of his colleagues. bill gradison -- phil bresdesen, i will only mention the role with respect to health reform. he was the president of what was called the health insurance association of america. this is the trade association for traditional health insurers. his organization played a particularly interesting role. they put out a series of ads, harry and louise. and then we have been rosen, -- dean rosen, a chief health adviser to senator frist when the senator was the senate

majority leader. . right to senator frisk when the senator majority leader. nicoles was -- i think you were the chief health care policy adviser at omb back in the good old days and continues to toil in the vineyards and tim capretta who was also on the hill back then. spent some time at omb and has been talking about these issues for a long, long time. with that, let me turn it over to bob. and continue. >> yeah, thank you, joe. first of all, let me just say that i agree with joe's basic premise here, which is it's very hard to talk in any kind of specificity about that which we don't have the specifics to look

at. and the most important things we need to know the impacts of this on the economy on the people, on the distribution and the ways in which we might government and private entities administer the changes we have. i thought it might be useful as i quickly went through as a context for the remarks of others and what's different now and what's the same and the extent of which these factors will either make this task harder or more difficult. and i have eight areas in which i think the situation is quite different now from how it was before and a couple that quite

similar. first there's the budget complex. if you raum in 1993, we had just enacted the omnibus budget reconciliation act in the summer of '93. and that was to put the deficit on a path that we wanted to adhere to. and the task for health reformers is don't screw that up. but it -- the budget in a sense wasn't the big focus here. now we're in an environment in which we're told that the budget problem is the growth of health care costs problem and we're not going to deal with our unsustainable fiscal path unless we can readvise the health reform over the long run at least we'll lower not just federal cost health care costs

but also costs in the broader economy. and there's a consensus -- we have a consensus as the president suggests that i think could be reached if we had 300, $600 billion to throw in it. but we don't. and so the real -- here in my mind is sort of not what does this look like over the next ten years? is it deficit neutral, do we pay for every spenny we spend? for every spenny we spend? looking out at the ninth and tenth year, is the new spending less than the savings and is that gap growing? and if the answer to that is no, i think we have failed in the fundamental objective, one of the two of this whole effort. second area in which things are considerably different is the

economic context. when we took this up in '93, 94, we were two and a half years beyond the trough of the recession. and the unemployment rate had peaked at 7.8% in the summer of 1992. and was slowly falling. peaked at 7. % by the time this was introduced, 6.5% by the time it died, 6%. people weren't happy, the economy wasn't chugging but it was improving. where are we now? the thing was unveiled or effort was initiated when the economy was in free fall. unemployment still rising. we were on the brink of worldwide financial meltdown. the government took extraordinary actions, which have clearly made the american people leerry about the role which government is now playing

in the economy's life. no one is asking what the counter factual, if it hadn't rescued gm, if the fed hadn't poured money into the system -- the answer is clearly we don't know. but most would say a whole lot worse off than we are right now. this has created a situation -- economic context which makes this challenge much harder to succeed on. i don't need to really say anything about the political context, it was very partisan. the budget debate back in '93 it was passed without a single republican vote. but it's hard to look at then versus now and say it's not more contentious now. i think it certainly is. and we have far fewer moderates and legislative giants like bob

dole or george mitchell or people womening to go beyond their party's political interest to try and work out a deal. the media environment is clearly more inhospitalable to any change particularly issues like health reform which are easy to demagogue. we got our news back then through three network channels and newspapers back then there was no widespread cable talk show hosts that had no reigns of responsibility placed on them. and -- >> other than c-span, we want to mention c-span. unfortunately the viewers of this will be a tiny fraction of those watching any of the

shouting shows. we're waiting for you, you know. define roles here. the difference which i think makes things a bit easier, we have the ability to understand and measure quality and risk. to a degree that we didn't back then. and when you think about putting together a sensible health care reform plan, one that will work, i think this is terribly important. we aren't where we should be on this, aren't where we will be in five years but we're moving quite rapidly down a road here to get kinds of information and ability to adjust payments that len and i would have given our right arm to have back in 1993.

another area of difference is the perception of the u.s. health care system relative to that to the rest of the world. back in '93 we were pretty smug and had no problem saying, we might pay more than everybody else and we might leave 10 or 12% uninsured but the health care in america is the best in the world for those who are getting it. the a lot of studies have brought that into question now. and while certainly for some people in some circumstances that is still true, the evidence gathered by the commonwealth fund and others show that we have fallen pretty far behind a number of western european countries on all sorts of measures of quality, even ones that we used to pride ourselves

in, which is how fast can i get a doctor's appointment or can i get a doctor's appointment on the weekends. so that -- i don't think that has seeped into the nation's consciousness yet, but that is a factor that should help reform advocates. a seventh area of difference is our consciousness about the geographic differences in the cost of care and the lack of relationship between cost and the quality of care. we know that for same families, same income, same composition, same insurance policy will cost twice as much in miami as in minneapolis. this is an important set of knowledge that we have here and it makes reform infinitely harder in a political system

that is geographically based. what this means is for standard policies either the subsidy level for low income person has to be very different in the geographic areas of the country or the burden placed on that family for insurance has to be very different. and this is an issue which people haven't focused on yet because as joe said the detail isn't just out there. the eighth and last sort of area of difference is the consensus that exists monday stake holders now, provider group suppliers and insurers, whatever, the reform is inevitable, the question is not whether the we're going to have it. it's when and how.

and so at least at a superficial level we have a lot more agreement now than we had back then which makes at least the first steps of this a lot easier. what's the same? one thing that strikes me as the same is the american people and many of their leaders remain woefully confused and misinformed about health. they don't understand who's footing the bill, the employer or the worker. they don't fully appreciate what the insurance they are receiving through an employer costs. they think that premiums are outrageo outrageous, even though they are paying a small fraction of the total. they are sure they could have a same thing but a whole lot cheaper. must be somebody out there screwing them. it's the insurer, drug company and it's you know, providers of one sort or another.

they don't want to look in the mirror and say, hey, i might be a part of this. i want an mri and things which in other countries people don't get nris for and the value provided by that mri for better health care of marginal importance. it's very hard to change something in a rational way which people don't understand. that's what we've been trying to do. and i think a huge education task lies before us. whether we are successful in this round or not. lastly something is the same. our ability to estimate with any consequence, the consequences of various health reform bills is

quite limited. and this is -- for confession of somebody who spent a good part of his life doing this. and it's not for a lack of trying. i think various independent organizations and institutes have really devoted a lot of resources, a lot of talent doing this. but it is an unbelievably devilishly complicated task. we don't really have fundamental data base that one would want to have to try to develop models which you had a lot of confidence in. what you ideally would want is a a d >> characteristics of their

employers, of the insurance that they could have available to them. and some ability to see how this could change for significant changes in policy. estimating models, based on small changes in policy, and we are talking about rather large changes in policy. we do not know how employers will respond when the whole situation changes. will there be tipping points? how will providers think about changing the way they organize themselves and deliver care. these are questions which we are making good, educated guesses about. but, there is a huge range of uncertainty surrounding these estimates.

>> thank you, bob. let me ask you two quick questions. on your last point about limited ability to analyze complicated proposals, do you think that the ability has improved or just become -- is more of an analysis that we can do but it is not necessarily etter analysis better analysis. is the data better? are the methods better? are the studies that have taken place over the last 15 years something you can rely on? >> i think they are better, but modestly better, i don't think they are significantly better. were i betting my retirement on this, i wouldn't place a bigger bet. of course, i don't have the retirement that i had back then either. >> well, that's a great source

of comfort. your point about the people and politicians being misinformed about basically how health care works is certainly right but this is not preelly a question so much a statement i suppose. how do you get a political consensus over an individual personal decision when it comes to the use of health care, that mri for example? and we economists say, we need to put financial incentives in there. but that's probably not completely it. that's something we ought to talk about later in the panel. >> i think basically the american people and certainly their political leaders don't have a realistic view of what the range of viable options are for the long run because they

are politically difficult to swallow. and you know, it's easy for all of us to prescribe systems for society as a whole. when my kid is sick, i'm not sure i want to go along with that. >> right, exactly. >> bob, i'm sorry to hear about your retirement. the public will benefit if you labor longer -- since 80% of the public had some kind of health insurance back during the days the clinton plan was being considered as well as now, the views of the public i felt were the key to successor failure of health care legislation. and ken thorpe estimated 96% of those who voted in 2006 had health insurance poll after poll then in 1993 and '94 and now, indicate that to keep what we have and main change is to pay

less for it. vague assurances that you can keep what you have and not have to pay more i think are insufficient to give reassurance to people who are obviously concerned about what these plans mean to them, what they mean to their family. it's difficult for be specific as i -- difficult to be as specific as i would like to be about that. there is a specific plan that i can point to but what if you have a policy you like but isn't offered through the exchange. what if you have a high deductible health insurance plan not uncommon between farmers and ranchers and those policies are outlawed, none of the plans permitted in the individual market will permit a $10,000 die ductib ductible. what if your insurer increases your premiums to try to make up for the new excise taxes talked

about being imposed upon the insurance companies. i think i can pretty well sum up what i think we knew then by quoting gratison's law which goes back 15 or 20 years which was health reform will be decided not by speeches or television ads but over the kitchen tables as families discussion how it will affect them, which of course was the where the harry and louise notion came from. interestingly, back in those days when i was heading the health insurance association of america, we did something unusual internally, we did a daily national tracking poll of support for health insurance reform. and i recall very specifically that the high point was at the time of president clinton's speech, which i thought at the time was one of the best speeches i heard a president give in my lifetime and hasn't changed my mind about that. what happened afterwards, and we picked this up in our data, the

support just started to slip not dramatically but steadily, the line went down. and the longer the plan was out there it appeared the less support there was for it at the time. in that -- i think what happened is that the more the public knew about the plan the less they liked it or in a sense to know it was not to love it. when i was serving in the house, my great mentor was barbara con pal. there was a big i said why did you vote against that? he said there is something in there for everyone to hate. this is something to keep in mind. if a bill is rushed through too fast, there may be thing in there that once they become public, can cause real concern among the body politics.

something to think about. joe asked us, what do we need to know now? i think the real questions is what do american families need to know now? the most important thing is just the specifics. a specific plan or even two or three alternative plans. it has been puzzling to me over the last month or so to hear people arguing for or against the plan when there isn't a plan to be for or against at this point in time. much, far too much, what has passed for public discourse has been based on as much of lack information, more of lack of information as it has been on misinformation. i've been especially interested in how information is disseminated, and particularly the role of trade associations and membership groups because that's what i used to do back in that period. i think interest groups do play a key role in this process, not

by general statements of support or opposition, but by telling their constituents just what this plan or that will mean for them, their policy holders, for insurance company or the dues-paying members of their association. for example, the aarp, for which i have a very high regard, appears to be supporting the why of very large savings from medicare as a major source for advancing expanded coverage. should we be surprised that many medicare beneficiaries who pay dues to aarp would prefer such savings be used to bolster the admittedly shaky financing status of medicare? is this trade-off, isn't being discussed very much. i think that's curious. insurers with whom i was associated back in those days quite properly said pre-existing conditions will no longer be a barrier to coverage. of course that assumes universal

coverage or something very close to it. will there be adequate funding to avoid a premium death spiral during the transition to universal coverage? you've got to phase these things in. i'm to the saying there's been no discussion of it, but it's going to take a lot of money to make that thing work. the sicker people will be the first ones to sign up once policies become generally available and premiums come down. i focused on insurers since reform of insurance regulation is getting a lot of attention. it's almost become the centerpiece of the debate the last month or two. insurers who currently, obviously, play a key role providing health insurance have this time, unlike 1993 and 1994, been offered a seat at the table. i assure you, we weren't back then. they are on the universal coverage bandwagon, which is great. their great reward for coming to the table is hearing a public plan is needed to keep health insurance honest.

i heard that again from senator reed as i was driving to work this morning, using the word "honest." have they been dishonest? have dishonest people been invited to the table? have insurers been violating current state insurance regulations? perhaps evenizing insurance will help to sell reform, but at what price? the long-term implications of the current debates extend well beyond health insurance. i'm not hearing any debate about this. should there be government options in other parts of the economy where people are unhappy with what's going on? are there other industries which aren't honest? should we have governmental oil companies or government pharmaceutical companies or government banks or government real estate appraisers? that might be pretty popular right now. on the short list of what we need to know, and this is my major substantive point, where is the capital going to come

from to coverage get coverage for tens of billions of additional people? there was no discussion to this point in 1993/1994. regardless of whether insurers are for-profit, not for profit, mutual or co-ops, they need capital and need to earn a profit. criticizing insurers for earning profit is not constructive. if there to be a private sector role, capital can only come from re-investing profits or borrowing or stock issuances based upon evidence of likely future profitability. co-ops are no different. they do exist in the health care field in some parts of the country right now. they generally rely on re-invested profits to finance expansion. sometimes they run into conflicts between using profits for growth versus using profits to expand benefits or reduce premiums. will the new co-ops currently being discussed have implied federal guarantees on their

debt? will the co-ops be permitted to fail if they exhaust their resources or will they be bailed out? will existing health co-ops, will not-for-profit or mutual insurance companies be treated the same as new co-ops? finally i want to say a word about financing. i wish there were at least some discussion how the financing of health reform relates to other priorities. i already mentioned what i think is a relationship to the solvency of the medicare program. along the same lines, wouldn't committing, let's say, increased marginal income tax rates to health reform make it harder in the future to reduce the deficit or to reform the tax system which are also worthy goals? how high can marginal rates go without slowing economic growth, which the at the end of the day is essential to pay, not only for health reform, but all government programs, federal, state and local. i believe congress will act this

year. of course, i thought the clinton plan was passed, too. i did. for what it's worth, my personal preference is incremental reform and bipartisanship, which should be no surprise. that was my approach during my years in congress. that was then and this is now. incrementalism, which was a four-letter word in 1993 and 1994, is once again a four-letter word in 2009. >> thank you, bill. dean? thank you very much. thanks again for having me, including me. i have a slightly different list from bob's. i tried to focus on about seven things that are the same and about seven things that are different. there's some overlap so i think you'll hear some very, very similar scenes. a slightly different perspective. i wanted to focus a little more on the intersection between the

politics and the substance. i think you can't extract them. you are having a debate about politics, ideology and substance and that is all conflated and will determine the outcome. start with similarities first. you have a young, idealistic democratic president who staked his political fortune on health care. you have a large democratic majority in house and senate. i went back and looked. i don't know how many of you remember, bill probably does, in the house of representatives, and we know that even though committees pass bills back in '93 and '94, that health reform didn't come to a vote on the house and senate. there was one more. the democrats had a larger majority in the house at the time than they do now by one. interesting. the senate's a little different. 60 is a big difference.

in the house it is the same. a lot has been made and the president's right about committees moving forward. this is another similarity. at the time you also had committees in congress, major committees produced bills. senate finance committee and the labor committee under senator kennedy both produced bills. again, similarities. you had then and you have now and bob referred to this, a very, very determined and energized minority in congress among republicans. again, very similar to what you -- you cannot subtract all these major issues. the other one then pops up. another similar to, but also a difference, is that at the time, it was my recollection that health care reform dominated the news coverage.

throughout that two-year period, there was a lot: on with the economy. -- lot going on with the economy. ms of the following in congress, it seemed to dominate news coverage, although the news outlets were very, very different. it also, i think, for those who were there, at least my recollection, just dominated most of the time and energy and oxygen in congress, both in terms of estimating, in terms of committee time. sheila burke is here. you limited floor time in the senate in taking that up. it was a dominant debate just as it is now and crowds out other major priorities, in terms of congressional focus and in terms of time. i think finally, on the big picture similarities, this is an expansionive and expensive proposition. i remember reading the cbo report at the time as a much

younger and certainly more junior staff person and remembering the reaction of some of the key members of congress that was devastating to them, how big and costly this was. i think the same is obviously true now, although folks seem to have rest with this difference. bob touched on these. i've got a slightly different list i want to expand on a couple of these. we haven't touched on it today as much. except in joe's comments, but i think the timing of reform and the decision that the president made, the administration made early on to go forward with reform this year is really, really key. you know, if you recall in 1993, i think there was an explicit decision made we are going to deal with the economy first. we are going to try to deal painfully through tax increases

with sending signals to markets that were going to deal with our deficit, and now the president has clearly made the argument from the very, very start and the get-go that health reform is linked with the economy and needs to be done at times we are dealing with economic conditions and needs to be done now. i think that one piece, if i have to pull out others and i understand why he did it as a political matter, will be one of the things that politically comes back to cause him and others great difficulty as they try to sell the plan. for some of the reasons bob stated on the substance, which is a very difficult thing to do. when you look at the cbo analysis, the costs are going to go up as a result. at least the bills that have been produced in the house and in the senate so far. the timing is key. i want to come back to that. it makes a ton of sense politically to try to do it.

we talked to pollsters and you look and compare the polling at the time. the president, i think, clearly made the gamble that he was more popular at the outset than he will be later on. that's probably the case. we've seen his popularity fall. i think a lot of us who are, some of us who are incrementalists at heart, bill and probably myself, look at the situation and say, oh, my gosh, we are dealing with afghanistan, iraq, dealing with the economy, why would you want to take -- bailouts, and why would you want to take this on, too? i think the president made the calculation, not just substantively but politically, i think, that americans who are concerned about their job, concerned about the economy, will be more willing to accept big change early on. i think that's another reason i think he is pushing for it now. the other big difference, and bill obviously is the

representative. just to me the sort of interest of having the stake holder groups at the table. i joked when republicans did that it's called drafting bills and secrets with special interests. when the president does it and democrats do it, it's having stake holders at the table. it is interesting. pharmaceutical industry, the health insurance industry and others, and i think the calculation was made that those are the folks who in organized opposition, at least some of them last time helped to defeat health care reform. they are keeping them at the table, at least talking made sense. that's a big change. bob talked about this earlier. i think this is really, to me, playing out in the senate. i think you'll see in the next couple of week just this lack of, in numbers, a real center core, particularly in the senate, and particularly on the republican side. you are mentioned some of the

names dole and danforth. having the press call chuck grassley or mike enzi a moderate republican, it's interesting. if you look at it, and this is why i think it's so challenging in the senate, you sort of figure out beyond the three republicans in the group of six who are at the table and maybe one or two others, there are just not the centrists out there. you look at folks in the republican party in the senate have been willing to cross the aisle and work on major reforms with democrats. you think about people like george voinovich. you think about senator grassley. you think about people like judd gregg or john mccain. a lot of those people also happen to be economic conservatives, budge hawks and

others. i think the it's going to be very, very difficult to find more than one or two or three, perhaps, republicans in the senate willing to do this. it makes it politically necessary for it to be a democratic-only enterprise in a way i don't think was quite there at the start in '93 and '94. also, i think, frnkly increases the political opportunities and risks for the democratic party. another big change for me, and this has to do a little bit with the change in the media, is the strength and the passion of, we talked about the efforts the president went through to try to tamp down honoringed opposition, but this organic opposition that developed and we saw it play out in august, and some of it i'm sure was furthered by astroturf and people getting out there. it was made possible only by the

internet and the media we have now of people saying i care about this, i want to know what it means for my family. to me, anyway, from the folks i talked to and some of the town halls that i saw, seemed to be very organic and organized, that i think would not have been possible 15 years ago given the state of communication. the president, again i think another difference -- i remember thinking at the time when president clinton gave his address to congress and pulled out his pen and said if you send me a bill that fails to achieve universal coverage, i'm going to veto it. that was the end of reform. i didn't see any way congress could do it at the time. now this president has retained flex bil. that's one of the reason that all of us, depending where we sit and stand, heard a little bit of a different message earlier this week. i think that was quite intentional. we can debate, i'm sure we will later, who he was trying to speak to and energize.

i think this deference to congress and flexibility, at least, on the details, is going to be a key difference. bob touched on this so i won't go into it for a long time. i just have two other differences. i think the substantive debate at the time was also quite different. i think it was in several ways. there is a lot more effort in '93/'94 around what i think was called at the time market reforms. there was a great faith in managed competition, in the dominance or growing dominance of the private insurers. there was a feeling that some of those reforms could be adopted, that it would help slow costs overall. we already started to see some evidence of it in the early days of managed care. that, frankly, was what brought a lot of folks in the republican party to the table because even they were willing to spend some of the money, but they saw the hope we could have a more

organized and reform system. you hear a lot less of that now. you hear a little more quality debate. i think a lot of it, unfortunately, for those focused on substance and not on politics, has been obscured by this ideological, no-win debate about a public plan. seems to me, if you look at the geneology of it, we haven't had a large debate about what it means when you have the costs going up at that level. i think the character of the substantive debate has been different. i think it's been diminished in part because we had such a dominant discussion of the public plan. then i'll come to my last difference and end it there. i think the final difference for me is going to be the outcome.

i agree with bill. i'll go on record saying i think the difference this time is i think congress is going to pass a bill. i think for the democrats to have 60 votes in the senate and not to pass a bill would be probably legislative mal practice for them, begin how much this president has staked politically on reform. he is way out there. he raised and spent more money than any presidential candidate in history, if you believe the press reports, something like 70%, 75% of advertising dollars in the last months of campaign were about his health care plan and down sides of john mccain health care plan. i do not think failure is an option. i think in the senate, if you do not do a reconciliation route and you don't get all the sentist democrats to vote for the final bill, you can get them

to vote for procedural motions on 60 budget points order and other things to move forward in. my experience recently with the prescription drug bill, that is what happened. in fact, it was a great relief to people like senator gregg and senator lott and others, 51 republicans and 49 democrats to be able to go home and say they voted against a prescription drug bill that wasn't paid for, but they did vote with the president and they did vote with the leadership on the key procedural motions which got them to 60 votes. i think the outcome this time will be different. the question for me is not whether a bill will pass, but what will become of it in the minds of the american people? maybe not in the next election, but in the election when the president runs three years from now. i ask this question at a dinner last night, but i'll ask it again. the question is whether this bill is going to be more like

medicare or more like medicare catastrophic. i'm not saying it will be repealed, but i think these questions that the american people have and that they seem to be asking in august if you talked to people about how is this going to affect me? which even with a very, very detailed plan, i don't think can be answered. i'll close my comments with this. i heard joe antos yesterday on npr on the radio. i was driving into work and thrilled to hear joe get a question from a woman in michigan. i thought it was a great question about health reform. it was that she had been paying premiums. she was self-employed. her premiums were $1,000 a month to cover herself and her family. she had gotten a letter from her insurer telling her her premiums were going to go up by 33%. the rationale was there was a

change in the law requiring pre-existing conditions to be covered. she was concerned about how the new -- she asked very specifically, how is this going to affect me? it occurred to me, and there are millions of questions like that, we can't answer that. you can't answer that after you pass a bill. you don't know. i don't think as a result of any bills before congress, whether it's the one-page card the president distributed or 1,300 page bill that passed the energy and commerce committee. whether that 33% is going to stay there, whether it's going to be 20% next year or would have been 33%? i think this is where the economic argument, ultimately the president began on, is going to hurt him. i think most people's definition of reform, particularly those people who vote, particularly people with insurance is that i'm going to pay more but i'm going to save

money. your premiums will not go as quickly as it would have gone up otherwise. that is when to be a difficult political argument on top of the implementation of the other issues. i will in there and i look forward to the comments from my other colleagues. >> thanks. i am sure that bob shares and astonishment that people don't think in deviations from baseline terms in their daily lives. it is shocking. but they will be thinking about that in the future. -- i was going to raise a question with you my joke supplanted by will comment. it will come back. lynn, go ahead. my joke supplants my real comment. it will come back. let him go ahead. >> well, joe, thanks for having me. i can't think of a more fun way to spend a rainy friday morning

than reliving 1993/1994. i'll try to be brief. i do think there are some important things we know now that we didn't know then and i think they are relevant to everything we are talking about. one is, we didn't know that 18,000 americans die every year from not having health insurance, which is what the institute of medicine has taught us. you do the math. and by the way that was in 2002. if you adjust it, it's about 20,000 more now. we stopped debating the clinton plan in august '94. it's been 15 years. na's 300,000 people who died from lack of access to timely care, which they would have had if they had normal, not cadillac health insurance. we didn't know that then. i suspect if we had known it we might have debated it at least a week longer or thought about it. second, back then premiums were about 8% of the median family

income. today it's 18%. headed toward 35%, if you take out just ten years current trends of both growth and premium and growth and median income, which has been stagnated quite a bit by the recent economic excitement. third. while we knew it, only the longs talked about it, the single most important stress on our budget is medicare cost growth. we knew because we were taught algebra that the baby boomers will actually retire. they are coming. they'll come on this president's watch. when they do, medicare cost growth is going to be increased just a tad, if you can believe such a thing going forward. we know we have to solve this problem. we had a lot more knowledge of the system. that is to say, the liberty system. we had a decent sense that there

was geographic variation because of the lonely work jack winburg was doing there at dartmouth. now he has a lot better funding and we know a lot more about it. i must say to civilians, a simple country health economist like myself, when you look at the variation in medical practice and spending around the country, it is simultaneously stunning, scary, and also full of promise because it turns out one of the things we learned is, there are some parts of our country that are actually doing this stuff right. there are some parts of our country that are delivering very high quality care at very low cost, and no one seems to mind much. also no one seems to know much about it. anyway, we know a lot more about how to do stuff right. i would say there's also a difference there's been a

growing and maybe even finally complete consensus, that excluding people from insurance because they happen to have a health condition is immoral and shouldn't be continued. i agree with bill. it's not that insurance executives are immoral. the rules force them to play the game. you've got to change the rules. what's interesting to me is, paul ryan now support guaranteed issue. this is progress in civilization, i would say, because he doesn't have a mandate. it's not a serious proposal, but he does agree you've got to say in public now you oppose to pre-existing condition. so this is progress. then i would say we are equally aware of the obsolete model of fee for service. fee for service does encourage

volume, not value. when you compare us to other countries, one part of our country to another, you see we are good at engendering volume. another difference and a thing we know, harry and louise are now democrats. turns out harry had a cancer problem. i don't remember the details. ron pollack will give you the information story. they had to run him the way the real world works once you get sick in this country. they were self-employed actors. i would say some of the things are the same. the president's job is impossible. i wonder what madison would think if we were designing it today. on the one hand we had an articulate and ambitious president who had a majority in the house and senate.

we thought he was articulate because he could talk to bubba. bubba is now screaming at town meetings, but nevertheless. clinton could do all that. he designed a plan -- actually, it was in a hotel room, for six months. sarah roosevelt wrote from. it was designed to be a perfectly logical construct, which at some level it was. it was not, however, very effective political document. so this president said, okay, i've got majority in the senate and the house, i'm articulate. i can't talk to bubba, but i can talk to lots of people. i'm going to let congress do it because they told me if i do it, they'll complain about it. i'm going to let congress do it. well, you know, with all due respect to the critiques of my colleagues, congress did pretty well. they had three committees in the house agree -- think about this -- agree to do this in

tandem and they got it out of all committees in one summer. hell, in two months. so you got a bill. it's not perfect. i agree with that. in the senate you had a chairman who was dying of cancer, but his staff, of course, had pretty clear instructions and dodd came in and took over. and you got a bill out of the health committee. the finance committee is clearly stuck, but i think it's fair to say they are going to produce something. so i think congress did its job. the difficulty is congress didn't do its job in time for there to be more than a one-pager in august. so one similarity in now and then is that explaining complexity when people are scared is really hard. i'm not sure anybody could do it, what i observed from the way

these things have gone in various places, once you get past the shouting, which after some effort, you can. when you talk to people about what it's really about, and you see the members do that or see the people with the members do that. you see the people talk among themselves. people can be calmed down. there is a broad recognition that the system now is broken. people are very worried about the health care cost increases. they see no way to stop it. 80% of workers a year ago said they worried how to pay for health care in five years and they are covered. so i think there is some hope there. the difficulty of not having moderates in the republican party is a problem. i would observe two things. the moderates are still in congress. they are just democrats now. there are 53 blue dogs. there ain't going to be a bill that a critical mass of them don't agree with.

similarly, the 15 or so moderate democrats in the senate are in states that voted for mccain at some margin of consequence. so there's not going to be a bill they don't agree to either. the difference is there are very few moderates in the republican party. there is a struggle for the soul of the republican party that is playing out in some ways in the heart of chuck grassley. you've got the party of lincoln on one hand, and you've got the party of strom thurmond. that party is opposed to reform. there is no way they are going to reconcile anything, but what's left is the party of lincoln thinking about whether it's smarter to try to make this

thing moderate and workable and join and make it happen, or whether it's better to go sing the song of socialism and government takeover and rationing. let me tell you why the rationing song is a particularly bad song to sing. we all agree, i believe, if we don't get the medicare cost growth trajectory under control, the chinese will eventually take their money home. the good news is, they can't take it really fast because they've got a big old pile of dollars and they have no place to put their money 10, 15 years. we have somewhere between 10, 15 years, then they will take it home. we've got to do this. let me tell you a secret. if what you do is scream rationing every time anybody talks about trying to save money in the system, you are making it impossible. just imagine closing doors, in making it impossible to talk about medicare reform in a serious way and in adult

fashion. so i'll close with this, what i call difference from the past and a similarity which i think is a common vision we might actually share in this room, anyway. in the past, the stake holders opposed reform for all kinds of very reasonable reasons. what's striking to me is a a would-be observer of these scenes, is how the stake holders are actually still at the table. trust me, it's partly about the little deal rhom is cutting in the white house. what will happen if we do nothing? the medicare cost problem will continue to exacerbate. since we closed all the doors of addressing this in any serious

adult way, when the chinese start to get nervous about interest rates, we are going to put on price controls because that will work in the short run to hit a budget target. and satisfy our chinese debtors -- creditors. the people who run health systems and understand everything i am talking about, they know that. they do not want that. that's why they keep telling the few moderates willing to deal with this, get back in there and solve this problem. let me tell you a secret, right now 2/3 of hospitals lose money on medicare. now, 1/3 don't. therefore, you could argue that medicare doesn't underpay. we've got a bunch of inefficient hospitals. okay. now let's agree it's going to be hard to do reform. let's assume demint wins and we do nothing. we still have the medicare problem. we'll go to the hospitals and do what? take money from them without

covering people. good luck with that. really, really, really, good luck with that. there's only one way to do this and that is together. you have got to figure out it is a moral question to cover people. it is also, let's be frank, a bribe. it is a bribe by time so that our hospitals can become as efficient as we need them to be because that is the only way we are going to be in that cost growing. you are not going to get that time without investing there. what's interesting to me, in fact the best part of the president's speech the other night was the linkage between his commitment to, he said spending, he means coverage expansion. the linkage to that realized savings. he used the word realized savings. we can argue all day about whether and how to do that, but he just said he was for linking them. that's the only way we can do

this. you've got to get congress on the line, committed to covering people so they will get serious enough about cost control to stick with it, and you've got to give hospitals enough juice to get over the hemorrhaging so they can get with the program and become as efficient as we need them to be. i know enough real people now, i've gotten to be old, gray bearded and this is my last shot. i promised my wife christmas 2010 i'm done. i'm going to coach high school football the rest of my life. if you don't get it solved this time i'll get out of your hair. i know enough ceos who run health care now. they taught me a ton. main thing is just give me the frigging rules and give me the incentives and get out of the way. and we'll do this. because we would rather do it than have price controls. they will show the country how. thank you. >> thanks. your last comment

makes me realize what a contradiction is. they are born to pay for most of the health care coverage expansion by kevin rates to hospitals and medicare providers. -- by cutting rates to hospitals and medicare provider spurted 49% will be coming out of medicare. it does not matter, it is a huge amount of money. so we are going to take that money up front even though the white house said the bill refers to this as efficiency improvements, the way it really works in the traditional medicaid passion, we take the money. i agree with you. putting some pressure on providers is not such a terrible thing, the question is how much,

and how fast. but then we're going to turn around, because we're going to give the money back. . . around because you say we need to buy time. then we are going to turn around and give the money back. that's what this is really about, right? >> let's be clear. just be clear. most of the money in the house bill is medicare advantage, which medpac estimates we overpay them 18%. the second biggest chunk is the drug price change which forces the medicaid prices to the medicare program. and third is market basket update which is what you are talking about. that is a relatively small piece. i'm talking about buying time for them to become equipped to deal with the incentive structures that are also in everybody's proposal. >> i disagree with you that the

$150 or $200 billion taken out of medicare advantage plans is somehow not going to affect providers, but let's move on to jim. thanks, joe. thanks to all. i'm glad to be here. sorry to have to hold you up just a little bit longer before we get to questions. i'll try to be brief. lots has already been said here. i think start with the observation that the process we are observing this year is intentional. it's a reflection of what happeneded in '93 and '94. i think the way to understand that is to observe what took place in july in the committees that len was alluding to. i think he thinks they were very successful. my impression of the process at this point is not quite like that. basically what transpired was that there was some sense of what the bills were going to look like. there was a lot of back ro

negotiations with various stake holders. they unveiled july 14th and at the same time they also then unveiled sort of a new cbo to provide to the public their analysis of what was in those bills. it was their intention to have it pass out of the house by july 31st. so you don't have to be a genius to see the legislative tactic involved here was to try to truncate the amount of time between public semination of some analysis and votes. i think the fact they were trying to jam it through the process that fast without enough people getting a sense of what's going on here, what's in these bills, what does it mean, i think that contributed very substantially to the public then saying in august, whoa, whoa, whoa, wait a second. let's have more discussion about this.

so the fact is they did get it out of the committee. i'm not quite sure is dispositive of the process producing something that is going to be the final verdict in all this. in any event, i do think that it's intentional they don't want as much analysis done on this as was done last time. one reason i would argue we do need a lot more time to look at this is that even in the speech two days ago, the president made three very important assertions about the final product that i think are highly questionable and need to be verified. they're a sort of says who kind of factor to this. who is going to verify these assertions are actually taking place and the bill's being written? some neutral party needs to say yes or no. and they're pretty important questions. he said three things.

he said this will not increase the deficit. now or in the future. by the way, it used to be this was going to solve the deficit problem in the long run. we set that aside for the moment. now it is it won't increase the deficit and now we are in the future. there's not been anything presented by anyone that comes close to meeting that test. not by a long shot. the basic structure of what's taken place in the house is to create a new health care entitlement to get people into the coverage. very predictably cbo and others, anybody else looking at this is going to suspect that is going to grow at roughly the same rate medicare and medicaid has grown 40 years, 8% a year more or less, and the offsets for it perhaps cover it for a ten-year period. more or less they expect will grow at 5%. you have this, you don't have to be a financial genius to see this is a problem.

you've got a disconnect and it's going to make the problem much worse not better. and not by a little bit. by leaps and bounds. so you have this gigantic disconnect there. i think that's a huge issue that has to be resolved very clearly before they vote on anything, by someone, not the president himself just making assertions. someone's got to take a look and say yes or no or probably not. when dr. reishower was running cbo, was probably a lot. you need a good judge of people looking at this saying probably yes or probably no. when you look at house bills in particular, the house bills in particular, it's very clearly not, it doesn't come close. the other contention the president made was that the bills would lower costs for everyone, families, businesses and government.

again, this is an assertion that flies directly in the face of any, whatever analysis we do have of the bills emerging, essentially saying the exact opposite. that costs will go up for businesses. costs will go up for the government. and i'll talk about now. the one analysis that came out the other day from the lewen group, there are simulation models in various places. there are some academia. they did some analysis of the house bill and it brings out interesting facts about what is operative in these bills people probably should know before the final votes occur. one is that to get coverage under the bills that are moving through the house and the senate, they essentially do one

thing. they make people buy insurance. that's basically what it is. an individual mandate that says for the vast majority of lower or moderate wage workers who are employers who now definitively have to offer them something, they have to take it. it's going to cost them more money. this is going to come out of their wages. he does analysis, runs the numbers and shows, but no one said this yet, that on average, the uninsured would pay $1,400 more for health care under the house bill than they do today. it's not like this is all going to be handed out to people. it's going to come out of their pockets. is that a reason to vote yes or no? i'll leave that to others. people should understand roughly what the financial implications are, and this one is not something i think is subject to a lot of dispute. if you have an individual mandate for the vast majority of people are going to get coverage are lower wage or moderate wage

people working in employers who now have to offer and you make them take it and not going into the exchange, they are going to end up paying a lot more money for their coverage. that's how it's designed. that hasn't really been said by anybody else as far as i can tell so far. here we are in september. and it certainly leaves one to question whether or not this is going to lower costs for everyone, family, businesses and government. i guess let me just then move on to the point joe is raising, which i think is at the heart of the contradiction of what's going on here, which is the president said also, he asertd he is going to be able to pay for most of this $900 bill he expects will cost him in the end, through efficiency in medicare and medicaid. efficiency in waste in medicare and medicaid. there's been a lot of talk about that. i agree. i agree our biggest long-term issue is how do we deal with our

entitlement programs? fundamentally, what's at work in the bill is to push more people into fee for service medicare, open up potentially, depending how the public option is settled, more people in the working age population in something they could very well resemble it. and finally, to lever price controls through hospital payment reductions, fees that are imposed on medical manufacturers, pharmaceutical companies and labs, it's essentially a price control system across the board cutting of the provider community to raise money for coverage. this is not -- this is how we've always done it, actually. this is how we've done deficit reduction in the past, medicaid expansions in the past. this is nothing new. the politics drive you to this. the easiest thing to do is try to do price settings, to do fees on providers and assume that's going to somehow cut out waste

and inefficiency, but there is not one shred of evidence that that would actually occur if the bill passed. all this stuff they talked about, delivery system reform, on the ground changes and accountable care organizations, all the tough stuff is in the bill but in a way that gives no one confidence that it actually will emerge in any robust way. it certainly is not the driving force behind any predictions of savings. so the political process we are observing is producing exactly the kinds of cuts, fees, taxes that people all moan and say just make the system worse, but not better because they are arbitrary. there is no sense of quality. every hospital will get the same market basket cut, regardless of how well or badly they treat their patients. it's just a cut. that's really how they are paying for this. moreover, say what you will about medicare advantage, but it seems to me the only capitated

program that has something that can be built upon to move towards more delivery system reform, instead of that they are going to move potentially millions of seniors, single-digit millions of seniors out of medicare advantage, back to fee for service, probably with wraparound coverage. they will be for tote al fee fo service environment. i don't know that that gets us anything. i think the then and now comparison is that yes, we've taken a different tack this year to try to get to a different prediction of legislative passage. maybe that will occur as being predicted. i have my doubts, but i'll leave that to others who are better at that stuff, but i think what we are suffering from is just from a basic analysis of what's going on here, so the people have some -- you don't have to have

every number on every thing, but we need a little bit more. i think the public needs a little bit more about who exactly is going to pay for this? and what is the likely trajectory going forward? the idea that this bill is going to produce on the ground efficiency changes, that's going to transform how medical care is delivered in this country, is not there. it's not in these bills. to say it is is an assertion, not a fact. i think that's what we need much more discussion on before passage. i'll leave it at that. thanks. >> thanks, jim. i think i heard both len and you, in essence say, managed care shouldn't be a dirty word. is that right? >> i think we have to have coordinated care. you can call it what you like. >> i'm living in the past. we used to call it managed care. i'm sure my colleagues would like to dispute some of the

outrageous statements many of us made. would anybody like to make a comment at this point? i'll just make a comment on jim's characterization of the timeline of what's happened, more as a conspiracy than assort of this is the way our system works. i think generally the various committees had very ambitious schedules which they wanted to get bills through a lot sooner than it turned out to be. that's because they knew the summer recess was going to come. if they weren't at a certain point, they knew the momentum would begin to ebb. it wasn't get this out at the last moment, rush it through before we have the kinds of information we need to do sensible votes. there was the hope, i mean they tried and they weren't

successful. they reported out bills, sort of in july when they had hoped to do this in may or june. while i agree with jim it's really essential before we go down one of these paths, that we have a full array of analysis to exami examine. the process is such you have many bites of the apple. there is going to be, they knew, a very different bill coming out of the senate than would come out of the house. the real place that this will b

>> if you listen to the statements being made about it, that is exactly what the point is. if you just get it past the first vote, get something through the senate, we'll fix this thing, at which point it becomes a certain momentum builds towards passage. this is what they want. if you start having votes, people start committing, then there is a certain legislative momentum. the fact information can come in at the 11th hour and 50th minute that says wait a second, this is having an effect people didn't expect. they say too late. we have to pass this thing. i really think that's what's at work here.

>> i think time was not a friend of the clinton plan. my recollection is the president said woe have a plan in 100 days. he didn't. because of this 100-day pledge, the media, some of the media developed skills, assigned very able people who had not been looking at health care before, but were very much up to speed by the time the plan was actually out there. one of the striking things at the time, and this amazeded me. it's a different world of media than today, but there was not a single network that has many as one person assigned to cover health care all through that period. i believe that is correct. some of the newspapers did and they counted for more than "l.a. times," "new york times," "the washington post," "wall street journal," i'm not sure how many more i would add to that list. when the plan finally came out, there were people who would take a look at it, write the pro and

con articles and observe factually and sit back and look at them. i think that was a real challenge. if i were trying to manage this, i would try to get it through just as fast as possible. then if problems arise later, once the text is out there, just say we are going to clean that up next year or after the next election. >> to that matter, if the house bill is any indication, a lot of things congress probably won't be willing to make a call on, the most obvious example is five lines on what specific benefits they'll be covering. then there is a committee that will somehow deliberate on the specifics in some mysterious fashion. it's not just we'll fix it next year. it will be, we'll fix it over the next five or ten years. >> i would just like to say you can't please people who don't want to solve the problem. clinton had a committee work on a detailed benefit package that

was frankly more detailed than anything i've ever seen with the possible exception of the blueprints of a submarine my son got me into one day. he was accused of one-size-fits-all. you put it to a committee and it's obfuscation trick to get it through. if you don't want to solve the problem, we can't solve the problem. that's what you've got here. you've got people who don't want the bill to pass, people who will slow it down. people who do want it to pass and want to speed it up. our job, roughly, is to shed some analytic light on this process and push the veil back. one thing to be said here. this bill, if it does pass, ain't going to be perfect. it is also not going to be our last shot and making changes to the health care system. we are not trying, no one is trying -- some people are trying to claim this is what's being tried. no one is trying to remake the

entire health care system. the whole point you can keep what you've got if you like it, was to avoid what clinton fell into by trying to simply thing every human being's relationship to their health insurance. even if you had big firm out there on your own. i think first, let's all take a deep breath and realize the process is not one little model that either flies or doesn't, it's a process. >> you're absolutely right. let's see if the audience can bring some new insight to at least the panel. when you -- i hope someone is out there with a microphone. are you? all right. step right up. we have questions in the front. please come quickly. the tv audience is getting restless. come on. okay. go ahead.

and please identify yourself and actually ask the question. >> susan freidman, american osteopathic administration. can you comment on the impact not having senator kennedy in the room could be? thank you. >> i would certainly, i'm sure everybody's got an opinion here, i would say the impact of his illness has already been seriously felt because i know for a fact senator hatch and senator enzi, fully expected to work with him, to shape a bipartisan bill in the health committee. his illness prevented that from being possible. what you got is what you got. unfortunately, that had the spillover effect of taking that frustration and sadness and hurt into the finance committee where it was even harder to deal with.

his illness was hugely impactful in preventing what i would call a decent chance at a bipartisan conversation very early on.

>> i think while that's true in number that process to an extent this time, not a perfect analogy has been taking place inside the gang of six. i think those guys in the finance committee, in part the difference last time was in the senate, if you think about the mainstream group in '93 and '94, the chairman of the finance committee was not involved. i'll leave it at that. so i think there is and i think when you talk to those members and despite some of the

accusations that maybe some of the republicans don't really want to deal, i think those guys generally are having serious discussions, from what i can tell, and i think that that is the closest thing in this debate. i think that what's changed in part, you're right, there are fewer of those folks on both sides, republican and democrat, who are willing to create something in the middle that might work. having said that, it didn't work in '93 and '94. my view may be a little bit different than len's. if that president would have sent a signal like this president he was flexible, it might have worked. it didn't work in '93 and '94, so i think the democrats have decided from a political standpoint it is a smart move, they are going to take the big majorities in the house and now in the senate, and they are going to try to do something which more or less, while it's

not everything the party would want, it's closer to what the democrats would pass rather than something in the middle. i do think there have been honest, legitimate give-and-take in that group. >> one thing that is a striking difference to me is the decrease in the number of members of congress who immersed themselves in the details of health issues. i don't think that's a surprise. after 1993 and 1994, there were more profitable, maybe that's the wrong word, but areas where you could achieve more for your input of work, get better results than health care, for heaven's sake. it was taken off the table for a long time. as i think about the republican side, i don't mean to leave names out, but people involved there were really immersed in this. it wasn't something they got involved in the last year or too. dole, packwood, dr. frist and others. i think the list is short now.

health care is extremely complicated. i was immersed in this thing, but honest to god, i didn't think i really had a feel for the relationships for some of this stuff. i was into it four or five years. i don't know what impact that has one way or the other on what we are talking about today. i think it is worthwhile seeing that one of the impacts of what happened in '93 and '94 was to see a lot of congressional ener energies tailed in other directions. >> i want to get back to art's question about the subrosa conversations. i think there are two going on. the widen-bennett team, which before the election had 17 co-sponsors, nine republican, eight democrat, i don't know how to count lieberman, your choice. it had a bipartisan coalition. after the election, a couple of retirement here and there, i

think there are 15 now. that process never really stopped. that keeps some bipartisan. then there is the conversation going. then there is the 13 or so moderate democrats that have a little group co-chaired by carver, lincoln and bayh. i think the bill will be mostly democratic if it passes. that centrist core and the blue dogs in the house will exert, i would submit, moderation in a serious way. it would be better if we could get republicans to participate. i agree with dean completely. there are people outside that process on our side that are sincere who know health care. >> okay. this gentleman here. actually, anybody who wants to ask a question, keep your hands up so i can see where you are.

okay. i sort of have it. go ahead. >> tom merrill from american university. i have a question for len. i suspect len has a lot of headaches these days. i want to bring one up we haven't talked about very much. that is the public option. as a lot of people know, there are several different versions what the public option might mean. i think one of the ambiguities of the obama speech was which one was he talking about? one is like a nonprofit, just regular insurance company that happens to have the words u.s. government slapped on it. the other is a much more robust, medicare-style thing. you get the sense a lot of people in the house are going to say no unless they get that second thing. i know you thought a lot about this. just one question. two questions. one, where do we stand on that issue? two, is it going to blow off the process? >> great question, tom. i would go back to dean's point earlier that this issue has

gotten a ridiculous amount of attention. i would say frankly, if i could the reason is it's a convenient device of the far left and the far right to draw the bipartisan conversation away. what the left wanted when they saw the majorities was the democrat-only bill, which they mostly want. some on the left really do want government-run health care. that's true. not a majority, but a critical mass. the right, because the union started emphasizing this, right after the election, suddenly this became the big issue. heritage is smart enough to figure out, boy, thank you very much. you just gave me the perfect issue. now i can use, see, i told you, they want to do government to stop the grassley-baucus conversation from really gaining traction. so you have the left and right saying the public option is what it's all about. what the president said wednesday night, by my lot, was

public option's important to me. i think it could add value. it's not first order importance. it's not sin a quon non. it opened@@@@@@@ market. let's be clear. if it is working, what's the point? a lot of what we've done in the last three, four months, is teach democrats. it's a struggle, but you can.

that in fact, you can't pay medicare rates because you are going to kill these hospitals that are losing money, and the blue dogs had an amendment to push it up to market rates, and in fact, you probably are not going to add competitive value in markets like denver or seattle where they have robust competition. you've got a much greater awareness. my view of the president was open the door to the prospect that he is not going to say that. >> can i have one more thing on the public option? one thing in response to the medicare thing, which at least from my perspective -- i think the problem with the public plan was it was a compromise between two links of the democratic party. one who wanted single payer and one wanted it based on the employment system. it was hard fought among democrats, but made it difficult to reach a bipartisan consensus. both sides felt they had begin up on it. i think one thing from my

perspective that is different, and i hear this a lot, it's worth responding so i think there was a legitimate question among the policymakers as to whether this would actually happen even with all of the rules in place, and so to have an entitlement program where you wanted to have some way of making sure that the benefits you promised were actually delivered, i think was a little bit more of a question whereas now you do have insurers who were playing by some of these kinds of rules in the states. i think it's a little different. second, it was triggered in the different regions. it wasn't a national plan and third, i think one of the more important distinctions is that the government wasn't going come in and at that point negotiate. it was going to be -- if it were ever trickled, it was going to be essentially pbms and the

government would bear the risk because what it would show is there are two plans that could actually bear risk and do it, but they were going to go out and negotiate their own rates. it wasn't going to be the more robust government plan. at least to me, that's a couple of distinctions worth highlighting. >> with the risk of total cynicism, my view of the public plan politically is that it's been a stocking horse and that the general idea is that the more attention that's been given to it the easier it will be once it is off the table to say we got rid of that and now you can support the rest of the bill. there's one aspect to have a public plan or not to have a public plan which is to have a focus on and that is under some constructs it saves money and if you don't have it, you to come up with some other form of

paying for this and what we spent the summer doing is crossing all of the paid fors off the list. you know, we can argue for or against this public plan, but you have to remember it has a cost component to it, too. >> it is a very good point. in essence, it either works in that regard or it doesn't, and of course, we don't actually kn know. let's see, was there a question back there. oftentimes there was a bias of seeing the people back. the person right back there. >> hi. peter levine. jim has raised some major issues that would impact on any plan, and i wonder what len and barb reich think about that. we are going to be forcing more people into the service world. we have no idea how to control or improve quality. we're going to hammer hospitals without respect to whether

they're efficient or inefficient and this will happen if you put more money out there in the insurance system. i wish i could say something good about trying to save medicare advantage, but at least it was an attempt of having a structure to do this and the crazy idea of having a medical home and paying a doctor $ a month to manage the care, is just plain wacky. they don't want to do it in the first place and that's not going motivate them. what do we do about this issue about pumping more money into the sector where there is a shortage of family medicine and primary care? >> well, that's a great question. i would say two things. one, let's be careful about medicare advantage. some of it is indeed, delivering high-quality care. that would not be the policy for service fee for it which is basically just a sheer overpayment for no good reason

other than ideology which is expensive. so what i would say is you could go to a system like i believe will be the final proposal out of the finance committee and i think, therefore it will win in conference and that is a competitive bidding where you allow them to bid. they bid what they bid and they offer services and we actually have a market. what a concept and you, indeed, allowed this to go forward. we tried to do competitive bidding in the '90s and john kyl killed it all by himself. it was impressive. bob remembers all of this because he didn't want competition in his town because they didn't want competition. they prefer to be overpaid by formula, i would too, if you can get it. >> so first you've got to agree, you have to have competition. second, you were correct. we do not have a payment formula that is going to fundamentally

alter the incentives to deliver high-quality care tomorrow. i do not believe we're going to create one in baltimore. i do believe we have a pretty good sense of payment structures that we want to move toward. they include, ultimately, integrated health systems, accountable and what i would call it, i would call it integrated health systems where you pay a full, global fee, you can say it again if you like and they take accountability and they actually show what they do. there are very good systems out there doing very well. also, you account do bundling where you go across hospital, physician and create incentives to coordinate and there are places without integrated systems. a concrete example that i've writ benlately is grand junction, colorado, where they achieve outstanding results at very low cost just by sharing information and building incentives on their own at the moment and then third, you can do some bundling of chronic

conditions, which is after all, where we spend most of our money. yes, some versions of medical home make no sense, but having a common, shared if you will, incentive structure between primary care physicians which should be managing the basic care, specialists are going to need to be called in given the condition and hospitals occasionally having a shared savings kind of bundle might be a smart way to move. there are a lot of private insurers experiencing with these kind of arrangements. so i think what we have here is a system, as joe said, get some savings up front by taking away from private fee for service and making everyone else bid. rationalize some of the more egregious price distortions in our current payment structure, the likes of what we do in office equipment and build incentive, if you will, experiments and whatever you want to call them, and i would predict that if you do the

incentives and you make it clear that we are going to make it care fee for service as it is, less profitable to you, then moving in a world where there's far more accountability and far more coordination and care, i predict most providers will go there. and there's a lot of them who are ready to teach the rest of them how. >> i would like to comment just on the context in which i see this recent part of our discussion. when medicare and medicaid went on the books and there was an extraordinary inflation of health care costs. i worry what happens now isn't that the uninsured are getting no care, but they would certainly get more care than they have been getting which in itself could be a significant inflationary element. beyond that, a lot of the fund-raising payment systems that are being talked about are increasing costs for the provider. they'll try to pass those things on, they can't eat them which is

a separate inflationary impact in addition to just having more people able to pay the bill. i think many of the things that are being discussed have great promise longer term for reducing savings, but i don't think that necessarily it should have been thought of where we've been the last few years on cost, but ought to be thought of in the context of how do you deal with a substantial increase in the inflation rate beyond what we've had in recent years. it's scary, but a real possibility. >> just to comment on the language that's been used which we're going to force people into fee for service. what we do right now is bribe them to participate in medicare advantage when we have no substantial evidence that the quality of care is significantly better than those in unmanaged

fee for service. in the long run, what we want to do is pay for performance here and have the pay for performance across three food groups. the medicare advantage component. those who are in fee for service, but have joined the accountable care organization for something like that and those who remain on the open range, you know, eating grass wherever they want in the unmanaged fee for service world and transfer resources across those three buckets in a way that doesn't increase the costs over where the baseline is right now and that will help create the incentives that will make the system we're talking about work better. this is not something that's going to happen in the next five years. i mean, we're talking about starting down a path that's

going to take a decade or two to fully develop if you want to go this way. >> just to be clear. jim's going to speak. bob's proposal is not in any bill right now. just on the word of the competitive billing and medicare advantage. there are two options in the book. there are one next to each other back-to-back. one would be competitive bidding just among the private plans and that saves money essentially by having less people in medicare advantage and more people in fee for service. that's essentially how it saves money and that's what is going to be presumably in the finance committee bill. by my life that's not competitive bidding and that program is not part of the bidding and that was why the demonstration was killed in the '90s, right? bob reich proposed in the past, i don't know if he's still for it. some versions of competitive bidding where everybody in medicare would get the same

voucher and they would pick where they would go into a private plan or the public government-run plan. it makes you wonder how the public option for everybody else would evolve over time. if you really want competitive bidding, do it for the whole program. >> let me put a plug for the book coming up pretty soon and then we'll ask chip to ask his question. i don't remember the title, but it's making this point. a book by roger feldman, brian dowd and bob cullen coming out some time this fall. >> actually, i just want to make a point of clarification. i'll start off by saying that i am with len and am a supporter of reform, but i think in the house bill and in the coming bills we have to be more careful about our numbers. i don't have them committed to memory, but the hospital number in the house bill is about 155 in terms of savings and frankly, they're the old-fashioned kind

of safings with some exceptions maybe for re-admissions that we can talk about. in the senate bill they'll be about the same and in the house bill for medicare advantage was, i think, 158 or 160. so -- which as have been discussed and then the numbers obviously on pharma will vary between the two bills. so i only want to point out just as a point of clarification that the hospitals aren't sitting by as a representative of hospitals and not contributing and also say that i think it is unfortunate that we have to go through this same process of trying to get savings the old-fashioned way, but those are the only savings cbo is going to count and hopefully we will get some reform out of the bills, but i don't think there's that much in there if we actually analyze it aa),@@@f@ @ @ @ r

and there were two of them. they cannot change the world. so we have to be very modest and humble about the potential for medicare as a change agent. i mean, i've been involved in medicare policy for many years and i think dlg served an incredible function and they don't always work. sometimes they cause bigger problems than we would have had otherwise. so i think we still have to be modest and humble about what we can achieve and that's the only part of the president's speech that bothered me a bit is it sets an expectation that we're going to be able to change the world with dramatically dealing with fraud and abuse and delivery reform and sort of been there, done that and we ought to keep at it, but i don't think

there's necessarily any given answers here that will solve all our problems. >> chip, i agree. thanks for clarification about the numbers. i would just say, let us not forget the cost of doing nothing is going up every day. >> i know you're with me, but to say that therefore, we don't know therefore we should do nothing is a pretty extreme conclusion. >> that wasn't chip's -- >> yeah. okay. >> actually, we have a television schedule to keep. i think we probably have to close up the discussion right now. oh, norm. do you have a -- norm, quickly. i didn't see him. >> the question is this, how much of a cost driver really is defensive medicine and how much prospect is there? >> if you had a set of best practices that provided some cover for doctors if they're sued, if they follow those best practices.

is that realistically something that could work as a major part of malpractice reform and could bring the cost down. is there a lot there? >> well, i'm going to say quickly, there may be some, but doctors, in my opinion, develop practice patterns as a result of their training and experience. i would be very surprised if they would dramatically change that as a result of what you're talking about. a new generation of doctors coming in might have a different view just as i think we are seeing some differences in many ways, in new physicians' approach to the practice than we've seen those that have been out there for some time. i'm not saying there are no savings, but i sure wouldn't count on a lot of them. i think that's the general concensus that this is small, but it could grow every time, but you throw in a few bells and whistles which are quite

controversial which is what if we had practice guidelines if you followed them. you would have a safe harbor. you know, over the long run that could have, i think, a very significant impact, but once again, we don't have the information we need to develop these at this point. we're talking 10, 15 years, i think. >> actually. there already is something like that great harbor if you deviate greatly from the standard practice, wherever it came from in your community you will have trouble in court whereas you can say, in essence, this is what all of the gastroenterologists do. we can't do any more in that local court. that's going to fly. so we're really already there. i don't think that will have a gigantic impact until you get some better idea about what to do. that's the hard part. we really have run out of time for formal questions. we have solved every health

reform problem and i appreciate that because i had my doubts about this, but we're there now and the only problem is i don't believe any member of congress

eeeeeeeeeeeeeeeeeeeeeeeeeeeeeee$

.

[captions copyright national cable satellite corp. 2009] [captioning performed by the national captioning institute]

>> you cannot do a ponzi scheme investigation without understanding how to do it. just be a smart person who is it a generalist, i don't think you can do it. >> how could the investigative team not include a -- an experienced investigator who would have knowledge of ponzi schemes? >> that's a very good question. at no point in time was there anybody on the case who had done a ponzi scheme investigation before. at no point in time did they go and say, let's see, how does one do a ponzi scheme investigation. if we don't know, let's go to our many colleagues who might know. they didn't. they didn't know, and they didn't seek out that information from others in order to know it

themselves. >> did you happen to ask the investigators an awkward question along these lines -- were you concerned that if you pushed and prodded that complaints would be made and your careers might be damaged? >> we did ask those questions to all the major players, and they said "no." we did not find that they were concerned that they would attack bernie madoff and their careers would be affected. i think there are some people who would like to bring a case against a person like bernie madoff, but they simply didn't have the skills to match up against him. >> did the s.e.c. bring with them people who might have sophisticated knowledge to provide advice or direction or any type of assistance? >> we weren't aware of that happening in the course of these

investigations and examinations. when question -- we spoke to people from the outside, they said they would be willing to look at that. we wanted to encourage private sector folks to explain to the s.e.c. individuals how to go about and conduct this due diligence. >> the investigations occurred over this 16-year period. that is an extensive length of time with many, many folks involved. soy don't direct this toward any one individual, but we did have from 2005 and 2008 christopher cox who had this management philosophy of light-touch regulation. was there any sort of equivalent in the investigative branch of being sort of "light-touch" investigators for fear of inappropriately interfering with firms? so on and so forth?

>> i didn't find that was happening with the madoff examinations and investigations. >> i meeshate your report very much and the series of recommendations. i'm not completely satisfied. there has to be a factor of a culture of management that affects what type of investigators you hire, whether you ask common-sense questions about what seems out of sync, whether there are mentors in the department you can consult with, et cetera, and i feel like if we're going to have a very successful team in the future, that that management philosophy is going to be critical to putting us back on track. >> yes, i agree with that. absolutely. >> thank you, senator merkley, thank you, mr. kotz. we will call our next panelists

forward. >> ok. let's get started. each of you has a limit.

mr. markopolus seven, and then five and five. your entire statement will be read into the record. you may begin. >> thank you, mr. chairman. thank you ranking member. thank you members of the committee. i can speak to 1/3 of the report. i did submit different complaints to the s.e.c. in march of 2001 and in the fall of 2005. if the inspector general's report was falsified, inaccurate, or a white wash, i would be denouncing it before you today, but i find this report to be extremely accurate,

exceptionally well written, well researched. it is comprehensive. it is hard hitting. it gets right to the fact of the matter. in a nuth shell, the -- in a nut shell, the s.e.c. staff was not capable of finding ice cream at a dairy queen. however, i don't believe that anything illegal or inappropriate occurred. they were asking if there were violations at high levels and low levels and every level in between, and he did not find it. i suspect he would have found it. certainly it would have been far less damaging to the rep

tegstation -- reputation of the s.e. drrk -- s.e.c. if they could make the case that there were one or two bad apples in the bunch and send them to prison. the report was so well done. the inspector general went down every avenue. when you do an investigation, you have to go down every avenue, and most of those will be dead ends. this was a typical investigation. for the victims out there, and i know you are watching, you definitely want to read all 447 pages. it is like watching a train wreck in slow motion and it has the same tragic ending on each page. it is unbelievable. sadly, it is true. it is a true report. keep in mind that the madoff case was the "twilight zone" of

all fraud cases. there was nothing about this case that was ever believeable. the scope. mr. madoff was in 40 different countries. he had 339 funds feeding him in new victims. he had a lot of help. this is perhaps the biggest international conspiracy of modern time. it is a record breaker of cases. i think it shows that the s.e.c. is currently not functional at present, but they are on the right track. the s.e.c. prior to december 11 was not in the fight vs. fraud. fraud is winning the front -- winning the battle on all fronts. white collar fraud is a cancer on this nation's soul. it is the white collar fraud that causes the most damage.

it is not the violent criminals, it is not the drug dealers. it is the white collar fraud. they have the best resumes, live in the nicest homes in the finest neighborhoods, and yet they cause the most damage. they are the ones that bankrupt companies, destroy pensions, destroy life savings of victims. let me tell you how this report affected me personally. i had lost faith in all government prior to the 11th, and it wasn't until i saw mr. kotz that my faith in government was reaffirmed. i have three young sons, all age 6 or younger at home, and when they grow up, i hope they turn out to be like mr. kotz.

that's how well i think of the inspector general. i want to thank mary shapiro to have this report written, knowing how damaging this would be to the s.e.c. but before you can improve, you have to hit rock bottom. i think they have hit rock bottom. the pace of performance at the s.e.c. is not taking place as she would want them to. she says she wants them to reform as if her hair was on fire. i think they are reacting quickly. you have to crawl before you can walk, you have to walk before you can run. right now i think the s.e.c. is crawling all over again. they have probably been out of the fight for two decades, and they need to get back into the

fight. thank you, mr. chairman. >> thank you, mr. markopolos for your persistence and dedication. i think you deservedly, when these chapters are written, will play a large role. >> members of the committee, i appreciate the opportunity to appear before the committee today to testify on behalf of the securities and exchange commission. my name is john walsh, and i am the acting director of the office of compliance inspections and examinations at the s.e.c. first, let me say without qualification that we all sincerely regret that we did not protect the -- detect the madoff fraud. i believe i speak here for everyone in the examination program. we view the madoff case as a

terribly unfortunate example of what happens when we fail in our mission. the type of fraud perpetrated by mr. madoff is the kind of misconduct we spend our days trying to uncover. that is why we feel the way we do. that is why we are working so diligently to address the problems that contributed to this failure. let me assure you, we have not been sitting idley by awaiting the report. since being appointed acting director last month, my most important goal has been to reshape the examination program. for example, we are actively recruiting staff with specialized industry experience. we are enhancing our training programs, including widespread participation in outside courses such as the certified fraud

examiner program. we are requiring examiners to routinely reach out to custodians and customers to verify that assets actually exist. we are integrating broker dealer and advisement investigation to make sure the right expert ees is being deployed in every examining. we are considering new risk-assessment techniques to more proactively identify areas of risk to investors. we are ensuring that examiners know they have management support as they follow the facts wherever the facts lead. but we know more can be done. so like others in the agency, we are carefully studying the inspector general's report and will continue to do so. the report shows that some examiners ask the right questions, but it also shows we

did not pursue all the examiners. the report shows some examiners were moving forward on the right path, but we did not take all necessary steps. to put it bluntly, the report shows that we simply didn't do what we need today do, and investors have suffered. going forward, you have our commitment that we will continue to learn from our mistakes and we will continue to assess how we can improve our examinations. thank you. >> thank you, mr. walsh, for your candor. >> chairman dodd, ranking member shelby, thank you for this opportunity to testify on behalf of the securities and exchange commission. having read this report, it is clear no one can or should defend, excuse, or deflect responsibility for the s.e.c.'s handling of the madoff matter. simply stated, in this case we

failed in our fundamental mission to protect investors, and we must continue vigorously to reform the way we operate. we have read the letters from investors. it is a sobering and humbling experience. i am here to commit to you we will carefully study the findings and that we will implement the changes to strengthen our examinations program. i am also here to personally pledge my unwaivering commitment toward revitalizing the reinforcement division and reestablishing the trust of the investors with whom we are entrusted to protect. i know my colleagues share this commitment. as you know, even before this

investigation was done we began to institute reforms -- stream lining management, expanding training, restructuring proceses, leveraging the knowledge of third policies, eliminating unnecessary policies and procedures, and revamping the way we handle the hundreds of thousands of dips -- tips and complaints examine referrals -- and referrals we receive each year. we plan to learn every lesson to build upon the reforms we have already put in place. with respect to the division of enforcement, almost immediately after beginning my tenure of the division on march 30 of this year, i together with my staff commenced a top to bottom examination of proceses. there are no sacred cows. that self-assessment resulted in numerous changes. collectively they have been described as the biggest

reorganization in at least three decades of the division of enforcement. these changes which will begin to address some of the issues raised by the inspector general include creating five specialized units national in scope where we will provide training and investigative know-how to conduct smarter and more pro-active investigations. to deploy these people back full-time. also, a single enforcement where we will collect, analyze, prioritize and monitor the tips received every year. from the madoff case we have

taken the lessons to heart and we are implementing change and improvement. there has been no complacency. it is not business as usual. there is heightened tenacity and professionalism. criticism of the s.e.c. should not object secure the 75-year -- obscur the 75 year commitment to protect investors. these employees continue to investigate fraud involving hedge funds and investment advisors. to take one example, since chairman schaap row -- schapiro took leadership, the s.e.c. has

investigated substantially more cases than in the same time period of 2008. this is a lesson we will not and should not forget -- our job is to protect investors from wrong -doers and hold them accountable for their actions. we recognize we must also accept responsibility for our failures. we stand ready to do so. on behalf of the commission, we pledge our commitment to regain your confidence and the confidence of the investing public. thank you for your time. >> thank you, mr. khuzami. i have a whole bunch of questions. the first, i just want to ask mr. walsh. he was there at the time. when you read mr. kotz' report, when you see mr. markopolos' complaint, it is astounding. this isn't just a mistake. this isn't just saying we regret

it. even mr. khuzami says, i'm not going to mar the 75-year reputation of the agency. well, when i got to the government, this was one of the most outstanding organizations. of course it will mar it. how the heck did this happen? mr. markopolos, a man of integrity, says he can't find fraud, mr. walsh, a man of integrity says he can't find fraud, mr. kotz, a man of integrity, says he can't find any fraud. you didn't have to have any training as an investigator to do the kinds of follow-up that would have revealed this to happen. all you had to have was an i.q. of about 100 and even a semi

-desire to find out what happened, not even a burning desire. so please share with me, because i am befuddled. mr. markopolos has shared with us. just share with us, how the heck this happened. most people, if they read what happened, they would say there had to be fraud. somebody had to deliberately do some of these things to let madoff escape. now we have no evidence of that, and it is unfair to leap to that conclusion, and i don't, but i'm just totally befuddled. in other words, if you sent a 15-year-old, you know, a sophomore in high school, and said, here's what's going on, just follow it through, as a homework assignment, they would know to do some of these things. tell me, what was going on here? was there an attitude that we shouldn't look?

this soft-touch investigating? i don't cast any shadow on your position at all, mr. walsh, but america needs to know. it is too confounding to accept an answer, well, gee, it was a mistake, a very bad mistake, and we're sorry. by the way, and this will be my next question to all of you, there must be 30 more of these. i just read about one in brooklyn yesterday. there must be scores more of these if the investigation was so fahd. go ahead, mr. walsh. >> i investigated two cases of these, and both of these were highlighted by the inspector general. i agree with him.

one of the failures was to obtain third-party information. this was unfortunate. >> did the s.e.c. fail to get third-party verification routinely on just about everything? >> at the time third-party vare fantastic was used as the examiners deemed appropriate. we now provide that as part of our routine -- >> i'm not asking how you have corrected it. i'm asking you. so there -- so never was there third-party verification? >> it was done occasionly, but as we saw here, too many people saw it wasn't needed in their particular examination. >> and would the s.e.c. -- you've been there 20 years. would the s.e.c. be when you first came in do more third-party verification in your

second year than your 18th year? >> it's hard to say. probably we do more in 2009 than we have ever done before. it is hard to say, sir. i am actually the in-house lawyer. >> you are trying to catch someone who might be fraudulent, and you have some serious ones, like those from markopolos. again, you don't have to be einstein to get third-party verification and not accept the potential defrauder at their word. >> yes, sir. you are absolutely correct. >> markopolos, what do you think? >> trained fraud investigators know that you never go to the person you suspect of the fraud first. you go to that person last. you go to all the other people in the organization. you question them. you build a chain of documents. you verify everything. here the investigators found and

caught him in numerous lies -- >> why do you think? it is befuddling. >> they had no formal fraud training, so they took the lies and they didn't dig deeper, and they didn't increase the scope of their examination, they didn't request more resources. it was it was a failure of fraud examination 101, it was a failure of dauts 1 -- audits, 101. >> it almost seems they didn't want to find anything. is that fair to say? >> they were not measured on the amount of fraud caught. they were measured and rewarded through promotions basically on the number of exams conducted, which is a meaningless statistic . >> of course. >> we should measure and promote based on the amount of fraud

caught. >> so you are saying the basic system of incentives probably wasn't just neutral but pushed people away from doing a thorough investigation. >> that is correct. >> mr. khuzami, do you agree with that? >> i guess i would start slightly differently, certainly from the enforcement side. what we know is that the enforcement division recently and during the time of these events has brought numerous cases based on vague complaints, based on press articles. the i.a.g. testified they didn't find evidence that the s.e.c. folks were lazy or not committed. we know the investigators know how to do the job, and there is a long history of cases to underscore that. so the question to me really was, this appeared to be -- to use an over-used term, a perfect storm. a confluence of events, a lack

of going to sources of competence to get advice, perhaps some personality conflicts, a lack of rigorous supervision, and a number of other factors, and perhaps mr. madoff himself. while there was a finding there was not undue influence, it takes a while to get around the fact that someone like madoff may be running a $50 million ponzi scheme. i think unfortunately, and this was the terrible result, is that all these factors came together to lead to the conclusion that we missed this. but it wasn't for reasons that i think you can draw significantly greater lessons across the entire division. >> i used to watch "drag net"

when i was a kid, i used to watch "law and order." i'm not investigator. i know if someone brings up a complaint three or four times, you go check with someone else. >> that's correct. but there was consultation -- >> no, you go out, and they would have caught him cold, right? >> yes. but third-party verification -- >> no. you are a starting policeman in the investigation unit. you know to do third-party averification. >> that's correct. >> so let me ask all three of you, it seems to me almost a certainty given how bad things were with madoff, that there are probably other ponzi schemes -- nong how large, that they haven't uncovered yet.

what do you have to say about that? mr. markopolos first. >> this past year helped collapse a lot of the ponzi schemes because you always need new money coming in. investors are very gun-shy, and understandably so, so that's why you are reading about so many. there are more out there. many fraudsters to be caught. >> would you agree, mr. khuzami? mr. walsh? do you think there are more? >> we have actually encountered problems. >> so you think the likelihood is there are more? >> yes. >> mr. khuzami? >> there are always more, senator. >> could any of them be in the

tens of billions. madoff was $50 billion. could they be in the billion dollar range? >> there is no guarantee that there isn't, but i agree with mr. markopolos that the economic cycle has shaken out a lot of the schemes that would otherwise exist, and that's why we've been able to bring with concerted effort 45 this year alone. >> the other thing that concerns me is that with new technology and increasingly dark markets, it is harder to uncover some of these things and it makes it more difficult. do all of you agree that it would be more difficult given we have less transparency in the markets these days than more? >> you are absolutely right, senator. less transparency equals a greater possibility for fraud and wrongdoing. >> and it would be one of the arguments from the fraud point of view that we ought to lighten up some of these dark markets

and shine some light into them? >> yes, sir. >> do you agree mr. walsh? >> yes. >> do you agree, mr. markopolos? >> the cockroaches always head to the dark part of the room, so yes. >> my father was an exterminateor, so i agree with you. now, let me ask you this. s to the -- as to the skills the investigator needs, do the s.e.c. have those skills? >> senator, they either have those skills, they have the capacity to develop them, and together with some of the reforms we have undertaken, we will get to the place we need to be in order to be ready. >> are you willing and able to fire people who are not up to the job? >> sir, there are various restrictions on what we're able to do in that regard, but we can get to where we need to be through a variety of methods.

we, for example, are creating specialized units which will really, through repeated investigations of the same nature, additional training, and hiring specialists who are focused in these areas, go a long way toward creating the kind of expert ees that we need. >> now, the s.e.c. has a lot of lawyers. i'm a lawyer. being a lawyer doesn't necessarily make you good with numbers. that's what you need to know to figure these things out. my question to mr. khuzami and mr. walsh, who in the inspection force has the ability to do the forensic accounting investigations in this world of very complex structured products, quantity at a timive -- quantitative products?

who has the ability to make quantitative models versus, say, the percentage of people who are lawyers? >> well, sir, we are clearly not where we need to be in the acquisition of people with some of these skills. we are not going to get to a point in the near future where large numbers of our staff have the kind of skills you are talking about. that doesn't mean we will be handicapped, but -- because what we really need is places people can go to get the advice they need. that can exist in the sister divisions of the agency and that can exist through training programs. so while my hiring goals may not allow me to have the kind of --

>> how many new people have you hired since you have come in? >> we have received an appropriation that allowed us to hire in 2009 -- >> well, i helped get you those people, but it is not close to enough. >> i agree. we have a significant request for 2010 and 2011. >> what do you think of the proposal i made that the s.e.c. should be able to use the fees that it gets -- registration, fines, and everything? right now it is about $1.5 billion and they only get about $800 million of it. >> sir, from my perspective, it is a very good idea not only for the amount of the funding but for the predictability of it. we can't even budget long term for certain kinds of projects. we can't go into the out years because we don't know whether the fund will be there.

so things like i.t. budgets, long-term projects, suffer. >> and i suppose even personnel, if personnel knows there will be a growing revenue stream and if they are good, they are likely to be promoted, and they will stay longer. because isn't one of your problems lack of experience? >> yes, and also being able to react longer. some of the banking regulators can bring large numbers of people on with specialties. we can't do that. >> they are funded the way -- we wouldn't have to get you this little appropriation for a small amount of people. what do you have to say about those kinds of things, mr. markopolos? >> i definitely concur. i was with the s.e.c., and the money -- >> so you support the proposal? >> yes. >> how about you, mr. walsh?

>> absolutely. we are hiring more senior staff that can come in from the industry and bring their knowledge with them. i believe the proposal you are suggesting would really help us do that. >> you know on tapes that were revealed by the media today, here is what madoff said when he coached his employees coming in. you may have heard this. it is coming out today. he said to those who will be interviewed by the s.e.c., "you don't have to be too brilliant with these guys because you know they work for five years at the commission, and then they bime a -- become a compliance manager at the hedge fund." madoff's analysis, as crooked as he was, was correct in this area, right? >> certainly we would like to retain our best talent for as long as we can. turnover isn't always a bad thing. >> it depends who turns over. >> i worked in an office where

furnishover -- turnover was a five- to seven-year thing. >> i am glad for one of the people who turned over. they came and worked for me. >> turnover has been relatively low -- >> since the market crashed. but before that? >> it was much higher. but i agree with my colleague. hanging onto the people we want to keep is always a challenge. >> i have a few more questions, but senator merkley has been waiting patiently, so i'm going to wait a few more rounds and turn it over.

>> thank you, senator. mr. markopolos, you said your three sons are watching at home, and i just want them to know what a courageous thing you did in reporting your belief that there was fraud at this firm. when i first read your 29 red flags report, you began it by asking for confidentiality, a limited circulation of who you were because of concerns of your safety and the safety of your family. and i think when you are taking on a mulet eye -- musm lti -billion dollar firm, those concerns are appropriate, but you took some risks, and we appreciate it. >> thank you, sir. >> i keep coming back to the cultural factor, because i can't

believe the folks even if they came relatively freshly out of college weren't able to see the basic elements involved. and snimse sometimes one gives -- and sometimes one gives the benefit of the doubt. there are cultural factors as to why that occurs. i want to get some sense is there any kind of regular socializing that goes on between the s.e.c. team and the financial world where people know each other? do they know each other individually? are they invited to go to parties? do they see shows together? is there any kind of mixing that makes people more friends than adversairies? >> sir, we're very concerned

about excessive fraternization because we believe that could create a conflict of interest. we have ethical rules where if someone wants to socialize, it must be a widely-attended gathering. they must come in for approval in advance. we take that very seriously. so i would hope that if there is that level of fraternization someone who is engaged in that will be recused from any work related to that firm. >> so they don't invite people to conferences in hawaii? >> they do invite people to conferences, and they can be very valuable, but again that goes to a careful review process to make sure the people that go to those conferences don't suffer from conflicts of interest while they are there.

>> any other comments? >> it is perhaps less a problem for us because we have a potentially adverse saral -- adversarial relationship with the institutions, but on the other hand it can be helpful because we can inform them what is wrong and where they should be cleaning up their act, and as long as you maintain a certain amount of distance, i think those relationships can be beneficial. >> i would like to comment. i don't think the s.e.c. is out there enough. they do not allow staff to attend economic club meetings, to attend c.p.a. society meetings. they need to get out there and mingle with industry participants. and they also need to have something very simple with them, a business card. how are you going to get a fraud referral, if you go to an event,

which they typically don't go anyway, how are you going to find out what is going on if you are not out there? how are you going to be educated on the new products going out every day, every week, every month if you don't attend events? they typically do not fund those. i think they need to get out there more. you don't need to fraternize, but they need to show up. >> is that something you need to take a look at with some of these vehicles? >> certainly with training and education, you are absolutely right. through enhanced training we are clearly moving in the direction of acquiring greater knowledge in those areas. >> yes, sir. i would agree. >> another challenge, and i think it was referred to by senator schumer, is that folks might come to your organization and see the possibility of

higher paying jobs in the industry they are regulating. is the revolving door and the potential for much better remune racial -- remuneration down the road a factor in people not finding those power brokers? >> this is something that came up whether i -- when i was at the department of justice and it is a problem now. there is no getting away from that risk, particularly for individuals that work in cities with high cost of living. that is just a risk. but the alternative to find people who are less marketable i don't think is palateable -- palatable either. but in my view the way to make

yourself marketable is not to conduct less vigorous investigations. if anything, it is the opposite. enforcement prosecutors are very interested in significant cases, thorough investigations, cutting areas of the law, and even sometimes high-profile cases in order to later embellish their employment opportunities. those are all good things. employers, on the other hand, are not interested in hiring, in my experience, people who are not willing to conduct those investigations or are not respected by their clegs -- colleagues and peers. i recognize the problem in the abstract. i don't think it is as big a problem in reality. >> i wonder if we could have a procedure when someone is leaving that we could take a look back at the work they have done and where they are going and we look back and make sure they weren't pulling punches and

make sure they weren't doing something they should have done. >> one of the questions that came up in the madoff situation is about the firm's auditor. does the s.e.c. review information about who a firm's auditor is? is there a change of practice in this area? am i right in thinking that had the inadequacy of the auditting been looked into, this would have helped the problem? >> certainly we are looking at it today. that is one of the high-risk elements we are considering as we sift through the community to see if there are, in fact, other

problems out there. >> i wo -- will close by saying that i think the incompetence of the s.e.c. served mr. madoff. it said to people this firm is credible and gave them greater confidence in investing, and it just points out how important this function is to the protection of the public. i understand you are doing everything in your power to put the s.e.c. back on course and i thi thank you for it. >> i have a few more questions. mr. markopolos, you made 14 recommendations to the s.e.c. if you had to, tell me the two you would consider the most important? >> if i had to pick two, i would

say the pink slip. that is when you get called in because you are not doing a good job. i think many of the enforcement investigators lack competence. they need to take multiple choice exams. those that don't cut the mustard, they need to let them go. they basically need to start weeding out staff. >> now, there are limitations on the ability to weed out staff. would you, mr. khuzami or you mr. walsh, comment on those? do these statutes get in the way? can you generally comment on mr. markopolos' suggestion of pink-slipping people. >> i can't let the comment pass without responding to the substance of it.

certainly in the five months i have been with the division i would not agree by any stretch of the imagination of the numbers of people that mr. markopolos suggests are deserving of pink slips. i have seen the performance of these people. they are committed, they are hard working, they are excellent at what they do, and if there is something we need to do, it is to train them better and provide them opportunity for greater expertise. >> if that's the case, how did they miss madoff? if they are so competent? >> senator, there are a number of variables that came together to cause this terrible consequence. my only point is it is not an example of the entire division. >> we can disagree as to how many there might be, but what about to get rid of some people? are your hands tied in that regard? >> we are adopting in 2010 an

enhanced performance management system which will allow us to better val wait -- evaluate the performance of individuals. the ability to impose discipline or to terminate in my view is not an impediment to achieving where we need to get. >> mr. walsh? >> i would agree. i think certainly we have a very skilled staff. to me, as i read the inspector general's report, one of the truly heartbreaking elements is that there was expertise on the staff. there were people that could have played the proper role in solving the problem, and they just weren't brought to baron the particular issue. >> this is so confounding. you say your staff is competent, they had the tools, and yet it just didn't happen.

this does not add up to people. >> there are a lot of turkeys that need to be let go. >> mr. khuzami and walsh are saying there are many more eagles than turkeys, they just happened to miss this thing. >> most of the inspectors at the s.e.c., honestly, i don't think they can find steak at an outback. >> let's make a wall between walsh and khuzami, because they seem like they are very good people and have excellent reputations. do you think they are just doing this because that's the job of them to defend their employees and maybe deep down inside them they realize there needs to be a lot more competence? >> i think so. i think it is the institution talking, not the men. at least i hope not. i think there needs to be different levels of compensation. there need to be better salaries. if you pay peanuts you shouldn't wonder why you end up with monkeys. you need to increase the salary and give these people the

bonuses they probably deserve, make them success-based. >> there are salary caps, limits. do you think, mr. khuzami and mr. walsh, they interfere with the ability to get the best people? would it be better if the compensation levels were changed so you could pay more to the top people? i don't just mean the senior advisors, but maybe you need 10 senior crackerjack employees and you can't do that given the rules. is it possible to -- that pay scales need to be changed? >> senator, i think that greater flexibility in bowing the ability and the amount we could pay people would be very helpful, particularly as we recruit market specialists, traders, others who came from wall street, others who may have a difficult time finding a job now may soon find themselves in

demand and making many multiples of that. >> so you would say you need more flexibility. do the top salaries have to be raised for what you can pay? do some certain key people -- for some certain key people, do the salaries have to be raised? >> yes, sir. we are constantly competing with wall street who have the skills necessary to regulate wall street. >> i asked you for two, mr. markopolos. give me the second. >> the second is almost as important. it would be to minimize, if not eliminate, the influence and over-lowering of this agency. >> i didn't hear that. >> of the attorneys. there are too many attorneys running the show. it is time to give people with capital markets a chance. we understand the frauds of the 21st century.

we know the math. we know the derivatives. we know how they are put together again. there are too many lawyers. the behavior we need to shoot for is way up here. it is good called good ethics, good transparency. >> that is two separate issues. one is making the standard higher. >> the lawyers only look at the low bar. we need to raise that. >> one is lawyers versus investigators. i asked them about that. we'll come back to that. but the first one is, do you think the actual standard of criminality has to be changed of at least what fraud is? >> yes. you need to increase the bar and make it more expansive. >> do you gentlemen agree with that? do you need some statchtri changes?

>> we generally don't lack for statutory vehicles. we do need swap agreements which would aid our investigations, as would the option that hedge funds and others have standard audit trails so we can quickly analyze their trading patterns. >> mr. walsh, do you have anything to add? >> no, i agree with pl my colleague on that. >> the second comment was too many lawyers. i sort of asked you that before. >> look, we are all about increasing our specialization. that's the thrust behind so many of the changes we've implemented. i will say, with so much

complicated -- just to take an example, in the new york office, one of our flagship offices, many of the same groups that were involved in this case did the sham finite reinsurance cases -- re-insurance cases. highly complicated cases. we did those cases. we did them well. $800 million worth of penalty went back to investors, 20 criminal convictions. we have that capability. we can do a lot more with some spirblized -- specialized expertise. >> the examination program actually has relatively few lawyers. i am a lawyer for the program, but there are only 13% of us. there are many fine forensic accountants. i believe where we need to grow is to have more financial

analysts, to have more trading specialists, people who understand trading issues. >> that is logical. you don't have the resources right now to do that, do you? >> no, we do not. >> so to reiterate, the kind of legislation i've introduced is very much needed if you are going to stop all these future schemes as the markets get more complicated. do you agree mr. khuzami? >> that could be the single best thing you could do, sir. >> last question -- the inspector general's report states, on a conference call, quote, a senior level washington, d.c. examiner reminded the junior examiners that madoff, quote, was a very well connected powerful person which one of the new york examiners interpreted to raise a concern for them pushing madoff to -- too hard.

did you feel that mr. madoff's stature protected him? >> yes, i do. i believe there is a protected species on wall street and they go after the small fry. >> could that be true, mr. walsh? >> i think that while the inspector director concluded there was no direct teerns by supervisors -- interference by supervisors, he believed that it could have been a secondary effect. we are taking this very seriously. we have established an internal hotline so s.e.c. examiners, any time they are being intimidated, they can call the hotline and it will ring on my desk or a number of people working with me. >> i think what they are saying here is, you wouldn't call a

hotline. what mr. markopolos is agreeing with and what the inspector general is saying is, because he was a powerful player they sort of instinctively might not have been as tough as they should have been. there is not a hotline that's going to change that. mr. khuzami, what are you doing to deal with the issue that the inspector general and mr. markopolos pointed out to get into these sort of psychological barriers? >> i think the way to deal with something like that is tone at the top and involved supervision, supervisors and managers that recognize where a more junior person may be more susceptible to that kind of influence and closely monitors to make sure that kind of thing isn't happening. >> thank you for your time. do you