Editor’s Note: Much of the burden of implementing the newly passed health reform legislation will fall on the Centers for Medicare and Medicaid Services. The agency must handle this task while continuing to perform its already daunting duties involving Medicare, Medicaid, the State Children’s Health Insurance Program, and many other functions.

How well equipped is the agency to handle all of this? To discuss this and other issues, on April 9 we convened a Health Affairs Blog Roundtable consisting of four people intimately familiar with CMS and the challenges it faces: Robert Berenson, senior fellow, Urban Institute, who was in charge of Medicare payment policy and managed care contracting at the Health Care Financing Administration (as CMS was previously known) from 1998 to 2000; Thomas Scully, senior counsel, Alston & Byrd, and administrator of CMS from 2001 to 2004; Bruce Vladeck, senior adviser, Nexera Inc., and HCFA administrator from 1992 to 1997; and Gail Wilensky, senior fellow, Project HOPE, and HCFA administrator from 1990 to 1992. Health Affairs Founding Editor John Iglehart and I moderated the discussion.

Below is a edited transcript of the Roundtable. You can listen to a recording of the entire Roundtable, and a shorter post featuring highlights of the Roundtable discussion was posted earlier as well. You can also read a previous Health Affairs Blog Roundtable about CMS involving Berenson, Vladeck, Wilensky, and Kerry Weems, who ran CMS on an acting basis for President George W. Bush.

Please note that the Roundtable was conducted before the nominations of Donald Berwick to be Administrator of the Centers for Medicare and Medicaid Services and Jonathan Woodson to be Assistant Secretary of Defense for Health Affairs.

CHRIS FLEMING:  Thank you for joining us in this conversation about the Centers for Medicare and Medicaid Services and implementing health reform.  I just quickly wanted to recognize that we have four folks with us who are intimately familiar with the challenges that the agency will be facing:

  • Robert Berenson, who was in charge of Medicare payment policy and managed care contracting at the Health Care Financing Administration, which was the predecessor agency to CMS, from 1998 to 2000;
  • Tom Scully, who ran CMS from 2001 to 2004 under President Bush;
  • Bruce Vladeck, who ran the agency under President Clinton;
  • And Gail Wilensky who also ran the agency under the first President Bush.

With that very brief introduction, I want to turn it over to John Iglehart to ask the first question.

Has The New Millennium Improved Things For CMS?

JOHN IGLEHART:  Thanks Chris.  In 1999, Health Affairs published an open letter titled “Crisis Facing HCFA and Millions of Americans.” I’ll read the first sentence and then pose the question: “The signatories to this statement believe that many of the difficulties that threaten to crippled the Health Care Financing Administration stem from an unwillingness of both Congress and the Clinton Administration to provide the agency the resources and administrative flexibility necessary to carry out its mammoth assignment.”

My question is whether you believe the state of the agency, now some 10 years later, has changed, whether it continues to be undermanned and under-resourced, or whether it’s in better shape, and whether the one billion dollars provided to implement the new health reform law is adequate for the task.

BRUCE VLADECK:  If anything, I think some of the problems are more severe than they were then.  Talk about being under-resourced and under-supported in a variety of ways: The fact that at this stage in the life of the Obama administration and in the context of everything else that’s been going on in health care, and the importance that the administration has attached to health care, there is no CMS administrator, there’s not even a formal nomination of an administrator — it’s just mind-boggling.  It’s almost incomprehensible.

GAIL WILENSKY:  There are, for me, a couple of levels of concern.  First, of course, having the one billion dollars does help, but it doesn’t make up for the lack of focus and attention that the agency has received for years, and it is particularly inexplicable that since September of 2007 the agency hasn’t had a confirmed administrator.

The agency has lost over the last decade or so a number of individuals who were very experienced in the rulemaking process, partly because of normal retirement, but partly because of the shortage of resources that have been accorded to the agency, even while there has been no lack of increased responsibilities.  I think the agency performs remarkably well given the mismatch between the burden and resources, but just throwing money at CMS now, while better than not having money, in no way makes up for the slights that the agency has received.

TOM SCULLY:  I couldn’t agree more.  CMS is probably going to go over a trillion dollars in spending annually with this bill at some point in the next few years.  It’s already – if you count Medicaid – probably well above $850 billion now, so it’s double the size of Defense Department spending.  Imagine if somebody went two years without a Secretary of Defense.  It’s the single biggest entity spending-wise in the government, and to not have somebody in there running it  — there are some great people, and the place goes on day to day, but the staff gets frustrated at not having defined political leadership.  It’s a bad thing and it worries me. 

Who knows if it is going to be Don Berwick or not — it seems likely.  But there’s a lot of discussion that he won’t be confirmed for months, that it will be political; that’s really a shame, whether you’re a Democrat or a Republican.  Ninety-five percent of this job is not, in my opinion, political.  Ninety-five percent of it is just making the trains run on time and making these programs run, and it’s crazy not to have somebody in there day to day, steering the ship.  

Marilyn Tavenner, the Deputy, is wonderful, but you should have a Senate-confirmed person in there as fast as you can, and I think it would really be a shame to politicize this nomination.  They need somebody in there.  The staff is frustrated not having somebody.  It’s absurd not to have somebody in there.

ROBERT BERENSON:  I agree with everything that my colleagues have said, and I’ll just add one thing.  On the $1 billion special appropriation — Tom would know this for sure — my understanding is that to implement the Medicare Modernization Act with the Part D drug benefit, there was a bolus of money, but it went away, after two years or something.  So it’s not an ongoing increase in resources, it’s to do one-time implementation.  But what the agency is being asked to do isn’t going to disappear after a couple of years.

SCULLY:  I totally agree.  Thank God there are a lot of very good people at the agency who have been there for a long time, and the place seems to be run pretty well.  But there’s no question — and I’m a pretty cheap Republican — that for the job it has to do, CMS is underfunded and undermanned.

BERENSON:  There’s a special ten billion dollars associated with the Center for Medicare and Medicaid Innovation, but there have already been some discussions that there will be a raid on some of that money to support vitally important functions that simply aren’t being done. That would shortchange one of the most important parts of this legislation: figuring out new organizational models and new payment systems to move the whole health care system. So there is a serious resources problem, and I think we all agree on that.

SCULLY:  Yes, one of the best things about CMS is that the bulk of the people, at least at policy level, are in Baltimore.  As a result, it’s a little bit insulated from politics, and most of the people there aren’t particularly political.

The bad thing about that is it’s in Baltimore and a lot of people in Washington don’t even know where it is and haven’t been there.  The first thing I did when I got to CMS, believe it or not, is I got a bus and got all the Senate Finance Committee staff and took them up to CMS to see what was there, and I did the same with the Ways and Means Committee Staff.  Ninety-nine percent of them have never been to CMS.  Out of sight, out of mind in some ways is a good thing and some ways is a bad thing.  The fact that the agency is in Baltimore depoliticizes it in some ways because it’s not right around the corner from the Capitol, but it also makes the vast job they have unfortunately kind of hard to understand for people on the Hill who are the ones who have to fund it.  That’s a problem.

Why Is CMS Chronically Underfunded?

IGLEHART:  Clearly the agency has suffered under both Democratic and Republican administrations.  As a follow-up: Is this kind of treatment inevitable for an agency like this, as the politicians see ways to gain points by bashing the agency on behalf of their local hospital, or beneficiaries, or physicians or whatever? Is it just endemic?

WILENSKY:  I think it’s the financing split between the entitlements and the support [for CMS’s administrative functions] coming out of appropriations that makes it endemic.  The support for the agency is competing against very scarce resources from the appropriations committees, and then it is always a question of whether or not members of Congress want to use these scarce appropriations dollars to support a bureaucracy on the one hand, or for low income children, education, and all of the other more popular programs on the other hand. If CMS were funded through an integrated single funding source, it would be less vulnerable.

SCULLY:  Gail is 100 percent right.  I don’t think people picking on CMS or HCFA that’s the problem.  The problem is that members of the Senate Finance Committee and the House Ways and Means Committee who care about health policy load on mandates, they pass these bills for the Medicare Drug benefit and its expansion, they want the agency to do back flips and they get angry when it doesn’t, they create all the policy mandates and the new programs, but they have no control over the funding. 

The appropriators are only tangentially interested day to day in Medicare and Medicaid; they’re more interested in building bridges, and funding AIDS research, and funding NIH [the National Institutes of Health].  They’ll give NIH tons of money. It’s a different political structure, and it’s an unfortunate accident of history, but the appropriators day to day are somewhat disconnected from the realities of running Medicare and Medicaid; it’s just not a priority for them.

So the  policymakers create huge new workloads, and the people who appropriate the money are off worrying about other things. There’s a disconnect; I think Gail is totally right.  Even little things like – there’s a reason there’s a CMS headquarters in Baltimore that’s relatively nice.  Gail personally, back when I was at OMB [the Office of Management and Budget] in the first Bush administration, spent a lot of time convincing OMB and the appropriators that the place needed a new headquarters in one place, which worked out well, and she was charming enough to get that through Congress.  Whereas the FDA [Food and Drug Administration], which is similar, has had the same fight for 30 years and is still split up over 8,000 buildings all through Baltimore.  As big a job as the FDA has, they have never gotten the political attention to even solve that problem.

VLADECK:  The appropriations process is a problem, and Gail is right that the underlying problem is that all the benefit money goes out of entitlement funds and the operating budget is appropriated.  But given that, I think it’s a little unfair to blame it entirely on the Congress because CMS routinely gets screwed within HHS, too, in their budgetary process. 

How can you compete with curing cancer, or preventing epidemics at CDC, or grants to any variety of constituency groups, which is most of what the rest of the Department does?  CMS gets short shrift throughout the process, starting right within the Department. There are more vocal constituents and more press conferences and sound bites associated with the rest of the Department, which by and large, except for FDA, gives money away to people.

Gail is absolutely right. The only solution is to fund CMS administration the way you fund the Social Security Administration, with a direct draw on the trust funds capped and overseen by the Congress.

SCULLY:  I totally agree.  There are two sides to that, though. The only entities that are funded directly from the trust fund — which is also an accident of history — are the Quality Improvement Organizations, formerly known as Peer Review Organizations.  When I came into CMS, I made a lot of changes to the QIOs. I think they’re wonderful organizations, but because they didn’t have any oversight, they were doing all kinds of wild stuff they shouldn’t have been doing.

So there is a balance to be had.  Funding CMS through the current appropriations system doesn’t work because there’s not enough money, but if you did it totally out of the trust funds, you’d need to have a lot more oversight to make sure that it didn’t get out of control.  In my opinion, the peer review organizations for a while were largely un-overseen, though I think they’re a lot better now.  Funding out the trust funds is the right thing to do, but you’ve got to be careful on that as well.

Addressing Fraud And Abuse: Prevention Versus Pay And Chase

IGLEHART:  Let me follow up and mention an interview I did with Kerry Weems in the last year that Health Affairs published. One of the interesting points he makes backs up what Bruce said was about HHS being a major part of the problem.  Kerry said, “I know, because I was the problem.” 

After this interview was over I said, “Kerry, this was a marvelous interview.  You were so candid.”  Kerry responded, “Well, confession is good for the soul.”

Kerry was very critical of both the Congress and the administration, and of the difference between the rhetoric that said yes, we do have to get rid of waste, fraud, and abuse, and the actual allocation of the resources, when that part of the program ran into the buzz saw that Bruce just mentioned.  With NIH grants, and child care, and a hundred other things, we’ll just hold waste, fraud, and abuse for the moment and not give it the money it perhaps needs.

So my question is with this new law, I’m wondering if you view the additional resources for waste, fraud, and abuse activities as a modest increase of resources, or perhaps as leading to a transformational change?  Where do you put that?

VLADECK:  I don’t know, and I have not looked at it closely.  But I don’t know of any funds that are earmarked for CMS at all.  I think as usual they’re giving it to the [HHS] Inspector General and to the Justice Department.

And again, it is much sexier from a political point of view to pay for cops and investigators than it is to pay the couple of hundred million dollars that are needed to upgrade the CMS data processing systems to do more preventive stuff, to do more data mining, to do more of the stuff that every credit card company and large retailer in the United States now does every night. It’s much sexier to have video of armed US agents breaking down the door of some phony DME [durable medical equipment] company than to invest the money in prevention so that the phony company never gets into the system in the first place.

SCULLY:  I totally agree.

WILENSKY:  Pay and chase is a very expensive and not very efficient way to try to go after fraud and abuse, but if you’re going to do the other, as Bruce was saying, you need to put in place systems that are now not there.  There is a lot of talk about increasing the focus on fraud and detection, but we’ll see where the money comes from.

BERENSON:  I would just re-emphasize Bruce’s point about the data mining.  For over a decade, the infamous McAllen, Texas has been either number one or in the top five in the country in home health spending. Atul Gawande deserves a lot of credit for pointing towards issues around physician culture.  But it could well be that there’s also some amount of fraud going on. Or something else we need to understand. We need an infrastructure to mine data, and do surveillance, and figure out what’s going on.  I haven’t seen the specific appropriation in the bill that would support that. 

CMS now has Peter Budetti, who has a very good background in this area, to be deputy administrator for program integrity, to give that activity at least more visibility. He’ll have a direct report to the administrator — if we ever get an administrator. It sounds like there is some seriousness here, but we will see if that is supported with some money to administer the increased emphasis.

SCULLY:  Peter’s a great guy, and he’s smart, and that’s a good move. 

In the relationship with Justice, theoretically CMS is the client.  The reality is they treat the CMS like dirt; they have all the money and they don’t really spend much time worrying about CMS.  I had multiple occasions where I tried to get Justice to talk to me about what their policy was and where they were going, and they acted like I worked for another country. The IG’s office was a little better. 

I don’t know if you guys went through that, but Justice has a lot of money and they have a little bounty fund.  Even when Justice is working things out with the HHS General Counsel’s office, they generally think of them as a nuisance.  So the whole relationship is a pay-and-chase situation where Medicare pays it, Medicare understands the policies, and even in the chasing Medicare is rarely really involved in what’s going on because Justice doesn’t talk to them very much.

BERENSON:  In the latter part of the Clinton Administration they actually set up a task force with Eric Holder being the Justice person meeting with Nancy-Anne [DeParle] on an ongoing basis, and so there’s some hope — given that Eric Holder is now Attorney General — that there would at least be some understanding over at Justice.  I know that he and the Secretary of HHS have talked about doing this on a joint basis.

SCULLY:  I was out of the government then, but that was the best it worked in the last 20 years that I’ve seen.  When I was the administrator, I can tell you, I would go over and pound on the door of Justice and be incredibly frustrated with the lack of understanding or involvement.

VLADECK:  This oscillates, because when I was administrator we had a pretty good relationship with Justice.  We didn’t get along with the IG at all — they would never tell us anything.

BERENSON:  I think 9/11 may have had an impact on Justice’s priorities.

SCULLY:  I got along with Ashcroft.  I knew him for years.  He was great.  He couldn’t get his own staff to call me back.

FLEMING: Just to change tack a little bit, you all have talked about the way that the agency has been understaffed and under-resourced, and that a one-shot infusion of resources is going to help but it’s not going to be enough.  Going forward, at least for the Democrats in Congress and for the Obama Administration, there are such huge political stakes in terms of making health reform work. Do you feel like those political stakes are going to make them come up with the resources and the manpower more than in the past, or is it going to be something where there is a lot of hoo-hah for a while, and then we’re going to settle into the same old patterns?

BERENSON:  I’m concerned that the focus is now on the new stuff that’s in the legislation which, you know, there’s a good infusion of funds to test new models.  But as Tom said earlier, the agency is fundamentally about making the trains run, and that part, the less sexy stuff, the stuff that may not be transformative, will continue to get short shrift while the Congress thinks that it is adequately funding the  new, important activities.  We have an ongoing problem regarding the basic functions of the agency.

SCULLY:  I agree, I don’t think it’s going to get any better.  As Bruce said earlier, you’ve got some very good people up there.  They get frustrated, and a lot of good people have left in the last decade, which is just a fact of life.  Secretary Sebelius, the new administrator, and the people in the White House have to understand that they’re very lucky to have people up there like Tim Hill, or Laurence Wilson, or Liz Richter who have been there for 15 years, are very smart, and make the place run on time.  They  have to give them more money and more attention — they’re running the place.  Make them feel needed, and make sure these really key people stay around, because I can tell you every couple of years people get frustrated and two or three really good people leave.  That’s really the biggest problem you have: no matter what administration you have, the day-to-day running of the operation is really driven by probably 30 or 40 people who have been there for their careers, who are really smart and good, and you want to make damn sure they stay.

VLADECK:  I think in every new administration there comes a point, which you hope is sooner rather than later, where the new people who come into the White House realize they can’t run the entire government from the West Wing and they have to give some support and assistance to their cabinet officers and to the people who actually run the government on an everyday basis.  It certainly was true of the Clinton Administration and I think it was true in the recent Bush Administration, but I’m not sure that transition has occurred yet in this administration.

WILENSKY; It looks like it hasn’t because of the delay in the appointment.  And it’s not just at CMS, it’s in other places as well involving health which are equally inexplicable, like the Assistant Secretary of Defense for Health Affairs.

VLADECK:  Or the General Counsel for HHS.

WILENSKY:  I find it bewildering, given the attention on health care in terms of reform and fraud and abuse, and on the health and well-being of soldiers, that you have these key functional appointments that are critical to the actual program operations being left vacant 15 months into the process.  To me, it reinforces the disconnect in the administration between very smart policy people and people who have experience and skills in running and implementing programs.  There’s a lack of appreciation that it’s not just about the policy and the politics.

SCULLY:  I think that’s true.  I had a little bit of an advantage because I was the White House OMB guy when Gail was running HCFA ten years before. I probably tortured her and she probably thought it was the same lack of understanding, and it’s probably true.  But at the end of working with Gail for four years I understood how important HCFA was and I got to know some of the staff, so when I came in I had a little leg up. 

There’s no question that the people in the White House don’t appreciate, for the most part, all of the stuff that’s going on in Baltimore.  When I was at OMB, I thought I knew what HCFA did.  Then I got there, and I realized that I understood about one one-thousandth of what was going on.  There are a zillion decisions made every day that I wasn’t aware of.

WILENSKY:  But Tom’s appointment wasn’t delayed; Bruce’s appointment wasn’t delayed; his replacement with Nancy Ann was expeditious.  There’s always tension, even within the Department, between the operating heads and the offices that support the Secretary as their main function.  Those kinds of tensions are traditional and cross party lines. 

To me, the inexplicable part is the vacancies in these key operating agencies that are central to what are reportedly major domestic priorities for the administration.  As I’ve said, I attribute at least part of this to a lack of understanding about the importance of implementation and operations to people in the most senior levels of the administration.

BERENSON:  At least for a significant period, the administration may have been wise to avoid putting a name up in the middle of all the partisanship over the health reform debate. If a name had come up last summer, during the talk about death panels, it probably would have produced a circus of a hearing at the Senate Finance Committee, because this position has to be confirmed.  But that’s now over, so it’s time to get an administration nominee announced.  

WILENSKY:  But they didn’t have any problem getting Peggy Hamberg as the FDA [Food and Drug Administration] Commissioner approved in March or April. I just don’t buy that. Sure November might have been a challenge, but anytime in the first six months ought not to have been more of an issue for that person than it was for FDA, and it certainly doesn’t explain why they don’t have somebody over in the Department of Defense running health affairs.

BERENSON:  I’m not defending the whole thing, but I’m just making an observation that it would have been counter-productive to put up Don Berwick, say, in November.  But it’s over, the bill has passed, and it’s time to get a name up there.

Tension Between CMS And The Rest Of HHS

VLADECK:  Gail touched a nerve a couple of minutes ago when talking about a little different aspect of this.  Every administration is different, every Secretary is different, but to me the most irksome part of the job was not OMB and people in the White House; Nancy Anne and I worked very well together.  Instead, it was the people in the staff divisions of the department and the so-called Secretary’s office. 

All you guys will recognize this immediately.  Somebody in ASPE [office of the Assistant Secretary for Planning and Evaluation] or ASMB [office of the Assistant Secretary for Management and Budget] told me, “Well, you know, my job is to protect the Secretary.” It’s their favorite line, part of their original orientation the first day on the job.  I said, “If you say that to me one more time, I’m going to punch you in the face.  What do you think, my job is to screw the Secretary?”  But that mentality is a cultural institutional thing that I don’t think is central to the problems of running the place, but reflects the sort of environment in which the biggest-spending agency in the federal government operates.

SCULLY:  I didn’t have that problem, fortunately, because every Secretary is different, and for whatever reason Tommy Thompson was a great person for me to work with.  I figured out pretty quickly that 95 percent of the money is at CMS, so for half of these people in these other jobs at ASMB and everywhere else, their view and their job and their mission is to second guess everything CMS does.

VLADECK:  Absolutely.

SCULLY:  As soon as I came in the door, I had about ten big fights with various people in the bureaucracy.  I immediately went to Thompson on all of them and we very quickly came to a position where I could ignore them all, which I functionally did for three years, and everything worked out well.  But that was upsetting to the people in the system.  There were about four months in between me and Mark McClellan, and four months after I left there were panels and meetings and boards that every other person in HHS set up to make sure that during that void they got in to second guess everything.  So by the time Mark got in there, there were multiple levels of bureaucracy for every damn decision because there are whole sections of the rest of HHS who think they exist to recreate everything CMS is doing.

From the point of view of making CMS’s life easier, clearing out a lot of that stuff would help a ton.  Fortunately for me, Secretary Thompson allowed me to ignore it all, but I watched it all re-form as soon as I left.

Challenges In Implementing Health Reform

IGLEHART:  There is something like 150 items that the administration will have to implement during 2010 from the health law.  A number of them pose a major challenge, and obviously if the administration should get off to a bad start or the wrong foot on implementation, that will only add to the divisions that already exist over the law. My question is what do you estimate will be the most challenging of those key provisions, whether it’s the prohibition on excluding children with preexisting conditions or something else.  What’s most challenging?

SCULLY:  The most important to me is that on January 1, 2014, you’re probably going to have, I would guess, 150 health exchanges.  You’ll have at least one in every state, and my guess is that the bigger states will have three to five by market.  That’s where the transfers of resources from tax dollars into subsidies for low income people are going to be.

The Medicaid infrastructure will have to expand a lot, but that infrastructure is kind of there.  The infrastructure to have 150 exchanges with risk adjustment and regulatory authorities and cash flows to go through all that is like Part D times ten.  A lot of it is going to be done by the states, but it’s a very short time line to make all that happen.  There’s a lot of structure. and I think that’s going to be tough to pull off.

WILENSKY:  I assumed you were talking more in the short term, and probably the biggest challenge is going to be how to set up the high risk pools.  You have to look at the relationship between the existing high risk pools in the states and the eligibility of new entrants, the displacement of existing state funds with some of the five billion in new federal dollars, and how to best implement all that on a going forward basis.  The functioning of the exchanges in the long term is probably the biggest challenge, but it like many other challenges is primarily a state challenge.  Getting the high risk pools off the ground is going to be at least initially an HHS challenge.  They’re already trying to grapple with the details.

IGLEHART:  Let me follow up.  Obviously, the existing state high risk pools do not cover very many people, I suppose because it’s expensive for the high risk people to pay the bill.  But is there something in the law that will make it easier or make the new high risk pools more effective than the existing pools?

WILENSKY:  Well, the problem with the high risk pools for the most part has been that they’ve only been partially subsidized.  You are segregating predictably high spenders.  If you don’t subsidize them substantially, the cost of their coverage is going to be very high, and that limits the number of people who are going to take advantage of this kind of insurance.

There will be a lot of regulations needed to implement specific provisions of the law such as being uninsurable for six months, how it will have to be documented, and how to price it relative to the standard offerings in the state.  I don’t know ultimately how much money could be used.  I just remember during the 2008 election, there was some, shall we say, high level skepticism voiced concerning the ten billion dollar figure that the McCain campaign had raised as being adequate.  So it’s not only who is eligible and how it will be run, but how fast do they blow through 5 billion dollars.

SCULLY:  Well, it’s two billion a year for two and a half years, but I think you’re going to find also far more insurance companies participating in the high risk pools for a different reason, too.  If you look back at when we did Part D, a lot of people got into those very short-term Medicare prescription drug discount cards because they thought it was a way to kind of get training wheels for getting into the bigger programs.  I think if states are getting into doing high risk pools, and there are more people in them with additional subsidies, more and more insurance companies will show up during that period just to get into the workings of the state because it’s going to be training wheels for doing the exchanges.  Even if they are underfunded and they don’t work perfectly, there are going to be a lot more people participating and a lot more focus on it than there would have been without this.

Who Were The Big Winners And Losers In Health Reform?

IGLEHART:  Let me ask, of the major stakeholders, health plans, hospitals, doctors, pharma, who in your estimation came out the winner and who lost the most during the course of this?

SCULLY:  Taxpayers had a rough year.

WILENSKY:  Upper-income taxpayers.

VLADECK:  It’s hard to make the case that any component of the provider community got very seriously hurt.  If you use as the baseline for analysis what’s correct, which is what likely would have happened in the absence of the passage of health reform, then I think large parts of the health care community got away easy. 

In fact we’re going to see, if we ever get a coherent deficit-reduction plan, that this process isn’t over in terms of either reducing the amount of money going into certain segments of the industry or increasing the amount that is taken out. But one of the things that was very different about the politics of 2009-2010, as compared to the politics of ’93 and ’94, was that very early in the process, all of the major provider stakeholder groups came to the belief that they were getting off relatively easy; if they could only hold to that, it was probably better than what the status quo would have produced.

WILENSKY:  I don’t know about relative to the status quo – I don’t necessarily agree with that.  I don’t think we can tell yet who the real winners and losers will be until we see a lot more specifics.  It depends on what happens with Medicaid rates; that’s half the increase of the insured.  It depends on how the negotiated plans and the exchanges are structured, and at what rates.  It could be that the provider community in general receives substantial benefits because of the increased number of insured people or the benefit could be much more limited. 

SCULLY:  Well, the bottom line is that it’s not really a restructuring or reform bill, it’s a universal coverage bill. I happen to think that morally may be the right thing to do, though you can debate whether you should do it with the deficits we have. 

You took a trillion dollars of new spending over the next decade, of which $600 billion is coming from taxes and other fees from the non-health care sector, and you put that trillion dollars into health care.  It’s hard to find losers when you’ve injected a bunch of money from the rest of the economy into health care, and even the health care cuts are cuts in things like Medicare Advantage, which were arguably overpaid and the cuts aren’t unreasonable, and the other provider cuts are by historical measures pretty minimal. So I think generally it’s hard to find losers in the health care sector. 

If you look at the winners in the health care sector, to my mind the biggest winner is the hospitals, perhaps excepting inner-city hospitals.  But as a general matter, there’s $45 billion dollars a year in the system now for hospitals to pay for the indigent-care people coming in through the back doors through Medicare DSH [Disproportionate Share] and Medicaid DSH.  Over the next ten years, about 70 to 80 percent of that will go away with people having insurance cards, but only about 15 percent of the existing subsidies go away.  That may not work out as well for inner-city hospitals with high levels of indigent care, but the bond prices and stock prices will tell you that most hospitals are winners, at least in this bill.  Assuming there are no subsequent bills, hospitals are probably the biggest winners.  They got hardly touched and got a lot of new money.

BERENSON:  I agree with that.  Hospitals, in fact, were inside the tent very early on. They negotiated a decrease in their Medicare updates that they figured out was acceptable, and now they are sort of off limits until 2020 from the new board that is supposed to maintain Medicare spending targets.  Their business model is pretty much intact.

In the long run, if we’re really serious about restructuring health delivery and developing new payment models, hospitals have to somehow go from being major “profit centers” to major “cost centers.”  Yet it looks like with this legislation they are protected, at least for the next decade, in their basic business model, which may not be one that we can afford.  So I agree with Tom: hospitals have done pretty well. 

There have been a lot of different opinions about whether the insurance industry came out as winners or losers. The point I would make is that the business model for insurance has to change.  Those companies that are willing to no longer avoid risk but do well at managing risk will be winners.  They’ll get lots more people, and there will be, at least to some extent, more competition among health insurers.  Those whose business models involve avoiding sick people will now have to change from that to something else, and we’ll see if they can make that transition.

Reforming The Delivery System

IGLEHART:  What about physicians?

WILENSKY:  Well, they were primarily ignored, both in terms of what happens with their impending fee reduction and how they will ultimately be incorporated into a reformed delivery system.  To me, this is the most disappointing part of the bill, which I agree is primarily about coverage expansion. It is very difficult to think about reforming the delivery system without more aggressive moves to redesign  reimbursement and organization.

Let me go back to the comment about the hospitals and their maintaining their business model.  I agree with the assessment that hospitals appear to be substantial winners in health care reform.  I’m concerned that hospitals would be the recepients of the money in so many of the models that are being tested in the pilot projects.  It certainly is worthwhile to see what happens in those kinds of pilots. 

However, many of the delivery system reforms are likely to result in less hospital use.  Therefore, it’s not clear to me that primarily or only focusing on the hospital as the payment recipient is going to give us much insight into some of the future delivery models.  I am hopeful that we will see more innovation in the pilots than is suggested, at least at first glance.

VLADECK:  Every time I get depressed over the logic of some of the mandatory initiatives in so-called payment reform legislation, I remember that for the first time really since the early 1980s CMS is going to have the resources to essentially do noncongressionally mandated experimentation and program development, and historically that’s where important changes in the Medicare program, and arguably in large parts of the health care system, have come from.  DRG’s [diagnostic-related groups] were not a congressional mandate.  The hospice benefit was not a congressional mandate.  PACE [Program of All-inclusive Care for the Elderly] wasn’t a congressional mandate.  A lot of the quality stuff was not a congressional mandate.

I think one of the examples Gail had in mind was the so-called bundled payment for hospital, physician, and post-acute services.  Hospitals are a major source of the problems in post-acute services, and I haven’t talked yet to a single hospital administrator who is really excited about doing this.  But the people who actually understand these issues have all kinds of interesting ideas about ways to reconfigure that with the hospitals as part of it but not in the middle of it, and I think they’ll find a lot of receptivity to those ideas. 

Now for the first time in a generation, people have the ability to test and experiment with new ideas not written into the statute, and to me that’s the most exciting and positive delivery system idea in the whole bill.  Once again, one of the great engines historically of innovation in the American health care system is going to have enough fuel to operate.

SCULLY:  I agree.  As you mentioned, the demo staff and the budget at CMS was strangled and non-existent.  For the size of the agency CMS is, it was a joke that they couldn’t really do anything because they didn’t have the money or the staff.  For example, it took a long time to get the ACE [Acute-Care Episode] demo – which bundles physician and hospital payments for cardiac services – up and running, even though it makes a lot of sense.  The Premier quality demo that I started years ago was like pulling teeth.  There are a lot of things; people know they want to do this, but there is no structural way to get it done, and this will be a huge help.

State-Based Health Insurance Exchanges

IGLEHART:  Are state-based exchanges likely to lead to a less stringent regulatory regime than one might envision in a national exchange?

WILENSKY:  More diversity for sure.

VLADECK:  They probably will.  On the other hand, I can’t even begin to imagine what a national exchange would look like.  We’re not talking about the stock market here.  We’re talking about what is essentially still a very heterogeneous industry from market to market.  As Tom suggested earlier, even the state is a big unit of operation in the bigger states relative to how health care delivery and health care insurance really work.

To me, the most fascinating intellectual challenge in running HCFA was that you have a uniform benefit structure, and what was supposed to be a uniform insurance program, being administered across this incredibly diverse and heterogeneous country, with people with different health care problems, with totally different modes of organization in the health care system, different practice styles, different cultural values about all sorts of things, and it’s an insurance program. It’s still hard enough to do something like an exchange at anything much larger than the individual market level; even FEHBP [the Federal Employees Health Benefit Program], which people point to as a national system, is really a national umbrella over a series of market-based programs.

You may get the left-hand tail of the distribution in terms of the adequacy of regulation of the insurance market in those states which are the least effective or the least aggressive,  but the alternative would come with all sorts of costs and disadvantages of its own.  That’s a tradeoff you have to make in a very large, very complicated country.

SCULLY:  I think it’s going to be fine.  It’s probably the best thing they did.  Forgetting all the political rhetoric, if you look back to the bills that Gail and I wrote for Bush 1, or the bills written under Clinton and everyone else, the common denominator is local insurance exchanges, and there are a lot of ways to make them work. 

If you run an insurance company and there aren’t any rules around it, and you take on a cancer patient who is going to cost you $300,000 a year and you’re collecting $10,000 in premiums, you’re an idiot, and your shareholders or bondholders should fire you.  It’s not the insurance company’s problem.  If there are no rules, they’re going to do what they have to do.  I don’t particularly think that’s villainous. 

I think the exchanges will set up fair rules.  If you look at Part D as a model, you’re going to have risk adjustment among plans.  There’s not going to be much cherry picking.  You’re going to have the plans policing themselves in a market that’s much more structured as much as regulators policing them.  You’re going to have much fairer insurance rules and much more rational markets seven or eight years from now once this thing gets going.  There will be a lot of hiccups along the road, but I think it will significantly help.  I think the right way to do it is more than state by state, but substate market by substate market, and my guess is that’s what will happen.

What Would Don Berwick Mean For CMS

FLEMING:  Assuming it is Don Berwick as the nominee for CMS, what particular impact might he have on the agency and how it operates in the context of health reform and other functions?

BERENSON:  I’ll take that one on if I could.  Don Berwick’s particular expertise, in addition to his passion for improving health care, is in thinking about new forms of organization and delivery. That’s another reason, if he is going to be the nominee, that they should get him in there right away.

One of the first and most important activities that CMS has to attend to is the Center for Medicare and Medicaid Innovation. Picking up on some earlier remarks, there are some things in the legislation that have been identified that the agency has to do in terms of some of the demos, but the agency has to figure out what it really wants to do. It has to formulate its vision for what the health care system should look like 10 to 15 years from now, and it has to develop a strategic plan for how to get there.

Berwick is as good as anybody around in thinking about those issues.  He should be there to figure out who should be the head of the Innovation Center and to be part of the critical thinking about how to proceed.  If he’s coming, he should arrive.

SCULLY:  I’ve talked to Don Berwick a little bit. I think he’s a great guy and a great pick for that kind of big-picture reformation thing.  One thing Bruce [Vladeck] and I discussed the other day that I hope Don keeps in mind is that it’s hard to get anything done at CMS if everyone hates you on the Hill.  CMS is the biggest spending entity in the country and the biggest thing that affects every congressional district. Every one of these guys, Democrat or Republican, has a health plan, or a hospital, or a DME [durable medical equipment] manufacturer in their District that’s angry every day, and you need to make sure that you put those fires out. A lot of the job is spending time on the Hill talking to both parties on a day-to-day, constituent-services basis, because it’s impossible to get anything done significantly with the agency if everyone in the world is shooting at it.

VLADECK:  Bob has made me a little uneasy.  Don Berwick is a very smart guy, and if he ends up in the job I think he’ll do a wonderful job.  But anyone who has the illusion that the administrator of the CMS is going to reshape the health care system is in the wrong line of work.  You can push it a little bit around the edges, you can establish some priorities, but even health care reform and $950 billion dollars is not going to reshape anything this large and this complex and this decentralized.  It’s important to keep in perspective.

CMS is an incredibly important part of the federal government; it does incredibly important stuff.  But anybody who has the notion that you’re going to change the world by running a couple of big insurance programs, I think, is subject to inside-the-beltway myopia.

BERENSON:  I agree with that, but a lot of the frustrations that doctors, hospitals, and insurers have had — Karen Ignagni says it almost all the time – was that the bill didn’t do enough to reform the delivery system. Everybody is looking in particular to Medicare to take the lead in this area. I think I agree with you, Bruce, that those may be unrealistic views.  But practically this innovation center gets to spend $10 billion. CMS is obviously not going to change the delivery system unilaterally, but interacting with private insurers and providers in a collaborative reform effort is going to take real leadership. My point is that that’s Berwick’s strength, so it would be a shame if he showed up after a lot of those initial decisions were made.

SCULLY:  Well, the reality is, if you’re the CMS administrator, you’ve got $400 billion dollars a year to drive behavior, and you’ve got to think of it that way.  I came in to CMS and tried to get the hospitals to give me quality data; they bitched and moaned, didn’t want to do it, wanted to make it voluntary.  So we just happened to stick a little provision in the bill that said well, you don’t have to use quality data, but if you don’t, you get market basket minus 0.4, and it was eventually market basket minus 2.0.   That is a whole lot more than $10 billion dollars, and it makes hospitals jump a lot faster.

I think all of the stuff is important for innovation — putting grants out and money out for that is important.  But from a policy point of view, Gail remembers, back in ’89 that we paid doctors one dollar more if they filed electronically and one dollar less if they filed their claims on paper. We went from 5 percent electronic claims when Gail was there to 97 percent in a year. Doctors bitched and moaned and complained, but they all immediately started filing electronic claims.

You’ve got $400 billion in Medicare. You’ve got less control in Medicaid, but you can drive a hell of a lot of change with the tools you have now if you use them right, and unfortunately, people don’t think of that enough.  Providers always bitch, but they always bitch no matter what.