
Organizations will be rewarded for keeping patients healthy and out of 
both emergency rooms and hospitals. Patients will benefit from 
additional services such as intensive education, monitoring and 
medication management. A bundled fee per patient will translate into 
shared savings for Medicare and for providers.
    My colleagues and I at Virginia Mason are pleased with the recently 
released ACO regulations and we are continuing to explore pursuit of an 
ACO designation for our organization.
                  promoting innovative models of care
    Perhaps the most promising component in the health reform law is 
the Center for Medicare and Medicaid Innovation (CMMI) with its mission 
of better health care, better health and reduced cost.
    Through our experience with the Virginia Mason Production System, 
we have demonstrated that the path to better health and better health 
care is the same path to reduced costs. As you might imagine, we are in 
conversation with CMMI regarding potential pilot projects.
    In conclusion, I'd like to thank each of the committee members and 
my colleagues on the panel today for your role in reforming America's 
health care delivery system. Sound legislation must support delivery 
system reform that begins in each of our organizations, because our 
patients and communities are counting on us and can wait no longer.
    I am happy to answer any questions.
                            Resources Cited
Adams, C.R. & Kimbell, D. (2011). Retrieved Nov. 5, 2011 from http://
    www.dartmouth-hitchcock.org/news/newsdetail/59724/. Dartmouth-
    Hitchcock; The Dartmouth Institute for Health Policy and Clinical 
    Practice.
Kenney, C. (2011). Transforming Health Care: Virginia Mason Medical 
    Center's Pursuit of the Perfect Patient Experience. New York, NY: 
    Productivity Press, Taylor & Francis Group.
The Staff at the Washington Post (2010). Landmark: The Inside Story of 
    America's New Health-Care Law and What it Means for Us All. 
    Philadelphia, PA: Public Affairs Press.

    Senator Whitehouse. Thank you, Dr. Kaplan. We will continue 
with the witnesses first, and then we will do questions 
selectively at the end.
    Our next witness, Greg Poulsen, is the senior vice 
president for Intermountain Healthcare, which is based in Salt 
Lake City, UT, Senator Hatch's home State. He joined 
Intermountain Healthcare in 1982, and in his current position, 
he shares responsibility for the operational and strategic 
issues of the organization. He has had direct responsibility 
for strategic planning, research and development, and marketing 
and policy for over 20 years.
    He is a Commissioner for the Commonwealth Fund in 
Washington, DC, focused on defining a high-performance health 
system for the United States. He has been a consultant and 
provided counsel on health policy development in other 
countries as well, and we are pleased to have him with us.
    Mr. Poulsen.

  STATEMENT OF GREG POULSEN, SENIOR VICE PRESIDENT AND CHIEF 
            STRATEGY OFFICER, INTERMOUNTAIN HEALTH-
                    CARE, SALT LAKE CITY, UT

    Mr. Poulsen. Thank you very much for the opportunity to be 
with you.
    As you mentioned, Intermountain Healthcare is based in Salt 
Lake City. We have roughly 3,200 physicians, 23 hospitals, and 
are the largest insurer in the State.
    I think we have become particularly well-known nationally 
and internationally for identifying best clinical practices, 
and then applying them consistently in much the same way that 
Virginia Mason has.
    Dr. John Wennberg at Dartmouth summarized the results about 
a year and a half ago by saying, ``Intermountain is the best 
model in the country of how you can actually change health care 
for the better.''
    If the Nation could reduce health care spending for acute 
and chronic illness by more than 40 percent if it practiced 
like Intermountain. However, we know that there remains much 
room for improvement at our organization and at others. The 
closer we look, the more we find areas where improvement can 
and must be made.
    I know that other leading organizations see it the same way 
we do; we just heard about that. The primary challenge for us, 
and the main reason more organizations don't adopt high-value 
models discussed in this hearing is the underlying fee for 
service payment system, which predominates, of course, in the 
United States.
    Intermountain and other organizations have shown that 
improving quality is compatible with lowering costs. And 
indeed, high-quality care is generally less expensive than 
substandard care. Unfortunately, such high-quality, low-cost 
care generally leads to lower revenues and lower incomes for 
providers. To put it bluntly, the current payment system 
rewards disorganized, inefficient, and often unnecessary care.
    Experience demonstrates that effective, coordinated 
clinical practice can improve outcomes dramatically while 
reducing costs significantly. Let me give you a couple of 
examples.
    One relates to patients coming to emergency rooms with 
sepsis, which is a deadly whole body medical condition 
generally associated with blood infections. By applying a 
carefully organized series of best practices every time, 
consistency here is the key, Intermountain's mortality rates 
have plunged to nearly 10-times lower than the national 
average, from roughly about 40 percent to about 5 percent. 
Because of much more rapid recoveries and fewer complications, 
costs were much lower as well in both national norms and our 
previous experience.
    The reward? The revenue loss of more than $10 million per 
year to Intermountain hospitals and physicians, so a reward of 
a penalty, and if you will, for that kind of improvement. 
Similar results can occur with management of chronic diseases.
    At Intermountain and other places, we have developed a 
coordinated, evidenced-based approach to managing patients with 
diabetes, for example, and have applied it across our entire 
system. The results are much better health, many fewer 
complications, and much lower cost. Indeed, what we have seen 
is a dramatic reduction in amputations, lower ER visits, lower 
rates of heart disease and other hospital treatments, and 
roughly a reduction of $5 million per year; again, a loss of 
revenue.
    Sepsis care and diabetic care are just two examples of 
dramatic improvements that can be made to both costs and 
quality simultaneously. At Intermountain, we have seen the same 
dynamic play out in well over 100 other cases with services 
ranging from managing glucose in cardiac surgery, to defining 
the optimal time to induce labor for expectant mothers.
    The magnitude of our health care value problem, and 
opportunity, can be seen in the expense data from across the 
country. Even after adjusting for differences in input costs 
like labor and building expense, similar populations of 
individuals with similar diseases cost Medicare substantially 
more than twice as much in some locations than in others. Much 
as you pointed out, Senator Whitehouse, on that graph you 
showed at the first of the meeting.
    We even see huge variation within relatively small 
geographies like within Utah, or Washington, or Minnesota, or 
New York, even within New York City. And this variation does 
not correlate to quality of care. Indeed, the reverse is true.
    Improving care value is hard work, and it takes time, and 
it takes resources. We believe that it is unrealistic to expect 
most providers to do these hard things when their reward is a 
financial penalty. For this reason, we believe that health care 
payments should move rapidly toward a payment mechanism that 
rewards value rather than volume, as all of us here have said.
    As the largest payer in the Nation by far, Medicare can 
catalyze this change. We believe bold movement toward 
comprehensive prepayment to provider groups has the potential 
to yield dramatic improvements. Really, changing health care 
delivery requires changing incentives.
    We believe that changing from fee for service to prepayment 
will be challenging, but the alternatives are much more 
difficult, and will not yield nearly the beneficial long-term 
results.
    We have submitted a white paper that outlines five 
principles that we believe would foster this type of change and 
put health care, and Medicare, on a sustainable and affordable 
trajectory. We hope you will find it useful.
    Thank you for the opportunity to be with you.
    [The prepared statement of Mr. Poulsen follows:]
                   Prepared Statement of Greg Poulsen
                                summary
    Intermountain Healthcare is an integrated not-for-profit health 
system based in Salt Lake City, UT. Intermountain operates 23 hospitals 
in Utah and Idaho; more than 160 clinics; and an insurance plan, 
SelectHealth, which covers approximately 500,000 lives in Utah. 
Intermountain's Medical Group employs approximately 800 physicians, and 
about 2,300 other physicians affiliate with Intermountain.
    Intermountain has become well-known nationally and internationally 
for identifying and consistently applying best clinical practices. Dr. 
John E. Wennberg of Dartmouth summarized the results, saying, 
``Intermountain is the best model in the country of how you can 
actually change health care for the better.'' Dartmouth has estimated 
that if healthcare were practiced nationally in the way it is provided 
at Intermountain, ``the Nation could reduce healthcare spending for 
acute and chronic illnesses by more than 40 percent.''
    Intermountain's focus is on providing high-value healthcare. To 
that end, we:

     Have developed and structured physician-led clinical 
programs so that medicine at Intermountain is practiced by 
collaborative teams, and is based on the best available data.
     Establish specific clinical improvement goals, with 
accountability for accomplishing these goals reaching all the way to 
Intermountain's governing board.
     Have developed information technology that allows us to 
track, compare, and improve outcomes--and eliminate inappropriate 
variation.
     View variation as an opportunity to improve, whether we 
find it in our clinical outcomes, or our supply chain.

    For example, by providing systematic, science-based treatment--
prompted by good clinical decision support--to patients coming to 
Intermountain's emergency rooms with deadly blood infections (sepsis), 
we achieved mortality rates that were about one-tenth of the national 
average, with dramatic cost savings. The reward? A revenue loss of more 
than $10 million per year to Intermountain physicians and hospitals.
    We know there remains much room for improvement; when we accurately 
measure our own performance, we consistently fall short. The primary 
challenge, and the main reason that more organizations don't adopt the 
high-value models discussed in this hearing, is the underlying fee-for-
service payment system that predominates in the United States. Put 
bluntly, the current payment system rewards disorganized, inefficient 
and often unnecessary care.
    We believe that healthcare should move rapidly toward a payment 
mechanism that rewards value rather than procedure volume. As the 
largest payer in the Nation--by far--Medicare can catalyze this change. 
We believe bold movement toward comprehensive prepayment to provider 
groups has the potential to yield dramatic cost and quality benefits to 
the Nation.
    Intermountain has submitted a white paper to the committee that 
discusses much more fully the key components that we believe could move 
healthcare in the United States to sustainably higher value.
                                 ______
                                 
    Intermountain Healthcare appreciates the opportunity to discuss 
improving quality and lowering the costs of health care from the 
delivery system perspective. My name is Greg Poulsen, and I am senior 
vice president and chief strategy officer of Intermountain Healthcare 
in Salt Lake City, UT. Intermountain operates 23 hospitals in Utah and 
Idaho; more than 160 clinics; and an insurance plan, SelectHealth, 
which covers approximately 500,000 lives in Utah. Intermountain's 
Medical Group employs approximately 800 physicians, and about 2,300 
other physicians affiliate with Intermountain.
    Intermountain has become well-known nationally and internationally 
for identifying best clinical practices and applying them consistently. 
Dr. John E. Wennberg of Dartmouth summarized the results, saying, 
``Intermountain is the best model in the country of how you can 
actually change health care for the better.'' Dartmouth estimated that 
if healthcare were practiced nationally in the way it is provided at 
Intermountain, ``the Nation could reduce healthcare spending for acute 
and chronic illnesses by more than 40 percent.''
    Intermountain's focus is on providing high-value healthcare. To 
that end, we:

      Have developed and structured physician-led clinical 
programs so that medicine at Intermountain is practiced by 
collaborative teams, and is based on the best available data.
      Establish specific clinical improvement goals, with 
accountability for accomplishing these goals reaching all the way to 
Intermountain's governing board.
      Have developed information technology that allows us to 
track, compare, and improve outcomes--and eliminate inappropriate 
variation.
      View variation as an opportunity to improve, whether we 
find it in our clinical outcomes, or our supply chain.

    However, we know there remains much room for improvement at 
Intermountain; the closer we look, the more we find areas where we can 
be better. The primary challenge for us, and the main reason that more 
organizations don't adopt the high-value models discussed in this 
hearing, is the underlying fee-for-service payment system that 
predominates in the United States. Intermountain and other 
organizations have shown that improving quality is compatible with 
lowering costs--indeed, high-quality care is generally less expensive 
than substandard care. Unfortunately, such high-quality, low-cost care 
generally leads to lower revenues and lower incomes for providers. Put 
bluntly, the current payment system rewards disorganized, inefficient 
and often unnecessary care.
    Experience at Intermountain and elsewhere demonstrates that 
effective, coordinated clinical practice can improve outcomes 
dramatically while reducing costs significantly. One example relates to 
providing systematic, science-based treatment to patients coming to 
emergency rooms with sepsis (which is a deadly whole-body medical 
condition usually associated with blood infections). By applying a 
carefully organized series of best practices EVERY TIME--consistency is 
the key--Intermountain's mortality rates plunged to nearly one-tenth of 
the national average (roughly 40 percent mortality nationally vs. under 
5 percent at Intermountain), and because of more rapid recoveries and 
fewer complications, costs were much lower than both national norms and 
our previous experience. The reward? A revenue loss of more than $10 
million per year to Intermountain physicians and hospitals as a direct 
result of improving quality. This is a dramatic illustration of the 
need to retool payment systems to incentivize value.
    Similar results can occur with management of chronic diseases. 
Intermountain has developed a coordinated, evidence-based approach to 
managing patients with diabetes, and it is applied across our entire 
system. The results are much better health, many fewer complications 
like heart disease and amputations, and much lower cost; my friend, Dr. 
Denis Cortese, who recently retired as the CEO of the Mayo Clinic, told 
KARE TV in Minneapolis, ``If I were ever diagnosed with diabetes, I 
would want to be treated by Intermountain Healthcare. They have the 
best outcomes in the country--and the lowest costs.'' Again, 
unfortunately, the current payment system penalizes this success: our 
much lower rate of ER visits, amputations, heart disease and other 
hospital treatments costs Intermountain providers roughly $5 million in 
revenue per year.
    Sepsis care and diabetic care are just two examples of the dramatic 
improvement that can be made to both quality and cost. At 
Intermountain, we have seen this same dynamic play out in well over 100 
other case types across the spectrum of care, from the timing of 
elective inductions of labor for pregnant women to the selection and 
administration of the most effective antibiotics. Intermountain 
develops these ``best-practice'' protocols for those procedures and 
case types that we perform most often, that are the most expensive, or 
that have the widest variation in their performance--and we do it both 
through careful analysis of actual outcomes data available through our 
electronic medical records and through review of the latest and best 
scientific evidence. At Intermountain, our clinicians are not required 
to follow the protocols absolutely. Actual practices may vary somewhat 
because of patient preferences and values or because of clinicians' 
best judgment. However, our clinicians have come to trust the data, and 
they rely on the decision support protocols as a valuable tool in the 
diagnosis and treatment of patients. And, it has been convincingly 
demonstrated that overall, both outcomes and costs improve.
    The magnitude of the problem caused by the perverse incentives in 
the fee-for-service payment system--and the opportunity--can be seen in 
the expense data from across the country; even after adjusting for 
differences in input costs--like nursing salaries and building costs--
similar populations of individuals with similar diseases cost Medicare 
much more than twice as much in some locations compared to other 
locations in the country. We even see huge variation within relatively 
small geographies (within Utah or Washington, for example). And this 
variation does not correlate to quality of care--indeed the reverse is 
frequently true. Generally speaking, people living in areas with low 
quality of care cost CMS and other payers more than those in areas 
where high-quality care is provided.
    The perversity of our current payment system is also evident in the 
fact that we now have huge regulatory requirements built to prevent 
providers from succumbing to the enticements inherent in the fee-for-
service payment system. Fraud and abuse, anti-kickback, RAC audits, re-
admission tracking and many other regulatory instruments--which are 
hugely expensive for both the Government and providers--exist primarily 
to prevent providers from following the incentive to provide 
unnecessary care.
    Improving care value is hard work, and takes time and resources. We 
believe that it is unrealistic to expect most providers to do these 
hard things when their reward is a financial penalty. For this reason, 
we believe that healthcare payment should move rapidly toward a payment 
mechanism that rewards value rather than procedure volume. As the 
largest payer in the Nation--by far--Medicare can catalyze this change. 
We believe bold movement toward comprehensive prepayment to provider 
groups has the potential to yield dramatic cost and quality benefits to 
the Nation.
    We suggest five principles to foster this change:

     First, of course, is the development of a mechanism to pay 
providers for meeting the health needs of individuals in the most 
clinically and financially efficient way possible. Various permutations 
of prepayment, coupled with effective quality and patient satisfaction 
measures are, in our view, the most effective mechanism to do this.
     Second, we believe that government should require 
results--high quality at affordable cost--rather than requiring a given 
organization structure. Intermountain is structured differently than 
Virginia Mason, which is different than the Mayo Clinic, which is 
different than Geisinger, which is different than the medical community 
of Grand Junction Colorado, and so on. And yet, all of these have 
achieved dramatically better quality at lower cost than the Nation at 
large. It is often tempting to prescribe an approach--something that 
worked somewhere else, but it is much more effective to define and 
reward the desired outcome and unleash American creativity to achieve 
it. The best model may not have been tried yet.
     Third, we believe that people using the healthcare system 
should have appropriate incentives to use the system wisely and to do 
their part in maintaining their own health. Individuals should have 
financial as well as literal skin in the game.
     Fourth, the Federal Government generally, and CMS 
specifically, have huge amounts of information that can help providers 
of care to be more effective. One of Intermountain's keys to success 
has been a very robust data base of information that helps us to see 
what works and what doesn't. CMS could assist providers that lack our 
data capabilities to achieve similar benefits.
     Fifth, and finally, there should be a substantial reward 
mechanism for providers making the major changes needed to provide 
high-value care. Specifically, organizations and localities that are 
currently high-cost should be given very strong incentives to do the 
hard work necessary to change paradigms from volume-based care to 
value-based care. This means less incentive and reward for 
organizations like Virginia Mason and Intermountain, but then, we don't 
have to make as many hard changes. We believe that the benefits of 
giving substantial incentives to higher cost places to make the needed 
but difficult changes will provide dividends to the Nation for decades 
to come.

    We are including in this submittal a much more detailed white paper 
outlining our thinking on the key components that we believe would move 
healthcare in the United States to sustainably higher value. The 
document speaks directly to Medicare, because it is the country's 
largest payer for health services, because it is directly under the 
purview of the Federal Government, and because it tends to set the 
direction for commercial payers. The ideas could be adapted to Medicaid 
and to commercial plans.
    Thank you for the opportunity to present on this important topic 
today. Questions may be directed to Intermountain's Director of Federal 
Relations, Bill Barnes at [email protected] or at 801-442-3240.
                                 ______
                                 
  Recommendations to Congress for Building Sustainable Medicare Value 
                        Intermountain Healthcare
                              introduction
    Projected expenditures in government healthcare programs are the 
largest Federal deficit issue facing this country. The imbalance 
between the number of people paying into Medicare versus recipients, as 
well as the escalating cost of care for beneficiaries, is growing in 
ways not predicted--or even imagined--by the creators of Medicare. 
There is consensus that the Medicare spending trajectory is 
unsustainable and, unless checked, will be the leading contributor to 
the deficit in the future. Real deficit reduction is virtually 
impossible in the absence of healthcare improvement. It will require 
brave leaders to take on this divisive but critical issue.
             many proposed solutions have major challenges
    Many less-than-ideal, insufficient, or politically unattractive 
alternatives to balancing the Medicare books have been proposed from 
all directions. The easiest option at the present is to ``kick the can 
down the road'' once more, opting to leave this issue out of the 
discussion entirely for the time being, but this would leave an ever-
growing problem for the next generation of American citizens and 
leaders. We firmly hope that the necessity to finally address this 
problem substantively will be acknowledged.
    Of course, taxes could be raised to cover the predicted gap. 
However, a modest change in Medicare payroll taxes would have little 
impact. Eliminating the Medicare shortfall would require that the 
Medicare tax be raised several fold, and this would be disastrous 
economically, politically, and from a fairness perspective. 
Additionally, if healthcare costs continue to grow at their current 
rate, a tax increase today might only serve as another temporary 
solution. If either ignoring the issue or raising revenue to 
unprecedented levels is not palatable, the only alternative is to 
reduce the Medicare cost trajectory.
    Medicare spending could be reduced through reducing benefits, 
rationing services based on patient criteria, or queuing patients. 
While each of these options is used in other countries, they would 
currently be politically challenging to implement here. Opponents to 
these options, including most Americans, will respond that 
beneficiaries and their physicians, not the Federal Government, should 
be making medical (often ``life or death'') decisions for seniors. So, 
while we believe that evidence should impact how care is provided (and 
the Federal Government may well play a role in disseminating this 
evidence), we believe that more dramatic intrusions into care practice 
are likely to be very controversial. Spending could also be reduced by 
increasing the Medicare eligibility age to 67 or 70. Medicare benefits 
could be means-tested or tiered, with those who have higher incomes 
being made responsible for a larger percentage of their healthcare 
costs. All of these alternatives would likely result in public outcry, 
as Medicare was not initially constructed to be a safety-net program 
and those who have paid into it would feel they were not receiving what 
they have paid for.\1\
---------------------------------------------------------------------------
    \1\ Actually, the average person pays far less into Medicare than 
s/he will receive (which is at the heart of the current problem). This 
is in large measure due to increases in both longevity and healthcare 
costs that were never anticipated by the creators of Medicare.
---------------------------------------------------------------------------
    The most straightforward approach to reducing Medicare spending is 
to force across-the-board cuts to providers, such as the 2 percent 
reductions required if the Joint Select Committee and Congress cannot 
reach another solution. Although simple to impose and seemingly 
compatible with the need to reduce the overall cost of Medicare, this 
alternative would likely result in a cascade of negative consequences. 
Some providers that currently serve large Medicare patient populations 
and are unable to reduce their costs may be unable to survive on 
decreased margins and would eventually cease to exist. Other providers 
that have mixed practices may discontinue providing services to 
Medicare beneficiaries, resulting in access issues for America's most 
vulnerable seniors (we have already seen this in some parts of the 
country). Additionally, this may lead some providers to simply shift 
costs to other payer categories, increasing commercial insurance 
premiums at a time of economic vulnerability.
    And perversely, the Nation's most efficient, value-oriented 
providers would be disproportionately impacted by these cuts, since 
they simply have less ``fat'' to cut. Furthermore, since one way to be 
successful in a world of reduced per-use payments is to increase 
utilization of profitable but questionable services, some providers may 
simply attempt to ``make it up on volume,'' which would make a major 
problem worse. Any system, good or bad, will ultimately produce exactly 
the results it incentivizes. A payment system that continues to pay 
providers on a per-use basis, albeit at a reduced rate, is likely to 
result in an increase of per-person utilization in order to spread 
significant fixed costs over a larger pool. For this reason, we do not 
believe these cuts will necessarily result in meaningful deficit 
reduction in the intermediate and long term.
                          a better opportunity
    Intermountain believes there is another option, an alternative with 
a significant upside for the Nation. This option addresses cost by 
improving clinical quality and avoiding waste. Implementation of this 
option can begin as early as 2013 through relatively simple changes to 
the current CMS payment model.
    To understand the opportunity, it is important to recognize the 
massive variation in the way healthcare is provided within the United 
States--with per-capita cost differences of more than two-to-one among 
States for both Medicare beneficiaries and the rest of the 
population.\2\ Additionally, for decades, research conducted by the 
Dartmouth Institute for Health Policy and many others has highlighted 
even greater variation in utilization and cost of healthcare services 
among smaller geographic regions within the United States.\3\ Even 
after adjusting for age, sex, ethnicity, and local price variation, 
there is more than a threefold difference in cost per beneficiary.\4\ 
Interestingly, the quality of medical care does not increase with the 
higher costs of healthcare. As shown in the following graph, States 
with higher costs of healthcare tend to have lower quality of care.
---------------------------------------------------------------------------
    \2\  Health Expenditure Data, Health Expenditures by State of 
Residence, Centers for Medicare and Medicaid Services, Office of the 
Actuary, National Health Statistics Group.
    \3\ Jonathan Skinner, Elliott Fisher, and John E. Wennberg, ``The 
Efficiency of Medicare'' in David Wise (ed.) Analyses in the Economics 
of Aging. Chicago: University of Chicago Press and NBER, 2005: 129-57.
    \4\ Jonathan Skinner, et al., A New Series of Medicare Expenditure 
Measures by Hospital Referral Region: 2003-8, 21 June 2011. The 
Dartmouth Institute for Health Policy & Clinical Practice, http://
www.dartmouthatlas.org/downloads/reports/PA_Spending_Report_0611.pdf.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Those areas with higher quality yet lower costs have accomplished 
this through providing care with greater effectiveness and consistency. 
A good example is the Dartmouth study of care provided at the end of 
life; the overtreatment associated with fragmented care (unfortunately 
all too common in the United States) results in much higher costs and 
poorer outcomes for patients.\5\
---------------------------------------------------------------------------
    \5\ John Wennberg, et al., Tracking the Care of Patients with 
Severe Chronic Illness; The Dartmouth Atlas of Healthcare 2008.
---------------------------------------------------------------------------
    Collectively, this enormous variation in virtually every type of 
care provided in the United States, and the overutilization it 
represents, has significant cost and quality implications--and provides 
an enormous opportunity for improvement in both cost and quality. For 
example, based on the most recent Medicare data available (2008), the 
average spending on the over-65 Medicare population was just over 
$9,000 per person (priced-adjusted by geography). If we could simply 
move the highest-cost States down to this national average, the country 
would save $17 billion annually (and $209 billion over 10 years) \6\; 
if overall spending approached the performance levels demonstrated by 
the most cost-effective States ($7,000 per person), savings would be 
$94 billion per year and $1.13 trillion over 10 years. Of even greater 
note, if performance approached that demonstrated by high-performing 
organizations, including Intermountain Healthcare, savings would be 
$160 billion per year, with 10-year savings of $1.9 trillion.\7\ 
Furthermore, because these savings are modeled on organizations 
performing in the current environment of perverse incentives (providers 
largely being paid for volume, rather than value), we believe the 
opportunity estimated here is likely conservative.
---------------------------------------------------------------------------
    \6\ Based on price-adjusted Medicare spending per person, with a 4 
percent growth in the aged population.
    \7\ John Wennberg, et al., An Agenda for Change: Improving Quality 
and Curbing Health Care Spending (Lebanon N.H.: Dartmouth Institute for 
Health Policy and Clinical Practice, 17 Dec. 2008).
---------------------------------------------------------------------------
    We call our proposed solution Shared Accountability. Shared 
Accountability requires partnerships and collaboration among all the 
important healthcare players: physicians, hospitals, other healthcare 
providers, and--critically--patients themselves. At the heart of the 
Shared Accountability concept is the alignment of incentives around the 
health of beneficiaries, rather than payment for the services they use. 
Shared Accountability payment models should move toward prepaid, 
outcomes-based arrangements as quickly as possible.
    We believe this solution can be practically realized, because 
history has repeatedly shown that healthcare providers are highly 
adaptable (e.g., the implementation of DRGs in 1983, the managed care 
revolution in the late 1980's, responses to even the possibility of 
reform in the first Clinton administration, alignment around EMR 
``meaningful use'' requirements, etc.). The healthcare industry has 
great capacity to learn and evolve rapidly when incentivized to do so. 
Additionally, while many components of the Patient Protection and 
Accountable Care Act stirred controversy in the provider community, 
there was widespread concurrence across the country supporting the 
concept of ``accountable care.'' Many healthcare providers throughout 
the United States now agree that changes in the delivery system are 
inevitable and necessary; the status quo is no longer a viable option. 
We need to change the regulatory and payment system to incentivize our 
intended outcomes (lower per-person expenditures and higher quality of 
care), something that across-the-board reductions in per-use payments 
will not accomplish. Only by fundamentally changing the system can we 
truly solve the Medicare deficit problem for future generations of 
Americans.
Shared Accountability: Key Principles
    Through practical experience, Intermountain and other organizations 
have discovered and demonstrated a number of key principles that can 
deliver high-quality healthcare at the lowest appropriate cost. We 
believe that if Medicare and Medicaid programs align incentives in such 
a way as to be consistent with these principles, organizations across 
the country would be able to move healthcare in the United States to a 
much more effective paradigm.
    1. Medicare (and other payers) should move from paying providers 
for volume to paying for what Americans really want: healthy 
beneficiaries. We suggest that the Federal Government should move to 
full prepaid, outcomes-based arrangements for Medicare beneficiaries as 
rapidly as possible.

    The old cliche that ``you get what you pay for'' has proven true in 
healthcare, but not in a beneficial way. For decades, American health 
providers have been paid for the volume of care they provide to their 
patients. It is not surprising, therefore, that studies have shown 
substantial overutilization in many areas and that more intensive (and 
remunerative) procedures are frequently chosen over less intensive, but 
equally effective, alternatives. In our experience, this impact is 
often subliminal: many providers don't even recognize the incentive 
directly, but the very culture of care is impacted by it. We frequently 
adopted the mentality of ``it probably won't hurt; we might as well try 
it.''
    If the fundamental Medicare payment mechanism were rebuilt around 
value--quality and cost measured at the beneficiary level--the 
beneficial impact would be enormous. And because Medicare, which is by 
far the largest healthcare purchaser in the country, tends to establish 
the payment mechanisms that others adopt, we can reasonably expect that 
these benefits would accrue to the rest of the population as well.
    These general concepts have been proposed by both Democrats and 
Republicans, and there is much agreement that greater accountability, 
especially in the payment mechanism, is essential to making fundamental 
improvement in the way care is delivered. It makes sense from both a 
free-market and a social-conscience perspective. In spite of this, 
there has been little progress in this area. Currently, Medicare Part C 
is the only full prepayment arrangement for managing the totality of 
health for Medicare beneficiaries, and less than a quarter of Medicare 
beneficiaries are enrolled in this program. Additionally, because 
Medicare Advantage is designed primarily as an insurance program, most 
plans are not highly integrated with healthcare providers; so while the 
insurer is paid in a way that discourages unnecessary utilization among 
their beneficiaries, delivery systems and providers are still generally 
paid on per-use arrangements with few value-oriented incentives.
    We believe this situation should be fundamentally changed. 
Accountability for Medicare beneficiaries should move toward prepayment 
in a deliberate but expeditious fashion. The following principles 
discuss some of the key components of such a course.

    Congressional Action: Congress should make it clear that the 
current Medicare payment trajectory will be significantly reduced and 
that providers will become accountable for the total cost of care for 
the population they serve. Prepayment for the care of ``traditional'' 
Medicare beneficiaries should be made available to willing provider 
organizations beginning in 2013.

    2. The best results come about when healthcare providers behave in 
an organized, collaborative fashion. Whenever possible, make use of 
existing healthcare infrastructure and relationships, while encouraging 
growth in beneficial relationships over time.

    Repeated studies and analyses have shown that organized care 
delivery systems can be much more effective in providing high-quality, 
efficient care than the more common fragmented amalgam of healthcare 
providers. The logic behind this is clear: A system can reduce 
duplication, coordinate the services of different specialties, provide 
the most effective diagnostics at the most effective time, and reduce 
the likelihood of conflicting treatments. It is also more able to 
identify and eliminate quality and cost problems and to take effective 
action to fix them. Systematic, coordinated care is more consistent, 
more efficient, and more attractive to patients.
    But while the benefits of systematic care are widely recognized, 
the question of how to move from our current fragmented approach to a 
coordinated system is still hotly debated. Some advocate moving 
entirely to organized systems with employed, salaried providers, while 
others advocate approaches that use independent practitioners. The 
collective experience of many high-value organizations suggests that if 
correct incentives are provided (as discussed above), many different 
organizational approaches have the potential to achieve dramatically 
improved performance. In a widely hailed article, well-known physician-
teacher-author Atul Gawande pointed out sterling performance in 
coordinated care by two diametrically different organizational 
approaches: first, the Mayo Clinic, an organization with more than a 
century of history, a deep culture, and a very cohesive corporate 
structure, and, second, the medical community in Grand Junction, CO, 
which is constituted largely of independent physicians and an 
independent hospital that got together to create a virtually integrated 
system with a common electronic medical record, changed the payment 
structure, and put a coordinated focus on value improvement.\8\
---------------------------------------------------------------------------
    \8\ Atul Gawande, ``The Cost Conundrum,'' The New Yorker (1 June 
2009).
---------------------------------------------------------------------------
    High-value organizations across the Nation have come from markedly 
different communities, history, and culture, and yet have achieved 
national recognition for both quality and cost-effectiveness. We are 
convinced that many other existing and potential organizational types 
can also achieve great improvements in value. Therefore, we believe 
that any ``reform'' program that is rigidly prescriptive about 
organizational structure will miss an opportunity to make effective use 
of organizations that already exist, many of which have the potential 
to significantly improve healthcare value if appropriately 
incentivized. Furthermore, American ingenuity may develop beneficial 
structures and approaches that have not yet been envisioned. An 
inflexible design would push many willing and engaged participants out 
of the race before they even get to the starting line. What matters 
most is that existing or future healthcare organizations, regardless of 
their configuration, be rewarded for delivering on the promise of 
improved quality and reduced costs.
    Regulations must make it safe and feasible for physicians and other 
providers to work together in ways that improve value to the community 
through the provision of optimal care. They must be able to share 
information, coordinate incentives for quality and efficiency, and 
receive payment collectively from Medicare and other payers. Many of 
today's regulations are designed to protect purchasers (the Federal 
Government in particular) from inappropriate utilization; for instance, 
extensive regulation is designed to prevent kickbacks from facilities 
to physicians for providing (potentially unnecessary) care at their 
institutions. Under a prepayment approach, however, this whole problem 
simply evaporates, since unnecessary utilization results in financial 
harm to the providers rather than to the payer (CMS in this case). 
Similarly, regulations should monitor competition among systems 
providing care, not among the individual providers within a system. 
Again, if CMS (and potentially others) prepay for all of an 
individual's care, then the costs of the individual components become 
the concern and accountability of the coordinated system itself. Only 
at the system level can care be coordinated in a way that maximizes 
value to the purchasers and, ultimately, to the community.

    Congressional Action: For organizations that accept prepayment, 
provide relief from the regulations that are designed to prevent 
overutilization. If an organization accepts prepayment, overutilization 
harms the organization rather than CMS, rendering the regulations 
unnecessary (since the organization will be motivated to police 
itself). Relief from these regulations would save a great deal of money 
for both providers and the Government and would be an attractive 
inducement to participate in prepayment.

    3. Flexibility should be allowed for organizations to develop new 
models of care that are not constrained by the walls of a hospital or 
clinic.
    Government healthcare programs have, understandably, tended to 
regulate existing structures. The unintended consequence has been to 
entrench those structures, which often hinders trial and adoption of 
new and innovative care models. Historically, payment structures have 
reinforced traditional silos of care (e.g., physician care, inpatient 
care, outpatient acute care, hospice care, homecare, etc.), an approach 
that ultimately works against the patient's best interest. If 
organizations take on prepaid, outcomes-based arrangements with 
Medicare, they should be given the freedom to coordinate care in the 
way that best meets the needs of the beneficiaries they serve. For 
instance, innovative home-based and community-based models for advanced 
illness management and end-of-life care, including those that 
incorporate telemedicine and significant care management resources 
(which under current payment mechanisms are not compensated costs), are 
frequently just what the patient and family desire. Participating 
organizations should be given the flexibility to care for patients in 
the settings and with the approaches that best meet their individual 
patients' needs.

    Congressional Action: Legislation should direct CMS to allow 
organizations that accept prepayment and accountability for the health 
of Medicare beneficiaries to deliver care outside of traditional silos. 
Legislation should also direct CMS to view results (cost, quality, and 
service) as the key performance metrics, and process measures should be 
used only when an outcome measure (result) is unavailable or inadequate 
in a given area.

    4. The patient-provider relationship should be seen as a healthcare 
partnership. Both parties must be given the tools and incentives to 
work together to efficiently maintain and improve beneficiary health.
    If either providers or Medicare beneficiaries feel they are being 
forced into a new Medicare program, even if evidence has shown such a 
program will improve quality and reduce costs, there will inevitably be 
backlash from the outset. Willingness to engage in a partnership and 
active participation of both parties will be critical. In our 
experience with innovative care models, we have seen that the majority 
of both patients and providers are agreeable to participation in 
something new when they are given the choice to do so, when the 
incentives (financial and otherwise) are aligned, and when they have 
the knowledge, skills, and tools they need to be successful. All three 
of these elements will be critical in building a viable program.
    Both providers and Medicare beneficiaries will need to initially be 
given the option to participate in the new model. Traditional Medicare 
should still be an alternative for both providers and seniors, but the 
premiums and benefits to beneficiaries and the per-use payments to 
providers in the traditional program should reflect the fact that it 
will be a less-efficient paradigm than the new model. If no alternative 
model is offered, premium, benefit, and provider payment changes are 
inevitable as a means to rein in the Federal debt; this new model 
provides an option to avoid those across-the-board changes.
    All Medicare beneficiaries opting for the new model will need to 
select a Shared Accountability Organization from which they will 
largely receive care, including a primary care provider or group of 
providers who will coordinate their care. This active and explicit 
selection process is necessary in order for Shared Accountability 
Organizations to identify the patients for whom they are accountable. 
This selection could be made easier for seniors if Medicare were to 
provide personalized information to beneficiaries about which Shared 
Accountability Organizations their existing providers participate in. 
To make this selection requirement politically palatable and to 
encourage competition among providers in an area, Medicare 
beneficiaries should be allowed to change their selection periodically 
if they are not pleased with the quality or service of the organization 
they have selected.
    All providers who opt for the new model will accept accountability 
for each beneficiary's health and expense. It is not enough for 
providers to just consent to participate in a Shared Accountability 
Organization and continue to receive per-use payments for health 
services provided. The governing and organizing body of the Shared 
Accountability Organization will need to be required to build provider 
payments that incentivize high-value care, including maintaining 
beneficiary wellness and, when necessary, efficiently returning 
Medicare patients to health. This is critically important for the 
success of the program and to separate it from insurance-oriented 
programs that have not had the ability to motivate effective health-
value improvement. So, while we don't believe the Federal Government 
should specify the details of these arrangements or the organizational 
structure, we believe it should be clear that individual providers and/
or provider organizations must have major participation in the quality 
and expense incentives.
    Similarly, while we believe individual organizations should be free 
to implement as they see fit, we believe tools for both physicians and 
beneficiaries that facilitate changing the conversations around care 
decisions will be important for successful programs. Shared Decision-
Making is a good example. In Shared Decision-Making, patients are fully 
informed of the true risks and benefits of alternative courses of care, 
so they can play an active role in selecting the best treatment options 
to meet their personal needs and values. (It is important to note that 
Shared Decision-Making tools work best when provider incentives are 
aligned around the health of beneficiaries, rather than the number and 
type of healthcare services provided, which is why both elements in 
concert need to be a part of the model.) Health literacy, price 
transparency, and other similar tools for both beneficiaries and 
providers will also likely be part of a comprehensive Shared 
Accountability model.

    Congressional Action: Beginning in 2014, Medicare beneficiaries 
should be given an incentive to enroll with a prepaid organization. 
This incentive should be small initially, but increase over the next 4 
years (e.g., those opting out should pay increasingly higher premiums 
over that time).

    5. Accurate and timely data will need to be provided and used. Data 
are necessary for both managing the health of beneficiaries across the 
healthcare continuum and for holding Shared Accountability 
Organizations responsible for beneficiary health.
    There is currently a great need for improved sharing of data and 
information in the healthcare industry. In order for this new program 
to be successful, CMS will need to provide comprehensive data to those 
providers agreeing to take on accountability for the totality of 
beneficiary health. Without accurate information, it is very difficult 
to identify whether best care is being provided, both from a quality 
and an efficiency perspective. Timely feedback is also critical. Access 
to the information must be reasonably rapid to impact care patterns. 
Meaningful, complete, and timely data must be provided to individual 
physicians and organizations that are willing to take on accountability 
for patient care and outcomes. If patients are not willing to have 
their data shared with their Shared Accountability Organization, it is 
impractical for these Shared Accountability Organizations to be held 
responsible for managing the healthcare costs and quality of these 
beneficiaries.
    Additionally, providers (physicians, hospitals, homecare agencies, 
etc.) working in collaboration in a Shared Accountability Organization 
will need to be able to share data with one another. Currently, there 
are many barriers to data-sharing that need to be addressed before any 
successful programs can be built. Providers will need to be given 
license to share information with one another when the purpose is to 
improve beneficiary health.
    Quality and performance metrics will be necessary to ensure Shared 
Accountability Organizations are not reducing healthcare costs at the 
expense of long-term outcomes (one of the major criticisms of the 
managed care movement of the 80s and 90s). Performance metrics should 
be consistent with those of other programs and payers. We are seeing a 
growing number of inconsistent (and sometimes incompatible) quality 
metrics being created by different oversight and purchaser 
organizations. Metrics need to be harmonized both in terms of what is 
measured and how success is achieved. We believe the greatest 
performance improvement will be achieved if a reasonable number of 
metrics (those validated as both actionable and important to individual 
and population health) are utilized across all government payers. The 
number of metrics required must be operationally feasible, which means 
a limited core measurement set. In order to motivate individuals and 
organizations, it is generally best to set goals upfront. Achievement 
thresholds, scientifically based on recent historical performance of 
organizations across the country, should be utilized for determining 
success within quality metrics. If goals are met, providers should 
logically be able to expect that rewards will follow. The consequences 
of achieving those goals should be clear.

    Congressional Action: Congress should designate one entity to 
develop a reasonable number of quality, service, and efficiency 
measures to reflect value provided to beneficiaries. These measures 
should be applied to all government programs (all forms of Medicare, 
Medicaid, FEHBP, CHAMPUS, etc.). This would not only reduce duplication 
and compliance costs but would also make improvement much more likely 
than in the current hodgepodge of different and occasionally 
conflicting measures.

    6. A successful program will give all participants the opportunity 
to succeed in the short-term, thereby cultivating trust and encouraging 
provider and public participation and acceptance.
    There has been an historical standoff between providers (and 
geographic regions) that have had high historical per-beneficiary 
medical expense and those that have had low medical expense. There is 
more than a two-to-one variation between high-cost and low-cost 
providers (and regions), and much energy has been wasted in attempting 
to defend (or condemn) the performance of one by the other. 
Spokespersons for the low-cost organizations have argued that they 
deserve a bigger piece of the pie, while the high-cost organizations 
argue for defending the status quo. Of course, this leads to stalemate 
and, ultimately, continuation of traditional, unsustainable, cost 
increases.
    We believe there is an approach that allows for a positive outcome 
for all participants who are willing (and able) to improve healthcare 
value, both for those who have had historically high cost and those 
with lower cost.
    We suggest that a single, affordable, nationwide, average per-
beneficiary rate be defined (lower than the current average rate). That 
national target rate would then be adjusted to reflect legitimate 
differences in the underlying cost of providing care in different 
regions and organizations (which CMS does today for geographic 
variation in wages and teaching, for example). Of course, prepayment 
amounts should appropriately reflect differences in underlying risk 
factors for the specific beneficiaries in each organization. Thus, each 
organization would have a specific target derived from the national 
target adjusted to reflect specific differences associated with the 
region, organization, and the beneficiaries they serve.
    Then, over a period of years (5 to 7 seems reasonable), payment to 
an organization would move from their current per-beneficiary total 
payment to their organization's target. If an organization is able to 
improve more rapidly than this ``glide slope,'' it can retain the 
entire difference in any given year. Of course, high-cost organizations 
and geographic regions have far more opportunity to improve than do 
low-cost organizations, so they have far more opportunity to receive 
major payments. On the other hand, they must work harder and make more 
changes in order to achieve these, and if changes are not made, they 
have a potential for significant downside. Low-cost providers, on the 
other hand, have much less opportunity to achieve large savings but are 
rewarded by not having to make as many difficult changes. (Appendix 1 
has a step-by-step description of the recommended process.)
    At the end of this period, the Federal Government would pay a 
consistent rate across the Nation (with variation only for legitimate 
input cost differences), which would be significantly lower than the 
current trend. As discussed earlier, this new, lower rate (and lower 
growth rate) could dramatically improve the Medicare unfunded shortfall 
without the need for increased payroll taxes or cuts to benefits.

    Congressional Action: Congress should designate an entity to 
establish a reasonable nationwide per-beneficiary payment and to define 
specific cost-adjustment and risk-adjustment mechanisms to reflect 
legitimate differences among regions and organizations. Congress should 
enact a program that designates movement from current total pay to this 
target; the program should allow organizations that are able to 
accelerate savings beyond this pathway to retain the additional 
savings. (Savings to the Government will be defined by the targets.) 
\9\
---------------------------------------------------------------------------
    \9\ See Appendix 1 for a more detailed description of the 
recommended process.

    7. A transitional period will be necessary.
    Some organizations are ready to accept accountability for Medicare 
beneficiaries today. However, some communities don't have any 
organization that is remotely prepared to undertake such a challenge. 
As we noted earlier, we believe that creating correct incentives will 
unleash tremendous creativity and development activity that, if 
supported by an appropriate regulatory environment, will lead to 
surprisingly rapid development of Shared Accountability Organizations. 
If these organizations are then allowed to keep a portion of the 
savings they earn (as noted in the previous section) while on the path 
to affordable care, we believe success is very likely. And for every 
year during the transition, CMS will spend less than it otherwise would 
have under the traditional system.
    This transitional period also can provide the motivation for 
providers to create the mechanisms necessary to accept shared 
accountability. Payment in a geographic area would move toward the 
target regardless of whether the providers in the area worked together 
to improve value, and CMS would withhold funds (from the fee-for-
service payments to all providers) equivalent to this amount. For 
example, if a 2 percent reduction in spending is required during a 
year, then CMS would withhold 2 percent of all fee-for-service payments 
to providers. At the end of the year, if the providers had reduced 
unnecessary utilization by at least 2 percent, with resultant savings 
for CMS of at least 2 percent, then the per-use payment withhold would 
be returned. This would allow providers who reduce unnecessary 
utilization to avoid a reduction in payment for the services actually 
rendered. Of course, if utilization is not decreased by at least 2 
percent, the withhold would be retained by CMS. In either case, CMS 
saves at least 2 percent over what it would otherwise have spent, 
either through reductions in utilization or reductions in per-use 
payments.\10\
---------------------------------------------------------------------------
    \10\ Appendix 2 suggests a legislative approach using the methods 
discussed under this item that might be useful to achieve short-term 
cost-saving while this more detailed plan is under discussion and 
development.
---------------------------------------------------------------------------
    Under this approach, providers are incentivized to reduce 
unnecessary utilization--regardless of their level of formal 
organization. However, this approach would motivate providers to work 
together (and to create Shared Accountability Organizations of one form 
or another) so that they would have much better control of their joint 
performance. Either way, CMS is guaranteed to achieve targeted savings 
and over time would move toward the target rate. Providers would either 
have to make improvements in care patterns or simply be paid decreasing 
amounts based on the old metric. In the short term, this approach would 
also allow rapid congressional action that would be more strategic and 
beneficial than simple across-the-board cuts to all Medicare providers 
(but with the same beneficial impact on the Federal budget).

    Congressional Action: For next year, implement a withhold of 2 
percent of payments for all Medicare providers across the country. If 
the providers in a given geographic region are able to reduce overall 
utilization by at least 2 percent relative to target, the withhold 
would be returned to the providers at the end of the year. If not, then 
the withhold would be retained by the Government. For future years, a 
targeted trajectory toward a national targeted per-beneficiary amount 
would be defined; this amount would be paid to organizations willing 
and able to accept prepayment. For those providers unwilling or unable 
to accept prepayment, this trajectory would be used to define a 
withhold percentage (which providers would receive if their utilization 
achieves equivalent savings).
                          concluding thoughts
    This is a pivotal moment in our Nation's history and for the path 
we must build for a sustainable future. Many important items are up for 
discussion and debate in the effort to reduce the deficit, but none is 
more critical in size or scope than healthcare spending. We believe the 
Nation needs a new approach that will incentivize spending in the right 
places and for the right things, with a promise of significant savings 
without harming beneficiaries for whom we have a mutual responsibility. 
We hope these recommendations serve to launch a new dialog, an exchange 
of ideas that is perhaps different from what has come before, and a 
discussion in which there may be a winning option for the Federal 
Government, Medicare beneficiaries, and the country as a whole.
  Appendix 1: A Step-by-Step Description of the Transition Described 
                          in Principles 6 & 7
    For the sake of clarity, we will examine the transition looking at 
two hypothetical, but representative communities: one is historically a 
high-utilizing community while the other is a low-utilizing community. 
Cost differences based on differences in input cost (e.g. wage 
differences) are adjusted. Exhibit 1 shows these communities and their 
cost to CMS on a per-beneficiary basis.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    1. Define a target level for an average, national, per-beneficiary 
expense. This should be a level that would result in a sustainable 
expense for the Federal Government into the future.
    2. Define adjustment factors that would accurately reflect 
legitimate differences in input costs of providing healthcare among 
geographic regions (similar to the adjusters to DRGs today).
    3. Define adjustment factors for medical risk (Johns Hopkins ACGs 
are an example) to reflect differences in patient populations: illness, 
age, etc.
    4. For a geographic region or a Shared Accountability Organization, 
apply the cost adjusters and the medical risk factors. This becomes the 
target for that region or organization. See Figure 2.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    5. Over a defined period of time (we will use 2013 to 2017 as an 
example), the per-beneficiary paid amount would move from the current 
expense rate to the target. Figure 3 illustrates trajectories for both 
high and low utilizing communities (or organizations).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    6. If the geographic region does not develop capabilities to accept 
prepayment, then these targets would be applied to fee-for-service 
payment (to bring spending into line with the national target). This 
could be done using a withhold approach. If at the end of the year, the 
providers had achieved savings in expenditures through utilization, 
then some or all of the withhold (and, potentially, additional funds) 
would be distributed (in the following year) to the providers. In this 
way, CMS could be reasonably assured of meeting the target level, but 
the providers could also have some control of their income by reducing 
utilization (which, in our example, would bring utilization closer to 
national norms).
    7. This same example can be used to show how an organized provider 
group would be incentivized (as opposed to a non-organized geographic 
region as discussed in the previous step). An organized group could 
simply be (pre)paid the identified amount to care for those 
beneficiaries for whom they had accountability. If they are able to 
reduce expenses below that level, they would retain all of the savings. 
If they were able, through improvements in utilization (avoiding 
overtreatment, helping patients manage chronic disease, improving 
patient safety, reducing re-admissions, etc.), to achieve costs below 
the defined rate, the providers would retain the entire difference. 
This is a clear incentive to develop an organized mechanism to accept 
accountability for care of Medicare beneficiaries and to create 
mechanisms to provide care for those beneficiaries in an effective 
manner. And, of course, the highest cost areas of the country have the 
greatest opportunity to generate savings (and, therefore, make the most 
money during the transition). Figure 4 (which applies to both 
communities and organizations) shows the opportunity for providers in 
high-utilizing areas. The shaded area shows potential opportunity, and 
this opportunity amounts to tens of billions of dollars--which should 
get the attention of providers.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    8. CMS would use consistent quality and satisfaction metrics to 
ensure that quality and efficiency were both being provided. These 
metrics would be used to generate either bonuses or penalties.
    9. While there are potentially billions of dollars available to 
providers that work hard to manage ineffective or noncontributory 
utilization and reduce unnecessary costs, the real saver is CMS (and 
ultimately, the taxpayer). Figure 5 shows the savings as the shaded 
areas, generated from both low and high utilizing areas and 
organizations, compared to the historical trend. By simply moving 
toward practice patterns already demonstrated by high-value localities 
and organizations, savings to the Government can very realistically 
approach $100 billion per year by 2017. Indeed, appropriately set 
national targets would produce savings sufficient to place Medicare on 
a sound actuarial basis. And shared accountability--with beneficial 
incentives--could create a new (and sustainable) trend for the future.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    10. In our example, by 2017, all parts of the Nation would have a 
consistent, fair, sustainable, and affordable rate for Medicare 
beneficiaries. And as a byproduct, this more effective care delivery 
would become the model for care provided to non-
Medicare consumers as well.
    Appendix 2: A Short-Term Approach to Cost Reduction for Medicare
    We recognize that the approach discussed in this paper will require 
substantial analysis and discussion, and that creating both legislation 
and subsequent regulation is likely to take some time. With this in 
mind, we also suggest a short-term solution that could be rapidly 
adopted and that incorporates some of the components discussed in this 
paper.
    If the target is a reduction in per-beneficiary expense, we believe 
the concepts described in Principle 7 will be more effective than a 
simple across-the-board cut in fee-for-service payment rates. The 
enormous and unwarranted variation in treatment volumes in the United 
States makes it clear that the most powerful way to create major cost 
savings is through elimination of ineffective and unnecessary 
utilization. Not only is overtreatment expensive; it is often risky to 
patients and frequently leads to poor medical outcomes.
    Therefore, we suggest that a target rate for per-beneficiary 
spending be set in each geographic region (based on historical 
expenditures in that region). Rather than simply lowering the fee-for-
service payment rate across the board, we instead propose that CMS 
withhold a fixed percentage of total fee-for-service payments to 
physicians, hospitals, and other Medicare providers.
    Suppose that in 2012 the initial withhold rate is 2 percent. If the 
providers in the region keep overall utilization at least 2 percent 
under the target rate, then the withhold money is returned. If the 
target utilization is not met, CMS keeps the withhold money and returns 
it to the Treasury. In either case, CMS saves at least 2 percent over 
what would otherwise have been spent. This proposal can therefore be 
scored by CBO without tenuous assumptions about behavioral responses to 
financial incentives. Indeed, there could be even greater savings (and 
shared saving with providers or consumers) if the region kept 
utilization further below the 2 percent target saving. With a little 
additional complexity, this same approach could be applied to specific 
institutions that care for large numbers of Medicare patients (rather 
than just to geographic regions).
    The key benefit to this approach is that it begins to incentivize 
providers of care to work together to reduce unnecessary utilization. 
This could effectively prepare them for the next step suggested in this 
paper: joining together to accept accountability for the health (and 
associated quality and cost) of a group of beneficiaries.
                            Useful Resources
Baicker, Katherine and Amitabh, Chandra. ``Medicare Spending, the 
    Physician Workforce, and the Quality of Health Care Received by 
    Medicare Beneficiaries.'' Health Affairs (April 2004): 184-97.
Cutler, David M. Your Money or Your Life: Strong Medicine for America's 
    Health Care System. New York: Oxford University Press, 2004.
Enthoven, Alain C. ``Shattuck Lecture: Cutting Cost Without Cutting the 
    Quality of Care.'' New England Journal of Medicine 298:22 (1 Jun 
    1978): 1229-38.
Fisher, Elliott S., David Wennberg, Therese Stukel, Daniel Gottlieb, 
    F.L. Lucas, and Etoile L. Pinder. ``The Implications of Regional 
    Variations in Medicare Spending. Part 2: Health Outcomes and 
    Satisfaction With Care.'' Annals of Internal Medicine 138:4 (18 Feb 
    2003): 288-99.
Fuchs, Victor R. ``More Variation in Use of Care, More Flat-of-the-
    Curve Medicine.'' Health Affairs (7 Oct 2004): Web Exclusive.
Goodman, D., A. Esty, E. Fisher, and C. Chang. Trends and Variation in 
    End-of-Life Care for Medicare Beneficiaries with Severe Chronic 
    Illness. A Report of the Dartmouth Atlas Project. Lebanon, N.H.: 
    Dartmouth Institute for Health Policy and Clinical Practice, 12 Apr 
    2011.
Hirth, Richard A., Michael E. Chernew, Edward Miller, A. Mark Fendrick, 
    and William G. Weissert. ``Willingness to Pay for a Quality-
    Adjusted Life Year: In Search of a Standard.'' Medical Decision 
    Making 20:3 (2000): 332-42.
Jencks, Stephen F., Edwin D. Huff, and Timothy Cuerdon. ``Change in the 
    Quality of Care Delivered to Medicare Beneficiaries, 1998-1999 to 
    2000-2001.'' JAMA 289:3 (15 Jan 2003): 305-12.
Stukel, Therese A., F. Lee Lucas, and David E. Wennberg. ``Long-term 
    Outcomes of Regional Variations in Intensity of Invasive vs. 
    Medical Management of Medicare Patients with Acute Myocardial 
    Infarction.'' JAMA 293:11 (16 Mar 2005): 1329-37.
Wennberg, J., S. Brownlee, E. Fisher, J. Skinner, and J. Weinstein. An 
    Agenda for Change: Improving Quality and Curbing Health Care 
    Spending. A Dartmouth Atlas White Paper. Lebanon, N.H.: Dartmouth 
    Institute for Health Policy and Clinical Practice, 17 Dec 2008.

    Senator Whitehouse. Thank you so much, Mr. Poulsen.
    Our final witness is Dr. Mark Fendrick, professor in the 
Department of Internal Medicine and Health Management Policy at 
the University of Michigan. He is one of three University of 
Michigan faculty that developed and named the concept ``value-
based insurance design,'' and co-founded the University of 
Michigan Center for Value-Based Insurance Design.
    He currently co-directs the Value-Based Insurance Design 
Center, which advocates for the development, implementation, 
evaluation of innovative health benefit plans. We are delighted 
to have him here.
    Thank you, Dr. Fendrick.

 STATEMENT OF A. MARK FENDRICK, PROFESSOR, M.D., DEPARTMENT OF 
   INTERNAL MEDICINE AND DEPARTMENT OF HEALTH MANAGEMENT AND 
POLICY, UNIVERSITY OF MICHIGAN, AND CO-DIRECTOR, UNIVERSITY OF 
MICHIGAN CENTER FOR VALUE-BASED INSURANCE DESIGN, ANN ARBOR, MI

    Dr. Fendrick. Good afternoon and thank you, Senator 
Whitehouse. Good afternoon and thank you, Chairman Whitehouse, 
Senator Franken, and other members of the committee.
    I am addressing you today not as a representative of the 
University of Michigan, but as a primary care physician, a 
medical educator, and a public health professional. I applaud 
you for holding this hearing because health care quality 
improvement and cost containment are among the most pressing 
issues for our national well-being and economic security.
    While there is little disagreement over the fact that there 
is enough money in the U.S. health care system, research shows 
that if we spent our medical dollars more frequently on 
services for which there is clear benefit for improving health, 
we could enhance quality and contain costs.
    Thus, instead of the focus on how much we spend, I suggest 
we shift our attention to how well we spend our health care 
dollars.
    Moving from this volume-driven to value-based system that 
the other panelists talked about requires a change in how we 
pay for care, but it also requires a change in how we engage 
consumers to seek care. All of these earlier testimonies 
focused on the critical importance of reforming care delivery 
and payment policies. Far less attention, however, has been 
directed at how we can alter patient behavior. Today I propose 
that clinically nuanced patient incentives are essential for us 
to bend the health care cost curve.
    Now most of us know that the most common approach to 
directly impact consumer behavior is cost shifting requiring 
all of us to pay more in the form of increased premiums, and 
also increased cost sharing at the point of service. Yet in 
every health plan across America, these cost sharing increases 
have been implemented in a one-size-fits-all way in that our 
patients are charged the same amount for every doctor visit, 
every diagnostic test, and every prescription drug.
    Does it make sense to you, Mr. Chairman, that my patients 
pay the same out-of-pocket to see a cardiologist after a heart 
attack as to see a dermatologist for mild acne I could barely 
see. They pay the same co-payment for a drug that could save a 
life from cancer or heart disease as a drug that will make 
toenail fungus go away or my hair grow back.
    As Americans are required to pay more and more to see all 
their clinicians and to fill all their prescription drugs, they 
use less, significantly less essential care. Realizing that 
this lack of clinical nuance was available in all the health 
plans, the private sector began to implement a concept our team 
developed known as Value-Based Insurance Design or V-BID.
    The central premise of V-BID is to reduce financial 
barriers to essential, high-value medical services. These are 
the services that I beg my patients to do such as recommended 
immunizations, preventive screenings, and critical treatments 
for chronic conditions that drive the vast majority of our 
health care spending. It must be stated clearly, though, that 
V-BID programs never determine what is covered and what is not.
    If we are serious about controlling costs and improving 
health, we must change the incentives for consumers as well as 
for the providers that we've heard very much about today.
    As a physician practicing in a medical home, I find it 
incomprehensible to realize that my patient's insurance plan 
does not offer easy access for those exact same services for 
which I am benchmarked. Does it make sense that I personally am 
offered a financial bonus to get my patient's diabetes under 
control when her benefit design makes it prohibitively 
expensive to fill her insulin prescription or afford the co-
payment for her eye exam?
    Momentum for the V-BID concept is rapidly growing in the 
private sector. Hundreds of self-insured employers, public 
organizations, unions, and insurance plans have designed and 
implemented V-BID programs. The Federal Government should not 
erect barriers to the adoption of V-BID. And maybe more 
importantly, it should encourage the expansion of V-BID 
principles into both public and private programs.
    They could do this by avoiding rigid requirements for 
essential health benefit plans. By maintaining flexibility and 
benefit designs with respect to State health exchanges, 
revising Medicare's one-size-fits-all cost sharing, and 
allowing innovation such as variable copayments in strained 
Medicaid programs. Details for these specific recommendations 
are provided in my written testimony.
    I will close by saying as a practicing clinician, I believe 
that the goal of our health care system is to produce health, 
not save money.
    I strongly concur that health care cost containment is 
absolutely critical to our Nation's fiscal health. Importantly, 
the cost containment initiatives being considered by this panel 
should not produce reductions in quality of care.
    That said, the use of these clinically nuanced incentives 
to encourage both providers and patients is an important step 
toward a more effective and efficient health system. This 
common sense, feasible approach will ultimately produce more 
health at any level health expenditure; 10 percent more the 
same, or 10 percent less. I believe this is an opportunity that 
we can't afford to miss.
    Thank you, Mr. Chairman, and I will take questions from the 
panel as well.
    [The prepared statement of Dr. Fendrick follows:]
              Prepared Statement of A. Mark Fendrick, M.D.
                                summary
    Research shows that if America spent its health care dollars on 
services with solid evidence of clinical benefit, we could 
simultaneously enhance quality and reduce costs. Thus, instead of 
focusing on how much we spend on health care, we should consider how we 
allocate our scarce health care dollars in order to maximize the amount 
of health produced for the money spent. While the critical importance 
of payment reform is well-described, far less attention has been 
directed to how we can alter patient behavior to bring about a more 
effective and efficient delivery system.&
    The most common approach to directly impact consumer behavior is 
cost shifting: requiring beneficiaries to pay more in the form of 
premiums and increased cost-sharing for clinician visits, diagnostic 
tests and prescription drugs. To date, patient cost-sharing has been 
implemented in a ``one-size-fits-all'' way, in that patients are 
charged the same amount for every doctor visit, diagnostic test, and 
prescription drug. However, increases in patient cost-sharing lead to 
decreases in the use of both non-essential and essential care. Peer-
reviewed studies show that when patients are asked to pay more for 
high-value screenings, clinician visits and potentially life-saving 
drugs, they buy significantly less.
    Realizing the lack of clinical nuance in available health plans, 
the private sector has driven the adoption of Value-Based Insurance 
Design, or V-BID, that simultaneously addresses quality improvement and 
cost containment--the two critical goals of health care reform. The 
central premise of V-BID is to reduce financial barriers to essential, 
high-value health services. A V-BID approach to benefit plans 
recognizes that different health services have different levels of 
clinical value. By reducing barriers to high-value treatments and 
discouraging low-value treatments, these plans result in better health 
at any level of health care expenditure. Studies show that when patient 
barriers are reduced, compliance goes up, and, depending on the 
intervention or service, total costs go down. If we are serious about 
``bending the cost curve'' and improving health outcomes, we must 
change the incentives for consumers as well as those for providers. Any 
effort to control costs should include clinically nuanced, not price-
driven, strategies such as V-BID.&
    V-BID is being widely implemented by health plans and employers; 
however, Federal Government programs are lagging far behind. The 
Federal Government should not erect barriers to the adoption of V-BID 
in the private market, and it should consider ways to expand V-BID in 
public programs. In particular, the Government should avoid rigid 
essential health benefit requirements that might have the unintended 
effect of prohibiting value-based principles. It should maintain 
flexibility and limit mandates in benefit designs with respect to State 
health exchanges. V-BID should be applied more broadly to include 
secondary prevention; allowing high-value secondary prevention services 
to be made available without patient cost-sharing would address the 
high costs of managing chronic disease--and could significantly impact 
aggregate medical spend. Finally, we should fix Medicare's ``one-size-
fits-all'' cost-sharing that dates back to the 1960's and encourage the 
use of V-BID principles in Medicaid plans.
    The goal of health reform should be to improve Americans' health 
and address rising costs. Approaches such as V-BID, that allow patient 
co-payments to vary based on whether an intervention is high-value or 
low-value, can help meet this goal. This is an opportunity we cannot 
miss.
                                 ______
                                 
    Good afternoon and thank you, Chairman Harkin, Ranking Member Enzi, 
and members of the committee. I am Mark Fendrick, Professor of Internal 
Medicine and Health Management & Policy at the University of Michigan. 
I am addressing you today, not as a representative of the University, 
but as a practicing primary care physician, a medical educator, and a 
public health professional. I have devoted much of the past two decades 
to studying the clinical and economic impact of health care innovation, 
and founded the University's Center for Value-Based Insurance Design in 
2005 to develop, implement and evaluate innovative health insurance 
designs to ensure efficient expenditure of health care dollars and 
maximize benefits of care.
    Mr. Chairman, I applaud you for holding this hearing on ``Improving 
Quality, Lowering Costs: The Role of Health Care Delivery System 
Reform'' because quality improvement and health care cost containment 
are among the most pressing issues for our national well-being and 
economic security. We are well aware that the United States spends far 
more per capita on health care than any other country, yet lags behind 
other nations, that spend substantially less, on key health quality 
metrics. However, research shows that if we spent our health care 
dollars wisely on services for which there is clear evidence for 
improving clinical outcomes, we could simultaneously enhance quality 
and reduce the amount we spend. Thus, instead of the unwavering focus 
on how much we spend--I suggest we shift our attention to how we spend 
our increasingly scarce health care dollars in order to maximize the 
amount of health produced for the dollar spent.
               from a volume-driven to value-based system
    Moving from a volume-driven to value-based system requires a change 
in both how we pay for care (supply side initiatives) and how we engage 
consumers to seek care (demand side initiatives). Other testimonies 
today and at earlier committee hearings have focused on the critical 
importance of reforming care delivery and payment policies. Far less 
attention has been directed to how we can alter patient behavior to 
bring about a more effective and efficient delivery system. While you 
have heard about the potential of Accountable Care Organizations, 
Patient-Centered Medical Homes, bundled payments, and other initiatives 
to influence providers, today I propose that similarly aligned patient 
incentives are essential for each of these programs to accomplish their 
objectives and for us to really ``bend the cost curve'' for health 
care.
    Over the past few decades, payers have implemented multiple 
managerial tools to constrain health care cost growth. The most common 
approach to directly impact consumer behavior is cost shifting: 
requiring beneficiaries to pay more in the form of increased premiums 
and increased cost-sharing for clinician visits, diagnostic tests and 
prescription drugs. In nearly every health plan across America, cost-
sharing has been implemented in a ``one-size-fits-all'' way, in that 
patients are charged the same amount for every doctor visit, diagnostic 
test, and prescription drug [within a specified formulary tier]. Cost-
sharing increases are similarly passed on without any regard to 
clinical nuance. Does it make sense to you, Mr. Chairman, that my 
patients pay the same co-payment to see a cardiologist after a heart 
attack as a dermatologist for mild acne, or the same co-payment for a 
drug that could save a life from cancer or heart disease as a drug that 
would make toenail fungus go away or hair grow back? In the typical $5 
generic drug tier available to most Americans, there are drugs so 
valuable I have often reached into my own pocket to help patients fill 
these prescriptions; while for the same price there are also drugs of 
such dubious safety and efficacy, I honestly would not give them to my 
dog. This ``one-size-fits-all'' system lacks any clinical nuance, and 
frankly, to me, makes no sense. Such an approach fails to acknowledge 
the well-documented differences in clinical value among medical 
interventions.
    As Americans are required to pay more to visit their clinicians and 
fill their prescriptions, a growing body of evidence demonstrates that 
increases in patient cost-sharing lead to decreases in the use of both 
non-essential and essential care. Peer-reviewed studies reveal that 
when patients are asked to pay more for high-value cancer screenings, 
clinician visits and potentially life-saving drugs, they buy 
significantly less. A noteworthy example is a New England Journal of 
Medicine study that examined the effects of increases in copayments for 
doctor visits in Medicare Advantage plans.\1\ As expected, individuals 
who were charged more to see their physician went less often; however, 
these patients were hospitalized more frequently and their total 
medical costs increased. This seemingly counterintuitive effect simply 
demonstrates that the age-old aphorism, ``penny-wise and pound-
foolish,'' applies to health care.
---------------------------------------------------------------------------
    \1\ Trivedi, A. N Engl J Med. 2010 Jan 28;362(4):320-8.
---------------------------------------------------------------------------
                  value-based insurance design [v-bid]
    Realizing the lack of clinical nuance in available health plans, 
more than a decade ago the private sector began to implement a concept 
our team developed known as Value-Based Insurance Design, or V-BID, 
that simultaneously addresses quality improvement and cost 
containment--the two critical goals of health care reform. The central 
premise of V-BID is to reduce financial barriers to essential, high-
value health services. These are the services I beg my patients to do, 
such as recommended immunizations, preventive screenings, and critical 
medications and treatments for individuals with chronic disease such as 
asthma, diabetes and mental illness.
    A V-BID approach to benefit plans recognizes that different health 
services have different levels of value. It's common sense--by reducing 
barriers to high-value treatments (through lower costs to patients) and 
discouraging low-value treatments (through higher costs to patients), 
these plans result in better health at any level of health care 
expenditure. Studies show that when patient barriers are reduced, 
compliance goes up, and, depending on the intervention or service, 
total costs go down.
    To date, most V-BID programs have focused on lowering patient costs 
for high-value services. For example, these programs make drugs and 
services for chronic conditions such as diabetes, asthma and heart 
disease that drive the vast majority of our health care spending, less 
expensive and more accessible. Though less common, some V-BID programs 
designed to discourage use of low-value services, such as unnecessary 
imaging and procedures, have also been implemented. It must be stated 
clearly that V-BID programs never determine what is covered and what is 
not. Instead of having all branded drugs cost $30 out-of-pocket for the 
patient, a 
V-BID formulary would, for example, provide certain high-value drugs 
such as statins for high cholesterol or insulin for diabetes for $10, 
with other drugs for $50. This clinically nuanced reallocation of 
services is a necessary component in order to move from a volume-driven 
to value-based system.
              improving quality and bending the cost curve
    Let me be clear, Mr. Chairman, I am not asserting that Value-Based 
Insurance Design is the solution to all of our health care system's 
problems. But, if we are serious about ``bending the health care cost 
curve'' and improving health outcomes, we must change the incentives 
for consumers as well as those for providers. Any effort to control 
costs should include clinically nuanced, not price-driven, strategies 
such as V-BID.
    Your committee is currently examining many exciting, some unproven, 
supply side health reform initiatives such as bundled payments, pay for 
performance, Patient-Centered Medical Homes, and ACOs. If these 
initiatives provide incentives to clinicians to recommend the right 
care, it is of equal importance that incentives for the patients are 
aligned with these goals as well. As a physician practicing in a 
medical home, it is incomprehensible to realize that my patient's 
insurance plan does not offer easy access for those exact services for 
which I am benchmarked. Does it make sense that I am offered a 
financial bonus to get my patient's diabetes under control when the 
benefit design makes it prohibitively expensive to fill their insulin 
prescription or provide the co-payment for their eye examination?
    I'm pleased to tell you that the intuitiveness of the V-BID concept 
is driving momentum at a rapid pace in the private sector, and we are 
truly at a ``tipping point'' in its adoption. Hundreds of private self-
insured employers, public organizations, non-profits, and insurance 
plans have designed and tested value-based programs. Just a few recent 
examples include the Connecticut State Employees' Health Enhancement 
Program, UnitedHealth Group's Diabetes Health Plan, and Blue Shield of 
California's ``Blue Groove'' Plan, each of which provide incentives for 
individuals with chronic diseases to seek the right care at the right 
time, by the right provider.
    But, despite recent advances in the Federal Employee Health 
Benefits Programs, and the requirement that private plans provide 
selected primary preventive services with no patient cost-sharing in 
Section 2713 of the Patient Protection and Affordable Care Act [PPACA], 
Federal Government programs are lagging far behind. The Federal 
Government should not erect barriers to the adoption of V-BID in the 
private market, and it should consider ways to expand V-BID among 
public programs.
    Provided below are some potential policy approaches:

    1. Avoid Rigid Essential Health Benefit Requirements: As stated 
above, there is substantial movement in the private market toward 
greater adoption of 
V-BID. Setting uniform requirements for co-pays and deductibles can 
have the unintended effect of prohibiting value-based principles. The 
potential result of strict cost-sharing requirements without clinical 
nuance would be underuse of high-value services and overuse of low-
value services. Additionally, as the Institute of Medicine (IOM) argued 
in its recent report, the essential health benefit package should 
evolve to promote more value over time.
    2. Maintain Flexibility and Limit Mandates in Benefit Designs with 
Respect to State Health Exchanges: Value-based designs generally raise 
the actuarial value of a plan, even though they may reduce health 
spending in the long run, because they lower the up-front cost and 
therefore lead to increased use of high-value services. Under PPACA, 
plans in each tier--platinum, gold, silver and bronze--have 
corresponding limits in actuarial value. Consequently, States and the 
Federal Government should take care when mandating specific benefits 
and services for plans. Too many prescribed benefits will exclude 
value-based designs, especially for the bronze and silver plans, which 
will be sold to the very low-income populations who have the potential 
to benefit most from V-BID.
    3. Expand Secondary Prevention: While the removal of patient cost-
sharing for preventive services is commendable, the V-BID premise of 
reduced patient cost-sharing for high-value, evidence-based care has 
important implications beyond preventive services as mandated in 
section 2713. The definition of preventive services in PPACA is narrow, 
focusing on primary prevention. Evidence-based services for those with 
identified chronic diseases, such as eye examinations for those with 
diabetes, behavioral therapy for individuals with depression, and long-
acting inhalers for asthma sufferers, offer as much or more value than 
those preventive services identified in section 2713. These services, 
often referred to as ``secondary prevention,'' are typically the 
foundation of quality improvement programs, such as pay for 
performance, disease management and health plan accreditation. Allowing 
high-value secondary prevention services that would be made available 
without patient cost-sharing, similar to those primary prevention 
services selected in Section 2713, would be an important extension of 
the health enhancing and cost containment goals of health reform.
    4. Fixing Medicare's ``One-Size-Fits-All'' Cost-Sharing: The 
Medicare ``one-size-fits-all'' approach to copayments dates back to its 
inception in the 1960s. The Medicare Payment Advisory Commission 
(MedPAC) has repeatedly advocated the use of V-BID as a long-run 
measure for improving quality and lowering spending. For example, in 
its 2010 Report to Congress, MedPAC wrote that V-BID could be used to 
tailor Part D cost-sharing requirements to individuals' clinical needs. 
Additionally, Senators Stabenow and Hutchison introduced a bipartisan 
bill, S. 1040, ``Seniors' Medication co-payment Reduction Act of 2009'' 
to allow a demonstration of V-BID within Medicare Advantage plans. The 
Federal Government should remove the barriers to enable the 
implementation of this innovative approach.
    5. Encouraging Innovation in Medicaid: Finally, within Medicaid we 
see States, under pressure to cut Medicaid spending, raising copayments 
on an extremely cost-sensitive population without any regard to 
clinical nuance. Research demonstrates that these co-payment increases 
will cause some patients with chronic conditions to forgo care and end 
up in an emergency room or hospital, which could result in higher 
overall spending.
                               conclusion
    It is my hope that as you consider changes to the delivery system, 
you will take the common-sense step of allowing co-payments to vary 
based on whether an intervention is high-value or low-value. As a 
practicing clinician, I believe that the goal of our health care system 
is to produce health, not to save money. That said, I strongly concur 
that health care cost containment is absolutely critical for our 
Nation's fiscal health. The goal of health reform should be to improve 
Americans' health and address rising costs by utilizing strategies that 
produce a more effective and efficient health system. Value-Based 
Insurance Design is one step toward reaching that promise. The use of 
clinically nuanced incentives (and disincentives) to encourage or 
discourage patient and provider behavior will ultimately produce more 
health at any level of health expenditure. This is an opportunity that 
we cannot miss.
    Thank you.

    Senator Whitehouse. Thank you very much. I am really 
delighted that you all are here. We sometimes seem to be 
blundering through a cloud of mixed information here in 
Washington, and we are looking at the health care system as a 
real priority.
    Admiral Mullen, who is the Head of the Joint Chiefs of 
Staff has said that our national debt is the No. 1 threat to 
our national security. And if you look at what the reason is 
for our national debt and deficit, whether you are looking at 
Congressman Ryan or President Obama, they agree that, at its 
heart, it is health care.
    Solving this is a very short jump to recognize that solving 
the health care dilemma is vitally important to America's 
national security. Through this cloud of information and 
misinformation, your organizations are showing the way, showing 
they can actually, practically be accomplished. And that what 
Dr. Kaplan described as, ``The path to better health and long-
term health care is the path to lowered cost,'' is the secret.
    We seem to have missed it. There is an awful lot of 
politics around this issue, as you may have noticed in 
Washington. But beneath all of that, there are some really 
practical solutions that you all are bringing to life. So it 
means a lot to me that you are here.
    Dr. Kaplan, in your testimony you used the phrase 
``cultural transformation,'' about what happened at Virginia 
Mason, and I can appreciate that. One of the ways that you make 
cultural transformation happen is with extraordinary leadership 
and clearly you have shown that.
    But in order to sustain cultural transformation, it helps 
to have something that has been mentioned a lot in this 
hearing, which is incentives. The incentives have to be aligned 
and pointing in the direction that you want to proceed, 
otherwise it is just going to be a lot more difficult.
    We do our best here to try to figure out ways to realign 
those incentives, one of the problems that we face is that from 
your side, you face innumerable payers. The incentive signal 
gets confused by what private insurance companies, government 
programs, and other entities that are compensating you for 
care, or how they are sending those signals.
    Out of that complex cloud of payer confusion, the sort of 
Babel of the payers, what are some of the simplest and clearest 
ways that you think we, in Congress, could have an effect? Dr. 
Kaplan first, then Mr. Poulsen.
    Dr. Kaplan. I think that the history of health care payment 
suggests that Medicare really does set the tone. It does more 
than set the tone, so that I believe it is, as Mr. Poulsen has 
suggested, that we do need to move much more expeditiously to 
modify a payment system in the public sector.
    I think that Medicare and our State governments who have 
similar economic challenges have an opportunity to, in a 
substantive way, modify payment. And we will see the commercial 
private sector move as well.
    But I think there is even a bigger issue and that has to do 
with transparency. We don't have transparency in this country. 
We don't actually--in health care. No other industry, as I see 
it, actually has the kind of veil or a camouflage between the 
buyer and seller of services that health care has today.
    So I believe that if we had transparency, the potential of 
the kind of All Care Act, as I see it, is one of the last 
chances of a market-based system that could actually lead to a 
market whether it was Medicare and Medicare Advantage as part 
of Medicare, or the commercial sector. That we would actually 
be able to understand what we are buying, what we are paying 
for it.
    Employers in this country are becoming increasingly 
noncompetitive in global economy because of, just like the 
Federal Government, line item health care costs. They don't 
even know today that their health plans are paying some 
providers more for certain services than others, actually for 
the same service with perhaps even inferior quality.
    I think we need to use the power of the public sector, 
while also, whether it is mandates or whether it is some other 
vehicle to create more transparency. That it actually allows 
there to be an understanding between the buyer and seller of 
services, people paying the bills, government, employers, and 
individuals increasingly understanding how much skin in the 
game they have, what they are paying, and what they are 
getting. And I think that will then drive a better alignment of 
incentives.
    Senator Whitehouse. And do you agree with Commissioner 
Koller that having 6 or 7 cents out of every health care dollar 
being spent on primary care is a sign of something gone wrong? 
And that we need to raise the proportion of the health care 
dollar that is spent on primary care, so that it is lower than, 
say, insurance company overhead, which is higher than 6 or 7 
cents out of every health care dollar right now?
    Dr. Kaplan. Absolutely. I think that we need to take a look 
at what we are really spending our money on in this country, 
and where we are getting the benefit or not. And I think 
primary care is one of those areas that has been undervalued 
historically in the fee for service RVU-driven relative value 
unit-driven, procedurally driven, old economy of health care, 
which happens to be alive and well today.
    We need to flip that paradigm because that is where 
tremendous value accrues prevention, partnering with 
communities, schools, churches, and senior centers. That all 
happens as an extension of, what many call, an accountable 
medical home. And I think we need to help support those, and 
then we can rationally use what is wonderful specialty care and 
procedural care system in our country. But primary care is 
disproportionately disadvantaged today.
    Senator Whitehouse. My time in this round has expired. I 
will turn to Senator Franken, but we will continue the 
discussion. Thank you.
    Senator Franken.

                      Statement of Senator Franken

    Senator Franken. Thank you, Mr. Chairman. My State of 
Minnesota has been a national leader in providing high quality, 
low-cost care, yet receives extremely low Medicare 
reimbursements. The average reimbursement for Texas, for 
example, is about 50 percent more than in Minnesota per 
Medicare patient, but we have better outcomes.
    This isn't about pitting Minnesota against Texas, but it is 
about incentivizing States to do the right things--the things 
that Minnesota has been doing and the right things that many 
hospitals have been doing.
    So the Affordable Care Act applied the Value Index to 
Physicians and Clinics only, but not hospitals. And it seems to 
me that that approach hurts hospitals that are providing high 
care, high-value care because it reduces their payments.
    Does anybody here have an opinion on that, Dr. Kaplan, Mr. 
Poulsen especially? Should hospitals be included in the value 
index?
    Mr. Poulsen. I would be happy to address that. Maybe 
slightly indirectly and suggesting we think that the answer 
ultimately should yield similar costs across the country in all 
communities for care of Medicare patients.
    Clearly, there are going to need to be adjustments for 
differences of input costs. It simply costs more to hire 
nurses, and build buildings, and maintain property and 
equipment in Manhattan than it does in Salt Lake City.
    That said, the kind of discrepancies that you have 
discussed, we think, are best eliminated in the most effective 
way possible. We think that an effective way to do that over 
time is to reward the providers, all the providers, doctors and 
hospitals, for moving in the direction of most effective and 
efficient care. That is a slightly roundabout answer to the 
question, but that would clearly be our perspective.
    Dr. Kaplan. I would agree. I think that on the one hand we 
are saying we want physicians and hospitals to work together 
seamlessly. I want our patients to get all the care they need 
and only the care they need. I want it to be given in the right 
venue. And when you create an uneven playing field between the 
physicians and their hospital partners, who should be their 
partners or colleagues, I think that it creates artificial 
barriers to accomplishing just what we are trying to do.
    I also think that it is important that we recognize that 
we, the providers--I am a physician and representing a 
hospital, a medical center--we have a big role to play. We have 
to do our part. We have to be willing to challenge our old 
assumptions, take out waste, change the way we think about our 
work, and redesign it, as I tried to describe, around patients, 
not around us.
    But to do so in an environment that has these barriers and 
these disincentives, and unevenness through the forces, it is 
hard not to think about how we are going to change our mindsets 
and the paradigms in our culture, the cultures and our 
institutions. And then to have the payment environment and 
regulatory environment conspiring against us instead of trying 
to facilitate that, I think it makes it ever more difficult.
    Senator Franken. You are talking about the culture in a 
hospital where people are working together, right. And you have 
mentioned medical homes and how they work. I know that, for 
example--and Mayo is used maybe too often as an example from 
Minnesota because other hospitals in Minnesota do a very good 
job as well--but one thing Mayo does is its doctors are 
salaried.
    Dr. Kaplan. Correct.
    Senator Franken. So they don't receive any benefit for 
ordering more procedures. It is health care and not sick care, 
is sort of the cliche, but it really is. I think I am running 
out of time, so I will go back to the Chairman, and we will 
continue this, I guess.
    Senator Whitehouse. Absolutely. Chris, one of the things 
that Dr. Kaplan mentioned in his remarks just a moment ago 
about transparency was the different payments that are made to 
different providers for the actual same service. You have 
looked into that in Rhode Island. Could you let us know what 
you found?
    Mr. Koller. As we were trying to understand why we are 
looking at 8 to 10 percent increases that do not make my 
stakeholders, the employers who are buying health insurance, 
very happy, we were struck by the significant increase that 
health plans were requesting in payments for hospitals. Price 
increases of 7 to 8 percent, outpatient price increases of 
something less than that, but high utilization increases. And 
we also heard from hospitals who said, ``We're not getting 
enough money.''
    So we used our power as the regulator to collect 
information from the insurers, actual claims information about 
what health plans get paid, and then we indexed it to Medicare 
because Medicare makes adjustments for teaching. They make 
adjustments for severity. They make adjustments for charity 
care.
    We found for inpatient medical surgical services, a subset, 
that there were some hospitals that were being paid by 
commercial insurers 80 percent of what Medicare would pay them. 
There were other hospitals that were being paid 160 percent of 
what Medicare would pay them.
    The only differences that we could attribute to that was 
their negotiating power, which leads us to believe--to Dr. 
Kaplan's remarks about transparency--that to a certain extent, 
transparency should extend to pricing, particularly for those 
hospitals which have market power. The costs rise to the level 
of revenues that are capturable.
    And it is on the basis of that, that we tried to intervene 
in classical, public tradition where there are price controls 
in place, a price authority in place. That was the basis for 
our contracting standards.
    Mr. Whitehouse. It is one of the strange things about the 
health care system that for most products, the customer 
actually brings the price with them. And the price is not found 
at the point of sale. If I go into a grocery store, then beans 
cost whatever they cost a pound, and they cost that much, and 
there is a sign that says, ``$1.99 a pound,'' and that is what 
it costs, and it does not matter who you are.
    When I show up in the health care system, what it cost me 
to have a particular procedure, has a lot to do with what kind 
of insurance I have and that the pricing is very disconnected 
depending on who you are.
    Mr. Koller. We are inconsistent in our public policy. While 
on Medicare, we have a very deliberate public setting, rate 
setting policy with specific factors that we have agreed to. 
For the other half of the market, for the 50 percent that is 
private pay, we have a completely opaque system that rewards 
market dominance.
    Mr. Whitehouse. Dr. Kaplan.
    Dr. Kaplan. I just want to say that an unintended 
consequence of the Accountable Care Act and the movement to 
promote coordinated care has led to, as I am sure you know, a 
consolidation, a serious, a significant, what I would call 
serious, consolidation in many, many markets across the 
country.
    Consolidation happens for different reasons. It may happen, 
as I believe it does in Intermountain, to create better 
coordinated, lower cost, higher value care opportunities for 
communities that otherwise would not have them.
    But in many communities and Seattle, frankly, is no 
exception, Boston is much well-known for this, consolidation is 
occurring to create even greater market power. And I think 
there have been several studies done recently which document 
this, and just as Mr. Koller references, that spread is 
enormous.
    What that does to a hospital that is focused on execution, 
and on patient experience, and on lowering costs and delivering 
better value, is it creates an uneven playing field. Now, we 
are getting paid less, so we have to manage things in a very 
different way from the neighbor down the street who is part of 
a 26-hospital system.
    That is a dangerous, unintended consequence of the 
Accountable Care Act, not legislated, but just market behavior, 
and I think we need to be vigilant as a society around this.
    Mr. Whitehouse. Commissioner Koller talked about the 
employers of Rhode Island as being his constituents. And Dr. 
Kaplan, you described some of the ways in which Virginia Mason 
has reached out to significant employers in your area. And I 
know, Mr. Poulsen, from our discussions that you try to engage 
with the business community in this area.
    It has been a bit frustrating to find a really good model 
for business engagement on this issue. We have talked to our 
chambers of commerce in Rhode Island over and over again, and 
they sort of generally get it, but they have a lot going on. 
And to focus on this is sometimes more than they can bear.
    The Leapfrog Program is very helpful. Bruce Bradley from 
the Leapfrog Program, you may remember, is a former Rhode 
Islander. We are very proud of him. But it is built on really 
big employers who have really big market share and can dictate 
behavior. And if you don't come from that environment, the 
Leapfrog model begins to slip in terms of its relevance.
    For those of us who really are believers in the potential 
of reform in our health care system to deliver better quality 
care, that lowers the cost of the system, and better 
coordinated care that serves people better, what is the best 
that you can think of for advice for how to get the business 
community involved in a helpful way and direct into that path?
    Mr. Poulsen.
    Mr. Poulsen. I think we believe that, again, incentives are 
at the heart of what has historically been wrong with the 
current health care system. So we would encourage businesses to 
become active in getting it right.
    As Dr. Kaplan said, Medicare certainly can lead the way. 
They are bigger than all of the commercial purchasers put 
together in most communities. So they can be a catalyst in 
doing this.
    Employers and employer groups, we believe, can take the 
appropriate following step which is to encourage or demand that 
they purchase in the same way. Which is, they purchase health 
through their individual employees and their families rather 
than purchasing MRIs, and surgeries, and visits. If they will 
do that, then you've got something that is truly comparable.
    One of the reasons that the current system is opaque is 
because there are thousands and thousands and thousands of 
items that nobody really understands outside of the medical 
community that are put together into an episode of care. And to 
try and tease that out is more difficult than trying to tease 
out the very detailed bill if you get your transmission 
replaced. And figure out, ``Gee, did they really do that? Is 
that really necessary? Was that helpful? Could I have gotten it 
less somewhere else?''
    But all understand when we are feeling well, when we are 
healthy, when we are treated with respect, when we have good 
outcomes, and to be able to make a comparison at that level is 
vastly easier. And therefore, vastly less likely that people 
will abuse the system and play games.
    Senator Whitehouse. Dr. Kaplan, then Dr. Fendrick, then Mr. 
Koller.
    Dr. Kaplan. I think that employers in this community need 
to ask the right questions, and I think they have been isolated 
in some ways, again, from the marketplace, whether it is 
through their health plans who would prefer they don't talk to 
the providers. Or whether it is through the brokers, and 
intermediaries that see their role as packaging things in, all 
tied up with a nice bow, and giving it to the employer and 
says, ``Your aggregate rate of increase this year will be 8 or 
12 percent.''
    Employers have to ask some questions: what am I getting? 
What am I paying for? And what are you paying the provider 
community?
    As we sit down at the table, I mean, it sounds very, almost 
naive but it is about having a simple conversation. When you 
can actually engage with a CEO or employee benefits vice 
president, you come to understand how they see quality, what 
they really want for their workforce.
    In our marketplace, collaborative work was recently 
published in ``Health Affairs'' in September of this year. The 
employer community itself gave us five product specifications: 
same day access, evidence-based medicine, 100 percent patient 
satisfaction, rapid return to full function, and affordability.
    Senator Whitehouse. The article will be placed into the 
record of this proceeding by unanimous consent.
    [The online version of this article may be found at http://
content.healthaffairs.org/content/30/9/1680.full.html].
    Dr. Kaplan. I just want to say they do have within their 
means, they have under-leveraged their power in the 
marketplace. And I think today, they are beginning to feel the 
pain enough so they are willing to take a look.
    And a company like Microsoft, 5 years, 10 years ago it was,

          ``I want to manage my health care costs, but I am 
        competing with Cisco, and Dell, and Google, and I will 
        educate my employees, but I am going to give them 100 
        percent coverage everywhere.''

    Today they are saying,

          ``We need to rethink how we manage our health care 
        expenditures and whether we really want to give 100 
        percent open access to every single physician, every 
        single hospital regardless of how much it costs.''

    We need to encourage them to be thinking differently.
    Senator Whitehouse. Dr. Fendrick.
    Dr. Fendrick. I think the reason why employers have been 
driving the value-based both supply and demand side systems is 
they finally realized that unlike any other sector, their 
business where they look at what they get for what they spend, 
for health care, they have historically looked at only what 
they spend. And they don't think that way when they buy real 
estate, or when they buy cars, or when they buy computers. And 
this idea of the product they should be buying, which is 
health, as opposed to just that number what they spend is 
really driving this transformation, at least on the demand 
side.
    Because of this narrow focus on health care costs alone, 
payers never really knew what the true value of the investment 
in health was to their firm. And now that we are starting to 
see these champion employers like Pitney Bowes, and Safeway, 
and Boeing, and Dell that understand that a healthier workforce 
doesn't just reduce the amount of patients who go to the 
hospital emergency room. But they are on disability less. They 
are on absenteeism less. And, in fact, they provide these 
nonmedical benefits like retention and morale, which are really 
hard for academics like myself to measure.
    So the more the firms are starting to include these 
benefits, they are starting to realize the true value of their 
health care investments. And given that, if things go as 
planned, by 2014, many of these firms have to make a decision 
to stay in or stay out. Most of them don't have the information 
to make an informed decision on the value of their medical 
spend. And thankfully, I think, the impetus by this committee 
and the national debate is bringing this discussion to the 
forefront.
    And the more we broaden the benefits in terms of what we 
get financially in health, in terms of the fiscal 
responsibility part, it will drive the value proposition that 
you described faster and higher.
    Senator Whitehouse. Thank you, doctor. Mr. Koller.
    Mr. Koller. Yes, I would like to maybe get your question 
around how the Federal Government could address this. A couple 
points, one, the number of people who are getting their health 
insurance through their employers is decreasing. It is a steady 
decline. It is somewhere down south of 60 now, between 55 and 
60 percent, and that number is not going back up. Once we have 
figured out--once the new players figure out how to operate 
without offering health insurance, they will continue to do so.
    From a financial standpoint, we need that remaining money 
to make this system work. So it is very important for us to 
retain that money in the system.
    In our work around developing a health insurance exchange 
in Rhode Island, we have gone and asked small businesses, 
``What do you want from an exchange? '' And the answer is very 
clear for them, and it is actually consistent with what has 
been discussed here. They want employee choice. Because it 
turns out that if you give employees the choice, they will 
accept less choice of provider for more comprehensive benefits. 
That works for a high-value delivery system. It works for 
Intermountain Healthcare. It works for Virginia Mason teamed 
with a couple of other folks. And if you give that choice to 
employees, they will make it because it is their money that 
they are bringing with that.
    So I think that the work around the design of the health 
insurance exchange will promote competition for high value. Any 
sort of individual purchase, employee purchase will make these 
guys more successful, which is exactly what we need.
    But there are barriers to that sort of employee choice. 
They exist deep within the recesses of IRS rulings around tax 
benefits, and taxation and benefits. And understanding what 
those barriers are so that we can make more people want them, 
because that is what we need, will be very important.
    Senator Whitehouse. One quick question, you talked about 
your Medicare Advanced Primary Care Practice initiative, and 
the problem you had going into it, to use your words, 
``Providers hate being jerked in different directions by the 
conflicting demands of different carriers.'' And what you were 
able to do with the Medicare Advanced Primary Care Practice was 
to get all the different payers together on the same payment 
model, so that everybody was being dragged in the same 
direction. And Medicare agreed to do that itself, did it not?
    Mr. Koller. That is right.
    Senator Whitehouse. How easy was it to get them to come in 
and participate?
    Mr. Koller. A heck of a lot easier post-Affordable Care 
Act. I think that Medicare has gotten a direction clearly from 
statute around the importance of, one, innovation. And two, 
innovation not just on their terms, but on collaborating with 
local States.
    Medicare, for all of its strength, is only 40 percent of 
the local market. Our common goal here is delivery system 
change. So what we had done specifically was to get a group of 
commercial payers together, implement changes for the patients 
at our medical home, and then take advantage of Medicare 
actually changing its rules.
    This was a real shift for Medicare. They came and said, 
``We will adopt to what's being done in the community, rather 
than the community adopting to what we are saying.'' You talk 
about a cultural shift, that is very significant.
    I think Medicare, frankly, needs to learn how to do more of 
that. They are working hard, but I think direction from 
Congress in general and the appropriate committee becomes very 
important, because the all payer alignment is critical.
    Senator Whitehouse. Good, because part of why we are here 
today is to help send those messages. And one of the messages 
that I want to send is that I very much hope that the 
Administration will take a look at the delivery system reform 
elements in the Affordable Care Act, take a look at the 
implementation of them, the innovation center, the various ways 
in which they are moving forward. And come as quickly as they 
can to a target of savings that they are willing to point 
everybody at.
    I have said over and over again that I think if President 
Kennedy had said we were going to bend the curve of space 
exploration, we never would have gotten to the moon. It was 
because he put a hard target out there that the whole Federal 
Government swung toward that target. So every chance I get, I 
urge the Administration to do that, and I will continue to 
communicate with Administrator Blum about that.
    I know he got a hard time today for the difference between 
what an actuary can compute and what an administration goal is. 
But goal setting in every activity, whether it is a corporate 
activity or a family activity, setting clear goals is how you 
make yourself accountable for progress. I think that we need to 
set a lot clearer goals that bring this together.
    I take from this hearing three strong messages. No. 1, is 
that incentives are critical, that the fee-for-service program 
sends all the wrong ones, and that we need to figure out the 
way to get off of that as quickly as possible.
    No. 2, that Medicare has a significant role in driving that 
behavior, just because of its size and scope, and because its 
billing system is the basis off of which a lot of other payors 
catch a free ride. So if you change that, they have to change 
as well as, I guess, payment reform. It boxes above its weight 
in payment reform because it is the baseline for so many other 
payers.
    And finally that there really, really is true significant 
potential here for better care to be delivered at a lower cost 
by coordinating it better and providing the right incentives.
    I sometimes bemoan how much I feel we are on the wrong 
track around here in our discussion of health care, which seems 
to be often more directed toward political benefit than to the 
realities of health care.
    I had a meeting with George Halvorson back in September. He 
is the CEO of Kaiser Permanente, which is one of the biggest 
health care systems in the country. Like I said, he is the CEO. 
This is not somebody whose opinion one should take lightly. And 
in our conversation he said this, and I had it transcribed 
because he was introducing me, and so we have a record of it.

          ``There are people right now who want to cut 
        benefits, and ration care, and have that be the avenue 
        to cost reduction in this country and that's wrong. 
        It's so wrong, it's almost criminal.''

    It's an inept way of thinking about health care. And I will 
continue to call on it, I think it is really important.
    People like me, we can stand in Congress, and talk, and 
fight to pass laws all day long. Regulators can do what 
regulators can do. But it is Virginia Mason, it is 
Intermountain, it is Gundersen Lutheran, and Geisinger, and 
Kaiser, and Mayo, and all of these organizations that are 
actually moving on this that are the force that is really going 
to be convincing to people ultimately here in Washington.
    So I thank you very much for the time and the trouble you 
took to come here. The value of your testimony is considerable. 
The value of what you have accomplished is even more so. And I 
hope that you don't mind if I continue to try to work you in 
every way possible to see to it that the message that you and 
other CEOs, and managers of health systems have your 
experience.
    The money you saved in addition to the lives you have saved 
from your sepsis changes. The money you saved as well as the 
lives you have saved from your diabetes treatment changes. The 
way you have worked with employers to bring their costs down. 
That is a message that is, frankly, not being heard in this 
town anywhere near enough. And if I can continue to drag you 
into hearings, and into forums, and to try and get you in front 
of the Administration, and to do whatever it takes to convince 
people that this is really a productive path to be going down, 
I want to do it. And if you have ideas for me, to help me do 
that, I would like to do that as well.
    It is 4 o'clock, and I want to let everybody get to their 
planes and on their way. So the hearing will stay open for 
purposes of any further comment or exhibits that anybody wants 
to add to the record for an additional week.
    The live hearing is now adjourned.
    [Additional material follows.]

                  Prepared Statement of Senator Murray

    I first want to thank both Senators Harkin and Whitehouse 
for holding and chairing for this hearing on how we can reform 
our health care delivery system.
    As I have said before, this is such an important issue--
particularly now as we continue to implement the Affordable 
Care Act law passed this past year. We all know that health 
care costs play a substantial role in the greater discussion of 
our national debt and deficit. Fortunately, this landmark 
legislation contained a variety of provisions specifically 
intended to improve the quality and delivery of care while at 
the same time working to bend the cost curve. One of these 
provisions was the establishment of the Innovation Center at 
the Centers for Medicare and Medicaid Services, an agency 
tasked with researching, developing, testing, and expanding 
innovative payment and delivery arrangements in order to see 
how we can begin to reward quality not quantity of care in our 
health care system.
    We have already begun to see industry step up to the 
challenge. In my home State of Washington, the Virginia Mason 
Health System has been working hard to develop an innovative 
delivery system that tackles both the cost and quality of 
health care for its patients. I want to especially thank Dr. 
Gary Kaplan, chairman and CEO of Virginia Mason Health System, 
for his appearance today on the panel.&
    Founded in 1920, Virginia Mason serves as an example for 
hospitals across the country on how to develop systems of 
delivery that work to decrease costs and eliminate waste, while 
simultaneously maintaining high-quality care and patient 
safety. Through their Virginia Mason Production System (VMPS) 
management system, modeled after the Toyota Production System, 
they have achieved significant cost savings. For example, 
Virginia Mason has saved $11 million in capital investment by 
using their space more efficiently and reduced their inventory 
costs by $2 million through reductions in supply chain expenses 
and other standardization efforts. At the same time they have 
worked to reduce costs, Virginia Mason has seen an increase in 
the quality of care for their patients. They have reported an 
85 percent reduction in the time it takes to report lab 
results, a decrease in the length of the course of overall care 
from 66 days to 12 days, and patient satisfaction increase to 
98 percent. Virginia Mason also saw a reduction in the 
diagnosis time for patients at their Breast Clinic from 21 days 
after their initial call to just 3 days. In fact, Virginia 
Mason found that many of these Breast Clinic patients receive 
their results on the very same day of that initial call to the 
center.
    I want to thank you again, Senators Whitehouse and Harkin 
for holding this hearing as well as Dr. Kaplan and Virginia 
Mason Health System for their continued leadership in this 
field. We need to continue to discuss ways we can reform the 
way in which we deliver health care so that we can reduce 
overall costs not only to the government and individuals, but 
also how to streamline and improve care. I look forward to 
working with my colleagues on the HELP Committee on this issue.
     Response by Jonathan Blum to Questions of Senator Whitehouse, 
                   Senator Enzi, and Senator Roberts
                    questions of senator whitehouse
    Question 1. What was the process for drafting the final rule of 
section 3022 of the Affordable Care Act (the Medicare Shared Savings 
Program for Accountable Care Organizations)? How was input from 
relevant health care stakeholders sought prior to making the draft rule 
public?
    Answer 1. This Administration and CMS have been committed to a 
transparent process for implementing the Affordable Care Act that 
includes feedback from a wide range of stakeholders. We engaged the 
public and solicited comment and ideas on the Medicare Shared Savings 
Program regulation for more than a year. On October 5, 2010, we held a 
Workshop on Issues Related to ACOs that was co-hosted by the Federal 
Trade Commission and the Department of Health and Human Services' 
Office of Inspector General. The workshop solicited public comments on 
the legal issues raised by various ACO models being considered by 
health care providers. On November 17, 2010, we published a Request for 
Information in the Federal Register to obtain comment on specific ACO 
issues, including beneficiary attribution and the special needs of 
small practices. Information from both of these activities was used to 
prepare the Shared Savings Program proposed rule.
    Published in the Federal Register on April 7, 2011, the proposed 
rule allowed for a 60-day public comment period. During that time we 
held a series of open-door forums and listening sessions to help the 
public understand what CMS proposed to do and to ensure that the public 
understood how to participate in the formal comment process.&
    We received over 1,300 comments on the proposed rule and we took 
all of these comments into consideration in drafting the final rule. 
Commenters were very helpful in suggesting ways to improve the Shared 
Savings Program policies, and we have revised many of our policies as a 
result of those comments. For example, in the proposed rule, ACOs could 
choose from two ``tracks,'' each of which has at least 1 year of two-
sided risk (the ACO would share in some portion of any savings but also 
be at risk for a portion of any spending over the target). We received 
comments that some ACOs were not ready to accept two-sided risk. In the 
final rule, ACOs may still choose from two tracks for their first 
agreement period; however, the first track does not include two-sided 
risk. This change encourages participation in the program for ACOs at 
different levels of readiness.
    In the proposed rule, we explained our plan to assess the quality 
of each ACO using 65 quality measures in 5 domains. Commenters urged us 
to focus on the most important quality measures and to reduce the 
number of quality measures. In the final rule, we streamlined the 
quality measurement to 33 measures in 4 domains to reduce the reporting 
burden and focus on the important measures.
    In the proposed rule, entities eligible to form ACOs independently 
were limited to the four groups specified by the statute as well as 
certain critical access hospitals. Commenters urged us to find a way to 
allow federally qualified health centers and rural health clinics to 
have a more significant role in ACOs, due to the importance of these 
providers in providing access to care in underserved areas. In the 
final rule, we were able to expand the entities eligible to form an ACO 
independently beyond the four groups specified in the statute and 
certain critical access hospitals to include federally qualified health 
centers and rural health clinics. We anticipate that this change will 
increase the participation in the Shared Savings Program. These are 
just a few of the changes we made to the final rule in response to 
public comment. We have greatly appreciated the robust engagement of 
the stakeholder community in the development of the Shared Savings 
Program, and we believe that engagement is reflected in the provisions 
of the final rule.

    Question 2. I have long advocated for the Administration to set a 
cost-savings goal and timeline for the delivery system reform 
provisions of the Affordable Care Act. Having specific, accountable 
goals will spur bureaucratic and regulatory efforts to implement, or 
even expand upon, the ACA's delivery system reforms. Does the 
Administration have a cost-savings goal, patient outcomes target, or 
timeline for the implementation of the ACA's delivery system reforms? 
If not, would the Administration consider setting such goals?
    Answer 2. The Administration is committed to reducing costs and 
improving care in our Nation's health care system. This goal will not 
be reached all at once or with one single solution. Instead, agencies 
across the Administration are working to achieve this goal. CMS, with 
over 100 million people enrolled in our programs, is working to change 
the current incentives in Medicare, Medicaid and the Children's Health 
Insurance Program. For example, we are introducing bundled payments so 
that provider payments are based on quality, not quantity. We are also 
launching new initiatives using Accountable Care Organizations and 
targeted initiatives for Medicare-Medicaid beneficiaries to encourage 
more coordinated care. Other partners within HHS are focused on 
prevention, outreach, and performing cutting-edge 
research.
    Achieving delivery system reform requires multiple, simultaneous 
innovations because the current system is a complex arrangement that 
delivers a wide range of health care services over many types of 
settings. Therefore, CMS has not established one goal or target for all 
of these diverse initiatives. Nevertheless, we are committed to 
ambitious goals that will revolutionize how health care is delivered in 
this country where we are able to identify and quantify such goals. For 
example, CMS set aggressive goals for the Partnership for Patients 
initiative: a 40 percent reduction in preventable hospital-acquired 
conditions and a 20 percent reduction in unnecessary re-admissions to 
hospitals by the end of 2013.&

    Question 3. Your written testimony noted that following the 
implementation of the ACA, growth in Medicare per capita spending has 
declined significantly and Medicare Part D, Medicare Advantage, and 
Medicare Part A premiums will remain nearly the same for 2012 as 2011. 
Can this stabilization in cost growth be attributed, in any part, to 
the Centers for Medicare and Medicaid Services' (CMS) implementation of 
the ACA's delivery system reforms?
    Answer 3. While the reasons behind any change in Medicare cost 
growth can be complex, it is important to note that overall Medicare 
cost growth dropped from 7.9 to 4.5 percent between 2009 and 2010; this 
slow-down occurred at the same time that many seniors with Medicare 
received cheaper prescription drugs. Many of the expected benefits and 
savings of delivery system reforms included in the Affordable Care Act 
have not yet been fully considered in this analysis. We expect that 
many of these reforms, including Accountable Care Organizations, 
bundled payment programs, and demonstrations launched by the Innovation 
Center, will save money for the health care system in the coming years.

    Question 4. Is CMS undertaking an analysis of the effect of the 
ACA's delivery systems reform provisions on health care cost growth? 
How is the agency evaluating the effect of delivery system reform 
initiatives when they are implemented (aside from pilots and 
demonstrations where evaluation is required by statute)? And against 
what goals or benchmarks?
    Answer 4. The Independent Office of the Actuary in CMS annually 
produces projections for health care spending for multiple categories 
of National Health Expenditures, including private health insurance, 
Medicare, and Medicaid. These National Health Expenditures projections 
would capture any changes in health care cost growth that result from 
delivery system reforms.
    We agree that establishing benchmarks to gauge our progress toward 
improving the health care delivery system are crucial. Each component 
of delivery system reform has different goals, targets, and benchmarks 
to measure success based on the aims of each specific initiative. For 
example, the Partnership for Patients Initiative is seeking to achieve 
two goals: reducing preventable hospital-acquired conditions by 40 
percent and reducing hospital re-admissions by 20 percent between 2010 
and 2013. These goals are associated with specific cost reduction 
estimates. Further, CMS plans to measure quality across 4 domains in 
the Medicare Shared Savings program with 33 quality measures spanning 
Patient/Caregiver Experience, Care Coordination/Patient Safety, 
Preventative Health, and At Risk Population. CMS expects ACOs to 
generate estimated savings of up to $940 million over the first 3 
performance years as they put in place the infrastructure and redesign 
processes to focus on coordinating care for populations proactively.

    Question 5. What are the Administration's priorities for ACA 
delivery system reform that have not yet been fully implemented?
    Answer 5. The Center for Medicare and Medicaid Innovation 
(Innovation Center) is beginning to test a variety of different payment 
and service delivery models to improve health care quality and lower 
cost. In addition to Accountable Care Organization models, on August 
23, 2011, the Innovation Center invited providers to apply to test and 
develop four different models on bundled payments. Depending on the 
model selected, providers have flexibility in the Bundled Payments for 
Care Improvement initiative in selecting conditions to bundle, 
developing the health care delivery structure, and determining how to 
allocate payments among participating providers. The Bundled Payments 
initiative is a key delivery system reform centered on improving 
quality and efficient care delivery, while reducing costs and 
increasing care coordination. The Innovation Center has also launched a 
Comprehensive Primary Care initiative, which is a new multi-payer 
initiative fostering collaboration between public and private health 
care payers to strengthen primary care. The CPC will test a 
comprehensive primary care model for service delivery as well as a 
payment model that includes a monthly care management fee paid to the 
selected primary care practices on behalf of their fee-for-service 
Medicare beneficiaries.
    In the last year alone, the Innovation Center has implemented a 
number of initiatives and models, including those described above as 
well as the Partnership for Patients, the State Demonstrations to 
Integrate Care for Dual Eligible Individuals, the Innovation Advisors 
Program, Federally Qualified Health Centers Advanced Primary Care 
demonstration, and the CMS Health Care Innovation Challenge. Naturally, 
as we learn from these early models and demonstrations, we will 
determine what other areas of research and innovation may be necessary 
to achieve the further reforms in our health care system.

    Question 6. At the hearing, several of the witnesses on the second 
panel recommend that CMS better coordinate its payment reform efforts 
across Medicare and Medicaid. Is CMS taking steps to align payment 
structures between Medicare and Medicaid? If so, what reforms have been 
undertaken to this end?
    Answer 6. CMS is committed to better coordinating care for 
individuals eligible for both Medicare and Medicaid. Better alignment 
of the administrative, regulatory, statutory, and financing aspects of 
Medicare and Medicaid promises to improve the quality and cost of care 
for this complex population.
    On May 11, 2011, the Medicare-Medicaid Coordination Office launched 
the Alignment Initiative, an effort to more effectively integrate 
benefits under the Medicare and Medicaid programs. The Alignment 
Initiative is not simply an effort to catalogue the differences between 
Medicare and Medicaid, nor is it an effort to make the two programs 
identical. Rather, it is an effort to advance beneficiaries' 
understanding of, interaction with, and access to seamless, high-
quality care that is as effective and efficient as possible.
    The first step in the Alignment Initiative was to identify 
opportunities to align potentially conflicting Medicare and Medicaid 
requirements. The Medicare-Medicaid Coordination Office compiled a list 
of opportunities for legislative and regulatory alignment, grouping 
ideas into the following broad categories: care coordination, fee-for-
service benefits, prescription drugs, cost-sharing, enrollment, and 
appeals. This list was published in the Federal Register on May 16, 
2011, and the public comment period closed on July 11, 2011, bringing 
in over 100 responses from beneficiaries, advocates, professional 
health associations, plans, and States. In addition, CMS conducted 
local listening sessions, which were attended by over 500 stakeholders.
    The Medicare-Medicaid Coordination Office has also partnered with 
the Innovation Center on initiatives designed to improve care for 
people eligible for Medicare and Medicaid, awarding contracts of up to 
$1 million each to 15 States to design person-centered approaches to 
coordinate care across primary, acute, behavioral health, and long-term 
supports and services for Medicare-Medicaid enrollees. CMS provided 
information to States about the ``State Demonstrations to Integrate 
Care for Dual Eligible Individuals'' via an Informational Bulletin 
(http://www.cms.gov
/CMCSBulletins/downloads/12-10-2010-Federal-Coordinated-Health-Care-
Office
.pdf) and contracts were awarded in April 2011. This initiative was 
designed to improve care and lower costs for Medicare-Medicaid 
beneficiaries and identify delivery system and payment integration 
models that can be rapidly tested and, upon successful demonstration, 
replicated in other States.
    CMS is also taking steps to test models to align payment structures 
between Medicare and Medicaid. In July 2011, the Medicare-Medicaid 
Coordination Office, in cooperation with the Innovation Center, advised 
States of a separate initiative that offers them the opportunity to 
test models to align financing between the Medicare and Medicaid 
programs while preserving or enhancing the quality of care furnished to 
Medicare-Medicaid enrollees (https://www.cms.gov/smdl/downloads/
Financial_Models_Supporting_Integrated_Care_SMD.pdf). The purpose of 
the Financial Alignment Initiative is to develop, test, and validate 
fully integrated delivery system and care coordination models that can 
be replicated in other States. The Medicare-Medicaid Coordination 
office identified a capitated model and managed fee-for-service (FFS) 
model as the choices for States interested and committed itself to 
providing technical assistance to States that meet the minimum 
standards for participation. Interested States were required to submit 
a Letter of Intent to participate by October 1, 2011, and 38 States and 
the District of Columbia expressed interest.
                       questions of senator enzi
    Question 1. What are the metrics CMS will use to evaluate new 
delivery system reform models, such as the Bundled Payments for Care 
Initiative? Specifically, how will you measure savings and quality 
improvements?
    Answer 1. We agree that establishing benchmarks to gauge our 
progress toward improving the health care delivery system is crucial. 
Each component of delivery system reform will have different goals, 
targets and benchmarks to measure success based on the aims of each 
specific initiative.
    For example, in the Bundled Payments for Care Improvement 
Initiative, CMS is allowing applicants to propose the quality measures 
by which their care will be tracked, though all applicants will be 
required to report current Hospital Inpatient Quality (IQr) measures at 
a minimum. CMS will ultimately establish a standardized set of measures 
that will be aligned to the greatest extent possible with measures in 
other CMS programs. Three of the models being tested under this 
initiative would involve a retrospective bundled payment arrangement, 
in which a target price for a defined episode of care is set based on 
applying a discount to total costs for a similar episode of care as 
determined by historical data. Each delivery system reform initiative 
will have unique metrics based on the characteristics of the model or 
initiative being tested.

    Question 2. How does CMS plan to expand implementation of 
coordinated care models that have demonstrated success at integrating 
care and lowering costs for the Medicare program? Does CMS have a 
national strategy to scale up successful models?
    Answer 2. CMS is committed to expanding successful models, and has 
a team of staff who can do outreach and spread information on new 
ideas. For example, CMS recently hosted several Advanced Development 
Learning Sessions to provide stakeholder organizations with knowledge 
about what it takes to become an Accountable Care Organization. These 
events were open to all interested provider organizations and the 
information is still available on the Innovation Center Web site. 
Similar learning opportunities will be available for each initiative 
the Innovation Center announces, and are an important component in CMS' 
efforts to educate stakeholders and spread successful delivery system 
models.

    Question 3. Mr. Blum, in the final accountable care organization 
(ACO) rule, CMS chose to exclude indirect medical education and 
disproportionate share hospital payments from the calculation of a 
provider's expenditures. However, it included additional payments made 
to rural providers in this calculation, which sets a higher bar for 
eligible providers who might want to participate or join an ACO in 
certain areas. Why did CMS elect to exclude some payments, but not 
others? Won't this make it more difficult to form ACOs in rural areas?
    Answer 3. In both the proposed and final rules, we considered 
whether to include or exclude a number of different payments from the 
ACOs benchmark and performance year expenditures. We proposed not to 
make any adjustments to either the benchmark or expenditure 
calculations; however, we were persuaded by commenters who suggested 
that not adjusting for Indirect Medical Education (IME) and 
Disproportionate Share Hospital (DSH) payments had the potential to 
create an incentive for ACOs to avoid appropriate referrals to 
particular hospitals or providers, for example teaching hospitals. We 
were concerned that this could deter the provision of care in the most 
appropriate setting. Therefore, our final rule adjusts ACO benchmark 
and performance expenditures for IME and DSH payments. Unlike IME and 
DSH adjustments, however, we do not believe other payments that are 
included in Part A and B expenditures (such as geographic payment 
adjustments or other incentive payments) would result in a significant 
incentive to steer patients away from particular hospitals or providers 
since ACOs will be compared to their own historical expenditure 
benchmark that is updated by a national factor. Since each ACO is 
compared to its own historical expenditure benchmark, we do not believe 
including such payments will make it more difficult for ACOs to form in 
rural areas or deter participation of rural providers in ACOs. 
Furthermore, we announced our advance payment initiative that will 
provide the opportunity for organizations such as rural-and/or 
physician-only ACOs with limited revenue and access to capital to 
receive a portion of their anticipated shared savings up front as a way 
to encourage the development of ACOs with the infrastructure and 
expertise to improve and deliver high-quality care while slowing the 
growth in health care spending. &

    Question 4. Mr. Blum, does CMS have plans to extend the nationwide 
Medicare Advantage star demonstration program after 2014? How many 
other demonstration programs have CMS implemented that were started on 
a nationwide basis?
    Answer 4. The Quality Bonus Payment (QBP) demonstration builds on 
the bonus payments authorized in the Affordable Care Act by providing 
stronger incentives for plans to improve their performance thereby 
accelerating quality improvements. This demonstration will begin in 
2012 and will run for 3 years through 2014. Beginning in 2015, the 
current law provisions for computing QBP will be in effect.
    CMS initiated several demonstrations on a national basis since the 
passage of the Medicare Modernization Act of 2003. These include 
demonstrations to enhance the Part D program as well as Medical Savings 
Account (MSA) products.

    Question 5. Expatriate plans provide a valuable service to 
Americans living and working overseas. Often expatriate plans have a 
much greater administrative burden for the insurance company because 
there is the need for translation services as well as making overseas 
claims and setting up overseas networks. It would serve to logic then, 
that these plans be exempted from the Minimum Loss Ratio (MLR) 
requirement.
    While most expatriate plans have received a short-term MLR waiver, 
they have not received a permanent exemption. Several companies have 
contacted the Centers for Medicare and Medicaid asking them to 
permanently extend the MLR waiver. Without an extension many of these 
companies have said they will have to move their expatriate plans 
overseas, which, according to news reports, would result in over 1,100 
U.S. jobs lost.
    This is not the time for the Federal Government to force 
regulations on businesses that result in lost jobs for Americans. What 
are the Centers for Medicare and Medicaid planning to do to ensure that 
those jobs remain in the United States? Will CMS provide for a 
permanent expatriate plan MLR exemption? If not, please elaborate.
    Answer 5. CMS does not have the statutory authority to exempt 
certain types of plans from the MLR standard. The statute, however, 
does allow CMS to take into account the special circumstances of 
smaller plans, different types of plans, and newer plans. In the 
interim final rule with comment period, CMS used this authority to 
implement a multiplier of 2.0 to the MLR numerator for expatriate 
policies; this adjustment acknowledges the higher administrative costs 
and volatility of experience in these plans when compared to typical 
insurance plans, as expatriate plans cover care in all parts of the 
world in a wide variety of health care systems.
    CMS believes that a multiplier of 2.0 is appropriate to ensure that 
issuers remain in the expatriate market. CMS also believes that the MLR 
requirements continue to allow U.S. issuers to offer expatriate 
policies to U.S. employers that want to provide their employees who are 
working abroad and their dependents with comprehensive health insurance 
that meets the unique needs of expatriates and provides benefits that 
are at a minimum comparable to the coverage of their U.S.-based 
employees.

    Question 6. Recent media reports have revealed that parents and 
other individuals who serve as caregivers for disabled individuals and 
receive Medicaid subsidies to provide care to these family members are 
classified as ``public employees'' by certain State agencies. This 
classification results in the State, in conjunction with the Service 
Employees International Union (SEIU), deducting a portion of the 
monthly Medicaid subsidy provided to these families as ``union dues.'' 
Is CMS aware of this practice? How many States operate this type or 
similar arrangements? Please describe CMS' current oversight plan for 
State Medicaid agencies to ensure that Federal dollars are being spent 
appropriately on health care services and supports.
    Answer 6. CMS takes our Medicaid oversight responsibilities 
seriously, and works to ensure that Federal dollars are spent 
appropriately through our oversight and approval of State Medicaid 
plans, waivers, estimated and actual State expenditures, and other 
State actions.&
    The 1915(c) Home and Community Based Services (HCBS) waiver program 
allows for a State to make payment to ``legally responsible'' relatives 
(spouses, parents or legal guardians of minors) under specific 
circumstances per the terms of the State's waiver application; however, 
this is an individual decision of each State. Federal Medicaid law and 
regulations impose certain restrictions or conditions that must be met 
for States to allow legally responsible relatives to be paid 
caregivers, which CMS enforces through the State Medicaid plan 
amendment and HCBS waiver approval processes.
    CMS does not keep statistics or otherwise become involved in issues 
related to the unionization of home care or other health care workers.&

    Question 7. How is the Administration planning to communicate 
actions the Secretary will take to establish and operate a Federal 
Exchange within States that do not create State exchanges? Is the 
Administration planning to initiate a rulemaking or issue guidance 
pertaining to the Secretary establishing a Federal exchange? If so, 
when does the Administration anticipate publishing a proposed rule or 
guidance?
    Answer 7. When CMS operates an Exchange in a State that does not 
establish its own, the same regulations apply as for State-based 
Exchanges. The comment period on the Exchange proposed rules closed 
October 31, 2011. CMS is currently reviewing the comments received and 
is working toward finalizing the rules in the near future. We 
understand that States and issuers are anxious for information and we 
are diligently working to provide guidance and certainty to accommodate 
these concerns; we plan to release additional guidance on various 
topics over the next several months.

    Question 8. From what accounts has the Secretary funded the 
$52,294,545 contract with Booz Allen Hamilton for ``Implementation 
Support'' and the $55,744,081 contract with CGI Federal for the 
``Federal Exchange? '' What is the anticipated value of the contract 
that the Administration is considering for the ``data services hub'' 
and from what account will that contract be funded?&
    Answer 8. The $55,744,081 million CGI Federal contract to build and 
support the information technology systems for the Federally 
Facilitated Exchange (FFE), and the tasks on the Booz Allen Hamilton 
contract for implementation support related to the FFE, were obligated 
from the Health Insurance Reform Implementation Fund and HHS General 
Departmental Management as the Booz Allen Hamilton contract supports 
other CMS initiatives in addition to the Exchanges. Approximately $30 
million is also obligated from these funds for the pending award for 
the data services hub contract.
    Question 9. Please provide a detailed accounting (e.g., 
expenditures by date, payee, purpose, etc.) of how the Administration 
has spent the $1 billion appropriated to the Health Insurance Reform 
Implementation Fund created in section 1005 of Public Law 111-152. Do 
any funds remain in this account?
    Answer 9. We recognize that the committee is interested in 
understanding these figures and will provide them to the committee 
under separate cover.
                      questions of senator roberts
    Question 1. We have been made aware that there have been over 
200,000 comments in response to the preventive regulations, these are 
the two regulations issued by HHS, Treasury, and Labor implementing 
section 2713 of the Public Health Service Act (one was issued last 
summer and one was issued in early August). Does the Administration 
plan to respond to these comments and if so when?
    Answer 1. Given the large volume of comments received, all three 
agencies are still working to review and understand them. When issued, 
the final rules will respond to the comments received.

    Question 2. Both preventive regulations were implemented through an 
interim final rule (IFR) process. Does the Administration plan to 
finalize these IFRs and if so what is the timeline for doing so?
    Answer 2. The Administration is working to meet the effective dates 
that are in the Affordable Care Act. The Administration continues to 
address comments received on IFRs and will finalize rules as 
appropriate.

    Question 3. Does the Administration plan to finalize any of the 
interim final rules that were put forth to implement the Patient 
Protection and Affordable Care Act and if so what is the timeline for 
doing so?
    Answer 3. Because of the timing of statutory deadlines, in some 
cases we issued interim final rules requesting public comment for 60 
days. We have read the public comments that have been submitted and, 
where appropriate, we adopted the comments in sub-regulatory guidance. 
The Administration continues to address comments received on IFRs and 
will finalize rules as appropriate. We also note that recent agency 
rulemaking has utilized proposed rules, solicited comments, and 
finalized rules.
                               Attachment

    Health Reform Implementation Fund--Obligations and Outlays as of
                           September 30, 2011
------------------------------------------------------------------------
            Fiscal year 2011                Through September 30, 2011
------------------------------------------------------------------------
              Organization                  Obligations       Outlays
------------------------------------------------------------------------
Internal Revenue Service................    $188,861,953    $112,093,091
Office of Personnel Management..........      $1,855,701        $435,770
Department of Labor.....................      $1,640,450      $1,640,450
Department of Health and Human Services.    $242,617,622    $116,469,245
                                         -------------------------------
  Total Health Reform Implementation        $434,975,726    $230,638,556
   Fund.................................
------------------------------------------------------------------------

  Response by Gary S. Kaplan, M.D., FACP, FACMPE, FACPE to Questions 
                         of the HELP Committee
    Question 1. Do you believe that a fee-for-service system is a 
sustainable model for delivering [financing] health care?
    Answer 1. A health care financing system based predominantly on a 
fee-for-service model is unsustainable. Three years ago, I was one of 
several chief executives of prominent health care organizations 
interviewed for a Washington Post article about the problems with our 
country's health care system. The story's headline summed up the CEOs' 
opinions: ``U.S. Not Getting What We Pay For.'' Sadly, 3 years later, 
Americans are still paying for a lot of things that aren't necessary 
when it comes to health care. In fact, of the $2.6 trillion spent on 
health care in the United States, nearly half of it is waste that adds 
no value for patients and sometimes even causes harm.
    The current health care system is fraught with waste. A fundamental 
problem with the system is how providers of health care are paid. Under 
the current fee-for-service model, there are few incentives to keep 
people out of doctors' offices and hospitals. From the health care 
provider's perspective, the more you do, the more money you make. More 
tests lead to more procedures, which can lead to mistakes, 
complications, misdiagnoses and the use of unproven therapies.
    Those picking up the skyrocketing tab include the Centers for 
Medicare and Medicaid Services (CMS), along with commercial payors and 
employers. Sadly, our patients pay the highest price as the recipients 
of substandard care.
    Although the fee-for-service model contributes to the ills of our 
current system, there may be limited small community or service-
specific subsets in which it is appropriate.
    I hope and anticipate we will get to the point where the U.S. 
health care system pays providers to rely on the very best evidence, to 
deliver the right care at the right time, and only the care that is 
required to improve health.

    Question 2. How can we shift Federal health care delivery systems 
from systems that are based on volume to systems based on value? How 
can we realign incentives for care?
    Answer 2. The shift from volume to value starts with payment 
reform. At Virginia Mason Medical Center, we're demonstrating now that 
health care organizations can provide the highest quality care to 
patients at the lowest cost. In our American culture, this is 
counterintuitive. We're conditioned to believe that to get the best 
quality you have to pay top dollar. That's not the case in health care.
    In their Health Affairs article, ``Medicare Spending, The Physician 
Workforce, and Beneficiaries' Quality of Care,'' Katherine Baicker and 
Amitabh Chandra report:

          ``The quality of care received by Medicare beneficiaries 
        varies across areas . . . States with higher Medicare spending 
        have lower-quality care. This negative relationship may be 
        driven by the use of intensive, costly care that crowds out the 
        use of more effective care'' (2004, W5-185).

    Our country can't afford health care costs to continue escalating 
at current rates. Inevitably, advances in medicine and clinical 
technology contribute to the costs of care, but these increases in cost 
can be offset significantly by eliminating variation, including 
unnecessary and excessive testing, as well as treatments that lead to 
no benefit.
    As Virginia Mason's experience demonstrates, higher quality care is 
associated with lower costs. In December 2011, Virginia Mason was named 
a Top Hospital by The Leapfrog Group for our accomplishments in the 
areas of patient safety and efficiency. Virginia Mason joined the 
University of Maryland Medical Center-Baltimore as the only two 
hospitals to receive Top Hospital distinction every year since the 
recognition program's inception in 2006. For 2011, Virginia Mason is 1 
of 52 hospitals in the country to meet Leapfrog criteria for highest 
performing urban hospitals.
    With approximately 1 percent of America's hospitals meeting 
Leapfrog's quality and resource use criteria, there is work to be done. 
An important first step is moving from a fee-for-service payment 
structure to evidence-based care financed by bundled payment, shared 
savings or provider risk-bearing approaches that require provider 
accountability for patient outcomes.
    The Physician Quality Reporting System, which was established in 
the 2006 Tax Relief and Health Care Act, was a move toward payment for 
value. This initiative benefits patients because it provides financial 
incentives to those providers who achieve the highest quality results.
    Further, the rollout of the Patient Protection and Affordable Care 
Act will include innovative payment approaches, such as bundled 
payments in preventive services, surgical episodes of care and chronic 
disease management. Additionally, delivery model innovations, such as 
Accountable Care Organizations, will promote hospital/physician 
integration and coordinated patient care across the continuum. Similar 
models, including shared risk and shared savings, would support better 
care and ultimately better population health. Further, multi-payor 
demonstration projects that don't allow cost shifting from CMS to 
commercial payors hold promise for realigning incentives for care.
    As a clinician, I know that my patients are vitally important and 
often underutilized members of their own care teams. Shared 
decisionmaking tools offer patients resources for a thorough 
understanding of treatment options. Additionally, patients who have the 
information to make informed decisions about their care are more likely 
to choose less care.
    David E. Wennberg, M.D., MPH; Amy Marr, Ph.D.; Lance Lang, M.D.; 
Stephen O'Malley, MSc; and George Bennett, Ph.D., in their article, 
``Randomized Trial of a Telephone Care-Management Strategy,'' in the 
New England Journal of Medicine, stated: ``Provider-based studies of 
preference-sensitive care have consistently shown that decision-making 
support results in fewer interventions than usual support'' (2010). Not 
only is honoring patient preference the most respectful approach to 
patient care, it may well be less expensive.
    Shifting the delivery system focus from volume to value will 
require financial incentives, such as strict adherence to quality 
standards, as a condition of payment. It will also require delivery 
system reforms and patient engagement.
    Additionally, by using efficient, integrated providers as models to 
set the rates for reasonable cost and quality standards, we all can 
benefit from the experience of those organizations demonstrating that 
higher quality care at a lower cost should be the expectation. Finally 
and most importantly, we must listen to our patients and provide all 
the care they need and only the care they need.
                               Resources
Baicker, K. & Chandra, A. (2004). Medicare Spending, The Physician 
    Workforce and Beneficiaries' Quality of Care. Health Affairs. doi: 
    10.1377/hlthaff.w4.184.
Centers for Medicare and Medicaid Services. Overview, Physician Quality 
    Reporting System. CMS.gov. Retrieved December 12, 2011, from 
    https://www.cms.gov/PQRS/.
Connelly, C. (2008). U.S. ``Not Getting What We Pay For.'' The 
    Washington Post. Retrieved Dec. 12, 2011, from http://
    www.washingtonpost.com/wp-dyn/content/article/2008/11/29/
    AR2008112902182.html.
Wennberg, D.E., Marr, A., Lang, L., O'Malley, S. & Bennett, G. (2010). 
    A randomized trial of a telephone care-management strategy. New 
    England Journal of Medicine. Retrieved Dec. 12, 2011, from http://
    www.nejm.org/doi/full/10.1056/NEJMsa0902321#t=articleDiscussion. N 
    Engl J Med 2010; 363:1245-55.
                                 ______
                                 
                          Intermountain Healthcare,
                             Salt Lake City, UT 84111-1486,
                                                  December 5, 2011.
Hon. Tom Harkin,
U.S. Senate,
731 Hart Building,
Washington, DC 20510.

    Dear Senator Harkin: Thank you for the opportunity to have Greg 
Poulsen, lntermountain Healthcare's senior vice president and chief 
strategy officer, testify before the Health, Education, Labor, and 
Pensions Committee at the November 10, 2011 hearing entitled 
``Improving Quality, Lowering Costs: The Role of Health Care Delivery 
System.'' We applaud the committee for tackling this critical issue and 
we look forward to further discussions with the committee about how 
best to transform the delivery system to incentivize high-value health 
care.
    Below are Greg Paulsen's responses to the questions posed 
subsequent to the hearing.
      Response to Questions of the HELP Committee by Greg Poulsen
    Question 1. Do you believe that a fee-for-service system is a 
sustainable model for delivering health care?
    Answer 1. No, the fee-for-service payment mechanism is at the heart 
of the problem, and any meaningful solution must reduce and ultimately 
eliminate fee-for-service in order to remove the inherent perverse 
incentives.

    Question 2. How can we shift Federal health care delivery systems 
from systems that are based on volume to systems based on value? How 
can we realign incentives for care?
    Answer 2. lntermountain Healthcare believes that additional pre-
payment mechanisms should be made available as rapidly as possible. 
Medicare Advantage exists today, but is insurance-centric rather than 
provider-centric, and generally yields a fee-for-service payment to 
providers. Providers and beneficiaries should be encouraged to move to 
pre-payment with a combination of incentives (to develop care 
management capabilities and to accept prepayment) and penalties (lower 
fee-for-service payment rates). We spell this out in greater detail in 
the white paper entitled ``Recommendations to Congress for Building 
Sustainable Medicare Value'' that we submitted with our written 
testimony.

    Question 3. Mr. Poulsen, can you discuss in more detail the 
recommendations lntermountain would make to Congress for constructing a 
sustainable health care delivery system? How can we best pay for a 
system that delivers high-quality, low-cost outcomes?
    Answer 3. lntermountain's white paper, referenced above, gives 
greater detail on this as well. The principles for ``shared 
accountability'' discuss in greater detail the way we think such an 
approach could be implemented. Ultimately, risk-adjusted per-
beneficiary prepayment is the mechanism we believe would be most 
effective. And if we use this mechanism to rationalize regional 
differences in Medicare spending (as described in Appendix 1 on page 
16), the savings could place Medicare on a solvent and sustainable 
footing for decades to come.

    Question 4. Mr. Poulsen, will Intermountain apply to be an 
accountable care organization?
    Answer 4. lntermountain is not planning to apply to be an 
accountable care organization at this time. There are significant 
structural barriers in the current ACO regulations that we view as 
highly problematic. lntermountain is concerned about issues of 
governance and compliance, and we have communicated these concerns to 
CMS. However, our greatest concern is in the area of attributing 
beneficiaries to ACOs. We believe that a small minority will be 
extremely unhappy with being attributed (without the opportunity to opt 
out, except by changing physicians--to one that doesn't participate in 
ACOs). We have learned by sad experience that a small subset of 
outspoken people can do incalculable damage--in this case, both to the 
Government program, but also to the provider involved. lntermountain 
believes that participation must be voluntary, and that beneficiaries 
should be able to opt out (albeit, as we noted before, at a higher 
cost).
    We believe, based on our experience, that the potential exists for 
outspoken hostility disproportionate to the number of people with 
negative feelings. For these reasons, lntermountain Healthcare does not 
plan to apply to be an ACO at this time.
    Please let us know if you have any additional questions and please 
know that lntermountain stands ready to assist the HELP Committee as it 
continues this vital work.

            Sincerely,
                                               Bill Barnes,
                            Director, Federal Government Relations.
                                 ______
                                 
 Responses by A. Mark Fendrick, M.D. to Questions of the HELP Committee
    Question 1. Do you believe that a fee-for-service system is a 
sustainable model for delivering health care?
    Answer 1. As we aim to create an efficient and effective system 
with a goal of optimizing health, I strongly believe that a fee-for-
service system is not a sustainable model due to its lack of clinical 
nuance in the volume-based incentives it provides to clinicians. The 
current payment model is designed to encourage overuse of both high- 
and low-value services. While I believe alternative payment mechanisms 
need be explored, it is essential that we include patient engagement 
programs whose goals are clinically aligned with payment reform 
initiatives. While new payment models are being implemented and tested, 
we should reform the existing fee-for-service system to include 
programs that provide incentives for providers--through quality 
bonuses, and patients--through value-based insurance design (V-BID) to 
increase the use of medical services for which there is strong 
evidence. For example, Medicare Advantage plans could easily replicate 
clinically nuanced incentive programs administered by private insurers 
that demonstrate improved clinical outcomes and lower disease-specific 
costs. Reforms to make Federal health spending more effective and 
efficient must not wait for dramatic changes in the payment system. 
Intuitive and feasible consumer engagement concepts such as V-BID that 
are proven successful should be included in future payment reform 
efforts.

    Question 2. How can we shift Federal health care delivery systems 
from systems that are based on volume to systems based on value? How 
can we realign incentives for care?
    Answer 2. Moving from a volume-driven to value-based system 
requires a change in both how we pay for care (supply side initiatives) 
and how we engage consumers to seek care (demand side initiatives). The 
well-documented differences in clinical value among medical 
interventions must be acknowledged. Thus, the incorporation of clinical 
nuance into supply and demand side reform initiatives is critical. To 
encourage providers to increase the use of high-value interventions 
requires a payment methodology that explicitly identifies specific 
services and quality metrics for which clinicians can be rewarded for 
their use. Consumer engagement activities, including shared 
decisionmaking programs and clinically nuanced benefit [V-BID] plans 
must be developed that encourage patients to use high-value services 
more often, and discourage those services that are harmful or 
unnecessary.

    Question 3. Dr. Fendrick, does a value-based insurance system 
penalize or disadvantage patients or beneficiaries in any way? Why 
don't more organizations adopt this system?
    Answer 3. In public and private health plans across America, 
patient cost-sharing is implemented in a ``one-size-fits-all'' way, in 
that patients are charged the same amount for every doctor visit, 
diagnostic test, and prescription drug. As Americans are required to 
pay more to visit their clinicians and fill their prescriptions, a 
growing body of evidence demonstrates that increases in patient cost-
sharing leads to decreases in the use of both non-essential and 
essential care. The resultant decreased use of potentially life-saving 
interventions leads to worse health outcomes and increased total costs 
in certain circumstances. This clinical and financial effect is 
amplified in chronic conditions that fuel a majority of medical 
expenditures.
    Instead of the status quo where plans implement indiscriminate 
cost-sharing increases without clinical nuance, V-BID programs remove 
patient barriers to high-value services to mitigate decreased use 
secondary to patient out-of-pocket costs. Nearly all V-BID programs 
implemented to date reduce co-payments for certain preventive services 
and evidence-based treatments for chronic conditions (e.g., heart 
disease, depression, diabetes, asthma, etc.) For example, the 
University of Michigan and UnitedHealth Care implemented a V-BID 
program for individuals with diabetes; General Electric is among 
several organizations that offers free tobacco cessation services, and 
provides bonuses to employees for quitting smoking. Consumer response 
has been overwhelmingly positive, including those who are not using 
subsidized services.
    The ultimate goal of V-BID is to ensure that beneficiaries get more 
of the care they need, and less of the care they don't. It must be 
noted that V-BID programs never determine what treatments are covered 
and those that are not--they simply provide a clinically nuanced 
approach to patient cost-sharing for services already offered by a 
health plan. A properly designed V-BID program will always include an 
appeals process and provide safe harbors for individuals with special 
circumstances. V-BID has received broad support from health care 
stakeholders from across the advocacy spectrum, including labor, 
employers, patient advocates, clinician groups, insurance plans, and 
policymakers on both sides of the aisle. We do not believe such a broad 
coalition would be possible if V-BID were in some way disadvantaging 
patients.
    The interest in V-BID is growing rapidly as employers and insurers 
develop 
V-BID plans and published research confirms its clinical and economic 
merits. The prestigious New England Journal of Medicine recently 
published a trial demonstrating a V-BID program for patients with a 
history of heart attacks improved outcomes at no increased cost to the 
insurer. An accompanying editorial recommended that private plans 
should quickly adopt V-BIDs. Aetna, Blue Shield of California, and 
SeeChange Health have followed suit and announced new V-BID products. 
Additionally, the Governor of Connecticut and labor leaders recently 
agreed to adopt a health plan for State employees based on V-BID 
principles. While the private market has taken the lead, we believe 
that public programs should join the private sector to encourage V-BID 
and other innovations that will result in healthier Americans and a 
more efficient delivery system. We would look forward to opportunities 
to explore these possibilities with you, as outlined in my earlier 
testimony.

    [Whereupon, at 4:03 p.m., the hearing was adjourned.]

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