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Hearing of the Senate Committee on Finance - Roundtable Discussion on Comprehensive Health Care Reform


CHAIRED BY: SENATOR MAX BAUCUS (D-MT)

WITNESSES: STUART H. ALTMAN, PH.D., SOL C., CHAIKIN PROFESSOR OF NATIONAL HEALTH POLICY, HELLERSCHOOL FOR SOCIAL POLICY AND MANAGEMENT, BRANDEIS UNIVERSITY, WALTHAM, MA; JOSEPH R. ANTOS, PH.D., WILSON H. TAYLOR SCHOLAR IN HEALTH CARE AND RETIREMENT POLICY, AMERICAN ENTERPRISE INSTITUTE, WASHINGTON, DC; KATHERINE BAICKER, PH.D., PROFESSOR OF HEALTH ECONOMICS, HARVARD SCHOOL OF PUBLIC HEALTH, CAMBRIDGE, MA; LEONARD BURMAN, PH.D., DIRECTOR, TAX POLICY CENTER, URBAN INSTITUTE, WASHINGTON, DC; ROBERT GREENSTEIN, PH.D., EXECUTIVE DIRECTOR, CENTER ON BUDGET AND POLICY PRIORITIES, WASHINGTON, DC; JONATHAN GRUBER, PH.D., PROFESSOR OF ECONOMICS, MASSACHUSETTS INSTITUTE OF TECHNOLOGY, CAMBRIDGE, MA; MICHAEL F. JACOBSON, PH.D., EXECUTIVE DIRECTOR, THE CENTER FOR SCIENCE IN THE PUBLIC INTEREST, WASHINGTON, DC; JAMES A. KLEIN, PRESIDENT, AMERICAN BENEFITS COUNCIL, WASHINGTON, DC; EDWARD KLEINBARD, CHIEF OF STAFF, JOINT COMMITTEE ON TAXATION, WASHINGTON, DC; GERALD M. SHEA, ASSISTANT TO THE PRESIDENT FOR GOVERNMENTAL AFFAIRS, AFL-CIO, WASHINGTON, DC; JOHN SHEILS, SENIOR VICE PRESIDENT, THE LEWIN GROUP, FALLS CHURCH, VA; GAIL WILENSKY, PH.D., SENIOR FELLOW, PROJECT HOPE, BETHESDA, MD; STEVEN WOJCIK, VICE PRESIDENT OF PUBLIC POLICY, NATIONAL BUSINESS GROUP ON HEALTH, WASHINGTON, D.C.

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SEN. BAUCUS: Committee will come to order. Before we get started, I want to say a few words about hearing each other out. The reason we were getting together here today, so that we can hear each other out. This works because we treat each others views with respect.

And I respect the views of everyone here including everyone in the audience. And that respect, in turn means listening and not interrupting when others are speaking. I sincerely hope that everyone here today, including our guests, especially guests from the audience, will forward these proceedings with that level of respect.

The novelist Edith Wharton said, "The only way not to think about money is to have a great deal of it." Today, we host the third of our three roundtable discussions on health care reform. This one thinks about money. With any luck, we'll have a great deal of it.

This roundtable discussion will preview many of the revenue and savings options that the committee will consider at a walkthrough session next week, heading into our markup next month. The committee has spent a good deal of time laying the groundwork for comprehensive health care reform.

We have discussed ways to reform the health care delivery system. We've talked about ways to provide health coverage to all Americans. Now it's time to think about money. It's time to talk about how to finance health care reform. I am committed to comprehensive reform of our health care system. But I also recognize that we need to pay for it.

The proposals that we have discussed in our previous roundtables and the walkthrough will not come easily. The reforms that we are planning are not cheap. But Americans already spend $4.50 million on health care every minute of the day. That's $2.5 trillion a year. Without reform, over the next 10 years, America will spend more than $33 trillion on health care.

The federal government alone spends nearly $700 billion a year on Medicare and Medicaid. And the federal government forgoes almost $300 billion a year in federal tax revenue in health care tax expenditures. The costs of health care are high for families, for businesses, for the federal government and states alike.

To make the system more affordable and provide coverage for all, we need to look at where we spend money on health care today. And when it comes to the government, we need to look at both spending and tax expenditures. The first place that we should look for savings is within health care itself.

We should reform the health care delivery system to bring higher quality and greater efficiency to all Americans. We discussed a range of reforms during the walkthrough on delivery system reform. And we will discuss additional savings options today. We should also look at the current tax treatment of health care.

I know that there is some controversy about doing so. Some do not want to modify the current unlimited exclusion for employer provided health care. And I agree that we are not going to eliminate that exclusion. But the current tax exclusion is not perfect. It is regressive. It often leads people to buy more health coverage than they need.

(Applause)

We should look at ways to modify the current tax exclusion so that it provides the right incentives. And we should look to ways to make it fairer and more equitable for everyone. We also need to look at other tax benefits for health care. Among these are tax preferred health savings accounts and the itemized deduction for health expenses.

We should try to make sure that those benefits are structured fairly and efficiently. And because of the cost of comprehensive health care reform, we will need to look at other options. Among those is the president's proposal to limit itemized deductions. All of these ideas deserve close and careful scrutiny and discussion.

Finding money that we can all agree on will not be easy. But few worthwhile things are. Achieving comprehensive health care reform is important enough that we must find a way to succeed. This roundtable will begin the discussion of how we can responsibly finance health care reform.

At next week's walkthrough, we will look at the menu of options for finance reform. We need to keep all of the options on the table. And everyone has to give and take to make this work. And I hope that my colleagues here will keep an open mind as we start this discussion.

Together, we can find the money that we will need to finance comprehensive health care reforms. It will not be easy. This roundtable is an important part of those discussions. Each of our participants today brings an important voice to the discussion. They are experts, stakeholders, or both.

And once again, forgive me for not taking the time to introduce every participant. We have however distributed a biographical sketch and a brief statement for each participant. And as we did before, we gave each participant and senator some questions that will help start a dialogue. And beyond that, I look forward to a very fruitful discussion.

So, let's get started. Let's see if we can advance the effort of comprehensive health care reform.

Senator Grassley.

MS. : (Off mike.)

(Sounds gavel)

SEN. BAUCUS: Committee will be in order. Comments from the audience are inappropriate, not of order. Any further disruption will cause the committee to recess until the police can restore order.

MS. : (Off mike.)

SEN. BAUCUS: Committee will be in order. The committee will stand in recess until the police can restore order.

(Recess)

(Sounds gavel)

SEN. BAUCUS: Committee will be in order. The committee will stand in recess until the police can restore order.

(Recess)

SEN. BAUCUS: Let me just speak a few minutes --

MR. : (Off mike.)

SEN. BAUCUS: Sorry, committee will be in order.

(Sounds gavel)

SEN. BAUCUS: We will recess until order is restored.

(Recess)

(Sounds gavel)

SEN. BAUCUS: Committee will be in recess until the police can restore order. I will ask the police please, please, come expeditiously.

(Recess)

SEN. BAUCUS: We will stand in recess until the police can restore order.

MR. : (Off mike.)

SEN. BAUCUS: And I'll say to all -- everyone who is out in the audience who may be similarly inclined, believe me, we'll hear you. We deeply respect the views of everyone here.

MR. : (Off mike.)

SEN. BAUCUS: We've got an extremely open process and I just urge everyone to respect --

(Applause)

-- the views of others but not interrupting those who are speaking. There will be plenty of time to be with everybody. This is a long haul process. And so, those of you in the audience who are not panelists and wish to be heard, I urge you just to contact my office, we'll figure out a way to talk to you. I'll figure out a way to listen to you. I'll be there, personally, to listen to you.

Senator, do you think that option rather than to interrupt and be rude to our panelists here who have come long distances and long time trying to make very thoughtful presentations to the committee. But I will meet with anybody who wants to meet -- who wants to meet with me.

Okay. Senator Grassley.

(Sounds gavel)

SEN. CHUCK E. GRASSLEY (R-IA): Right or wrong, politics often drive -- is driven by polls. Some follow them and some do not. And I'll bet if you polled every member of Congress asking them what they think would be the hardest part of health care reform, they'd probably would say something like we're doing today, trying to figure out how to pay for it.

And if I were asked, I would say something along the same lines. So here we are, Mr. Chairman, as top tax-writers of the Senate, it appears that we have our work cut out for us. I thank you for your leadership in trying to answer this tough question. To start this important process, I have some questions of my own.

What are the most appropriate financing tools available to us? Should we look at non-health related measures? Or should we stick to health-related measures consistent with our interest in looking at all of the options out there. I think it's appropriate to look at both. But I will emphasize that I do not agree with all of the non-health related measures that we will be examined.

And some of those have been put forth recently by the president. But this does not mean that we can't talk about them. Yesterday, we had a White House gathering between the White House and industry folks that would lead some to believe that we don't even need this roundtable. Our money problem is somehow solved with $2 trillion of savings from better efficiencies and so forth.

Well, I'm sure that we will be waiting for some time before this fairy dust becomes real gold. The Washington Post mentioned similar promises were made in the '70s but look at what it got us; not much. But it does emphasize -- the meeting yesterday does emphasize something that I want to emphasize.

President Obama is going to be a key player in health care reform. And I guess he has to be -- because it's his shot at leadership that's going to help us find a way to pay for health care reform. For example, Mr. Chairman, there is maybe some financing measures that the Senate may agree on.

But we found evidence that there is a great difference between the House and Senate on how you might pay for them. So it may come down to presidential leadership. The president's leadership is not only essential in finding ways to pay for health care reform, but the president's leadership is going to be key to health care reform generally.

So I thank you for this important meeting. And I look forward to our expert analysts, in helping us solve some of these problems.

SEN. BAUCUS: Thank you, senator. I'm going to just recognize senators as they seek recognition. There is no deliberate rule here today. So if any senator wants to speak or ask a question just raise your hand.

Same rules for panelists; some panelists may want to jump in and say something; maybe a panelist had thought some senator said something to deserve the response. And so feel free to, you know, take advanced opportunity to raise your hands, so I could recognize you, so you can proceed as well.

SEN. GRASSLEY: I would lead off, Mr. Chairman.

Chairman if you want me to --

SEN. BAUCUS: Go ahead.

SEN. GRASSLEY: Okay. IOS has historically granted tax-exemption to hospitals because they operated for the benefit of the poor. Over the last 40 years, with the creation of federal and state insurance programs such as Medicare and Medicaid and the growth or private insurance, it has been increasingly difficult to distinguish the activities of for-profit hospitals from the activity of charitable hospitals.

It appears that tax-exempt hospitals are more likely to provide services for those with insurance than for the poor and -- (inaudible.) Federal tax breaks for charitable hospitals amount to billions of dollars each year, and includes federal income tax exemption as well as the ability to raise capitals through tax-exempt bonding and financing of charitable hospitals.

So a series of questions along this line to Mr. Kleinbard, or Mr. Altman and -- or for Mr. Burman or Gruber or, you know, anybody that wants to jump in. If as a result of health care reform everyone has health insurance, presumably hospitals should see a steep decline or the elimination of uncompensated care. This trend appears to be occurring in Massachusetts. Giving this trend doesn't make sense to repaying tax exemption for hospitals?

MR. : We can address that too.

SEN. GRASSLEY: Well, I suppose who are -- Mr. Kleinbard would be one to address that too.

MR. : Kleinbard, okay.

SEN. GRASSLEY: Kleinbard, yeah.

MR. KLEINBARD: Senator Grassley, thank you. There is some good data that has been developed by Congressional Budget Office and by the Internal Revenue Service. Those data are consistent with the point that you made that charity care for -- within non-profit hospitals receiving tax-exempt status is only about one half of 1 percent greater as a percentage of revenues than it's the case for for-profit hospitals. It's about 4.7 (percent) as opposed to 4.2 percent.

That would suggest as well that if coverage becomes broader and broader, the number of uncompensated care cases will go down. And therefore, if you were to choose to retain a tax-exempt status for hospitals, you would need, I think, to ask the question, what is the mission that makes those tax-exempt entities unique. What -- could that mission be repurposed.

Today, the value of the tax exemption, all aspects of it, we outlined in our pamphlet, one's in the neighborhood of $6 billion a year, and so the question would be are there other charitable purposes beyond the so called "charity care case" to which the tax-exempt institutions could be directed as the condition of their tax-exempt status.

MR. : I am -- (off mike.)

SEN. GRASSLEY: Dr. Gruber, you are raising your hand there.

MR. GRUBER: Yes, first, I would like to speak the experience in Massachusetts. We are exactly right, Senator, that we have seen a large decline in our uncompensated care since our health reform law was passed. And I very much agree with the spirit of the question that this raises the -- question of the mission of nonprofit providers and what role they play.

I will say that there will be, under any reform, some remaining need for uncompensated care. About a third of uncompensated care today goes actually to the insured who don't pay their co-payments or deductibles. And the number of uninsured is not going to go to zero; it won't in Massachusetts, it won't in the nation as a whole.

So I think we can definitely move to more rationalized system, but it has to be a system that recognizes that there will be some need for uncompensated care, even in a universal coverage world.

SEN. : I want to ask so how much will nonprofits make up -- what they lose -- not compensated. Let's say we have universal coverage. You know, a third is uncompensated as you say, uninsured, and other people get paid. Assuming we had universal coverage, how much would hospitals save. I mean, Mr. Kleinbard, somebody has a figure, we have a number, and how much that would be roughly, Dr. Altman?

MR. ALTMAN: We have just hospitals --

SEN. BAUCUS: Turn your microphone on please, Doctor.

MR. ALTMAN: There is a tremendous variation in the hospitals' use of uncompensated care. Many of our public, private hospitals can have 12 (percent), 15 percent. The average is much closer to 4 percent, 3 or 4 percent. So I think the issue here is going to be, for the average community hospital, the uncompensated care, as I said, runs between 2 (percent) and 4 percent of their revenue.

But for some it could be 15 percent. So the issue is, will it be the end -- that part, it's going to be the extra payments that we now give these institutions, disproportionate share. And those, I do agree with Senator Grassley, that we need to substantially look at it. But I would argue for what it's worth that -- a community, the benefit of the hospital deduction keeps community benefits far in excess of just the issue of uncompensated care.

So just like for educational institutions, I think, it would be a mistake to totally wipe it out, but we can substantially reduce it.

SEN. BAUCUS: Dr. Burman, are you seeking recognition?

MR. BURMAN: Yes. One aspect of tax-exempt hospitals is that they qualify for tax-exempt bond financing and that's a really inefficient way to subsidize anything. A large share of the benefits actually goes to the bond holders rather than to the entities that are issuing the bond. So it certainly makes sense to bring that in or convert it into some kind of direct cash subsidy, in which case you could target it to the places that need help.

SEN. BAUCUS: Okay. Dr. Wilensky.

MS. WILENSKY: I'd like to continue the targeting notion. I agree with the comment that, no matter what expansions in coverage we have, there will be some people who will slip through the cracks and remain uninsured. The question is whether or not we would be better served to use the safety net hospitals or the public hospitals as providers of last resort.

And otherwise use more targeted subsidies, if there are specific functions, we would like hospitals to take on that the mass tax- exemption for all nonprofit hospitals seems to be reflective of an error that has long since lapsed.

SEN. BAUCUS: All right. One more on this subject, Mr. Shea, then I have a little bit of business to conduct.

MR. SHEA: Thank you, Mr. Chairman.

I think the overall point that the difference between the for- profit and non-profit hospitals has been shrinking. As Dr. Wilensky says, it was a different era, it's absolutely true. The distinction you see today, mostly or over generally, is between public hospital division of uncompensated care and private, whether they are for- profit or non-profit.

However, as others have said, this is not all the same. And there is some non-profit hospitals that still adhere to the basic mission of providing care regardless of whether or not people got the ability to pay. But let me just make a point that hasn't been made here on this, which is I -- we are concerned about the destabilizing effect of this kind of tax change at the same time as we are asking enormous change from the hospital industry in terms of restraining costs.

And I would suggest you we rather focus on that, and later, perhaps, once we have universal coverage look at this question, and not try to do the two things together --

SEN. : Why -- why not together?

MR. SHEA: Because I am afraid it really would destabilize the basic delivery system.

SEN. BAUCUS: Okay. I appreciate that. Quorum is now present. I thank my colleagues for the attendance. We will now interrupt the roundtable for a couple of pieces of committee business first. Before the committee's nomination of Neal Wolin to be deputy secretary of Treasury, I apologize to our panelists here; this is the only way we can get business done, when we have a quorum. And we have that quorum, so man on man, I am taking advantage of it.

SEN. : I so move.

SEN. BAUCUS: Entertain the motions, report the nomination. Senator Grassley so moved, and there is no further debate, all of them in favor say aye.

SEN. : Aye.

SEN. BAUCUS: -- those opposed, no. The ayes have it, and the nomination is further reported.

One further piece of business, as we've previously discussed, Senator Grassley and I would like the committee to hold closed meetings, May 14th, May 20th, and June 4th to walk through health care reform policy options. So I would entertain a motion pursuant to Senate Rule 26 paragraph 5 to close those meetings.

SEN. GRASSLEY: I move.

SEN. BAUCUS: There is no further debate, and without objection the meetings May 14, May 20, and June 4 will be closed. I thank all senators.

Senator Bingaman, I think you were seeking recognition.

SEN. JEFF BINGAMAN (D-NM): I wanted to ask one of the obvious issues we are going to have to make a decision on is whether or not to deal with this employer exclusion as a way to help pay for health care reform, whether to cap it, whether to deal with it at all, eliminate it. I would be interested in any of the witnesses giving us their views. I know this is an interesting issue.

The president has not endorsed this. I believe Senator McCain did strongly endorse it when he was seeking the presidency. And so I'm not sure where the politics of this issue are. But I would be interested in whether or not it works, Mr. Klein.

MR. KLEIN: Thank you, Senator.

And I thank the committee for the opportunity to be here on behalf of the American Benefits Council. I think that speaking on behalf of our members, we believe that the exclusion which is really an employee exclusion, is fundamentally important in order to maintain and hopefully expand upon the employer based system.

In answer to your question, I have to take issue with one point that the chairman noted in his opening remarks, in saying that this exclusion is some how regressive. In fact, I think, we would be hard pressed to find aspects of the tax code that are more progressive when one considers that it is very common practice for employees at all income levels to be afforded the same employer based coverage.

There is very interesting report that just came out from the Commonwealth Fund demonstrating that exact value of the expenditure is much greater for lower and middle income individuals than for higher income individuals. It represents a much greater percentage of their overall income.

And of course the fact that it's also exempt from social security tax means it's very important for them as well since there are fully subject to that. Two other very quick points. The other argument that is often made for limiting the exclusion is that it will have cost savings. In fact I think that employers and employees would agree that there are no more incentives that are needed to try to contain cost.

Costs are not transit -- cost of transit is not necessarily high because the plan is excessive. In fact, a plan may be more costly that does not provide its comprehensive coverage because of the age of the group of people who are covered, the geographic location where they are located that maybe a higher health care cost area and so fort.

And the last point is one of enormous complexity. Congress examined this issue, in fact, during the Tax Reform Act of 1986. And it chose not at that time, wisely chose not to cap the exclusion. What they did do in place was establish a provision called section 89 of the Internal Revenue Code.

And in order for any tax exclusion to work and to be equitable for workers, it would require an extraordinary amount of valuation to ensure that what would be reported on a person's W2 form would take into account some of these regional differences, would take into account the type of coverage they have -- single, single plus spouse, single plus spouse and children, et cetera.

And what was created in this section 89 was a very complex proposal that ultimately had to be repealed because it was unmanageable.

SEN. BAUCUS: Dr. Gruber, did you have a perspective on that?

MR. GRUBER: Yes, thank you Senator. I -- my perspective differs in some fundamental ways from the one that was just presented. Let me just point out the three reasons why I think this is problem in our tax code is the natural place to look to finance the kind of health reforms we are talking about.

The first is this is a large amount of dollars we are talking about; it's about $250 billion. As of a year or two ago making it the second largest federal health care program in America. It is regressive. The statement that was made was incorrect. It is a benefit which the higher your tax rate, the more benefit you get from this exclusion, so by definition it's regressive, and it's inefficient.

Because people are buying health care with tax subsidized dollars. They are -- when they have decision between, should I get paid in wages, or should I get health insurance that doesn't mean that much to me, I would get the health insurance because it's tax free where the wages are taxed.

In terms of the comments that were made just now about regressivity, that's just wrong. It's a highly regressive benefit. And in terms of complexity, we have to remember the world's very different now than it was; the section 89 experience was a bit of fiasco in many ways. We have to remember the fundamental difference with the world today, which is now every employer who is self-insured has to have a COBRA benefit that they report.

What that means is that, for an employer to report their benefit, for tax purposes, if they are insured they get a bill that they can report. If they are self-insured they have a COBRA premium that they already by law, have to calculate that they can report.

So the fundamental problem that bogged this down in 1986, which was calculating premiums for self-insured employers is not a problem anymore. And so administratively, there is not a major problem here. This is very doable. It is exactly the right place to go to finance health care reform. It's really -- it's the win-win solution. We both make our health care system work better and we raise the money we need to cover the uninsured.

SEN. BAUCUS: It is a big subject. I've said to seek recognition. I'd like to stay on this subject right away and explore it. And I see all raise your hands, we will get to you. But I see senators seeking recognition to.

Senator Stabenow, you are first.

SEN. DEBBIE A. STABENOW (D-MI): Well, thank you, Mr. Chairman.

SEN. BAUCUS: And stay on this subject.

SEN. STABENOW: Yes, absolutely. I think this is one of the major questions for us. And Dr. Gruber, to follow up on your testimony, and I know a number of you mentioned that, Mr. Shea, you have spoken about this. Many of you have spoken about this. But in your testimony, you said that the right reason to worry about the erosion of the employer subsidy is that second order individuals are triggered more -- much more fairly in employer groups today.

So I wondered if you might just talk about that, and then, if Mr. Shea, from an employee standpoint, I know there are issues that have concerns that have been raised as well about that. And I would just say, as a comment ahead of time, it seems to me the two very different approaches, one is to look at the value of the benefits. In which case, it may very well be -- I mean these are negotiated benefits where people have given up wage increases to take health care packages that are important to them based on regional differences or the age of the employees and so on.

That's one thing versus capping based on income for high individuals. So what -- would welcome, Dr. Gruber, your thoughts in relationship to your comments about the right reason to worry about doing this.

MR. GRUBER: Thank you very much, Senator. I think the context in which the tax exclusion is tackled is very, very important. There is no health expert who is setting up a system today who would include the tax exclusion for employer-provided health insurance. That doesn't mean that we would all favor getting rid of it in a vacuum, because if we get rid of it in the vacuum you do have the problem that there are many people who are older and sicker, who have trouble finding health insurance in the non-group market. That's why it's very important that it be part of a package of reform and part of the kind of reforms we're talking about here today.

And just -- if we move to a new system of the kind that's been outlined by Senator Baucus' white paper or by President Obama, a system where there is reformed insurance markets with guaranteed issue and non-discrimination based on health, where there is new exchanges that people can fairly purchase health insurance, then we don't have to worry about these issues anymore. Then basically, we get away from the unfair discriminatory world we now have in insurance markets towards one where people even if they are not getting insurance through their employer can get health insurance in a fair way that doesn't discriminate against the sick.

So that's why -- taking it away in a vacuum is a problem for that exact reason. But doing it in the context of reform is okay, because you deal with that problem. I think the other issue you mentioned which is important is the notion about what about employees and employers to negotiate the packages. They gave up wages to -- in return for health benefits. That's why I think, you know, if there is one lesson they have learned from Massachusetts on the negative side, it's you need to face this kind of reform.

And this is a fundamental change, the notion of doing it right now while it's urgent. It's urgent to pass the law, I think, and to get steps in place. I think we do need a phase-in period so that people who negotiated contracts under the old rules have time for those contracts to play out. And so that everybody is working under a new set of rules that's well understood in advance.

SEN. BAUCUS: Senator Wyden?

SEN. RON WYDEN (D-OR): Thank you, Mr. Chairman. Mr. Chairman, I think this highlights the point that the country is spending enough on health care, but we're not spending it in the right places and these tax rules really illustrate it. Now on the first glance the tax rules clearly look like a sweet deal for the typical middleclass person. That middleclass person says hey, health care isn't going to be taxed for me and my employer gets the deduction. But what looks sweet actually has some very sour consequences for that typical middleclass person.

Mr. Sheils, I want to walk you through an example that highlights this question. If you're middle class and say you have a modest package from your employer what you are facing today are more co- payments and your coverage keeps going down. So that middleclass person needs more money to make ends meet. But instead of putting more money in your pockets the federal tax code takes it away from you to subsidize the deluxe health plan held by somebody who, for example, says they want to go out and get a designer smile. My question to you, Mr. Sheils, is isn't it possible to convert this unfair tax system into a new one that cuts the waste and still protects the middleclass family from getting taxed on their health care?

MR. SHEILS: Yes, thank you, Senator. We certainly -- you and I have certainly worked on that in developing your bill. Senator Enzi has a bill which would make some of the changes you're describing. In both cases it really would turn out that individuals -- most individuals would actually see a net increase in their tax benefit, not a reduction.

And it's because in those bills -- certainly, in your bill it was decided the idea wasn't so much to raise revenues, it was to change the incentives people face, to create incentives for people to go to plans that are perhaps lower cost and better managed. Integrated delivery systems like HMOs, I think, are good examples.

So -- and what we found was that it's possible to do it in a way where almost everybody really was better off, at least initially. And the middle class and higher-income people -- well, lower- and middle- income people, those individuals in those groups more or less would come out ahead by -- I think it was -- in your bill, it was an average of about $150 a family, if I remember correctly.

So you can design this thing. You can purpose-build it in a way that will give you the changes and incentives that you want to make, while at the same time not hurting most of the taxpayers out there.

SEN. WYDEN: Mr. Chairman, can I just follow that up with Mr. Kleinbard, very briefly?

SEN. BAUCUS: Yeah, sure.

SEN. WYDEN: Mr. Kleinbard, my understanding is that you found that something like 70 percent of the American people have health expenses of under $15,800. So hypothetically, if someone gave a generous deduction to the middle class, say ($)17,000, ($)18,000, take a sum like that, wouldn't that be a way to convert the system today that seems, at least to me, so inequitable to a system that would protect the middle class, and honor President Obama's campaign pledge, and still have some extra money left over in order to start the process of health reform.

MR. KLEINBARD: Yes, sir. What we found in our data is that for someone who is insured, for a family who is insured, the value of the insurance premium at the 70th percentile is in the neighborhood of the $15,800 number that you gave. And that means that if you were to on the one hand, take away the employer-sponsored insurance exclusion that benefits employees, and on the other hand replace it with a standard deduction of the magnitude you say, you would leave the -- that family at that 70th percentile of premiums with the same pre-tax income tax case as they would have been with the employer-sponsored insurance. And so our numbers, taking all taxes into account, would suggest that at that kind of level, a majority of Americans would actually end up with a no increase in taxes.

SEN. BAUCUS: I appreciate that. You know, frankly, to be honest, I don't think we are going to repeal the exclusion. And what Senator Wyden's bill does, that's just not going to happen. We've got health care reform in front of us right now and we have to, in my judgment, work with what we have got to make what we have work better.

We cannot go to a totally new system. Some want to go with single pay; I don't think that's going to work in this country. Some want to go the Senator Kyl approach, which is totally different. I don't think that's going to work in this country. And as -- you know, to be -- give all due respect, some want to repeal the exclusion for other reasons, I don't think that's going to work either.

There are ways to -- in that health care reform that bend the cost curve in a very significant way, provides health insurance reform which this country desperately needs, and also cover all Americans. And I, very modestly, suggest that the white paper that we published last November is a very large step in that direction. Sure it's not perfect, it needs lots of improvements. But that's our current system.

And we -- America is a battleship, we are an ocean liner. We are not PT boat, we're not a speed boat. We can't turn on a dime. And Americans have expectations about what they have and don't have. It's the devil you know versus the devil you don't know. And I just humbly submit that we just work with the system that we have, we are going to make it a lot better and that's the way we are going to deal with the bend of the cost curve in a very significant way.

I want to get one more senator on this subject. And I better go over here, on this -- Bunning, on the same subject? Okay, I want to go -- I want to stay -- talk to --

SEN. : Same subject.

SEN. BAUCUS: I'd like to ask one senator the same subject first and then move on.

Okay, Senator Nelson.

SEN. BILL NELSON (D-FL): Well, then, what do you do, Mr. Chairman?

SEN. BAUCUS: Sorry?

SEN. NELSON: What do you do, if you can't touch the tax-favored treatment of employee-sponsored, what are you suggesting?

SEN. BAUCUS: I am -- first of all, I'm not suggesting -- I'm suggesting we do not repeal it. We are not going to repeal it.

SEN. NELSON: All right, so how do you modify it?

SEN. BAUCUS: Well, that's what the options are all about. You can fit a limit on the income, you can limit on benefits, you have a combination of limits and/or benefits. That's what this is all about here. That's what this roundtable is all about, is try to figure out what's the best way, is there a way that's better than others. I'm against repeal of exclusion. I do think it makes eminent sense to closely examine the exclusion, to see the degree to which they can be approved.

SEN. NELSON: All right, so would you take a certain income level and eliminate the exclusion above that particular level?

SEN. BAUCUS: That's an option.

SEN. NELSON: Would you go at the 70 percent level that they were talking about?

SEN. BAUCUS: Well, that's -- again we can balance any way we want. Basically, it's -- my understanding is that the average in business is about 77 -- it's about 75, 76 percentile of actuarial value that the companies now provide for their employees.

Okay, Mr. Shea, you've been waving your hand there, so --

MR. SHEA: Your point about this being a radical change is absolutely right. And I can't resist the opportunity to say, if we are going to do a radical change, I think single-payer is really the way to go. And we could cut out all of --

SEN. BAUCUS: Your past support demonstrated --

MR. SHEA: All of my members, yes.

(Laughter)

All of this mechanical folderol. But I just wanted to make a couple of points, really going back to Senator Stabenow's issue. You know, I asked our unions what their experience was in terms of the cost of benefits in similar situations. And let me give you one example.

A construction trade fund -- two different funds in Western states gave -- I've got the following example. Plan A, and these are average 50-year-old, similar demographics, rural and urban -- Plan A, the cost is $16,600. Plan B, the cost is $10,000 -- $10,046. You might think that ($)16,000 has a better benefit package, it doesn't. It has higher deductibles, higher co-pays than Plan A.

The difference is simply, as it was explained to me by the actuaries, the difference is simply the health experience, that is the claims experience of those two funds, and the size of the funds. So in terms of the practical application of this, you couldn't -- I don't think you could possibly do it, without building an even much more complicated situation. But you know, the bottom line is, this is the Willie Sutton rule being applied with all due respect.

There is an awful lot money here, as Dr. Gruber said. And so it's natural to look at it. But going back to my comment on the charitable hospitals, this would really destabilize the system. And it would also, I would just say, undermine support for health reform. If you've talked with any of your constituents, certainly when I talk with workers about this, they are just flabbergasted at the idea that somebody would tax the benefits they already paid for, because as Senator Stabenow pointed out, this is simply deferred wages.

SEN. BAUCUS: Yeah. Well, there are a lot of banks here, this is one I -- that involves -- recognize Senator Bunning, but as far as the answer to Senator Nelson, there are lots of options on the table and modification of the employer-provided exclusion is just one of many, many options. And I don't want to leave the impression that that's the only one. It's not the only one. There are many, many, many other options that we are looking at.

Senator Bunning.

SEN. JIM BUNNING (R-KY): Yes, I have a couple of questions for Dr. Greenstein and Michael Jacobson. Both of you seem to favor an increase in the alcohol tax. Are you aware that there has been a loss of 540,000 jobs in the hospitality industry over the last year? And that unemployment in the hospitality industry is now at 11.4 percent. Would it surprise you to learn that indexing alcohol tax for inflation would cost an additional 160,000 jobs to be lost in the hospitality industry?

Both of you speak as if alcohol tax increases would have small impact on the price of alcohol. Are you aware that federal, state, and local taxes combined already account for 59 percent of the cost of the bottle of an alcohol?

Are you aware that federal revenues from alcohol taxes actually declined following the last alcohol tax increase in 1991? This meant that Congress collected about ($)2.4 billion less than expected for the first five years of the tax increase. If this is the case, how can this be viewed as a stable way to raise revenue for health care? Either or.

MR. GREENSTEIN: I'd be happy to start. Could I just before I do, ask the chairman -- as you know, there are a number of us who also wanted to make comments on the employer exclusion. So --

SEN. BAUCUS: Sure, Dr. Greenstein -- if you don't mind, Senator, if he speaks on that subject --

SEN. BUNNING: You can go right ahead and -- just so you answer my question.

MR. GREENSTEIN: Okay, I can answer his question and Dr. Jacobson can answer it. I'm just suggesting after we do --

SEN. BUNNING: Because I only have a few minutes.

SEN. BAUCUS: Senator Bunning has the floor. So it's his choice.

MR. GREENSTEIN: All right.

SEN. BUNNING: You go ahead and answer wherever you want to first.

MR. GREENSTEIN: Virtually every major industry in the country has lost a lot of jobs in the past year. We are in the deepest recession since the end of World War II. I don't know that there's something particular here. My assumption is that health care reform of the magnitude that we are talking about will take several years to implement.

And certainly I and I would presume other panel members, who have various recommendations that include recommendations involving the tax code, are not suggesting that these changes be immediately instituted now while we are in the middle of the recession. We are talking about what would be instituted several years from now, hopefully when the economy is in good recovery and when the changes in the health care reform are instituted.

With regard to alcohol taxes, I would note that in real terms the federal excise tax on alcohol has fallen 85 percent since 1951 and 37 percent since 1991. The kind of change that -- I would --

SEN. BUNNING: Can I interrupt you just a second? Even though there was a major increase in the alcohol tax in 1991.

MR. GREENSTEIN: There was an increase, but the tax is X amount per gallon. It's not -- if you have a sales tax at the state level, that's a percentage tax. As the price of goods and services rise, the sales tax rises.

The excise tax on alcohol is a given number of cents or dollars per gallon and as a result of which, as inflation over time raises the price of all goods and products including alcohol, the excise tax falls in real term and falls as a percentage of total sales.

Federal alcohol excise taxes, some years ago, were about 12 percent, I think in 1980, about 12 percent of the gross alcohol sales. They're now about 6 percent.

The main recommendation in my testimony is merely to put in real terms the excise tax on alcohol back to where you put it in the 1990 deficit-reduction agreement. And in terms of the impact that would have, it would increase the tax on a bottle of beer by $0.04, on a glass of wine by $0.03. If you, like myself, following doctor's recommendations, have a drink every night, which I do, I have a glass of wine every night --

(Laughter)

SEN. BUNNING: Can I get a --

MR. GREENSTEIN: -- it would cost me $10.85 over the course of the year, if had a drink every single day of the year. I do not think that is a crushing tax burden or something that's going to cause big dislocation --

SEN. BUNNING: So we had local, state taxes increase prior to our discussion here at the national level.

Dr. Jacobson, would you mind answering the question also?

MR. JACOBSON: I think there are a lot of questions about those various figures you used and --

SEN. BUNNING: Really?

MR. JACOBSON: We can provide you with some details about --

SEN. BUNNING: Thank you, would you do that for me?

MR. JACOBSON: I'd be glad to. But I think Mr. Greenstein had, you know, an obvious point that inflation every year erodes the value of the taxes, of these excise taxes. Also, our society pays a tremendous toll because of the heart disease, the cancers and other health problems posed by alcoholic beverages that a strong alcohol tax increase would help pay for tax -- for health reform and marginally reduce these expenses caused by alcoholic beverages.

So it's not -- it shouldn't be, you know, we're not going to -- we are not advocating putting all the costs of health reform on the alcohol and beverage industry. But as part of the suite of prevention measures, it makes absolute sense. When Alaska raised its alcohol taxes, they saw an almost immediate decline in mortality.

SEN. BUNNING: Okay, I have one more question.

SEN. BAUCUS: Okay, then we're going to Senator Cornyn.

SEN. BUNNING: One more question.

Joseph Antos, lifestyle taxes. Dr. Antos, would the lifestyle taxes supported by some of our witnesses be progressive or regressive? In other words, with increased excise taxes on alcohol or soft drinks, can they hit low-income families more harshly than upper-income families?

MR. ANTOS: Thank you, Senator. I'd say they tend to be regressive; they tend to hit lower-income families. Not just alcohol taxes, but also of course tax on cigarettes. In fact, that's a particularly good example. The middle class has largely overcome its cigarette addiction. But lower-income people, for various reasons, do not have necessarily the access to the kinds of assistance that the rest of us have and may have difficulties in life. And frankly, a cigarette helps that.

So the fact is that raising taxes in these matters are fundamentally not going to have a gigantic impact on health -- lifestyle or health care costs simply because the problem is much bigger than that. If we want to deal with this as a health issue then we have to take public health steps.

SEN. BUNNING: Thank you very much, Mr. Chairman.

SEN. BAUCUS: (Off mike) -- on the same subject -- briefly --

MR. : Just a very brief comment.

SEN. BAUCUS: Briefly, before I recognize Senator Cornyn.

MR. : Thank you, Mr. Chairman. I think for all of these proposals you need to think about the whole package together and not just -- I mean, anything you do to raise revenues is going to raise taxes on some people. Some of these things might seem aggressive, but if you use the money to pay to cover low-income people, as a group, they would be much better off. Thirty-five percent of people with incomes under $10,000 don't have any health insurance.

SEN. BAUCUS: Senator Cornyn?

SEN. JOHN CORNYN (R-TX): Thank you, Mr. Chairman. The administration proposed $600 billion as a down payment on an estimated $1.5 trillion health system overhaul. To me it seems counterintuitive that you spend more money in order to save money to say the least. But I'd like ask to Dr. Baicker to talk about what the economic evidence shows because to me it seems like it's very fundamental to what we are doing here.

We can't make unjustified assumptions that by spending $1.5 trillion dollars, we're actually going to bend the cost curve where now we spend 17 percent of our gross domestic product on health care.

And associated with that I want to ask Dr. Antos to comment. Yesterday we saw a press conference at the White House where stakeholders said that they would save a lot of money over the next -- $2 trillion over the next 10 years by voluntarily -- and I couldn't find any kind of enforcement mechanism there -- but voluntarily reducing their rate of increase in health care costs over the next 10 years. Can you tell me, Dr. Antos, would you comment on whether you think that is a realistic assumption?

Dr. Baicker first.

MS. BAICKER: Thank you. I think an emphasis on focusing on measures that save money can be mistaken in that a lot of things we might spend money on would get us a lot better health outcomes and be -- would be well worth the money spent. And a lot of things that might reduce costs might do so at a cost in health that is larger then we want to bear.

So I would focus, instead, on measures that improve the value that we get from the health care system. And in truth those measures are unlikely to approve budgetary savings in a narrow window. And we should invest in them because we think they promote health in an effective way and may save money over the very long haul, but not because they would solve any short-term budget issues.

And that brings us back to the employer exclusion.

There are not that many opportunities to change the tax treatment of anything in a way that both makes the system more progressive and improves the value that we get from it. I would agree with what John Gruber said that the current system is regressive, not only because the value is worth more to people in higher-income tax brackets, but because as Dr. Burman noted, people in lower-income tax brackets are less likely to have access to any employer insurance at all. And when they do, are likely to have a policy that has a lower premium.

So by changing that tax treatment, you could move towards higher- value care by aligning incentives to provide not just more care and not just more expensive insurance, but higher-value care that produces more health. And whether that would save us money in the short run I don't think is a question we should be asking.

SEN. CORNYN: Thank you, Senator.

SEN. BAUCUS: I see a lot of hands there. On the same subject --

SEN. CORNYN: Mr. Chairman.

SEN. BAUCUS: Yeah.

SEN. CORNYN: My question with Dr. Antos, if he could just follow up on the second part of that, please.

SEN. BAUCUS: Right.

MR. ANTOS: Thank you, Senator. The ideas that were presented yesterday were certainly voluntary. These are ideas that we've heard for the last 20 or 30 years. They are fine ideas. But the fact is that most of these -- and these are ideas, these are not proposals, there was no -- as you said there is no enforcement mechanism. In fact, no specific steps suggested in the letter yesterday as to how we would achieve savings at any level, much less $2 trillion.

So these are fine ideas. We have been talking about them for a long time. We need to continue to work on them. This letter will not suddenly trigger a change in the health care system that we desperately need to promote efficiency.

Now, a better question or a bigger question is what -- even if this $2 trillion were achieved, what impact would that have on the federal budget which is, I think, the issue really before this committee. And the answer is a very, very small part of that would end up as savings in the -- at least in the first 10 years of the federal budget.

To give an example, the Congressional Budget Office estimated with regard to the stimulus package that there would be approximately three-tenths of 1 percent reduction in health care spending, federal health care spending because of the -- what they say is $32 billion spent on health information technology. Three-tenth of 1 percent, we have a long way to go to get through to the $2 trillion

SEN. BAUCUS: Well, I think the point is, you know, a lot of this is incremental over time, you start to bend the curve a little bit here. Okay, one more, and then I go to Senator Conrad on the same subject.

Okay, Dr. Wilensky.

MS. WILENSKY: A point was raised that I want to emphasize and that is that there is a distinction between how to raise the money to expand coverage estimated maybe at $1.5 trillion for the 15 percent who do not have coverage now and ($)635 billion that was suggested by the administration. But the harder question that this committees has wrestled with goes to the other 85 percent of us who have coverage and that's what do we do to be able to sustain the spending for Medicare, for Medicaid, and to improve the value. And making sure that when you look at how you get the money to expand coverage, whether or not that's helping us to improve value for the rest of us or just as a revenue-raiser becomes very important.

I'd like to echo my support for the committee's considering in whatever way it thinks is politically feasible to alter that current tax treatment of employer-sponsored insurance. I appreciate the problems of changing it completely, but to the extent that you can limit it in some way will both raise money and drive some better outcomes in terms of the kind of health insurance that people are likely to choose.

SEN. BAUCUS: I'm sure we get back to the senator again. But don't forget to go on and say something, but I've got senators recognized too. The budget question, I think, is a good segue into recognizing the chairman of the Budget Committee, Senator Conrad.

SEN. KENT CONRAD (D-ND): Thank you, Mr. Chairman, and again, thank you for this roundtable and thanks to each of you for participating. I've got a question I'd like to pose to three of the -- or four of the panelists. And that is a question of -- if they were to give two or three of their best ideas for financing health care reform, what would those two or three ideas be?

And I'd start with Dr. Wilensky and then Mr. Sheils, Mr. Gruber, and Mr. Greenstein. If I could ask the four of you, if you were to give us your two or three best ideas for financing health care reform, what would they be?

Dr. Wilensky?

MS. WILENSKY: The first one, not to be a broken record, is to go after the tax treatment of employer-sponsored insurance. It's regressive, it's inefficient, and it's a lot of money. How you replace it, in terms of how you decide to subsidize whether moving it to credits, doing it directly to subsidies will influence how much money you get. I don't think you can avoid taking that on.

Second, I'm very appreciative of the work that you and Mr. Baucus did last August in terms of your comparative clinical effectiveness bill. I believe that represents an important way to slow down spending, first investing in the money, and then recognizing that we've got to drive change so that we use it. Concepts like value- based insurance, where you vary the co-payment towards the most clinically appropriate use of care, value-based reimbursement where you reimburse more than the institutions, and clinicians that provide good quality and efficient care can make a large difference.

That will take several years at best to generate the information and to implement and you'll have to change the ability of CMS to make use of these kinds of concepts in terms of how they reimburse. It's an area the private sector can do on its own if it wishes to, you night learn something. But statutory change will be needed for CMS.

Number three is you've got to go after how we reimburse physicians. The current system is the most broken part of Medicare. We spend a lot of money. We are doing badly for the physicians that are trying to practice in a conservative manner.

They've had no fee increases over the decade, and that we see 10 to 12 percent spending increases, which is unsustainable and unfair. Many of you are from states that take this, particularly hard, in terms of the current reimbursement under Medicare.

SEN. CONRAD: Mr. Sheils?

MR. SHEILS: Thank you. In our -- in the testimony we prepared, we actually looked at a few ideas. And I guess that I'd have to say that I'm really interested in these ideas that both raise revenues and change incentives for individuals when it comes to health care and the health.

For example, the tax exclusion for health benefits, if we were to cap that at, say, the average amount per worker right now, we would raise -- that phase-out that's described in here (ph), both about $700 billion of revenues over 10 years.

The health spending would go down by over $300 billion as well. And the reduction in health spending has to do with the fact we've created incentives for individuals to go in the plans that are going to be more efficient.

The second thing we looked at was the tobacco tax. It seems kind of mundane, well, everybody points to it, but we played with it a little bit more. We looked at a $2 per pack cigarette tax. We raised about $250 billion in revenue, and we also had about almost $200 billion in savings.

We got reduced health spending, some of which went to the federal government in federal programs. The last thing I looked at was the -- again with the mundane. We looked into recovering federal money that's now in the safety net, and that includes Medicaid Disproportionate Share hospital funds, the Medicare DSH payments, there are - -there's funding for FQHCs, and so on.

And you know, we've heard today that it's important to maintain the safety net system because we're still going to have uninsured people. But if you were to take, perhaps, half of that back in the context of a major expansion of coverage, almost everyone, you would be able to raise another $130 billion.

Now, I don't -- I'm trying to remember these numbers off the top of my head, but basically we got to $1.2 trillion in federal revenues, about $0.5 trillion in savings and spending throughout the system. And that would be -- we did analyze the president's proposal during his campaign, and at that time we estimated his proposal would cost about $1.2 trillion. So at pretty much base for it, but it's -- you're going to get 19 different ideas and they are all good.

SEN. CONRAD: Okay, Dr. Gruber?

MR. GRUBER: I like Dr. Wilensky's broken record analogy, because this is one of the opportunities to see the degree of consensus among a wide array of experts on the win-win nature of using, reforming the tax exclusion in finance health care reform.

It's the top of my list as well, because it is exactly the right thing to do to finance health care reforms, for the reasons I've given, for the reasons others have given. What I want to do is to talk for one minute about what that means. Senator Baucus has raised the issue of you can reform this. There're lots of moving pieces.

I think we should talk for just a minute about what the moving pieces are. There is the cap. We talked about you can cap it at a certain level. You could do an income related. There is also the issue -- the rate at which you inflate that cap. So for example, just to give ideas, if you, starting in 2012, cap the exclusion at the 50th percentile, I estimate you'd raise about $500 billion.

Now, alternatively, you could say well, that's not fair because that hits several of the taxes. So let's say we did something else. Let's say we said that we are not going to touch the exclusion for families below $125,000 of income. We're then going to cap it between a ($)125,000 and $250,000 of income, and then get rid of it, but only for families above $250,000 of income.

That's a progressive cap that raises just the same amount of money without touching families below $125,000 of income. There's a lot of money there that you can use -- that you can get at in very progressive and different kinds of ways, many of which get you the kind of efficiency savings and productivity that we want to get out of the system.

So I think that's the number one place to look at. I'm thrilled to hear the general support for it today. I think, the second place to look, I've just would really echo Dr. Wilensky on looking at value- based adjustments of the system.

I think this is the harder one. I can't give you numbers. I think it's hard to give numbers on how much different packages can deliver, but obviously, thinking about the kind of reforms that she discussed are important. But I would also echo what Mr. Sheils said.

I think we really need to think about lifestyle-based changes both in taxes and insurance prices. In the state of Massachusetts, the fundamental part of reform was, for the first time, insurers were allowed to rate people's health insurance prices based on smoking status.

We need to think about setting up a -- the right kind of incentives for people, both for the prices they pay for their goods and the prices they pay for their insurance to try to induce healthier lifestyles and raise revenues at the same time.

SEN. CONRAD: Mr. Greenstein.

MR. GREENSTEIN: I think this is a key question. And I think the first point is there's no single mechanism you can pass that can get you most of the way, all the way there, that can probably get you even half of the way towards financing the whole package.

So that leads to the conclusion that you are going to have to put together an array of items on both the spending and the revenue side of the equation if this bill is going to be paid for. Let me start with the spending side.

I would absolutely start with the types of reforms in Medicare that the president proposed. I know you discussed a number of them in your delivery roundtable several weeks ago, ranging from reining in overpayments in Medicare advantage to raising premiums on affluent Medicare beneficiaries.

Some of these have been opposed on one or other side of aisle; we're going to need all of them to deal with this important priority of health care reform. And those kinds of Medicare changes, bundling (ph) the payments changes and hospital readmissions, you really get a triple benefit from them.

They can help finance the bill. A number of them will get picked up by private insurance, and will help slow the rate of growth in private sector health care cost as well. And they will help shore up Medicare financing for the long-term. We're going to get a bad report at 2:30 this afternoon from the trustees on Medicare financing.

Medicare reforms can do all three. And I would supplement them with some additional reforms in terms of pharmaceutical pricing in Medicaid as well as Medicare that can yield some additional savings. Second deals with the employer exclusion.

Senator Stabenow raised some important issues. But again, I don't see how you can put a package together that's going to get you to fully paying for this, unless you touched the exclusion.

I would agree that you do not want to eliminate it. I think we need stronger employer-based coverage, not weaker. However, a well- designed cap, as part of a well-designed health care reform, can actually increase employer-based coverage.

If you combine it with an individual mandate, and perhaps, a pay- or-play mechanism like Massachusetts has, you are going to end up even with the cap, I think, having more people enrolled in employer-based coverage, not few. There were three particular issues that have often been raised.

What about people who were sicker? Part of your health care reform plan, I believe, I hope, will have a prohibition on insurers charging higher prices for sicker people than for healthier people.

SEN. CONRAD: Right.

MR. GREENSTEIN: What about regional variation in cost and firms that have older workforces? I would recommend you have a cap that builds in an adjustment for regional differences in health care costs and adjustment for the age of the workforce of the firm.

You can have an adjustment built into the cap itself. The third item I'd mention you asking for is other tax-preferred -- tax treatment of health care. By the way, I think -- I presume that you are going to have subsidies for low and moderate income workers, and you are probably, I presume, going to deliver that through a tax credit.

So I think it's a mistake to just think of these as tax increases. You are -- the goal really is to redesign the tax code's treatment of health care costs in a much more efficient way. So right now, we spend money on flexible spending accounts, which increased health care costs. They are use it or lose it.

We all have the experience, at the end of the year, you rush out. I did it on March 15th, myself. I went to the -- I spent an hour in the CVS loading up on things I didn't need because it was use it or lose it.

You also can use your FSAs for all kinds of low priority elective unnecessary medical procedures that no insurance would cover.

Now, we don't necessarily need to get rid of FSAs. But they were put into place to help people afford coverage in the absence of the national health care reform.

In the presence of the national health care reform, FSA should be reformed. And by the way, they really ought to be incorporated into any cap you have. Otherwise, you are going to have health coverage that was -- employer contributions that were over the cap. If the employer reduces them to the cap level, and the employee takes the additional amount he or she pays and puts them all through an FSA, you really haven't effectively changed very much in terms of the tax treatment.

SEN. CONRAD: Okay.

MR. GREENSTEIN: Finally, the lifestyle taxes, alcohol, sugar soft drinks we've talked about. And I would hope you wouldn't totally rule out looking at the issue of the itemized deductions. I know the president's proposal is not really still on the table in the form we presented it, but --

SEN. : Oh, yes it is. It is one of the options.

MR. GREENSTEIN: Okay. But they are not sub-options; you could look at excluding charitable contributions alternatively. The criticism has been that people deducted 35 percent today if they are in the top bracket, and what happens if they deducted 28 percent? Our analyses suggest, there would not be a big impact that would cripple charities. Well, I'll put that analysis to the side.

My point is simply, you could deduct a 35 percent. If the top rate goes back to 39.6, that's in the baseline. You get savings just from holding the deduction rate at 35.

SEN. BAUCUS: Well, thank you very much.

Senator Snowe, and then Senator Cantwell on my list here. Senator Snowe.

SEN. OLYMPIA J. SNOWE (R-ME): Thank you, Mr. Chairman. Dr. Gruber, I wanted to get back to the single national cap on tax exclusion as well. And I heard Dr. Greenstein just sort of addressed the question of making regional adjustments. And there are marked geographical variations among states in terms of costs.

Now, some obviously can be addressed, along with the reforming health care system. Perhaps some changes, drivers of cost and not amendable to change. So I would like to have you address, if you have given any thought to how we could structure, you know, such a cap that includes those variations.

For example, in my state of Maine, you know, it would cost $1,600 for a family plan, versus, you know, the average nationally of $12,400. That's almost a, you know, $3,600 difference, almost $4,000. In an individual market it's $24,000 for a family of four. Now, there are some real costs differences in economy scales.

So, obviously, that, you know, for rural areas, particularly. And so I'm wondering if you have given any thought to incorporating some kind of adjustments that includes criteria for those costs, indexing the cost of coverage, indexing the subsidy to make sure that people have adequate coverage depending on which state, you know, they live in.

Obviously, we don't give people more than they need, but we don't want to get them less than they require to access this coverage as well. And Dr. Greenstein, if you have any question -- you know, have anything in that regard and how you'd make those adjustments for regional, I would appreciate it. And then there's one other question I have, thank you.

MR. GRUBER: Well, I think Senator Snowe, you are raising a very important issue. There are large variations in the cost of health insurance across the nation. Part of those will be compressed as part of national health care reform, particularly in non-group markets.

You mentioned higher non-group prices in Maine versus other states. A lot of that will go away with the reform, but a lot of it won't. So I would personally advocate that we have a cap that is adjusted, at least initially, for premium differences across state. So for example, what you could do is you could say in the first year, you have a cap, which is adjusted fully for premium differences across states.

But over time, that should phase out to recognize that some of those premium differences aren't due to cost of living differences, they are due to inefficiencies in the way medical care is delivered. So in the long run, you could move to a cap which varies just by the underlying cost of living.

So you could say, for example, if the cost of living in Maine is 10 percent higher than in Mississippi, the long run cap would be 10 percent higher. But if the cost of premiums in Maine is 50 percent higher, you'd start at 50 percent higher, but over time, giving Maine time to adjust, you'd then eventually move down to something which just reflected cost of living differences.

That's something which reflects the true cost of living differences that drive your health care costs, but which forces states which are higher costs to take the steps for deficiency that we'd all like as a nation. So that's the kind of step that I would strongly endorse.

SEN. SNOWE: I appreciate that.

Dr. Greenstein?

MR. GREENSTEIN: I would agree that probably different regional variations in insurance cost is probably the best way to do the adjustment. We haven't really looked at the question Dr. Gruber just mentioned about, what do you do over time.

I hope it would be possible over time to limit the adjustment to differences in cost of living, as he suggests, I'm not sure it would be possible to go that far. But certainly in terms of constructing the cap, I think not just through the first year, but through the whole first period, you'd want to vary it by differences in insurance costs.

And hopefully, as various reforms work their way through the insurance system, one hopes that the variations in insurance costs across regions would themselves compress, and that the -- a cap adjustment, therefore, naturally would narrow because the differences in cost, one would hope, would narrow.

SEN. SNOWE: So the timeframe would obviously be important in this, whether it'd be, you know, 5 years, or 10 years, or something and facing again in some time. One other question, Dr. Greenstein, you mentioned --

SEN. BAUCUS: Hold one -- hold on one minute, Senator Snowe.

SEN. SNOWE: Yes.

SEN. BAUCUS: Can I just ask a question on this precise --

SEN. SNOWE: Okay.

SEN. BAUCUS: Senator, I'm sorry. You know, if you would not --

SEN. SNOWE: Yes, yeah. No, I yield -- I had one more question on --

SEN. BAUCUS: Okay, please go ahead.

SEN. : I cut on this precise point, because I'm concerned about, under the 16th amendment, the Congress have power to lay and collect taxes or income --

MR. : On this point, right, sir.

SEN. BAUCUS: On this point, yeah. Okay.

SEN. : From whatever source derived, without -- a portion that among the several states and without regard to any census or enumeration, that's the exact language. Now, in Mr. Kleinbard's testimony, he points out that the tax code does not adjust for variation in cost of living between regions, and sometimes the variation may be considered unconstitutional.

Now, what I'd like to know is the view of the various folks here, would a geographic variation on capping the exclusion based upon the state you live in, be unconstitutional? Now, such an idea seems unprecedented, but in fact, even though the higher cost of living in certain areas is usually accompanied by higher wages, would such a geographical variation mean that people in some areas of the United States would be subsidizing health care for people who are located elsewhere in the United States?

MR. : If I may, Senator. Thank you so much and I have to leave it to constitutional scholars to answer the question as to whether or not it would violate the constitution. But your question and Senator Snowe's question underscores just one of the challenges that would be involved in capping the employee exclusion. Whether or not it's unconstitutional, I don't know.

But I can tell you it'd be extraordinarily complex, and the geographic variations account for some of the differences in the cost, as does the age of the workforce, as does the claims experienced, and so on, and so forth. And this walks you right back into the section 89 experience which should not be underestimated.

I dug out of my filing cabinet yesterday, this little button calling for the repeal of section 89. And some of you may remember the hundreds, if not thousands, of workers and small business people and benefits professionals who marched up to Capitol Hill when they had to deal with this incomprehensible challenge of trying to value this different coverage.

And with all due respect to Dr. Gruber, and just in general, what I would say, I don't have the sterling qualifications of the academics on the panel who are supportive of capping the exclusion and I'll conclude. So I'm disadvantaged by the needs to sort of tell you how employers and employees will behave in practice rather than in theory. But I must say that the notion that somehow we're in a different place because of COBRA than we were 20 years ago, is simply wrong.

It's one thing to make a rough justice approximation of the value of the health benefit in order to know what to charge a former employee towards the premium. It's quite another to be fair to people in terms of the way you are reporting some taxable benefits on their W-2 form.

SEN. BAUCUS: Mr. Klein --

MR. KLEIN: Yeah, if I could. I actually have some data that I think is relevant to your question and then I'd like to come to the specific problem. The first, the insight that Senator Snowe began with, of regional variations is absolutely correct. In our data, we discovered, in fact, that variations across regions are larger than variations across income levels.

You would think that higher income employees have much more generous plans than lower income employees. In fact, the variation across income levels, at least when you go by quartiles, which may be too uppercut, but that's all the data we have, shows less than a 10 percent variation between the bottom quartile and the top quartile of incomes in the value of the insurance premiums. We see a significantly larger variation when we look at costs across regions.

So the problem is there. There's no question about it. Then you turn to solutions, and there are two issues that you need to think about. The first is that the internal revenue service today does not really frankly care very much where you live within the United States, very little terms whether you are a resident of Maine or you are a resident of Boston with a summer house in Maine.

When we go to the regional variations that's going to matter a lot. And that's something that the IRS does not really police today, with -- there are a couple of places in terms of where is your principal residence, and things like that. But as a general matter, the whole question of how we will define who is in which region, and how will the IRS police that, it's going to be a significant issue. And we should not overlook the administrative burdens that that would put on the Internal Revenue Service.

The second question you raised, the constitutional one, the issue with the uniformity clause of the constitution, which requires that excises and other taxes be levied uniformly across the states. It is my belief, although there's a good deal of more research to do, the great thing about constitution is that you never get to the end of research. But based on our preliminary research, we believe that one could design regional variations that are constitutional. It would require, however, a more sophisticated definition than simply going state by state.

Because for example, New York State has some very, very high cost areas and some relatively low cost areas. So we do think that you could work with the constitutional constraints, but it would require a more sophisticated approach which in turn adds further to some of the administrative burdens. But the problem is real, as I said, it's a very substantial variation.

SEN. BAUCUS: Okay. Senator Grassley, you were asking on geographic variation, correct?

SEN. GRASSLEY: (Off mike).

SEN. BAUCUS: No, not this subject? Okay.

SEN. GRASSLEY: (Off mike).

SEN. BAUCUS: Foreign and geographic variations.

Okay, Senator Cantwell?

SEN. MARIA CANTWELL (D-MA): Well, I know we're talking about geographic variation, and I want to go back to Dr. Wilensky's point about Medicare reform and geographic variation. Because before I'm interested in taking about new sources of revenue, I'm interested in talking about how we're going to make this system more cost-effective.

And Washington State is one of those that you've referred to as a high health outcome state with relatively low cost. And what I don't understand is why this Dartmouth study isn't carrying more weight in explaining the transformation that can happen. For example, Washington state beneficiaries, per spending average for a year is $6,200.

So for the U.S. it's $7,400 or roughly a $1,200 difference. For New Jersey, it's $8,512; for Florida, it's $8,452; $2,200 more per Medicare beneficiary. Now, why should we keep paying for that? Why should we, in Washington State, keep paying for that?

If the entire country went to the state -- the general state -- rate that Washington had per beneficiary rate, we would save close to $55 billion a year. So why is it that we can't use this study to break through that there are systems throughout the country that are higher outcome, lower cost, and before we spend another dime raising someone's revenue somewhere else, we better implement those efficiencies.

SEN. BAUCUS: Great question. Who wants to take it?

MS. : I'd like to respond.

SEN. BAUCUS: Great.

MS. : It actually goes to a point that Senator Hatch made of, are we asking people in one part of the country to pay for the health care in another, and of course in Medicare we do that all of the time. Your state residents pay the same Medicare taxes into the system. But as you've pointed out, Medicare pays very differently according to the practice style and how health care is delivered in these areas.

The differences can be a matter of threefold according to some of the estimates that MedPAC and other commissions have done. There is not an association with higher health outcomes or more response to patient preferences in the higher spending areas. They vary within states. As somebody just mentioned, it's not enough to just say one state does this, and another one does that.

New York -- California is an even bigger example, Los Angeles area is incredibly expensive and Northern California area is much less. So there are mechanisms you can use to try to drive spending down in the high cost areas that have little health value. It would require arming CMS with very different tools in terms of how they reimburse clinicians and institutions rather than paying the same amount with only adjustment for cost of living.

It will be, if not to CMS, delegating to some other group, a lot more authority in terms of how you set up reimbursement systems. I believe, it will be very difficult no matter what tax increases you use to sustain health care spending and improve the value unless you take on these broader issues.

SEN. BAUCUS: Dr. Baicker?

MS. BAICKER: Thank you. Highlights, I think, the importance of thinking beyond just the insurance structure because I've done some research in the area that you're discussing and the variation that you see is among the people who are all on Medicare fee-for-service.

So it's not that people have different types of insurance paying for their care. And in fact, in the parts of the country where we spend the most on Medicare beneficiaries, they are the least likely to get high quality, low intensity interventions like diabetic eye exams, flu shots, mammograms, that kind of care may fall through the crack.

Some people are seeing a lot of specialists and not seeing a lot of general practitioners, and when there isn't an integrated infrastructure of information, so no one is saying to the patient, gee, it's time for your flu shot in between all the specialist visits.

So if we could find a way to promote that low intensity, but high value care by reforming the payment system, such that providers are reimbursed for providing high quality care, not just more care, and where there's an opportunity to do higher value interventions, phone calls.

People are reimbursed for answering e-mails. People's coordination of care is encouraged not just through doctor's office visits, but through hospitals, and through episodes of care, managing a disease like diabetes or hypertension requires coordination across a wide array of providers.

And right now, we are just reimbursing more for more care, and that seems to drive that relationship between the higher spending and lower quality care even in a program where everybody has the same insurance product.

SEN. BAUCUS: I -- you know, it's a very important subject. This Dartmouth study has been referred to many, many times, by many, many people, and CBO did the analysis of it, and it concluded to be about 29 percent savings; $700 billion roughly.

So I've a couple of questions about it. First, is there any reasonable justification for geographic variation? I mean, I'm assuming the Dartmouth study adjusted for, you know, lots of different factors to try to get a true sense of the disparity in health care spending versus outcomes, but my first question is what justification is there for it?

Second, what's the cause -- what's the main cause of geographic variation? I think, you, Dr. Baicker started to touch on some of the causes. And third, what are some of the better solutions to attack it. My assumption is that some of the delivery system reform contained in the white paper will help get after that problem with health IT and credit effectiveness, and reimbursements based on quality, and so on and so forth

But -- so I'd like just a little discussion on what -- is there any justification for it, because they sure talked about it a lot? And second, what are the main causes, and third, and what do we do about it? Okay.

Okay, Dr. Wilensky?

MS. WILENSKY: The -- this year's report particularly highlights the -- how the variations can impact spending. There is a chapter that looks at the treatment of chronic disease and also end-of-life care, and it compares the Los Angeles area --

SEN. BAUCUS: Right.

MS. WILENSKY: -- the Northern California, Intermountain Health Care, and the Mayo Clinic. And it indicates that even that there are some parts of the country like the Los Angeles area, that even their lower spending areas, are way more than other parts that are not very far geographically, call it practice style differences.

There is discussion about how you begin to drive change, so that the more aggressive interventionist changed some of their behaviors, take a lot of different activities, financial, but also having good data, that the outcomes in fact are not improved.

The first response, according to other earlier work that Wennberg and others of Dartmouth have done is that physicians will say, I'm different, my patients are different. My patients are sicker, I'm having better outcomes. It's only if you can have good data to show that the patients aren't different, that they don't get better outcomes that you can begin to try and drive change in addition to having it backed up by financial awards to those who have good clinical outcomes and practice conservatively.

Very different end-of-life care in terms of how medicalized the last six months of life are, and within small areas -- and that means that it will require more than just crudely taking a state or multiple states and label them high spending, and that's why I've used the California area. You all have talked about this because you have come from states that --

SEN. BAUCUS: Right.

MS. WILENSKY: -- tend to be quite to be low-spending and have been appropriately --

SEN. BAUCUS: Right.

MS. WILENSKY: -- frustrated that you don't see this recognized in a payment. But it will mean redefining how we reimburse under Medicare, if you want to capture those savings and reward the kind of behavior you want to see.

SEN. BAUCUS: Okay.

Mr. Sheils?

MR. SHEILS: Thank you. We worked into this and done some research on it, and we first got involved when we were looking at the question of establishing a comparative effectiveness institute. And the question we were faced with was, well, how effective will it be to generate new guidelines.

And one of the things you'd find in our literature reviews is that physician adherence to guidelines, the medical practice guidelines, evidence-based medicine, is actually quite low. Only about 55 percent of physicians are found to be adhering to the guidelines.

SEN. BAUCUS: And why is that?

MR. SHEILS: I'm sorry.

SEN. BAUCUS: Why is that?

MR. SHEILS: There is -- studies have to tried to look at that, why the -- some of it is that they don't know about the guidelines. That's number one. Number two, they may not agree with the guidelines; they may feel that it's wrong. And the third, it's always very politely put, but it's difficult to, with a guideline, alter the practice of medicine with a physician.

What they found is that things like publishing the guidelines don't really make much difference. They found that doing what we call, these conferences and so on, presenting papers that doesn't do very much. The only they found was really effective was, as Ms. Wilensky was saying, is when they did profiling, and find positions that seemed to be operating out of balance, and then when you end up with the physician to educate that physician with what is known about it.

That was shown to change medical practice. The study we looked at though showed that the cost of doing that is about $7,200 per physician, so is the cost of the item. I think the conclusion we came to is that, and I think CBO is sort of here on this as well, is that generating the information is necessary, but not sufficient to fix the problem of variation of medical practice.

We need changes in incentives that the companies have, and they might have to be some fairly stiff incentives like paying physicians less for doing care that isn't indicated under the guidelines, but without incentives, probably not going to get very far with it.

SEN. BAUCUS: Mr. Klein?

MR. KLEIN: Yes, and I couldn't agree more, in answer to your question, why does this occur. It is because we have a misalignment here between outcomes and what we pay. Health care may be the only product or service provided in this country where, as a matter of routine, we pay as much, if not more for poor quality as we do for good quality. So in terms of your initial question, it is not part of --

SEN. BAUCUS: It has a reimbursement based on quantity.

MR. KLEIN: And that's one big part of it, and without regard sometimes to quality whatsoever, and I think that what you outlined in your White Paper, are precisely the kind of measures that need to be taken to address this.

SEN. BAUCUS: Well --

MR. KLEIN: And just want to sort of add the point as well, very briefly that, you know, comparative effectiveness is an area that deserves more attention, and it is absolutely essential that these kinds of changes be part of the overall reform effort.

SEN. BAUCUS: Well, Dr. Altman, you have something --

MR. ALTMAN: There's one of the things that I wanted to support, Senator Cantwell on. One of the major differences that goes on in the state of Washington, state of Oregon, in Minneapolis is the organized delivery system, the integrated delivery systems you have there.

And we need to -- so I would totally support what I've heard before. In that White Paper, you are moving towards those integrated delivery systems. And I would support my colleagues, but it's how the system is organized, and we have big differences.

And those three states that I would focus on, Washington, Oregon, Minneapolis, and parts of even Massachusetts, are where integrated delivery systems are playing out. So I would support what others have said that we need to change the incentives.

We need to move towards -- we need to move away from fee-for- service towards integrated bundle payments. And we need to sort of penalize those institutions and providers that continue to practice low quality high volume care. And you can say, fine, if you are going to continue to practice that way, we don't have to pay you the same rates. So what Senator Cantwell was saying is absolutely correct.

SEN. BAUCUS: Okay.

Senator Lincoln.

SEN. BLANCHE L. LINCOLN (D-AR): Thank you, Mr. Chairman.

I just wanted to go back a little bit to the geographic variation in that cap. And I think it's correct that, you know where wage is adjusted in regions account for variations that when cost of living is higher, pay is higher also; usually in those areas, appropriately, in some ways to compensate the workers.

But I guess what I'd like to kind of add on to was -- I can't remember who -- which one of you all made the comment that the variances in health care cost across regions exist for a number of reasons, not just higher cost. And I know, Mr. Kleinbard, you had some of that in your testimony.

But is it possible that some of those regional variances result from behavior and practice as you've mentioned that could and should be corrected. And you know, that's something that we, obviously, have to look at. And are we rewarding certain regions for less efficient and more expensive health care; is that a part of the conversation?

And to Mr. Kleinbard, I'd ask you, do we adjust anywhere else in the tax code for geographical variances?

MR. KLEINBARD: I can address that last part of your question. With respect to practice issues, you know, I'd defer to the health economists. Essentially we do not in the tax code. We do make differentiations, of course, on Medicare spending side, but in the tax code, we essentially do not make any kind of regional variations. The nearest thing you can see to that would be, for example, some of the special benefits for the Gulf Opportunity Zone, or something like that.

But it's a general matter, no --

MR. : But actually there are some regions -- I mean, low- income housing credit allocations vary by the state, the sales taxes deduction varies by state.

MR. KLEINBARD: Well, the consequences vary by state, and I agree with that.

MR. : No, but I'm -- it's actually designed to vary by state in those cases.

MR. KLEINBARD: No, that the sales tax --

MR. : The sales tax is actually, if you have, the details vary by state. The low-income housing credit allocations are based on population. But I don't think there's any reason why if you had an objective measure to define differences and costs across states that you couldn't -- I think you said this in your answer before.

You know, for example, if you tied -- the ideal thing would be if you could design an efficient health insurance plan, and figure out what cost that would be in each state, and tie a cap to that, that would be the ideal cap. And the second best measure might be to take something like the lowest cost plan, and the Federal Employees Health Benefits Program which vary across the state. You could decide to tie the cap to that. So I don't think there would be a problem with that.

MR. KLEINBARD: I don't -- as I said before, I don't disagree Len (ph), with the ultimate constitutional question. I do think it's fair to say that the -- that we don't, in fact, as a general matter, impose different tax rates based on cost of living. If, in fact, you have higher income in a state -- a region that has a higher cost of living, you are paying at a higher marginal rate.

We do not give a special adjustment to keep you with the same rate as you would have been had only you been earning less, in a lower cost region. That would -- that's my point.

MS. : But your question also is predicated on the distinction between differences in states that we want to take into account, and differences between states that we don't want to take into account. Some of those differences are because medicine is practiced in some areas in a much less efficient way, and do we want to continue to subsidize that through the tax code by saying the more inefficient your practicing medicine here, the higher is the tax benefit your residents would get.

I think those are the kind of distinctions we'd like the tax code to smooth out over time. The question then is, in the first year that you implement this, do you want to penalize the people who are living in those high cost areas by having them take a much bigger hit in year one. And I'd agree with John Gruber that you want to smooth it out a little bit over time, especially because contracts have been negotiated, and because people don't have control over this, especially in the short run.

But in the long run, I don't think the tax code should be promoting widely different bundles of health care in different parts of the country.

MS. : But if your cost of living is so much lower, because you live in a poorer area, but all of the sudden you are going to be carrying a heavier part of that burden, because there are other areas where the cost of living is higher, for whatever reasons, but those people in those states are compensated normally by a higher income.

So I mean, my concern is -- because I come from a state that has disproportionately low-income people, but I also have lower cost plans, if, in fact, they are going to share a greater burden of covering those states that have higher cost plans, because they have a higher cost of living in those areas. I'm already in the tank.

SEN. LINCOLN: And that seems like a much bigger tax policy question that in a way is specific to health care. There are few provisions in the tax code that seem to take into account differences in the cost of living. But by and large, the tax code doesn't adjust for the fact that some parts of the country are just more expensive to live in, whether or not wages keep up commensurately; and that's going to be true of health care as well.

So why do you want to just take the cost of living component into account, seems like a broad tax policy question. Whether you want to promote or take into account the excess cost, above and beyond the cost of living that's driven by differences in the quantity and quality of health services consumed; that's the health policy question that I think we would want to eliminate differences over time.

MR. : Do we need to use the tax code? What I think many of us are saying is you don't need to use the tax code. And as a matter of fact, what you need to do is change the way Medicare pays for these providers. And you can make a major change on that without getting into the tax issues. And that -- and that is where the dollars will flow directly back into the federal government.

MR. : Yes.

MS. : I think that's a good point. But I think it's going to take both.

MR. : But -- but again, if you had a cap that varied by region, and you used the money you raised from that to cover low income people, the people in Arkansas might well be better off. And then the current subsidies really provide next to nothing for low income people no matter how much you are paying for health insurance.

SEN. BAUCUS: Okay, Senator Grassley.

SEN. GRASSLEY: Dr. Baicker, on this issue, we have been talking about regional variations. Do you think a flat national cap would have changed the downward pressure on insurance that you discussed?

MS. BAICKER: Yes, I think if we were to reform the current tax treatment in a way that didn't provide a subsidy for more and more expensive plans, that would exert a downward pressure on the cost of insurance and the cost of care more broadly. But it would also encourage the kind of value based insurance that we've talked about before where you would want people to seek out insurance policies that delivered the highest value care for each dollar premium they were paying.

And that incentive is dulled right now by a system that subsidizes more and more insurance regardless of the marginal value of health. Now, how you can do that in a way that doesn't involve a potential degeneration of risk pooling in the employer market would be through a complementary policy. That I wouldn't want to just reform the tax treatment alone, I would also want to provide an alternative mechanism for risk pooling, such as risk adjusted payments between insurers or risk adjusted vouchers for health insurance.

Or higher cost enrollees generated more revenues for insurers so they wouldn't seek to avoid high cost enrollees, but the enrollees themselves wouldn't have to bear that cost. There would be a social insurance component that we are currently delivering in a really inefficient way through the employer system. We could rather deliver that social insurance component through an alternative mechanism that would create an incentive for insurers to seek out high cost enrollees and provide them with higher value care.

For example, if you had an insurance company that specialized in diabetic disease management, and they weren't trying to shed their diabetic enrollees because they were paid enough to make it worthwhile to insure them, but they provided the most efficient coordinated diabetic care available, people would seek out that plan if there were appropriate incentives for people to get high value care. And that is what we don't have right now.

SEN. GRASSLEY: Thank you.

(Cross talk)

SEN. : Let me just go back to what I believe Dr. Altman said just to clarify in my own mind. You are saying the most direct way for us to deal with some of these geographic disparities and to essentially reward lower cost more efficient delivery of care is to do it through the Medicare system, and to -- instead of doing a regular across the board reduction in Medicare benefits, adjust those reductions to reflect the geographic differences that currently exist. And do that over a period of time. Is that -- is that what you were saying?

MR. ALTMAN: That's -- (off mike) -- I think trying to get at it by putting a cap. I would support some form of a cap on employer exclusion. But to make it the major item and to sort of push down hard on it beyond a certain point so that we could turn things around, I think is the wrong way to go. The better way to do it is to go into the payment system to reward value based payments, to move towards an integrated delivery system, and to sort of penalize those that continue to practice, cease of service high cost low value care. You can make it up much faster.

SEN. : Okay, Dr. Antos?

MR. ANTOS: This -- and Stuart's suggestion is really a top down kind of an approach and certainly we should move in many of those directions. But we should also not forget that people still make decisions about health insurance based largely on what they think they are paying for health insurance. And apparently, the latest survey suggested that they think they are paying $100 a month.

So we do have to deal with the -- with the tax treatment of health insurance. There is a way to smooth -- smooth that -- smooth that transition that hasn't been suggested although many suggestions have been very valid, and I think, worth working on. And that is why not give people a choice? Why not let people choose between a capped tax exclusion and a tax credit?

With a tax credit, you don't run into all of the problems that may exist with legal issues. And you can risk adjust it in terms of both, the person's income, the person's health status and the overall cost of health care in that area, applying some pressure where it seems overly expensive. But if you give people that choice they'll make the right choice and it won't necessarily drive people out of the broader coverage. They'll -- they can stay if they want. They can use their tax credit where they want.

MR. : Senator, can I comment on this from a different perspective? The point's been well made how complex the trying to provide equity within the tax system is if you were to go this route. But there is no question that we could improve the practice of medicine. You saw medicine numbers, 30 percent or so of like $2.5 trillion a year is for care that doesn't really help people.

And the beauty of what you have done in your options report the other week, about delivery system reform is you are in tune with what is going on in the health professions and the health field. This has been a long time coming. But people believe that we could do a lot better. And we have learned that there are ways to do this. And people, physicians, for instance, have become much more comfortable with this.

And I would just suggest, going way back to Senator Cornyn's question, there was real significance in yesterday's announcement. I understand you take it -- we ought to take it with a few grains of salt. And really what you need is to get this stuff in score-able numbers.

But the significance, I would submit to you, is that the trade associations, which you know, are not necessarily thought leaders, but really, you know, represent everybody, they are comfortable enough with the idea of big system change because their constituents are ready for that.

I think that's the lesson of the work that has been done in the last 10 years among consumers, purchasers, physician groups, hospitals and insurers, and goes on today. It is a very, very big and robust enterprise.

I think your -- that is the right moment here. It is not nearly as explosive as taxation, believe me.

SEN. : Can I ask a follow-up question, Mr. Chairman? Let me just ask, yesterday's announcement, I applaud that. But my understanding is that much of the increase in the cost of health care is related to technology improvement. And it seems to me if that is the case, then it makes it all the more important that if we are going to reduce the growth in health care costs that we pursue this comparative effectiveness effort.

There is no other way we are going to make the kinds of savings that were talked about yesterday or today, that the president was championing. We are not going to make them real unless we really get serious about comparative effectiveness. Is that right or wrong?

MR. : I think that is absolutely right, Senator. And I think again, the professions are ready for this. There're some outliers. People have to be assured that it is going to be done fairly. But I think people are ready for this. And I would suggest to you also that looking forward, we have to go way beyond comparative effectiveness.

Because as you mentioned technology we have a system that is -- that has developed a model of competition among providers that is based on more and more and more technology. The new heart institute across town begets another heart institute on the other side of town. This is what competition is among providers. It is dysfunctional in the extreme. So we have to go beyond that, comparative effectiveness. But that is one of the first places to start, because I think people are ready for it.

SEN. : Yes, thank you.

MR. : (Cross talk) -- sorry about that.

MR. : One of the things that the business community does is look at the pipeline of what is coming down the road in terms of --

SEN. BAUCUS: Could you speak a little loudly? Bring the microphone closer to you or on or something?

MR. : One of the things that the business community --

SEN. BAUCUS: Thank you.

MR. : -- does is -- thank you -- is look at the pipeline of the new medical technologies, medical interventions that are coming down the road. For the past decade and longer, the business community has been very concerned because we are seeing what is coming down the road in the next few years in terms of the cost of new medical interventions being applied to common conditions, chronic conditions, cardiovascular disease, diabetics, asthma, all of these, many of these which are becoming much -- more and more prevalent.

So we definitely need a strong vigorous comparative effectiveness effort. And more evidence based medicine. More focus on primary -- more value in the Medicare system and other payment systems for evaluation and management, care coordination, and the hand offs between hospital care and other settings.

The tax, just if I can talk a little bit about the tax exclusion, my observation in listening to the discussion about the geographic adjustments that would have to be made if we capped the tax exclusion, that has major implications for the employer system because right now, the -- and especially if it is an employer that is in multiple states, we pride ourselves on having the same benefit for the same employees no matter where they live.

And we would have to deal -- that would be another administrative complexity that self-insured employer plans would have to deal with and especially the more states, or the more regions you have people in, you are going to have to be making all these adjustments and then raising all these equity issues. People doing the same job for the same pay, some of whom will be taxed depending on where they live on their health benefits, others who will not.

So I just want to make that point that it is a major complication for the self-insured employer system as well.

SEN. BAUCUS: One thing though, that struck me is the testimony of Uber Reinheart, whom all of us know of, and in this -- not in this room but in this Committee, point out that even in the state of New Jersey, if I recall correctly, he looked at the end of life costs in the last six months at three different hospitals in New Jersey, and found a variation of three-fold.

One hospital spent three times what another hospital spent, in his own state, New Jersey. And he asked them, "Hey, what is going on here? Why do you spend three times?" "That is just the way we do it." You know, practice patterns and so forth. And my guess is that that explains a lot of the disparity around the country. That is just the way we do it here.

MR. : Right.

SEN. BAUCUS: For whatever reason, that is just the way we do it. So we are trying to get at that with all of the things we are talking about here, with every system reform, the health IT, comparative effectiveness, and value based purchasing, and -- (inaudible) -- primary care docs and so forth.

I'm trying to bend the, you know, the stovepipe so there is more collaboration in bundling and some integrated care and things like that but I'm just astounded at the variation in the country based on practice patterns, which to me indicates there has got to be an awful lot of -- must explain a lot of the waste that occurs in the current system.

MR. : You know, Senator, that -- this -- I think the single biggest difference between the United States and other countries, is in just what you just said. When you just look at the high cost of dying in this country, and of course, it is geographically different. But if you just looked at that, and I've -- we've looked at it and compared it to Canada or in England and places like that, that is where the big difference is in our spending pattern. And it has to do with the organized way we deliver care.

SEN. BAUCUS: Right. Now there is a question that many of us have thought about, and Senator Wyden sometimes raises this very question. And it is delicate, it is sensitive, but it is important. I would like any of the panelists to address what this country might do about the high cost of end of life care. Dr. Wilensky, you raised your hand first, you're going to be called on first.

MS. WILENSKY: We shouldn't fool ourselves that this is going to help as much as it might sound. And I say that because the percentage of Medicare dollars spent on individuals during the last 12 months of life has been pretty constant over the last several decades. About 28 percent of the Medicare dollars are spent in the last 12 months.

Now, that is not to say that there aren't strategies that can be used to try to encourage care that meets what the family and the individual wants, that reduces some of the medicalization. I mention that this year's Dartmouth Atlas showed a three-fold difference in the last six months of life between spending in Los Angeles hospitals, Northern California, Intermountain, and Mayo that along with the other variations is very important.

The Congress has tried to encourage advanced directives at people, say how they want to be treated. That's important. Making hospice more available, shared decision making, where there is more discussion between the families and the physicians is very important. Making sure these benefits are available. But when you look at it within the whole context, these variations occur all across the life scale and in all kinds of health care only some of which is related to the last six months.

SEN. BAUCUS: Okay, any other comments on the last six months.

MR. : Yeah -- yes, let me -- first, you know, Gail's comment about the same percentage really sort of hides what is really happening. Remember our population is aging and at the very, very elderly, the costs go down. So that percentage should be falling and it is not. Second, the cost of care is growing by so much. So at the same percentage, it is worth a lot more.

So let's go back to the issue of comparative effectiveness which we are supporting, that's where that can have a big impact.

It is not they're only there, but that is where the waste is. That is where people are using technologies that really either don't work at all or keep people alive for very limited at very high cost. Hospice is one option. But we do need to take account of the -- you know, I hate to say it, the cost benefit cost of some of the things we do.

And either we can do it directly or we can do it by bundling payments and let the delivery system deal with it. So it is a combination of the delivery system dealing with it or -- and/or you providing more information for people to make the right decisions both for themselves and for the care.

SEN. BAUCUS: Before I go to Senator Carper, anybody else want to --

MR. KLEIN: Yes.

SEN. BAUCUS: Okay, Dr. Klein.

MR. KLEIN: Yes, Mr. Chairman. Thank you. You won't hear me saying this often but this is one area that I think does call out for Congress to commission a study. Because I honestly think that the realm within which the questions are raised here are within the realm of ethics and faith and other factors that are outside the province of tax policy and health policy.

SEN. BAUCUS: (Cross talk.)

MR. KLEIN: And in order to ensure that we do have patient and care givers and health care providers better informed about the different options, that is just going to take more time and will be able to be done as part of the very important health care reform initiative that you are under. But a word of how that links into the technology issue, which is what sort of gave rise to this. I just have to put in a plug on behalf of technology since a number of people have identified it here as a reason for increased costs, particularly at the end of life.

Technology can be our friend. And I think that what you have called for in your white paper in terms of promoting health care information technology is the perfect example of that.

And I think we only need to look for example, I think, in closing, the experience following Hurricane Katrina where literally overnight hundreds of thousands of people were separated by hundreds of miles from their medical records that were in paper that were either inaccessible or destroyed. And all these people knew was, "Gee, in the morning I take a pink pill and in the afternoon I take a yellow pill."

If this kind of information were available digitally we wouldn't have that. The health care sector lags seriously behind almost every other industry in this country in terms of its adoption of health care information technology.

SEN. BAUCUS: Senator Carper.

SEN. THOMAS CARPER (D-DE): This is a segue. The folks that happen to be veterans who in those -- that part of the country, during Katrina who were hospitalized in VA hospitals, that were in VA nursing homes, who were moved out of that -- out of harm's way to other facilities inland. When they arrived in those VA facilities, the people receiving them, they knew what meds they were taking, they knew what their medical conditions were, they knew about their lab tests or MRIs and provided excellent -- excellent care.

I have a son who goes to MIT, who is a lot smarter than his dad. And he was in a -- he was on this drive on team there, he is out there riding his bike last -- just before Christmas, and he wiped out on some black ice outside of town and really screwed up his hand pretty good.

He had -- went to the doctor's office, actually the hospital there and had the x-rays and so forth; came home for Christmas couple of days later. We took him to a specialist there, a hand specialist there. He went out and worked in San Diego for the month of January. And he visited another hand specialist out there. He went to all three of them.

Every one of them, you know, they never talked to the other -- the other two physicians. They all took their own x-rays and there was just no way to really figure out what kind of care he had gotten and to see if there was any conclusions or just no communications. That sort of thing goes on all the time, I think, goes on all the time.

And I wasn't planning on getting into health IT. In Delaware, we've been standing up something we call the Delaware Health Information Network. We've been working on it for a number of years starting when I was governor. The idea is to link our hospitals, our doctor's offices, med labs, and so forth. And can use some of this stimulus money to really -- to incentivize the doctor's offices, especially the smaller offices to move toward medical -- electronic health care records.

And I think we got a pretty good uptake on this sort of thing. That did you -- you all have any specific advice for us as it pertains to using -- effectively using stimulus money, there's $19 billion that has been set aside for harnessing information technology. I would welcome your thoughts as to what we might -- how we might spend that money effectively. Dr. Wilensky?

MS. WILENSKY: The VA has been able to demonstrate how important it is to be able to at least pull up records and read what is there. And during Katrina that was a clear example. One of the issues as you are going forward, there are really two areas, that states that are trying to promote health IT need to focus on, as we do in this country.

One is interoperability but the second is standards and terms that are used within the medical records themselves. The VA and the DOD represent our two most advanced areas of electronic medical records, but they have been struggling mightily for the last decade and a half to learn how to talk to each other.

SEN. CARPER: I understand they are under orders right now from Bob Gates to work on that.

MS. WILENSKY: Yeah. They've been under orders from many --

SEN. CARPER: I think this time it is for real.

MS. WILENSKY: -- many commissions of the Congress for the last, well, basically the last two decades. But trying to make sure before you start or while you are early that there is an agreement both about interoperability, but we've talked about comparative effectiveness. And if we are going to make use of the natural variation that occurs in how care is provided, maybe more than we would like, but that is occurring.

And to try to see the clinical outcomes that occur with that natural variation, it means that not only do you need to be able to look at the record, so you don't repeat the test, but researchers need to be able to do a deep dive into the record to be able to see if you treat cardiac disease differently with angioplasty or with bypass surgery or medically, and you stage the illness, are you having different clinical outcomes?

And getting that kind of decision making early, rather than after you've already invested billions of dollars will be very important, and it will be much harder to fix it after the fact.

SEN. CARPER: All right.

Yes, sir. Can you turn on --

MR. : Is it on? Yeah. This is also -- I want to drive some -- the point that there is to be a business case for the use of health IT and for doctors and hospitals to cooperate with each other. Outside of, you know, certain kinds of health systems such as Kaiser Permanente, which clearly there is -- there is a business reason because the doctors are generally their employees.

In most of health care in America, it is a fee for service and a mystic kind of a system. And there are in fact, strong business reasons to not cooperate. Hospitals don't want to loose not so much the patients, they don't want to lose the admitting physicians. And if it is too easy to move patient records from one hospital to another, from one insurer to another, it is too easy to lose market share.

So I -- that is a big, big problem. There has to be a business reason. Medicare is providing a little bit of a business reason by imposing a penalty if unspecified standards aren't met in a few years. But that is not a positive incentive. That is a negative incentive.

SEN. CARPER: Could I --

SEN. BAUCUS: Go ahead.

SEN. CARPER: I'm not -- I just have one other issue I want to -- I don't know if anybody has talked at all about health savings accounts, and when they were -- I think they are being used in a couple of other countries along with our own.

I want to -- among the things I found attractive about the health savings accounts is that they had the potential for reigning the growth of health care costs. They encourage individuals to make better health related choices. Are they the end all, be all? Not at all. But in -- as we look at the context of health care reform overall, what place is there? Or what can we learn from -- from health savings accounts going forward?

Yes, sir. Dr. Gruber.

MR. GRUBER: First of all, I'm glad your son chose wisely for college and I'm very impressed. I've trouble enough walking on that black ice. I'm impressed he was out biking.

SEN. CARPER: I was a junior at Ohio State before I could spell MIT.

(Laughter)

MR. GRUBER: I think that in terms of -- I think it is very important to separate the concept of a high deductible health plan from a health savings account. I think that we -- as -- we as a nation move towards a more rationalized health care system, part of that, which we haven't really talked about today, is going to be putting more of a burden on patients to make cost conscious decisions about their health care.

And high deductible health plans can play a role in that. That does not mean that we should have a large regressive tax subsidy attached to them to promote them. The right way to promote high deductible -- high deductible saving -- health accounts is exactly by saying the U.S. government will not subsidize excessively generous insurance but subsidize a general level of insurance. And that is a level which can be readily met by things like high deductible plans.

But to, in some sense say, "Okay, to make you get a high deductible plan, we are now going to give you an extra tax break." That is what I call two wrongs trying to make a right. It doesn't work that way. If we want to promote high deductible health plans, the right way to do it is to stop the subsidies we give, that cost people to get excessively generous insurance, rather than to try to bribe them with a highly regressive tax break to get those high deductible plans.

SEN. BAUCUS: Do you agree with that, Dr. Greenstein?

MR. GREENSTEIN: Excuse me?

SEN. BAUCUS: Do you agree, because this is a -- subject is going to come up quite a bit, HSAs.

MR. GREENSTEIN: I very much agree with what Dr. Gruber just said, and there actually are aspects of HSAs that promote unnecessary and excessive health care spending. A couple of examples. First, HSAs can be spent on a very broad array of health expenses, all sorts of things that aren't covered by a health insurance plan.

Now, there is more justification for that at the present time. But if you have a reformed health care system where you have some kind of creditable minimum benefit standard, maybe that an exchange sets or some other body sets, then the notion that you are going to allow all sorts of tax deductibility into an account for all kinds of additional health insurance -- health spending is a concern.

There is a second issue, which was when health savings accounts were first enacted in 2003, there was a rule that the amount that an individual could put in an account in any year was limited by -- was the lower of some very high amount or the deductible for your high deductible plan. In 2005 or '06, the law was changed in, I think, a very unwise way.

So that now, you can put an amount in up to the maximum amount specified in law even if that is way over your deductible. So for a family plan, family coverage, a deductible plan of $2,300 qualifies you to use and has, but you are allowed to put in on a tax deductible basis $5,950. Well, the extra $3,650 is a huge tax shelter.

So I would recommend first, that you go back to not having an amount to be able to be put in on a tax deductible basis that exceeds the deductible for the plan. Secondly, I really think you need to deal with the fact that one aspect of HSAs has nothing to do with health. It is really to provide a tax shelter for high income people in retirement and to evade around the limits on IRAs you've put in, because in retirement you can withdraw money for health. You can withdraw for non-health expenses. If it is non-health, it is taxable. And there are no income limits at all on it.

So when you put all these features together, you've created an incentive for high income people to use HSAs as one hell of a tax shelter.

MS. : Can I suggest --

SEN. BAUCUS: Senator Wyden. I'm sorry, there are senators seeking recognition too. Senator Wyden.

SEN. WYDEN: Thank you very much, Mr. Chairman. Let me also say I really appreciate what you are doing on regional disparities and end of life care. I'm looking forward to working with you on it. On this question of choice, and I think Jerry Shade touched on it and now we are on the HSA issue.

It is very clear to me that with 85 percent of those lucky enough to have health coverage, but not getting any choice among plans, it is going to be critical to reform to give people choices, in effect, with a menu like members of congress have.

So Mr. Shields, the question for you is, isn't it true that it is a vital cost containment tool that people have a range of choices with at least a standardized minimum package so that insurers and others have to compete for their business and people get rewarded for smart selection?

MR. SHIELDS: Yes, it really would be pointless to create new incentives for people to go into lower cost plans if they don't have that option available to them, if it is not available to them at work. Lots of people, you might be surprised, myself included, don't have access to an HMO at work.

If we are interested in maybe making a step in that direction for purposes of controlling cost, those options, those lower cost options, HSAs for example as well, have to be available to people. And how do you do that when you are dealing with a very -- with say small groups, for example? You can do it, I've always thought it would be interesting to create the exchanges as Senator Wyden proposed and some of them -- to have in Massachusetts.

Also I've toyed with the idea of perhaps asking insurance agents and brokers to present a multiple offering to each employer where there are -- is a choice of health plans. Perhaps that's a way of getting choice to these people. But it really is quite -- it would really be in many cases fruitless to improve -- increase incentives to be cost-conscious if people don't have that option to jump to in response to the incentive.

SEN. BAUCUS: Would you though modify the ERISA plans? Companies that are self-insured who provide insurance for their employees, but they're self-insured, would you delve into that arena and require more choice for the employees?

MR. : Well, I think that requiring -- let me put it this way -- many health reform proposals originate in the notion that we have to give choice to people and we have to present them with financial incentives that will go into making those choices.

You are not going to put everybody in a system where there is exchanges and so on that everybody must go through. We have to look for a second-best.

And I would think that small, even self-funded plans have the potential to benefit here on a cost-basis providing a range of options to the workers.

So the struggle is in once you created -- particularly when you change the tax incentive the question is how are we going to make sure that people have options available to them. And with an exchange that is an option to the employer, some people will be --

SEN. BAUCUS: Does it require self-insured to participate in the exchange, that's my question?

MR. : Yeah --

(Cross talk)

MR. : Well, that would -- I think that one could provide a range of options without having to force it, the self-employed, self- funded status, some of the larger employers.

SEN. BAUCUS: Ms. Stabenow, I think you are next.

SEN. STABENOW: Thank you, Mr. Chairman, very much for another very thoughtful discussion.

I need to ask, I guess a fundamental question just to particularly of our business representatives and with Mr. Shea as well just to have it on the record, because I've been involved for about 30 years I have to say in health care policy. I started when I was five- years-old and I --

SEN. BAUCUS: When you went to the doctor?

SEN. STABENOW: Yes, yes. And for years now, particularly coming from a state with a large number of large employers providing quality health care, we've talked about losing jobs to international competitiveness issues because health care issues is on the back of business.

And for years I've said we've got to get health care costs off the back of business to be more competitive internationally. And as we come to this very important discussion now, we're now hearing from business that is not what is desired.

And we have -- there are multiple options, I mean, from a Medicare kind of system to taking the employer tax treatment and giving it totally to the employee and addressing issues of choice and so on.

But we're now hearing that employers want to be in the business of health care and I've heard the discussion around that, but for the record I think with all of you here, distinguished individuals here, I'd like to have a discussion or at least comments regarding the fact that even in light of the international competitiveness issues, it is a desire to build on the employee -- the employer-based system rather than to choose a different direction.

MR. : If I could start, if I may -- the employer-based system as you well know provides -- has many merits and provides many advantages. To merit the tax treatment it -- the employer-based plans achieve economies of scale so they can provide health care costs at a lower transaction cost level and lower administrative cost level to more and more employees.

Senator Stabenow, you had mentioned earlier what about -- the concern about the older employees, employer-based plans, cost subsidized coverage, so that the younger and the healthier employers -- as you -- employees as you know subsidize the sicker and the older workers.

There are also employer plans depending on how large they are in the market where they -- in the markets, the health care markets, where they have -- employees can leverage that purchasing power on behalf of employees to provide lower health care cost and many quality improvements and innovations.

And they have that power to do that for their employees if employers have the resources they want to provide health benefits to employees.

There are lots of health -- obviously, health benefits to the employees, productivity benefits and other reasons for employers offering coverage.

MR. : Senator, if I may, Senator, excellent question, but I think that the vast -- I know that the vast majority of employers, certainly major multi-state employers don't want to abdicate their role in the delivery of health care coverage.

They do want -- we do want the kinds of reforms that have been talked about this morning and this afternoon around ensuring a better alignment of cost and quality and the other ideas that have been put forward.

But we believe that it is critically important, both from the employer and from the employees' perspective that we build upon the employer-sponsored system. The employer-sponsored system allows large multi-state employers like my own to ensure that they're providing benefits equitably to their workforce wherever they may live or work.

And we shouldn't gloss over the fact -- we've been talking a lot about the problems that still exist in health care system, but where there have been improvements and innovations, those have largely been driven by strong employer engagement. And I don't think as a nation we want to lose that.

MR. : You know, it's --

SEN. STABENOW: (Cross talk) -- excuse me, I'm sorry, is there someone else?

MR. : Can I just make just one comment, just that you know --

SEN. BAUCUS: One of the two of you.

SEN. STABENOW: (Cross talk) -- so we hear from our employee end as well.

MR. : It's no surprise that large employers like the current system because they can provide health insurance relatively cheaply. Small employers might have to pay twice as much for the same health coverage.

And because of the way that we tax this, basically they can provide a large share of compensation in the tax reform whereas small employers that can't afford to offer health insurance are all paying compensation in cash wages.

So that -- I think that's a major reason why small employers often don't offer insurance. It's not because they wouldn't like to be able --

SEN. STABENOW: Yes.

MR. : -- to provide the benefit, it's because they can't afford it. And it actually creates a distortion by favoring large employers over small employers in the tax code.

Not -- that's probably where you get a bigger efficiency cost. It's not so much that employers have to pay for health insurance. Employees pay for it through the reduced wages. And so we're distorting -- we're basically choking the playing field in favor of large employees.

SEN. BAUCUS: Mr. Shea, and then we'll go to Senator Schumer.

MR. SHEA: Senator, thank you. What employers want and not just employers, but workers too, is cost containments, relief from the high cost. Believe me, I can tell you for 25 years unions and employers have worked together. It has been nothing but damage control.

We may have had unlimited tax preferred treatment; we haven't increased benefits. You know, it's may be been a tiny bit on the margin. We have seen costs go up and up and up despite the tax deferred.

So I really want to just make a point without going into detail. I think we haven't talked much about the behavior part of the tax treatment, and I really just want to suggest you need to look long and hard about whether or not you're going to get the desired outcome that a lot of people want to theorize will happen, if you have tax benefits therefore you reduce cost in the system.

I don't think that's true just to put it -- but cost containment is what we need, and there are two structures on the table that really would add to that.

One is the exchange mechanism and if you look at the exchange, John Sheils' data that he did for I think the Commonwealth Funds shows that the administrative cost in the exchange for small business is like one-half the cost of -- in an administration for groups of 20 or under and it's like one-third if it's below 10.

So it's really a very substantial saving and then the other is the public health insurance plan option. What employers say to me is we want choices, we want real competition in the insurance market. Because all of the work that people do even in very large employers to restrain cost aren't going to work -- and they will tell you that down the line -- aren't going to work without some national assistance.

One piece of that I would suggest is the public health insurance plan option. The other is what we've been talking about, and where business have been leaders in fact, and that is on the delivery reform work, and they have been a very, very positive force in that.

SEN. BAUCUS: Senator Schumer.

SEN. SCHUMER: Well, thank you.

And I agree with you on the public option, Mr. Shea. I have just one question actually of you, different -- you know, we're looking for cost savings here today, and I saw that whole group at the White House yesterday.

Well, one place for cost containment which could make a significant difference is a generic -- a biogeneric pathway for biogeneric drugs something that myself and others have worked on, on this committee.

The estimates, of course, savings are almost always too low. I worried that yesterday the estimates of cost-savings might have been too high or too ephemeral. When Ronald Reagan signed the chemical generics law, he said it would save a billion dollars over 10 years and a recent study found that generic utilization saved Americans $734 billion over the 10 years from '99 to '08.

So what do you think of putting this in the bill? This wouldn't be our jurisdiction, it would be the Health Committee, but still while we're on cost-savings I figured I'd ask you and then whatever any of the other panel thinks. My only question.

MR. SHEA: Thank you, Senator. Thank you for your work on this. I think it's an important area to deal with, and whether it's union funds or employers, they now pay for biopharmaceuticals, and we're going to have more and more of this, as you know, because of the science and that's great science.

But we have to get them into the generic market as soon as possible. And we know from the drug market the Hatch-Waxman Act has been very effective in this area. And when you look at the experience with Medicare Part D, the reason that that has been successful has been because of the entry of generics.

So this is really a crucial area, and you know, we need to be careful to encourage innovation but these prolonged periods of exclusivity, I don't think makes any sense from our point of view. You know, if that's the price of innovation, we could wind up in the poorhouse frankly.

SEN. BAUCUS: I -- you said in your earlier comment, I think it was you, Mr. Shea, talking about the effective, proper way to sort of bend the cost curve, a lot of -- we're here today, this subject, in large part because health care costs are rising at such a rapid rate.

So we're trying to figure out some way to -- fancy term -- bend the cost curve. So the question is what's the most appropriate way that two to three most important mechanisms sensitive to the quality of health care that you can come up with that appropriately would start to bend the curve.

And you suppose -- really you didn't think that eliminating the benefits and the employer exclusion will have much effect, if I recall correctly. I also heard you say that maybe the public option will be an enforcer on these insurance companies.

But I'd just like to ask the panelists here the two or three most effective ways -- because this is really -- (inaudible) -- had, how in the world are we going to begin to get a control on the rate of increase of health care costs in this country? And again in the sensitive way, an appropriate way, that also addresses the need for quality and coverage.

Mr. Altman, I see you raise your hand first.

MR. ALTMAN: Yes, I would like to turn us to Massachusetts. We in Massachusetts did do a two-phase approach; one, coverage, and now we're seriously looking at cost-containment.

So we're your guinea pig, we're your poster child, and I think the state is -- well, I know the state has taken this very seriously.

And where they are pushing and where I would like to suggest that the national should push is to move towards global payments, bundled payments, and to do it in the context of state -- some state systems.

Again, if I could repeat what I said, we need to change the delivery system to support what Senator Cantwell and others said. By doing that we can also slow down the cost growth without imposing wage and price controls. Wage and price controls just simply limit prices and wages for the existing system. We need to move towards value- based payments.

SEN. BAUCUS: Right.

MR. ALTMAN: Unfortunately, the current balance of power between the hospitals and doctors on the one side and the payers on the other just isn't there to do that.

SEN. BAUCUS: Okay.

MR. ALTMAN: I'm concerned about the public system because I'm concerned about Medicare. Medicare has been a real problem in this area. I mean, I'm a big supporter of Medicare, I love Medicare, I'm on Medicare.

But I can't put that up as the number one insurance model when it comes to redesigning the delivery system.

SEN. BAUCUS: Because of administrative pricing and so forth?

MR. ALTMAN: It's -- well, it's administrative pricing, fee for service. So Medicare needs to get into the act in a way -- in a really big way. So my suggestion for the number one cost-containment over time is to change the delivery system and squeeze it enough to get out the inappropriate care.

SEN. BAUCUS: Very well said.

Dr. Jacobson.

MR. JACOBSON: Well, I think a major thing is to keep people out of the medical system.

SEN. BAUCUS: I want you to turn your microphone on, sir.

MR. JACOBSON: Okay.

SEN. BAUCUS: Thank you.

MR. JACOBSON: I think a major goal, and as you said, the cornerstone of health reform should be prevention, keeping people out of the medical system. And that will save huge amounts of money, and it can be done partly through your committee, partly through health, through things like lowering the sodium levels in food.

According to Rand Corporation that would save about $20 billion a year in direct medical costs.

Getting rid of trans fat would save the government a couple of billion dollars a year.

The taxes we've talked about. Somebody mentioned tobacco taxes, sugar-sweetened beverage taxes, would raise a lot of money and reduce -- help keep people healthier, reduce obesity in the case of soft drink taxes and then more sensible modes of treatment than it gets into the comparative effectiveness.

SEN. BAUCUS: Right. I guess, calculus -- part of the calculus here is what's politically palatable too, in addition to what's the efficiency, and what's the right public policy.

Mr. Sheils.

MR. SHEILS: I guess I -- thank you. I think we know what works in cost control. Its capitation, putting people in situations where they have to -- they're going to fix some of the money to work with, and they have to do -- maximize the efficiency within it.

DRG is one form of capitation, and we saw dramatic drops in the --

SEN. BAUCUS: Right.

MR. SHEILS: -- length of stay almost instantaneously way before any one was expected. We had -- in 1989 the average rate of growth in spending for employer coverage was 18 percent a year.

Employers just freaked and made a tremendous investment in managed care. They put people in -- many people were in HMOs, but they made a big transformation in the delivery system emphasizing those plans where there's capitated payment and people had to work within it.

But in 1996, the average rate of growth in health care dropped to eight-tenths of one percent from employer coverage. Adjusting for inflation, it was an actual reduction in health spending.

So -- and with our own Medicare Part D program this emphasized competition market forces and Medicare Part D came in I believe it was 37 percent under budget. Whoever heard of a federal program on health came in under budget?

We know what works. We know capitation works, we know markets going to work. And this is what I think about -- what occurs to me when we talk about changes and incentives.

Putting people in systems, integrated delivery systems where they have the right set of incentives to control cost rather than just crank up volume is the answer and anything that moves in that direction, I think is important.

SEN. BAUCUS: Dr. Gruber.

MR. GRUBER: You know, we've talked about the role of the employers, the role of providers. I think we do need to return to the role of the consumer, which is that one other place we have real evidence is making individuals price sensitive to the use of medical care.

You know, we talk in Massachusetts about the example of the pregnant woman who drives by the North Shore Medical Center where the doctor has 30 years experience delivering babies to go down to the downtown Academic Medical Center and have a 25-year old resident deliver her baby at three times the price.

There's no incentive for her not to do that. What we need to do is we need to both bundle payments and the other things Dr. Altman and others have talked about on the provider's side. We also need to make patients sensitive to these cost differentials.

We have to make them aware of the cost differentials through our information, but we have to make them sensitive to those cost differentials through when their incomes are high enough bearing some of those cost differences themselves.

We know that works, we know we can lower health care cost without sacrificing health by making patients more cost-sensitive. I think that's an important part of -- has to be something we can't lose sight of as well.

SEN. BAUCUS: Okay.

Mr. Klein.

MR. KLEIN: If I could just add three other quick ones that have not been previously mentioned, and associate myself in support of many of the ones that have been, such as comparative effectiveness and so forth.

But first, I think some safe harbor protections for both providers and payers who render care consistent with practices that are evidence-based -- to get back to that issue of ensuring that we're paying for good quality.

Secondly, you know, there is one important lesson that we can take from the Medicare system which has been discussed earlier, and that is Medicare has rules with respect to so-called "non-payments" for so-called "never events." These are preventable errors, things -- procedures that shouldn't have occurred in the first place.

Frankly, all payers should follow that practice, and I also think that health care providers should be required to report all those medical errors as a condition of payment by Medicare.

And then lastly one of the very positive things that employers and others have been doing is promotion of wellness, how to reduce cost, keep people healthier.

There are issues that arise there where Congressional clarification would be very helpful. For example, employers that want to conduct a health care risk assessment to help determine whether or not assistance can be provided to individuals because they may have some genetic predisposition to some disease or some other condition of that sort, employers right now need some guidance that being able to collect that information protecting the privacy of the worker does not violate the Genetic Information Nondiscrimination Act.

Those are some very practical things that need to be done in order to support the kind of efforts we're talking about.

SEN. BAUCUS: Okay. Well, Mister -- okay, Dr. (cross talk.)

MR. : I think the integrated care area is the direction where we are going. We don't talk about capitation anymore because of the problem of the late '80s and the early '90s, but we do talk about integration and bundled care was a move in that direction.

And there are just great examples of what high-performance systems, whether they be Mayo, or Geisinger, Intermountain, or Kaiser can deliver it through a integrated system --

SEN. BAUCUS: Right.

MR. : -- and coordinated, and teamwork, and using IT. You've got to put all these things together. You can get a lot there, but Dr. Gruber raises a point that hasn't been talked about and I was hoping to come up and that is consumer engagement.

I've spent 25 years working with employers about how do you get individual workers in the game on this? And I'll tell you, it's a very humbling experience, Mr. Chairman, because people like the idea of getting information, but they haven't seen it come in a form that really is very usable for them yet.

And based on my experience, I'm convinced that we need to approach this a little bit differently and that is put it -- bake it into the doctor-patient relationship. We hear from our doctors about suggestions what we should do. We largely follow them.

It's a rare person who says, well, excuse me, I've printed out this webpage with the Medicare data on quality and could we review it. It's not what most of us do when we think we need some attention.

But if you had a system that built into it regular education, health education through the doctor-patient relationship and you started this in a way, or you got close to it with your delivery system reform where you said to do with rehabilitations you would pay for the people in the physician's office who did that work.

It's extra money. You're not asking the physician to go and do that. I think that idea is worth exploring -- I'm sure it's worth exploring in terms of consumer engagement.

There has been a lot of work done on this by employers and we're pleased to have been part of that. I think it is key to cost- containment and I think we're finally at a point where we can have a real discussion where people won't simply take it as cost-shifting, because we're talking about system reform.

I mean, that's the beauty of the announcement yesterday. These trade associations are stepping up and saying, you know, we're going to save $2 trillion. Well, of course, you've got to put them down, but even if it's $1 trillion, that's a serious investment.

And then it raises then the question for consumers as something that we, for instance, would be happy to say, well, we are achieving the cost-containment that we need, let's talk about what our end of this bargain is.

SEN. BAUCUS: While you're on this subject, I just -- there's so much to cover here -- that's the groups that met the president.

You know, we're going to get significant benefits with universal coverage. And I mean, the pharmaceutical industry, well, hospitals will less charge for care for example. Insurance companies, similar policies, so forth, so I kind of am interested in what are some of your ideas if we tell them where they could say, you know, nice sounding words yesterday somebody said.

But it's not much of enforcement, but the questions with the follow-through or follow-up and I just -- you know, we really get big benefits with universal coverage, insurance companies, pharmaceuticals, hospitals, and so forth.

So where should they pony up? Where should they show savings? And I'll start with you Dr. Wilensky?

MS. WILENSKY: Let me say the first thing you ought to do is to have CBO or others do a scrub for all the specific payments we've put in over the years with reference to disproportionate share payments, uncompensated care, bad debt, et cetera.

There are a lot -- and there are a lot of specific programs in HHS, some of which may still be important, but some of which may not or not in their present form in terms of the levels for specific populations, the maternal and child care, various programs, some of the special population supports.

Again -- and I'm not suggesting this is just a blanket cut, but they ought to be reconsidered as to whether the amounts are appropriate, whether they need to be more targeted, particularly the payments that are going for bad debt and uncompensated care.

As you go forward, people have talked about the importance of moving toward more integrated delivery systems and bundling care, and I'm very supportive of that notion, remembering to learn from the mid- 1990s experience that people responded much better if they feel the insurance plan is their choice.

The kind of backlash we saw to managed care in '97, '98 didn't seem present with the federal employees in Washington, because they knew every November they could choose another plan. And making sure as much as we think we're moving toward good systems that we want to engage consumers in a complete way that is not only -- will reward and encourage better health behavior.

And I support a lot of the statements made about trying to both push and pull better behavior from individuals. But if they're going to have a choice about these health care plans, they're much more likely to be forgiving of some changes they might not like because they're able to respond and think differently.

One final comment; Stuart Altman was emphasizing that Medicare now, although it does many things well in terms of providing access to care, is a very old-fashioned, out-of-date, inappropriate delivery system. It's almost all the things we've talked about needing to be changed.

(Inaudible) -- a la carte fee for service, no real word for quality and efficiency. And that means a lot of change, and having the Congress decide who will be -- that'll be comfortable directing that change, and providing very different authorities than have what traditionally happened, will be part of the going forward mechanism if we're going to try to change how health care is delivered in the Medicare system.

SEN. BAUCUS: Dr. Gruber.

MR. GRUBER: Yeah, I think on the provider's side it does hearken back to Senator Grassley's original point about how we reimbursed providers for the uncompensated care they deliver and a much more targeted approach to doing so.

But I want to more come on the insurer's side, which is, I don't think it has to be a system which causes big wins for insurers, because I think a key part of the system has to be a much more rigorous, competitive environment among the insurers.

In Massachusetts we set up this connector mechanism where insurers compete on a web portal that's very transparent and we've really gotten prices down in our Commonwealth Care Program which provides care for low-income populations.

We've had a very aggressive bidding strategy amongst five Medicaid managed care organizations provide care and we actually had a zero percent cost increase for our Commonwealth Care Program this year because of an aggressive competitive bidding strategy.

So I actually think this doesn't have to be a situation where there is lots of extra resources going to insurers in particular, if we do this in a way which maximizes the competitive forces in the insurance market.

SEN. BAUCUS: Dr. Greenstein.

MR. GREENSTEIN: Let me just take one area of those that you mentioned which would be pharmaceutical companies. So I think you could start with two measures that the Senate passed on a bipartisan basis in 2005 but that were not enacted.

One would increased the minimum rebate in the Medicaid program. On a related front, in Medicaid, drug manufacturers are not required to pay rebates for drugs prescribed for beneficiaries in managed care.

SEN. BAUCUS: Right.

MR. GREENSTEIN: The theory here was that managed care would negotiate good enough prices on its own. The evidence shows that hasn't happened. In 2005 you passed legislation that would extend the rebate for managed care.

In addition to those two, some loopholes have developed whereby manufacturers of brand-name drugs can get around the provision and more, which says that if the average manufacturers price rise is faster than the CPI, that's supposed to be reflected in a higher rebate.

There's loopholes that can be closed there. There's a CBO option in the CBO options book on that. And the HHS inspector general proposed as well that manufacturers of generic drugs no longer be exempt from the adjustment in the rebate if their manufacturer price rises faster than the CPI.

There's now also one in Medicare. The assumption when the Medicare drug benefit was established in 2003 was that the private plans offering the drug coverage in Medicare would be able to negotiate lower drug -- as well a lower drug prices for the dual eligible. So as you know, it was shifted from Medicaid drug coverage to Medicare.

The assumption was Medicare would get lower and lower drug prices than Medicaid did. Medicare is paying in some cases 20 percent to 30 percent more than Medicaid did because Medicaid had the rebate that I just referred to.

And the private plans didn't get similar economies in Medicare. You could require before the dual eligibles that the prices under the Medicare drug benefit match what they would be had those people still been in Medicaid, and the Medicaid rebate were in effect.

And finally, and I know this is a little controversial, but if we're talking about the pharmaceutical companies, and particularly if you couldn't get some of those other measures I just mentioned, I think you could look at some of the international tax reforms.

You know, President Bush's IRS Commissioner Mark Everson warned in 2006 that there was growing evidence of the pharmaceutical companies shifting growing amounts of profits overseas.

Their share of sales and of assets in the U.S. is on the -- excuse me, their share of sales and assets that are overseas are about 40 percent of their sales, 40 percent of their assets. What they show on the books, 70 percent of their profits overseas, even though drug prices for the same drugs are lower overseas than here.

They are engaging in totally legal practices to move a lot of their profits overseas to avoid corporate income tax. They're going to make a lot of money out of universal coverage.

SEN. BAUCUS: That's a very --

MR. GREENSTEIN: There is a whole menu of things to look at with regard to pharmaceuticals.

SEN. BAUCUS: Thank you. You've been thinking, thank you very much.

Senator Grassley.

(Laughter)

SEN. GRASSLEY: Yeah, I think this question fits in with what was just discussed, but maybe a little higher altitude.

Dr. Wilensky, Antos, and Dr. Gruber, we discussed the need to bend the growth curve of health care spending. We already spent 16 percent of GDP on health care, more than any other country.

A statement made, now probably two hours ago, seemed to suggest that we don't need to be as concerned about the new spending or upfront costs. What is your view on this, and how do we make sure that we don't make things worse instead of better from an economic standpoint?

MS. WILENSKY: That's a -- it's a large question. Not making them worse from an economic standpoint to my mind is to ignore the cost of funding the expansion, and not have it as a funded item.

There were -- Massachusetts has shown us how quickly coverage can be expanded. And in a very admirable way they have -- very close to universal coverage now. They had some sources of money that unfortunately are not available to the federal government in Medicaid waiver that was about to expire, a pool of money that was previously used for uncompensated care.

And so to my mind the challenge will be making good on our commitment to make sure everyone has access to health insurance and coverage, and indeed coverage, but recognizing it's a big cost, and we need to make sure that our funding is able to match the expansion.

But the second thing is to take advantage of what seems to be widespread agreement by provider communities, and payers, and your policy advisers here that reimbursement needs to fundamentally change, bundled payments, trying to reimburse for quality and efficiency, going after the geographic variations that we've talked about for at least the last decade, and using payment reform along with better information to drive the kind of behavior change, recognizing it's going to take several years to implement these changes.

And we need to monitor as we're going out to not put ourselves in a very big fiscal bind. We need to be concerned about what's going on at a aggregate level to the deficit, and to move as fast as we can, but not faster than we're able to fund.

SEN. GRASSLEY: Dr. Antos?

MR. ANTOS: Thank you, Senator. CBO points out that the overall question of how quickly health care spending is perhaps the single determining factor on our country's fiscal balance over the long term, so it's a very, very serious question. We need to -- perhaps the most important thing we need to do is to make sure that we size the reform right.

We don't want to get the promises out ahead of our ability to pay for it, and ahead of our willingness on the part of people to be taxed or to make other sacrifices to make all of this happen.

Unfortunately Medicare is an excellent example of how that hasn't worked out. You look at what we're doing now with the sustainable growth rates, the physician payment, what is that all about?

That is having extended promises to individuals, and to physicians in this case, for payments. Congress says, well, we want to pull some of that back. And we all know how difficult it is to pull back a promise after you've made it. It's almost impossible.

So I think the most important thing we could do is to take a step back and ask of the various options that we have to promote greater efficiency, how quickly will they come online, what will it take to get them moving, and how does that comport with our willingness to tax ourselves and to make expansions in the availability of health care.

What that really calls for is a phase-in. If we jump into this with both feet, then we're going to have serious, serious economic problems, not just now, but over the foreseeable future.

SEN. GRASSLEY: Dr. Gruber?

MR. GRUBER: Yeah, I think that's really a fundamental question. Let me offer three points in response.

I think the first point is the way we do reform has to be within the kind of competitive environment that's going to make sure we take advantage maximally of what we're adding to the system.

As I mentioned in my last answer, to make sure that we recognize that we offer our resources into the system, and use a competitive solution that redistributes those resources not just to the providers and insurers but back to consumers.

I think the second feature is to make sure that we use payment structures for this reform that are as win-win as possible. We focused on two today; reforming the tax exclusion and lifestyle -- pricing on more expensive lifestyle choices.

And I think that basically those are win-win solutions that we can use to pay for things. But the fundamental -- the most important point that I would make is -- perhaps a bit in contrast with Dr. Antos, is not to be afraid to do coverage first.

I think that to recognize that fundamentally if we're going to reform health care cost in America, the first step is to get everyone covered. And the first step is to get all of us going in the same direction, rather than some of us fighting for this coverage, and some of us fighting for cost control to say, okay, let's move to an equitable system, where everyone in America has health insurance, and then let's all work together to make that affordable.

And we have a great example of that in Massachusetts. What we did in Massachusetts, we had a bill which didn't even pretend to be about cost control.

I would highly recommend that Congress consider building as much more cost control in it than Massachusetts did.

But none the less, it was a bill that was about coverage. We did that bill, we got everyone covered, and then everyone sat back and said, wait a second, how are we going to make this sustainable? We have to get costs under control.

And the result has been mentioned by a couple of speakers here, with the fundamental cost control bill passed through our legislature that set up a Payment Reform Commission to look seriously at the overpayments of many of our providers in the state.

And it was a bill that would not have possible, literally would not have happened, if we did not first move to universal coverage, and first get everyone to get that topic off the table, and get everyone focused on cost control.

And so I think the most important lesson is that you can do coverage first, that that's a critical step towards the long-run solution we need of getting cost under control.

SEN. GRASSLEY: Dr. Wilensky, you asked for -- to be recognized.

MS. WILENSKY: I'd like to make an important distinction. I agree with not holding coverage expansion hostage until you get cost control, but we do have to worry about how we fund the expansion.

Massachusetts funded their expansion through the Medicaid waiver and also with the uncompensated care pool. What I'm trying to encourage you is to remember we've got to fund the expansion, and then we're going to have to figure out how to make the spending sustainable.

I am considering -- and for me the big economic worry is not yet another unfunded major program, large program. That would I think be a very serious economic mistake. So don't hold it hostage until you get cost-containment in place. But you've got to figure out where the money is going to come from for the 15 percent expansion.

SEN. GRASSLEY: If you want to talk on it --

MR. : Yeah, thank you, Senator. Thank you, Jim. You know, the very, very high-altitude people, I think there's broad agreement that we have to go to evidence-based medicine as opposed to the practice pattern variation that's really driving up the cost so much.

The question is how you take that and bring it down to actual cost-savings. And I would just say to you, you're sense of urgency that this committee has had, and the president's had in this is absolutely on target.

I mean, you look at the employer-based system, which is what we want to base the expansion of health coverage on. This system is not collapsing, but it is really in serious danger because of high health costs.

My -- I would just suggest to you two mechanisms. One, develop a payment authority within the federal government structure that's not CMS -- that could test out some of these payment changes. So you tie quality to payments, but do it in a rapid-cycle kind of way.

We don't have years, and years, and years to do pilots and tests and come back to you and report. I just don't think we have the time. So I think you need a different mechanism to tie -- a structure to tie payments to reforming.

And then secondly, I do think you need the competition of a strong public plan. I would disagree to some extent with my colleagues, Dr. Altman and Dr. Wilensky about Medicare. They may not be -- they aren't the right sort of delivery model.

But they have led the way in terms of getting hospital support on quality measures. They have led the way in saying we're not going to pay for some of these things. That was Secretary Thompson, followed by Secretary Leavitt, who did that sort of thing.

They showed that hospitals could report on quality measures, they showed that the hospitals performance improves when they report on quality measures. No private employer was able to do that.

We were all kind of scratching around trying to get to that. We need the leadership of a strong, robust, public program.

MR. : Senator Grassley, I could not disagree more strenuously with Dr. Gruber. I think it would be a grievous mistake, and a tremendous missed opportunity, if the congress were only to focus on one of the three essential components of health care reform that being coverage.

We are all in favor of addressing the issue of coverage, and we support everyone being covered, not simply access to it, but everyone being covered. But the cost and the quality initiatives that we've talked about today are just as essential.

And congress is frankly up to the job, and I think to sort of relegate that and say it needs to be dealt with later, is to sell short your own efforts and initiatives, and frankly to potentially exacerbate the problem by not coupling improved coverage -- universal coverage with these cost and quality issues.

Lastly, we're only going to get health care reform in this country if the public believes that it's a winning proposition for them. This is a rare moment to be captured.

And if I may return to the point made earlier about the tax exclusion as it relates to this; there are over 160 million Americans who receive coverage through their Employer-provided plans. The notion somehow that the exclusion on Employer-provided coverage is regressive is completely upside down.

Of course, higher income people who pay at a higher rate and pay greater dollars in taxes will enjoy a benefit from a tax preference. That's true of any preference; the mortgage interest deduction, charitable contributions, deduction for state and local taxes.

But as a percentage of their overall income, this exclusion dramatically benefits lower and middle-income people. And you don't want to make the political mistake of the Medicare Catastrophic Act, where people felt that they were losing something in the short-term in any benefits to them or perhaps somewhere off in the distant future.

You don't need to do it that way, and it would be unfair to the very people that you're hoping to serve.

MR. KLEINBARD: I'd just like to --

SEN. BAUCUS: Mr. Kleinbard, and then Senator Wyden.

MR. KLEINBARD: Thank you. I just would like to respond on the progressivity point, just to give some numbers and give some data here. It may be that the savings are a smaller percentage of a very high income individual's tax -- total after-tax income, but that simply reflects the fact that that person had lots of income.

And as I said earlier, medical costs, the amount actually spent on insurance premiums does not go up proportionately with income. So for example, when you look at the savings per tax return, you see that people who say have a $25,000-a-year income might save on average $1,900 a year.

Somebody at $100,000 income is saving $4,500 a year. So of course the system today is regressive. It is regressive in the sense that someone with the same health-plan is getting in affect a larger subsidy even though he is richer, and has a higher income. That is the fundamental upside down nature of the subsidy today.

That is inescapably correct. It is also the case that it is not required that a subsidy have that characteristic. A tax credit does not. A tax credit is a lump sum.

Now, what you all as -- it's up to you all what to do with it, but the data are that there is in fact a very substantial benefit that goes up with income, and in turn it is a feature of current law but it is not required of a federal subsidy.

SEN. BAUCUS: Senator Wyden.

SEN. WYDEN: Thank you, Mr. Chairman. Chairman, I just wanted to ask one last question about something that you put on my radar that I think is absolutely key and that's the transition period. The whole question of sort of what we have today, and moving into a very different kind of system.

The president clearly started that in the campaign. He made it clear that everybody in the United States would have a chance to keep the coverage they have. It's going to be written into law, hundreds of senators are going to vote for that.

He also said that middleclass people are not going to get taxed. And Gerry Shea has made the point I think very eloquently on that point about why that is so important.

So then the question becomes, how do you start moving to a transition to a modern system? And much of today's health care, the question of going back and forth on the tax code, comes from the 1940s.

So the question then is, how do you, for example, reform the tax code so it is fair to the large employers, got to be very sensitive about ERISA, but also convert it to something that's modern. And I think that's the generous deduction.

There are other changes, administrative cost reduction; certainly, if you have big pools of people that will hold administrative costs down. Sign-up with your employer, your employer wants to do that.

Administrative cost reduction is part of the transition. And then most of the ideas that you all have been talking about today; rewarding prevention, buying value, dealing with geographical disparity.

So I think there is a sense of what needs to be done in this transition period, and I thought I'd close with you, Ms. Wilensky, because of your background. And I'm particularly struck by the fact that you and I have talked about it.

You advised John McCain in the campaign, but you've been very supportive of a lot of the ideas of President Obama. And I think that's exactly the kind of effort we're going to need to bring the country together.

And why don't you, at least from my standpoint, give us a little bit more insight about how the country can transition from a system that largely came out of the 1940s, and we can pick on the chairman's very good point about actually getting from there to here, and reforming health care.

Dr. Wilensky?

MS. WILENSKY: Thank you. Like all of the people in this room and at this table, I most want to see these problems addressed. I want to see people have insurance coverage, and I want to try to help develop a health care system that improves value and rewards quality.

There is some debate as you get down to the specifics about how you go about doing it. But during the campaign, people like Jonathan Gruber and I, and David Cutler and I, and David Blumenthal and I, who were sharing many podiums commented about how much similarity there existed in terms of the kinds of changes that needed to happen in terms of better promotion, more focus on chronic disease, health IT, et cetera.

I am a little concerned about the expectations. Somebody mentioned earlier of trying to manage expectations now. It's important that we make some aggressive, significant moves.

You could actually say you've already done some moves when you reauthorized the -- and expanded the children's health insurance coverage, subsidized COBRA, strengthened Medicaid.

But you need to make some other significant expansions with regard to coverage, provided you can pay for them. I'm sympathetic with the politics of the tax exclusion changes.

I would hope you can do some of the ones that Jonathan Gruber raised of limiting -- just flat limiting the amount of the deduction, doing it for specific income groups, or otherwise targeting more of who you want to have that deduction. And mostly it'll depend on how you index it over time.

As long as it's not indexed to medical expenditures, it will begin to have more impact over time. You need to decide who will be comfortable with -- to help redesign the reimbursement under Medicare. I'm appreciative that CMS and HIPAA might not be your choice.

I don't have any allusions there to tell you to direct that. But you need to decide how to change the delivery of health care and the reimbursement system under Medicare, and to start it quickly, however you do it, through pilots, as Gerry Shea said.

And to recognize while you will probably move faster on the expansion of coverage that these are going to take a period to fold in all of these reimbursement and delivery system changes, and that people need to start saying that out loud to help try to not have a sense of disappointment.

So I think there's a tremendous momentum here. And the fact that you had the group yesterday indicates -- matches for self-protective reasons, but a real agreement that we need to change, and there are a lot of things we can do to make it better. It's figuring out how to harness that energy and to not lose that momentum, but to monitor the expectations.

I'm a little afraid, that one's going to be harder for you as people who have to report back to your constituency.

SEN. WYDEN: Thank you Mr. Chairman.

SEN. BAUCUS: Thank you, Senator. Frankly I think it's a good point to wrap up with. We're, I think, making history here. And you certainly all are. You've spent so much time thinking about how we reform our system.

And I do think, it's been said by others, the stars are pretty well aligned this time to finally accomplish our objective, which is getting control over the increased costs. Second, to reforming health insurance market. Third is providing coverage for all Americans.

And it will not be easy; nothing worthwhile is easy, but we're going to get there. And I cannot thank you all enough for all this good work and your help, and I suspect this is not the last time we're going to be conversing on this subject.

This could take many more weeks, months, and into the next couple of years too as we put this together, but my job is to keep the men going. My job is to keep people working together, as long I possibly can. My job is just to help all of us together with no theological axe to grind, just to get a really good, solid American health reform put together.

We need a uniquely American solution here. We're not some other country; we're the United States of America. And we're noted for our ingenuity, we're noted for our imagination, we're noted for our can-do spirit.

And we're going to put this together in a way that will make sense. And that's not only my objective, I notice all of you too, and I can't thank you enough for coming and spending about three hours here trying to undertake these next steps.

So thank you very much, and the committee is adjourned.

END.


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