American Enterprise Institute

April 24, 2007

[Edited transcript from audio tapes]

11:45 a.m.	Registration
Noon	Luncheon
12:30 p.m.	Introduction:	Christopher DeMuth, AEI
	Keynote Speaker:	Michael Leavitt, Department of Health and Human Services
1:30	Adjournment

Proceedings:

Christopher DeMuth:  A great pleasure to have Secretary Mike Leavitt at the American Enterprise Institute this afternoon for this address that we are delighted to be sponsoring along with the Heritage Foundation and the Galen Institute.  He has been Secretary of Health and Human Services since the beginning of President Bush’s second term, having served as head of the Environmental Protection Agency during the first term and before that as the highly successful and popular three-term governor of Utah.  Among his many accomplishments at HHS, he has overseen the implementation of the Medicare Prescription Drug Benefit Program, promptly enrolling tens of millions of seniors and disabled people and fashioning a highly-competitive market for their business, providing them with variety, good service, and good prices that sets a new standard for further health care reforms. 

At a time of sometimes over-the-top partisanship and overheated inflamed rhetoric, Mike Leavitt stands out as a model of energetic public service and enlightened public leadership.  And in the Galen, Heritage, AEI think-tank world, he is particularly admired for being studious, brainy, and adamantly devoted to the public interest.  His talk this afternoon is on promoting health insurance for children and all Americans.  And he promises to give us all exact details on all of the health care legislation which the Congress will be enacting this year.  Please give a warm welcome to Secretary Mike Leavitt.

 Michael Leavitt:  Chris, thank you.  I’m appreciative of having this distinguished forum and the trio of distinguished organizations that have collaboratively put it together today.  Thank you. 

Some of you know that I have recently become a grandfather.  It has been a wonderful experience.  I was boorishly going on, I suspect, with one of my friends who explained to me why it is that there is such a close bond between grandparents and their grandchildren.  He said it is because they have a common enemy. That may well have been on my mind yesterday.  I had a chance as a trustee of the Social Security and the Medicare Trust Funds to meet in our spring trustee meeting, and I know you have a report from Rick [phonetic] in some detail about that meeting.  But may I say as an American and as a grandfather, it was a sobering experience for me.  It always is.

I acknowledge I am sure, that we now measure this one government program we call Medicare as a percentage of the entire gross domestic product.  I think that fact in and of itself is telling.  It became clear as I looked through the charts that he provided that as the unfolding scenes of life take place, when my grandson becomes 25 years old it will have gone from 3 percent of the gross domestic product up to almost 7 percent, and when he becomes my age, which I might add seem to happen very quickly, it will have gone to 10 percent of the gross domestic product.  This is a very serious problem and one that we have to deal with.         Yesterday, we issued for the very first time a financial warning, a warning required by Congress.  Congress indicated to the trustees at any point in time if you project forward that in a five-year period for two consecutive years that it will have exceeded 45 percent of the total support coming from general revenues, we as Congress need to know it, and the American people need to know it.  What I believe is a very important warning yesterday, the trustees of the system issued that warning.  It happened last year.  It has happened again this year.  Likely, it will happen again next year as things unfold.  The report that does not tell it all, it is certainly accurate and actuarially sound, but I suspect there are a couple of things you may not have read in the report. 

One involves the fact that the report was based on the law, and the law includes the need for adjustments in physician reimbursement rates.  Some years ago, Congress passed a law that required that the rates are adjusted downward whenever expenditures go up to a certain level, simply stated.  The problem is, every time we reduced the rates, just magically there are more procedures, and the total amount just continues to go up.  It is a vicious cycle.  And the reality is this is exactly what happens when the government is setting prices.

Every year we have the same debate over the so-called “doc fix.”  How will we fill in the gap?  Now, the way it is now set up, next year we will have to reduce doctors’ rates under Medicare by 10 percent, and then every successive year after that for the next nine years, we will have to reduce it by 5 percent, the cumulative effect of which would be about a 41 percent reduction in physician rates.  If you believe that Congress will do that, then you can assume that, in fact, we will reach that trigger level in 2013.  If you think that is not likely to happen, as it has not happened for many years in the past, then we will reach the threshold in 2010, roughly.    Now, at that point what changes?  Well, it is just the continuation of what is happening today.  Medicare is not simply eroding the trust funds, it now begins to erode the capacity of the federal government to meet all of its other needs, because every basis point erodes, it takes away our capacity to deal with national defense or any of the other things that we call upon government to do. 

Now, I’m sure that you were told there were some rays of good news in this report.  One is that the Trust Fund last year indicated it will essentially become insolvent in 2018.  Now, it is 2019, a one-year reprieve.  I think what is more important than that fact is why.  Essentially two parts: The first is Part D.  There was a lower than expected level of expenditure on Medicare Part D.  And the second was that there are hospitalization rates that have fallen for reasons that we simply do not understand.  Now, this will make Rick cringe a little when I say it but let me just say I have some hope and some optimism that there is a correlation between the fact that we have seen for the first time prescription drugs in the hands of seniors, with the idea that there may be heart operations that we would have paid for during the last year that we have not had to because we gave them prescription drugs.  We will see as this unfolds whether that trend continues or not. 

For those of you who are not as close to Part D, let me just give you a brief reminder of how this program is constructed.  There was, of course, for many years a desire on the part of the people of this country to have a prescription drug program for the reasons I have just outlined.  The plan had always been to say we will have a one-size-fits all government program like we do in Part A and Part B, but that was resisted.  Republican Congress and the President indicated we are going to have prescription drugs, but instead of using compulsion, we are going to use markets.  Instead of using one-size-fits all, we will have the market allow prices to be established and we will allow competition and innovation. 

And that is exactly what happened and the market responded, responded robustly.  And today, we stand with 92 percent of all of those who were eligible, having a plan.  The better news is 80 percent by virtually every estimation are happy with their plan.  Why are they happy?  They are happy because they could choose a plan that fit them.  If they have one-size-fits all, you can bet there will be a lot of people who would not be happy.  And the 20 percent who are not can now choose a plan that will help them become more pleased in the future. 

We are all going to get better at this.  And the price?  Originally, the estimate was $37 a month per beneficiary.  This year it will be delivered for about $22 a month.  Why?  Because of competition, primarily, saving the tax payers money as well - over 200 billion dollars.  I believe that this difference between the good news in the report, and the bad news in the report frame up a very important question, and that is what is the role of government in health care?  Why is it such a good illustration?  Well, fundamentally, Part A and B demonstrate one philosophy and Part D demonstrates another.

There are two very divergent views as to the role that government ought to play in health care.  The first is that government ought to be the proprietor.  We ought to define the benefits.  We ought to set the prices.  We ought to bear the risks.  There are others of us who believe that government should be an organizer.  As an organizer, our task is to set the rules, to remedy the inequities, and to subsidize the needy -- two very divergent points of view. 

Part A and Part B are excellent examples of the way these two philosophies play out.  On Part A and B, Congress very clearly establishes the benefit.  There is no innovation to speak of in a larger framework.  Second, government sets and regulates the prices.  Taxpayers bear the risk.  Future generations bear the risk.  And the system is very clearly on the road to insolvency.  And we are sowing the seeds everyday that will produce an insurmountable weight to our prosperity. Part D, on the other hand, is a model of what happens when government serves as an organizer.  Congress set rules.  It allowed the private sector to innovate, to respond to solutions that consumers would want, and respond they have.  The markets set the prices and continue to.  Government has provided extra help for those that are poor.  And the result we already mentioned: falling prices, happy consumers, the government saving money, and hopefully, a healthier population.

During a recent debate in Congress, I had a conversation with a member of Congress about should the government negotiate drug prices.  Essentially the conversation was, “How do I explain that the government set prices on doctors and hospitals and medical devices but not prescription drugs?”  Well, the answer?  Government making those decisions is producing the greatest financial mess in the history of our country.  The answer is not to change Part D.  The answer is to change Part A and B.  The first rule of getting out of a hole is to stop digging and that we need to. 

I’m happy to say we are in various ways, Part D included.  Medicare advantage, now 20 percent of the Medicare population that has chosen a private plan.  We have gone from 4.7 million to something over 8 million now of those who have made a selection.  They are getting extra benefits.  They are getting better care.  We are also beginning to implement competitive bidding on Parts A and B, but those are different stories for different days, but they illustrate a need for us to decide if government is going to be a proprietor or an organizer. 

When government acts as a proprietor, the same thing happens every time.  I have traveled in my role as Secretary and before all over the world looking at health care systems.  It does not matter if it is Europe or if it is Asia or if it is Latin America or if it is here in the United States.  The same thing happens when the government acts as a proprietor.  People talk about the concept of universal care, but closer examination makes clear that there is not much universal about it. 

In virtually every system, a budget is set, it is granted to the provider of the care and, essentially, they provide all they can for what they can.  And the reality is that when you support institutions, most of the time the institutions get taken care of but the people do not always get taken care of.  Where are they?  Well, they are generally in the waiting line. 

Now, my observation is, in looking at all of these systems no matter what continent it is on, the same thing is generally true.  Physicians typically will practice a part of the day in the public system, and then they almost always have a private practice where they care for private patients.  So the reality is, if you are in the public system, then you wait and wait and wait.  If you have the money, then you are very capable of being able to go to a doctor and getting it there.  Universal care is not always universal. 

Let me just say that one of the things I worry about is that unless we change, Medicare and Medicaid will become the same thing.  Many doctors have stopped taking Medicare patients.  Others make enough in essence on their other practice they continue to do so.  It is the same proposition.  When government acts as a proprietor, the same things apply: long lines, lower quality, and higher taxes.  What we need is a system of competition, competition where value is the currency.  That to occur, every person needs to have access to a basic insurance policy.   

Now, there are a lot of good reasons why that is true.  One is it helps them stay healthy.  The truth is people who do not have insurance do not get preventative care.  They do not get the care they need at the time they need it.  Generally, they go to an emergency room, which is great if you have an emergency, but it is not good if you are looking to get basic primary care.

The second reason that it is valuable is because it creates a social and personal stability.  It is a way in which societies can organize to share the worry and to share the risk.  And it also creates a systematic method for managing costs.  One of the most profound pieces of information that is left out of this debate is the fact that people in America who do not have insurance for the most part get care.  It may be ineffective, it may be unequal, it may be inconsistent, but they are getting care.  And we can do better than that.  What is not widely understood is that while we do not have a kind-sounding name like Medicare, or Medicaid, or SCHIP between federal and state and local budgets, we spend over 30 billion dollars a year in sending payments in lump sum to hospitals to pay for those who do not have insurance. 

One has to wonder if it does not make some sense at least, to spend at least part of that money rather than perpetually paying the bills of people who do not have insurance to just help some of them get insurance.  Nevertheless, we are doing so today and they are getting care.  So very quickly, you come back to the very basic proposition.  What is the role of government?  Should we be a proprietor or should we be an organizer? 

Now, some would have the role of the federal government as a proprietor expand.  They would like to expand our business as a proprietor.  Others believe as we move forward, we need to become an organizer, as I have said.  Clearly, we have been headed in the direction of those who believe we ought to be a proprietor.  We are headed for more government; at least, that is the trend.  Medicaid enrollment is up 50 percent over a decade ago.  Today, the federal government provides health insurance for 45 percent of all children.  Half of all the births are paid for by the government. 

Now on the next few months, we will see a debate ensue in Congress about the future of SCHIP, the State Children’s Health Insurance Plan.  SCHIP was meant to be for low-income children who are not eligible for Medicaid, those that are earning less than twice of the federal poverty level.  There are some who would raise it to 400 percent or $82,600.  But that would mean is that 71 percent of all American children would be on public assistance.  There are those who would expand it to cover adults.  In fact, there are already three states that cover more adults than they do children.  SCHIP is being proposed in the spirit of expansion of health coverage, but that is not the reality.  The reality is that 60 percent of Americans who are newly enrolled in public programs like SCHIP were formally insured by private plans.  For every 10 people who go on a publicly funded plan, six of them leave a private plan.  This is called “crowd-out.” 

We need to reauthorize SCHIP.  Let me clear about that.  It is a very important tool.  But we need to stick to what was intended to do, and that is to help low-income children have health insurance.  Besides, that really ought not to be, however, our objective.  Our objective ought to be for every American to have access to basic insurance at an affordable price.  The solution to this dilemma just is not incrementally to hook one more car to the train of government funded or government-run health care.  The solution is for every American to have affordable basic insurance, including children. 

Now, those who understand the dangers of the trend need to engage.  If there is a single message, I hope that I will convey today, it is that.  Those of us who understand the flaws of government-run care need to step forward.  We need to step forward with genuine plans that accomplish that task.  The old saying in politics is that, “You cannot be the candidate with no candidate.”  The corollary to that is you cannot beat the bad plan with no plan.  Plans need to be based on a very simple core philosophy.  I will surprise nobody here that I believe that philosophy needs to be government as an organizer.  It needs to be uniquely American plan.  A plan needs to have a core strategy. 

Let me offer a very simple one.  If you are elderly, if you are poor, if you are disabled, government ought to provide coverage to you and we ought to pay for most of it.  But if you are everyone else, you deserve to live in a state where your government has organized a private marketplace, where through your employer or on your own or through a mechanism organized, you have access to a choice of basic plans that are affordable.

Now on the State of the Union, the President made clear that he believes that, as well.  He instructed the Secretary of Health and Human Services to go out to the states, where he said, “That is where the action is.  See what you can learn.  Find out what is happening.  See if we cannot harness some of that energy and innovation.” 

Since that time, I’m happy to report to you that I have met with over 40 governors and state legislators all over the country.  I can report to you that there is a torrent of activity going on.  We are currently working directly with almost two dozen states who are working to develop plans; plans that would cover every citizen of their state or that would allow every citizen to have access to a basic plan of insurance at a level that is affordable.  States are convinced they can do this if they have the tools.  Every state has to solve some problems that they have in common. 

I would like to talk about what those problems are and the process that through each state must go.  There are essentially three problems that states must organize a solution for.  The first is a basic plan.  What do you mean in our state by a basic plan?  The second is, how are we going to pool risks to assure that the hard to insure and chronically ill can be covered as well?  And lastly, how do we solve the puzzle of affordability for those who cannot afford it on their own? 

Let us talk for a few minutes about the basic plan.  Let me suggest that I believe every state needs to answer a question for themselves.  And that question is, “Is there more virtue in having a thousand people with a basic plan of insurance or having 500 with a comprehensive plan and 500 without?”  I believe that across the country, states are acknowledging the virtue in having a basic plan available to all of their citizens. 

Now, one barrier to that in many states has been the action over time for reasons that were noble and understandable, the accumulation of a large series of mandated coverages.  Those coverages have, in total, created an atmosphere where some people simply are priced out of the market.  They cannot afford it.

Each state then needs to deal with that question.  States approach it differently.  When I went to Vermont, it will not surprise you.  In Vermont, I found a highly comprehensive plan.  Frankly, the state was willing to step up and tax their citizens to accomplish it.  I might not –- Governor Leavitt might not have proposed that, but at least they put forward a plan and defined the word “basic” and created a plan of affordability and a plan of pooling. 

I went to Tennessee.  Governor Bredesen has a much different approach.  He has defined a very simple plan, very basic, has a relatively low limit of liability, but it is $150 a month.  And the deal is $50 for the insured, $50 for the employer, and $50 from the state.  I predict thousands of people who currently do not have insurance will because of that basic plan.  It is not a comprehensive plan, but it fits the needs for the capacities of Tennessee. 

We have all seen other states, Michigan.  Governor Granholm has put forward a plan that would cover 1.1 Million uninsured people in the state of Michigan.  It is a basic plan.  It has a limit of liability around $35,000.  It has a basic preventative benefits.  She has a plan that if ably worked out they will be able to afford it.

 Illinois, Governor Blagojevich.  You go to Missouri.  Missouri has been completely reorienting their system under Governor Blount.  There is a lot of action going on right now.  As I indicate, we are working with almost two dozen states. 

Some say, well, listen, Congress ought to establish a basic benefit package, that is if Congress will have the capacity to constrain itself.  The reason a state will have that capacity is because states have to deal with one factor that the national government does not - they have to balance their budget, and they have to find someway to balance those scales between affordability and benefits.  It is a virtue of this system.

Now, let’s talk about risk pooling.  How do you go to the second part of the puzzle they have to solve?  How do we assure that the hard to insure can be part of this?  There are at least five ways that I can think of that states can choose from and that states are beginning to choose from to solve that problem.  The one that has had the most conversation recently has been the individual mandate.  Massachusetts chose to use it.  It has been discussed in California.  It is being discussed in Illinois.  But it is not being discussed in a lot of other places who are solving the pooling problem a different way.  Some are choosing to use their Medicaid population as a pooled population.  Others say, “We will use our state employee benefits as a means of being able to create a pool sufficient to solve that problem.”  Others are using uninsured pools so that they are creating to allow the market to operate and then allow tax dollars to focus on those who need subsidies in that area.  Others are looking for reinsurance arrangements that would allow that to be solved.  Almost all of them are talking about a connector system that begins to allow that to occur. 

There is one thing I believe, we will look at Massachusetts over time as having piloted or at least tried this concept of a connector.  It is not just important in being able to pool risk; it is also a very important tool in being able to aggregate different contributions to a premium to make it affordable. 

Let us talk about affordability.  What does affordability mean?  Well it might mean different things to different states because at the root of that question is, who do we subsidize?  It may be that some states choose to subsidize to a high level, others may have a more constrained reaction to that.  The beauty of a federalist system, the laboratories of democracy, is that we will find a lot of different ways, and states will learn from one another. 

But there are two parts of the affordability question that have to be dealt with in every state.  The first deals with the problem that the Congress has to solve, that the federal government is in charge of, and that is this blatant discrimination that occurs between those who purchase health insurance through an employer and those who purchase on their own.  It is the problem of the teacher’s aide who works at the school but not enough hours to get insurance, who is married to a construction worker.  They make a pretty good living together, but neither of them has an insurance policy offered through their employer.  Consequently, they are forced to go out and buy it on their own and to buy it after they have paid their taxes.  And it is just too heavy a lift. 

In order for states to solve the affordability problem, Congress needs to solve that problem. 

The President put forward a proposal in the State of the Union, to make it uniform, standard deduction for those who have health insurance.  There are others who made proposals.  The bottom line is it needs to be solved if we are going to achieve an affordability plan in these states who are so interested in doing this. 

The second problem is how do we close the gap beyond that for those who simply cannot afford a basic plan?  The President has proposed the idea of some affordable choice grants where under certain conditions, the federal government can partner in the development of those plans. 

So I want to ask, could this happen?  Could we really see a system of insurance that would make it accessible to every American?”  I think the answer very clearly is yes from a financial standpoint.  As we work through these state plans, I would not take the time to go through any of them today individually, but if the states have the tools of the tax problems solved, a partner in affordability, they can solve these problems and that is the reason these governors are proposing it. 

How about politically?  Is it reasonable to expect that we will see in a political time like this?  May I just tell you that this whole atmosphere is reminiscent to me of 1995-1996 on welfare reform.  At that time, I was chairman of one of the governors’ associations; I was deeply involved in this.  The government was divided, the White House in one party, the Congress in another.  There were different opinions about welfare reform not only between the administration and the Congress, but different opinions in between the two houses of Congress and different opinions within parties. 

However, the states, the states were highly engaged in this problem.  Why?  Because they were dealing with this on the line everyday.  They were desperate to find a solution to this.  The states came forward in a bipartisan way and said, “Republican and Democrat, here are the problems we have to have solved if you want us to take care of this.  We will not all solve it in exactly the same way but give us the choice, get out of our way, and give us the tools and we will get it done.” 

Now, ten years in retrospect it is pretty clear now.  It worked!  But the atmosphere is eerily reminiscent of that.  I’m aware that the governors are, in fact, working right now to develop a list of tools. 

Let me just say in summary that I believe the picture of a nation with every person having access to a basic insurance policy at an affordable price looks a lot more like a 21st century network of PCs than it does a clunky, inefficient mainframe computers of the 1960s.  And the metaphor is intended.  Government has a role.  Government’s role is to be the organizer, not the proprietor.  The poor, the elderly, the disabled need to be able to turn to Medicare and Medicaid and SCHIP as they have in the past.  Every other American deserves to have a choice of basic plans.  And those who cannot afford even a basic plan, we have an obligation to step up.  The result will be better health.  It will be lower costs for all Americans.  Thank you.

 Christopher DeMuth:  Secretary Leavitt has agreed to take questions.  I will call on you.  We have two roving microphones.  Please wait until the microphone arrives.  I would appreciate it if you would introduce yourself before asking your brief question.  The floor is open.  Who is going to break the ice here?  This gentleman –-

 Morton Kondracke:  Hi, Morton Kondracke from Roll Call.  Why did the President not market his proposal as a universal coverage plan that would offer hope to all kinds of people?  Why leave that idea, basically, for Democrats and for some states?

 Michael Leavitt:  I believe there is now a widely held aspiration for every person to have access to an affordable basic plan.  We tend to use different terms in the way we use it.  Sometimes the Democrats like the word “universal.”  Republicans like the word “every.”  But the reality is the proposal is the same: People need access to insurance.  What the President said in the State of the Union was, “We need to solve that puzzle, and the place to solve it is where the innovations are taking place and that is in the states.”  He said two things.  “I want the Congress to deal with the problem that they uniquely can solve, and that is the blatant discrimination, the undefendable discrimination that occurs between those who buy in the private market and those who buy through their employer.” 

And second, he said, “I want the Secretary of Health and Human Services to go out and talk to the states, and let us begin to organize a plan at the grassroots level where the solutions will be found.”  And we can organize a plan, hopefully a plan that will have bipartisan participation in which we can say, “Let us go together and find out a way to do it.  We may not do it in Congress, we can do it across the country, and we need Congress to cooperate to provide the tools.”  I believe that this may be a moment in history where that could happen.  And at that point, a lot of people would be saying, “Let us solve this problem.”

 Tom Robinson:  Secretary, Tom Robinson with Health Care.  How do you address the dilemma that some have articulated that even if there is universal insurance, the system is not strong enough to provide the universal access?

 Michael Leavitt:  Elaborate a little on that question.  I’m not sure.

 Tom Robinson:  Some say that the health care system is simply not comprehensive enough to provide the care that the people would need if ever it would have covered.  It is a pretty comprehensive question.

 Michael Leavitt:  Thank you.  I believe that people are getting care, today.  As I indicate, I think it is the wrong kind of care in many cases.  It is at the wrong place.  They are charging the wrong price, but it is because we really do in many ways have a two-tiered system.  We have those who have insurance and those who do not, and those who do not end up in a public system where they go to hospitals and wait in line in an emergency room.  We are paying for that care.  We are paying for it in a lot of different ways.  We are paying for it with the inefficiency.  We are paying for it with the health that ultimately we are missing.  We are also paying for it in cost-shifts from private employers into this system, and we are paying about 30 billion dollars in public dollars going to support it. 

Now, we have the infrastructure in place and the restructuring of the business model.  It is not going to happen overnight.  It should not happen overnight.  We need public hospitals.  We have to have hospitals that are able to cover those who, for whatever reason, do not have insurance.  We have to transition our way.  But listen, if people are better off with insurance -- I was in New Orleans a couple of weeks ago.  I walked through clinic after clinic after clinic.  And I sat down by people who were –- listen, these are people who are uninsured.  And I would say to them, “You got this clinic.  It is nice that you can come here.” 

There are some people who asked the question, “Would you rather have these clinics, or would you rather have insurance?”  And I did not know the answer, but I suspected the answer.  The gentleman said, “You just get treated better when you have insurance.” 

Over and over, I heard that message.  It is not only about their self-dignity, it is also about having people in a system that begins to help manage the efficiency of the system.  I believe we have the basic assets.  I believe we have the money that is in the system already.  We are paying 16 percent of our entire gross domestic product on health care.  It is impossible for me to understand the argument we do not have enough money in the system.  And frankly, we are not producing health outcomes that are measurably better than those who pay substantially less.  Could it be that our system is not sufficient as it could be?

 Grace Marie Turner:  Mr. Secretary, thank you so much for your coming today and for inspiring us about free market ideas for health reform.  I’m particularly interested –- Grace Marie Turner, Galen Institute.  I’m particularly interested in your comments about crowd-out, and the fact that Jonathan Gruber of MIT work has shown so much that as you increase access to public coverage, that especially to higher income levels, the target SCHIP population, that you crowd-out private coverage. 

And obviously, if Congress is thinking about spending $75 billion on expanding SCHIP, you have to ask that question.  But I’m interested in talking with the states.  What is their perspective on SCHIP expansion?  Because, obviously, they have to pay part of this bill if it were expanded to 400 percent of top coverage, and poverty may not necessarily add to the bottom line of the insured.

 Michael Leavitt:  Let me say I have been a governor, and I understand the economics of the state, and it is not at all surprising that some governors view SCHIP as a means of being able to expand the roles of those who are insured.  May I suggest to you that for the most part, that is not an issue of expanding health care as much as it is a dispute between partners on who is going to pay the most.  I was there when SCHIP was passed and, by the way, SCHIP was passed in a divided government with bipartisan support as a purpose of helping low-income children.  But it has now begun to be used because of the enhanced match to cover other populations. 

But again, it comes down to how we are going to organize the vast majority of our system.  We clearly have a system and continue to need a system where those who are needy have capacity to get insurance.  But the strategy I have laid out today says that as a compassionate nation, we assure that if you are needy, if you are disabled, or you are elderly, or if you are low-income, you have help and you have coverage.  Everyone else needs to have access to a market place that will provide them with choices that will continue to drive costs down and quality up. 

I might add that is a phrase we ought to spend some time talking about it.  I hope someone will ask me a little later in this conversation about the cost issues because just having everyone have insurance is not going to solve the cost problem.  We need to reflect market realities and create a system of competition based on value and transparency in the broad construct of our system, not just in access to health insurance.

 Bruce Smith:  Bruce Smith, George Mason University.  We heard this morning, Mr. Secretary, that on Part D only 7 percent of those costs are covered by premium, 80 percent by the government.  Now, if as you suggest, and I think that it would be a good idea to try to use Medicaid as a basis for getting states to offer universal coverage.  But are there enough resources there to do it?  If you are going to subsidize things, people will be glad to have insurance, but what part of the insurance bill could be paid by people in the former premiums if you did have a more universal type coverage?  And how much would you have to subsidize, and how much could we not afford to subsidize?

 Michael Leavitt:  Look, let me acknowledge that every state would be slightly different, but when you begin to model each state as we have done –- if you say then, let’s start with the tools you already have and then let’s add three new tools that you do not have.  The one would be solving this tax dilemma because once you solve the tax dilemma and you take the dollars that are currently going to people who are buying insurance to an employer and allow those who do not have insurance to have the same benefit no matter how you go about it, you put dollars into the hands of a health care –- of a health insurance purchaser.  And that goes a long way to close this affordability gap, a long way.

The second tool would be –- what I referred to earlier as affordable choice grants, where I believe that it is not unreasonable for us as a nation to begin asking the question –- well, for us a nation, as a country to help the states and  close the affordability gap for the very needy. 

And lastly, there are a lot of states who are already spending billions of dollars to support hospitals, and they need to continue to support those hospitals.  But one must ask the question, is it not reasonable to use at least a portion of that money that is perpetually being used to pay for the uninsured to buy at least some people private health insurance policy?  Now, not all of it, not all at once, but does it not make sense as an ongoing strategy? 

Now, you start taking the tools they already have and you add those four tools.  Every state, I believe, every state can find a way if they define a plan, define a basic plan, just select a solution for pooling, create a path of affordability.  Every state in this country in relatively short time could enact this.  May I say there is nothing unprecedented about this happening?  Think about car insurance.  There is no federal law about people having car insurance, but in every state in America we have a financial responsibility law, as well as a mandatory insurance law.  And it happened because the states wanted to solve a problem.  They solved it slightly differently, but they solved it.  And we have a network today that provides that benefit.  The same thing can happen with the states.  The finances are there. 

 John Graham:  Thank you, sir.  The President has talked -- John Graham from the Pacific Research Institute in California.  The President has a goal of portability and that is one goal of the tax reform.  If you allow the states or encourage the states to go off in all different directions with respect to organizing the private insurance market, Americans also like to move across stateliness.  So is there not a risk of having more friction in the individual American moving from one state to another?  Under the Commonwealth connector and then to Governor Schwarzenegger’s connector when he moves from Boston to Los Angeles, how do we manage that trade off?

 Michael Leavitt:  I’m going to challenge you to think a little differently here, all of you.  I mentioned the fact that I thought that the National System of Insurance in the future would look more like a 21st century network of PCs than it will 50 mainframes.  One of the things that might ultimately need to happen is to have some kind of interstate pooling of risk, where by agreement people can not only pool risk but also begin to share portability.  The virtue of that is that we, through the laboratories of democracy, we learn. 

The complexities of health care are legion and they are absolute.  If you divide this problem in a way that will allow innovation and experimentation, we will find ways to solve it, and we will continually get better.  That is the uniquely American way.  That is what distinguishes our economy from virtually any other economy in the world.  And yet, we have failed to use that very simple philosophy in our health care system.  Government needs to be an organizer of free markets and allow them to work.  And when they do, it can work in health care.  We have seen it over and over again.  People simply do not have access to information that allows them to make judgments on quality and cost.  I’m continuing to tempt you to ask me about the cost question. 

 Jill Wexler:  Jill Wexler with Managed Healthcare Executive Magazine.  This is not exactly on cost but more related to the previous questions.  Some of the basic state coverage plans that you sort of described seem to have caps that might limit how much coverage a person would get.  And I’m wondering what happens to individuals who have very high health care costs in a particular year.  Would an appropriate role for the government be to provide some kind of catastrophic roll-back coverage for high-cost individuals?

 Michael Leavitt:  Yes.  May -- a number of states that I have talked with have thought about that as an alternative.  It is clear that some of the plans that I have looked at that have low limit of liability, they will cover the basic needs for 99 percent of the population.  The 1 percent, however, will produce 25 percent of the cost.  And so in the same way that we have to have some way to pay for uncompensated care, we need to have a way to cover under insured.  The important thing is that we get them into a system. 

May I say, I do not think we have a health care system in America.  What we have is a large, robust, rapidly-growing health care sector.  There is nothing about our sector that qualifies it for a system.  It is not connected.  It is completely diffused, and I continue to invite someone to ask me about cost. 

 Laura Truman:  Laura Truman with the Coalition for Affordable Health Coverage.  One of the arguments made by people who are now in leadership roles in Congress which has certain political appeal is we just should offer people the kind of coverage that we have offered to us as members of Congress.  Everybody should be able to have that kind of coverage.  And so, I wanted to hear your response and thoughts on that.

 Michael Leavitt:  My belief is that we go back to the question, is there more virtue in having a thousand people with the basic affordable policy than five hundred who have what Congress have and five hundred who have nothing?  Would I like everybody to have that Congressional card?  Yes, but let us not forget that one side says insurance and the other side says credit.  Because ultimately, the vast majority of the charges that go on that card go on to the credit of our future generation.  This is about bringing a sense of balance. 

And one of the virtues of having a network, the way I have described it is that the states have to wrestle with that dilemma and balance affordability with benefit.  Now, that does not preclude anyone from having more benefit if they wanted, but having a basic plan for everyone would be a vast step forward, not just in the individual lives of those who lack having it but it would be a major step forward in the context of a system of health care. 

 Christopher DeMuth:  Secretary Leavitt, there are many more questions but may I find it to interrupt with one of my own?  I wonder, do you have any thoughts about the issue of cost?

 Michael Leavitt:  Well, yes, I do.  As a matter of fact, I do.  May I just say that we have a two-part dilemma that is evident to all of you.  One is that every American needs access.  Every American needs access to a basic insurance policy at a cost that is affordable, but we also have to have –- it is not enough to just have access to health insurance.  We have to be in a system that begins to create competition based on value.  Now there are some who say competition does not work in health care.  That is not true.  We have seen it in Part D.  We have seen it in many other areas.  What we lack is the capacity for that information to be available.

I mentioned to you I have just become a grandfather.  I had a birthday.  The context to that, I’m now 56 years old, and I was reminded on my birthday that I needed to have one of those over-50 tests.  I’m talking about a colonoscopy here.  Now, I want to just share with you my personal experience because I think it illustrates in a very real way what the system looks like today, and what a system of competition based on value ought to look like.  I had one of these over-50 tests when I turned 50.  I gave them my insurance card and sat back to sort of endure the experience.  That is all I can tell you about it.  It all turned out okay. 

When I turned 56, I decided to get another one.  I said I’m just out of a little field trip on this.  I’m going to call and ask people, “When can you see me, and how much will this cost?”  I called two places here in Washington, D.C.  Both places said to me, “I’m sorry, we cannot tell you.”  Now, that was unsatisfying to me.  And so, I called a couple of doctors at HHS and I said, “Let us do a little field trip on this and help me design, if you will, what you call in the business an episode of care.”  That is a little bid speck on my colonoscopy. 

So I called back the doctors’ offices and we went through each item.  It was not that hard.  It turned out that the first one was $6,500.  The second one was $5,500.  Now, I have to tell you I was absolutely blown away by what they told me.  I had no idea how much it cost, which of course, demonstrates one of the real flaws in our system today.  Nobody has a clue how much health care costs.  And they have no way of finding out.

 Well, I went home to my wife.  By the way, I bought one of those health savings accounts.  I have a serious interest in this now.  I said to Jackie she needs to get one, too.  We are talking about two, two times $5,000 or $6,000.  We are talking about serious money here.  I said, “Maybe when we go home to Utah to see the kids, maybe they are cheaper out there.”  So I called up and sure enough went through my little episode of care, and it was about $3,000 out there.  That is important, but then a fascinating thing started to happen to me.  I started wondering, I wonder if there is some difference between the $6,000 one and the $3,000 one.  You never want to cut any corners when you are talking of colonoscopy. 

Well, it occurred to me I was doing exactly what we do not want to happen in our health care sector or in our health care system.  I was comparing quality with cost.  In absence of any information about the quality of that procedure, I was assuming the most expensive was the best.  We all know that is not true.  I thought to myself that is a great example of what is wrong with the system.  Would it not have been a lot better if instead of having to design my own little episode of care, if there were some standard episodes of care that every consumer could use and understand what the cost of that procedure I should expect?  Would it not be a lot better if rather than have to guess between the $3,000 and the $6,000 version, there was some kind of independent evaluation of the quality so when I find out they are the same, I could make a consumer choice?  Would it not be a lot better if I did not have to call around and make all this sort of embarrassing phone calls to figure this out?  What I’m describing for you is good old-fashioned competition.  What I’m providing you a vision of, I hope, is a system of value or competition based on value. 

I will just tell you there are four things we have to do to get there.  The first is we have to have electronically-connected medical records.  You have heard a lot about it.  I’m not going to go beyond that, but it is clear that you cannot go from a sector to a system without connecting it electronically.

Second, there has to be some broadly accepted universally agreed upon standards that the medical community themselves have devised on what constitutes good health care. 

Third, there has to be episodes of care that have been defined so people know what goes in to health care. 

And lastly, the incentives have to be right.  Everyone in the system, everyone has to have an incentive to provide high quality, low-cost care, including the consumer and the provider and the payer.  Everyone.  It is a system of competition based on value now.  We do not have the time, but I would love to tell you about what we are doing to create electronic medical records, what we are doing to define standards of quality, to define episodes of care. 

You have seen what is happening in Congress and other places with payers as we begin to wrestle with how to create the right incentives.  I believe based on what we are doing within two years, you will begin to see fragments of this system of competition based on value.  I think in five years, the word “value” is going to be a regular part of the medical lexicon in this country.  I think in 10 years, this is the way the system will work.  And when it does, we will look back on the last decade as a remarkably transformative event when we got better health at lower cost for all Americans.  Thank you.

Christopher DeMuth:  Secretary Leavitt, thank you for coming over this afternoon and for your terrific and very impressive presentation.  Ladies and gentlemen, we are adjourned.

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