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Washington Business Group on Health National Association of Manufacturers Health Agenda 1984-85: Pub/ic & Private Strategies . June 19-20, 1984 • L'Enfant Plaza Hotel • Washington, DC TI02970929

TABLE OF CONTENTS Agenda item Tab Balancing Competition and Regulation .............. 1 Medicare Reform ................................... 2 Negotiating with Providers ........................ 3 Capital Policy and Planning ....................... 4 Fringe Benefits Legislation ....................... 5 Medical Education ................................. 6 Health Care from the Perspective of the CEO Disability Management Corporate Culture T102970930

June 19, 1984 Dear Conference Participant: Welcome to "Health Agenda 1984-85: Public and Private Strategies. " In co-sponsoring this conference, the NAM and the WBGH have joined forces to pursue a mutual institutional goal of promoting more effective management of health costs. We"think employers working togethe~ at local, state and national levels have the best chance of bringing about reform in the health care marketplace. During today and tomorrow you will hear a broad array of speakers -- health policy experts, corporate managers, benefits consultants, federal and state lawmakers, Congressional staff, researchers, and others -- discuss public policy issues and specific employer cost management strategies. We hope you will take advantage of the time allotted for interchange with those speakers as well as with others in the audience. Again, we are pleased to have you with us, and please feel free to cali on WBGH and NAM staff if we can make your partici- pation more meaningful. Best wishes for a productiv@ two days. Willis B. Goldbeck President Washington Business Group on Health ~ Alexander B o Trowbridge President National Association of Manufacturers TI02970931

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i. BALANCING COMPETITION AND REGULATION TI02970933

- BUSINESS AND HEALTH Creative Regulation Designed to Stimulate Competition BY RICHARD A. GEPHARDT An all-payer proposal based on a perJbrmance test helps providers and purchasers. Health care costs are rising. They are rising so fast that most people have been anes- thetized by the numbers. The rule of thumb that costs double every five years ap- plies to Medicare and Medicaid, and it also applies to employers. For example, three major St. Louis corporations looked at their health care cosls over the past five years. The best record was an increase of 100 percent; the worst record, 160 percent. At some point, the anesthesia wears off and the pain begins, At some point, employers wake up and take the courageous first step to curb their costs. But it is a complex problem to tackle -- one that hits some fundamental nerves about a fascination with new technology and a fear ofdying. It involves compassion for the poor and concern about the role of government. Continued debate is needed because America is rapidly on its way to spending 15, if not 20, percent of its gross national product on health care. That was fine while the pie was growing, but now additional health spending means less resources for other needs. The Kennedy- Gephardt proposal (H.R.4870) attempts to reduce the hemorrhaging without crushing the competition that is beginning to occur. The Kennedy-Gephardt proposal is designed to help the health system restructure, it is based on state health plans where the criteria for success is the moderation of health care cost increases. It is a performance test, rather than a series of rules and regulations that the state must follow. It has a carrot of financial incentives for states to implement such a plan, and the threat of a federal regulatory system if the state is not interested or fails to meet the performance test. States have the flexibility to implement a voluntary strategy, a competitive strategy or Rep. Richard A. Gephardt (D.-Mo.) is a member qf the House Budget, and Ways and Means Committees. COST MANAGEMENT REPORT a regulatory strategy. They can even combine strategies. The proposal is not perfect, but it outlines some of the hard choices that America will face over the next few years. Those hard choices will be made if, and when, Congress tackles the deficit problem. The deficits are huge and they run into the foreseeable future. The national debt is currently $1.2 trillion and will double in the next six.years unless some action is taken to curb it. Reducing the deficit is going to be difficult. While defense and taxes must be on the table, curbing health care ~osts is a critical part of the puzzle., too. Medicare and Medicaid currently cost $80 billion a year. They account for one-tenth of the federal budget, but they contribute one out of every five dollars in budget growth. No matter how Congress decides to slow Medicare and Medicaid spending, the private sector will be involved. There are some basic options for the federal government. It ca n cut benefits, raise taxes, pay providers less, or make the health system more efficient. Focusing on the last option makes the most sense. There are many things -- increased access to care, new technology and malpractice -- that fuel the fire of increasing costs. The structure of the health system itself also adds to these costs. A patient goes to the doctor. The doctor decides what is wrong and orders the test. Neither of them are responsible for the cost. A third party -- either an employer or the government -- picks up the tab. Just imagine if there were a car care program in which the government paid for a new car when anyone in America had a wreck. Ira person had a wreck, he or she would immediately go to the local car dealer and choose a new car. Most people probably would choose a Lincoln ora Cadillac, and steer away from a Chevette. Pretty soon everyone would be driving Cadillacs and the country would have a carcost crisis. Government expenditures for car care would be skyrocketingand Car Standard Review Organizations (CSROs) would be set up. APRIL 1984 T102970934

BUSINESS AND HEALTH Any industry in America -- if it were structured like the health system- could become as costly. In many ways the physicians, the hospitals, the employers and the consumers are all acting rationally. Restructuring for Efficiency The he.alth system needs to be restructured to encourage and reward efficleney. There are all too many examples of inefficiency. For example, the rate at which people are hospitalized varies tremendously around the country without a corresponding variation in health status. The people living in Olmstead County, Minn., which is served by the Mayo clinic, are in the hospital 38 percent less than the national average. In one town in Maine, 70 percent of the women will have hysterectomies by the time they are 75 years old. Twenty miles down the road, only 20 percent of the women will have that operation. The Kaiser Health Plan provides health care with 1.8 hospital beds per 1,000 people, while in St. Louis the ratio is 7 hospital beds per 1,000 people. Regulation might be needed to solve the financial crisis, but regulation will not address these kinds of inefficiencies. What is needed are competitive medical plans which reward providers and consumers for using the system efficiently. There are many positive signs that this is beginning to happen. Minneapolis now has 32 percent of its population enrolled in six competing health maintenance organizations. The premium increase for those HMOs was only 7 percent last year. Tulsa and Richmond, which three years ago had no alternative delivery systems, now have several health plans competing for patients. Deere & Co., Xerox, and Hewlett Packard are just three of many companies that have made major changes in how they offer health benefits. But these positive private sector developments are mere ripples on a tidal wave that may crush everything. While it might be preferable to wait five years and see what happens, the federal deficit necessitates major action in the health area by 1985 or 1986 at the latest. A national debate is needed now on how to stop the hemorrhaging without losing the patient. What kind of health system does America want in the year 2000? In many ways the choices are between a regulated or a competitive system. Many countries, like Canada and England, have a regulated system. An alternative is a competitive approach, but there are no well-developed competitive medical plans that serve large portions of the population. When Congress deregulated the airlines, American and.TWA were waiting in the wings ready to compete. But where are the TWAs of the health system? The Creative Side of Regulation The Kennedy-Gephardt proposal is a regulatory approach which accommodates competition. California, Wisconsin, Missouri and other states may take the competitive tack. They may work with employers and push competitive bidding or preferred provider organi- zations. States like Minnesota may have enough competition PAGE 20 within their borders so that their costs are already being moderated. These states may avoid regulation. Other states like New York or New Jersey may choose to regulate, based on past successes. In New York, for example, the rate of increase in hospital revenues was held below that of inflation. Alth'ough regulation may be necessary in the short term, it should be seen as an opportunity to restructure the system. Look closer at regulation. Under the Kennedy-Gephardt proposal, competitive medical plans (CMPs) are exempted from either state or federal prospective payment regulations. A CMP is a prepaid group of physicians and hospitals that agrees to provide all of the health services needed by a member in a year. This structure makes physicians and hospitals more careful about how they use resources. For example, in New Jersey, an HMO had an average length of stay for a normal delivery of a little over two days. When New Jersey implemented its regulatory system, the H MO was forced to pay an amount that was based on an average length of stay for a normal delivery of five days. Because New Jersey does not have an exemption, the HMO did not have an incentive to use the hospital efficiently. Some of the more tightly organized PPOs that employers are creating would fit the definition of a CM P and be allowed similar freedom. These escape valves will pres.erve private sector initiatives that use health resources more efficiently. But, there are two sides to a competitive market: thel2 supply side aiad the demand side. When employees ar~ making their annual decision between traditional insurance. and a C M P, they need to see prices. If they are insulated from the prices; then the market will not work. Affect on Employers One of the few provisions in the Kennedy-Gephardt proposal that directly affects employers is the equal contribution requirement. When an employer offers an employee several choices, the employer must contribute an equal amount regardless of the plan that the employee chooses. If the employee chooses a CMP and its premium is lower than the contribution, then the employee will receive at least 50 percent of the difference in the form of a cash rebate. The employer pockets the remainder of the difference. Employers have expressed dissatisfaction with the fact that CMP pricing follows that of traditional insurance, which is to charge what the market will bear. Thus, CMPs end up offering better benefits to attract employees rather than lowering premiums. The equal contribution requirement is a necessary provision to make a competitive health system control costs. Employers have a stake in participating in the health care debate. There .really is no difference between the public sector and the private sector in health care. While each sector picks up the tab, the elderly and the working population go to the same hospital. Employers and government should recognize their mutual financial problems and work together to'find a solution without crushing the competition that is beginning to develop. • APRIL 1984 T!02970935

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2. MED]~Cia~RE REFORM T102970937

CONFERENCE SUMMARY JOIIN IGLF, HART, ~ditor, Health Affairs, and Special Correspondent, the New England Journal of Medicine, Project Hope, Millwood, Va. Mr. IGLF, HART. As this productive Conference on the Future Of Medicare draws to a close, ] think that it is well to remember that the circumstances of this program reflect a predicament that faces not only the United States but virtually every industrialized nation in the world--almost regardless of political philosophy or health pol!cy approach. And that predicament is summed up simply by saying that health needs and demands are outstripping the re- sources available to meet them. To place this summary in a political context, which is appropri- nte because when all is said and done the solution to medicare's long-term l~nancing problem will be a political solution, we should note that we are gathered in the nugust chamber of a powerful congressional committee that oversees medicare. And it also over- sees most of the other big-ticket social entitlement programs that consume an ever larger percentage of the gross national product. For lhe last 5 years, this committee has struggled with tough prescriptions for dealing with the problem of health care costs. It demonstrated a boldness in the late 1970's by reporting out Presi- dent Carter's hospital cost containment legislation. The House of Representatives rejected that legislation in November 1979, based largely on the arguments of two young legislators named Stockman ~md Gephardt who favored the private sector's proposed solution-- the vo|untary effort. The VE has long been a dead letter, Stockman has been busy cutting social programs ever since from his powerful post at the OMB and Congressman Gephardt--a member of the Committee on Ways and Means--is pressing for a regulatory solution. So much for voluntarism. Another piece of political lore that I believe is worth mentioning. is that powerful health interests that usually were able to carry the day without much trouble, now are finding it increasingly diffi- cult to clnim policy victories. The American Medical Association, for example, won a stay of execution from mandatory assignment, 350 but the proposal--with the backing of the House Democratic lead- ership--clearl. ~..will be back next. session.. This is a classic, pocket- book msue, p~ttmg the economic standing of doctors against the out, f-pocket liability an elderly beneficiary must accept if he or she needs to visit a physician. Since the medicare pr.ogram was cre- ated doctors have enjoyed the discretion to bill patients directly if in their judgment medicare payments were inadequate, Now, a growing number of legislators are of the mind that doctors should be compelled to accept as adequate payment what medicare will allow because physician discretion is translating into an ever-larger financial burden for the elderly. I believe it is appropriate to point out that legislators who serve and have served--indeed, who sat in this very chair--on this com- mittee were responsible for social security cash benefit increases and medicare benefit improvements that establisl~ed in part the spending trends which are proving so troublesome today. My point is that placing blame, be it on legislators who enact the laws, doc- tors who render the service, hospitals which provide the physical facilities, or beneficiaries who demand and are indeed entitled by law to the care, is not a highly productive exercise. They are all party to a medical care system that has evolved from a time when the service proylded ~vas less complex and the expectations of the recipients were ]"ower. The services have become highly sophisticat- ed and costly, the physician population has grown dramatically as have the expectations of the beneficiaries. The fact of the matter is that there is no service in our society that is more highly valued today than medical care. So the challenge that lies ahead is not to d!minish medical care as a priority, but rather to improve the effi- ciency and effectiveness of its delivery. The opening remarks of Congressmen Shannon ond Moore re- flected this new sense of urgency. Both legislators characterized medicare's financing problems as the toughest domestic issue facing Congress in the immediate future, At the same time, though, Mr. Shannon indicated that he is not willing to abandon the expansion of the existing governmental role in extending social benefits. He did so by pointing out that adequate health care re- mains beyond the reach of many Americans, and adding: "We cannot allow the medicare financing crisis to divert attention away from the major work that remains to be done in assuring adequnte health care for all Americans." Mr. Moore, taking note of the recent enactment of medicare's DRG-based payment system stated that "the solutions we select are critical since they willset the direction in our health care delivery system in general just as the DRG prospective payment system ' * * is setting the direction for hospital payment * * *. We expect to see that used heavily outside medicare across the spectrum of our health care delivery system." You may recall the Govern- ment's steadfast promise of 1965, contained in the medicare law, that the program would take no policy steps that could be con- strued as seeking to influence the practice of medicine. Times clearly have changed. Maril~n Moon followed the Congressmen with an introduction to the medicare financing problem, a litany that has become familiar; as she pointed out, depletion of the HI trust fund is projected by