Remarks: NCSU Emerging Issues Forum 02/08/2005 When Governor Hunt called and asked me to speak here today, I was honored by the invitation. In Tennessee, we are going through a difficult time with our Medicaid program - called TennCare - and this provided a welcome opportunity to step back for a day from the immediate issues and talk with you about some of the longer range ones, and provided also an opportunity to hear from others and to learn. Tennessee is in a unique and uncomfortable position. We have today the most comprehensive Medicaid program in the country; we have the highest proportion of our population on Medicaid of any state in the nation, we devote the highest proportion of our state budget to Medicaid of any state in the nation, and we have the third highest growth rate of cost of any state in the nation. The business people in this room know that one doesn't need a degree in economics to figure out that that is not a stable situation in a medium-sized, medium-income state. Following a full year of study, I proposed a comprehensive reform strategy designed to preserve full enrollment by placing reasonable limits on benefits. The plan won broad support from legislators, providers and enrollees, but public-interest lawyers thwarted it by refusing to lift legal roadblocks, including "consent decrees" brokered in the 1990s that obligate the State to provide benefits well beyond federal requirements. As a result, we instead are moving ahead with an alternate strategy to reduce benefits and enrollment for a limited number of adults while preserving full coverage for children. Even after reductions in adult enrollment, the program will remain one of the nation's most comprehensive state healthcare plans. We are dealing with the circumstances and are enjoying an excellent and supportive relationship with CMS - the federal agency responsible for Medicaid - and with its director Dr. Mark McClellan. I believe that part of the reason for that excellent relationship is that we are not coming to Washington demanding more money that isn't there, but are trying to get at some of the underlying structural problems of the program. When your pharmaceutical costs grew 24% last year, there is no way on earth to revenue your way out of the problem; you have to cut that growth rate down. While Tennessee has a particularly acute problem because of the scope of our program, we are just the leading edge of what is happening across the nation: I recently read a study that indicated that 22 states can expect to allocate more than half of all new tax revenue over the next five years to this one program, including North Carolina and Tennessee. Medicaid is a clear and present danger to the budgets and priorities of the states. At budget time, it has become the gorilla that comes to the table and eats and drinks what it wants, and then education and public safety and state employees get to fight over what is left. Health care for our citizens is extremely important, but so is, for example, education, and I know that many governors are feeling the need to establish a more sensible balance between health care and other priorities for their citizens. As I have struggled with the Medicaid issue in Tennessee, one thing that has become very clear to me is the need to fundamentally restructure it. In the 40 years since the inception of Medicaid, a great deal has changed, both in health care itself and in our knowledge of how to make things work in government. While there is still a chorus out there of, "It's just about money, we just need to put more dollars in it," most sensible Americans on both sides of the aisle would like to see less effort on "spend more" and more on "spend smarter." Providing health care to our poorest and most vulnerable citizens is a wonderful and worthwhile enterprise-it offers a saving hand to people when they are at their most vulnerable; when they are scared, for themselves or their children; when they are dependent. Like all great enterprises, it is powered by the heart, and many of us see this as an obligation arising from deep personal and religious values. All great enterprises are powered by the heart, but they are steered by the head, and all of us who are holding the wheel here in 2005 need to do some steering. I'd like to talk with you today about how we might go about this. Medicaid is a huge program - it now exceeds spending in state budgets for K-12 education - but is has become a patchwork that lacks an underlying clarity of purpose. It's grown over the years to become like some vast castle, complete with turrets and flags and flying buttresses, a castle that has been added to and added to until the original purpose is buried in all the add-ons. Medicaid started out to provide basic health care to the poorest women and children. Medicare didn't deal with the nursing home issue, so a nursing home benefit was grafted onto Medicaid, where it doesn't belong and where it creates perverse incentives. Looking at the results of draft physicals in the 70s, America became rightfully concerned about the general state of the health of our young people. EPSDT (Early Periodic Screening Diagnosis and Treatment) was the result; a wonderful program, but one that clearly belongs in the public health arena and not in a health insurance program for the poor. Tennessee, I regret to say, ranks near the bottom in America in some basic health indicators; we are 46th in the incidence of diabetes, 45th in the number of low birth weight babies. We have had for a decade what is without argument the most comprehensive and most generous health insurance program for the poor in the nation - TennCare - and we have not moved those indicators one notch during that time. Whatever benefits there are from comprehensive medical insurance - and there are many - it has not succeeded improving some of the most basic indicators of the healthy well-being of our citizens. There are today 49 separate eligibility categories for Medicaid, and they have been added over the years more to satisfy various political constituencies than from any coherent overall plan. It is in some respects deeply unfair: Medicaid covers with extensive benefits more than eight million people with incomes more than 150% of poverty, and yet provides nothing for 18 million poor working people with incomes less than 150% of poverty. In the language of software, Version 1 of Medicaid has been based on a 1960s view of what was needed and how to go about it. Over the years, we have taken the design, patched it and added to it and patched it again, and I would say in software terms that we are now up to about Medicaid version 1.56; what we need is a fundamental redesign, Medicaid 2.0. We have learned a lot over the years, and I believe that by applying some common sense - common-sense economics, common-sense management principles - we can fashion a far better, far more sustainable and far more humane system than we have today. Health insurance is misnamed; it isn't really insurance any more. Insurance is when you own a home, and the likelihood of it burning down is small but it would be catastrophic if it did. You and many like you each put a little money into a pot, and if fire or flood happens, that pot can be used to make the unfortunate homeowner whole. Back when health insurance was "hospitalization" it had that characteristic; you didn't expect to have big hospital bills, so you put a little in every month, and if the unexpected happened, you had a place to go. That's not the way it is any more. It's not insurance, but rather a big day in and day out money transfer mechanism. The vast bulk of Tennessee's expenditures for TennCare are not for catastrophic events, but routine ones; the $50 doctor visit, the $60 prescription, the $95 lab test. The payouts are not a once or twice in a lifetime event, they are often monthly ones. The way in which Medicaid pays for services-put a lot of money in a bucket, and providers and beneficiaries take out what and when they want, and demand more when the pot is empty - the way in which Medicaid pays for services has more in common with a socialist economy than the common sense economic and business principles that do such a good job in allocating resources efficiently in other parts of our American life. This is the heart of the matter: Health care has become so big, and so important, and so expensive. The frontiers of health care in our nation today are not in what we can do - we have the best medical care in the world - but in access to that care whether you are an investment banker or a single mother working at Wal-Mart. Continuing to provide that access to those who have it now and expanding it to more of the tens of millions of uninsured is only possible with a more economically efficient system, one that spends our scarce resources smarter. What are some principles that we might build around to design a more effective system? First, that everybody pay a little something for everything. Until and unless there is some economic tension, until the users of the system make for themselves choices as to how scarce resources are to be used, the system will continue to be inefficient. Imagine you are shopping for groceries at the grocery store. You've seen the ads about the latest food products, you wheel your cart up and down the aisles and make your selections. Everything on the shelves is available, as much as you want, nothing is off limits. When you come to the checkout counter, you're rung up, you never even see the total, your wallet stays in your pocket and the bill is just sent to the government and is never heard from again. You'd spend a lot more than you do now. But this is exactly the way Medicaid works today. It is fundamental economics that if you want someone to make efficient choices, they have to have a little skin in the game. A free-market economy is built on the principle that you don't make resource allocations from the top down, but push those decisions out into the world in a million small decisions rather than one central one. The way that is done is by having people decide what they are willing to pay for and what they are not. That is the American economy, and it works incredibly well. Medicaid permits some so-called copays now, but they are too small - they haven't been increased in 20 years, for example - and they are not required; an enrollee can simply refuse and still get the service. They're more like a small voluntary contribution than a way of providing economic tension, and they don't work. This is not about being hard-hearted: We have in Tennessee a number of faith-based clinics to serve the uninsured. It is an article of faith with them that everybody pays something and it is a basic truth that people value things they pay for and don't value things that are free. The first principle is that everyone pays something. The second is for us to pay for the things that are important first. Over the years, we've backed into an assumption that everything that can be placed under in the category of "health care" is somehow on an equal footing with everything else. But there is a vast range in the importance of different health care services. If you need an appendectomy, it is vital and life saving. Most people would agree that if you are pregnant, you should have a doctor watching the pregnancy and making sure the child is born as healthy as possible. But at the other end of the spectrum, if you have a cold, there is not the same moral imperative that you have a decongestant to clear your head. As we work in Tennessee to try and contain costs within the current Medicaid system, one of the things we have asked the federal government to approve is to eliminate coverage for two categories of drugs; antihistamines and gastric acid reducers. These are primarily comfort drugs, and with Prilosec and Claritin now available over-the-counter, there is no capability in the prescription drugs that is not available off-the-shelf. I think it is no better than 50/50 that this will be approved, but there is a tremendous amount of money here: We spend over $200 million annually for these two categories of predominantly comfort drugs. In a world of limited resources, it seems bizarre to me to be telling some people that we can't afford to help them with their blood pressure medication so that we can pay for others to have the latest brand name allergy remedy. Step back with me a moment to look at what has happened in the health care economy. Since the 1960s, there has been a tremendous expansion of the resources available to pay for health care, in both the government and the private sectors. In the public sector, Medicare and Medicaid together this year will spend over $600 billion and are rapidly approaching a trillion dollars. When I was in college, that $600 billion was zero. We have in America a very efficient and flexible economy, and business has of course found ways to capture as much of this as possible. What my mother called heartburn and took Pepto-Bismol for is now acid reflux disease, and the little purple pill is a multi-billion dollar product. American business is very efficient, and like Darwin's finches occupying every available ecological niche, American business will figure out how to generate sales and profits in every niche that is open and will work to make new niches where they can. We need to exercise some intelligent discretion here, and prioritize what we do; we need to stop just being payors and become purchasers. Here's the way I try to think about this: We have in America tens of millions of our citizens who cannot afford to pay the full price of health care services and products that are available to them, and our government has properly undertaken to step in and pay for help. When you think about this, replace the words "government pays for" with the words "my neighbors pay for," which is after all what is really happening. So I have a serious disease, and can't afford to pay for treatment, should my neighbors be asked to help? Of course. I'm a pregnant woman, and can't pay the full cost of doctor visits to check on me and my baby, should my neighbors be asked to help? Of course. But I have heartburn, should my neighbors be asked to buy me the latest brand name remedy? Probably not. Especially probably not when many of these neighbors doing the paying are working poor without health benefits of their own and who often don't feel they can afford these same things for themselves or their families. Health care encompasses a vast range of services and products today, and Medicaid 2.0 needs to pare down what it pays for so that the important things are taken care of first. It's just basic prioritization: Make sure everyone has access to the foundations of staying healthy and alleviating suffering before we bring in the fancy trimmings. I've described two commonsense principles we should keep in mind as we reinvent Medicaid: Everybody pays something for everything, and pay for the important things first. I now want to suggest a third principle: Pay for what works. There are huge variations in practice patterns in our health care system, there are myriad ways of dealing with any specific diagnose, and we need to stop treating them as all equal in our eyes and start focusing on outcomes. Every successful business I know concentrates on results, works to improve results, pays for results. I see this most acutely in the area of pharmaceuticals. Drug companies have a wonderful business model. You invent new things, in a great many cases just variations on old themes, variations on which you can get new patents. You put your enormous marketing muscle behind selling these both to doctors and directly to the patients, you set prices that are typically paid by anonymous third parties and are therefore not a part of the purchasing decision. Marsha Angell, a former New England Journal of Medicine editor, has pointed out that in 2002, the FDA approved 78 new drugs, and only 7 of them contained new active ingredients that were classified as improvements over existing medications. It's become fashionable to bash the drug companies for this, but that's misdirected; they are doing what companies do- find ways to generate sales and profits for their shareholders. The fault lies with those of us who are doing the purchasing for not exercising our intelligence and judgment when we buy these products. By our decisions we are driving this behavior. If you can build a successful and profitable business around largely taking old ideas and putting some chrome on them and marketing them at high prices as the latest new thing, why would you do very much of the harder and more expensive work of inventing new things? There is a great deal of research about effectiveness, about what works in medicine, which drugs work, which are most cost effective. But we've accepted a world in which doctors and hospitals and various advocates decide what is needed, no matter how expensive it is, no matter how little advantage it offers over other alternatives. We've accepted a world in which sophisticated companies spend enormous sums to influence behavior, but in that world, the role of government is just to somehow come up with whatever it takes to pay the bills that result from this. Their position: We'll decide what you buy, you just pay. We have played out the role of simply being payors, being conduits for money, in the future we need to start exercising judgment and becoming intelligent purchasers. Purchasers, not payors. Three thoughts for some underlying principles we should use for Medicaid 2.0: Everybody pays something, pay first for what is most important, pay for what works. There are other issues, other things we need to reinvent in Medicaid as well: Moving toward comprehensive and electronic medical records, tailoring benefits to the needs of different groups; a disable adult needs different benefits than a healthy child or an elderly person. A uniform and comprehensive approach to disease management. Offering a helping hand to our poor when they are sick, when they are vulnerable and scared: believe me, my heart is right there, along with the hearts of a lot of other Americans; these are matters of deep personal and religious values. Our hearts are there; we need to use our heads too. If we keep our eyes on the fundamentals - on getting the principles of economics to work for us, with the incentives in the right place - if we get the fundamentals right, we'll do fine; we'll have the luxury of paying attention to these other issues; we'll be able to make some mistakes and still be all right. But if we don't get the fundamental economics right, if we don't get ahead of what's happening, no amount of tinkering around the edges with secondary issues will save us from failure. When I was growing up, I used to love to hunt and fish, and my uncle Ozzie had a huge collection of old Outdoor Life and Field and Stream magazines. I used to pour over them in the evening and copy things down, and one little nugget I have always remembered and has always served me well was the Hunter's Prayer. It isn't even really a prayer, it's just a little couplet: "The wisest words / Of woods and glen / Shoot where they're going / Not where they've been." The need and the political will are there to invent the next generation of Medicaid. If all we do with this opportunity is fool around with the federal/state funding formulas or try to get a bigger discount on some drugs, or argue about putting even more money into a 1960s vision of health care, then we will have shot way behind the target. But if we get ahead of the target, if we recognize where health care is going and get out in front of it-get economic principles working for us; pay for the things that are important, pay for the things that work-then we'll hit that target, we can devise a system that serves our people well in the years ahead. This is something America can do, and the time is right to do it.