a cincinnati-based corporation that's the country's largest grocery store chain. it's ashley the fourth largest retailer of any kind in the world. and theresa is in charge of kroger's health, welfare retirement and pay plans. pretty broad portfolio, and kroger had some expense with reference pricing as well. theresa. >> thank you for coming today. i just want this been all the time to about what we're doing around reference-based pricing to we happen to the target price and because with might relate to that a little better so i might refer to it as target pricing throughout my discussion today. but i wanted to start just by getting a little bit of information about the kroger company so you can get a flavor for what we're all about and will refocus our efforts. we put about 343,000 associates, all u.s. states. we offer about 35 states across the country.

in the company health care plan we have about 85,000 eligible associates. the rest of our associates are represented under collective bargaining agreements and their benefit plans are provided through other funds. so where we innovate and where we try new things really within the company plan, and that's where the target pricing initiative is today. so that's where i'll focus our discussion for this afternoon. mainly, we operated grocery retail centers throughout the country, but we also have distribution centers, fuel centers, manufacturing centers, fine jewelry stores. usually get a few eyebrows that raise a message or restores but we are one of the larger jewelry chains in the country as well. to talk a little bit about what our objectives are with on health care plan, we really focus on trying to keep it simple for 350,000 people to try to understand what we are trying to accomplish with the health

care benefits that we provide to them. we really focus on objective. the first one is to improve the health of our associates and family members. we truly believe that if we can improve the health of our associates and their family members, not only will be able to hold down the cost for the company and costs for our associates, we also think that's a better place to be as an organization, more productive associates, happier worklife balance so we're focused on health improvement. secondly, we're very focused on reducing costs. the grocery business is not one of high margin so we are very focused on where we invest our dollar. we spend about $1.5 billion on health care for all of our associates in all of the benefit plans. so we are very focused on health and reducing costs. as we are looking at to reduce cost, we are constantly looking at not just what health care costs, but how people access the health care system and where

they're choosing to get care. so where are they making or where are they able to make decisions about quality and cost as their accessing health care when they need it. so a couple of initiatives, i'm going to focus most of my discussion today on our target pricing initiative but when implemented that in 2012, we took to initiative at the same time and focused on target pricing, which is our discussion today about putting a price in place for certain services. and we focus our services on high-tech imaging. so cat scans and mris and the like. we also at the same time put in a very specific centers of excellence program to focus on hip or knee replacement and find fusion surgery. so that typical initiative is really focus on quality of care and cost of care. target pricing as my other panelists today have talked about is not so much about

quality because we are assuming that the majority of the quality in a high-tech imaging service is relatively the same. the difference is in the variation and cost. so our two different initiatives are addressing those costs, and then on the centers of excellence peace around the quality of care. our target pricing program we partnered with anthem, they are our claims administrator self-insured plan so they are very instrumental in helping us design our target pricing and are centers for excellence program. so the target pricing program only has three levels were associates and providers get involved in making a choice about where to access a high-tech imaging service. so the first thing that we put in place is that any high-tech imaging service has to get prior authorization or precertification. so the provider or the associate

would call into blue cross blue shield before a service is received. and that is where it really starts. it's on the slide, you can see the aim or high-tech imaging. that is usually where a physician or provider would get some education about our target pricing program. to help them understand that the plan has a certain threshold of how much we will pay for high-tech imaging services, and help the provider then understand where in the market can they go our way they can send the patient to stay at or below the target price. so that is the first level and use in some of the results that's usually where most of the services will get redirected them. the second public office shopper program and that's usually where a nurse from anthem will outrage to our associates or family member who is due to get an mri or ct scan, and help them in more educated on our target pricing program to let them know that the plan will pay up to a

certain level and that there are a lot of choices in the market to help them understand what providers they can go to, if they want to be at or below the target price. or if they choose to pay more and go someplace else, they can do that as well. so completely voluntary program that we do help educate both the provide and our associate as they're making the choices on where to go to get their care. then the third piece is implementing that target price. so in 2012 we started with five high-tech imaging services, and we started only in 10 anthem states. so is technically a little pilot for us, and in terms of how we implemented it. so you see you on the slide five tests in 2012. we added a sixth high-tech imaging service in 2013, and also in 2013 we expanded it to all of the u.s. states across the country. so we were able to capture a lot more of our associates in that

initiative. a little bit about the results that we are seeing. you can see here from the three levels of the program the clinical review operational activities, so that's the first level where most of the services are getting redirected to a provider who is at or below the target price. you will see the 2012 total year savings, and remember that's just 10 states for us, and in the third quarter 2012, or 2013 year to date slightly bigger but again a cross the u.s. the middle, the shopper program, not as much savings but we wouldn't expect as much there. we hope most of the services would get redirected, and they have, prior to getting the outreach call from a nurse to an associate. actually implement the threshold of the target pricing program we have about 30% of our population that still chooses to go over the target price, and we think

that comes down to education. so if you think about a lot of people when they go to the doctor still aren't comfortable questioning costs or questioning quality, questioning whether doctor sends them for service. so celebrity and about 30% of the population chooses to still go to a facility that is at or above the private market price. to give you an example of the variation in cost, in ohio, where a ct scan of the abdomen, the cost ranges from about $260, to about $2600 depending on where you go. so that education alone both to the provider entity associate our associate is critical. right now it's all telephonic-based comments are getting them to really have that conversation with her provider is difficult but we are making progress, as you can see in her numbers and getting people educated. early and 14 we will be implement in an online tool so that people can access, cost,

and quality transparency, cost information online so they can start to make even better decisions. so what we actually saw with the unit cost, when the blue rose here, the 2012 results for the 10 states where we have had target pricing in 2012, and as you can see were actually able to reduce the unit cost through target pricing by redirecting people to a cost efficient provider. and by about 12% on both ct scans and mris. compared to all other states in 2012 where we didn't have target pricing implemented, costs actually increased for both ct scans and mris in 2012. when you break that down by the five services, high-tech imaging services that we had in 2012, you can see each of the individual services and into 10 states would target pricing in

2012. all of those went down. summit in significant. if you look at the abdomen ct right in the middle, went down by 32%. in unit price in the states where we had target pricing. compared to some of the increases in the other states for the same services. so i the same time we implemented target pricing for medical services, the high-tech imaging, we also implemented on several prescription drug categories. so i wanted to give you a little bit of the results from the prescription drug side as well. kroger has her own tv him, so we just kroger prescription plans to help us design a very similar target pricing initiative that we had in the medical world in the pharmacy world as well. so we took three categories of drugs in 2012 and that's the ppi's and the blood glucose test strip. and 2013 we added another category.

that really focuses on education at the point-of-sale. when someone is in our store, the added from us and talking to a pharmacy tech or pharmacist, really being able to get that education about the choices that they have, because if you think that some the drug categories, that an act example, huge variation in cost or we are just starting to see that drug category kind of settle out with it going generic latch up with that huge variation in cost, and not a high variation ineffectiveness in that drug category. so we've seen some really great results on the pharmacy site as well. and here is just some statistics on what we saw in unit cost in the prescription drug side. see you can see some pretty significant cost reductions on all three of the drug categories in 2012. utilization was not significantly impacted. i think initially what some people might think of is individuals might forgo a medication because of target

pricing because some of that cost may end up with them if they choose a higher cost of drug. we saw a little bit of that in that in category but other than that the utilization -- in the ppi, the utilization was down on the bit but not significantly. we are watching that closely because what we don't want to happen is we don't want people to stop medications when you need but we want them to be better educated about the cost and the quality of the services that they are receiving. >> so just a brief moment on standard of excellence, and this is the service what we did is we looked at me replacement, hip replacement and spinal fusion surgeries, muscular skeletal decision for us has always been one of our highest categories in our medical plan. so we looked at how could we look at a cost and look at quality of care that people were receiving, and could we take a network and parents will be to be a little more and include

travel expenses if someone was willing to go to a high quality cost efficient provider, or a particular joint replacement or spinal fusion surgery. and so we are able to do that. we have four tiers within the network, and we leveraged at blue cross blue shield centers for excellence or blue distinction network, and we went for the. we started with quality and added a cost component. so this is some of the results from 2012 and 2013 when we implemented that. so we had about 264 joint replacements are back using surgeries -- fusion surgeries in last 18 months or so. in the middle to embark you can see the impacts of the cost. someone who chose to go to the highest quality, most cost efficient providers around the country, we saw about a 28-30% reduction in cost. when you include travel, so we paid for travel and very similar

to what calpers is doing. again, about a 30% decrease in cost. and from a quality perspective, no adverse side effects. so potentially avoidable complications, there were none in the first year by someone going to a facility that may not be in their hometown where they had to travel for that hip replacement in the first year in 2012 we had about 20 facilities in the network so we people traveling around the country for this surgeries and had really great feedback and great experiences. and as you can see, great quality and low cost for our members, or for our associates. over all, i was in our associates are very pleased with the program. one of the things we thought we'd hear a special on target pricing and implemented it was a lot of pushback. you are just shifting the cost to me. instead what we're hearing is thank you. thank you for letting me know that there's such a big difference in cost in my community but and if i know i can go someplace else and do the same quality at a less cost, that's good for them and it's

good for the company. and so we have seen a lot of positive results and a lot of positive feedback from our associates by doing things like target pricing and centers of excellence. so thank you for your time today. >> well, thank you, theresa. very interesting. finally, we are going to from dr. michael belman. is the regional vice president and medical director for programs and innovations for anthem blue cross in california. anthem and shivered as a part of wellpoint. he's been trained as an internist, specialized in pulmonary medicine. he's been with anthem since 96, and he's in a great position to discuss with us the role of insurers in reference pricing and their various partnerships with employers. and by the way, dr. belman made a couple of changes in this life back from the version you have in your kids.

-- kits. you can get the latest version on the alliance website after you get out of here. >> thank you, ed. .. >> i live in west los angeles where it's not only important to look healthy, you have to look

good as well. [laughter] so one of the striking features was that a free-standing surgical center in 90210, just around the corner from the gucci store, in fact, was a total price of $3500 for the cataract whereas the two largest west los angeles facilities -- one an academic institution and the other a very large community hospital -- the academic institution was about 6,000, the large community hospital was 11,000. for me as a individual who paid a 20% coinsurance, the benefit was direct to me in the sense that the coinsurance on the 3500 saved me 2-$3,000 out of pocket and it also saved them money in the sense that they paid the 3500 and not the expanded fee. so i'm telling you this because my experience, although it was relevant for me, doesn't make much of a dent in these two high-priced institutions, and it

didn't save that much money for anthem. but now what we're seeing unfolding and what you've heard today from kroger and from calpers is the realization or the actualization of these differences that make a big impact in terms of the price that everybody pays because, in fact, once these expenditures from these employers starts trending down -- and in some cases it is trending down -- that makes a difference to the premiums that they charge the following year. and that's the premiums that you pay. so this is a direct impact for all of us. so i just wanted to emphasize that because it, obviously, has relevance. i'm also using my ipad because as good as the cataract surgery was, there is no way that i can read that screen over there. [laughter] so the point that i wanted to make at the beginning is that the costs outside of premiums, co-pays and deductibles are typically unknown to the average consumer and i might say, also,

to the average physician. and that's why this is an education for physicians, and i commend kroger, in fact, on making sure that the physicians know about that. because physicians are totally oblivious to what the charges are. they know what they receive, but they do not know what facilities receive, what drugs cost, etc. and, in fact, a recent article in the new england journal of medicine highlighted this dilemma and actually called the coinsurance and deductibles an avoidable side effect of treatment or harmful effect. in other words, people undergo treatments and/or receive medications and then have the unpleasantness of finding that the charges that result or the out-of-pocket expenses are so extreme as to make it extremely difficult to actually pay for these. so this becomes very relevant in this setting. so we also know that in california the hip and knee replacements vary between 20,000 to 110,000 across the network. so you saw a similar diagram to this where we talked i think

when we had the talk for the, from from cpr. and, essentially, this shows the range of pricing in california of the 110 or so institutions that provide hip and knee surgery. so it was noted that when you choose a value of $30,000, that you encompass a significant number of institutions within the network. it also included a wide geographic distribution, so if there was travel involved, it was a reasonable amount of travel and p didn't require long distances. and this was really, i think, the basis for the number. the other point that i think was important is that we did look at at -- am i going the right way? i'm going to wrong way. there we go. we did hook at the quality, and i'm going to come to that in a moment, but essentially, the value-based purchasing design establishes the payment for

elective procedures. it limits the obligation of the payer and guarantees members the ability to choose a facility that will provide services within an appropriate cost range. one interesting term that has been used is it acts as a reverse dedoesn't bl. instead of the enrollee paying a defined limit and then taking over which is the standard deductible that many of you are familiar with, in this case it turns that on its head, and the plan pays up to to the limit after which if the enrollee chooses an institution above the threshold, the enrollee is liable for the increment. the participating hospitals were based on the procedure volume, as you heard. they met the standard regulatory standards, so they were all accredited at high levels by the appropriate external agencies. and we also have an anthem quality program for hospitals. and a number of metrics are measured across a broad range of

procedures and tests and treatments that the hospital provides and outcomes that they report publicly, and it's combined into a score. all of these hospitals were participants in the anthem program. so the overall impact was the shift of members to designated hospitals and shift away from nondesignated hospitals. and i think you would, it would be appropriate to reemphasize that point, that although there was a shift to the designated hospitals, the big, the big change was the shift away. and the decrease in total costs -- and this, i think, was a critical point how the market reacted to this -- was the decrease in cost in the nondesignated hospitals, some of which prior, immediately prior to the advent of the program lowered their price in order to be part of the network. the other point that is made in

the article by jamie robinson in health affairs is that the upward cost trend from 2008 to 2010 which ran from 28,600 to 34,700 was reversed in 2011 with the advent of this program. so the really was a very striking example of bending the cost curve down which i believe is the washington phrase for, or the goal that has been set for the affordable care act. on the quality side, we use the hospital claims to look for general complications and jenin nexts, things that -- general infections, things that are not necessarily related to the surgery itself, but if there were results from, say, heart problems, kidney problems, lung problems as a result of the surgery or there were infections like pneumonia or kidney infections, so on after the surgery and, in fact, in the designated hospitals these rates

actually dropped slightly. significantly, but they dropped. there was no difference in complications related to the surgical sight itself in terms of the process three cease, the hips or the knees, there's no difference, and no other site complications like local infections or bleeding and the like. we also followed the claims for 180 days after the surgery, and it's important to note that there was no difference in the readmissions either for joint issues or for other complications in the two populations that went to the two different institutions. and also bearing in mind again, and i should have maybe emphasized this, we're also comparing it to noncalpers ppo anthem members whose claims we also had. so as you saw in some of the slides that were shown earlier, there was this comparison group of anthem ppo members in the same geography as was the, as were the calpers pens.

members. we have a number of other clients that have as a result of the successful experience we had with calpers and with kroger have also joined the reference-based benefit movement, and so i've listed some of these. it's not as important as much as the fact that there is now, i would say, a shift, and a number of large employers are embracing this program as a way to disrupt the continued increase in health care costs very largely driven, in fact, by institutional pricing. so this has been a very encouraging development. in addition, we also have expanded it to include what kroger has included and what others have used in the past to include for outpatient procedures which are for cataracts, arthroscopy and endoscopy. so this is definitely something which has really blown the lid

off, i think, the veil of secrecy over pricing together with a number of other events that have happened in the past and some recent publications including the very notorious one in "time" magazine earlier in the year which i think was also a major, major impact. as was cms', actually, release of charge masters which occurred recently as well. should also just mention, because i noted in the "wall street journal" which was left outside my hotel room this morning, an article from intermountain, the intermountain health system run by a very, very prominent health researcher, brent james, on the current initiatives within the salt lake city region which i would imagine is most of utah to develop not what they call a charge master, but, in fact, a cost master. where they're actually developing costs of procedures

based on real data and not wishful thinking and numbers plucked from thin air which has been the basis of most charge masters up til now. and i think this is the start of a new movement where cost accounting will, i think, enter the health care arena and make it much more long call and much more sane -- logical and much more sane. so that, i thought, was an encouraging development. so in summary then, our with reference-based pricing expands the barrier of medical prices, it raises the question of why variation in procedure is justified. there are a large number of organizations that are out there collecting quality, but there is still much work to be done in this regard. it provides a useful mean of helping purchasers, members make choices that help reduce costs both for the company, for the individual. and it's definitely a valuable tool in the overall approach to bend the cost curve down. thank you. >> terrific. thanks very much, michael. we are at the point where you

can have input here. there are green cards that you can fill out a question to ask one or more of the panelists, and there are microphones that you can use to vocalize your questions, and i would invite our panelists as well, if you have comments about anything you've heard or if you wanted to ask one of your panelists another question to jump right in, and let's mix it up. in the meantime, the first mixer-upper, would you please identify yourself and keep the question as brief as you can. >> i will do both. i'm bill rogers. confident in the statement that there's no such thing as a stupid question, my first question is do all of these reference prices include the professional or physician's payment, and then my second question is how do you all decide what to do in subsequent years with your reference price? >> two good questions. >> well, the answer to the first one is, yes. it was the total claims, institutional and professional,

that were included in the calculation. >> and andrea, you talked about bundled payment being a part of this calculation. >> right. so i think, um, i think in the calpers example that that's one not all reference pricing programs include both. so that's something you need to distinguish. but if you, as this evolves and as reference pricing gets paired with a bundle payment, then, yes, you'll see them be bundled together and paired together. >> so if i could just make one additional comment which, when you look at physician reimbursement across the state -- and i'm referring now to anthem's reimbursement -- there is variation geographically minor, and in some cases if there is special expertise. but the degree of variation or the standard deviation of the reimbursement is a fraction of what it is for facilities. >> and and how about adjustments? those of you who are involved in

this business, how do you go from year to year? can you ratchet down further, or do you have to take advantage -- take into account what's going on in the market? >> well, from kroger's perspective, we looked at it of the five services that we target priced in '12, we did look at the cost data for 2013. we decided to leave the target price where it is, and it's roughly around $800 for one of those high-tech imaging services. but we found we didn't really need to adjust it at in this point. but our plan is to look at it every year because what we don't want to happen is our target price stays the same, but the cost of services continues to go up. so we need to adjust that, and we will as we need to as we move forward. but our hope is that it brings down the cost and that we have more and more people staying at or below that target price wherever we can. >> okay. yes, ma'am. >> hi. sandra -- [inaudible] from senator heinrich's office.

i believe it was mentioned that education was the variable that was distinguishing between those who were opting for reference or target-based procedure or facility and those that weren't. and i'm wondering if there's any evidence of that or evidence of any other variables that would distinguish between folks who do and don't and also providers who opt for that and don't. thank you. >> well, i'll talk about it from kroger's perspective. we have anthem after every individual that does have an mri or that's going through our target price program. they're actually surveying them and asking them a series of questions, did you know about the program before you had the service, do you understand how it works. and what we're finding is that there's a vast majority of people that didn't undersnd it. so i think there is a big education component, getting people to understand, one, what their benefits are because it's complicated, you know? they understand deductible and coinsurance, and anything past that they don't. it's complicated.

so having that initial education up front, we do a lot to the communicate to our associates on their benefit plans and give them access to a lot of resources. but it's going to take some time, i think, to really get people to understand that they do have choices to make and that there is a lot of variation for certain services in the health care system. so we're going to continue to educate and continue to give them access to resources. i also mentioned i think that right now we don't have an online tool where people can go to get information about cost and quality of providers in their community, and we will be implementing something like that in the first quarter of 2014 so that a they can access information before they go to their providers and before they have to get a particular service. so we're hoping that will help further educate people. >> okay. david? >> pretty similar to calpers' situation as well in terms of we -- anthem does a patient

experience follow-up study in looking at members' knowledge of the program and all of the follow-up questions and their awareness. so similar to kroger, we're rolling out in mid 2014 a much more web-based and mobile tool to provide cost and quality information as well. >> okay. well, you've unleashed a tremendous volume of questions on green cards, and we're going to plow right in. a lot of them are very basic and i think will help fill in some of the blanks in the people's knowledge. how do insurers handle complications in procedures that extend the costs above the reference price? and are consumers forced to accept that burden? >> right. so the reference price is for routine procedure, so if the procedure becomes non-routine,

it would not fall under the reference-based pricing program. and i think you see that when i was showing some of the variation in the chart. some of those dots are outside of the 0,000 or above -- 30,000 or above that, and those are falling into the non-routine procedures which are not excluded from the way the claims data is set up. >> before -- don't forget what you were going to say, but i did want to follow up because there's another question in the be pile that asks about how you work that medical exception. does it happen before or after? how big is the acquisition between the two -- the division between the two categories, that sort of thing? >> my understanding is that it works through, it's before, and it would also occur after, say the colonoscopy gets in, and they need to do some other procedure. >> right. it's a question of communication between our case manager and the calpers staff so that the aberrations or the exceptions are picked up and then can be dealt with.

>> okay. andrea? >> i was just going to say that so when it falls into the exception and outside of the reference price, the normal cost sharing would apply. so just to round out the story that if you're outside of the reference price, meaning you're an exception to the rule that would qualify you, then your normal cost sharing and your benefit applies. >> and could i -- actually, one of the questions that came in before ties into that, that line of observation, and that is, um, you're talking about major procedures with potentially thousands of dollars even in the co-pays. how do these potentially large out-of-pocket expenses square with the out-of-pocket limits that are supposed to go into effect in the affordable care act next year? which i think are something like $6400 a person per year? or has no one -- >> my impression is that at

present this particular program where there are options to go to a reference-based -- a facility that is designated within the reference price range is not the same as the standard open-ended out of pocket when you go to any number of institutions. so there is the choice that the member has here to make, to stay within the range of the expenses. that's my understanding of the current perception. >> and i rephrase that, that means if the patient chooses a nonparticipating program that doesn't meet the price point, whatever that excess is does not count toward the whatever hundred dollar out-of-pocket limit in the aca? is that a fair reading of what you just said? >> that's my understanding. >> okay.

>> that's my understanding as well. i think we have some, i think there's some resolved interpretations because one of the things as representing purchasers, purchasers work with many health plans around the country, and not all health plans are equipped or able to -- or want to implement these kinds of programs. so i think there are different interpretations around that particular issue. which, you know, is maybe health plan dependent. it could be other variables about why someone won't implement it unlike wellpoint that has decided that it's viable. >> question, another question about prices. how do you monitor whether the prices rise for the nonreference price procedures? that is to say, is there some sort of cost shift going on? >> well, i'm sorry. >> go right ahead. >> i will jump right in.

when cpr's been advocating for reference pricing or at least encouraging our purchasers to use it a as a strategy, the criticism is, well, that's -- as i said before, it's a really blunt instrument to use in the marketplace, and you just whack at it, and now you've disrupted the market. but the, the reality is that, you know, employers do have to kind of stand up and say, you know, we're not going to tolerate the variation anymore. and, you know, i think when you, when you send that message into the marketplace, they're going to respond with a shift this volume. and when there's a shift in volume, then you see a change this behave. in behavior. >> and sort of a variation of that same question has to do with the impact on physician incomes. has there been pushback from physicians on this aspect

because the total amount is higher -- is lower than it would have been otherwise or volume isn't flowing to the hospitals where they have privileges? have you heard anything like that? >> i can't -- from no? >> i think anecdotally, the orthopedic surgeons have all been pretty positive in terms of coming fort in terms of participation -- forth in terms of participation programs. as was mentioned earlier, the variation in costs have little to do with the professional fees that we see. so there's a little less, you know, pushback from that. >> okay. >> just the one point i would make, i think it's logical to assume there's going to be disruptions, and that's clearly part of the goal of these innovations is to reduce the cost trend. and a number of stakeholders will get impacted through various interventions. this one happens to possibly impact physicians to some extent and facilities, but there are others that impact individuals'

plans and so on. so i think we're all in this together that we're searching for ways to come to, you know, reasonable adjustments to the fact that the trend has to come down. but it does raise the issue both with bundle pricing and with reference-based men b fits that -- benefits that in this case we assume that the physicianing's decision to operate is correct -- physician's decisioning to operate is correct and the procedure gets done. so, well, maybe you didn't even have to do it. it's all very well to have reference-based prices, but you can make it up on the volume. and so everybody, and so the physicians would certainly come out equal in that setting. so it's encouraging to see that some of the quality metrics that are being developed -- and there are registries now being developed around the country, there's one in california, the california joint replacement registry -- which will, which is collecting data on preoperative

and postoperative enrollee function, pain, etc. so that these indices can be incorporated into the decision-making process. so when the surgery is decided upon b, it's based on some rational information. and there's tracking of provider performance in each of these metrics. >> and, of course, kroger program has a reauthorization -- >> we do. and i think the disruption is exactly why we're doing what we're doing. we want people to understand that there is a variation in cost that isn't necessary. and so the more that we have providers calling anthem questioning why the slower the volume going a different direction is great. that's exactly what we want to happen. >> andrea? >> yeah. i was just going to follow up on a point that dr. belman made cans, you know, will -- there is a risk of the payments being made up for on other services. but i think if you speak with a

hospital cfo, they will say, well, i know what my margins have to be, i know that if i'm going to take a hit over here, a haircut over here, i'm going to have to increase something somewhere else whether it's on rice or utilization or volume. and i think there is the risk of that happening. i don't know that we have any evidence of it, of that sort of shell game actually happening. i think the insurers once they have a little more experience with reference pricing and as they see how charges if they have their payment tied to charges and those change, then they will, you know, we'll have a little more evidence of whether there is that kind of cost shifting within a facility's procedures. but i think the, it's -- while it can happen, it should not limit the first step which is to implement the reference pricing on front end. >> yes. david? >> yeah. we get the same question as well

for the hips and knees, kind of looping back around. as you saw in our muchs, we didn't actually see an increase in volume over the time, and then on the other three procedures that we're looking at, i think we've seen a little bit of increase in colonoscopy, but that necessarily isn't a bad thing. that's, for screening like that, it's probably a good thing. >> be okay. yes, ma'am. >> my name is lisa summers, i'm with -- [inaudible] health care institute, and my question is for andrea or anyone else on the panel, but particularly given cpr's work on pa a alternativety care payment reform, certainly ob care is not entirely elective. once you're pregnant, you have to deliver, but women certainly have months to shop for prenatal care and delivery services, and we know there's huge variation in cost and quality. and it's a very high frequency occurrence with four million births a year. so i'm interested in whether or not any of you are looking at

reference pricing for maternity care, and if you have thoughts about whether or not the lessons we've learned from the global payment in ma a alternativety care -- which is somewhat like bundled care -- informs this discussion at all. >> so i'll start by saying that so far i think while we work with some very progressive employers, they sort of self-select to be that way by being part of catalyst for payment reform, i don't know that maternity care will be, maternity care services will be at -- that's probably farther down the road in terms of reference pricing. i think maternity care is much better suited for bundled payment or a blended payment methodology because you have so many parts of, you know, you do have time to look around and shop, but you also have many providers within that system. and then once you're in the facility delivering, there are

other variables that can come into play. so i'm not sure that we'll see reference -- maternity care be a reference price bl, if that's a word, benefit. it may be, but i haven't seen it yet. i think it's more appropriate for different kinds of payment reform like bundled or blended payment. >> the one comment i would make is that, you're right, that there is wide variation. we haven't looked at bundled or reference-based pricing, but because of the wide variation in, for example be, c-section rates amongst hospitals which in california range from 22 to 50% and the appearance or the fact that there is now a decreasing but up until now a fair number of women who were induced, where labor was induced prior to the 37th week or just shortly after the 37th week, between 37 and 39

weeks which is now recognized as a non-- actually, a counterindication. if there were no other complications, a term should be 39 plus. and the rate of these non-medically indicated, premature deliveries has gone down dramatically, but that particular target plus the c-section rate, be the those are reduced, can reduce costs enormously because a large number of those infants end up in the intensive care unit where costs are astronomical. so one of the early successes we've had is, in fact, with reducing c-sections and with reducing premature induction of labor where it's not indicated. so that can have a big impact on total costs and out-of-pocket costs. >> and this is -- i'm sorry. this is actually an area where the private sector can learn from medicaid, because we have several state medicaids, and we just did a, we just released a

case study on south carolina's birth outcome initiatives where it's not a reference pricing ram, but it is a non-payment policy for early elective inductions. and so the, you know, the commercial private sector could learn a lot to reduce those c-section rates and the early elective inductions which are a major cost driver. >> yes, go right ahead. >> hi. my name is -- [inaudible] from the national academy of social insurance. and i have two short questions. so in addition to consumer education, are there a new set of challenges for implementing reference pricing for orthopedic and other health care services versus implementing it for trucks and pharmaceuticals? and then -- drugs and pharmaceuticals. and be then really quickly, my second question, are there examples either at home or abroad where reference pricing has not worked in bringing down the cost of care or in bringing down the quality? >> i think reference-based pricing, target pricing is still so new that it's hard to say,

um, you know, where it hasn't worked right. we're all kind of in that version one type of initiative where we're just trying certain things. we're trying different things between calpers and what kroger's doing and what other employers are doing. so i think it's early to tell where it's not working. i think in kroger's results we've seen positive results both on the quality cost side and from feedback from our associates. so we haven't seen any one of the things either on the pharmacy side or the medical side where it's not working yet, but we're certainly watching things like it here on the pharmacy side because, like i said before, we don't want people to forgo medication when they need it because of cost. so we need to look at that very closely and make sure that's not happening. but right now we haven't seen anything negative or something that's not working yet. >> in our research, we haven't found either at home or abroad.

i think at home it is too new. abroad where reference pricing on druggings has been, um, quite common, i haven't read anything that would indicate that there was a decrease or that it didn't decrease costs and it also decreased quality which we want to improve quality. on the consumer education piece, i don't know if anyone on the panel can answer that question. i don't know that there is -- there are different challenges for implementing different types of reference pricing programs, so it's obviously, when you're implementing a reference pricing program for hip and knee replacement which is far more complex than just a lab test or imaging, you know, there are lots of variables in there. the consumer education piece has to be tailored to the type of service, or if you're doing multiple services, it has to be tailored to it. i don't know, you know, i think a lot of it would -- it's around

medical literacy and being able to articulate something in an easy-to-understand way whether it is a lab or a knee or hip replacement, but it's highly dependent on the type of service. >> i think the other thing is it's easier to know or ask about the cost of a prescription drug than it is to know about the cost of a medical service. so when you're going to the counter at a pharmacy, you can ask about different costs for different levels or categories of drugs, the generic versus a brand name, etc. and it's not so easy on the medical side. you have to do a lot of digging and a lot of research to even know where to go to get cost information on the medical side. so it's a little easier on the pharmacy side today, but we're hoping on medical side it gets to be just as easy so that people can make better choices. >> a couple of times in the last few minutes we've talked about elect i versus non-- elective versus nonelective health expenditures, and we have a

specific question asking if we have some sense of what share of health care spending is elective as opposed to trying to negotiate while you're in the ambulance on the way to the emergency room. >> i don't know the proportions of spending. >> i have no idea. >> could find out. >> could find it, but -- >> and since chronic care counts for such a large percentage of spending particularly in medicare, does that count as elective or not? one would think that if you're taking a preventive drug or going through some sort of service to keep you from worsening in your diabetes, that that would not necessarily be elective. >> well -- >> could you apply that, apply reference pricing to those kinds of things as well?

>> so in the kroger program on the pharmacy side, it's any script in those four categories of drugs. on the medical side with the high-tech imaging, we don't do target pricing for children. although we're finding that what's happening with our associates and their family members who are over the age of 18, they're starting to ask questions when their children need an imaging service. so that's good. and we're also not doing it on emergent services. so don't really call it elective, right in you're getting an mri or a ct scan and it's not a an emergency, target pricing's going to apply. >> david, do you have something to add on that? several people are interested in the application of your travel reimbursement policy. you might call it domestic -- >> domestic tour itch. >> -- tourism, medical tourism,

yes. so let me just read them off because there are a bunch of aspects of it. if somebody had to travel to a distant hospital, are travel expenses paid before travel in the event the patient can't afford it? what kinds of expenses are covered such as lost wages for extra time off, child care, postprocedure follow-up visits, expenses for a traveling companion, i think we may have heard a little bit about that. that's all on one question card. do you pay for follow-up care for patient and family after a procedure at a preferred provider who's located far away from the patient's home? and finally, are reimbursement for travel expenses is good, but what about for conditions where travel is difficult and painful or people who don't have a companion to travel with them? what is, what are the conditions under which you're requiring people to pay for travel

impacting their mobility and ability to get to the high quality care? lots of interest. would you like to expand on your descriptions of the travel policy? >> sure. so in the kroger program in our centers of excellence program, if someone chooses to travel to use one of our we call them tier one facilities and they don't have one this their community -- in their community, we have a group of professionals at anthem that that's what they do. they help to coordinate the flights, the hotels, the meals, the companion traveling with them. all of that is taken care of so that it's not coming out of the pocket of the associate. so it's billed as a claim through our billing process that we have with anthem. so all of that is taken care of for them. if someone can't travel, then we

have accommodations for that as well. so they're not penalized for having a comorbid condition that prevents them from traveling or some other type of barrier. so it isn't intend bed to be such a stiff penalty just because they can't travel. so we try that first, and if they're willing to do that and if they can physically do that, if not, then we also accommodate them to try and get them to another centers of excellence be, a tier ii provider to take care of that for them. so we really try and coordinate all of that. i would say one of the challenges that we experienced early on went we implemented the centers of excellence program was the postoperative care. so moving someone back from a centers of excellence facility that might not have been in their community and getting them back into their local provider for that care. and so it's taken a lot of coordinationing between an hem

finish coordination between anthem and the nurses that help us do this at anthem, the surgeon and the local provider community. i think we finally got it all figured out, but that was really where the challenge was. it's not getting them to the high quality facility, getting the great services there. the challenge for us is really getting them back into the local provider community. but it's working, and it seems to be something, i think, that barrier has been worked out for us. >> david? >> follow up with the same, anthem has a concierge service which provides all the travel arrangements. the -- also, again, the same. if they're not allowed, if they have a chronic condition that doesn't allow them, they would get a medical exception which wouldn't force them to use the facility. so they could use something in the community if it was too far. and in california, luckily, we have enough facilities, that

only happens at a very small number of facilities in northern california where we have this kind of issue. >> and, actually, this question goes in the other direction. if examples provided today -- in the examples provided today, we see large insurers pushing for competition in procedures for which there are a lot of providers in an area. do you have any thoughts on how this model might work in an area with just one or two providers and a small insurer network? we're at -- is that what you find yourself addressing when you have somebody in eureka? >> right. so, i mean, that's the challenge, right, of having enough regionally-located, geographically-dispersed reference-based pricing facilities and then having to have that travel and the canyon package -- companion package. and so in terms of the impact of that in terms of on the market, well, if there's only one

facility and they're either meeting or not meeting, so it's, you know, it's a little difficult to look at the variation in a region like that. >> yeah. i was just going to comment that if you have only one or two providers who can perform a procedure in a geographic area, you -- if there is variation, which most of the time if it's -- it's really only one or two providers or very few that are clustering around each other, so you don't see the same variation. therefore, you, you know, this type of pricing doesn't necessarily have the same impact for those providers, and it won't have the same kind of -- and if you think about it, then you could end up if some kind of antitrust issues where if you have two providers and they're agreeing to either set or be close to one another on price, i mean, we get into a whole other area of complicated issues when you're really only talking about where you don't have competition and you only have one or two

providers so you can perform a service. so it's not likely that these will occur there. >> okay. we have only a few minutes left, and i'm going to ask you to spend those minutes not only listening to the qs and as but also filling out the blue evaluation form if you would. and we have another california-centric question here. how about you've got a market in california that is heavily penetrated by hmos, and the questioner wonders how the reference-based prices for anthem's ppo compare to the prices in california hmos. the prices that they pay. >> well, the hmo in california in general is significant,

although it's actually decreasing gradually over the past few years, and the ppo is increasing overall. but there's still a very large number of hmo members. in most cases as far as anthem goes, the hospital pricing is a contract between anthem and the hospital. so the professional component is where the capitation occurs on the hmo side with the exception of about 15% of our network which is in a full risk or more of a global capitation setting. so the answer, in short, is that the hmo is not currently part of this initiative. and the prices paid at those institutions are the prices that the standard anthem price. >> and, actually, this is a related question, at least poor country lawyer thinks it's

related. it might not be. why can't reference pricing be part of the carrier networking contracting negotiations, that discounting up to the reference price versus usual and customary? is that a reasonable question if this context? in this context? >> well, first of all, i'm a physician ad hoc, so -- [laughter] i don't want to venture into that. but be i think you're asking is it, should it be part of the normal contractual negotiation or rather than the negotiated price it is a agreed upon between both parties s that the essence? >> i guess that's right. that as you establish -- >> right. >> -- a network that's willing to meet that price, can you leverage that into going to those who are outside that range and negotiate that as art of your new contract? as part of your new contract? >> >> well, i'm probably not going to venture too far into that other than just to reemphasize

the fact that there was that pressure on the nonconforming institutions with the calpers initiative to actually bring the prices down. which actually happened without it being a direct goal. so it may well be that it could be effective. >> i was -- >> [inaudible] >> from a payer's perspective, it's where we want it to go, right? so we want to be able to bring the cost down of all of those services in a particular category, so hopefully, target pricing or reference-based pricing is eventually going to lead us there. it's just one of the initiatives trying to get costs more aligned in a community. >> i think it's really important to understand that, i mean, reference pricing is ultimately a benefit strategy. it's not a payment strategy. so while you are capping the payment, you could still pay for it on bundled payment or fee for service or another method. so reference pricing is a

benefit design. so while, you know, calpers -- i don't want to speak for david here, but calpers implemented reference pricing without having to renegotiate contracts, and anthem didn't renegotiate contracts during that period. they looked at the data, and they set the benefit design price of $30,000, and then hospitals moved cordingly. and then surely, i would imagine, in subsequent contracting cycles with those facilities that were either outside or at or below, that becomes part of the conversation. but you don't have to implement reference pricing through a contract negotiation although once it's occurred, it probably does become a part of it. or i think there's a question. >> [inaudible] >> you want to get to a microphone? right behind grow. right behind you. >> right now -- i'm a

taft-hartley fund, but anybody who has a relationship with a good carrier like an anthem, they say we'll give you a guaranteed discount of 60%. but it's based on the usual and customary. and what i'm suggesting is we would have a lot more manpower if our carriers weren't just negotiating on my behalf or kroger's behalf, but on their of business and telling some of these facilities we will take a 60% discount but be up to a reference price as opposed to the usual and customary which is more supply driven. and so it's a really kind of out of the box way to think, but it's something i think everybody in the room could benefit from if they have, you know, stronger negotiations while we still have a chance before network negotiations go away because everyone in the country's going to have insurance, and a hospital won't take a discount

anymore. >> that's a very improved formulation of your question from if -- from mine. and does it elicit some further response from any of our panelists? >> well, again, the point i would make is that i, that in this whole area of pricing has been changed as a result of the, let's say the shroud has been lifted. and so the previous discussions that occurred on discounts or the desired target price were discussions around the argument about percentages off. now discussion is different, and those high-priced institutions from my own personal experience in california are aware of the pact that their prices are now out this and can be seen by the public. and so it is a different discussion. to the extent that you're -- the end point you've described, i can't speak to that. i'm not expert at that.

but i believe the nature of the discussion has changed because of the fact that when the target prices are put out by these institutions, they are -- they could be recognized as way out of range of averages and reasonableness. so i think it's a positive. i'm not sure exactly where you want to get to yet. >> okay. all right. and by the way, one of the best illustrations of the impact on the upon the participating hospitals is this the -- on the nonparticipating hospitals is in the chart. jamie robinson, and we have our friends to thank for these very readable one-pagers summarizing jamie robinson's article. there's a lovely chart on that second page that shows you the impact on the pricing of these services in the hospitals that were not participating in the calpers experiment.

yes, bob. >> bob grist with the association of community health. with all the discretion that the payers have in setting reference pricing that you've disclosed in this panel and with the tendency of employers to cost shift onto employees usually in the form of greater deductibles or co-payments, what are the protections for consumers from reference pricing which sets a standard price and expects the consumer to pay anything over that reference price? it seems like a very dangerous precedent even if it's in the interests of the payer in the short run. you haven't given any indication that this is a way of actually

reducing total health care costs. we don't know whether the hospital is going to follow this procedure with regard to other payers or whether they're going to shift those costs onto other procedures. and i'm not sure how comfortable we should feel about this particular short-term strategy to help payers reduce certain costs. the panel itself is telling one story, and we don't have on the panel providers or consumers who have been discriminated against because their unique needs did not fill the, you know, you sort of assume that quality remains the same. but, in fact, that may not be the case if most health care situations -- in most health care situations. >> well, for us, i think, it's about being an informed patient. and it's completely sol p

tear -- voluntary for our associates and their family members to choose where they get care. we don't tell them they have to go anywhere. the choice theirs. and they have an opportunity to be informed before they obtain a ct scan or an mri or get a particular prescription and to make a coys as to whether or not -- a choice as to whether or not they want to stay under the target price or if they prefer not to. so the choice completely theirs. it's about, for us, it's about information and about helping them be informed consumers of health care and to make a choice from that perspective. so they know whether or not they're going to be paying more if they choose to do so. >> go ahead. michael. >> yeah. no, that's a very good question, and i would say to the issues of patient protection, there is the protection that if the enrollee

or the member stays within the defined reference-based network, then their share is fixed as to whatever benefit structure they have with their employer. the only time they would be subject to additional cost is if they went outside the network. so i don't think it's necessarily bad in that sense. the quality issue is relevant, and i agree that when you're talking about quality in general, there are a large number of metrics out this, and there are a few hundred that have been developed by very prestigious organizations. but be when it comes to -- but when it comes to specific quality issues within these very detailed procedures such as hip and joint replacement and so on, a lot of quality metrics that need to -- or a lot of quality information that hopefully will come out of registries. what we have at the moment is not completely adequate. so in terms of the overall success, i would just say that there are a number of

initiatives that have been put out there, and there are various organizations that describe various initiatives for bending the cost curve down. very many of them have failed. and this is one of the few that at the moment has had some success. and it's had success as well documented not just by calpers and not just by anthem, but by an impartial third party here with the health economists at uc berkeley. so i think there is some validity to this study the. i'm pretty sure. these are very good researchers. and i think it is a success story. now, whether or not it can be replicated a across the country, that remains to be seen. but in this has been a successful initiative, and i think it's -- i mean, i'm biased, of course, but i think it has done something to push the knowledge and the practice of health care delivery along. >> go ahead, david. >> okay. calpers is exreamly sensitive to this -- extremely sensitive

to this question given who we represent and, in fact, the jamie robinson article includes an analysis of the out of pocket to the payers. i didn't include it because it gets a little complicated talking about coinsurance, co-payments, deductibles, but we did see the out of pocket went down to our members over time with the implementation of the program. and in general, if you think about so something like -- so in that case with the hips and knees the deductible plays a big role in terms of how the out of pocket hits you. something with the more, the colonoscopies, the cataracts, you know, the coinsurance still plays a role there, and, you know, the lower costs are going to benefit you. so that is going to be included as well as when we do our follow-up economic analysis of those three other procedures we're doing on reference pricing. in terms of total costs, that was also included looking at the out of pocket plus the net pay, so that went down dramatically as well. as i said, for the hips and

knees. and that may have been due to the deductible being reached in a number of cases. and then i think your last part was a little bit about, talking about the bubble. if you push down on the balloon here, it comes up over here. i think that's just for calpers something we'll have to look at in the future and be aware of and be concerned about. >> and i just wanted to comment that i think there is awareness on behalf of the payers and the purchasers that this is somewhat of a short-term fix. but it is one of the few short-term fixes that actually is seeing positive results. and so in the absence of being able to look at the total and being able to bend the total cost curve down, i think the strategies are having to be, they have to be a little bit more piecemeal. so it's not that we're not conscious of the impact that it could have, it's just that sometimes things have to occur

incrementally. and as dr. belman said, some of the incremental things haven't worked so far, and this is actually starting to work. and then we'll have to see what lessons can we learn from this to look at the more total population costs and the total costs and not having that cost shifting occur in the balloon impact. but part of this is disruption and inthough sative disruption -- innovative disruption that could help with short-term costs which we are all struggling with and then learn from that to see what are the long-term lessons and strategies we can put in place. >> all right. my, that is a fittingly big picture end to this discussion, final comment anyway, if not the end. this has been quite edifying for your moderator anyway. i've learned an awful lot about the way this mechanism works and might work for others in a similar situation.

and i'd ask you to while you're filling out the evaluation forms that you've not had a chance to do yet note that we are indebted to our friends at wellpoint for helping us think through this session and put it together and for your great questions which covered a number of aspects of this that weren't all that clear. and finally, ask if you would join me in thanking our panel to help us understand this concept. [applause] [inaudible conversations]

>> the washington post reported that the goal is to have a pursuit of users to be able to sign up for health care plans online. is it acceptable if one in five are not able to get insurance on line? >> thank you for the question. the way to look at that figure 10 who go on the system, roughly two will not get through. baskets you can put those two out of 10 in. those who experienced technical difficulties is one. that would be error messages or delayed response times.

we arere metrics that using to measure improvements that have been made -- improvements in reduction of error message and site stability . someone may not be comfortable doing this online, may not be familiar with the kind of information they need with regards to their financial the process onnd their own and decide to use one of the other methods that are available to get information and enroll. finally, there are those who have personal or family situations that are complex enough that the site is not the best place to go to and role. you're better served by using a -- a live live person

person through the call center or one of the walk-in centers that exist around the country. it is important to look at when you talk about aiming to have the website functioning effectively for the majority of people, there is a universe of people who will go on the site but leave it without getting through it for several reasons. only one of them is categorized as being -- as having to do with technical issues. the goal is to get people and allowe system them to enroll in a plan and purchase quality, affordable health insurance if they desire. beenis why we have pursuing other avenues. we knew these populations exist.

is this acceptable to the president? people on 80% of 20% of people in not able to, they probably wouldn't stay in business very long. >> you're looking at that statistics implicitly. inat that statistic simplicity. will be a portion of people who will go on it and they may decide to use a different method of enrollment, not because there's a problem with the website, but there situation is comp luxe enough -- they may have children who there seeking to get covered who live in different states. members of your family

could be eligible for medicaid and others may not be. individuals filing separately where some are able to purchase and others aren't. those kinds of complex the universe of the population with those kinds of issues are going to be better served by using a navigator. there are folks who are trained to help walk individuals through this process and who can help them if they have a complex situation. there are others -- this will always be the case -- even though so many americans are computers andth use computers and online sites regularly, there will be some

who will choose not to do so online. that has always been the case. if you look at the metrics, we are focused on when it comes to the functionality of the website, speed and response times. response time, as we have explained, is how fast the system response to user requests. ofrs were waiting an average eight seconds four pages across the site to load. this past week, that average remained under one second. another one is error rates. a measure of the frequency of system timeouts or failure that prevent the user from advancing

usersult in errors -- in receiving error messages. we have reduced that from 6% to 1%. that is not where we need to be, but it is significant progress. site stability is constantly being addressed. as more consumers use the site, the site remains stable and does not crash. thornberryp -- mac theack for mary talks about way the department of defense does business. we will give an update on the health care law. that is live at 7:00 eastern. our senate foreign relations panel will look at the response

to typhoon haiyan. adobe test -- to testify live on c-span three. law enforcement officials will testify about digital currencies, such as the bit coin. we will hear about the risks and benefit of virtual court currencies -- virtual currencies. >> every weekend since 1998, book tv has brought you the top authors. >> women's identities are tied to their work in a way we may not like. it is true. when i look at someone like marissa mayer who was chosen to be the ceo of yahoo!, she was then asked how much maternity

leave and she said none -- the women exist, it is not the way -- i took plenty of maternity leave, but i feel like that is a growing -- that is a woman that there can be space for. the fact that there are some stay-at-home dads who are happy and do not all live in portland, oregon, that is ok, too. throughout the fall, we are marking 15 years of book tv on c-span2. affair-- we bring public offense from washington directly to you. we put you in the room at briefings and conferences and offer complete gavel-to-gavel coverage of the u.s. house. c-span, created by the tv cable

industry 34 years ago and funded by your local cable or satellite provider. now, you can watch us in hd. >> now congressman mack thornberry talks about trying to change the way the defense department spends money and gives security clearances. the texas republican is heading initiative for the house armed services committee for the pentagon acquisition process. the international cities hosted this one-hour event. >> welcome, everyone. i cannot afford the billing hours that are in this room right now, we better get started. welcome, everybody.

i was in abu dhabi when i said that mack thornberry was -- when i heard that mack thornberry was going to give a big announcement. i got back. it was three hours ago. the most important thing for me to do is get away from the stage quickly because i will make mistakes if i try to stay here. i can't resist. i wanted to say that i was in abu dhabi this last weekend, two weeks before that, i was in tokyo at a conference. and two weeks before that, in seoul. and every place, i'm hearing the same thing. it is what the hell are you doing to yourselves. they want america to be a global leader. they see what we're doing, and they're genuinely anxious, worried about what we're doing. they say why -- why is this happening? i give them an explanation about very deep turmoil we have within

our government about how do we establish priorities when our budget is so out of whack. and this is going to be with us for a while. i tell them that, i say this is going to be a longer term problem. we're going to have this problem for a while. and you can feel everybody sag that we had this -- but i said, don't be mistaken. if we're needed tomorrow, if the iranians were to do something crazy, we'll be there, we'll be there. don't worry about that. so what we really have to look at is not today. we have this remarkable capacity, remarkable military. what are we going to have in ten years? what are we going to have in 15 years? that's really the issue on the table. that's really what vice chairman thornberry is doing. he's going to look at the most important questions. we can't do what we've been

doing and stay on the path with -- the path we are on. we don't have those resources yet the world needs us to be just as capable in 10, 15 years as we are today. how are we going to do that? that's the challenge in front of us. i'm not at all surprised that the chairman turned to mack and asked him to head this up. he is so highly regarded in this town, having been here for 19 years going on 20, having had such distinguished service, having touched the department so many ways, there's no one better suited for this challenging time than mack thornberry. please welcome him with your applause. we look forward to his speech. [applause]

>> thank you, john. i appreciate the chance to be csis.t i'm excited to be here with the serious work that goes on here. with all of the interactions with csis exports over the years, i benefitted tremendously from their guidance and ideas. and i have no doubt that the work that goes on here makes an important difference. y'all are nice to listen to me, but we could all take notes from dr. hambry or some of the other experts here on this topic. i do have to note, however, the last time i was at csis, it was for a cyberexercise. i was asked to play the president and dr. hambry has not invited me back since.

it was deeply disturbing for him, as is understandable. chairman mckee and i have been talking about a focused defense reform effort for sometime. he wants me to tackle acquisitional reform, organizational bloat, and the security process. something mike rogers is equally interested in. today, i'm going to focus on the first of those topics. i have to confess that the first two questions that popped into my mind when buck asked me to tackle this were one, is it possible, and, two, is it worth the effort? if that comes across as skeptical, for every three years in congress, we've passed some sort of legislation on acquisition reform. now, maybe some of it was helpful. maybe some of it contributed to the problem.

but if you look at the whole picture, there are things that are certainly no better now and some ways they're worse than they were 20 years ago. so let me give you a multiple choice question here. a study was done with six problems with the d.o.d. acquisition, schedule slippage, lost growth, lack of qualified personnel, adequate cost destination, and insufficient training and management contractors. what year do you think that was done? 1962, 1982, 2002, 2012? yeah, i think the answer is it could have been done in any of those years. as a matter of fact, in the last 50 years, we've seen 27 major government studies and over 300 nongovernment studies on those issues. that was harvard business school

study in 1962 looking at the same things. frank kendall mentioned here a few days ago, defense acquisition has been a significant issue for us since the revolutionary war. but at the very same time, dr. hambry is written about this, one of the key factors in our success in world leadership has been that industry is an indispensable partner with the armed forces in defending the country. he wrote, we have harnessed the power of the profit motive to national security. so it is a fundamental strength. and at the same time, it's a persistent problem. most all of the studies that have looked at the problem over the last 50 years have said roughly the same thing. and as i mentioned there's been a number of legislative attempts with unsatisfactory results. the lesson i learn with that is we have to go deeper. we have to not just treat the symptoms but deal with the root

causes of the problem that have made it so difficult for us to solve these problems over the last 50 years. remember, we're talking about a lot of money here. last year the department of defense let contracts for $360 billion, that's 10% of the entire federal budget, and more than 50% of d.o.d.'s obligations. and as g.a.o. testified in our hearing a couple of weeks ago, if you compare 2008 to 2012 and look at cost estimations just in those four years, we got 7% worse on developmental costs. 13% worse on total acquisition costs. and the average delay in initial operating capability went from 22 months to 27 months. so just looking at the last four years, we've gotten worse.

in all of these categories. but, of course, it's not just the acquisition of weapons and equipment. the pentagon spends more on service contracts than it does on weapons. and there it's harder to know if the taxpayers are getting good value. what we do know is if you look at the last five years, contract spending is down 10%. but bid protests are up 35%. -- up 45%. there's hardly a contract awarded these days that there's not a protest on. what's the effect of these trends? well, we waste a lot of money and effort. we have more tail and less tooth. more overhead and less fighting capability than we should have for the money we spend.

who said this and when? as long as we offer assistance where the checkers are outnumbering the doers, the doers are going to spend more paper work for the checkers. it could have been any or all of the defense manufacturing facilities i visited in the last two or five years. but that's admiral rickover quoted by packard in a letter to george schultz in 1970. we're at the point where it's estimated that about a third of the procurement dollars are going to overhead right now. and the rest of the story is that it's not just waste. we're not as agile and responsive as we need to be in a dangerous world. so we face this festering problem of getting good value for the taxpayers in a timely way in a larger context of two essential facts. one of the facts is the world is not getting any safer or any less complex.

when he retired a couple of months ago, deputy cia director morrell said he didn't remember a time in his 33 year unless the -- 33 years in the cia where we had so many front burner national security issues. i won't go on about it. but just a brief list of cyberproliferation, terrorism, syria, russia, china, iran, north korea, keeping the alliances together, makes the point. things are not getting any easier. i think the second essential fact is we're going to face tightened defense budgets as far as the eye can see. truth is, we dug ourselves a deep hole of debt. now we all hope that the economy improves. we need the reform entitlement programs, which is where most of the spending is. we need to find a way to get our fiscal house in order without the across the board cuts that sequestration would impose. we need more stability in funding because the disruptioned -- disruptions caused by the

uncertainty that we faced are undermining every attempt to improve a system and are costing us dearly. but the point i want to make is if all of that stuff is solved in the way i wanted it to, i know of no scenario that envisions a return to large defense budget increases short of some catastrophic event that none of us want to see. so even in the best case scenario, we've got to face a dangerous, complicated world with limited resources. that means we have to get more defense for the dollar. that's the reason chairman mckeon has asked me to spearhead this effort on the three interrelated topics, focusing first on how the pentagon buys goods and services. let me be clear, the purpose is not to cut defense or not to make it easier to cut defense. the purpose is to get more defense, more value out of the dollars we spend. one very encouraging thing is i

think this is completely bipartisan and bicameral. adam smith, the ranking member of the house armed services, as well as senator levin and senator inhoff are just as interested in this as we are on our side. that's an essential place to start. i'm also very encouraged with a lot of what frank kendall had to say here ten days ago. and i guarantee we will be more than happy to sit down and go through with him line-by-line, federal regulations to thin them out and to simplify them. of course, along the way, we can't just focus on big d.o.d., we've also got to work with the services up and down the chain of command. you're not going to do this without full participation of the industry partners that dr. hambry talked about. but i think we're at a point

where everybody agrees this is the time we have to act. we started october 29 with a hearing look back at the last 25 years of acquisition reform efforts. three excellent witnesses that gave us their insights. we're going to continue across government and outside of government. and, again, so far, there's been nothing but eagerness to help. i expect we're going to have working groups across organizations in the coming months and obviously we're going to have hearings directly on this topic. but in addition to that, this topic is going to shape all of the rest of the hearings we have. whether it's shipbuilding or airplanes or how to best meet the needs of our service people who are deployed and the contract support there. these questions are going to influence all of the hearings that we have in the coming years. now, we're not looking at this as, okay, we're going to take two years to study it and come

out with a 2,000-page bill to solve all the problems in the world. we're going to make progress along the way as we go. and also have a good humility, ,- a bit of humility understanding that not all of the answers to this are going to come through legislation. some of what we need to do in congress is to change our oversight, the questions we ask. and to help encourage some changes in culture in the pentagon and in the services. one suggestion already being made is y'all ought to have a hearing on an acquisition program that's done well. and pat them on the back. don't just call it the people -- don't just call up the people who are in trouble. reward the people who have done a good job. and obviously, we need y'all's help. your input, to make this work. not just about substantively

what needs to happen, but what sort of process will help us reach the best results. so let me get back to my two questions -- is it possible? and is it worth it? i think there's a lot of understandable skepticism that goes with 50 years of frustration. there's some people who argue that basically there's only a few things that you can try. you can centralize or decentralize, you can have greater flexibility or more rigid mandates, emphasize the government or the contractor. there's lots of options we tried and it's not going to get better than this. i don't buy that. i think it is important as we did in the first hearing to acknowledge that what he we've done so far has not worked out so well. and to try to learn the lessons that that teaches us. but i also think we're not going to make things better by piling on new mandates, new oversight offices, new micromanagement. that's not the direction we need to go.

the rest of the story is that an automaker can take a car from concept to customer in less than 24 months, if a computer company can change its manufacturing requirements in a day, if boeing can take a commercial airliner and develop and field it in less than five years, surely to goodness, we can do better than we're doing now for the men and women who risk their lives to serve our country around the globe. as with most things, i think the key factor comes down to people. one thing is we're making it harder and harder for people who know what they're doing to serve in the system. and that's a problem. we also have to hone in on the reasons that good people who are in the system act rationally but their decisions are not good for getting the best value for the taxpayers.

so, it seems to me, incentives in the system are incredibly important. we've got to ask, what does the system encourage someone to do? the simplest example is it encourages you to spend all of the money before the end of the year or you'll get less of it next year. but here's another example. if you have to replace the pipe in your home, do you pick copper or plastic? if you have a system to reward you for taking the least expensive item at the beginning of the acquisition, you know what the answer will be. are we looking at the lifetime costs of the decisions that we have to make? isn't that what the taxpayers are going to be on the hook for? let me give you another example that was brought to our attention. the system today would rather pay $1 billion for something and allow the contractor to have a 5% profit than pay half as

much and allow the contractor to have a 20% profit. how can that be good for the taxpayers or for getting the most value for our money? so things have to change. we may well have before us a unique opportunity to change some of these built-in incentives. a set of circumstances that give us a better chance but also demand from us a better response that we've had in the past 50 years. let me just suggest some of the reasons that give us this opportunity. the defense base was consolidated 25 years ago. today there's six. secondly, d.o.d. is becoming a less influential buyer in the market generally. but also more and more companies are focusing on other customers other than d.o.d.

and the harder and more expensive it is to do business with d.o.d., the more companies -- the fewer the companies that will do so. commercial technology is often in the lead on innovation and obviously we have to take advantage of that. fourth, we have better data than we had before, we have more insight into what's happening in the system. that's allowing us to get new opportunities to get down at a deeper level. fifth, other countries are not sitting still. sixth, iraq and afghanistan have proven what acquisition can mean in saving lives and, yet, we had to set up a separate acquisition system for the things we wanted the most to get around the current system because it couldn't get them there fast enough. and i want to add a last factor. that is -- i think d.o.d. is in transition. partly because of tighter budgets, partly because of the wind down in afghanistan, the

changes happening around the world. things are in flux. so if you put those things together, this is the time. not only is it possible. i would suggest it's a necessity that we take advantage of it. so finally, is it worth the effort? well, our goal is to help the pentagon be a smarter buyer of goods and services and help get top quality equipment and services contributing to our security quicker. and the difference to our security that comes from getting more defense for the dollar, and having a more agile responsive system, is just an norm us. enormous. in his book reviewing the history of warfare since 1500, max booth writes, innovation has been speeding up.

that means keeping up with the pace of pain is harder than ever. the risk is rising. today there is no room for error. i have to say, that very point was made over and over again this past weekend out at the reagan library at the reagan defense conference. where we heard about the pace of technological change getting faster and faster and the difficulty in catching up once you get behind. british military writer, little heart, wrote in 1944 military history is filled with the record of military improvements that have been resisted between the development of new weapons or tactics and their adoption, there's often been a time lag. sometimes a generation. and that time lag has often

decided the fate of nations. now, i'm not going to tell you that i think the fate of our nation is dependent upon the success of this project. but i really do believe that a lot is at stake and that we have to do better and that we have to overcome 50 years of frustration. and that we can only do that with your help with all of us working together towards this common goal. thank you. [ applause ] >> ladies and gentlemen. thank you very much for that conversation there. here is how we are going to proceed for the remainder of our hour, if you will. we'll engage in a short and brief conversation up here. i have a couple of questions we're going pick up on based on your comments this morning. then we'll open the microphone to questions from the floor. be thinking about the questions you want to ask and when the time comes, we will ask you to

raise your hand and have a procedure of using the microphone and identify yourself and move forward. let me have a couple of thoughts about your useful description of why you're doing what you're doing and what we hope to do. there's a lot on -- worth the effort piece, if you will. i think you made a case strongly for why it's important or critical as you say. it's a little harder, though, to talk about the possibilities, not necessarily the possibilities of undertaking the effort, but the possibilities of actually achieving results. how are you going to measure your success here, if you will? are you going to measure it based upon what you can contribute even to next year or to the fy-16 bill? or was there a broader set of perspectives that you want to use as measures of success? >> we have not set a particular time frame, though we're thinking roughly two years. and if we can identify things to do in next year's defense authorization bill, we're going snatch that up. but at the same time, we're

going continue the conversations, working groups, etc., with an idea for next year's bill. again, i think it's really important. you don't hear this that often from the people in congress that legislation is not going to solve all of this. so, for example, i had a conversation last week with one of the service chiefs about career progression for program managers. and so part of it is, i think these conversations we're going to have in hoping to influence the what's rewarded, what's not. the culture within the institutions. now, what's your ultimate measure of success? you know, i hope some of the figures that i recited looked better in five years' time. yeah, i don't know if there's one that will tell us the whether or not he will answer.

i think it's okay if we don't solve all of the problems in the world. but we have to do better. >> what you described is a process in which this is not a stove pipe effort by the committee, but really not only within the armed services committee itself but reaching across the aisle and to the senate side as well. that's a bit encouraging because just to take your example of promotions of individuals. we've learned the hard way of no matter what the power of the acquisition dynamic is, it's not enough to bring a change to the overall personal management system and the promotion about this. there's a set of rules and regulations in place they are. there. fundamentally they don'try ward people for staying in place for too long. it's a management structure that would have stability and continuity and management looking around to see the results of their own decision. by putting it in a kplee level, perhaps you're able to bridge some of the nonacquisition-related pieces. is that part of your game? >> think about this.

if you're in charge as a program manager for a highly complex weapons system, you're on the job for 18 months or two years, by the time you figure out what the job is, you're gone. just to give you another example, in the subcommittee i chair, jim landrum and i make a habit with nearly every hearing with the services coming to testify before us of talking about -- talking about -- asking about cybercareers. because it's a little different than the traditional military career. if we're going to get and keep the best people we need for cyberwork, then we have to adjust the career path accordingly. the same thing needs to happen here. we need to keep and get the best. they need to be rewarded. some suggestions are that you can increase their salary right away. even if they are on the military side, even if their ultimate promotion opportunity are more limited. i don't know, we need to talk with the personnel people about what we can do and what we can work with the services to do to

have the kind of quality people. they've got to be trained. but, again, the question is, what does the system reward them for doing? because that will overcome any legislation that we can pass. >> so if you're going to tackle the question of acquisition reform from a broader perspective, beyond just a level of acquisition itself. one thing on incentives, prospects for managers inside the system. the other aspect is what are you doing this for? answering the "for what" question. it's a requirements issue, but also a what's your long-term strategy. the committee's broader review of strategy and forestructure of answering the question, why do we have this military? >> well, i think some of those questions will inevitably come up. but at the same time, i'm really conscious of not trying to do everything in a single bound. so, for example, a lot of things

were talked about -- reforms in personnel compensation and retirement and health care and so forth. maybe a very good discussion to have. but it is not something beyond what we've talked about with the program manager but with the general reforms, that's not something that we're going to deal with. i think there's lots of very important questions about strategy and particularly the way that the world is changing that will influence certainly requirements and what we buy. but what we're focused on here is the value that we get for the money we spend on whatever it is, goods or services? >> let me notch that down a little bit. secretary gates when he was postulating some of his reductions in 2009, 2010, what -- was arguing for what he referred to as the 70% solution or the 80% solution, you can find them using either of those words. the idea is tell us what you can get now a more affordable price

and reasonable timeline that meets most of the requirements if you will. is that something you take a look at? >> yeah, that will be part of this ongoing process. again, so at key milestones, a lot depends on the questions we asked in congress. >> right. >> and if we talk about the 70% solution and preventing requirements creep and all of the problems that all in all can make a difference. we can make a difference with the questions we ask. that will apply across all subcommittees and the full committee. all of the meetings and the hearings we have for the coming year. >> let me look at the industry piece as well. you mentioned d.o.d. has fewer companies on which they're more dependent now than 25, 50 years ago.

this sets up the possibility that there might be a good idea that has national security value. are you going to look at how innovation is generated and bring that in for defense acquisitions? sure we would get into specific technologies, but the basic point of how hard it is to do business with the department of defense, which is what limits the department of defense from taking advantage of some of those innovations is part of what we have to deal with. it is not just the innovative, it is the smaller companies that have the niche products who are just at the point of where they say it is hardly worth it. >> the chief cause of problems

is solutions. see, a cases what we week and a half we talk -- a week and half ago we talked about regulatory requirements that rubber managers have to deal with. it is a daunting list. none of them were looked at in the comprehensive framework. is that what you are proposing? >> absolutely. it is a great point. there is a cost overrun over here. there is a new restriction or a new oversight or something and then you add those up. it is like barnacles that feed on themselves over time. is go hope we can do through, thin those out, try to simplify and rationalize some of

.he regulations that apply that makes it easier for reduce overhead costs. get fornk how much we the money we spend if we cut that down. when some of those touches are put into place, i would find the ability to strengthen part of my own organization. now that i sit in the think tank, i am much more gala terry and then that. of talent andth expertise here. i am going to recognize some reporters.

identify yourself and your affiliation. >> breaking defense.com. you were one of my toughest graders. >> i am making notes. you mentioned the regulation several times. what i did not hear was legislation. arguably, part of this problem was created by congress. a lot of the oversight is mandated by congress. is a big part of the >> yes, absolutely.ections of

congress has contributed to the problem over the years to a substantial extent. we need to then it all out. absolutely. wait for the microphone. >> my name is everett. i was acquisition executive during the 1980s for the navy. the system can be made to run. but it has two modes, effective and disaster. right now you can see the effective mode