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 ñ 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 spending is by making care better. improved quality in our construct equals affordability. it may be the clearest win-win

in the debate over healthcare reform and as cleve said, it's getting insufficient attention, we believe, here in washington. .. instead of focusing 0 coverage, it focused on cost an you >> and one of the centerpieces of that law was a payment reform commission which is focused on how do we change payments in massachusetts in a way that advances these twin goals of

improved quality and cost. and remarkably, by the first meeting of this commission on which i serve, the consensus emerged was that you have to move away for the fee for service system and we have to move towards a system of global payments, if we're going to as a community slow the rate of growth in health care spending and improve quality. much of the deliberations of this commission, and i believe the ultimate recommendations, which are due to be released within weeks of the summer, were based on the alternative quality contract, which we call our aqc in massachusetts, so i want to explain that now to you, and what we're doing with it. so what is our alternative quality contract? well, the assignment was fairly simple, but challenging to accomplish. design a payment system that promotes quality and affordability. now, we already had in massachusetts one of the most mature, if not the most mature pay for performance program in the country, but it was built on

the chassis of our fee for service system and as such, was insufficient to the task that cleve assigned us, to ultimately work to transform the delivery system so it's routinely and reliable live providing safe and effective care for our members in our community. so even if our mature fee for service system, just emergency if an outpatient physician practiced at one of our leading academic centers, successfully manages a group patients with congestive heart failure and who are not admitted to the hospital as a result of their work, their reward is they get less revenue. conversely, if patients are admitted to the hospital and they contract a preventable infection, the reward to the hospitals and physicians is they get paid for money. clearly that system is backwards and needed to be reversed. so we assembled a team of reimbursement experts, physicians, measurement scientists, some people new to the world of health plan but not new to the world of thinking

about change. we surveyed the work that was done nationally, we surveyed other innovative results but we decided we needed to invent something on our own and what we did essentially was combine, as you'll see, what we call global payments with some very substantial incentives for improved performance. so i'm going to kind of give you a picture of this alternative contract, as if you were, imagine for a second, you're either the leader of a physician practice or perhaps you're a hospital cfo or c.e.o., how do we develop the contract? the first thing we do is establish a global payment, a risk adjusted global payment and i'll explain that to you in a moment, based on the current services offered by either the physician practice, the hospitals, or preferably the two combined. and as cleve often said, we're not trying to pay less than we paid today. what we're trying to do is have health care grow at a slower rate than it has been and health care, medical trends in massachusetts is currently around 10%, so medical costs are

growing at about 10% per year in massachusetts. premiums are growing a little bit lower, because shifting cost to workers, but medical costs are growing about 10%. so then the second thing, and just the second thing we do is then sit down and negotiate an inflation rate, which we're trying to get down to very close to cpi, in the 3% to 4% range, which is very different than what has happened in massachusetts. that's the first thing we do. the second thing we do is talk about performance incentives. and here, we're not talking @@

where they are in terms of our measurement, but can earn up to 10%. and then finally, as we try to explain the hospitals and physicians and they're increasingly understanding, there's an enormous opportunity for them to keep the savings from eliminating unnecessary harmful care and waste in the system. but we're not just asking them to do that. we're partnering with them to do it. so what are we doing? we're giving them, each hospital and each physician practice we contract with, customized reports that show down to the physician level the variations in care in their practices. what are their rates of c-sections and hysterectomies. what are their rates of readmissions, what are their rates, again, down to the physician, using the wendburg

style data, but at the physician level, so it's actionable. it's one thing to say minneapolis and miami are spending wildly different rates, but you have to really get down to one physician and office next to theirs, you know, why is one performing endscopes and one rarely performs endscopes, so what's in the global budget that we put in? it's all medical expenses, primary care, experiment care, behavioral health and pharmacy. we want to deal with one of the biggest problems identified in the institute of medicine report which is the intense fragmentation in the delivery system. we know that for example from a safety perspective that one of the greatest risks for safety are handoffs and not just handoffs between the hospital and the home or the hospital and nursing home, but handoffs within the hospital itself for

intensive care unit to the regular floor from the regular floor to a skilled nursing facility. we're also offering as part of our payments infrastructure help. we know that many delivery systems and physician practices are not organized today to manage within a global payment. they need help with information technology, they need help with care management. some of our early adopters are, for example, innovating by having group visits. one of them talks about that the key to success is between the visit, that our whole system has been focusing on a visit, because as we heard from robert reischauer, that's where the payment goes, but what happens between the visit? that's where the crucial moment may be in a person's progress of a medical illness. finally, we're looking at innovative ways to manage risk. this is not about shifting risk to providers. it's about working with them together to share risk and we can do this a whole variety of means, including reinsurance,

stop loss insurance, and other techniques. now, when we started proposing this to physicians and hospitals in massachusetts, some of them naturally said, wait, this is sounding awfully familiar to something, that c word, that c word that we really didn't like in the late 1980's and 1990's, and it's true that there was a very mixed experience with cappation, although surprisingly, there's a number of practices in massachusetts that operate on a risk deal, but how does this deal with capitation. first of all, the initial payment level that we give to this group of physicians and hospitals are derived from the historical experience of that provider group. we're not setting some artificial member to meet our budget expectations. secondly, one of the criticisms of capitation was there might be incentive to avoid sicker patients. well, we adjust our payments based on every year, based on the health status and morbidity

of those statements, that that physician practiced and that hospital is caring for. third, we're adjusting the payment every year in line with inflation. now not the kind of medical inflation that many providers have been earning over the last decade, but still, capitalittation was often at the end of the year is how can we lower the payment? we're not talking about that. and finally to the criticism that there might be withhold willing of care, under a system based on capitation, that can't happen in our system, because this only works financially for fir significances and hospitals and only works for patients if these quality incentives get paid out. and the quality incentives, as you'll see in a minute, are based on quite a comprehensive set of measures. so how do we think about this measurement work is this we start with a set of principles? we said that the measurement work should build towards the institute of medicine's definition of the end state, which is safe, affordable,

patient centered care, that the measures should include process measures, outcome measures and measures of patients' experience. they should go from the inpatient side of care to the ambulatory side of care. we also wanted to get out of some of the flaws for pay for performance. if people don't succeed on a measure, they stop working on it halfway through the year. we established this notion of gates an we defined high performance in absolute terms. we weren't trying to get to, for example, 90% of compliance if 90% was what was achieved in high perform willing regions. we actually wanting to go to theoretical limits. we knew and we've seen that people can eliminate zero infections in intensive care units for month after month after month. 100% compliance with evidence-based guidelines in preventive care and again, we're looking at outcomes, not, did you do the test, did you do the test for diabetes, but was the blood sugar level under control

so a true outcome measure. what do these look like? i'm not going to go through them specifically, but you can see they encompass a whole range of diagnoses, illnesses, outcomes at the inpatient side, cardiac care, pa money i can't care, -- pa money i can't care, infections, safety, complications, experience, and then on the outpatient side, a whole range of diagnoses. we're convinced after spending time with physicians and hospital leaders and clinicians, if for example on the outpatient basis, if a practice were to perform at the highest level in our contract in these areas, they would have built the infrastructure to deal especially with chronic illness, which for our plan, 5% of our members account for 50% of our spending and we know that that's part of the solution to affordability, so who's working with us? it's a whole range, this contract began in january of 2009, by may we had seven groups

signed up. they range from 40-physician practice in the western part of our state to tufts medical center, which is academic medical center in boston with affiliated physicians, across eastern massachusetts. there are community hospitals, there are urban hospitals, there are hospitals outside the city. we expect three other groups to come into this contract within the next four to six weeks. collectively, these organizations and the new ones we expect in are -- account for almost 1,000 primary care physicians, almost 2,000 specialists, and 20% of our mements. and it was really interesting that when we started this process, you know, we first approached those health care organizations which had some history with accepting risk, had some history of integration between physician and hospital and we expected, you know, honestly, a kind of slow adoption rate. we expected to work closely with a few early adopters, but the

environment even in the last six months has changed. pressure for change from washington, pressure for change from massachusetts from our payment reform commission, but i think most importantly, an increasing realization that to be a successful hospital or physician practice in the future, is going to be about providing value and not just building volume. a hospital c.e.o. whispered to if he at a board meet tag we both attended last week, he said, andrew, you've been telling me, you and cleve have been telling me for two years that this is the way to go, i've been rejecting that, i couldn't see how a hospital of our size could actually be successful under this contract. now i understand that unless we're successful under this kind of contract, we won't be successful in the future where we hope medicare, medicaid, and other private plans are paying in a way that promotes quality and pro poets afford -- promotes affordability. thank you very much. [applause]

>> thank you andrew, and thank you, cleve. that's a very interesting experiment. it's not an experiment. i mean, it's really happening in the marketplace and it's unique because of the size and the number of participants in it, and it's really happening and it's really worth paying attention to. now i'd like to introduce paul ginsburg. i'm sure almost everyone knows him. he is a well known expert on health policy and has a very detailed knowledge of markets and costs and he will also be talking about the misaligned incentives and the need for payment reform. and he is frequently quoted in of the paper and asked to testify before congress, because he has that unique ability to take something that's very complex, really understand it, and analyze it, but make it accessible and understandable to a wide audience. so paul. thank you. >> thanks, nancy, and sometimes it's hard for me to understand it. it motivates me to keep it simple.

but i'm going to talk about payment reform. because when many people have asked me, well, seriously, what could be done in the context of health care reform, that actually contains costs for the long term? i believe that payment reform is one of the ripest opportunities. let me go into the background. basically, payers, both public and private, in the united states, have sending the wrong signals to providers of what they want, and these signals are inadvertent. but basically, primary care, forget it, we don't value that. do lots of imaging and diagnostic procedures? yes. especially if you own the facility. we want to reward that more than

if you're just doing the interpretation and providers are responding to these incentives like never before and for many services, the response involves increasing capacity. and the ownership of capacity by physicians tends to further increase the use of these services. now, let me talk about what would the payers like to do as far as payment? what's their objectives in setting provider payment rates? i would say the core beginning for all payers that i have know about is that, at least traditionally, is that the structure of payment rates and i'm talking about within fee for service now, the structure of payment rates should not influence decisions on care delivery. very explicit in medicare. for public payers, there's an additional issue about fairness to different types of providers. now, both of these goals are

achieved when relative payment rates align with relative costs. so it's really not rocket science to know what payers would like to happen, but it's also -- it hasn't really been working out that way. so let me talk about how the pattern of the payment structure deviates from of the cost structure. to if you talk about inpatient hospital payment under medicare, we've known for a long time that the surgical drg's are more profitable for hospitals than the medical drg's. now this was never intended to be the case by cms, and cms deserves a lot of credit for having reduced the magnitude of these distortions, in a revamp of the drg methods under mark mcclellan's leadership, but the

distortions in hospital payment remain for many private payers, who are not using drg's, either the old system or the new updated medicare system, but they are paying on the basis of per diems and discouldn'ted charges. so for privately insured patients, the incentives for hospitals are still there. now, physician procedures involving new technology are more profitable for physicians than evaluation and management services. now there are two aspects to this and this is getting into a little bit of detail. the medicare fee schedule is calibrated so that a big component of it is the physician work or really the time, effort, intensity that physicians personally put into the services and the other major components is what we call the technical or the facility or the practice expense component. ba