>> so yellow. sorry, yellow one. so you have a yellow question card and we'll hold questions until the end so that we can make it through all of our speakers. so let's start with bob reischauer. he is president of the urban institute and former director of cbo under clinton. he's been through this once before. he is really uniquely positioned to understand the incredible need for healthcare reform, the politics around healthcare reform, the economics and, of course, the arcane language of scoring which is becoming increasingly important. and i have learned to always listen to bob because not only is he very insightful with his analysis and judgments but he's almost always right. and so i'm always asking him -- not only me but others always asking him to handicap things so here he is. bob reischauer. [applause]

>> thank you, nancy. one correction, it wasn't under clinton. [laughter] >> that i served. i predated him but he outlasted me. [laughter] >> so i think to his relief. let me add my welcome to all of you, to that of nancy. i also want to take the opportunity to congratulate -- nihcm has become influential and a respected voice on healthcare policy. it's done this on a number of ways. first through its issue briefs called expert voices, which top analysts summarize succinctly

the state of knowledge on a particular issue and then add their unique perspective and for those of you who haven't accessed one of those, i think there's probably some out on the table, i would. i have a little stack of them somewhere in my office that i refer to quite frequently. it's also had influence through the reports that it generates from its research projects on a wide range of topics from childhood obesity to health system capacity and on and on. and it's been an important convener, which is a vital role in the health policy debate. it's brought together practical business leaders from the insurance industry with policy analysts, with legislative staff and policymakers to explore

important health issues that are facing the nation. but in my opinion, probably the most important and unique contribution that nihcm has made has been an indirect one, one resulting from the various annual media awards that it puts out. it awards a prize for radio and tv journalism, one for general audience print media and one for the trade publications. and these awards, i think, have had a big impact stimulating more and better coverage of health issues throughout the nation and it's raised the prestige of the journalists and investigative reporters who cover health. the awards also have caused editors and publishers to channel more resources into covering health topics and for

that i think all of us who are interested in this area should be grateful. enough patting you on the back. >> oh, that was so nice. [laughter] >> you can pay me afterwards. [laughter] >> let me turn to the assignment that i was given when i was first invited to participate on this panel, i was asked to talk about our fiscal future in healthcare, which seemed like a modest-enough topic for me to get lost in quite easily. i then looked at the material again last night and found that there was a slight change, and i was listed as somebody who might talk about how we might finance health reform, which is an understandable shift given what's happened in the last few weeks. well, unfortunately, i didn't have time to put the finish

touches on my secret painless plan that raises $1.5 trillion without cutting provider payments or increasing taxes or imposing burdens on employers so you're all just going to have to wait a few weeks for that to come out. and instead what i'll do is focus a couple of the implications of our perilous financial situation on health reform. if we press rewind and go back a decade and a half to when the clinton administration was struggling to enact fundamental healthcare reform, we find that the effort was driven largely by what i would call a moral imperative. how could the richest nation in the world leave 40 million people, which was the number at the time, uninsured? and many more millions fearful that they would lose their access to affordable health insurance and access to care if

they lost their job or they found themselves sick? especially, in a weak economy which prevailed during those years. of course, financial issues were important back then. but the fiscal challenged really been dealt with through the deficit reduction act of 1993, which was signed into law august 10th of 1993. that piece of legislation raised individual and corporate tax rates and the gas tax and eliminated the tax cap on h.i. payroll taxes and extended the discretionary spending caps and it subjected more of social security to the income tax. supposedly this sort of put the nation on a good path with respect to the deficit, and the

order to those trying to develop health reform was, you know, don't screw up what we've already accomplished. you know, go out and do health reform, but, you know, it doesn't have to play a big role with respect to the budget. this piece of legislation that had dealt with the deficit, of course, was a very fragile and hard-fought accomplishment. it passed the house 218-216 with no republican votes. it passed the senate only after the vice president cast the tie-breaking vote also with no republican votes. so there was a lot of concern that this achievement not be undone by health reform. but no more burden was placed on health reform.

of course, the situation has changed markedly over the last 15 years. while the moral imperative is as strong now as it was back then, there's a new and in many ways more urgent imperative for health reform, and that's namely the fiscal imperative. after the surpluses of the 1998 to 2001 period disappeared, devoured as they were by a recession by the response to 9/11, by two wars and by huge tax cuts it, became increasingly apparent to budget wonks that the nation was hurdling in an unsustainable fiscal path, peter orszag and his not so merry band predicted this unsustainability and concluded that it was largely if not entirely

attributable to the projected excess healthcare growth of programs, by excess cost growth, what i mean is the excess growth in spending largely in medicare and medicaid over and above the growth of g.d.p. historically, that's been about -- somewhere between 2 and 2.5 percentage points a year and it was projected to continue into the future. gao, the center on budget and policy priorities, a number of analysts in the private sector, like henry aaron, and bill gale, and allen hourerback did similar calculations and came up with similar conclusions. when i played around with these projections back in 2007, i concluded as others had that through some miracle we could hold down federal healthcare spending growth to half a percentage point faster than

g.d.p., we could extend all of the tax cuts that were enacted since, index the alternative minimum tax, allow discretionary spending to grow along with both inflation and population and have a balanced budget for at least the next 40 years. so this gives you an indication of what role rapid healthcare spending plays in the projected unsustainability of our fiscal situation. without some restraint on healthcare spending, the choices that faced us were quite unpleasant. sharply higher taxes, deep cuts in nonhealth programs or budget deficits that would begin to balloon and at some point would explode. no one paid much attention to these dire warnings isn't surprising. we had a president who had no real interest in pushing for fundamental health reform and a

deficit that while unsustainable in the long run appeared to be on the right path in the short run. from 2004 until the economy tanked in 2008, the deficit was coming down. and people tend to forget this. by 2007, it reached a mere $180 billion or 1.2% of g.d.p., which is a lower figure than any that was experienced in the 22 years between 1975 and 1996. that the budget wonks were predicting fiscal disaster in 15, 20, 30 years fell on deaf ears, of course, because the long run that counts in washington is the number of years until the next election. by this measure, the wolf wasn't anywhere near the door and the economy, while it wasn't great, was certainly okay.

of course, the last year has seen all of these elements change. we now have a president who is deeply committed to fundamental healthcare reform and an omb director who is appropriately obsessed with the role that health plays in our fiscal future. and the economy has taken a deep dive. our financial sector has imploded and asset values have plummeted. what this has done is cause a sharp reduction in revenues and an increase in spending on cyclically sensitive entitlements. the administration and congress have also enacted a huge stimulus package and used various other forms of financial wizardry to prop up asset values and give a boost to the financial sector and, of course, pick up a few car companies on the cheap. [laughter] >> the bottom line of all of this is that our deficits are soaring.

cbo has estimated that for the current fiscal year, we will have a deficit of around $1.8 trillion or 13% of g.d.p., which is over twice as large as any deficit we've experienced since the end of world war ii. in percent of g.d.p. terms. looking at fiscal 2010, the next year, doesn't look a whole lot better, a deficit of something in the order of 1.4 trillion or 10% of g.d.p. and even looking out over the full 10-year period, the cbo projections of what the president's policies would entail are pretty, pretty bleak. the specter of a financial disaster is no longer two or three decades away. in short, the wolf -- if the wolf is not at the door, we should look for him in the foyer. [laughter] >> all of this points -- all of

this puts the fiscal imperative front and center as we consider the size and the shape of fundamental health reform. in contrast to 1994, this time around we have to ask how can reform contribute to a broad effort to bring future deficits down? this is no mean feat because it's inevitable that any reform has expands access to insurance in any kind of significant way is going to increase deficits in the early years. subsidies are expensive and spending cuts and tax increases that might pay for them can't be turned on immediately. one has to phase them in gradually over several years, especially, when we are experiencing such a weak economy and fragile financial sector. let me close drawing your attention to three implications of our current fiscal situation as they relate to healthcare reform. the first of these is that while

it's important that we try to pay for reform fully over the first 10 years, it is equally, if not more important, how we choose to pay for that reform. there's been a lot of political rhetoric about fully paying for health reform. and i applaud both the congress and the administration for making promises on that front. but the impact of the reform on health spending, both in the public and private sectors, 15, 20, 25 years from now, is more important than what happens over the next 10 years. offsets or pay-fors that we might consider really come in two different flavors. one flavor is those that grow more slowly than costs. and the other is pay-fors that

have -- hold out the prospect of compounding at a faster rate than program costs will grow after the tenth year. many of the cuts of the provider payments fall into the first group. reforms that alter the incentives facing patients, providers, and payors in the structure of the delivery system tend to fall in the second group. given the current fiscal situation, it'd be better to have a reform that fell a few hundred billions dollars of paying for itself for the first 10 years but the exceeding costs in the growing amounts in the eighth, ninth and tenth years and a fully paid-for plan than spending was just offset by savings at the end of the first 10 years and annual savings quotas were met each year by an ad hoc package by new one-shot measures. what this suggests is that a lot of effort should be devoted to

instituting from the start measures that can incredibly bend the curve, change behavior and restructure the institutions in the health sector. second, as we craft the package of policies that will pay for health reform, we have to be cognizant of the reality that notwithstanding what i said about health costs being the root cause of our unsustainable fiscal future, health reform, even wildly successful health reform, is not going to get us all the way to the fiscal promise land by itself. other deficit reduction actions are going to have to be enacted. this is a good reason to focus the search for pay-fors in areas that are related to health. taxes on sugary soft drinks, taxes on alcohol, capping the tax inclusion on employee sponsored premiums and flexible spending accounts and cuts

related directly to medicare and medicaid fit the bill. if health reform is paid for through savings from nonhealth-related parts of the budget, we can expect that when policymakers return to the issue of how we deal with our long-run fiscal future, how we cut the deficit, they are going to -- they are going to inevitably come back and whack whatever is done in health reform, which would not be constructive especially to a new policy trying to get off the ground. finally, everyone should be aware that there is a world audience for health reform and this audience isn't particularly concerned about universal coverage or the quality of healthcare. it's interested in the course of the u.s. deficit and what health reform might do to the borrowing needs of our nation and the value of the dollar. in recent years, the united states has been heavily

dependent on large capital inflows from abroad. a significant portion of the treasury's new debt, in fact, 74% since december 2000 has come from foreign interests. this happens -- has happened because many nations have had large trade surpluses with the u.s. or were awash with petro dollars or had no need to stimulate their own domestic economies. the inflow allowed the united states to borrow at very low rates but all of that has changed now. the trade surpluses have disappeared. the petro dollar balances have shrunk and many countries are trying to stimulate their own economies. not to mention the fact that other democracies in the world are also in the market, borrowing huge amounts of money. so we have to be very, very

cognizant that the ability of the united states to move forward and buy the time for health reform to begin moderating the growth of cost is limited. and what this means is that, i think, the cbo cost estimates and the debate around the spending in these programs is critically important to our future. now, i realize that this message has not been very uplifting and it's very hard to try and extract the silver lining from this dark cloud. but cognizant of the fact that uwe reischauer, where is he, will appear later and regale us in one way or the other, i thought i might end with a little humor even though it

be-gallows humor. what do i do? this is to make the point that fiscal futures can change both up and down dramatically in very short periods of time. when i was thinking about what i might say today, last night, i came across this chart which was from a talk i gave eight years ago. and at the time we were enjoying a four-year period of budget surpluses, and at that time there was a lively debate taking place about how the fed would conduct monetary policy once the public debt was paid off. the projection at that time was that, yes, in 2009, if we devoted all of the projected surpluss to paying off the debt, we would have no public debt at this point if we chose only to

use the social security and trust fund surpluses it would take us maybe 2011 or 2013 to do this, and the question was, you know, how could the fed conduct monetary policy when all the public debt was paid off? and the answer that most economists gave was that it wouldn't be a huge problem because the fed could conduct monetary policy by buying and selling fannie mae, freddie mac and gmac debt instruments. [laughter] >> and as it turned out, the economists were half-right. [laughter] >> we haven't paid off the federal debt but we are conducting monetary policy by buying and selling freddie, fannie and gmac debt. so this illustrates the fact that 5, 8 years from now the gloomy outlook that i'd just given might be very, very different should health reform in a constructive way be enacted. thank you. [applause]

>> thank you, bob, for those excellent and somewhat sobering remarks. and for your very kind words about nihcm's anniversary. i really appreciate that. next we'll hear from cleve killingsworth ceo of blue cross blue shield of massachusetts. cleve is a very important leader of healthcare reform in massachusetts. he's also participating very much in the day-to-day way in that healthcare reform as well. he's been an outspoken advocate for quite a bit of time now on payment reform and he is doing some very interesting things with his own company. joining him will be andrew dreyfuss who is executive vice president of healthcare services for blue cross blue shield of massachusetts. >> good morning. it's good to be here. we don't often get a chance to present to this particular collection of folks, so this is pretty exciting. we are grateful to have this

opportunity. as nancy just said i'm copresenting with andrew dreyfuss, my partner in crime back in massachusetts. his team leads the development and implementation of our alternative quality contract. what i'd like to do is just take a couple of minutes to try to create a context in which the aqc emerged and then andrew is going to take you through some of the main elements. in the mid-'90s blue cross blue shield of massachusetts was in trouble. it almost went out of business. it was involved in too many businesses and it was slow to emerge to react to the emergence of managed care. by 2004, however, it had righted itself. it became fiscally stable and then it became even stronger. it had significant membership growth and became the dominate payor in the marketplace by far. in 2001, the institute of medicine released its chasm report which taught us that

98,000 people die in the nation's hospitals of avoidable medical errors and they could be by abuse or omission of services and a strong statement about medical errors generally in the system. it was the first time that the magnitude of the problem was characterized for the nation in such actionable terms. this report came from a prestigious organization, the institute of medicine, which has lots of physician credibility all around the world. and so about five years ago, kind of having righted our insurance company, we decided that the next place to add value for our members was to improve the quality of care that they received. and we used the institute of medicine report along with studies from windberg and others as the basis for making the case for change in massachusetts. we also reasoned that we, blue

cross blue shield and other insurers were the ones who purchased the care and we needed to demand change. we had for the first time data in the format and of the nature that would allow us to go to our providers and make the case for change. without being asked so, cleve, where did you get your m.d.? we believe that because of our brand, our members would expect that we would not contract with hospitals and physicians that we knew provided unsafe care or ineffective care. the data suggests that it's as much as 30% of the $13 billion we spend on care in massachusetts for our members may be of questionable value. and then, of course, there's a problem if you spend $13 billion and you pay 90% -- 93% of your claims, there seems to be a problem with that algebra kind of not acknowledging the 30%

waste. it became clear that this was a problem that we as an insurer in the community needed to deal with. and, of course, as it's our responsibility to do as members to reduce the unnecessary and morbidity that we now had evidence was occurring. to deal with this, we designed a four-point strategy. the first point headed to a hospital governance. how do we teach hospital trustees to be better advocates for care in their institution? and we made a partnership with the massachusetts hospital association to get this done. public education was another component. how do we teach the public in massachusetts what's true about healthcare delivery. legislative and regulatory reform was the third, the third point, the third point of intervention and then payment reform. the idea was to do all these things together. do them all at one time. and then arrive at a tipping point where providers would feel that it's more beneficial for

them to do it the new way than to do it the old way. and our participation in health reform process in massachusetts was an expression of achieving the legislative and regulatory reform we needed and importantly health reform massachusetts was accomplished without a public plan because such a plan was not needed to extend access across care. we got there by making the existing program working better and coalition between all the stakeholders. the national debate -- the national debate, we believe, needs to be around changing the delivery system and the most effective way to change the delivery system is to change the payment system. we believe that the alternative quality contract has been our best initiative and will ultimately prove to be the most successful initiative when it

comes to dealing with affordability of healthcare in our state. instead of rewarding providers by how much care is provided, it reimburses doctors and hospitals for the quality, safety and effectiveness of the care. so with that, i'd like to ask my colleague, andrew, to come up and give you more of the detail around the elements of the agency. >> thank you, cleve. so the question that cleve proposed to us is develop a payment system that will respond to these twin goals of the affordability and the key question for us is how do you extract the estimated 20 to 30% of care that is unnecessary and even harmful? our response was you do it by putting physicians, caregivers, and patients back in the center of the healthcare system and give them financial incentives to improve care and eliminate waste. because we believe that the most promising way to slow the growth in healthcare spen i