nurses, office staffs, that are involved in providing a service. i'm going to point out that the biggest distortions are actually on the technical side. hb,rr$,r strategies. what is a service line strategy? basically, identifying those service lines, whether it's

cancer care or heart surgery, or orthopedic surgery, that the hospital finds most profitable so, you know, creative brands, you know, expand the capacity and try to increase admissions in those procedures. physicians are investing in free-standing outpatient facilities. and they're investing in facilities if their own offices. as we've watched single specialty mergers over time, you know, the number one reason used to be, to have more leverage in negotiating with payers. more recently, the number one on their list is reach the scale needed for equipment, intensive services to be in the practice. if you're not big enough to have an mri, merge with another single specialty group and then maybe you'll have a scale needed. and now, courtesy of -- mccallan

texas is a great example to me of responses by providers, particularly physicians, to the payment incentives in our system. physicians are also shifting to more lucrative specialties. we see primary care shortages increasingly in evidence, and we also have research that shows that specialty mix influences spending basically, the mix that we have in the united states, which differs from most other countries with a much smaller proportion of primary care is a factor that leads to our costs being higher. now, capacity leads to further rates, higher rates of service use. you know, capacity is often justified on the basis of patient convenience. it's more convenient for the patient to have their test right here in the office. they have don't have to go to this hospital outpatient

department. and of course, with we have third party payments, this changes the calculus of patient convenience, so why should the patient be concerned if they're going to a less efficient, more expensive facility. and self-referral incentives now apply to more services as more technical capacity is brought in to physician practices. so it's not just the self-incentive to prescribe morphy significance professional time. now the incentives are prescribing the use of technicians and less constrained resource if a physician practice, so the self-referral incentives become more powerful. when the services involve a technical facility payments and are more profitable. and one thing that nobody's payment system, except i think in germany, has gotten around, i'm sure there are some others

internationally, is that in a service where the average costs of providing the service are much higher, than the marginal costs of providing an additional service, when fixed costs are very substantial, there will be still an additional incentive to use of the equipment more and provide more services. well, what could we do policywise to reduce these price distortions? i believe that medicare is very well positioned to lead in this area. for one thing, it does have credibility with providers. providers don't love medicare, but medicare is probably more credible than private payers with providers. and medicare has the ability to engage the provider leadership in its work. and also, medicare has sufficient clout with many employers and you know, very contrary to predictions by my fellow economists when the plead

care physician fee schedule was introduced in 1992, really changing the pattern of relative payment fairly radically, there wasn't really any evidence of access problems caused by this change in the medicare payment structure, so medicare does have clout. and we find that private payers are increasingly following medicare payment structures, so that if medicare changes, in many areas, the private payers will automatically change as well. the medicare relative value scale for physicians is used extensively, although private payers often need to deviate from it, to accommodate the market power of a particular provider. such as a powerful single specialty group. now, what can medicare do? well, there's a -- what i call an easy part of the reform

agenda, a bunch of steps just to, you know, change the current -- revise the current payment structure so that it more accurately reflects the pattern of relative costs. this is easy, it appeared in a -- in the house schip bill, i guess it was a year or two ago. it's probably doable today. and basically involves a better process for updating physician work values, because that process, which is done by cms, with advice from the relative value update committee, called the ruck, has not succeeded in identifying those services, which because of productivity gains over time have become relatively overvalued or overvalued compared to the other services. there's also a need for much more accurate estimates of facility.

-- facility costs. and there needs to be frequent updating to reflect declining costs associated with technology, probably even considering projections of unit costs. let me give you an example of the problems with the lack of data. for those that have followed this, cms assumes that a piece of equipment, and maybe it's specific to imaging, is run 25 hours a week. when i asked, what's the basis of that assumption? well, we didn't have any data, so we just chose that number, presumably not to offend too many people. net pack has recently urged that that number, based on some date that that they have reviewed, be increased to 45 hours per week, just based on the patterns they see owed there in the medical care system. so really, pervasive throughout the practice expense side of the fee schedule, there's this need

to invest more in gathering more data to do this more accurately. one short-term thing is that we could do what japan does. japan in its physician fee payment schedule, looks for trends in volume, and when it sees services with particularly rapid increase in the volume of services, it takes that as a signal, well, our price must be too high. we'll reduce the price and japan has very sharply reduced the prices of the complex imaging procedures, ct scans, mri's, and cat scans. now, this is the harder part. i think there's real long-term potential of using broader units of payments. and once we have fixed, but it's very important that we fix the fee for service payment structure first for two reasons.

first, the fee for service payment structure will underlie, say particularly if we use a bundle payment approach, a per episode approach, will underlie, to sarah palin operate what the bundled payment rates will be, but also realistically, for years, i suspect, our efforts to pursue broader units of payments are going to be blends of fee for service with the broader payment unit, rather than going cold turkey and eliminating fee for service. so some of the early experience using broad every payment units, sometimes puts providers if a bind. because the incentives to reduce the cost per episode may involve disproportionate reduction of the most profitable services and that really undermines provider's interest or ability to pursue these changes.

so there are initial steps being discussed by congress now as part of health reef form, such as incentives to reduce hospital readmissions, bund i willing post-acute care into the inpatient drg's, post acute care would be care in nursing homes, home care, rehabilitation facilities. and using a supplemental capitation payment for medical home services. you know, the medical home idea is really a payment reform of, in addition to recognizing that many of the services that we believe today constitutes good primary care, many of them are not paid for. and the medical home is really an idea to focus on those additional services and cover them with a capitation payment. now, beyond these, and you may be surprised at some of the things i thought were easy things in the payment unit, i

think the big challenge is, but the big rewards are per episode bundles and accountable care organizations and i would say that, know, what you just heard about in massachusetts, is i shouldn't have said accountable care -- that's a buzz word. let's just say capitation like structures, so let me say a few things about per episode bundles. first, the key is including all the providers involved in an episode of care. our system has long had experience using bundles for a single provider, but the point here is to use a bundle that crosses all the providers involved in care. and this provides incentives for an efficient delivery an episode of care, provides incentives for the different providers to choose efficient provider partners, so that the o orthopet

does the procedure at the most expensive hospital, they never get a reward, but if they do it at a more efficient hospital, less expensive, they might have not have to change anything they do and this way they could be a winner in per episode bundles. now, the attribution of episodes to -- of patients to different episodes or different providers, can be a challenge. it's easy with the major surgical things. initially, this actually has been pursued by private insurers, as a modification of fee for service. basically, bonuses or penalties in for per-episode efficiency and cms to me is laying the groundwork for this in the future for medicare, as they are implementing, as directed by congress, resource use reports,

which basically are for information only, reports to physicians on the efficiency with which episodes of treatment that they're involved with are provided. now, there's been some criticism by some of the proponents of c capitta ted of per bundles uses. i would bundle them in two services. one is leaving of the incentives to generate more episodes of care in the hands of providers, and possibly those providers that do very well on per episode payment, having even greater incentives. i think of the other reason is probably limited policy resources. you know, we may have to choose as particularly federal governments in whether it's going to -- whether we're going

to put the limited policy resources into proceeding and developing per episode bundles, or proceeding and developing with more capitation-like approaches. ok. i did label this as a accountable care organizations. which basically have per enrollee incentives, rather than per episode incentives and involving organizations that are formed to take per enrollee risks. i think massachusetts actually is a very good place to be launching capitation-like initiatives, because there are a lot of providers that are well positioned from their experience under, you know, earlier managed care models in taking per enrollee risk. now, many of these, as i think in massachusetts also, works as

fee for service payments, with bonuses or penalties for quality and efficiency. and the key challenges nationwide are can effective@ã powerful, if patients were engaged. if not only were the efficient

providers rewarded on a, say, per capita, per enrollee basis, but also, the enrollees had an incentive to use the efficient providers, so you can get movement to them, which is much more robust, and you know, the key thing is we're to the going to save a lot of money just by moving patients from one delivery system to another because the delivery systems are limited in how fast they can grow their compassist. but -- capacity. but if there was enough movement that these systems that lost enrollees noticed it, and decided to improve their efficiency, then we could get much more rapid gains from this approach. this brings me to private payers. where do private payers fit in with it? and i think there is a lot of potential for medicare to work with private payers, because their interests are the same.

in fact, working with medicare, blows away anti-trust restrictions. so it facilitates working together. but there's a distinct problem of private payer market power. especially in hospital care. and -- so in a sense, if medicare just decides to cut its payment rates, how much of this will actually be shifted to private payers as a result? and you know, there are two basic strategies to address provider market power. i don't think anti-trust policy has been very effective and has a lot of potential, at least in the short term, but basically, you can have patient incentives to choose less expensive providers, which means revamping your insurance benefit structure, because few benefit structures have such incentives, and the other possibility, and

that's the market approach, and the other possibility is a regulatory approach of literally regulating the payment rates by all payers for a provider. neither of these has been getting much, if any, discussion in conjunction with health care reform. so if i can conclude. i think payment reform may have the greatest potential to bend the trend of medical spending. and medicare is well positioned to lead in this area, in conjunction with health care reform, but medicare's potential to lead needs shoring up. there's probably a real need for reform of the governance of the medicare program, which is getting more and more attention in congress with all these ideas about federal health boards or

basically creating something that's more insulated from day-to-day political pressures from both congress and from the administration. and also, though, providing reliable resources for cms or a new governance entity to really do the developments and the payment decisions, to perform the technical functions is very important. and i also think that limitations in private payer market power will have to be addressed. thank you. [applause] >> thank you, palm. that was excellent. now we'll look at a state example where they're actually

doing some very interesting things. the state of minnesota, and for that, we have patrick geraghty, president and c.e.o. ever blue cross blue shield of minnesota, who will discuss the recent initiatives that he is involved in. minnesota is well known for its low cost of care and its high quality of care can really serve as a model for the nation, and as we work toward those goals. >> thank you, nancy. some of you who are close to the front of the room know that there's a fly buzzing over the podium here, and a couple of weeks ago, i would have just swatted it. [laughter] >> but we live and we learn. thank you very much. it's my honor to be here representing the state of minnesota and representing blue cross blue shield of minnesota. the discussion that we're having as a nation is really not just about health care, but it's about health.

and wellness, prevention and quality outcomes is really what we are collectively thinking about and looking at. so as we talk about what we're doing in minnesota, i would like you to take a look at these slides, where we're looking certainly at cost, we're looking at improving care and we're looking at the value being delivered in the system. i'm also going to talk a little bit about how we positioned our company as a health company, and some of the things that are distinctive about that. and then i'll touch on some disruptive innovation, because health care is in great need of disruptive innovation to continue to improve what is happening in the country. one of the things we have in minnesota and i think it's the back bone of the difference in the minnesota model, is the tight integrated nature of health care and health care delivery in minnesota, particularly in the twin cities,

but certainly in rochester, minnesota, as well a place called mayo. and many of you have heard of mayo, and it's getting a lot of play in the national discussion. we in minnesota are very proud of the mayo health care system and it certainly does an outstanding job. but i'm also here to tell you that we have a number of terrific health care providers in minnesota, and we have significant opportunity to have quality and to have tremendous amount of access as a result of that. so you have can see that the fair view system, aligna, health east an mayo, all of these institutions as well as our children's hospitals and a number of other institutions provide outstanding care for the folks in minnesota, and this is -- this is really an important issue. one of the community ethics that i think has been advanced in minnesota and is one of the distinctives, if you will, is

that we have learned a lot of lessons about where should we collaborate, and where should we compete? and the system needs to take some lessons from some of that example, and i'll touch on that as we move through this discussion. certainly working on payment reform, i don't need to repeat a lot of what you've heard already today, but i agree with the premise that has been put out here, if you pay for volume, you get volume. and we have seen that largely across our systems, across the united states. in minnesota, we have medical homes and what we call baskets of care, that are actually part of public policy and are being piloted in a variety of places. so these are certainly measures that we think are important in the system as it evolves, but we also think that global payment is going to be a very important and significant feature of how health care gets funded in our

state. it will be important that as the private sector, in combination with our health systems, move towards more globally oriented payments, that we move that way with medicare moving that way as well. so i agree with of the comments that have been made about medicare and medicare payment reform, it's going to be important to have critical mass as we move through that. a variety of other instruments about been put into play to sort of get at the cost issue, because there isn't one flavor that suits everyone, and you have to have a lot of different approaches. so certainly, we've done things to tier networks, so some these smaller employers, who are making more cost-related choices are making them around what delivery system works for them. we have done work around centers of excellence. minnesota happens to have 16 designated centers of excellence

within the blue cross system. so it gives us lots of choices and opportunities there. we profile providers on their quality, and use that data and made that data transparent in hour market, and that's been important. has it taken on the full flavor that i think it will in the future? no. but it actually has put information out there and i think it will become increasingly more information -- more important as that information becomes more robust. we've also moved to what we call a care comparison tool, which allows the consumer easy access to move through the various forms of treatment that they may be looking at, to compare treatment patterns and also to look at costs. so it's an important part of the equation, when we are talking about how do we get the consumer in the equation, the consumer needs to understand, we need to be more transparent as an industry about sharing information, about cost, so that people can make informed

decisions, and this care comparison tool is one of the vehicles for getting that done. changing the care model, obviously, we need to take fee for service type of reimbursement out of the system, where we can. and i think that will be an important part of the transition to a new health dare system for all of us. -- care system for all us. it will also be important to incent the right kind of procedures. so one of the benefit plans we see taking on a lot of interest are benefit plans where the consumer can have a reduction in their premium by managing their numbers and when i safe their numbers, being aware of your blood pressure, being aware of your cholesterol, being aware of your body mass index, an we make that available thank you a number of employers today, and those employers set bench marks and then as you move towards improving those numbers and demonstrate that you've moved

towards improving those numbers, you actually get a premium reduction. those are incentive-based benefits. those are important to this overall reformest that we're all talking about. some of the other things we've tried to do is certainly minnesota is one of the early leaders in retail clinics and we now actually waive co-pays if you use the retail clinics, to trying to put incentives in the benefit package to use the right place for people to be accessing care, where you can get quality, and where you can get a lower cost, so it's also about having the benefit line up with where we'd like to take the system. one of the other things that has been a valuable conversation going on if minnesota is one that involves all the c.e.o.'s of the various health plans in town, and the large health systems in town. and i mentioned the four large systems before, but it also includes the children's hospitals and some of the other

providers. we've made it open to anyone who wants to be in that dialogue, but literally, we are as a group of leaders, meeting every couple of weeks, talking about how do we as a private sector reform the system, and do the things that are necessary to deliver the quality and outcomes and access that are expected of us and should be expected of us by each and every person in our state. so we have set some very aggressive parameters for ourselves. we want to flatten out the trend line. we want to make that less than cpi if we can. and what all of the health systems have come forward and said is, they are interested in global payment, they would like to engage those dialogues. so we're not as far along as cleve's payment with global capitation type of payment, but we are moving down that path and the providers of care see that as an important vehicle that they are actually asking for. we think with the foundation we

have in minnesota, and with the change payment reform, that we can be a model for the nation and we would very much like to step up to that challenge. when we look at some of the collaboration, i mentioned before, understanding where to collaborate, where to compete, we as a community have moved to a number of different organizations. one called the institute for clinical system improvement. we refer to that as icsi. that is also looking at best practices and establishing those for the community, not health plan by health plan, not institution by institution, but for the community. a valuable asset. minnesota community measurement is looking at data, it's looking at the patterns that are emerging in our community, and publishing those. so you as a consumer can go and ã"2k at minnesota community