the third each of the basic health plan is that it is intrinsically tied to how much we want the federal government to spend on health care. if we want to have a basic health plan that provides complete coverage for every single american, then clearly that health plan is going to cost a lot of money. and so the financing of the basic health plan, particularly the design will be tied to how much we want to spend. in this particular proposal we have tied the design of the basic health plan so that the spending a summer to what will happen under the aca. but i want to be clear that we could change that spending level to the status quo, we could make a 10% less to the status quo. that may be too generous, but the bottom line is that we could change the spending and design the basic plan in any way that we want. the basic feature still holds. as amitabh said, the idea behind the basic point is to take each individual, identify what are the health risks.

do they have diabetes? are the obvious? do they have a history of artery disease? then try to identify the primus associate with that individual. individuals within didn't -- would be given this basic plan and if they're happy, then you have full coverage. it would hard to measure you wouldn't be happy with the plan but are wealthier and you want more coverage, the deductible is two i, then you could go on the private market of national health insurance exchange and you could purchase individual coverage, a more general plan. and the premium support that you get would be tied to that basic plan. in other words, someone who's sick, their health care costs are going to be higher, the premium support that they would receive to be able to purchase a plan in the private market would also be higher. so that's the way the subsidy occurs in our framework. and, finally, an important way in which our plan is financed is that we're going to eliminate employer-sponsored health insurance, and we expect that wages would rise. there's a lot of economic

evidence that as you eliminate the tax preferred status of health insurance, wages will match the value of the insurance. and those wages, that income can then be used by individuals to purchase the kind of health insurance that they choose, that the desire. let me than walking through a very basic illustrated basic plan. we are not wedded to this plan. this is to give you a flavor of how this plan that we envision might work. maybe look not at me but at the slide because this will be more informative. consider two types of families, very broadly speaking to a healthy family of four and the sick family of four. the sick family of four as we describe here is going to be in the top 20 percentile of the health care expenditures in the united states. if you look at the, family income, families with greater income, the y. axis is the deductible but these families

would pay under this basic health plan. so again this is a supreme health plan but there are deductibles and the our copayment. some the details come we can go through the in the dna but the basic point to take from this figure -- from the q&a. those under threat of% of the federal poverty lincoln for those who are poor, if they are sick there will be no deductible. so they cannot do anything, no copayment. for those who are healthy there will be a minor and an increasing deductible as income goes up. so for the wealthiest families, a family of four with an income of about 110,000, you can see that the deductible for a healthy family could appear quite high. $50,000 under a basic plan. and the idea is this is supposed to catastrophic coverage for those, and if they want to then buy more generous coverage, they can do so. the most important thing to take from this slide though is that those who are healthy should not

be hitting $50,000 deductible. that's the whole idea. is that people who are healthy, insurance premiums that they will get on a private health exchange, because those premium are tailored to the risks will be much, much lower. the idea behind this is for families have an ability to pay, that the catastrophic coverage kicks in and they can purchase additional coverage that is more generous than they desire. i would like to walk you through a couple of examples of some numbers again. i'm a physician so numbers are sometimes a little bit difficult, but start with again two types of them to healthy families and sick families. the top is the healthy families. take a family, for example, it was less than 1% of the poverty rate. they will have a basic interest by with zero mean, joe deductible, zero copayment. complete coverage. the basic plan is very good. as the increase in can, a family

of four who is is that 1000% of the poverty line from this type of family and if that the basic plan in the premium would be zero. the out of pocket expense you would be on average $610. they could instead purchase an alternative more generous plan, and the way we define generous plan here is a plan with zero deductible but 20% copayment. that plan, the premium would be approximately $560, and on top of that with a copayment, $122 to so approximately $800. but remember, when we eliminate employer-sponsored health insurance, wages will rise takes a wage increase for the sammy would be approximately $1700 that money could then be spent toward the premiums or the out of pocket expenses, once the co-payments taking. let's look at sick families the again, 46, 100% of the federal poverty limit, zero deductible,

zero copayment. moving to the 1000% family. families were 1000% of the federal poverty limit. for them, you can see the out of pocket payment could be quite large. so for example, under the basic plan because the deductible is high, the out of pocket expense you could approximate $12,000. if you can look at this alternative plan, and more generous plan, ginny by with zero deductible but 20% copayment, the premium would be $11,000 the out of pocket expenditures would b-24 hundred dollars. let me take you to this next slide help you figure how this plan it works, whether subsidies are occurring. in our plan, everybody benefits relative to the aca except those who are wealthy and sick. those have an ability to pay but also use additional health care resources. as amitabh said, this is an issue of bill gates who has hypertension diabetes, versus the mail clerk who also works at

microsoft. the current model, these individuals are paying the same amount. in our view that is not the most equitable way to deliver health care. so i would like to conclude by offering a few comments comparing our plan to the aca. we all believe, all of us in this room, i think that universal coverage and care for the poor and needy is paramount. we cannot have a health care system that doesn't achieve those goals and we all agree on those values. the question is and how do we achieve those values. in our model we rely on competition, innovation and tax credits more than the affordable care act. we offer more choice to individuals. we offer a better way to think about how do we treat poor who currently are in a two-tiered health care system. we want our patients with medicaid, or people are poor and have medicaid insurance, we want them to have access to the same physicians that amitabh or darius or try to have access to

the that is the broad vision we have here. at the end of the day, take a point is her plan should not cost more than the aca. >> thank you. now we're going to turn to first nina owcharenko. >> great. thanthank you so much for havine today and it's a great presentation. i would tell the audience that the report itself is chock-full of great information and is more than even i think the presentation itself has shown. there's a lot that the authors get into. and with those kind of walk through what the complexes and dilemmas of the current health system are. and i agreed with many of the issues that were raised in the report, as joe already mentioned from the comment about the disciplines or marketer relies on stopgap measures to rethink its gap, kind of the lettering and living on top of a broken system the inequities in the system that have a healthy poor

subsidizing the wealthy is an important one and even the virtue of living the choice and competition as a basis for solution i think are all things that i certainly found myself agreeing with. to the authors themselves, i think this is a very difficult task that i think is what realize how hard it is to overhaul the health care system, and a really good cogitation to the discussion on this and the thought experiment about how this system could work if we take away some of the key problems in the system. to whether it is looking at what you do, what a system would look like if you take what community rating. if you take away the exclusion. ever look at different ways of looking at the safety net. how would a new system operate under that? i think that was a very valuable contribution to the discussion and a big raised good thoughts in my mind of moving forward of how do you put all this together into one plan. so i know you your goals. a couple things that as i read

through your presentation as was the report itself, the goals that stood out in my mind, first was kind of an effort to great value in health care, something that is much needed and i think not only so that the sick and the poor have access, but also that others in the system find value in participating in the system. and access to health care. it was noted the and insurance rates in report gets into this, a significant amount of the uninsured are those below 100% of poverty, but the second largest group are those actually about 400% of hobby but i think it illustrates the challenge of trying to provide access to the poor but also making sure that you are not crowding of people among higher income level. the second standout gopher was ever to protect the poor and sick, something that i do think needs to be done. i think our current program, and you guys, have document really underserved support them in this is, the medicaid program and a

lack of access in particular i think was based on funding levels to providers to showcase that. and efforts to control public spending as a whole. i think that looking, recognizing of limited resources and with limited resources we need to prioritize spending in various ways. and look at health care entitlements whether it's medicaid arm medicare or the tax exclusion, which i call and entitlement in a generic way, really shows that spending needs to be prioritize in a better way. so there are few things that think are significant improvements with what the proposal is putting forth, and first one is leveraging choice and competition. we know if we can bring choice and competition drive ensures to be for the individuals themselves and to kind of fix marquis of it's a level playing field. the opportunities for diversity in the plans and consumer choice i think is very valuable. i'm very intrigued by the long-term plans your the long-term plans in multiyear

contracts and how that would evolve and maybe that's something we could talk about in the q. and a. how do see that evolving in the long-term, and is it just kind of too far in the future to really get a handle on. another improvement is allocating the existing resources. i'm a strong supporter of looking at rethink and exclusion for the exact reasons you pointed out, that if the valley for hiring, some lower income people as was converting the medicaid spending into more of direct assistance to the individuals. and i do also think that the improvement moving towards the premium support system that you look at, it helps to monetize public spending, cut for a defined contribution based on a real market price of what the products are in the marketplace. so those are kind of the improvements i see but i think part of the helpfulness of these discussion is taco where we see action may be some of the challenges in moving a these

proposals forward, and really moving it from what i call the theoretical to the practical. and made i just been in washington too long but i see that there are several i think big hurdles in taking a proposal like this and putting it in front of a congressional, in front of congress and moving it forward. the first one i was is really balancing this question of the basic health plans with controlling costs. your plan it seems by reading it starts with the idea of we are going to be fun with the basic health plan is. i think it really underestimates the challenge of what that would look like. if you are too prescriptive and say, here's what the design of a basic plan will become you will find resistance across the board. on all sorts of groups, but if you leave it to congress to decide and panels, et cetera, you will continue to be kind of spinning in circles as well as there are differing opinions, edit and people just threw up their hands. so i think that's one major

challenge in designing with a basic health plan would be. and then second is the subsidy part of it, and looking at then how do you interlock the subsidy that is a very complicated subsidy in some respects. it's not a clear flat subsidy amount that we've seen in previous proposal where it's a fixed subsidy amount. then you define the package afterwards. it's kind of the reverse commute with a plan first, define what the plan is in any of the subsidies backfilled to make up the difference in the blanket and i think that's going to be very complicated, not only to administer but even to explain to people how does this actually help me or how do you take this to a variation from there. the second part of balancing this is how do you maintain a basic health plan and maintain financial control? we always have this pressure year after year, you see the pressure of if we make this plan

more generous there will likely be more political pressure to say that we should make a plan more generous. new innovations to we haven't covered thes these kinds of druo what i these types of therapy. the more generous you make a plan to more costly the plan becomes. so the reverse happens as you start to reduce costs and to focus on reducing the costs and the level of the generosity of the benefit begins to suffer and get issues like went in the medicaid program. you have less access to get a i think that your report card acknowledges that this is a major dilemma. i'm going to quote a couple things because i think you hit on head. to produce problem is there's no solid solution to solve this, which the one quote is the cost of our proposal also it depends on a political determination regarding the appropriate scope of coverage under the basic plan. that in itself is what i think has hampered efforts to move towards health care reform in the future, but it's good that you acknowledge it. this second point you make in the report which also resonate with me, which is a political question comes the level of coverage that society deems essential for people in

different socioeconomic categories. so i think it clarifies for the reader in particular me, that this is a really big problem that the basic health plan and the subsidies together you will still need of some people involved in taking out how to get to the perfect sweet spot as we call it. the second challenge, and it's hard for me to say this, is ending the employer sponsored health care coverage, in particular the exclusion. it does make pure economic sense, nonpartisan but i think everyone can agree when you read about and you see what's going on, it is really a distorted feature in the system. but i think it's more politically entrenched than ever before and i think the resistance is not only on the right but even on the left. he recentered of union plan saying that they don't want to have their employees going into exchange is because the benefits are less generous than what the reporting in the union plans. we also see i think even within

congress to pass couple of weeks talk about whether members in congress and the staff will be able to retain their employer-based subsidy. so i think that in particular with the start in the discussion of the affordable care act, and the promise of saint if you like your health care you can keep it, sometimes the rhetoric starts to grab hold more than ever before. and i think that this is one instance where the retreat is back to th the status quo, at a political retreat is to the status quo, and preserving the employer-based system and with having it as an antidote to the affordable care act is a big challenge moving ahead. nonetheless terry is really overhaul of health care system as a whole. i would think that having a proposal like this, i can imagine how many pages of legislation it would require, as many people in washington have obamacare fatigue come and so trying to overall won six of the economy and the other correction is probably just as a daunting

task as it was fast helped a lot to begin with. the second is the challenge between national versus state or federal versus state. there is a strong question about in the affordable care act, you know, they had to split the difference of same with the exchanges but we also will of a state exchange that i think that was partially apolitical decoration for them. and i think that you will face as well is there's too much of a ship to the federal control over all the health care sector and what role does the state play and the resistance you look at the state level towards moving everything to the federal level. i do think him and it wasn't mentioned, but you do propose possibly a pilot project i could set this all. i think it's are intriguing and be more of a gradual effort. but then you also have the counterpoint of it's just one experiment, how does this in one state applied to the rest of the country, what happened in massachusetts may not apply to utah, for example. the last point i know rob is the transition issue. everyone can see the vision of where you want to go long-term

or get a sense of where it is, but how do you get from a to z. and what of the bumps along the road and author of some people to what is the collateral damage that will likely perked up which could create some dilemma in getting to your end goal. in conclusion, i'm just point out that if you think this is a valuable contribution to the discussion the other forward to rereading it sometimes in the future, based on grace others that you try to address. i think that for the future that the political and policy does still need to settle on the current health care law before understand how we overlaid a new system in that area. and so that maybe when that new landscape is out there we can revisit these ideas and figure out how do you apply them in a new environment moving forward. thank you. >> thank you, nina. and henry aaron, you are going to wrap it up. >> as on the python uses it, and

now for something completely different. [laughter] i have to say that discussing this for both will is are difficult for me for three different reasons. first, we are in the midst of a great national effort to implement systemic health reform. i believe this proposal is irrelevant to that debate. second, the proposal has design features ugly for little appeal to the mass of the general public. third, as the tired cliché goes, the devil, or god, depending on your theology is in the details. and this plan leaves unspecified a host of critical elements. before i explain those comments, i want to anticipate possible responses that the authors may have. first, i may have misunderstood their proposal. and if so, i look forward to corrections.

second, they may say that their paper is not intended really as a fully raw practical proposal, but as a thought experiment. i think that response would also fail. after a century of debate on how to extend health insurance coverage and reform the payment and delivery system, our political system laboriously and painfully birth reform legislation. we have debated and litigated. we will do more of both. but it is the law of the land. and law-abiding citizens will try to implement it. implementation is going to be rocky. it may succeed. it may fail. i actually believe that at first it's going to do both of those things in different places. if ultimate administrative legal and political faith remains

uncertain. but it is naïve, and here i echo i think what nina was saying, it is naïve to think that the u.s. will walk back from the affordable care act say, oh, nevermind, and then adopt a radical measure that scraps the current interest remarque of the entire nation. i'm going to turn to whether this proposal will or should have appealed to the public and to the key missing element that i think have to be specified before it really is a proposal. the proposal would replace medicaid acute care and employer-sponsored coverage with a universal voucher, sufficient to pay for the lowest our second lowest premium on basic insurance coverage sold through a national exchange. that in a nutshell is the proposal. people would be free to buy

additional coverage. vague references made in clean support for supplemental coverage i think, but is nowhere described in the paper. federal would replace state regulation of insurance. all limits on medical underwriting would be ended other than those required by the constitution. insurance companies would be encouraged to write multi-year insurance contracts by authorizing them to find customers who cancel the contracts and presumably to sue them for damages, a proposal that in my view completely misses the real reason why long-term contracts are so rare in health insurance. in addition, everyone would have access to some level of general revenue financed emergency care. for the sake of illustration, the authors present two papers

and they're perhaps available on the slides. they shall have a deductible could vary by income and predicted medical expenses but not actual, predicted your there's one schedule of deductibles for families with lower than average protected medical expenses. and another for those with above average predicted medical spending who are labeled extremely burdened. the trigger, as described in the paper, for predicted use of medical services is $4000 in 2011. based on 2011 data. the authors don't say whether the $4000 threshold is adjusted for family size, age, or initial health status, and if so, how. note that the best constitutionally permitted algorithms now available to predict health care spending

explain no more than 20-30% of the actual variance in medical spending. furthermore, the skewness in medical outlay small proportion of families account for most health care spending, means that there will be a reverse effect. a large majority of people with high actual medical bills will have below average predicted medical spending and, therefore, will face a higher deductible. that means that most households classified as extremely burdened would, in fact, also have negligible actual medical spending. to see what these, to see what deductibles we are talking about we have to look at the authors examples. i shall focus on the majority who we have below average predicted medical spending, but,

in fact, would include most of those who will have above average actual medical spending. a four person family with half the poverty threshold and, just $11,175 a year, we face a deductible of $550. as the poverty threshold, the poverty level would be -- at four times the poverty threshold, and income of $89,100, where subsidy under the affordable care act jump in, the deductible would be $35,760. and for a four person done with an income of 223,500, there may conceivably one or two of you here in the room, your deductible would be your annual income. if you were judged to be extremely burdened medically, your deductible would be just

$145,275. in plain english, this plan would provide no financial assistance for health bills whatsoever for the mass of the population. it would cut loose the mass of curly insured americans for all of the insurance they now enjoy the work or through medicaid, in return for which they would be provide a voucher sufficient to buy coverage that would provide most of them nothing in most years. i rather doubt that many here will find such an offer that eating. but even if you do, how many of you would be willing to bet on the reelection of an official who voted for such a proposal? i mean, really. in addition the plan leaves important questions that have to be answered before the proposal is ready for serious discussion.

here, i will echo some things that nina said. first, how our basic benefits defined? what limits, if any, will there be a physician visits, days in hospital, rehabilitation services, network adequacy, mental health coverage, provider fees? what limits, if any, with a be on annual or lifetime benefits? would there be stoploss protection? if so, at what level? how would it be related to family income? as insurers would have to sell to all would be purchasers, all limits on medical underwriting would be barred on the what would premium subsidy schedule is actually look like? i think that some people would face premiums in the six-figure range. isn't talk of supplemental coverage for them rather fatuous? because one would have to use past income for competing deductibles, what would be done

for people whose income drops for example, because of an illness. as deductibles are high enough to cause a major jump in bankruptcy, due to serious illness, even if there are stoploss limits above those deductibles, wouldn't this re-create the very problem that of uncompensated care that the plan claims to end? if individuals decide to go without insurance rather than pay fully underwritten premiums for care beyond the basic level, wouldn't this fact either add to emergency room costs or medical bankruptcies, or both? mention is made of add on basic coverage at the state level, how would that work lacks those are some questions that i think our basic and needed answered. i want to close with just a few words about the national priorities for reform that are

listed on page five of the paper, two of which incidentally are missing from today's slides. the three on today's slides, and the fourth that is listed in the paper, namely, increased efficiency in health care delivery i think command of general agreement. very few would disagree. they might argue about the relative importance. ..

>> was to handguns it could suggestion and the book and dc was to handguns it could -- access to health care for the sick and the poor. public spending is what it is; logical consistency as well as fiscal prudence would require that we pay the taxes sufficient to deliver on those four core priorities. and that means not just fulfilling them for you and me, but also fulfilling them for the vulnerable populations covered by public programs. thank you. >> thank you, henry. well, those were some very important comments. i think we have a few minutes for a little discussion about agreements and disagreements about what's really wrong with this paper and potentially what's right with the paper too. so maybe darius, you could start. >> thanks.

thanks, henry. i'm glad you liked the plan. [laughter] >> i'll try to be more direct in my other comments. >> that's always been my experience. so i'll just say a few things and then hand off to give them a chance. first of all, i would say it's also naive, i think, to think the aca will remain untouched over the coming years. when medicare was passed in 1965, i imagine there was probably fatigue in passing that legislation as well, yet succeeding administrations over the next 10, 15, 20 years added things like medicare advantage, like medicare prescription drug benefit, they changed, they added prospective payment. now, you might say we're at a little too early for this discussion. perhaps. but i think that nina and henry's points, that this discussion is extremely complex, warrant a longer national discussion before we're ready to talk about changes to the aca.

and as a subsidiary point to that, i actually don't necessarily think that one would have to start from scratch in order to rebuild or rebuild the health care system in some kind of, you know, image. rather, one can think about changes to the way the aca implements tax credits as a starting point for a sub subsidy scream. one can imagine -- scheme. one can imagine the aca's provisions a as a starting point for exchanges as well. so i think this plan isn't necessarily as radical as one might interpret it to be. it is true, i think it's a fair point, that the paper was grappling with some fundamental issues, and so it comes off as obviously a radical change. i think it could be or it needn't be, that's the first point. the second point is it's quite misleading to look at the basic plan and interpret these as the

coverage people would get. it's a little bit like looking at the aca or the status quo and saying, look, in the aca we are leaving uninsured all these middle class and upper class people. that's because the aca doesn't lay down a minimum sub si -- we -- subsidy or few those people. all we're doing is setting a floor for people to use. it's extremely likely that the high deductible thresholds henry quotes will be brought down by individuals seeking coverage on the private market just like they purchase coverage today. we have increased the floor subsidies over the aca and the status quo. i think that's a an important point. the ore point that's relevant is that ending community rating actually makes it cheaper for healthy people to go out and buy down their deductibles, for example. so it actually becomes more

feasible to bring your deductible down a lot if you're in one of the healthier groups. now, to the points that henry made about the prediction of medical spending, he's 100% correct that predicting medical spending is difficult and not much of the variance is explained by it. i will note that current policy already attempts to make these kinds of distinctions by transferring more medicaid coverage to people who are medically needy, for example, and i would also agree with henry, i presume he would say this and i would agree with it, that there are lots of problems in the way we define who's sick and who's medically needy. we agree. and i think we're not following every conceivable problem if health care system in one fell swoop, and there is this problem of how do you identify who's sick. that's not a problem that's unique to our plan, it's unique to any kind of legislation that tries to assist the sick to a larger extent than assisting the healthy. and i don't think there are any particularly bulletproof ways of

doing that today. so i'll just hand it off to you if you want to add to that. >> two quick comments. the first is, you know, i think what makes health insurance different from every other form of insurance is the social insurance part of health care. this is not like car insurance. if you can't afford be car insurance, you don't get to have a car. with health insurance there is that social insurance component which is basically the degree to which the healthy pay to subsidize the cost of the sick which is something that we don't really have an explicit conversation around. and so we view it as, you know, sort of -- we put that up front saying we need to figure out what this basic plan is. we don't think an economist will ever figure out what that plan is, moral philosophers from harvard will figure out what that basic plan is. but until we devise an institution that figures out what it is, you know, we're really not going to make a whole lot of traction on improving the health insurance marketplace.

so i guess, i mean, one could say, well, that's a limitation, you guys didn't figure it out. but our view was, you know, as economists what we're good at doing is figuring out how to get the market part of this to work, the price, the incentives to work, and it's really society and its sense of social justice that should tell us what that basic plan ought to be. so that was one thought. second, again, a high-level response to henry. you know, i think you say that we agree with you. we spend some time talking about the opportunities to improve diversity of choice in the medicaid program, but our plan is really not only directed at public spending. it is directed at total spending. i think our view as economists is if people want to spend an increasing chunk of their paychecks on health care, that's perfectly all right. but with we would want them to

elect to spend a greater and greater portion of their paychecks on health care. right now under employer-provided health insurance we don't have the choice. and so all harvard employees have the same health insurance plan. many harvard employees would prefer a less generous plan which would free, which would allow them to have higher wages which in turn they could spend on, you know, gasoline, college tuition, a mortgage. so i think, i think we actually agree with you this is not only directed at reducing the growth of public spending, but to sort of bend the curve on total spending. and we think the single best way to bend the curve on total spending is, a, get rid of employer-provided health insurance and, again, not even by fiat. if employers want to deliver health insurance to their employees just like they deliver a nice office space or meals, they should absolutely be entitled to do that. all we want to do is eliminate the subsidy, eliminate the tax

expenditure associated with employer-provided health insurance. and since that's the largest source of coverage in the united states, there's no question that we think that that would help reduce the growth of total spending on health care, not only the growth of medicaid spending. so that was the second point. finally, i think -- and this is just an observation -- i think that we are in this uncomfortable place as a country. i certainly feel it as an economist, where any opportunity to, any attempt to sort of modify the aca in any direction is viewed as a threat to the entire aca. you know, we think -- at least i'm speaking for myself here -- think that our plan starts and ends in ways with ideas that are lifted right out of the aca in ways, completely turbocharges them with the exception of eliminating community rating. and we think that eliminating community rating is actually

something that will happen naturally. we're just the first to come out and say it. it's going to happen naturally because of the heterogeneity of patient preferences. there is no way that young people want to pay the same insurance premium as old people, that rich people will want to pay the same premium as poor people and so on and so forth, that cancer patients want to pay the same premiums as diabetes patients. so there is this underlying heterogeneity for health care, and if we don't acknowledge that, we'll have to keep circling the flock with more and more mandates, and at some point those mandates will fracture. what we're saying is, look, if people really were willing to enter into that kind of social contract, then great. we just don't think they are which is why the aca introduces the individual mandate. i think the authors of the aca understood that the young and healthy are not going to want to

buy health insurance. did you want to add -- >> [inaudible] >> okay. first of all, thank you. [laughter] darius, this proposal does go in a completely different direction from the aca. if what you're saying is that there are ways to modify the aca consistent with your principles without jettisoning the whole system, it would be helpful if you would say so, but you don't in this paper. so i would urge in a revision that you take up the specific modifications in the aca that you think would move it in a desirable direction. second, if you really believe the goal is slowing the total growth of health care spending, then i would urge you to lobby hard for saying so in the paper. finally, much of this discussion sounds as though the united states is inhabited by two disjoint populations,

neanderthals and homo sapiens, the sick and the well, and they're completely distinct, and they never cross over. but at the same time, the paper says we should have really long-term insurance contracts, and if you do, the gap -- the difference between the sick and the well vanishes. we are all at some point in our lives in varying degrees both. so i think there is at root a deep-seeded inconsistency of conception that this inconsistency indicates and reveals. >> i would just add that a it still gets at the issue of the basic plan, and i think the challenge which is not a challenge just for you, but for everyone -- and it gets a little thk -- is it' geing aaying, i

predictability and that the rest of it may be just a transition to get us to the long-term plan. and i don't know if you can comment on that a little bit, on how you see that long-term planning playing in the kind of execution of this. >> going to ask my co-author to -- i think he wants a chance to speak. >> nina, thank you very much for your comments. one is transition issues, because i think that's essential. realistically, we have to figure out how do we get from the aca to our plan, and i actually believe it's not substantial steps, because the aca contains some key provisions that overlap with our plan. specifically, it contains tax credits from individuals between 133-400 percent of the poverty level, tax credits to help them lower the cost of premiums for them. what we would do is take those tax credits and eliminate the

income limits on them. so they wouldn't startat 132%, and they wouldn't end at 400. they would go all the way up and down the income ladder, we would general lite to the -- generalize to the entire population. that's number one. the r number two -- number two, the exchanges are very important. we need a nice marketplace where people can buy and compare health insurance plans to satisfy their needs. we will take those and generalize those too. now, if you do generalize those two important things in the aca, you don't need a lot of other things in the aca. you don't need the medicaid expansion because the tax credits will take care of it. you don't need the employer-sponsored health insurance tax breaks because the tax credits for, on the exchanges will take care of it. so that's what we think. we think the aca got something very right, we need to go with what's right and expand on it. that's, i think, the main transition point. the second thing i'd like to stress is when henry talks about

the basic plan, he makes it out to be a very uncharitable plan, you know, if you're -- makes it out to be a very uncharitable plan. but the thing that's missing is the basic plan is not what you have to live with. it's what twines how much subsidies you're going to get. you can always top it off. you can say, oh, my premium -- sorry, my deductible is $20,000. that is way too high. well, what do you do? that person would go out and buy a plan that is supplements the basic plan that lowers the deductible down to $5,000, to $1,000, to $500. and the really interesting thing is if you combine, if you take into account the fact that we eliminate community rating, the price of reducing that deductible is much lower today, much lower under our plan than it would be today. so that plan might only cost an extra $150. so you take the basic plan plus $150, and your deductible will come down to $1,000.

that's possible. that's the important thing here. we're changing prices to make plans cheaper. >> well, you know, i spent a lot of time doing cost estimates over the years, and i've heard some pretty amazing stories, and that number is pretty amazing to me, but, you know, i can't wait for this plan to go into effect. [laughter] i guess i have one, maybe 30 seconds to ask, gee, i've heard a lot about the under 65 insurance market and a lot about medicaid. have you, have you met, you know, the older generation? how about medicare? where does medicare fit in on this. is there a quick short answer, and then we'll go to the audience. >> i think that medicare emphasizes a lot of these transitional issues. everybody's right to say we're still beginning to think through, so we have not tackled

that question. maybe the next aei report, joe. >> can i just add one thing to that? you know, i think there is nothing in this plan -- i think one of the reasons that we didn't touch medicare is because there's a lot of disagreement amongst the eight of us on whether we could touch medicare with this plan. again, speaking for myself what i like about medicare is it doesn't essentially have this apartheid plan which you've got the poor in one plan and everyone else in another plan. at the same time, what i don't like about medicare at all is the fact that medicare essentially reimburses for services without regard to their value, and let me give you the example of proton bean therapy for prostate cancer. the private insurers went to cms and begged them not to cover this therapy. they said we have no evidence this therapy works. but they told cms if you, medicare, cover it, we the private insurers will have to cover it too because if we don't, we will be sued.

well, cms decides to cover it, so it is a long way of saying that to the extent that we want cost control in health care to come from decision making by physicians and hospitals and providers, one reason to extend this plan up to medicare is that we're more likely to see technology assessment of that type which would have avoided the proton beam problem. >> but a.m. knew tab, and this is a point nina made as well, why do you think that in your world you are going to be free of the congressional oversight, the pressures a public agency like the center for medicare and medicaid services into making what was probably an ill-considered approval judgment in this case? the same guys are -- women and men are going to be running for office and voting on your basic plan as for medicare.

>> you're right. and what they'll probably be doing in november is they will be, essentially, campaigning on the size of that basic plan, right? so you'll have a guy say i'm -- elect me for office because in my, if you elect me, the basic plan will include the pro on the beam -- proton beam. what our plan does is puts an explicit price on that kind of conversation, on that kind of getting people to vote for you. we can say, well, this is what it's going to cost us. >> well, just to wrap this up with a little bit of maybe possibly a cynical comment, there's already that price, but it probably doesn't show up directly in anybody's medical bill. but it's still there. okay. so let's, let's go to the audience with some questions. in this lady had her hand up -- this lady had her hand up way ahead of everybody else.

wait, please. wait for the microphone, please state your name and affiliation and, of course, try to ask a question. >> my name is barbara dallow, and i'm a nurse. i wanted to say, first of all, i was really happy to hear you speak of quality as one of the big priorities, because i think we all want to get well when we're sick. my, i want to address your el vailing of the -- elevating of the government responsibility to provide care and responsibility to protect through a basic plan. historically, that has always led also to government control as in obamacare when that government control is leading to economic rationing and loss of the md/patient decision making. how to you reconcile government control based on the economic and political needs of politicians with the needs of

the patients for good quality care? i was in washington, and i happened to -- >> okay, okay, we have your question. [laughter] >> okay. >> i think that's -- i think this speaks to the issues that both henry and nina have raised about government intervention in the plan. i think there's a continuum here. you can never, obviously, disengage the health care system from the political system. the issue is that the more buying power we give to the government, the more influential it becomes, and the greater its capacity to make changes that may be good and may not be good. an example of this is the medicare prescription truck benefit. drug benefit. so if, for example, the government directly covered insurance policy or directly provided insurance for prescription drugs, it would have a lot more direct buying power for those prescription drugs, and it could make very direct determinations about what drugs can and can't be purchased. what instead we have is a system where the government subsidizes a private marketplace.

cleary, there's still the -- clearly, there's still the potential for it to interfere and intervene, but the disconnection or distribution of authority and purchasing power across the private and public sectors mitigates this to some extent. in fact, we are all in complete agreement that political processes will have unpredictable effects in general. >> i'd just like to say a word about the affordable care act, because it was misrepresented in the question. patient choice among insurance plans for most people will increase, not decrease. there is nothing in the system that are represents governmental imposition of benefits since a default plan, for example, in the district on whose health benefit exchange i sit, the default plan is the private sector plan that was most commonly offered, and insurers can offer additional benefits on top of that for which they are free to charge, and that

individuals are free to buy. so the idea that somehow choice is compromised, that patients are in a straitjacket, that federal legislation is constraining the range of offerings available under the affordable care act is simply false. choice is increasing, and the only danger that a that faces is from those states in which governors, legislatures and attorney generals are trying to make the plan fail in implementation. >> i just wanted to do a quick response to henry's point. it's just an addendum, and i think you and everybody will agree that one area where the aca has not increased choice, and that's medicaid. what it does -- you're below 133% of the poverty line. the aca puts you into your

state's medicaid plan with no choice, and as has been alluded to, there's massive access problems. you end up with a card, but you can't find a physician. that's how we're going to treat the poor under the aca. the alternative is to mainstream the poor, allow them to have access to the same kinds of health insurance plans that you and i have at a subsidized level where it's completely affordable to them. i think that sort of treats the poor sort of with much more dignity tan i think the aca -- >> actually, the aca raises fees for primary care through medicaid to medicare levels, so admittedly, in an insufficient degree, but it tries to improve access somewhat. >> unfortunately, that's only for two years, right? >> yeah. [laughter] >> thank you all. tyler o'neill, a journalist with

the christian post. my question is to nina. you mentioned the difficulties of applying this plan as in the political space, and ted cruz has made a lot of headlines by saying he'll try to defund obamacare. but this plan would be a more conservative solution to obamacare. so what do you -- do you consider it at all viable or the ideas from it viable as an option for, say, the gop to produce in the future? >> well, i mean, i think i said in my conclusion that the ideas that we need to see where the dust settles. we don't know, as henry even said, whether implementation, how it will go, whether the health care law will continue as is. i mean, there is still, i think, some efforts that there may be a repeal of the health care law depending on once the law takes effect. so i think that this is an important contribution. i think we need to see where the

policy and the politics end up on this and then revisit what the proposals here offer. i said earlier that i think there are a variety of things that we have in common in the ideas that i have in what we should be doing that overlap with the ideas there. but then you have to sift that through and figure out at what point do you have something that builds a larger consensus. >> something that nina also said that the world will have permanently changeed before we get to -- changed before we get to serious consideration of alternative policies. john is next. >> thank you, my name's john graham, i'm a senior fellow at the national center for policy analysis, and my question is about community rating and the repeal of community rating. and i'm struggling -- maybe i haven't understood the proposal. today we have in medicare advantage community rating, but there's a risk adjustment behind the curtain, and that's what's going to happen in the exchanges. in a state like new york, the

individual market doesn't work because there's no readjustment behind the curtain. so what i'm trying to understand in your proposal, if i had hiv/aids, do i go to the national exchange and they say your premium's $150,000, now you can apply to the irs, they'll give you a tax credit for $130,000? i don't quite see how that's going to sell to the voters. have i understood correctly, or can i just get some clarification? >> so what would happen for that individual, and let's suppose $150,000 is the actual premium they're coded. if they're below 350% of the federal poverty level, which is a pretty high threshold, they would go on to an online exchange, they would ask for the basic plan which would cost $150,000. but they would immediately be matched with a tax credit, and so when they check out, the price that they would pay is zero.

>> [inaudible] >> john green with the national association of health underwriters. so on page 26 your example speaks to this issue. an attorney who goes there gets cancer, and then you guys subsidize him. what's the point of getting insurance? be part of the social contract is that we're all in. but now i can just wait til i'm sick, and my god, the best of both worlds should be really pie in the sky. it's all free, and, you know, i don't have to do anything. can you with clarify this? >> it depends on your income level. if you're below 350% of the poverty level, from day one you're covered for a plan that covers you whether or not you

get sick. it doesn't matter whether the premium is paid at the beginning of the year or next year when you get sick. the government's going to have to pay for that once we decide we want to provide coverage for the poor and the sick. now, if you're above 50% of -- 350% of the poverty level and sick, you have an incentive to get the insurance ahead of time, and that's the simple answer. we do provide insurance. the fact that you pay for it every year opportunity make it not insurance. >> i'd also just briefly add that the presence of long-term contracts and in an individual market as opposed to our employer market would be something that our hypothetical lawyer would probably be interested in as a protection against income loss due to high health care spending. >> hello, my name's dr. nathan -- [inaudible]

of george washington university hospital. so my question is, you know, the central tenet of this plan is choice and competition in health insurance will bring down costs for families. last year i got published in the new england journal in response to dr. antos and saying that there isn't a whole lot of evidence for choice and competition bringing down cost. dr. gruber has shown a lot of choice in inconsistencies among the elderly, they pick plans that don't minimize out of pocket costs, and then dr. mcwilliams of harvard has how long medicare advantage that too many medicare advantage plans just floods people's ability to pick the appropriate plan, and they don't always respond to the generosity of plans. so, you know, how confident are we that choice and competition will improve value in health

care? >> actually, so i think the brief answer, one is kind of compared to once. compared to what? it's clear that medicare, which doesn't have a lot of choice, hasn't done a particularly good job of restraining costs. so the question is, are there alternatives that would do better? in terms of the part d example which i think is salient here, it is true there is evidence of choice and consistencies. i would say, however, there's also evidence by dan mcfadden and others that suggests that on the whole choices have been reasonably beneficial and overall the costs of that program have been somewhat less than anticipated which all goes to say that markets don't work perfectly. the question is whether they'll work better than the alternative, and that's, i think, the way to frame the question. >> two points. first, the idea that medicare doesn't have a lot of choice is false. the typical medicare enrollee has a choice between traditional medicare and a couple -- a dozen

or more medicare advantage plans. so the, there is an abundance of choice already in medicare. we could argue about the exact bidding arrangements that exist, and i think the economiests here could probably design better ones that would promote price sensitivity and competition better than the current system does, but choice, we've got it. and there is evidence on the relative performance of medicare advantage versus traditional medicare. it actually was done through a freedom of information suit by brian biles i think at george washington and some colleagues, and the evidence is that on the average -- it's not uniform, it depends on where you live -- medicare advantage plans are slightly more costly after adjusting for patient characteristics and benefit packages, package differences than traditional medicare is. a so that's in support of the

skepticism that the questioner raised. on the importance of long-term contracts, i fully agree it would be great if we had long-term contracts, but i think the reason we don't is not that insurance companies are fearful that, or are unable to recover losses from those who cancel coverage as stated in the report, it's because they can't predict what long-term costs are going to be. they don't know the course of medical technology, and they have to be fiduciaries for their shareholders. in addition to that, behavioral economics has taught us that people tend to overweight current costs and discount especially low probability risks in the long run. and what are long-term insurance contracts but a commitment today to pay more than you have to when you're young and healthy so you can pay less when you're older and sick.

so we're calling upon people to do what psychologically and what behavioral economics has indicated thai really not -- they're really not very good at doing which is making very careful, long-term plans involving risks that are difficult to appraise. that -- those are the reasons we don't have long-term insurance contracts, not because of a legal impediment that the companies can't recover costs that they may receiver because of cannes -- suffer because of cancellations. >> just one quick point on that. it's actually, it would be ideal to have long-term contracts that literally set flat premiums, but it's not necessary. you can imagine a pretty good long-term contract that just says you can't raids my premium -- raise my premium for something that happens to me, but you can raise it for aggregate technological reasons. we can rerate the whole group, but we won't rerate you when you write a long-term contract with them.

that's just one point, that you can still get pretty good results with that kind of a setup. >> you know, we have about 30 seconds. so if you could ask about a 15 second question, and you'll get a 15 second nonresponse, i think that's -- >> okay. what can be done to incorporate into the health care universe the increasingly, increasingly growing number of americans who are skeptical of the conventional remedy, medical treatments for -- and would prefer more integrated approach that incorporates alternative and preventive approaches to their medical care? >> so i can address that. i'm a, i always get confused, the bottom line is that the market should be able to produce plans that people value. so, for example, if you have back pain and you want to see an orthopedic surgeon, you want to get an mri, then you can choose

a health plan that will cover those kinds of services. if instead you want to go to a more holistic provider which certainly some of my patients have chosen to do and they have great outcomes, you can go to an insurance plan that will cover that kind of coverage as opposed to paying out of pocket. >> great. thank you very much. please, join me in thanking our panel if for a great -- panel for a great discussion. [applause] [inaudible conversations] >> tonight on c-span's encore presentation of "first ladies" -- >> now, if you were an invited guest of the madisons or part of the intimate circle of family and friends, you would be invited into the dining room from the drawing room. and here dolly madison would sit at the head of the table. her husband, james, would sit at the center of the table. dolly would direct the conversation, and james would be able to engage in intimate or lively conversation with the people to his immediate right

and left. now, this table today is set for eight people, but there could be as many as 20 people served in the dining room. that would not be unusual. and, indeed, dolly madison considered dining at montpelier to be so much more relaxing than entertaining in washington. she said she was heads worried serving a hundred -- less worried serving a hundred people in montpelier than 25 in washington. >> the encore presentation of our original series "first ladies" continues tonight at 9 eastern on c-span. >> a recent pentagon report says that if budget cuts required by sequestration go into effect, the army will lose 70-100,000 soldiers in its active duty force with similar troop reductions in the other military branches. brookings institution fellow michael o'hanlon highlighted the report in arguing that these cuts to the defense budget are too damaging to military

readiness. he discussed the pentagon report yesterday at the brookings institution. this is an hour and a half. >> to another panel discussion here at the brookings institution. this one is called "dissecting the pentagon's strategic choices and management review." i'm marvin kalb, and i'm resident senior fellow here at brookings and a senior adviser for crisis reporting which is hoe candidated just next door. -- located just next door. way back in august 2011, believe it or not that's only two years ago, congress passed and the president signed into law a legislative monstrosity called the budget control act. it was a way of doing something when nothing seemed worse. at least at that time. a joint select committee was set up to control the spiraling deficit, but congress warped that if the committee -- warned that if the committee failed to come up with a solution,

sequestration would automatically follow meaning massive cuts in both defense and all other programs. those cults have now begun -- those cuts have now begun. the pentagon was already prepared to cut $150 billion over the next ten years. however, sequestration would require $500 billion in cuts over the next ten years. last week defense secretary hagel soberly warned that cuts of that magnitude would not only affect entitlements such as salaries, housing, education and the like, they would also affect defense readiness and capability. if the u.s. for some time now had been ready if necessary to fight two wars at the same time, now with these cuts that would no longer seem to be possible. meaning, america's defense strategy would have to be radically altered.

so what to do. in a macro and micro sense. we've asked too highly respected defense and budgetary experts to explain reality and options to us. they are mackenzie eaglen, a resident fellow at the american enterprise institute, and if i got this right, during the last presidential campaign she helped governor romney. but the governor's loss should in no way be ascribed to mackenzie. [laughter] our other expert is michael o'hanlon, a senior fellow here at brookings, and though he has written many books most recently author of "healing the wounded giant." recently, our panelists co-authored an op-ed in the "wall street journal" urging congress to reverse sequestration or watch the nation's military readiness go into a decline.

mackenzie, why don't we start with you, and then we'll go on to mike, then i'll ask you both a couple of questions, then we'll go to the audience, and we're going to finish at 11:30. so ma kenzie, please. >> good morning. thank you so much for moderating, it's a pleasure to be up here with you and, of course, my good friend michael who not only did we recently author the op-ed in "the wall street journal" about some of these issues, but we were also together with secretary hagel and his team last week at a briefing about these choices and in this budget outlook, and we'll certainly talk, i'm sure, about some of what we discussed at that conversation. be i think you've set the ground very well. it's important to remember sequester is not the starting point, and so much in washington feels like we're always starting at square one. but sequestration is the fourth year of defense budget cuts. this drawdown has been well

underway. we peaked our defense spending in 2010, and there were a series of capability, capacity and real budget cuts ever since. and so there's been almost roughly $1 trillion taken out of current or planned or future dod spending in the last four years before sequestration. that's why this is tough. that's why you hear the chiefs constantly banging the drum, that's why you hear the secretary and undersecretary talk endlessly about how damaging sequestration is. this is not the fest dollar of defense -- first dollar of defense cuts or the first capacity that's being unwound as part of this process. and so a lot of the things that i think we'll talk about this morning, unfortunately, are overdue. so many of the choices that the pentagon has recently laid out are things i think that should have been under consideration four years ago. it's not to say that a lot of the defense cuts that started under president obama and

then-secretary of defense robert gates weren't of value or utility in certain cases. this is not their first efficiency drill at dod. and, but there is a lot of things done rightly and wrongly as part of the previous years. i'm not so sure the lessons learned have sunk in. and so what we have now is a defense department and a congress -- a washington, i guess you could say -- that continues to have to go back to the same pots of money and the same priorities for dod every year as part of the defense drawdown because we're doing it on an annual basis, we're doing it piecemeal. it's chipping away at the margin's defense cuts as opposed to big-term, big-picture, strategic planning thinking about this if we really do have to live with this, how do we handle it for ten years and work backwards. and instead we see what we saw in 2013 which is half a year or so into the fiscal year we're going to start to talk about serious change and serious

planning. and i certainly don't think that's any, any help to have a trillion dollar tab that's already on the table. >> be mike, pick it up, please. >> thanks, marvin. and by the way, i agree with you, mackenzie can't be blamed for governor romney's loss, but she's also been polite enough to remind us that she's from the great state of georgia, and with the atlanta braves ahead of the washington nationals, i admire her discretion and appreciate it very much. [laughter] what i would say and, again, it's been very well framed, some of the additional budget cuts that are now being considered, i think, are okay. and mackenzie and i don't have the exact same view. i don't want to suggest everything i say she would endorse. we do think there's room for efficiencies. and some of them are probably, if you can actually accomplish them, if you can get the congress to authorize them, if you can actually implement them the way people think, you can probably let's say reform information technology systems

at a massive organization like the department of defense, they're worth doing, you know? and the briefing that we heard week from secretary hagel and his team which developed some of the ideas that were also expressed by deputy secretary carter in his congressional testimony that everybody can read on the web, we saw an estimate that perhaps $40 billion could be saved over ten years from new efficiencies. and that's on on top of the othr efficiencies that were already identified as part of previous budget-cutting reviews like additional base closures. although it's worth pointing out that congress has not yet authorized those, and so if anything, we're even deeper in the hole because even to get to previous levels of planned cuts, we're going to have to either to persuade congress to change its mind and go ahead and authorize thing like base closures or find other ways to save comparable amounts of money. but let's say that base closures, for example, are authorized. some of these efficiencies could save somewhere around 40 billion

over ten years. and every time you ask the pentagon to try harder and go look deeper, they're probably going to find another five or ten being here. and so i would say on balance there's never going to be the end of any and all possible cuts. is that me? no. that's good. it's okay that it's you, i just didn't want -- >> the president, but i'm not answering. >> exactly. [laughter] so 40 billion, let's say we can do that. then there's another examination of possible savings which mackenzie and i wrote about in this "wall street journal" op-ed ten days ago, and they have to do with things like reductions in certain elements of military compensation or at least reductions in the -- [inaudible] now, these are not easy, and they're not inherently desirable. i think all of us would agree that we ask so much of our men and women in uniform that the idea that we should cut their compensation is not really a proper phrasing. we would, if anything, like to

make sure that every possible benefit that can be proposed that they receive. certainly wounded warriors. certainly the families of deployed soldiers. certainly troops leaving the force and trying to get a g.i. bill so they can transition to the private sector. all these people deserve compensation that's not in any way hindered or compromised. but there are certain ways in which military benefits have not always been modified or streamlined to accommodate the new ways in which we live. example would be the -- [inaudible] which, you know, exist in towns, they have plenty of walmarts and other such stores. and there are other ways in which you could make compensation reforms. and they're not trivially easy. i would not call them efficiencies. they are actually cutting back on the compensation or at least the rate of growth of compensation for our volunteer force that's done so much on behalf of all the rest of us over these last 12 years and

before. and if you add up all those savings which are more or less along the lines of what i would agree with and similar to the kinds of ideas mackenzie and i had in our op-ed, that's another $85 billion in savings. so if you add up those two chunks of money, we're up to about $125 billion in additional ten-year savings out of the 500 billion that could be required by sequestration. the good news is that 125 billion is almost the amount the president's proposing to save over his latest ten-year budget plan. so we don't have to make a lot of cuts into force structure or weapons modernization. there's room for some cutting, and in my recent book, "healing the wounded giant," i wound up advocating about $200 billion in ten years' savings because i was prepared to recommend certain changes in certain weapons programs. we're all going of to have somewhat different takes on what's the right number of army divisions or brigades, how many

joint strike fighters we should purchase. my own take was that we could save in addition to this $125 billion or so from efficiencies and compensation reforms maybe another 75-$100 billion from cutting muscle. and the pentagon seems to have arrived in a different place or, excuse me, in a similar place insofar as it goes. but then it had to keep going. and this is not a criticism of secretary hagel or deputy secretary carter because this recent review, the strategic choices and management review or scmr as it's called, the idea here was we're going to have to look for ways to save this $500 billion because sequestration currently is the law of the land, and it really may happen. and so above and beyond the kinds of changes i've already mentioned, the 40 billion in efficiencies, the 85 billion in compensation reform and then some modest tweaks perhaps to capability, the scmr did a

couple of things that i really don't like, and i'm not sure its authors like it very much either, but they had to put these ideas on the table. one of them is to downsize the u.s. army quite a bit more, and i'm just going to mention this in my opening comment and then wait for other discussion topics later on. but met me just give you a -- let me just give you a sense of what's being considered for the be u.s. army. right now there's just over half a million soldiers, it had grown up to 560,000 during the peak of the afghanistan and iraq wars. of course, we also mobilized some reservists and national guard, so we had maybe another 100,000 on top of that 560. all of these numbers are, by the way, quite modest compared to the 1980s, the cold war. we had 800,000 in the u.s. army alone in the 1980s. much larger, of course, during korea, vietnam, not to mention world war ii. so being down around 560,000, it was a growth from the clinton

years and from secretary rumsfeld's early thinking. all of that was in the 475,000 range more or less. but it was not huge, and it did not reverse the cuts that were made at the end of the cold war. now we're already planning to go down basically to where clinton and early bush had been. the army had been previously headed towards 490 240urbgz active duty traps, but the scmr is down to 420,000 or perhaps even lower if sequestration hits in its spirity and many of the cuts are taken out of the u.s. army. i think this is a bad idea. in fact, the only place i have a disagreement with the administration is they suggested this kind of a cutback to the army is not necessarily a bad idea because it complies with the president's own strategic guidance given last year at the pentagon, the so-called stoogic guidance document of 2012 which said we don't want to do these counterinsurgency missions anymore.

we've had enough. iraq and afghanistan have been frustrating and slow, let's watch our hands of this kind of stuff. that's the exact kind of sentiment we had after vietnam, and yet when taken to excess, it leaves you unprepared for the next time you might have to do a counterinsurgency whether you like it or not. there's the old bolshevik saying you may not have an interest in war, but it may have an interest in you. we may not have an interest in counterinsurgency, but what happens when not just syria stays mired in the mess that it's in now, but this affects more of the broader region, even lebanon and jordan? or when india and pakistan come to the verge of nuclear war over kashmir, and the only way out might seem an international force to sort of manage a trusteeship for kashmir for some period of time. i could go on with hypothetical examples that are going to sound a little crazy now but about as crazy in i had mentioned afghanistan as the source of a 9/11 attack.

in other words, you can't always anticipate where war might spring up, and i haven't even mentioned korea. bottom line, we have a lot more to discuss. the kind of cuts to the u.s. army being intended or at least being considered now within the scmr process i think are highly imprudent and leave us sort of catching onto the latest fad in warfare. we're tired of counterinsurgency, so let's just pretend we can decide here in washington we're never going to do it again. we've made that kind of mistake before, we shouldn't make it now. >> thank you very much, mike. let me ask you first, both of you, a very quick question. a kind of yes or no question. do you think by the end of this year congress will have acted on sequestration specifically for the military and pulled it out of the law? what do you think? >> no. or they may have acted, but they'll have acted separately in each chamber, and it will not be reconciled. there won't be any change to the law. >> so that we can realistically look forward to the

implementation of sequestration at the pentagon. mike? >> i fear mackenzie may be right. i'll be quick, i promise, but the cuts that would be required by sequestration are so harsh for that year, and there's no way to phase them in realistically, it's even a worse debacle than the notion of sequestration over the ten-year horizon, it dwarfs even what we're going through this summer and compounds what we're going through when almost half of the air force isn't flying, when equipment queues are piling up, and we're not fixing the stuff we need to keep safe for our forces. so i think congress may ultimately say $52 billion in 2014 defense cuts that sequestration would require need to be softened a little, and maybe they add the cuts to the back end. in other words, they don't do anything that's fundamentally changing the basic logic of sequestration, but they soften the blow in 2014. that's possible just because the specter of sequestration next year so horrible for the armed forces.

>> if that be the case, we're still working with the reality of very massive cuts. and, mike, you were getting us a little bit of a hint about the practical effect that's going to have on the military. but the military exists to implement, to fulfill the desires, the strategic aims of the country. now, as i mentioned earlier, we have lived in this country for a long time with the belief that we could fight two wars at the same time. i assume that we mean if you go back ten years iraq and afghanistan at the same time. that, of course, did not take into account as you were implying a moment ago that there could be an outbreak of hostility in korea which would involve the united states militarily. so if we look at the strategy now and we look at the amount of money that is going to be available to be spent, what dueck, mackenzie, will be the effect on the strategy itself?

what would you recommend to the president, for example, and he does listen to republicans, so it's okay. what would you recommend to the president that he begin to consider as a change in the strategic aims of the u.s. to conform to the economic reality? >> of course, i wouldn't want to advocate that, right? i'm already disappointed that the defense department has officially moved on from the longstanding two-war construct. this has been underway for more than the last couple -- >> moved on in the sense of beginning to change. >> correct. meaning where our contingency and our war planning are formally changing quietly to move away from the two-war capability, at least the two war simultaneous capability. certainly for any length of time. >> so where are we going now? >> so where are we going? well, the department is sticking by its january guidance, as

michael mentioned. the defense strategic guidance issued last january which is, you know, the rest of us call it the pivotal rebalance to a asia. it's basically an increased emphasis on asia and trying to hold the line in the middle east for the most part. but it is largely, regardless of what vapt -- vice president says, it is at the expense of capability in the rest of the world. they don't have a choice. so, for example, the cno just said we don't have a single ship in southern command. so you can't say it's not zero sum, that's the unfortunate reality of the pivot. although it's a relatively sound strategy. the qdr independent panel -- >> the what panel? >> the qdr independent possible -- >> which is? >> in 2010 which was the stress test to the obama first defense strategy that year, and they basically called for a pivot before the obama administration. some would argue even the bush administration started this. it's a sound strategy so long as

it's not zero sum. but the problem is i don't see any scenario where the department can continue to hue to it even though i know that's the predisposition at the pentagon is to hue to the strategic guidance. >> meaning what? two wars at the same time? >> an emphasis on asia and a toe hold in the middle east for lack of a better -- >> so that's both. >> correct. >> and so what you're saying is economically we're not going to be able to do that. >> they're already moving away from it in realistic terms. and, but the previous position is to not break the strategy, and we also heard this reiterated at the pentagon last week. you know, the management reviews, budget scenarios were implement the president's budget in 2014, no sequester as is, and it fulfills the guidance which in and of itself is questionable. i don't know that it would ever fully resource a quarter trillion in defense budget cuts like the senate budget, for example, proposals by senator patty murray, larger than the president's in this latest

budget process. that would bend the strategy, and then the full sequester would break it. where they literally would throw it out and start all over from january. fortunately, based on the double and triple whammy hold that michael's referencing, we're not just talking sequester dollars anymore, we're talking efficiencies that won't be realized in addition to sequester and we're talking about readiness holes that the department is plugging also with their own tab. it's something we should talk about later. all of these things combined means that any scenario is at a minimum bending the strategy if not breaking it. and i actually, like i said, i think it's a sound one, but i don't know realistically how you keep it. >> mike, you have written that you go from the two wars at the same time concept to one war plus two. and i assume by that you mean two smaller engagements. could you spell that out for us? what do you mean by that? >> yeah, thank you, marvin, i think it's really good that you're focusing in on the

strategic choices before us as we think about different defense budget levels because otherwise it just seems like -- doctor a lot of numbers, right. >> right. and there is, obviously to, room for debate even within a given size military or defense budget because it's not all the wars come in the same size and shape, as we know. nonetheless, the basic logic as you've been saying is for a long time we thought maybe we'd have to fight iraq and north korea at the same time. it turned out to be iraq and afghanistan. you can debate whether we had to do them both, but we did. ultimately, our military was a little too small even though we'd been trying to have the capacity for two at the same time, we were a little off in our calculations, and that's part of why secretary gates ultimately had to increase the size of the army and marine corps in the last decade. then in the 2010 quadrennial defense review that mackenzie referred to a minute ago, the administration began to soften a little bit the requirement for that second war to be quite as