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Remarks on Value-Based Transformation and the IPI Model

Alex M. Azar II
Commonwealth Fund International Symposium on Health Care Policy
November 14, 2018
Washington, D.C.

In the long run, it will be to the benefit of every country, and all of our citizens, to have a drug-pricing system that is driven by fair competition and negotiation, not by freeriding off of one country’s policies. The Trump administration is bold enough to take on this system, reform it, and address the many other challenges I’ve laid out today.

As Prepared for Delivery

Good evening, everyone, and thank you for having me here.

It’s an honor to be invited here by the Commonwealth Fund. This is far from my first time coming to a Commonwealth event: Way back in the 2000s, when I was deputy secretary at HHS, I joined our then-Secretary, Mike Leavitt, at a similar event to this one.

Back then, I had a much smaller bald spot, and I don’t think I had to give a speech. It was a great deal.

Tonight is a unique opportunity to provide an update on a movement in American healthcare that got going under Secretary Leavitt, and one that is taking place all over the world: the movement from healthcare systems paying for procedures and sickness to paying for outcomes and health.

Such a transformation will involve special attention to some of the health challenges on which all of our countries spend the most: first, patients in need of significant support and comprehensive treatment for chronic illnesses, and second, high-cost prescription drugs. Today, I want to address how the United States aims to get better value in both areas —first on chronic illnesses, and then on drug pricing.

The high costs, and poor outcomes, of patients with chronic illnesses are often driven by what we know as social determinants of health. These social determinants would be of importance to HHS even if all we did was healthcare services, as many foreign health departments represented here today do. But HHS is health and human services, all under one roof. In our very structure, we are set up to think about all the needs of vulnerable Americans, not just their healthcare needs, and how to help them before they become seriously ill or need especially expensive interventions.

Unfortunately, this has not always led to the smartest balance of spending. HHS spends over $1 trillion a year on healthcare for elderly and vulnerable Americans through the Centers for Medicare & Medicaid Services, which far outstrips any other investments the federal government makes in Americans’ well-being outside of healthcare. There are a variety of reasons why the federal government takes the lead on financing healthcare, and that is not about to change. But we believe we could be spending less money on healthcare—and, most important, helping Americans live healthier lives—if we did a better job of aligning federal health investments with our investments in non-healthcare needs.

One reason this doesn’t happen already is the sheer complexity of our health and human services system. Many federal programs for low-income Americans, like nutrition and housing, do not live within our department. Moreover, human services and healthcare programs for vulnerable Americans are often administered at the state level—states run Medicaid, cash welfare, subsidized childcare, Head Start, and many more such programs. On top of all that, much of the support our country provides to struggling Americans does not flow through government: It’s provided by churches, charities and other nongovernmental organizations.

Now, it is easy to look at the complexity and diversity of this system as a challenge. But I believe it can be an asset, as long as we make it a priority to better integrate services and address social determinants of health. I want to offer some details now about how we are doing this. Social determinants are a special focus for Adam Boehler, whom I have appointed to serve as senior adviser for value-based transformation and innovation. In addition to wearing that hat, he also leads the Innovation Center at CMS, the part of HHS that funds Medicare and Medicaid, where we have significant power to test new payment models.

Social determinants of health is an abstract term, but for millions of Americans, it is a very tangible, frightening challenge: How can someone manage diabetes if they are constantly worrying about how they’re going to afford their meals each week? How can a mother with an asthmatic son really improve his health if it’s their living environment that’s driving his condition? This can feel like a frustrating, almost fruitless position for a healthcare provider, who understands what is driving the health conditions they’re trying to treat, who wants to help, but lacks the time or resources to do so.

To help providers confront this challenge, last year, the Innovation Center launched a payment model called Accountable Health Communities, which can cover patients who have either Medicare or Medicaid. Under the model, as part of visits to their doctor, high utilizers of healthcare services are automatically screened for various non-health risks, like food insecurity, domestic violence, and housing and utility needs. If needed, patients are set up with navigators, who can help determine what resources are available in the community to meet the patient’s needs.

A model like this can take advantage of two key aspects of our decentralized, flexible system: the individualized approach it enables and the incentives we can offer to private-sector service providers.

One approach to social determinants of health would be, for instance, to say that we should identify a couple of the most common needs—like nutrition or housing—and really focus on investing in those.

But that’s not going to be of great use to someone in, say, a rural area, where food and housing may be affordable but finding a ride to their healthcare provider is the real challenge. That’s why we don’t believe in a rifle-shot approach to human services. You can’t focus on one or two needs to the exclusion of others.

Just like how every patient is different in healthcare, every person has unique social services needs—and we are intent on designing models that connect them to the services they need, rather than offering a one-size-fits-all approach.

Second, significant interest in this payment model has come from accountable care organizations and Medicaid managed care organizations—private sector entities who get to keep some of the savings if the model drives down healthcare costs. As part of our efforts to deliver value-based healthcare, we are moving more toward a system where providers can take on more risk through these kinds of arrangements. This, in turn, broadens the opportunities for providers to benefit from addressing social determinants of health. We have providers who bear risk for their patients’ outcomes engaging on social determinants of health already, and the results have been encouraging. One of the most acute issues, for instance, is nutrition.

Data from the Agency for Health Research and Quality at HHS found that Americans with malnutrition are twice as costly to treat at the hospital as those who come in well nourished. In fact, malnutrition is involved in 12 percent of non-maternal, non-neonatal hospital stays—$42 billion each year in healthcare spending. Naturally, a number of private health providers and payers have already tried addressing this issue: One private health system in Chicago, for instance, began screening high-risk patients for malnutrition, and then supporting them after discharge from the hospital with follow-ups, referrals and nutrition coupons. The savings were huge: more than $3,800 per patient.

So we see encouraging innovations occurring, but we also face new healthcare challenges. Consider the interconnected problems of chronic illness and non-health needs—and insert addiction into that picture. For someone struggling with substance abuse, it is that much harder to manage chronic health conditions and to secure housing, food and other necessities of life. The pressures can have deadly consequences: Neglecting treatment for a condition like diabetes can be bad enough, but skipping a dose of suboxone because you’re worried about where your next meal will come from could be deadly.

So through models at CMMI, we are actively addressing how to better treat and prevent substance abuse through a more holistic approach. In one example, the Maternal Opioid Misuse, or MOM model, ob-gyn providers act as a hub to connect pregnant women to screening and then referrals for services they may need to sustain recovery from addiction and then raise their child. While you would think many social services are available for pregnant women, pregnant women struggling with substance abuse often face particular challenges in finding access to medication-assisted treatment and recovery supports like housing. We are directly confronting that challenge with the MOM model—and investing in kids at a very early age, which we believe can yield particularly big benefits.

Well in advance of the launch of this model, and another related one, we worked to alert states so that they could begin engaging with their philanthropic and community organizations, to determine what resources could be marshalled to support these efforts.

Now, what I’ve described so far largely involves addressing social determinants by forging better connections between the health system and social services. We believe that can drive significant improvements and savings.

But what if we went beyond connections and referrals? What if we just paid for the particular services a patient needs ourselves?

We are actively exploring how we could experiment with actually paying for non-health services, like housing and nutrition—an integrated, individually driven approach to health and human services on a scale that has never before been tried in the United States. 

Much of what I’ve discussed today applies to particularly vulnerable populations, where healthcare needs are acute, healthcare spending is high, and there are many unmet needs.

But as we age, pretty much of all of us will end up being high healthcare spenders, with expensive, complicated conditions.

So we are eager to think about social determinants of health throughout the Medicare program, and one of the best ways we can do that is through the flexible, accountable, individual-driven system we already have: Medicare Advantage, in which managed care insurers provide seniors with their Medicare benefits.

Because MA plans hold the risk for their patients and they compete for their patients’ business, they have an incentive to offer benefits that are both appealing to their clients and that will bring down health costs—whether those benefits are traditionally thought of as health services or not.

The key is that we need to give them the flexibility to do this, which we generally haven’t done. But starting next year, plans will now be allowed to pay for a wider array of health-related benefits, such as transportation and home health visits. Starting in 2020, we are going to be expanding that range of benefits even more, to include home modifications, home-delivered meals, and more.

Paying for better value means being willing to pay for the right inputs—whether they are healthcare services or not.

Now, I want to turn to the other area I raised where we need to ensure we are getting the best value out of our health system: prescription drugs. We need to be paying not just for the right inputs, but also ensuring we don’t pay too much for the inputs themselves.

Americans today pay more, on average, for prescription drugs than other countries do. But this is not, as some seem to think, an axiomatic or universal outcome.

The disparity between what the U.S. and other countries pay for prescription drugs varies widely—and in many places, we do get a better deal.

The Food and Drug Administration will soon be releasing new data that shows the U.S. pays significantly less for generic drugs than some of the countries represented in this room. If we paid what Canada pays for generic drugs, we would spend about $12 billion more per year, and if we paid what Switzerland pays, we’d be spending $19 billion more. These discounts on generics are in part driven by the Medicare Part D drug program, where 75 percent of drugs dispensed are generic.

There are positive outcomes outside of generics, as well. In the market for expensive hepatitis C treatments, strong competition among the multiple cures available has driven net American prices to levels that are comparable to what other countries pay.

The discounts on brand drugs in Medicare Part D are confidential, and therefore it is hard to compare prices as an overall matter, but we know we often pay less than other countries.

Let me be clear about what this shows: Our private-sector-driven negotiating system, where patients choose the plans they like, can achieve outcomes as good or better than government-run systems that lack such exit rights. There were some doubters about this, once upon a time, but since Part D’s implementation, by one estimate, we’ve seen the program’s spending come in almost 50 percent under budget projections.

Now, there is room for improvement. Some rules in Medicare Part D hold plans back from negotiating discounts as deep as purely private-sector plans in the U.S. do.

We also need to unleash Medicare Advantage plans, the private insurance plans that provide Medicare benefits, to aggressively negotiate lower drug prices.

For instance, we’re allowing these plans to use new negotiating tools, which at least one major insurer already used this year to have patients use a biosimilar before a particular branded biologic.

But one of the biggest problems we face in Medicare is where we do not have private-sector negotiation: Part B fee-for-service, a government-run, single-payer program that by its nature sets prices.

Unlike Part D and Medicare Advantage, where private plans negotiate discounts, Part B is a price-setter.

For every drug covered by Part B—which is essentially every FDA-approved physician-administered drug—we pay essentially sticker price, plus a 6 percent add-on fee for physicians.

If a company launched an infused statin that cost $1 million a year, Part B might well end up paying for it, at a $1 million a year—or, actually, $1.06 million a year.

So Part B is already a price-setter, and as much a government-run health system as anyone in this room runs. It’s just a really dumb price-setter.

We’ve done the research: Governments of other countries, like many of those represented in this room, obtain significant, voluntary discounts from manufacturers on the most costly physician-administered drugs.

For the most costly drugs within the Part B system I’m describing, we pay 80 percent more than our peer countries.

This is really no surprise: The U.S. and other countries all purchase these drugs through centralized systems, but you ask for a lower price, and we don’t.

It produces a huge, costly disparity: In Medicare, we pay $8 billion a year more than we would spend if we paid an average of our peer countries’ prices. This is not a burden that the American healthcare system, or American patients, should bear—nor is it one that we need to bear.

One way to address the situation is the International Price Index model we put out earlier this month, which will not eliminate this price gap entirely, but reduce our prices to an average of 1.26 times what our peer countries pay.

As a wealthy country, we have no objection to shouldering part of the burden of funding innovation. Our objection is to shouldering most of that burden, because of our outdated pricing system, while other countries get a much better deal.

I’ve described today how the American system offers flexibility and room to innovate in many ways, but obviously, the way Medicare pays for these drugs has not been one of them. We have looked for alternative ways to introduce a market-based competitive pricing model, but there don’t appear to be feasible options besides some form of reference-price indexing.

Nor do we believe we should set our prices using some form of health technology assessment or other centralized assessment of value that purports to discern some objective determination of the value of a product.

Instead, we’ve chosen the most market-driven index we could come up with: the prices at which drug companies voluntarily choose to sell their drugs to a basket of comparably placed peer countries to the United States.

Besides being a dynamic index, relying on other major payers to determine what price manufacturers can bear, the international price index also provides incentives for manufacturers to balance out the burden of innovation.

This may well mean that, as our prices drop, other countries’ prices rise.

In the long run, it will be to the benefit of every country, and all of our citizens, to have a drug-pricing system that is driven by fair competition and negotiation, not by freeriding off of one country’s policies.

The Trump administration is bold enough to take on this system, reform it, and address the many other challenges I’ve laid out today.

But we also know doing so requires understanding diverse perspectives—both those of the American private sector and that of other nations. So as we work to advance the American health system, we look forward to listening to and learning from all of you. Thank you for having me here tonight, and I look forward to successful collaboration in the years to come.

Content created by Speechwriting and Editorial Division 
Content last reviewed on November 14, 2018