Project Vote Smart - Senator Max S. Baucus - Hearing of the Senate Finance Committee - The President's Fiscal Year 2010 Health Care Proposals

Senator Max S. Baucus

Current Office: U.S. Senate
Seniority: Senior Seat
First Elected: 11/07/1978
Last Elected: 11/04/2008
Next Election: 2014
Party: Democratic

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Title: Hearing of the Senate Finance Committee - The President's Fiscal Year 2010 Health Care Proposals
Date: 03/10/2009
Location: Washington, DC
Speech

Hearing of the Senate Finance Committee - The President's Fiscal Year 2010 Health Care Proposals

CHAIRED BY: SENATOR MAX BAUCUS (D-MT)

WITNESS: PETER ORSZAG, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET

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SEN. BAUCUS: (Sounds gavel.) The hearing will come to order.

On February 24th, President Obama said -- and I quote him -- "Nearly a century after Teddy Roosevelt's first call for reform, the cost of our health care has weighed down our economy and the conscience of the nation long enough. So let there be no doubt, health care reform cannot wait, it must not wait, and it will not wait another year." End quote.

I could not agree with -- more with our president. Our next objective is health care reform. Comprehensive health reform is no longer simply an option; it's an imperative. If we delay, the problems that we face today will grow even worse. If we delayed, millions more Americans would lose their coverage. If we delayed, premiums would rise even further out of reach. And if we delayed, federal health care spending would soar up an even greater share of our nation's income.

Senator Grassley and I have laid out a schedule to do just that. Our schedule calls for the committee to mark up a comprehensive health care reform bill in June. We should put a health care bill on the president's desk this summer.

The president's budget makes an historic downpayment on health care reform. Over the next 10 years, the president's budget invests $634 billion to reform our health care system. Reforming health care means making coverage affordable over the long run, it means improving the quality of care, and it means expanding health insurance to cover all Americans.

Given our current economic situation, this becomes more important than ever. According to the Center on (sic/for) Economic Progress, the number of uninsured people grows by 14,000 every day. We need fundamental reform in cost, in quality, and in coverage. We need to address all three objectives at the same time. They are interconnected. If you do not address them together, you'll never really address any of them alone.

Costs grow too rapidly because the system pays for volume, not quality. Quality indicators like lifespan and infant mortality remain low because too many are left out of the system. Families don't get coverage because health costs grow faster than wages. Without coverage, health insurance costs increase because providers shift the cost of uncompensated care to paying customers.

It's a vicious cycle; each problem feeds on the others. We need a comprehensive response.

Today, it's my pleasure to welcome the director of the Office of Management and Budget, Peter Orszag, to discuss the health care proposals in the president's budget. Peter and I have met many times to talk about health care reform. He's on the brightest and hardest- working folks in the administration. We all appreciate him very much.

Today, we'll explore the president's proposals to help offset the cost of health care reform. And today, we'll also explore any feasible proposals that the administration has left out. Our goal is to offset the cost of health care reform, so we need to think creatively about proposals that will both improve quality and reduce the growth of health care costs in a 10-year budget window.

As Dr. Orszag has said, the path to fiscal responsibility must run directly through health care. Our country's economic sustainability depends on health care reform. I look forward to working with the administration toward that goal.

So, let's, at long last, deliver on the dream of reform that Teddy Rooselvelt called for nearly a century ago. Let's, at long last, live the burden of health care costs on our economy and on the conscience our nation. And let us, at long last, enact health care reform this year.

Senator Grassley.

SEN. CHARLES GRASSLEY (R-IA): Thank you, Mr. Chairman.

The president released his budget last month, made it very clear that health care reform was a top priority. I share his commitment, and I'm glad that we're taking a closer look at some of the health care reforms that are being proposed in this 2010 budget.

Health care reform is important, but it won't fix all the problems with our economy, nor will it solve the entitlement crisis. Fixing health care is necessary, but not sufficient. Still, we have a great opportunity before us, and it's an opportunity we are taking.

The health care system, if you want to call it a system, is in desperate need of reforms. We spend twice as much on health care as other developed nations. And even with all that spending, our health care outcomes are often half as good. Millions live in fear of losing coverage. Forty-five million don't have coverage.

Last week, Senator Baucus and I joined other members of Congress and various stakeholders at the White House forum. We, in bringing everybody together, it was clear that we agree on a lot of issues and yet still have a long ways to go on others. But overall, I left the White House knowing that Republicans and Democrats share a commitment to expanding health insurance and improving the way care is paid for and delivered in the country.

On the same day as the White House forum, Senator Baucus and I announced an ambitious, but I think achievable, schedule for developing bipartisan health reform proposals. I feel positive about how we're starting this process. Let me also say that we have a long ways to go and there's a lot of heavy lifting.

At this point, I haven't heard from any Republican senators that we shouldn't be working on health care reform this year. We haven't had to make any difficult decisions yet, but no one has said to me that we shouldn't be trying to pass a health care reform.

Right now, Republicans and Democrats are able to agree on a variety of broad issues, but the true test of this bipartisan process will be how we handle those details, particularly the few tough details to work out. I do believe that by working together we can face this challenge and get the job done.

So that brings me to today's topic, the president's budget. The president's budget contains a number of bold proposals that interest me. However, it was also lacking in detail. So I hope to have you, Dr. Orszag, today shed some light on details of this budget proposal, how the administration will approach health reform.

We all see a nation's fiscal situation getting worse by the day. The current administration inherited a $1 trillion deficit, and they promptly added another $1 trillion to our national debt with an economic stimulus bill. The stock market has fallen another 20 percent just since the president took office. Now the Obama administration is proposing ($)634 billion health reform reserve fund, which they say is merely, quote/unquote, "a downpayment."

While fixing our health care system has to be a priority, so is financing it responsibly. We have an obligation to make sure that any changes we're considering in health care are financed and developed responsibly so that we do not make the situation worse. We must be very wary of the idea that we have to spend more up front to reap savings down the road. I'm not saying that that's totally wrong, but too much emphasis on that can be misleading.

Too often with the federal government, the up-front spending happens, but I've seen long-term savings never materialize. In his former position, our witness, Dr. Orszag, in the CBO was clear about the reforms that reduce costs and the ones that don't. As we consider the president's proposal and move forward on health reform, I hope that we can all maintain that clarity. If done correctly, prevention and health ID proposals can improve this system, but CBO has been very clear that they're not the cost savers that some would think.

As for specific reforms in the budget proposal, I was pleased to see a commitment to delivery system reforms. We need to change our Medicare pay for -- how we pay for services, making it more efficient, reward quality, and reduce waste and abuse -- and fraud as well.

The president has also proposed changes in Medicare Advantage. While there are very few details at this point, I have serious concerns about the level of proposed cuts and the rate at which those cuts go into effect. A competitive bidding proposal may be an effective way to increase competition in Medicare Advantage and reduce overall spending, but I believe if it doesn't carefully it can do harm to choice that we want to have for seniors.

I cannot support a proposal that will ultimately jeopardize coverage of the 10 million current enrollees or limit access for future Medicare beneficiaries. If almost all of Iowa's seniors lose their Medicare coverage, they have now or lose their ability to choose their own plan in a so-called reform, we won't have done a good job.

As Congress considers the president's budget and broader health reform efforts, I hope Republicans and Democrats can agree on four principles.

First, health reform should be done through regular order, not reconciliation, and be done in a fiscally responsible manner. The scheduled process that Chairman Baucus and I have developed would follow regular order, and so we're off to a very good start in that regard.

Second -- next, our top priority should be to bring health care costs under control. We must provide affordable coverage to 45 million uninsured, but it doesn't do anyone any good if Congress expands coverage but doesn't address out-of-control health care costs.

Third, we all -- we must also uphold the promise that if you're -- if you like the coverage you have, you ought to be able to keep it. President Obama made this promise time and time again during the campaign, and we owe it to Americans to make sure that we all help him keep that promise.

Fourth and last, whatever changes Congress makes to our health care system, we must ensure that at the end of the day, health care decisions are made by two people: the patient and the doctor. I support making sure that patients and doctors have up-to-date and effective information, but I would doubt support for reforms that allow some government bureaucrat to interfere with a doctor's ability to practice medicine. We shouldn't put the government in charge of your health care decision about what the doctor -- what doctor you might want to go to and what treatments that doctor might suggest.

I hope that we can hear from, you know, just -- Dr. Orszag, thank you for coming, and I hope to hear from rebuttal to my suggestions as well as answers to my questions.

SEN. BAUCUS: Thank you, Senator. Thank you very much.

Our witness today is a regular, Dr. Peter Orszag, only this time in the capacity of director of the Office of Management and Budget. As a member of our frequent witness program - (laughter) -- Dr. Orszag, we very much appreciate your being here again. And as you know, your prepared statement will be included in the record, and I urge you to proceed.

MR. ORSZAG: Thank you very much, Mr. Chairman, Senator Grassley, members of the committee.

The link between health care costs and the economy is undeniable. In 2009, Congress must take up an act on meaningful health reform legislation that achieves coverage for every American while also addressing the underlying problems in our health system. The urgency of this task has become undeniable.

Those are not my words; those are direct quotations from the document that the Senate Finance Committee put together last fall, and I would just say amen.

Building on the health forum that we held last week -- and I thank the chairman and the ranking member and other members of the committee who participated in that -- at which there was strong bipartisan support for getting health reform done this year, I'm looking forward to working with all of you to accomplish that goal of -- leading to a more efficient health care system, expanding coverage, improving quality and bringing down costs.

The president has announced his intention to nominate Governor Sebelius as secretary of HHS. My understanding is that she will be up visiting with members of -- with senators this week, and I hope and urge that the Senate will confirm her quickly so that we have the secretary in place as we begin this process.

In addition to that, Nancy-Ann DeParle, who is the White House coordinator on health reform, will be up meeting with you and your staffs this week to begin the process of working with you on legislation to get health reform done this year.

And on that, let me just note immediately, so that perhaps we can avoid the typical Washington game of "gotcha," that the administration has been very clear that we want a -- we put a significant downpayment on the table, but with regard to benefits and coverage we want to leave everything on the table at this point to allow the process to play out. So you should not expect and you will not be receiving definitive answers from me on exactly what the administration does or does not favor on the benefits-and-coverage side of health reform.

As is now I think well-appreciated, health care costs are the key to our fiscal future. You have a packet in front of you. Slide four shows projections of Medicare and Medicaid, Social Security and other parts of the health care -- of overall government spending.

And just to pick up on something that Senator Grassley said, it is clear that there are long-term fiscal problems in Social Security and in the rest of the government, but if you look at that graph, it is also clear that those two health programs are absolutely core to our long-term fiscal difficulties. And it -- I think it is undeniable, based on that graph, that health care reform is entitlement reform, simply looking at the numbers.

Health care reform, though, is not just a long-term problem. There is a more immediate saliency to it. Health care costs are reducing workers' take-home pay today to a degree that is unnecessarily large and perhaps underappreciated. Health care costs today are crowding out other priorities for state governments, including support for higher education.

And your taxpayer dollars today are financing variations in Medicare costs across different parts of the United States, across hospitals within a region and across doctors within a hospital that do not seem to correspond to better outcomes and higher quality for the higher-cost approaches.

And I have shown this graph repeatedly before this committee, but on page 6 of your packet you have that variation in health care costs across the United States.

And it is just worth emphasizing over and over and over again we have such substantial variation across different parts of the United States that cannot be explained by how sick the patients are in the higher-cost areas, by the cost of building a hospital, by doctor salaries.

The explanation is that in those parts of the country with higher costs, there are more procedures done, more days in hospital, more tests and what have you, none of which seems to actually improve health outcomes. And that is the key take-away. If you look at outcomes in quality, the higher-cost states, the higher-cost hospitals, the higher-cost doctors do not produce better outcomes than the more efficient providers.

Researchers at Dartmouth College have taken this data -- these data -- and suggested that if we can move the practice norms in the darker-colored parts of the country towards those in the lighter parts of the country, we could reduce health care costs by $700 billion a year, without harming health outcomes. There's nothing else that even comes close, in terms of opportunities to improve the efficiency of our economy.

Now, what are we doing to capture that opportunity? Several things. First, the Recovery Act was the most aggressive movement towards universal health information technology in the history of this country. It includes $19 billion to put us on a path of universal health IT.

Second, the Recovery Act also provides funding for an expanded comparative effectiveness effort, so that your doctor and your hospital have more information about what works and what doesn't in recommending treatments to you.

Third, we need to reform the financial incentives facing providers. Currently, we have incentives for more care, rather than better care. And that's exactly what we get.

The budget includes significant changes that will create stronger incentives for better care; a hospital quality incentive program so that hospitals are paid for better care, rather than more; penalties for high readmission rates because 18 percent of Medicare beneficiaries are readmitted to a hospital within one month after being discharged, many of which is unnecessary, both driving up costs and harming beneficiaries. Who wants to go back into the hospital right after being discharged, without it being necessary? Incentives for doctors; bonus-eligible organizations so that doctors have stronger incentives to provide higher-quality care.

And I could continue. We also invest in prevention and wellness. The Recovery Act provides a billion dollars for an historic effort at improving prevention and wellness.

All in, the budget provides $634 billion in a down payment to begin the process of health care reform this year, to expand coverage, reduce costs and lead to a more efficient health care system.

I and the rest of the administration team looks forward to working with this committee and other policymakers to get this done this year. Thank you very much, Mr. Chairman.

SEN. BAUCUS: Thank you, Dr. Orszag, very much. Could you just tell us what the cost of doing nothing is? Life is alternatives. You do something, or you do something else, or you do nothing. It's alternatives; it's choices.

MR. ORSZAG: The cost is --

SEN. BAUCUS: What's the cost of doing nothing?

MR. ORSZAG: The cost of doing nothing is a fiscal trajectory that will lead to a fiscal crisis over time. The cost of doing nothing is perpetuating a system in which workers' take-home pay is unnecessarily reduced because of an inefficient health care system. The cost of doing nothing is 46 million uninsured people who don't receive adequate health care. The cost of doing nothing is a burden on state governments that is causing lots of unanticipated effects.

For example, lots of families are experiencing higher tuition at public universities. Research very clearly connects those higher tuitions to rising costs for health care, in state government budgets, which then means they don't have room to support public higher education to the degree they did in the past.

In area after area after area, we see excessively high health care costs burdening workers, state governments and the federal government. I'm going to come back again, Dartmouth College; a $700- billion opportunity to reduce health care costs without harming quality. How can we perpetuate a system that contains that large an inefficiency?

SEN. BAUCUS: Now, based upon the Dartmouth College analysis, which many of us point to and which is very graphic, as you've demonstrated, if you could, prioritize one, two or three actions that this Congress, you think, can take to help address that disparity.

As you pointed out, I think, when you were in an earlier life at CBO, I believe a 29 percent geographic disparity, so as you say, it's about $700 billion. How -- what would you prioritize, one, two or three items that you think the Congress should take, to start to address that disparity, recognizing there's a little, you know, a lot of politics here?

You know, some of the states are getting a lot of money they aren't going to want to give up. We've got to figure out a way where we're working together to prevent that disparity.

MR. ORSZAG: I think this budget and what you have already signed into law is the most aggressive set of steps, to try to capture that $700 billion, that the Congressional Budget Office, the Institute of Medicine and others have come up with. Let me be more specific.

Too much of the medical care delivered, in the United States, is not backed by specific medical evidence that it works better than an alternative. Take prostate cancer, for example. We have dramatically different ways of treating prostate cancer, from proton beam treatments to other interventions.

There is no evidence that exists on what the benefits are, relative to how much that is costing us for the different kinds of treatment. And in different areas, there's just different norms.

Sometimes, you know, proton beam treatment much more likely or much more prevalent; other areas, not so much. To get at that, we need much more information, not only on what is done to a patient, which we already have through insurance claims, but what the result is.

What happens to your blood pressure and your cholesterol and what have you, so that your doctor can then have more information about effective interventions.

SEN. BAUCUS: You're talking about evidence-based medicine.

MR. ORSZAG: Evidence-based medicine, yes, sir.

SEN. BAUCUS: You are talking about that.

So how do we get the evidence?

MR. ORSZAG: We get the evidence by having -- by moving the health sector to something that has been pervasive throughout the rest of our economy but the health system has lagged behind, which is information technology.

It is stunning that in health care, unlike other areas, we still have to, when we go to the doctor, fill out paper forms every time you go to see a new doctor.

SEN. BAUCUS: But that's not evidence-based medicine.

MR. ORSZAG: Well, no, but it's an input. It's necessary but not sufficient. It's an input into evidence-based medicine.

The second thing we need to do is, have the medical profession much more aggressively be examining what works and what doesn't.

That's the comparative effectiveness effort.

And then in addition, providers should not be penalized -- under our current system -- it is stunning -- under our current system, providers are often financially penalized for doing the right thing, which is to say delivering more efficient care. We have such strong incentives for more care that if you deliver care more efficiently you're often actually financially penalized rather than helped. That makes no sense.

SEN. BAUCUS: Those did take some time, though, to get the evidence on which to have more of an evidence-based practice.

MR. ORSZAG: It is going -- it is --

SEN. BAUCUS: And how do you -- is there a -- is there a data bank? Is there repositories or something so that when this condition is -- a doctor diagnoses a certain condition and he or she wants to go look to see what's the evidence -- best evidence-based treatment here, in addition to what does my gut tell me, what was I taught in medical school --

MR. ORSZAG: Right.

SEN. BAUCUS: And so how do we get to the point where the doctor, then, has the availability to look at this very significant evidence- based data?

MR. ORSZAG: One of the other benefits of a health IT system is that not only does it give more information about what works, it also provides a platform for the Institute of Medicine or other respected bodies to deliver best practice guidelines or guideposts back to practicing physicians, so that it if I'm sitting at my doctor's office and I've got a problem, the doctor could immediately pull up not only the sort of recommendation from the medical profession on what works or what doesn't but then if he or she is interested click through to the underlying evidence so that more of the recommendation is based on that evidence.

And then not only that, but again, that doctor should not be financially penalized but instead should be facing strong incentives for that best-practice care. If we don't do that, we're going -- coming back to perpetuating the system that exists.

SEN. BAUCUS: I gotcha. Thank you.

My time has expired. Senator Grassley?

SEN. GRASSLEY: Yeah. Dr. Orszag, when I ask my first questions, I'm going to leave, but I want to come back for a second round. So I hope you'll still be here.

MR. ORSZAG: I'll stay.

SEN. GRASSLEY: Okay. (Laughter.)

On June the 28th, 2007, CBO economic and budget issue brief from your staff had this quote about Medicare Advantage cuts, quote, "would cause some plans to leave the program," end of quote. The brief went on to say, quote, "rural areas would be affected more than urban ones," end of quote.

So we have in this budget a cut of $176 billion to Medicare Advantage through competitive bidding. Question: If we take 176 billion (dollars) out of this Medicare Advantage program through plan bidding, how many of the 10 million beneficiaries enrolled in Medicare Advantage do you estimate would lose their current coverage? Also, how much of the 176 billion (dollars) in savings comes from decreased Medicare Advantage enrollment versus reduced payments to plans?

MR. ORSZAG: I don't have the enrollment data, but let me again just step back and say two things. First, I know many people believe that capitalism is founded on private markets, and it is. But I very firmly believe that capitalism is not founded on -- (audio break) -- to private firms.

That is what this system delivers right now. For every Medicare beneficiary in Medicare Advantage, the federal government pays $1,000 more than covering the same beneficiary under traditional fee-for- service.

In addition, it is true that Medicare Advantage plans then take part of that extra payment and deliver it in the form of either additional benefits or lower premiums to beneficiaries. But the data also suggest that every dollar of additional benefits costs the federal government $1.30 in costs.

So what we're doing is, we're all paying $1.30 in order to deliver a dollar to a sub-set -- 20 percent of Medicare beneficiaries. I don't think that is competition. I think that is an unwarranted subsidy.

SEN. GRASSLEY: Well, you're going to take half of my time lecturing me on capitalism.

Can you answer -- can you answer my question about how many of the 10 million beneficiaries enrolled would you estimate would lose? And if you can't give me a figure on the savings -- how much comes from less enrollment versus less expenditures -- at least tell me how many of the 10 million you think will -- (audio break).

Your agency that you had at that time said that it would cause plans to leave the program and it would affect my area of the country, rural America, more than urban America. So I want to make sure that we -- if we have a national system of health care it's going to deliver the same thing in Iowa as it does in California, because for 40 years it didn't.

MR. ORSZAG: I don't have the enrollment figures with me. I'd be happy to provide them in writing to you.

I would note two things. One is, this proposal is not the same as what -- what was previously discussed by the Congressional Budget Office. We are not simply reducing payment rates administratively, but instead introducing competitive bidding; which is a different proposal, and it will have different regional effects. But I will get you the enrollment figures in writing.

I would note, even under the Congressional Budget Office projections, what the impact was, was there was dramatic growth in Medicare Advantage that was projected. And the proposal would reduce that growth as opposed to reducing current enrollment.

SEN. GRASSLEY: Okay, I'll await your written answer. With the one minute and eight seconds I've got left, maybe you can answer one question for me.

MR. ORSZAG: Sure.

SEN. GRASSLEY: We see a commitment to program integrity in the budget. Every dollar spent on program integrity ought to produce a return on investment. A challenge that we faced in the past is having CBO recognizing the savings that program integrity efforts and other legislative proposals produce, because of scoring rules.

Being a former CBO director, you're in a unique position now as OMB director. The budget recognizes savings in mandatory spending from increased discretionary funding for program efforts. My question to you is whether CBO should in fact recognize these savings.

MR. ORSZAG: I think the short answer is there are current score- keeping rules, as you are aware, that mean CBO does not recognize those savings, even though they are based on hard evidence that they would occur.

It struck me when I was CBO director and it continues to strike me that some revisiting of those rules would be warranted.

So I -- there's a -- the group of scorekeepers that need to get together to discuss the rules, I think that would be a good thing to do.

SEN. GRASSLEY: My time's up, but I would ask the chairman if I could have maybe an extra minute on my second round, because I was lectured on capitalism and I studied that in economics.

SEN. BAUCUS: Senator, why don't you take that minute right now?

SEN. GRASSLEY: Okay. (Laughter.)

MR. ORSZAG: No more lectures.

SEN. GRASSLEY: Let's see. During the campaign, President-elect Obama often promised that under his health care reform proposal, quote, "if you've got a health plan you like, you can keep it." I'm concerned this might not be true if we have a public plan paying government rates competing with private insurers. I've heard some estimates -- I think they were from Lewin -- they predict 118 million people may lose their current coverage and 130 million will end up on government-run public plans.

Does President Obama intend to keep his promise that if you like coverage you have, you can keep it? And also, would he support a public plan that could crowd these 118 million people out of the plan that he said they could keep if they wanted it?

MR. ORSZAG: Senator, as I said at the beginning, we're trying at this point in the process to keep everything on the table. The president's campaign plan had a public option in it. There are obviously different ways of designing a public plan that would have different effects. And one of the things that we would look forward to working with you on is if there is a public plan, how to minimize some of the concerns that you've identified.

SEN. GRASSLEY: Great. Thank you very much -- (audio break).

SEN. BAUCUS: Thank you.

Senator Rockefeller.

SENATOR JAY ROCKEFELLER (D-WV): Thank you, Mr. Chairman. I thought it was very interesting the president in various statements that he's made about health care policy has said, you know, $634 billion -- it's not going to do it all, but it's going to -- it's the best start we've ever had in history, and I want you to in the Congress to figure it out.

But he's also said in sort of sub-clauses that we're going to be watching very closely; I have a health care plan that I care about. And the idea was that if we don't come up and do the job right, he's got plenty of people who are willing to step in and exercise judgment and muscle.

Question -- two questions. One is how do you coordinate federal efforts to define quality? I mean, you've got -- you've got the Agency for Healthcare Research and Quality; you've got the National Quality Forum; CMS has -- it does Medicare and Medicaid; quality improvement organizations, the QIOs. There's a variety of ways, plus all of our judgments and all the rest of it. How does this get defined on a federal basis?

MR. ORSZAG: Well, Senator, I think as you, Senator Baucus and others have pointed out, one of the issues is the process through which many of these things occur currently. I know you have an idea with regard to strengthening MedPAC; Senator Baucus has ideas on a health institute.

One of the roles that such a body could play is to coordinate more strongly the various different quality indicators and quality efforts that are currently under way.

SEN. ROCKEFELLER: So using those and others as advisory --

MR. ORSZAG: Correct. There are a lot of efforts under way, and I should say a lot of progress has been made to better measure quality. I mean, for example, the premier program for hospitals under Medicare has shown to be effective in improving quality in hospitals, so -- and that's just one example. There have been a variety of examples in which we are moving towards higher quality but we're not where we need to be.

SEN. ROCKEFELLER: The second question is what you've already mentioned, and that is, it's always bothered me in the system of lobbying that we have in this country, and particularly on this subject -- I don't know how many thousands of health care lobbyists there are. I think there were 14,000 at the end of the Clinton effort; higher-paid, more niche-oriented now. And so you get these heads of all these huge organizations saying, "We're going to be different. We're going to be different. We're going to cooperate this time," which I guess means that the lobbyists will stop lobbying and they'll just rely on the facts.

I think that the best way to take politics out of all of this is to take Congress out of the setting of reimbursement for doctors under Medicare and Medicaid and for hospitals, because those are a group of 17 -- could be whatever number -- completely dispassionate people. And I think one of the major problems you have in your $700 billion of wasted money every year is the fact that there are too many political judgments made because there's too much lobbying and Congress can -- you know, unless they're all health care experts, can fall victim to that. So the idea of MedPAC having the power to set those fees, reimbursement fees, to me is enormously attractive, takes politics right out of it and takes Congress right out of it.

Thoughts.

MR. ORSZAG: Well, as I said, I think there are changes to the current process that would be beneficial in terms of moving towards a more efficient health care system. Your idea of -- I think we've referred to it as MedPAC on steroids, or a much more powerful role for a body that is widely respected, is one approach. A related approach is the one that Senator Baucus has put forward. You mentioned some of the outside groups. I just came from America's Health Insurance Plans, their annual meeting. They have an idea that is similar also.

So one of the things that I'm hoping that we can explore as legislation is put forward this year is whether some change in the process could, again, help to improve decision-making, for the reasons that you've specified.

SEN. ROCKEFELLER: Mr. Chairman, let me just end with one thought. Along with what I suggested about MedPAC, they'd have to get substantial amounts of new money in order to do the research that they will need to do, because right now they have no authority to do anything.

CMS has all the authority.

Thank you.

SEN. BAUCUS: Thank you, Senator.

Senator Wyden, you're next.

SEN. RON WYDEN (D-OR): Thank you very much, Mr. Chairman.

Director Orszag, few people inside or outside government have dug more thoroughly into this subject than you, and I think that's why you're getting the tough questions, and we appreciate your being here.

Here's my take on where things are. With the economy sucking hundreds of billions of dollars out for these bailouts, Americans want to know why the $2.5 trillion that's sloshing around this year in American health care shouldn't be spent more efficiently first before you go to talking about hundreds of billions of dollars of new taxes in order to fund health care reform.

So what I want to ask you about are three significant cost savers for either individuals or government that you can get out of the $2.5 trillion that's being spent today.

The first is insurance market reform. The system is broken. It's all about cherry-picking and just taking healthy people, sending sick people over to government programs more fragile than they are. The people who are really getting clobbered are the 17 million in the individual insurance market. We've got to find a way to get them into bigger groups, so they have some clout. That's cost saver number one out of the 2.5 trillion (dollars).

The second big cost saver involves these tax rules. They're the third-biggest program in American government today. They're regressive. Making them progressive will help our people now, and it uses existing money.

The third involves personal responsibility. Over 10 million people in this country with incomes over $60,000 a year are uninsured, and it seems to me there ought to be some personal responsibility, rather than just having all these inappropriate emergency room visits.

So my question to you is, you've talked about everything on the table. If we can get those three significant cost savers for individuals or for government in a Baucus-Grassley bipartisan health reform package, are you going to object?

MR. ORSZAG: Again, at this point, I think everything, including those three, most firmly, should remain on the table.

SEN. WYDEN: What else should we be doing to get them off the table and into the bill? Because I think --

MR. ORSZAG: (Chuckles.) That's up to you.

SEN. WYDEN: (Off mike) -- they're in Senator Baucus's white paper. They're ones that have bipartisan support. We have senators of both political parties in favor of them. And I think what the country wants to see is getting these savings out of the system today first, before you start talking about new money, particularly new money that comes from taxes unrelated to health care. So what else can you say about getting savings out of the system first, before you go to new money?

MR. ORSZAG: Well, let me again say there are significant savings to be had. The Dartmouth College numbers perhaps are the most dramatic example of the opportunity. But in general capturing at least part of those savings or, you know, all of them or some of them is going to take some time.

We talked before about the practice variation that exists across regions, across hospitals, across doctors. It's not going to change like that.

SEN. WYDEN: But that's why the savings that I pointed out are savings you can get, next year, if we get them in legislation that has White House support. I'm not going to prolong this. But I hope that you're going to support those three major cost-savers, for individuals and government, because you get those savings quickly.

You help the American people. And it's not going to be credible to go on out and ask for hundreds of billions of dollars more, without first showing or getting the savings that are in the system.

The second area I want to ask you about quickly is the employer- based system. The White House to its credit has said it wants people to be able to keep the coverage they have, while helping to promote portability, which I think is absolutely key.

The typical worker changes their job now 11 times by the time they're 40. And with all these layoffs, it's becoming even more important. How would you envision people being able to keep the coverage they have while making coverage, health coverage in this country, more portable?

MR. ORSZAG: Well, there are lots of different approaches for doing that. I know that you and Mr. Bennett have an approach that would accomplish that. The chairman in the white paper has another -- (approach) -- about employer-sponsored insurance is, there's often a concern about crowding out.

That is, as you add other insurance options, do employers drop or scale back their offering? If you look at the Massachusetts experience, instead of crowding out, there was actually crowding in.

That is to say, employer-sponsored insurance actually went up after Massachusetts reformed its system, which would be the opposite of what you would predict. And I think the reason is, workers went to their firms and said, you know what; I really think we'd like health insurance through you. And more health insurance was delivered through employers as a result.

SEN. WYDEN: Thank you.

SEN. BAUCUS: Thank you, Senator.

Senator Roberts.

Are you going to ask about OT?

SENATOR PAT ROBERTS (R-KS): I beg your pardon, sir.

SEN. BAUCUS: Are you going to ask about OT?

SEN. ROBERTS: No. That was the trade representative.

SEN. BAUCUS: Oh, that's his question.

SEN. ROBERTS: That was Secretary Kirk, who I wished to ask if the trade of OT to Buffalo was a wise one, on behalf of our trade interest in the United States. But that's -- obviously from the response from the public, they don't know what the hell I'm talking about. (Laughter.)

SEN. BAUCUS: This is a health care group.

SEN. ROBERTS: Please don't take this out of my time. This was your question. (Laughter.)

SEN. BAUCUS: The clock hasn't even started.

SEN. ROBERTS: Put it back on five. There we go. (Laughter.)

SEN. BAUCUS: We're on five.

SEN. ROBERTS: Peter, thank you very much for coming. Thank you for the job that you do. I have one question. The answer is yes. (Laughter.)

According to the president's budget proposal, there appears to be support efforts to allow Americans to buy drugs from other countries. You know all about that. Tremendous, populist move in the Congress; I understand that. But last year, contaminated blood thinner from China caused hundreds of Americans to have allergic reactions and some deaths.

World Health Organization noted that drug counterfeiting is now a $32-billion a year business and growing rapidly. As the former chairman of the Senate Intelligence Committee, Senator Rockefeller probably shares the same concern. This is very concerning for me. If any one country wanted to launch a particular attack, in a particular area, this would be a wonderful way to do it.

Would you agree that before we move forward with any proposal, to allow Americans to buy drugs from other countries, we certainly also must demonstrate that we can do so safely, without increasing the chances that Americans may get a contaminated or potentially dangerous or counterfeit medication?

Would you also agree that if such a proposal were to move forward, we should demand that any drug imported into the U.S. meet the same high safety and efficacy standards of our FDA, including bioequivalency standards?

MR. ORSZAG: Yes.

SEN. ROBERTS: Thank you. (Laughter.)

I'm going --

MR. ORSZAG: Obviously there are different ways of --

SEN. ROBERTS: Yes. I understand that. I understand that. And I just want to say that I hope that Congress stays involved.

Senator Rockefeller wants to turn it over to a different group that hopefully would shine the light of truth into competitive darkness, but if it wasn't for this committee putting off for 18 months some of the Lizzie Borden cuts that CMS was making on virtually every provider in the health care providing world, it seems to me we would have had a much bigger problem of rationing health care and people dropping off the Medicare rolls because the medical profession simply wouldn't do that.

I have heard that in April the administration is likely to spell out the fact that they intend to give CMS least costly alternative authority -- the acronym for that now is LCA; it's a brand-new acronym -- which would essentially give CMS the ability to pay only for the least costly alternative product within a specific product category. CMS has done this with durable medical equipment for years, but when they tried to do it with drugs they were sued and they lost a court decision. I am told reliably that the administration intends to give them clear LCA authority.

And you can see how they might use this, basically deciding that a group of drugs or two drugs are similar and should be paid the same or they should only pay for the cheaper one. It gives CMS the authority to be the arbiter of clinical value, even though they have absolutely no expertise to make these kinds of judgments.

The interplay between comparative effectiveness research -- everybody on the committee ought to understand comparative effectiveness research. That's the golden ring; that's the tablet coming down from Mount CMS. And best costly -- and the least costly alternative authority is obvious. A CER study can say that one product is better than another, then CMS can invoke LCA authority to make the reimbursement decisions. Won't this lead to continuing rationing of health care? How can we ensure that care and not cost is the only overriding factor in comparative effective research?

How will CMS and FDA coordinate their efforts? I'm very concerned about CMS replacing the FDA, who conducts some of the most rigorous clinical trials in the world, as the primary gatekeeper for medical drugs and devices.

MR. ORSZAG: Well, let me comment on that final question first. One of the difficulties in the current system is the FDA testing is solely about safety and not about relative effectiveness compared to alternatives. So for -- (audio break) -- it is good to know that drug A is safe relative to a placebo. It would be better to know how much more effective drug A was compared to drug B and especially how much more effective drug A was relative to other interventions like surgery or this or that. We do very little of that kind of comparison and that's one of the things that comparative effectiveness research is intended to pursue.

SEN. ROBERTS: Well, Peter, I understand that -- (audio break) -- practices.

MR. ORSZAG: Right.

SEN. ROBERTS: You know, and you're going to have a design coming out from comparative research, the golden ring, and CMS and issuing out to all of the doctors and all of the home health care -- pardon me -- all of the health care providers that they do this. But how can you really know this? Aren't all patients different? There may be a situation where one doctor knows one patient. They tried a particular drug or a particular procedure that didn't fit in the better practices situation. It takes away that decision from the patient and doctor.

In addition, if you do do the reimbursements in the way that I think they're going to be coming down, you're going to have the providers -- many providers simply opting out. And that's what's been happening out in our rural areas. That's what your map shows, that basically you have -- (audio break).

MR. ORSZAG: (Audio break) -- obviously there has to be individual variation and idiosyncratic and sort of a one-on-one relationship with your doctor. But for me as a patient, I would like my doctor to have better information about what might help a middle- aged marathon-running male than he currently has.

And so one of the goals here is to expand the information base so that your doctor and your hospital have the information that -- it may not be perfect, but it's better than it currently exists, because we only -- we often lack information about what works and what doesn't. I mean, a great example is prostrate cancer. And there are huge -- hugely different treatments.

SEN. ROBERTS: Right.

MR. ORSZAG: And we don't know which ones work better. But, I'm sorry, yes.

SEN. ROBERTS: How about a middle-aged, non-marathon-running male? (Laughter.) Or a more mature -- (laughter). Do you get the drift?

MR. ORSZAG: That's -- that's exactly the point.

SEN. ROBERTS: You know, the chairman has a bill on this. And he will emphasize health care, as well as costs and the Lizzie Borden tactics by CMS. Pardon my bias.

SEN. BAUCUS: Senator Stabenow.

SEN. DEBBIE STABENOW (D-MI): Thank you, Mr. Chairman.

And Dr. Orszag, it's always wonderful to see you here. I appreciate your efforts in understanding of health care, and also your advocacy around health information technology, which I believe, as you know, is a critical part of this, as you have indicated.

First, let me just say broadly, I think when we talk about how do we get our arms around all of this in terms of health care, what makes this different than other areas of insurance is that you can choose not to get car insurance and not to have an automobile; you can choose not to have home insurance and not to buy a house. You can't choose not to get sick. And so whether you have health insurance or not, you will get sick anyway.

And so it creates a different dimension that makes it, I think, difficult also to apply a strictly private-sector model to this, when you look at the fact that our choices as human beings don't include getting older, getting sick and so on. So it changes the dynamics for us.

On evidence-based practice, one area I just wanted to raise that we really have already started doing is in the area of e-prescribing. And under the chairman's leadership, our work on the Medicare bill with e-prescribing goes, I believe, to more evidence-based practice.

We have over 2,500 physicians in southeastern Michigan who've been doing a pilot, even before this, working with General Motors and the UAW and Blue Cross and so on, for e-prescribing, that has allowed them to get evidence. They, through the software package, receive information. When they choose to -- or decide to give someone a prescription, they see what else they're on. The program brings up whether or not there's allergic reactions between medicines, whether or not there's some other counterindication. And the project in southeastern Michigan has shown that 30 percent of the time, based on evidence, based on information, the physician has actually changed the prescription. So that's just one example, I think, in a narrow sense, of how we can make a difference, save money, save lives.

On prescription drugs, I want to commend you for talking about better access to generic drugs, and the savings that come from there. And I wondered if you might speak more to that. We have multiple agencies -- HHS, FDA, FTC -- dealing with a number of anti- competitiveness agreements between brand-name and generic companies. I'm wondering if you have -- to what extent you have undertaken analysis up to this point on how much money would be saved, looking at a number of areas -- whether it's authorized generics, what FDA is doing, FTC and so on -- to really fully calculate what we might save as it relates to more competition through using generic drugs.

MR. ORSZAG: Well, as one example, we do have almost $20 billion in this health reserve fund that comes from more cost-effective delivery of pharmaceuticals. So that's a -- obviously a significant part of the overall effort to get more -- to capture that -- the efficiencies in our health system.

SEN. STABENOW: And have you made any determines in -- terminations (sic) in terms of specific legislation that the administration will be supporting around any of the issues on generic drugs in order to get biologics to the marketplace, dealing with authorized generics or closing loopholes as it relates to bringing generic drugs onto the marketplace?

MR. ORSZAG: Yes. And, in fact, as part of the reserve fund, we have a proposal for a follow-on biologic pathway to get approval, which we could discuss in more detail if you'd like.

SEN. STABENOW: Okay.

MR. ORSZAG: But it is included in the package.

SEN. STABENOW: Thank you. And finally, I wonder if you might just speak for a moment on the question to which -- when we look at international competitiveness, or lack of competitiveness, having a number of global businesses in Michigan that provide health insurance to millions of people, and seeing the lack of competitiveness, the loss of jobs that result from the inability to have a level playing field because we fund health care differently than other countries -- we spend twice as much as they do and so on -- could you speak at all to that as part of the economic challenge?

MR. ORSZAG: Yeah, absolutely. Health-care costs, again, are eating into workers' paychecks to a much greater degree here than abroad. And that is one of the forces that is weighing down on American families. I'm going to come back again: That $700-billion opportunity, even if you think it -- the Dartmouth College estimates are too high by a factor of two, so let's say it's only $350 billion -- that's a $350-billion drag on our economy that is not improving health outcomes.

SEN. BAUCUS: Senator Nelson.

SEN. STABENOW: Thank you.

SEN. BAUCUS: Thank you, Senator.

SEN. BILL NELSON (D-FL): Thank you, Mr. Chairman. I would like to enter some remarks in the record and some questions for the record, Mr. Chairman.

SEN. BAUCUS: Absolutely.

SEN. NELSON: Dr. Orszag, I am curious where your proposal -- one specific that you do mention is that you want to have the discount for Medicaid drugs increased from 15 to 22 percent. Now, that saves money. Why would you not want to have a similar discount for the purchase of drugs for the Medicare system? Not necessarily the same percentage.

MR. ORSZAG: First, with regard to the Medicaid proposal, yes, we are proposing a movement from 15 to 22 percent of the average manufacturer's price. And we also have some other changes, applying the discounts to managed-care organizations within Medicaid.

With regard to Medicare, one of the things that perhaps could be discussed as part of overall health reform are changes to the prescription-drug program as part of Medicare. We did not put forward a similar proposal for Medicare, at this point, but I know that there is interest in that topic, and that's one of the things that we're -- we will be leaving on the table as we go forward.

We were clear that this -- that the reform package that we put together was a down payment, but not the full deal, in terms of health reform, and that more effort would be necessary.

SEN. NELSON: Okay.

MR. ORSZAG: So we're eager for other people to come forward with their ideas, and I know that's one that many people have put forward.

SEN. NELSON: Well, what is your opinion that negotiations toward a discount in Medicare under Part D could achieve savings?

MR. ORSZAG: Well, it would depend on how it was done. If all that occurred was that authority was given to the secretary to negotiate, that would -- the impact would depend on how aggressive the secretary was in negotiations, and the secretary may not have as much leverage as one would like.

If, instead, an approach like -- as is embodied in the Medicaid program was adopted, that would have more teeth to it, but the consequences in terms of the pharmaceutical market would also be more significant. So there are obviously different ways of doing it and trade-offs across the different options.

SEN. BILL NELSON One, as you point out, is negotiations. Another is putting a discount into law. Well, on the issue of negotiations, what has been the experience of lowering the cost of drugs over the past couple of decades in the veterans department?

MR. ORSZAG: The Veterans Administration has done a good job of obtaining pharmaceuticals in a cost-effective way. Now, that's for a few reasons. One is that they have access to the government's best- price system, as does Medicaid. And secondly, that they have a formulary, so that they do guide beneficiaries towards particular drugs and away from others, which helps them then negotiate better prices with the manufacturers.

SEN. BILL NELSON: Do most private health insurance plans have a formulary?

MR. ORSZAG: Yes, sir.

SEN. BILL NELSON: The one thing that you did include, another specific recommendation in saying money, is to support efforts to buy drugs from other countries. Now, I have been -- this particular senator, because we have so many folks that buy drugs, in my state, from Canada -- have been involved in this. I'm curious as to what you think your savings would be with regard to the purchasing from other countries.

MR. ORSZAG: What the budget includes is some money to begin the planning process for doing that, coming back to what I discussed with Senator Roberts. Obviously, it needs to be done in a way that protects the safety of Americans. I think the evidence suggests that there are ways of doing that. But the savings will depend on exactly how it's done, and this is the beginning of the process rather than the end.

SEN. BILL NELSON: Okay. So this is just saying you would like to discuss that. You don't have a specific idea of savings?

MR. ORSZAG: Correct. And more than just discuss it; that we think it is a good idea and that we will be pursuing that path and we have funding to begin the process of fleshing out exactly how it could be done.

SEN. BILL NELSON: Thank you, Mr. Chairman.

SEN. BAUCUS: Thank you, Chairman.

Senator Kyl earlier said to me that he would very much like to be here but he has to tend to another meeting and will have questions for the record.

After Senator Kyl, next is Senator Schumer.

SEN. CHARLES SCHUMER (D-NY): Thank you, Mr. Chairman. Thank you, Director Orszag.

I'd like to follow up -- Senator Stabenow, my colleague, was beginning to ask about biologics, biogenerics, and I'd like to follow up on that. It's an issue I've been active in for a while. It's a major priority.

Now, your folks estimated that the savings was $9.2 billion over 10 years. Most of the -- and that was -- most people seemed to think that was a bit low, that there would be more savings than that, more than a little less than a billion a year. Could you discuss those assumptions?

MR. ORSZAG: Sure. The cost savings depend sensitively on not only the flow of biologic drugs and when they're coming off patent and what have you, but also things like the period of exclusivity. That --

SEN. SCHUMER: How much did you assume?

MR. ORSZAG: Seven years.

SEN. SCHUMER: Seven.

MR. ORSZAG: So one possibility is, one could adjust that. You could tighten up on collateral settlements. There are a variety of other behaviors that affect cost savings that could be explored if you wanted to dial that up.

But again, I want to just come back and say we went through a policy process, we thought this was the best balancing of competing interests, and that's why it's included in the package in the form that you see.

SEN. SCHUMER: Mm-hmm. Right now, of course, there's no generic competition. And so the biotech companies, understandably, price their drugs -- that assumes no competition. And -- which means, you know, basically an economist would tell you they charge monopoly prices indefinitely.

That's why I thought maybe your estimates were too high. Did you assume the price -- not just the price --

MR. ORSZAG: But -- too high or too low? Sorry.

SEN. SCHUMER: Hm?

MR. ORSZAG: That our estimates were too high or too low?

SEN. SCHUMER: Too low in terms of savings.

MR. ORSZAG: Okay. Right. Yeah.

SEN. SCHUMER: Too high in terms of how much they would charge.

I mean, again -- (off mike) -- seven-year exclusivity and only 9.2 billion (dollars) -- that's about the most conservative estimate I've had. Did you assume that the price of most biologics would come down?

MR. ORSZAG: Yes, and I'm sure we can get you more detailed information about the assumptions. But the evidence from the simple molecule market, where there already is generic competition, does suggest that as drugs come off patent, prices come down significantly.

SEN. SCHUMER: Right. Except the simple generic market -- they know that's going to happen, and so they price it differently to try to preserve more market share and things like that.

MR. ORSZAG: Correct.

SEN. SCHUMER: I don't think that happens, and I also don't believe you need a very long exclusivity period.

Now let's say we did it three or four years, just to pick a number. How much more would the government save?

MR. ORSZAG: I don't have a specific figure. I'm sure we could provide estimates --

SEN. SCHUMER: Would it about double, approximately?

MR. ORSZAG: I don't --

SEN. SCHUMER: I'm not asking you to --

MR. ORSZAG: I don't -- it's very -- it's not necessarily linear or easy to figure out, because it will depend on the flow of the current stock of biologics and when they're coming off patent and what have you.

SEN. SCHUMER: Right. And how about this: Will the requirement for the FDA to publish guidance before a biogeneric can be improved significantly impact savings?

MR. ORSZAG: Yeah. One of the issues is the sort of evergreening process --

SEN. SCHUMER: Yes.

MR. ORSZAG: -- of reinventing the drug by slight modifications. So there are regulatory things that could constrain that and add to savings.

SEN. SCHUMER: Mm-hmm. And how about this one: A requirement for biogenerics to have different names than the reference product -- how does that impact savings? It makes therapeutic interchange more difficult, let alone interchangeability, right?

MR. ORSZAG: That is correct.

SEN. SCHUMER: So all of these things, if they were put in the bill, would cut back on our savings, if they were put in the law.

MR. ORSZAG: Would increase.

SEN. SCHUMER: Yeah, would increase our savings, cut back on the price.

MR. ORSZAG: Yeah. Correct. Correct.

SEN. SCHUMER: Okay. My point here is that this is an area where there's bipartisan agreement in some of these. We had that last year. We're about to get that this year.

And I would just urge all my colleagues, but the administration as well, to get as strong a biologic bill as possible, not only from the point of view of the consumer, which is the number one reason. Generics have saved us probably more money -- the consumer more money and the government more money than just about any other medical change or advance -- and we do the same as biologics. Can we have your cooperation in trying to get as strong a bill as possible?

MR. ORSZAG: Absolutely. And let me just say, I mean, the reason we put forward what we did -- there obviously are trade-offs. I know you're aware of this.

SEN. SCHUMER: Go ahead.

MR. ORSZAG: One needs to balance the savings that you get against the incentives for the biologic drugs in the first place. And that's the balancing act reflected in our proposal. But clearly other people may have alternatives.

SEN. SCHUMER: Yeah. And these companies are very, very profitable under present law. We know that.

SEN. BAUCUS: Senator Bunning.

SEN. JIM BUNNING (R-KY): Thank you, Mr. Chairman.

Since 630 billion (dollars) is the down payment for health care reform, how much more will you need?

MR. ORSZAG: That will depend on the structure of benefits and coverage. There are different plans out there, and I can't give you a precise estimate because the plans vary. It depends what is done. But under any -- under any of the proposals that are out there, whether it's the chairman's or the plan that the president spoke about in the campaign or others that are floating around, it's clear this is a very substantial down payment.

SEN. BUNNING: Substantial?

MR. ORSZAG: Correct.

SEN. BUNNING: In other words, half?

MR. ORSZAG: I guess I don't want to sort of get in this game of --

SEN. BUNNING: You don't want to guess.

MR. ORSZAG: Right.

SEN. BUNNING: Okay. One of your suggested changes to Medicare is changing the way post-acute care is paid for. The budget suggests providing hospitals with a bundled payment for a patient's hospital- based care and also any post-acute care they may need, like a rehab hospital or a long-term care hospital.

Can you give us more details about this? One, does a bundled payment mean that some of CMS current payment policies like the 75 percent rule for rehab hospitals still apply if hospitals get a bundled payment?

MR. ORSZAG: I'm told, again, the motivation here is to provide a more efficient system. And that level of detail has not been determined. We'd have to work with you as legislation is written.

SEN. BUNNING: Neither one of those two things have got any details? Neither the bundled payment or the 75 percent rule? You haven't got any details on either one?

MR. ORSZAG: No -- wait, so on the 75 percent rule, you mean with regard to readmission rates?

SEN. BUNNING: No. I'm talking about payment -- bundled payments.

MR. ORSZAG: Right. That was a detail that we will need to work with you on as legislation is drafted.

SEN. BUNNING: You have a cost saving in your budget document of almost 18 billion (dollars) for bundled payments for hospitals. You have to have some detail of how much you came up with to get that to that number.

MR. ORSZAG: That is correct. And again, we have a broad policy -- in any policy proposal that you put forward, there's always going to be a superstructure and then there will be details. I am being told by the professional staff that we do not have a definitive answer to the 75 percent rule. And I am assuming, therefore, that it doesn't have a substantial effect on the score.

SEN. BUNNING: In other words, the 18 billion (dollars) that you're saving?

MR. ORSZAG: Hold on a second. (Confers with staff off mike.) Again, I'm being told that that is a degree of technical detail and interaction that is not --

SEN. BUNNING: Every year you do it in your budget document, every year. So you've got some experience that you're dealing with. This isn't a guess.

MR. ORSZAG: That is correct. And one of the things that happens during a transition year is we have eight weeks to put together a document that normally takes eight months. In April there will be the full thing that you don't want to drop on your foot and there will be more details provided at that point.

I apologize, but I am being told that at this stage we don't have that degree about the --

SEN. BUNNING: You can't answer the question.

MR. ORSZAG: I'm sorry?

SEN. BUNNING: You can't answer the question.

MR. ORSZAG: At this point, I cannot answer the question, sir.

SEN. BUNNING: Okay. I have been very supportive of Medicare Advantage over the years because it gives the seniors in my state options for coverage. In 120 counties in Kentucky, only 20 counties are covered by other than Medicare Advantage. So I have a hundred counties that Medicare Advantage is the only Medicare that we can get.

In old Medicare Plus Choice program, the vast majority of counties in Kentucky didn't have a managed care option under Medicare. These seniors could only use fee-for-service Medicare.

Your budget has proposed using competitive bidding in Medicare Advantage. What assurances can you give me that should Congress change Medicare Advantage like you have suggested, beneficiaries in rural areas will have managed care options under Medicare?

MR. ORSZAG: Well, the whole theory of the case behind competitive bidding is that if running a managed care or a Medicare Advantage plan is more expensive in rural areas than in urban areas, that will be reflected in the bids.

SEN. BUNNING: So Medicare Advantage will still be --

MR. ORSZAG: Yeah, this is not moving just to a hundred percent of local fee-for-service. There's going to be variation --

SEN. BUNNING: I would love to be -- have the options in those hundred counties of something other than Medicare Advantage, but that's the only option these people have --

MR. ORSZAG: I think --

SEN. BUNNING: -- fee-for-service or the Medicare Advantage.

MR. ORSZAG: Okay. Right. Yeah, they -- fee-for-service is still available.

SEN. BUNNING: Oh yes.

MR. ORSZAG: And Medicare Advantage, under this competitive bidding --

SEN. BUNNING: But you know fee-for-service and Medicare Advantage, there's quite a difference.

MR. ORSZAG: Yes, sir.

SEN. BUNNING: Okay. I have 15 seconds. Your budget recommends -- increases Medicare drug rebate from 15 to 22 percent --

MR. ORSZAG: Correct.

SEN. BUNNING: -- in a time when many drugs and biotech companies are facing tough economic times. What is your justification for increasing the rebate?

MR. ORSZAG: A couple things, sir. First, again, as was mentioned before --

SEN. BUNNING: I heard.

MR. ORSZAG: Okay. Pharmaceutical costs are one of the most rapidly rising parts of the health care system. Medicaid already has this rebate and we believe that more efficiencies are possible, which is why we proposed an increase.

SEN. BUNNING: So we'll have to wait till we see what the final plan, then.

MR. ORSZAG: No, there it's very clear we're increasing the rebate from 15 percent of average manufacturer price to 22 percent.

SEN. BUNNING: Thank you, Mr. Chairman.

SEN. BAUCUS: Thank you.

Senator Enzi, you're next.

SEN. MIKE ENZI (R-WY): Thank you, Mr. Chairman.

I had some other questions, but I want to go back to something that you were discussing with Senator Nelson, and that's the veterans competitive bidding. Maybe it was -- from your explanation -- maybe it was comparative effectiveness, because you said that you were trying to channel people into specific drugs. Doesn't it more than channel people into specific drugs?

When we were doing Medicare Part D I was -- I was interested in having as many people in Wyoming sign up for it as possible, so I did a whole series of town meetings around senior citizens' homes. And invariably at those I'd have somebody that would show up and they'd be really upset and they'd say, "Under this, I can't get the drugs I want." And all I had to say was, "You're a veteran, aren't you?" They'd say, "Yes. How did you know?" I'd say, "Well, the veterans does this competitive bidding process that eliminates things from the formulary. If you change to Medicare Part D, you can get those."

So isn't this bidding process an elimination of some of the potential drugs that people can have?

MR. ORSZAG: The way formularies work both in VA and in many private health plans is that there are a set of preferred drugs that are on the formulary. Non-preferred drugs are either not covered at all or the beneficiary has to pay more for them. And that's the way formularies work.

SEN. ENZI: Yeah. But it excludes veterans from getting what they want to have. But they can get it under Part D.

Nationwide, I'm finding that people are not realizing what anything less than a half a trillion dollars is. That's just change. Even in Wyoming, I was disturbed to find that because of the emphasis that we placed on health care reform -- and I'm glad that we're placing that emphasis on health care reform -- I have a significant number of people that think it's all going to be free -- free not just to the poor but free to the middle class as well.

That's an impression that we're giving out there. And part of it is this 634 billion (dollar) reserve fund that we have that is in the budget. And again, that gets above the level of change because that's more than half a trillion dollars. And then we say that it's just a down payment. That'll probably help on that impression out there.

But how did you come up with that exact number of 634 billion (dollars)? I assume it's from the chart that you have -- I think it's on page 15 -- that actually shows 633.8 billion (dollars).

MR. ORSZAG: Yes. We rounded.

SEN. ENZI: And as -- accountants like those exact numbers. You rounded; I wish you would have rounded to 700 or 800 or 500 (billion dollars) or --

MR. ORSZAG: Actually, on page 128, it is shown as 633.759 (billion dollars). There you go.

SEN. ENZI: (Laughs.) I hope the calculations can be that exact where -- it is kind of a guesstimate, isn't it?

MR. ORSZAG: Well, I guess there are two different questions. One is, why roughly that level? And again, that was a judgment call that that was a very substantial down payment relative to any of the plans that are out there. Should it have been 615 or 645 (billion dollars)? I'll -- you know, obviously, there's variation that's possible. And I guess I'll leave --

SEN. ENZI: I understand the difference between the budgeting and using all the decimal places and everything, but in the statements that we're making to the public, when we use something as exact as 634, they think that there's a -- an exact proposal out there that will do something already. And I would suspect that some of my colleagues think that too. That isn't the case, is it?

MR. ORSZAG: Well, there is -- there are proposals that will generate $634 billion to be devoted to health reform. The question then becomes, how is -- how are those resources used to expand benefits, coverage and other aspects of the health-care system?

So -- there is a lot of specificity, like in Table (S-6 ?), about where the $634 billion comes from. What we're trying to work with the committee and others on is where it then goes.

SEN. ENZI: Okay. I'm going to shift gears here, because I met with a number of people -- I've been working on health IT probably since I got here, but more specifically with Senator Kennedy over the last four years. And we've had a bill that even passed the Senate unanimously.

Our focus on that bill was to get interoperability, and we have improved interoperability. I've been talking to the software manufacturers across the country, and they're been -- they've been real pleased with the process on getting the interoperability. They see that as the biggest challenge.

Now, they -- we -- in the stimulus we had $19 billion. I'm interested in how we're distributing that $19 billion. But I was a little distressed, because from talking to them they said, "No, if we can get the interoperability, the money'll be there." How are we distributing that 19 billion (dollars) at this -- at this point?

MR. ORSZAG: There are a variety of mechanisms. And the 19 billion (dollars) actually includes both mandatory and discretionary spending. It's likely to involve significant reliance on state governments. I would, though, note that it's not just interoperability that's a concern. I think security and privacy is also a significant concern. And actually, there are ways of doing, as you know, health information technology that not only protects privacy but actually dials it up. Because with paper records, I have no idea who's accessing them --

SEN. ENZI: I understand that, because we just passed a bill --

MR. ORSZAG: Right. I know.

SEN. ENZI: -- where the security is so good, people won't be able to look at their own records, let alone have their doctor look at them.

MR. ORSZAG: (Laughs.)

SEN. ENZI: I know my time is expired. I'd like to submit some questions.

SEN. BAUCUS: You bet. They'll be submitted.

Senator Cantwell?

SEN. ENZI: Thank you.

SEN. BAUCUS: Thank you, Senator.

Senator Cantwell?

SEN. MARIA CANTWELL (D-WA): Thank you, Mr. Chairman. And Dr. Orszag, good to see you. Yesterday I think I had one minute to ask three questions of Ron Kirk, so the fact that I get five minutes to cover four topics here I appreciate.

MR. ORSZAG: Okay.

SEN. CANTWELL: But if you could help me get through those four --

MR. ORSZAG: Sure.

SEN. CANTWELL: -- and just get some general comments on them, I'd appreciate it.

My whole framework is really about the efficiency that we see in Washington State. And as we look at reforms nationally, I'm trying to understand how we will be affected and what we can do in carrying some of those out.

So your thoughts in general about -- because we have a low- utilization, high-outcome state.

MR. ORSZAG: You look good on this map.

SEN. CANTWELL: Yes.

So what can we do to further advance the medical home and coordination, in this system of reform you're talking about?

Secondly your thoughts on long-term care to promote efficiency. We radically changed our system, in the '90s, so that we were focusing more on home-based care. And I think it's like, you say, it's two- thirds more expensive to put those Medicaid patients in a nursing home than it is to focus on community-based care. So we've covered more people, kept the cost down. So I want to know what your budget reforms look like, in promoting efficiency in that manner.

And I just want one more reiteration on the Medicare Advantage, the low fee for service-cost states, that you're going to make sure that those areas are protected, that we're not going to lose that opportunity. And then I'll come back after you.

MR. ORSZAG: Sure.

So in reverse order, first, on Medicare Advantage, there will be much different effects, from the competitive bidding process that we've put in place, across different regions, than simply going 100 percent of local fee per service in different areas. So the whole goal of competitive bidding is to reflect the cost of private providers, for providing that coverage in different areas.

With regard to long-term care, clearly a significant issue, especially for Medicaid but not just for Medicaid; for family members and what have you. One of the things that will need to be addressed, and I know the Finance Committee's white paper highlighted, is long- term care costs as part of overall health reform.

And then finally with regard to coordinated care, we had an earlier discussion, and there are still a few details to be ironed out. But one of the motivations behind bundling post-acute care and hospital payments is precisely to provide more coordinated care. One of the motivations, behind the bonus-eligible organization proposal that we have, is to better coordinate care.

I think the evidence from the Institute of Medicine and elsewhere is that more integrated systems, where there's more care coordination, are more efficient. And that should be --

SEN. CANTWELL: But you think we'd see an evening out across the country then, so not the disparity between various states.

MR. ORSZAG: One of the ways in which we could narrow the differences is through more care coordination. It's not the only way. And even in more fragmented systems, I think, there are ways of moving practice norms towards more efficient outcomes.

But the evidence is pretty strong that the more integrated health systems do better, on the combination of lower cost and better quality, than fragmented systems.

SEN. CANTWELL: Okay.

And if I could, on a different subject, but it is about health in general, the health of our economy, I saw press reports this morning that the administration might be delaying, for five years, the procurement of a tanker air fueling system.

And if that's correct, and you're thinking about delaying it, will you do a cost-benefit analysis on the cost of delay versus build? Because the maintenance cost of those planes are costing us a lot of money. And I think that would give us a better idea of the choices that we might face there.

MR. ORSZAG: Let me be very clear, because I saw those press reports also. Decisions about the tanker or frankly other procurement decisions are going to be made by the Defense Department and in this case by the Air Force and the Defense Department.

And the tone of some of those press reports, with regard to the role of OMB, for example, are off not only with regard to the stage of the process at which we're at but frankly the role of OMB period.

SEN. CANTWELL: But do you think it would be wise to do a cost- benefit analysis, if that was the proposal by DOD?

MR. ORSZAG: I'm going to defer to Secretary Gates in terms of the decision-making process. But presumably in deciding what to do, with the tanker and other procurement decisions, one is evaluating the costs and benefits of different approaches.

SEN. CANTWELL: So that would be good to do in general.

MR. ORSZAG: Again I'm going to defer to Secretary Gates.

SEN. CANTWELL: Okay.

Thank you, Mr. Chairman.

SEN. BAUCUS: Thank you, Senator, very much.

Senator Snowe.

SEN. OLYMPIA SNOWE (R-ME): Thank you, Mr. Chairman.

Welcome, Mr. Orszag. One of the initiatives that's being discussed has been the whole idea of reforming the employer-sponsored coverage through a uniform tax cap. The concerns have been raised -- and I certainly raised this last week with Dr. Elmendorf on this question -- that there are significant regional disparities in terms of providing care in states, you know, across this country; and whether or not a uniform tax cap could reflect, you know, those disparities in terms of higher costs in delivering health care in particular regions.

For example, in our state we have, as you have said before, low Medicaid spending, but our costs are much greater in delivering, you know, those services. There's a difference between the spending and the costs that are required in order to provide that service.

In the last administration there was a proposal of 15,000 (dollars), that certainly -- for a tax cap for employer-sponsored coverage. In Maine, for an individual family to purchase health insurance, it would cost $24,000. So it would be extremely inequitable. What are your thoughts on that? Is there a way of indexing or phasing it out at certain income levels to, you know, reflect those disparities?

Secondly, the equitable treatment for self-employed, for example, who don't -- who are denied, you know, any tax benefits as a result of providing their own health care coverage. Is there a way of assuming cost savings from including them in providing tax benefits?

MR. ORSZAG: I need to preface this again by saying the administration doesn't have a proposal in this area. It's not part of the reserve fund that we put forward.

We have noted that more will be necessary. And one of the ideas that people, other people, have put on the table is the one that you mentioned, changes in the current exclusion for health insurance. If there were changes made, there are lots of different possibilities about how it would be done.

It could be done either on the individual side or on the employer side, for example. There could be variation regionally, as you have noted; although I would point out that the tax system does not tend to differentiate, at least explicitly, in regional variation like that. So I guess I would just come back and say there are lots of different ways of doing it and, if it were put on the table as part of health reform, lots of things that would need to be worked out.

SEN. SNOWE: Do you acknowledge that there is a problem by providing a uniform tax cap?

MR. ORSZAG: One of the things that happens with any uniformity in our tax code -- and I mean, our tax code currently has, you know, a standard deduction that doesn't vary by state, even though the cost of living varies by state. So we have decided as a nation to have a uniform tax system. And there's a certain awkwardness if there are changes to the tax code to move away from that general principle, but on the other hand, as you've noted, health care costs do vary across states. Clearly the case.

SEN. SNOWE: On another subject concerning comparative practices and their effectiveness, we, as you know, put in the stimulus plan 1.3 billion (dollars). It was very limited savings.

And, you know, I asked Dr. Elmendorf last week why we could not have achieved greater savings by, you know, implementing this study that's part of the stimulus savings. He said that you have to employ the practices; you cannot just, you know, make assumptions about what savings might be achieved, you actually have to employ those practices.

Is there a way of establishing a process by which we do employ these practices so we can achieve greater savings using Medicaid and Medicare? I mean, obviously there must be a better way to discern how we can achieve the best standards, perhaps, and maybe they are less costly. There's no way of learning that at this point because there's no, you know, mechanism for doing so and having an independent evaluation.

MR. ORSZAG: Let me say three things. First -- and just assume that there is some medically established best practice that exists. How does that translate that into the actual practice of medicine? One is I think the establishment of a best practice by itself does have some effect, because doctors obviously would like to be doing the right thing.

The second is, you can create incentives for that best practice to be followed. So, for example, insurance firms can create incentives for doctors to -- you know, you get a larger payment, for example, if you follow the best practice, and a somewhat smaller payment if you don't, as an example.

And the final thing is, there can be other changes. An example is medical malpractice. A safe harbor or defense against medical malpractice suits could be, "I followed the best-practice guidelines that the Institute of Medicine and the American Medical Association" -- or whatever body puts forward guidelines -- "that I was following that."

SEN. SNOWE: Well, do you think that a center for comparative practices should be established?

MR.ORSZAG: There are different ways --

SEN. SNOWE: Different ways of doing it?

MR. ORSZAG: There are different ways of moving forward aggressively with comparative effectiveness research. And what I think is crucially important is that we do so. I know there are concerns about exactly how that center would be structured, and it's important to have medical professionals at the heart of it. But again, I think clearly, more is necessary and there are different ways of doing it. And I would hope that we could move forward on an even more aggressive approach to getting more information about what works.

SEN. SNOWE: Thank you. Thank you, Mr. Chairman.

SEN. BAUCUS: Thank you, Senator.

Senator Lincoln.

SEN. BLANCHE LINCOLN (D-AR): Thank you, Mr.Chairman.

Dr. Orszag, we're glad you're here today as OMB director, and certainly understand that there are many intricacies and opportunities and challenges in health care reform. And we're pleased to be working with you.

I'm also pleased that President Obama has recognized our need for health reform by including in his budget the Reserve Fund for Health Reform. We know that real reform means increasing access to affordability and access to health care as well as bending the growth curve, and that's what we're about. And we also know that heath care is so intricately linked with what's going on in our economy.

I had about -- well, I've gone through -- a lot of my questions have been asked, and I appreciate your response to many of those. One that I don't think has been brought up was home health. And one of the areas that's slated for cuts in the budget is home health, a freeze in the market basket payment, the case mix adjustment and the re-basing of payments, to the tune of about $37 billion.

I've been a long-time supporter of home health care as an option for seniors. I think it's cost-effective, and it's patient-preferred. And it's been my understanding and certainly witnessing that because of home care, more patients are getting rehabilitation services, they're gaining independence and they're staying out of more costly institutional care.

How has OMB assessed the impact of these cuts on access to home care, especially in rural areas, states like mine that are predominantly rural?

We're getting estimates that, you know, that 56 percent of home health agencies in my state will have a negative margin by 2010 and 73 percent have a negative margin by 2011 if the president's proposed cuts go through. I understand the need to be fiscally responsible here -- tightening our belts; we all have to do that. But is there some way we can ensure that these changes won't adversely affect patient access or that the policy won't have the opposite of intended effects with higher cost to Medicare due to beneficiaries that are going to be moving to something more costly?

MR. ORSZAG: Yes. And let me just say, again, some belt- tightening is necessary in the health system. If you look at MedPAC and other recommendations with regard to home health, while they do provide quality care, margins are also significantly higher than in other parts of the health system.

For example, free-standing home health agency margins, on average, were 16 percent from 2003 to 2007 and even this year they're projected to be as high as 12 percent. I think there are lots of businesses in the United States that would love a profit margin of 12 percent this year.

So in looking at areas where some belt-tightening is possible, we look to areas that seem to have -- or sectors of the health system that seem to have disproportionately high margins currently, and home health is one of those areas.

SEN. LINCOLN: Well, CMS did -- they made a 2-3/4 percent across the board rate reduction for home health services from -- in '08, '09 and 2010 and a reduction again projected for 2011. The provision was estimated to reduce outlays for home health by over 6 billion (dollars). That reduction is based on an allegation by CMS that case- mix weights have increased without attendant changes in patient characteristics that were referred to by CMS as case mix -- the case- mix creep that they called it.

MR. ORSZAG: Right.

SEN. LINCOLN: Did OMB take into account what CMS learned during their comment period on the rule or the impact of that '07 case-miss -- mix adjustment?

MR. ORSZAG: I believe the answer to that is yes. And one of the reasons that the budget includes another 5 1/2 percent case-mix adjustment for home health --

SEN. LINCOLN: (Laughs.) Well, good, I'm glad you're having a hard time saying it, too.

MR. ORSZAG: -- (laughs) -- case-mix adjustment -- is the evidence of that case-mix creep, if you will.

SEN. LINCOLN: All right. Well, I appreciate it. I just urge us that we proceed with caution, because it -- in terms of the long-term costs that could be -- come from other institutionalized situations, I think home health care does provide a good quality in that.

The chronic care coordination that you all have talked about a little bit -- you've talked a little bit, but can you kind of discuss the leap that CBO has to make to determine the impact of avoiding high cost of hospital readmissions, medical error, patient noncompliance, other -- duplicate of services that's currently prevalent in our health care system? How hard is it for you to show that something has been prevented from happening, which is I guess what that does?

MR. ORSZAG: Well, it is difficult, but I want to again just come back. If you look at readmission rates, for example, they're too high -- 18 percent of Medicare beneficiaries being readmitted within 30 days when many of those readmissions could be avoided. My view is it makes sense to create stronger incentives for hospitals to avoid those readmissions and also to build out the information infrastructure so that hospitals have more information about what works to avoid those readmissions in the first place.

SEN. LINCOLN: Well, one of the things on chronic care coordination that we've offered up in the bill that I've been working on for several years is that we would target -- first target the subset of Medicare beneficiaries that are likely to benefit most from coordination of care so that -- those that are more likely to be in that readmission or other things because they have multiple chronic diseases that they're dealing with, that chronic care makes better sense for those folks.

So, I don't know, something we -- I hope we'll look at in terms of cost savings.

SEN. BAUCUS: Senator Kyl, you're next.

Senator Kyl.

SEN. LINCOLN: Thank you.

SEN. BAUCUS: Thank you. Thank you, Senator.

SEN. JON KYL (R-AZ): Thank you, Mr. Chairman.

Mr. Orszag, you seemed very well prepared to answer the chairman's first question about the cost of doing nothing. You've been around a long time. Can you name a member of the House or Senate who you know has advocated doing nothing in this area?

MR. ORSZAG: No, which is why I think we're going to get health reform done this year.

SEN. KYL: Thank you.

On your comment that the medical profession shouldn't be penalized for being more efficient, I think we would all agree with that. Wouldn't it logically follow that one of the first efforts that we should engage in to make sure that they aren't penalized from being efficient is to adopt serious, meaningful tort reform to preclude the medical profession from having to engage in the defensive practice of medicine?

MR. ORSZAG: What I would come back and say again is many health care professionals and doctors in particular point to the medical malpractice system as a problem. I think there are various ways of reforming it. One of the steps that would be beneficial in having more information about what works is a physician could -- the defense could be instead of "I'm doing what the guy down the hallways did" -- defense of medicine -- could be "I'm following what, again, the Institute of Medicine or the American Medical Association or what have you suggested was the right way forward." So there could be a much stronger safe harbor for best practice guidelines within the medical malpractice system.

SEN. KYL: Since that seems to be such a central point, I find it odd that it hasn't been noted in any of the presentations. And I realize we don't have the full written budget of the administration, but do you think that it's a significant enough factor that it ought to be included?

MR. ORSZAG: I think it's inevitable as part of health reform that medical malpractice will be examined. I would note that -- and I used to give a "yes no yes" answer to this question, but there are -- there are significant differences of opinion between doctors and academic researchers about the impact of medical malpractice laws both on the variation in cost across the United States and about cost increases.

SEN. KYL: Well, do you have an opinion yourself as to whether or not medical malpractice reform should be part of our solutions here to, as you say, ensure that physicians are not penalized for engaging in efficient practice?

MR. ORSZAG: I'm not allowed to have personal opinions anymore. (Laughter.)

SEN. KYL: Much has been made of the comparative research funding in the budget. And the concern that Senator Grassley expressed and I'm sure you've heard from others is, of course, that the federal coordinating council, if there should come to be such a thing, would use such information to make coverage decisions or to make reimbursement decisions.

Do you believe that it should be used for that purpose? And if not, would you support creating a fire wall between the work of the council and the comparative research and those kind of decisions?

MR. ORSZAG: Well, let's separate two things here. One is comparative effectiveness research, and the second is the kind of institute or board or body that Senator Baucus and Mr. Rockefeller and others have put forward.

Comparative effectiveness itself, even within the existing system, could be used by doctors, by --

SEN. KYL: It is to date, right --

MR. ORSZAG: It is and so -- okay. Let's leave that to the side.

Second question becomes, you know, you are deciding today what the reimbursement rate is for durable medical equipment and for wheelchairs and for, you know, what have you. I think some of the proposals that are out there to change that decision-making doesn't change -- you know, the fact of the matter is, someone has to decide, and the only question is, is it the Finance Committee or this other institute or board that would be making those decisions?

SEN. KYL: So the answer to the question is that you believe this research would be used to make coverage determinations; the only question is by whom?

MR. ORSZAG: No, I didn't -- no, I don't believe so. I mean, one -- at the extreme, if something is shown not to be effective, it could simply not be covered. But there also are a lot of, you know, less extreme ways of guiding medical practice -- for example, simply paying more for the things that work than the things that don't; creating penalties and what have you if you have high readmission rates, for example. And so it doesn't need to be a simple on/off switch.

SEN. KYL: No, sure, but creating penalties for certain situations -- you can make it virtually impossible for someone to use a particular method or treatment if you don't want to pay for it. Do you think that the coordinating council that's been contemplated here should be making those kinds of decisions?

MR. ORSZAG: Again, I think that -- look, there are different proposals out there --

SEN. KYL: I know it's up to us to make the decision.

MR. ORSZAG: Right --

SEN. KYL: Is that a personal opinion that you cannot hold?

MR. ORSZAG: I would say that is an issue that needs to be addressed as part of overall health care reform --

SEN. KYL: Does the administration have a position on that?

MR. ORSZAG: Not at this point.

SEN. KYL: (Off mike.)

SEN. BAUCUS: (Off mike.)

SEN. TOM CARPER (D-DE): (Off mike) -- Dr. Orszag, I've been in a lot of hearings before, and I've seen a lot of witnesses have water at their table. And let me just --

MR. ORSZAG: (Laughs.)

SEN. CARPER: -- I've thought -- and the only times I've heard you testify, as CBO director and here as OMB -- I thought: Boy, this guy is smart.

And I remember when we had a big Lincoln celebration in Delaware a month or so ago, celebrating his birthday, his 200th birthday, and I reminded the people of a story about President Lincoln and Ulysses S. Grant, who was his top general. Some of the people who worked for Lincoln didn't much like Ulysses S. Grant, and they were always calling on Lincoln to get rid of him, because they'd call Grant an alcoholic. They'd say: Get rid of him. He's no good.

And at the time, Grant was actually doing a pretty good job leading the troops, the Union troops, and Lincoln apparently said his top adviser -- he says: Find out what Grant is drinking and make my other generals drink it too. (Laughter.)

MR. ORSZAG: (Laughs.)

SEN. CARPER: We need to find out what you're drinking and we'll pass it around. (Laughter.)

MR. ORSZAG: I will -- I hope this isn't product placement, but this is Diet Coke. (Laughter.) Apparently there's a big controversy that has broken out between Diet Pepsi and Diet Coke, and what members of the administration drink what, but that is Diet Coke.

SEN. CARPER: Do you go back and forth, or you just a straight Diet --

MR. ORSZAG: No, I'm a Diet Coke guy.

SEN. CARPER: All right. All right. Well, I'm glad we got that on the record.

MR. ORSZAG: Okay.

SEN. CARPER: Second question, a little more serious question.

When the administration was rolling out their team at OMB, one of the names that they announced was that of Nancy Killefer as chief performance officer. And I have a huge respect for her. I thought, "What a great appointment." And she withdrew, for reasons that we're aware of. But I lament the fact that she's not on your team.

Have you filled that position with someone else?

MR. ORSZAG: We have not. I'm hoping that there will be an announcement or an appointment to fill that position within the next few weeks. And we've been actively interviewing and recruiting people. I am, like you, saddened by the absence of Ms. Killefer, who I think would have done a terrific job.

SEN. CARPER: And I would urge you as you go forward in this administration, if you have an opportunity to go back to her to ask her to find a time, the willingness to serve, I would urge you to do that.

At the budget summit hosted at the White House a week or two ago, one of the issues that I raised in our breakout session dealt with improper payments. You know, we have this improper payments law; all the federal agencies are supposed to report their improper payments. Most do now, and we know that improper payments last year were right on $72 billion, mostly overpayments but some underpayments.

We don't do a very good job. We do a much better job of actually figuring out what our improper payments are. We still don't do a very good job of going out and recapturing, recovering the moneys that have been improperly paid or overpaid.

About three years ago we began doing that with respect to Medicare, and I think we've been doing a demonstration project in three states -- California, Texas and Florida. The first year of the recovery, post-recovery audits, we didn't collect much money. Second year we collected a little bit. Last year I'm told we collected about $600 million. And I believe there's the inclination to go out and do in the other 47 states with respect to post-audit recoveries for Medicare what we've done in those three states.

Can you confirm that for us?

And one of the other things that came up at our discussion, our breakout session at the budget summit, was if we an actually recover all this money from Medicare, maybe we can do something like this for Medicaid. Can you address that?

MR. ORSZAG: Absolutely. And I think this is crucially important.

This budget invests substantial resources in program integrity, that is, making sure that the right person gets the right benefit at the right time, or the right provider gets the right payment at the right time.

As a result of hard evidence from pilot projects and other things, the budget projects $50 billion in savings over 10 years from avoiding erroneous payments, not only in Medicare but under the -- through the Social Security Administration and through the tax code.

That is $50 billion that would just go to the wrong person or provider, unwarranted, improper. And we need to be doing a much better job of protecting taxpayer dollars by investing in things that work, to make sure program integrity is maximized.

SEN. CARPER: All right. Good. Thanks.

Well, my other question is, expanding health insurance will only deal, I think, with one part of our health-care challenge in this country. And we also have to ensure that we're making a (rare ?) effort to keep Americans in good health as they become seriously unwell. And then -- I think the president's budget pointed out, and this is a quote, "Over a third of all illness is a result of poor diet, lack of exercise and smoking, all of which are preventable."

Can you just talk for a moment with us today about strategies currently used by Medicare and the Medicaid programs to emphasize wellness, to emphasize chronic disease management and obesity reduction, and, more importantly, ways that can -- we can improve upon what is currently happening?

MR. ORSZAG: Well, there are some efforts, but they're not where they need to be. And so the budget proposes to build upon the billion-dollar prevention and wellness fund that's in the recovery act, yet more investment in that area, because well-designed preventive and disease-management programs can help to improve health outcomes.

Another example is, the evidence is very clear that flu vaccines for Medicare beneficiaries help not only to reduce cost but also help them. We have strong incentives in this budget to increase flu vaccines for Medicare beneficiaries, in part because it keeps them healthier and in part because it saves Medicare dollars.

SEN. BAUCUS: (Gavels.)

SEN. CARPER: All right. Thank you, sir.

SEN. BAUCUS (?): Thanks very much.

SEN. JOHN ENSIGN (R-NV): Thank you.

A couple of quick questions. One quick comment on comparative effectiveness: others have raised the concern, if we end up with a federal board making the decisions, even if it's made up of medical professionals, we will regret ever doing that, simply because of a bureaucracy that's set up like that, that's government-controlled, making changes -- (audio break) -- kind of quality updates that'll need to be made.

I would just caution anybody against doing that. Keep it in the private sector. Keep it in the colleges -- American College of Surgeons, cardiologists, whatever. They're the ones who actually stay the most current with the research and the most nimble.

I have a couple of questions, though. One is one of the proposals out there is to have, you know, like an FEHBP type of a model and then also have a government plan. It seems to me -- and you've mentioned it before -- whether we're setting the prices on durable medical equipment, home oxygen, whatever it is, we all acknowledge there are pricing problems. So what do we do? We look at home health. You mentioned this with Senator Lincoln. Home health, we go, okay, they're making too much money so we can cut there. It's a very inefficient system, pricing, how much to pay a doctor for whatever. Don't we run into those problems with a government plan?

MR. ORSZAG: Well, you run into that difficulty in any system. And what I would emphasize is I agree with you that this --

SEN. ENSIGN: Yeah, but with a government plan, the government ends up with that problem.

MR. ORSZAG: Well, the problem exists regardless, and the question becomes how --

SEN. ENSIGN: The question -- who's the most efficient at doing it?

MR. ORSZAG: And how can we move toward a system that rewards quality and not more? And I think we're going to need both changes to Medicare to get there, but we're also going to need changes in the private system. Too much -- a lot of the private system is still based on a fee-for-service mentality also, and that needs to change.

SEN. ENSIGN: Well, a lot of this happened simply because of first-dollar coverage. The first-dollar coverage was one of the biggest problems that we ever ended up with, because it took a lot of the market forces out of medical decision-making. It destroyed -- and that's the reason HMOs came into being. You know, we can go through the whole history, and it just seems to me that the more you take it toward a more centralized decision-making process, the more you're going to end up with problems with pricing.

I only have a very short time. Let me -- there -- how do you foresee -- what do you foresee doing? There's about 12 million people who are here in this country illegally. A lot of them don't have health insurance. They use our emergency rooms for getting their health care today. What does the administration plan on doing with the people who are here illegally? Are you going to give them health insurance? Are you -- what exactly is going to be done? Because there is no immigration policy on the table today.

MR. ORSZAG: The president's campaign plan did not cover unauthorized immigrants. I would -- again, I'm not going to -- I'm not going to comment on the specifics of the legislation that you are all putting together, but I would imagine that there will be important protections against covering unauthorized immigrants as part of any legislation.

SEN. ENSIGN: Okay. And one fundamental question I keep coming up with -- $634 billion in new costs as a down payment -- we know it's going to be north of that based on your estimates. Senator Wyden and Senator Bennett had a proposal last year that the Lewin Group -- they made some changes, but the score I saw from the Lewin Group was it saved $1.5 trillion. Now, there's a big difference between saving a trillion and a half dollars and costing north of $600 billion. And what -- I guess I'm having a little problem -- a little problem.

Is there enough money in the health care system and maybe it's just being -- it's being distributed wrong? Or do we need to spend a lot more money in our health care system?

There seems to be two competing arguments here. The Wyden proposal seems to save a lot of money. Your proposals that you're supporting seem to cost a lot of money.

MR. ORSZAG: Well, I think, actually the motivation is quite similar. And the Congressional Budget Office analyzed the Wyden- Bennett legislation. I happen to know the former director of CBO. And so I have some familiarity with that analysis. And what it found was that once it was fully phased in, it would net to approximately zero. It would be budget-neutral.

That is the goal of health reform from our perspective also. We have a reserve fund. But the overall effort should be deficit- neutral. The Wyden-Bennett proposal includes a source of revenue that is then returned, to beneficiaries, but a source of revenue by changing the existing tax preferences.

We have a slightly different approach for putting revenue on the table. But the goal again is deficit-neutral.

SEN. ENSIGN: If it's going to be -- right, deficit-neutral. But if that's the goal, then why would you put a $634-billion cost in for a reserve fund?

MR. ORSZAG: No. It's 634 billion in savings. The $634-billion -- if all we did was the stuff that we've already put on the table, that's minus-634.

SEN. ENSIGN: Okay. All right. Thank you.

SEN. BAUCUS: Thank you very much.

Senator Hatch.

SENATOR ORRIN HATCH (R-UT): Well, thank you.

I know you've been asked the question. But as the, along with Henry Waxman, the author of Hatch-Waxman that has saved consumers at least $10 billion every year, since 1984, I'm naturally very concerned about having a biosimilar bill or a follow-on biologics bill that works.

A little over a year ago, Senators Kennedy, Enzi, Clinton and Schumer and I agreed that we should -- we should put the bill in the Health Committee through.

Now, that bill was estimated at 5.9 billion, if I recall it correctly, in savings, in actual savings, if we put that bill through. You've now got an -- and that had 12-year data exclusivity, which is probably the most important part of the bill.

Hatch-Waxman was -- the real name of it is Drug Price Competition and Patent Term Restoration Act. In other words, we had to balance the two sides. I remember the battles over that, between PhRMA and the generics.

The generics were very upset about it. But in the end, they were about 16-18 percent of the business at that time. Today, they're over 60 percent. And Hatch-Waxman is one of the reasons why they are.

Now, here's our problem. You've got -- you've got a savings, you think, of $9.2 billion. But that's based upon a data exclusivity protection of only 7 years, which will not work, when we had agreed to 12 years.

Now, I have to admit, the innovative companies wanted much more than 12 years. The generic companies wanted much less than 12 years. But that's what we arrived at. And we all agreed to that. And I thought with that agreement, with those very heavy stakeholders, that we could get this through.

And it's the most -- one of the most important bills in history because like Hatch-Waxman, it would save trillions of dollars over the years. And it would be the innovation that we need, to really bring biosimilars to the marketplace, not only in an innovative way but also in a cost-savings way, to the generics, when time goes on.

So I hope you'll relook at that, because I just don't think you can do it on a seven-year data exclusivity. And I don't know anybody who does.

And we'll never get a bill through if that's where the administration sticks, and it would be one of the tragic things that you could do.

Because this bill, along with -- and I was pleased with the president signing the executive order yesterday on embryonic -- and all forms of stem-cell research, but especially embryonic stem-cell research. Coupled with that, we may be able to ultimately save tremendous amounts of health-care costs. And -- by finding treatments and/or cures that we'll never otherwise find unless the incentives are in the program.

So I hope you'll take this back to the administration and to the OMB and think this through, because we arrived at those figures because we knew that's what it's going to take to have the innovation and yet still get that innovation ultimately to the generic companies, who could bring the cost down even more -- direct price competition, but also patent-term restoration that gives the incentives to do the innovative work. I just wanted to make that point with you.

But let me just ask you this question: The present budget says that the administration plans to build or -- on already $1.1 billion included in the recovery act for comparative-effectiveness research. Now, I agree with the value and the merits of doing comparative- effectiveness studies -- however, only in terms of looking at clinical effectiveness, and not in making treatment and coverage decisions, because there's too much variability from patient to patient that directly affects the treatment outcomes.

On page 70, the last sentence in the comparative-effectiveness section states, quote, "The findings can thereby enhance medical decision-making by patients and their physicians," unquote. Now, I take that to mean that comparative-effectiveness research will be used to look solely -- or solely look at clinical effectiveness, and not for making treatment and coverage decisions. And based on what is written in the president's budget, if this is a fair assessment, do you agree with this based on what you previously stated of an -- of how important it was for you and your physicians to take -- to make the treatment decisions?

MR. ORSZAG: Well, again, I'm going to come back and say I think we need much more information on what works and what doesn't. And there are a variety of ways of using that information to affect the way medical -- medicine is practiced. And that has to be the goal.

SEN. HATCH: But remember, that word "clinical" is very, very important, not only to me but, I think, anybody who looks at this, if you want to make a comparative-effectiveness system work. And you're key here, so I'm counting on you really looking at that.

MR. ORSZAG: Thank you, Senator.

SEN. HATCH: Plus the biosimilar thing. That's very important.

SEN. BAUCUS: Thank you, Senator, very much.

Mr. Orszag, many of us believe -- I have a series of questions -- series of questions about long-term savings I'd like to ask you. Many of us believe that if we do health-care reform right, that we can achieve significant cost savings in the years beyond the usual budget windows.

Do you think that's right?

MR. ORSZAG: Yes, sir.

SEN. BAUCUS: If that's true, shouldn't we try to recognize those savings as much as possible? Recognize the savings, find a way to recognize the savings?

MR. ORSZAG: All right --

SEN. BAUCUS: Quantify as best we can, and recognize them.

MR. ORSZAG: Best we can, recognizing that many of these things are going to be difficult to quantify precisely.

SEN. BAUCUS: Well, I didn't say it would be easy. I said we'd try to recognize it.

MR. ORSZAG: Try, yes. The effort is worthy.

SEN. BAUCUS: The operable word is try to recognize.

MR. ORSZAG: The effort would be a worthy one.

SEN. BAUCUS: That's good. Okay. And if so, wouldn't it be a mistake to focus unduly on paying for health care reform in the first six years?

MR. ORSZAG: Well, I think there are a variety of considerations. Again, the administration has said we believe that health care reform should be deficit-neutral, even over the medium term. And then over the long term, a key is bending the curve on health care costs, which many of the things that are in your white paper will help to do.

SEN. BAUCUS: But if we're going to get there, don't you think we have to pay for -- don't we have to invest up-front to get savings later?

MR. ORSZAG: We do have to invest to get savings later, but again, given our medium-term fiscal trajectory, we think the best way of moving forward is to invest in a deficit-neutral way.

SEN. BAUCUS: And how do you define the medium term?

MR. ORSZAG: Five to 10 years.

SEN. BAUCUS: So you want to be neutral?

MR. ORSZAG: Yes, sir.

SEN. BAUCUS: In five -- in that period. And savings begin to significantly be arrived at when?

MR. ORSZAG: That's correct.

SEN. BAUCUS: When? When's savings?

MR. ORSZAG: Savings will build over time. One of the -- one of the frustrations is there has not been enough research done on quantifying the things that we're talking about. I believe we have done everything that, you know, CBO, the Institute of Medicine, MedPAC have suggested, in terms of being the most auspicious to bending the curve on health care costs over the long term: health IT, comparative effectiveness, changes in incentives, prevention and wellness and what-have-you. It's very difficult to then say, "In 2072, the impact on health care spending will be this."

But just as an illustration, if we could reduce the rate of health care spending growth by 1 percent a year -- which may not sound like a lot, but the power of compound -- but it will be difficult to do. If we could, the power of compound interest is so strong that, after 50 years, we would reduce health care spending as a share of the economy by 20 percent or so of GDP. Huge amount: 1 percent a year; 20 percent of GDP. That is what we need to be focusing on, as we move through this effort.

SEN. BAUCUS: And so -- and do you think that that goal of 1 percent a year can be achieved? And if so, by when? What would be a reasonable target date?

MR. ORSZAG: Well, again, I think -- I was intrigued to hear that America's health insurance plans have put forward, you know, an effort to achieve exactly either 1 to 1-1/2 percentage points slower growth over the next -- I think Karen McNally said five to 10 years. They hope to do their part. Different parts of the system will also have to do their parts.

I think -- I don't want to set a specific goal, but as an illustration of the impact that different growth rates will have over the long term, because of the power of compound interest, I was just trying to illustrate how big an impact -- if we could achieve that, what the impact would be.

SEN. BAUCUS: What -- is it a reasonable goal to have health care costs (rise ?) at no greater rate than the CPI?

MR. ORSZAG: That would be an incredible accomplishment, and I guess I would just leave it at that.

I think if we just -- if we could reduce -- look, on average, over the past four decades, health care costs have been rising 2 to 2.5 percentage points faster than income per capita each year. If we could reduce that rate of so-called excess cost growth to 1.05, something like that, it would still be above inflation, you would achieve significant reductions in the out years in overall health care spending, and that would be a very good first step.

SEN. BAUCUS: Right, but the question is, how do we get there? And that gets to how are we going to -- what steps we're taking to recognize those cost savings and the degree to which OMB, for example, is working to estimate those cost savings, say, either beyond six or beyond 10 years, and how you can help us identify them so that we can write legislation.

MR. ORSZAG: Well, I'd look forward to working with you, as we have over the past several years. I think your white paper includes basically those key elements of a more efficient health care system, which, again, had been identified as the most auspicious approaches to reducing the growth rate.

SEN. BAUCUS: Right, but we just need OMB -- I mean, CMS actuaries -- there are a lot of different outfits -- we got a lot more data -- and help us the best we can, given the lack of data that exists.

MR. ORSZAG: Right. And we look forward to doing that with you, yeah.

SEN. BAUCUS: Yeah, and just sit down -- like next couple days, just to work --

MR. ORSZAG: And again, Nancy-Ann DeParle will be coming up, and I know Governor Sebelius will be making visits here this week.

SEN. BAUCUS: She is too. I have appointments with both of them, but --

MR. ORSZAG: This week.

SEN. BAUCUS: -- that's fine. I mean, that's great. I'd like to meet the wonderful ladies. That's -- (chuckles) -- I understand that -- but we got to go to work. And I'm just saying that she -- the two -- both the secretary and Nancy- --

MR. ORSZAG: We're all ready to roll up our sleeves, Senator.

SEN. BAUCUS: Good. And I know you are, because that's the key right here. Thanks.

STAFF: Senator Wyden.

SEN. WYDEN: Thank you, Mr. Chairman. And Mr. Chairman, it's been an excellent hearing, and you've summed it up in terms of having our sleeves rolled up and ready to go.

And I just have one additional question for Director Orszag, and it again goes to this question of finding savings now within the current system. And it involves the role of the individual. Very often this is called the so-called skin in the game kind of issue.

And the way I approach this is if you have a low-income person and they need health care, the last thing you ought to do is heap additional costs on that person. They have no money, and they're not going to be able to take care of their family if you put more of a burden on them.

I do think changing the private health insurance market to reward people for a careful selection of their coverage is very much in line with finding savings from the existing sums that are now being spent. I'd be interested in your thinking on that.

MR. ORSZAG: I do think that having beneficiaries pay attention, as they -- many do and should, to the cost of care makes sense.

I would just come back -- and this is something that had come up earlier -- while that is helpful, we do have to remember 25 percent of beneficiaries account for 85 percent of the costs.

It's really the very high-cost beneficiaries that drive most of the overall cost of health care. And for them, making sure that the providers -- the hospitals and their doctors -- have incentives for efficient care seems to me to be key, because someone who is on the way to the hospital in the ambulance is not likely to be choosing which hospital to go to based on how much it will cost.

SEN. WYDEN: There's no question that's right. And I think there is strong support for reimbursement increases in two areas. One of them is the area you've talked about, which is trying to make sure there's better coordination of care for those individuals, and the other is primary care.

I just know -- and I'm holding mine up, not to sell any private health insurance -- all of us who are members of Congress, we have a choice of our coverage. And so if you make a careful selection of your coverage, you're in a position to save some money. Most Americans, even those who are lucky enough to have private health insurance coverage, don't get a choice. And you have written and talked on this subject on a number of occasions, and I hope that we will see bipartisan support for that as well, because sending a message that you get rewarded for a careful selection of your private coverage makes a lot of sense.

To me, the other area, picking up on what Senator Carper talked about with prevention, is it's time to start giving financial rewards, actual financial rewards for practicing prevention. As you know, Saefway and other companies re doing this. It seems to me that if lower your blood pressure and lower your cholesterol and you're on Medicare, you ought to get a lower Part B premium.

How do you feel about the question of actual financial rewards for practicing prevention?

MR. ORSZAG: They do seem to work. A variety of private firms, including the one that you mentioned, have moved forward. There are lots of ways to motivate change; and especially when it comes to health behavior, that's crucially important. So financial incentives through insurance schemes or through bonuses for accomplishing your goals help.

I would note on a personal basis, I once had to accomplish a personal health goal and signed up on a website where a contribution would have automatically gone to a charity I did not support if I failed to meet the goal. And that worked beautifully.

SEN. WYDEN: You're a poster child for my point.

Here's my last question. On Medicare Advantage, which we are going to have, obviously, a spirited discussion, I come to this by way of saying that I don't think all Medicare Advantage is created equal. We have some in our part of the United States that has been very good, been very sensitive to consumer needs, and I want to be careful to make sure that those programs aren't put out of business for doing good work.

There are other Medicare Advantage programs, some of this private fee for service, and Chairman Baucus has tried to rein them in, and others, but they're still out there. And a lot of that private fee for service isn't worth a whole lot more than the paper it's written on.

Are you open to the idea of looking at the Medicare Advantage reforms almost like an insurance equivalent of "pay for performance"? If you're doing a good job and you meet a number of specific health- oriented objectives, you would not face some of these cuts, but if you aren't meeting those kinds of tests, that's where you would see the budget ax fall.

Are you open to that kind of idea?

MR. ORSZAG: There are lots of ideas on the table. One of the concerns with Medicare Advantage, especially with private fee-for- service, has been inadequate attention and reporting of quality.

SEN. WYDEN: Thank you, Mr. Chairman.

SEN. CHUCK GRASSLEY (R-IA): Thank you. I've just got three questions, so I'm not going to keep you here all day.

MR. ORSZAG: Okay, Senator.

SEN. GRASSLEY: Now, the first question comes on something that you'd think why bring this up when you're talking about health care? But money's fungible. So I want to bring up something about the cap- and-trade tax.

We had Secretary Geithner here last week, told us that -- cap- and-trade tax, quote, "does increase the cost of energy," end of quote. He also taught us that, quote, "If there are additional resources beyond what we have laid out in the budget, then they will be devoted also to help compensate for those higher costs," end of quote.

Moreover, there's a footnote in your budget regarding cap-and- trade tax. It says, quote, "All additional net proceeds will be used to further compensate the public." So the question is, how much more revenue than the 300 -- no, than the $646 billion laid out in the budget do you expect to raise from the cap-and-trade proposal? And if you can't provide a precise estimate, please provide a ballpark figure or a range. Please specify what is the maximum amount of total revenue collected under the president's cap-and-trade tax proposal.

MR. ORSZAG: I don't have a specific answer for you, in part because what the president has said is that he wants to reduce carbon dioxide emissions 14 percent below 2005 levels by 2020. But there are lots of different paths of -- or ways of getting there. And how much revenue is raised will depend not only on that path but also on details of, you know, is it upstream or downstream, how is the -- how does the system work? And the president has not put forward a specific proposal that fills in those details at this point.

SEN. GRASSLEY: Well, would you be able to -- not now, but when you get back to the office -- or have your staff work on something that could tell us under various scenarios what more might come in? To give us some -- I mean, we're working on a budget for the next 10 years here, and if this is going to raise more than -- and the possibility is more, because people in the administration have stressed that -- we ought to have some idea what we're talking about.

MR. ORSZAG: I think we could certainly provide an analysis of the plans that are out there and different proposals that are out there, sure.

SEN. GRASSLEY: Well, please do that, then.

Second, want to deal with disclosure and transparency of the cost of employer-sponsored health insurance. During -- June 17th last year, our -- this committee hearing, then, as director of CBO, you said, quote, "the economic evidence is overwhelming, the theory is overwhelming, that when a company pays for a worker's health insurance, the worker actually pays through reduced take-home pay.

I don't think workers realize that," end of quote. And then further quote, "Making the underlying costs associated with employer-sponsored insurance more transparent might prove to be quite important in containing health care costs," end of quote.

So my question: Do you still believe that disclosing the amount of health insurance coverage an employer pays on behalf of a worker could help control health insurance costs? And two, do you believe President Obama should include a proposal to disclose the cost of employer-sponsored health insurance coverage to workers in a comprehensive health care reform package?

MR. ORSZAG: I would say, as I said then, that I do think -- when I said health care costs are reducing workers' take-home pay to a degree that is unnecessarily large and underappreciated -- I believe I said that even today. The underappreciated part is, I think, because there's not as much transparency as could exist about the pass-through to take-home pay from employer-sponsored insurance.

Many firms are already moving aggressively in this direction to provide this information to workers, so one of the things that could be discussed as part of health reform is whether yet more needs to be done or whether the voluntary efforts that private firms are already taking is sufficient, because there has been a significant increase in private firms that provide that information to people already.

SEN. GRASSLEY: This is something that at least last year -- and I doubt if he's changed his mind -- that Senator Wyden has also been very much interested in.

Then my last question. In 2006, MedPAC stated, quote, "The strongest incentive in the Medicare program to coordinate care through the Medicare Advantage program --" no, let me -- let me say that sentence again. Quote, "The strongest incentives in the Medicare program to coordinate care are through the Medicare Advantage program. Because CMS pays Medicare Advantage plans a capitated amount for all of the enrollee's care, the plan has an incentive to ensure that beneficiaries with complex needs are well managed across the setting and over time," end of quote for MedPAC.

Question: Do you agree that a capitated payment system like the ones used in Medicare Advantage provide greater incentives for care coordination and prevention than the fee-for-service payment system?

MR. ORSZAG: Again, I think what -- bundling of payments do create stronger incentives. That's one reason why we moved -- or we proposed bundling post-acute care and hospital payments. It's another reason why we were proposing the bonus-eligible organization proposal. That bundling within Medicare helps to promote care coordination.

STAFF: (Off mike.)

SEN. GRASSLEY: Senator Baucus is coming back.

MR. ORSZAG: Okay.

SEN. GRASSLEY: I've just been told by staff. So can I -- I want to ask you another question until he comes back, then.

MR. ORSZAG: Absolutely.

SEN. GRASSLEY: (Off mike.) The budget proposes a number of delivery system reforms that would require providers to collaborate in order to coordinate the care of patients.

As we explore delivery-system reform, are there any statutory barriers to this collaboration that we should consider addressing?

MR. ORSZAG: I'm sorry, collaboration between who?

SEN. GRASSLEY: Between health care deliverers or providers, bringing about the coordinated care of patients.

MR. ORSZAG: There are -- there are some statutory restrictions. But I think one of the -- one of the most important ways that we can move towards more coordinated care is to create the incentives for doing so. And again I'm just going to, without repeating myself, just say we have a variety of proposals included, in the budget, intended to move in that direction.

SEN. GRASSLEY: Medicare payment accuracy has long been a priority for both Senator Baucus and this senator. In light of increasingly scarce Medicare dollars, it's even more important that these dollars are spent as accurately as possible.

The budget contains a vague proposal to use private-sector mechanisms, in Medicare, to ensure Medicare pays accurately. In the past, Congress required that use of private-sector mechanisms, such as recovery audit contractors.

What are these private-sector enhancements that the budget proposes, to ensure that Medicare pays accurately?

MR. ORSZAG: Well, there are a variety of proposals in the budget. For example, we do propose more frequent recertification of providers, under Medicare, so that it's much less likely that a Medicare payment goes to an entity that's not even a Medicare provider, and also enhanced auditing capabilities, so that even legitimate Medicare providers are not being paid for things that they don't do.

And under your leadership and others', we're trying to do that, not only with regard to Medicare but also with regard to the Social Security Administration, where problems also exist, and with regard to the tax code, where the tax gap is a significant issue that needs to be reduced.

SEN. BAUCUS: Thank you, Senator.

MR. ORSZAG: Before Senator Grassley leaves, can I also just say, I appreciate the fact that we held this hearing and that we're beginning the bipartisan process. And I look forward to working with you throughout. I appreciate it. Thank you.

SEN. GRASSLEY: (Off mike.)

SEN. BAUCUS: Thank you, Senator.

Mr. Orszag, I'd like to talk a little bit about universal coverage, individual mandates and so forth. I believe that for us to achieve meaningful, comprehensive health reform, everyone has to be covered.

All Americans should be covered. And there are lots of ways to approach that. Massachusetts has its approach, et cetera. But the real question is, how do we get everybody covered?

I know the president did not suggest individual mandate during the campaign. He did suggest however a mandate for children but not for all Americans. So if we could, just talk a little about how we get there, how we get from here to there.

Without getting into what the president supports and does not support, I'd just like us to have a little discussion, on how we get universal coverage and get everybody in the system. What are the ways to do it?

I think it's necessary to address cost-shifting that would otherwise occur if we did not.

It helps us focus on prevention, wellness efforts much more effectively if everybody's covered. It's kind of a no-brainer to me that costs over time would come down if everybody is in the system.

So if you could -- help me a little bit if you'd give me your thoughts on how to get universal coverage, and also how it would implement and execute and enforce an individual mandate.

MR. ORSZAG: Okay.

SEN. BAUCUS: If that were in the law.

MR. ORSZAG: Clearly, there are different ways in which one can move to expand the coverage. A key is to start bringing down the cost of coverage, so that it's more affordable. That will help.

In addition to that, providing health insurance in an easy and simple way. One of the reasons why employer-sponsored insurance is so popular is that it's really easy. It's not very complicated to sign up. The employer helps you with -- with your choice of plans and what-have-you. And we need to recognize that making it easy and simple is crucial.

In addition to that, you've mentioned there are different ways of encouraging further enrollment. Some people talk about heavy subsidies. Others have talked about automatic enrollment, with an opt-out approach. And then there's also a mandate, which is a possibility. The impact of a mandate will depend not only on how deeply subsidized the coverage is, but how the mandate -- where and how it's enforced, and what the social norms are around not having health insurance.

And I want to just come back for a second on the importance of coverage. In the chart pack that I gave you at the beginning, on flag 9, you see this very dramatic difference between insured beneficiaries and uninsured people in things like mammograms and colorectal cancer screening, on the right.

SEN. BAUCUS: Right.

MR. ORSZAG: Very dramatic.

SEN. BAUCUS: Right.

MR. ORSZAG: And these have been shown -- these are, you know, preventative measures that have been shown to be quite effective. Lack of insurance means people are not obtaining them at the same rate as those who are insured, and that causes problems over the medium to long term.

SEN. BAUCUS: Right. So my question -- you know, what about the people who are unemployed, who are self-employed, small group coverage? I mean, you know, it's one thing if you work for a big company.

MR. ORSZAG: Right.

SEN. BAUCUS: That's pretty easy. Let's put that off to the side a moment. Now I want to make sure everybody else is covered. So how do you get everybody else covered if they're not working, if they're in and out of the workforce, they work some work and some -- you know, they're just in and out of the workforce?

MR. ORSZAG: Sure.

SEN. BAUCUS: How do they cover them?

MR. ORSZAG: Well, there are lots of different approaches. I know your white paper, for example, proposed that Medicaid would cover everyone under 100 percent of poverty. That's one approach.

Massachusetts has another approach in which the health exchange, the connector, provides a mechanism. The Wyden-Bennett Plan has yet another kind of approach that is at least similar in spirit to that kind of exchange approach. There are lots of different ways of getting there, but it's clear we need to get there.

SEN. BAUCUS: But if we had individual mandates, your thoughts on how that would be enforced. How do you enforce it?

MR. ORSZAG: There are different approaches to enforcement. Again, I guess I -- not to belabor the point, but I'm not saying mandate, yes or no. We're just --

SEN. BAUCUS: No, I'm saying -- I'm playing the "what if" game.

MR. ORSZAG: The "what if" game, and I will play that to a limited degree, a "what if" game. Mandates could be enforced in different ways. There could be enforcement through the tax code, through financial penalties. It does -- the evidence does suggest that enforcement mechanisms are important.

For example, if you look at the difference between the share of people who buckle their seatbelts -- very high -- and the share of people who obey speeding limits -- little bit lower -- I think you can see in both cases there's a set of rules. The enforcement mechanism is different. And one of the reasons is that the social norm has shifted, in the sense that if you currently get in a car and you don't put on your seatbelt, I think the other people in the car sometimes say, "What are you doing?"

SEN. BAUCUS: Right.

MR. ORSZAG: And getting to that kind of point, which appears to be what happened in Massachusetts -- we've got -- Massachusetts has accomplished something like 97 percent coverage, even before the penalties on the mandate have kicked in. And that, I think, is because -- not only that the -- did the system deliver effective insurance --

SEN. BAUCUS: But how was the social norm conveyed?

MR. ORSZAG: There --

SEN. BAUCUS: Somebody with a --

MR. ORSZAG: In Massachusetts there was a huge outreach effort, and -- a public outreach effort to basically say, "You should be insured, and it's in your self-interest to be insured, and here's how you can do it." And that appeared to have worked.

SEN. BAUCUS: And what was the nature of that outreach effort?

MR. ORSZAG: There was lots of -- I think you couldn't go anywhere in Massachusetts without reading newspaper stories or seeing advertisements for the effort under way. It was one of the biggest things that happened in Massachusetts in recent history. And so, in a sense, everyone knew what was happening and what was expected of individuals.

SEN. BAUCUS: Now, is that -- is that costly? I mean, is there a cost -- I mean, do the -- dollar --

MR. ORSZAG: Enrolling more -- and in fact, there's been a lot of controversy over the costs in Massachusetts. The costs are only slightly higher than originally projected, and it's almost entirely because they have succeeded much more rapidly than possible -- than they thought in getting people into the system. In other words, they thought that what would happen is coverage would rise slowly. Instead, it's basically jumped up to something like 97 percent coverage very quickly.

SEN. BAUCUS: Now, intuitively, we all know -- in fact, you -- this chart shows it -- it's not intuitive at all, it's demonstrated -- that with certain wellness preventive measures, that over time costs are lower. But how do -- how do we value wellness? And how do you put a cost to -- a cost savings to wellness and prevention efforts?

MR. ORSZAG: Well, this is an area where -- I'll give you two answers. I think the more important one is let's take off the green eyeshades, and I think all of us in our -- as people --

SEN. BAUCUS: Right.

MR. ORSZAG: -- value our health. And things that make -- the ultimate goal of health care, after all, is to improve people's health. And so steps like prevention and better exercise programs and what-have-you that achieve better health just make us better off, period.

Now, with regard to -- put the green eyeshades back on; with regard to costs, it has long been noted that such a large share of costs come from both very high-cost beneficiaries and from at least partially preventable diseases that, if we could figure out a way of helping people live healthier lives, there's at least the strong possibility that we could reduce costs over the long term while also, again, having healthier lives, which is the ultimate objective here anyway.

SEN. BAUCUS: Right. But do you target who gets the immunization shot? Do you target who gets a certain wellness -- prevention -- preventive procedure? So -- it seems up front there's a cost if everybody gets everything -- why some are going to be much more likely to achieve health care -- better health care than others.

MR. ORSZAG: Well, presumably things will vary. I mean, take the flu vaccine as an example. It's actually not that expensive to administer.

SEN. BAUCUS: Right.

MR. ORSZAG: And it's been shown to reduce costs even over a very short period of time while also making -- while also improving the health of beneficiaries. That's one of the reasons why the budget includes a proposal to increase flu vaccination rates among Medicare beneficiaries.

In other areas, more targeting will be necessary. I mean, for example, it doesn't make any sense to target an anti-smoking campaign or effort against -- for a population that isn't smoking or that isn't likely to smoke. That's just one example.

SEN. BAUCUS: You know, we're -- we have a very ambitious markup schedule here in this committee, as I've already announced, you know, with the ranking into three subjects, and we've got roundtable discussions and our walk-throughs, et cetera.

MR. ORSZAG: Yup.

SEN. BAUCUS: We need some help. This is not easy. I'm just curious about getting cost estimates -- for example, from the Office of Actuary at CMS. I wonder if you could help in that regard.

MR. ORSZAG: I'd be glad to help. Again, I'm ready, as I said before, to roll up my sleeves and help you accelerate this process, because we want to get it done this year.

SEN. BAUCUS: I appreciate that. And you say "we." I guess we talk to everybody that seems relevant up and down Pennsylvania Avenue, but I'm thinking about, HHS Secretary-to-be Sebelius and Nancy-Ann DeParle and yourself. And you know, who would we talk to? How do we coordinate this?

MR. ORSZAG: I think, from the White House, Nancy-Ann will be up this week to meet with you, and she should be the direct point of contact. And obviously it would be beneficial to have the nominee for secretary of HHS confirmed as soon as possible, so that she can play a role.

This is such a huge undertaking that a collaborative teamwork approach is going to be necessary. So I think you're going be seeing many of us from the administration actively involved, as should be the case, given the magnitude of what we're trying to accomplish.

SEN. BAUCUS: Is there anything off the table as far as the administration is concerned?

MR. ORSZAG: Not to my knowledge, no. Everything is on the table.

SEN. BAUCUS: Okay. (Chuckling.) It's a pretty big table -- (scattered laughter) -- and stacked pretty high.

Well, Director Orszag, I thank you so much, deeply appreciate your enthusiasm and your dedication and your intelligence. It's going to be needed and utilized when we get across the finish line. Thank you very much.

MR. ORSZAG: Thank you, sir.

SEN. BAUCUS: (Strikes gavel.)

END.

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