healthsystem capacity and on and on and it is -- has been an important convener, which is a vital role in the health policy debate and has 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, mine shg, in my opinion, important contribution they've 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 on the

stimulating -- on stimulating more and better coverage of health issues throughout the nation and has raised the prestige of the journalist 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. [laughter]. >> okay? you can pay me afterwards! 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 and -- in health care, which seemed like a modest enough topic for me to get lost in quite easily. then i 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 has happened in the last few weeks. well unfortunately, i didn't have time to put the finishing touches on my secret painless plan that raises 1.5 trillion dollars without cutting provider payments or increasing taxes or imposing burdens on employers, so you are all just going to have to wait a few weeks for that to come out and, instead, what i will do is focus on 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 health care 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, then, but, the fiscal challenge had 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 gas tax and eliminated

the tax cap on hi 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 have 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 republic votes. it passed the senate only after the vice president cast a 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 is a new and in many ways more urgent imperative for health reform and that is, namely, the fiscal imperative. after the surpluses of the 19 -- of the 1998 to 2001 period, disappeared, the -- devoured as they were by a recession and the response to nine lynn and two wars and by huge tax cuts, it became increasingly apparent to

budget wonks that the nation was hurtling along an unsustainable fiscal path and peter orszag and his band of not so merry analysts at cbo die seconded the nature of this projected unsustainability and concluded that it was largely, if not entirely attributable to the projected excess cost growth of federal health care 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 gdp. historically, that has 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 alan auerbach 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 if through some miracle we could hold down federal health care spending growth, to half a percentage point faster than gdp, we could extend all of the tax cuts that were enacted since 2000, index the alternative minimum tax, and allow discretionary spending to grow along with both inflation and -- and population, and have a balanced budget for at least the next 40 years. so, this gives you an indication of what role rapid health care spending plays in the projected unsustainability of our fiscal situation. without some restraint on health care spending, the choices that

faced us were quite unpleasa. sharp lie higher taxes and deep cuts in programs and budget deficits that would begin to balloon and at some point explode and no one paid much attention to these dire warnings, is not surprising. we have 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 dollars. or 1.2% of gdp. which is a lower figure than any that was experienced in the 22 years between 1975 and 1996.

that the budget wonks were projecting fiscal disaster in 15, 20, 30 years fell on deaf ears because this number that counts in washington is this number of years until the next election. and by this measure the wolf was not 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 health care 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 caused 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 verse 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. the bottom line of all of this is that our deficits are soaring. cbo estimated that for the currents fiscal year, we will have a deficit of around $1.8 trillion, or 13% of gdp, which is over twice as large as any deficit we have experienced since the end of world war ii. in percent of gdp terms. looking at fiscal 2010, the next year, doesn't look a whole lot better. a deficit of something on the order of $1.4 trillion or 10% of gd perform and even looking out over the full ten-year period, the cbo projections of what the

president's policies will entail, are pretty, pretty bleak. the specter of a financial disaster is no longer two or three decades away. in short, the wolf is -- if the wolf is not at the door, we should look for him in the foyer. [laughter]. >> all of this points -- all of it 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 is inevitable that any reform that 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 by drawing your attention to three implications of our current fiscal situation. as they relate to health care reform. the first of these is that while it is important that we try to pay for reform fully, over the first ten years, it is equally if not more important how we choose to pay for that reform. there has 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 ten-years. offsets for 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 to provider payments, fall into the first group, reforms that alter the incidentsives, facing patients, providers and payors, and the structure of the delivery system tend to fall into the second group and given the current fiscal situation it would be better to have a reform that fell a few hundred billion dollars short of paying for itself over the first ten years but had savings exceeding costs

by growing amounts in the 8th, 9th and 10th years, than a fully paid-for plan in which new spending was just offset by savings at the end of the first ten years, and annual savings, quotas were met each year by an ad hoc package of new one-shot measures. what this suggests is that a lot of effort should be devoted to instituting from the start measures that can creditably 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 promised 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 on employer 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 is not particularly concerned about universal coverage. or the quality of health care. this -- it is 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 depend den on large capital inflows from abroad. and a significant portion of the treasury's new debt in fact 74% of -- since december of 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 pelt tro 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 and the petrodollar 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 mark, borrowing huge amounts of monday. so well, have to be very, very cognizant that the ability of the united states to move forward and bide the time for the health reform to begin moderating the growth of costs 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 up lifting. and it is very hard to try and extract the silver lining from

this dark cloud. but cognizant of the fact that uwe reinhardt -- 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 begallos humor and, can i -- what do i do? okay. and, this is just to make this 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, i came across this chart which was from a talk i gave 8 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 surpluses 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 until 2011 or 2013, to do this. and the question was, you know, how could the fed conduct monetary policy, when all of 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.

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 five, eight years from now the gloomy outlook i have just given might be very, very different, should health reform and a -- 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, appreciate that. next we'll hear from cleve killingsworth from blue cross/blue shield of massachusetts and is a leader of health reform in massachusetts and is also participating very much in the day-to-day way in that health care reform as well, and he has been an out spoken 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 dreyfus, who is executive vice president of health care services for blue cross/blue shield of massachusetts. >> thank you, nancy. good morning. 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 said, i am co-presenting with andrew dreyfus, my partner in crime, back in massachusetts. and, action mo-- among many oth things, his team leads the development and implementation of our quality contact and i want to take a couple of minutes to create a context in which the aqc merged and andrew will take you through the elements and in the mid 1990s, blue cross/blue shield was involved in too many businesses and slow to emerge

and react to the emergence of managed care and by 2004, however, it had righted itself, it became fiscally stable, and then became even stronger. it had significant membership growth, and became the dominant payor in the marketplace by for and '01 the institute of medicine released its report which taught us 98,000 people died in the nations hospitals of avoidable medical errors and those could be characterized also by overuse, under use, issues 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 reason zoned that we, blue cross and blue shield and other insurers were this ones who purchased the care and we needed to demand change. we had for the first time data in this format and in the -- of the nature that would allow to us go to providers and make the case for change. without being asked, so, cleve, where did you get your m.d. we believed that because of our brand, our members would expect we would not contract with hospitals and physicians that we knew provided unsafe adds -- and/or in effective care.

and data suggested 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 is the problem that, if you spend $13 billion, and you pay 90% -- 93% of your claims, there seems to be a problem with the algebra. the not acknowledging the 30% waste. so, it became really clear that this was a problem that we as an insurer in the community needed to deal with. and, of course, as -- it is our responsibility to do what we could to reduce the unnecessary and morbidity that we now had evidence was occurring and we designed the four point strategy and first had to do with hospital governance, how to teach hospital trustees how to be better advocates for care in their institutions, and we made up a partnership with the massachusetts hospital association to get it done.

public education was another component, how do we teach the public in massachusetts, which -- how health care delivery and legislative and regulatory reform was the third and the -- third point, third point of intervention, and, then, payment reform. the idea was, to do all these things together and do all of them at one time and arrive at a tipping points, where providers would feel it is more beneficial for them to do it the new way than the old way and our participation in health reform processes in massachusetts was an expression of achieving the legislative and regulatory reform we needed, and, importantly, health reform in massachusetts was accomplished without a public plan because some a plan was not needed to extend access across care. we got there by making existing programs work better and coalitions between all the stakeholders. the national debate... this

national debate, we believe, needs to be around changing the delivery system, and 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 the affordability of health care 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 would like to ask my colleague, andrew, to come up and give you even more of the detail around the elements. >> thank you, cleve. so, the question that cleve proposed to us is develop a payment system that will respond to these twin goals of quality and affordability. and the key question for us was how do you extract the estimated

20 to 30% of care that is unnecessary and even harmful. and our response was you do it by putting physicians, care givers, and patients back into the center of the health care 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 health care spending is by making care better. improved quality in our construct equals affordability. it may be the clearest win-win in the debate over health care reform as cleve said it is getting insufficient attention, we believe, hear in washington. -- here in washington and we are at a wonderful moment in massachusetts, where a public policy debate and a private sector innovation are coming together in a really unusual way. so i think most of you know that we passed several years ago a coverage reform law which has led to almost 98% of the residents of our state having

health insurance, a really remarkable advance. less sentenced was the second law that passed a year-and-a-half later, that we call health care reform-2. within massachusetts and instead of focusing on coverage it focused on cost. and one of the centerpieces of that law was the creation of a commission, 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 the commission on which i serve, the consensus emerged that was we have to move away from the server system and towards a system of global payments if we are going to as a community slow the rate of growth in health care spending, and improve quality. much of the deliberations of the commission and i believe the ultimate recommendations due to

be released within weeks, of the summer, were based on the alternative quality contract which we call our aqc in massachusetts and i want to plain that now to you, what we are -- explain that how to you, what we doing with that. 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, it was insufficient to the task that cleve assigned us, to ultimately work to transform the delivery system so it routinely and reliably provided safe and effective care for our members in our community. :