Just as with our constitutional system, maintaining the freedom we have in healthcare requires constant vigilance about the unintended consequences of the programs and rules we have—and an openness to reforming them.
As Prepared for Delivery
Good afternoon, everyone, and thank you so much for welcoming me here today.
There are many familiar faces in this room, and I have such fond memories of my work with the Federalist Society over the years.
My involvement began as a student at that well-known, cozy home for conservatives, Yale Law School. For me as a law student, the Federalist Society was more than just an opportunity to connect intellectually with like-minded students—it was also just a way to make sure I actually had someone who was willing to sit with me at lunch.
The Federalist Society serves as a support group for those who care about our founding principles, and care about applying them in the courts and throughout our government.
I am a devoted protégé of Justice [Antonin] Scalia, whom I know many in this room miss greatly. One of the signal lessons Scalia taught the legal world was that it can take a certain stubbornness to stay faithful to our Constitution and our laws.
Some of his most notable opinions, on topics such as freedom of speech and the Fourth Amendment, produced policy outcomes he didn’t like—but he adhered to what the law said.
It’s the easy choice to assume the law says what you want it to say; it is much harder to engage in the work of debating what it really says.
The Federalist Society has done invaluable work by building the intellectual and organizational foundation for this kind of textualist thinking to occur, and for leaders like Justice Scalia to emerge.
Now, today, I have left the law behind—largely. I have a very fine general counsel, Bob Charrow, to sift through the trickier legal questions we face.
But the industry I now find myself in, healthcare, can sometimes feel as unnatural an environment for someone who believes in the concept of constitutional, limited government, too. It often requires standing up against some stiff headwinds.
Right off the bat, that may seem obvious to you. The department I run, Health and Human Services, is largely known as a creation of the New Deal and the Great Society. Certainly, its scale would be mindboggling to the founders.
The department employs 80,000 people, with a $1.3 trillion budget and more than 300 individual programs.
Standing alone, we’d be the sixth largest government on earth. That’s right: the U.S., China, Japan, Germany, France, and then HHS.
But just because we have a massive, complicated system doesn’t mean there can’t be simple principles for reforming it. One of our presidents with great affection for our founding principles, President Ronald Reagan, applied commonsense solutions to the supposedly intractable challenges of his time, like an overly complicated tax code and a bloated, broken welfare system.
He had a pithy description of how problems are usually handled here in Washington. “Government’s view of the economy could be summed up in a few short phrases,” he said. “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
For too long, that has more or less been the federal government’s approach to healthcare. We saw it most recently with the Affordable Care Act, which imposed a new tax or regulation, or sometimes both, on just about every moving part in our healthcare system.
There was even a tax on not buying the right kind of insurance—until President Trump and Congress repealed it.
The Trump administration’s first instincts are the opposite of the big-government nightmare President Reagan described.
If something in our healthcare system isn’t working, we’ll see if there’s a regulation in the way. If prices are high, we’ll see if there’s a tax involved. If prices keep rising, we’ll see if there’s a subsidy driving them.
This thinking has been engrained in me for a long time. In fact, one of the other maxims I keep in mind came from one of my favorite professors I had at Yale, Robert Ellickson.
I found it useful to choose law school classes more by the professors who were most engaging than by the actual subject matter, which is how I ended up with Bob Ellickson in Land Use Controls—which I’m not sure Yale holds out as one of its marquee offerings.
The great lesson he had for us was this: When you take Metro North from Connecticut into Manhattan and you see land with burnt-out buildings or land that’s not being put to its highest and best use, even if only as a parking lot, ask yourself the following question: “How is the government involved here?”
That’s always been a guiding principle for me in thinking about economics and regulation.
When things don’t work the way they should, when we ask why the rest of our economy is fully digitized while healthcare isn’t, when we wonder why healthcare lacks the dynamism and consumerism of the rest of the economy, I look for culprits.
So very often, the culprit is government action, sometimes from decades or even a century ago. In some cases, government action may be needed to fix what government action broke. Sometimes the necessary government action may be strong medicine, because markets have become so distorted or so diminished.
And sometimes our solutions, because of political realities, may be subject to the law of the second best, to use law-and-economics speak.
Always, however, our actions will be aimed at building markets and competition, restoring price signals and incentives, and empowering consumers, rather than having government decide what is best for the individual.
Now, this can be a bit of a contrarian approach to healthcare, just as the Fed Soc approach is to the legal world.
No other country on the planet has a written Constitution, a federalist system, and a respect for individual rights in the way that we do.
And no country has a free-market healthcare system, respectful of patient choice and open to innovation like the one we have.
That doesn’t mean our health system is perfect, of course—far from it.
Just as with our constitutional system, maintaining the freedom we have in healthcare requires constant vigilance about the unintended consequences of the programs and rules we have—and an openness to reforming them.
This is true for each of the four priorities that I’ve laid down for HHS: reforming the individual market for insurance that Obamacare undermined, bringing down the high price of prescription drugs, fighting the opioid crisis, and moving to a healthcare system that pays for health and outcomes rather than procedures and sickness.
With each of these challenges, part of the problem we face is unintended consequences of sweeping, centralized government action.
Obamacare usurped the power states traditionally had to run their own insurance markets, imposing new regulations and new open-ended entitlements rather than doing the hard work of building a fiscally sustainable, state-run, consumer-driven system.
In prescription drug pricing, government action has helped create a broken system that works for all of the special interests involved, but not the patient. We have a system where everyone makes their money as a share of a drug’s list price.
This means, literally, the higher price you charge, the more appealing your drug is to the market. Meanwhile, patients pay their drug costs as a share of these ever-rising prices.
The opioid crisis had at its root a hubristic idea about how we can treat pain, which was reinforced by short-sighted government payment policies. We seized on quick pharmacological fixes and produced deadly unintended consequences.
Finally, for the last half century, government regulation has dominated the way we pay for healthcare services, so it is little wonder that we keep paying more and more for them.
Regulation is one of the most significant sources of unintended consequences, an issue this administration takes very seriously, and it’s an issue that many people in this room, I know, actually enjoy talking about.
When we talk about the administrative state, we typically think of rules from the FCC, the NLRB, all of the early 20th century progressives’ alphabet soup.
HHS is attentive to the costs that we impose on market actors with these kinds of rules. In the last year, by OMB’s accounting, we cut more economically burdensome regulations than any department.
That represents $12.5 billion in savings in present value terms—earning us not just the No. 1 spot, but actually making up half of the whole administration’s regulatory savings.
President Trump set a goal of removing two regulations for every one new regulation imposed. At HHS in 2018, we took five deregulatory actions for every new regulation imposed. For physicians alone, we estimate that our reforms will save 53 million hours of paperwork per year.
But perhaps the most significant federal rules that go through notice-and-comment every year aren’t quite traditional regulations—they’re payment rules, issued by the Centers for Medicare & Medicaid Services.
Each year, physicians, hospitals and other healthcare facilities are told by the federal government how much they’re going to get paid by Medicare, and what they need to do to get paid.
Now, they don’t have to take Medicare; a slice of doctors, often very high-quality ones, do not.
But the size of Medicare is such that, for many, it is a mandatory system—and a system that effectively micromanages so many of their decisions. We tell them exactly what we’ll pay for, and how they need to fill out a form to get paid for it.
Imagine the standard legal process of billable hours, except it’s the federal government managing that process, and the time you spend to comply takes time away not from a legal client, but from a patient who needs your attention and care.
In other words, nowhere does the administrative state loom larger than in the place you’d want it least: your doctor’s office.
So what if, instead of sticking with this status quo, we radically simplified these burdens?
What if we said, we’ll pay you a certain amount for each patient you take care of—if you keep them healthy, if you produce good outcomes, you can keep the savings?
It’s sort of like being on retainer, rather than billing for every hour. Of course, some patients are riskier than others, just like some legal clients are riskier than others. Thankfully, in healthcare, we have quite a good system for risk adjustment, which I’m not sure exists for picking out legal clients.
Most important, the more risk that healthcare providers are willing to take on, the less we will micromanage the work they do.
This is how we’ll accomplish what those of you who work in healthcare, or follow healthcare policy, know as the shift from “volume,” where insurers and the government pay for individual procedures, to “value,” where we pay for outcomes.
A well-known economic axiom, one I think even lawyers understand, is that when you pay for something, you get more of it. When we pay for healthcare procedures, we keep getting more of them to pay for. The federal government simply cannot afford such a system.
Margaret Thatcher had a famous quip that the problem with socialism is that eventually you run out of other people’s money. The problem with Medicare today is that we already are running out of other people’s money—and those other people happen to be our children.
The Medicare Hospital Insurance Trust Fund will be out of money just eight years from now, necessitating large tax increases or benefit cuts.
If you think the federal government spends a lot on healthcare now, consider that, over the next 30 years, the share of our economy spent on Medicare and Medicaid is projected to double.
Reforming the system in the way I’ve described will go a long way toward putting us on sounder fiscal footing, but as I’ve laid out, it’s worth remembering how it will also be a huge rollback of the role government plays in American life.
I now want to discuss another area of healthcare where government rules are firmly entangled, and how we propose to reform it: prescription drug pricing.
Earlier this year, the President laid out a vision for bringing down the prices Americans pay for prescription drugs, using four strategies: more competition, better negotiation, incentives for lower list prices, and lower out-of-pocket costs.
Each of these, first and foremost, will rely on market forces. This includes areas of competition you are probably familiar with, like rapid approval of generic alternatives to expensive branded drugs. The Food and Drug Administration has approved a record number of generic drugs the last two years under President Trump.
Generic approvals, from January 2017 through July 2018, saved American patients $26 billion in drug spending. According to new numbers from the FDA, we are actually paying substantially less for generic drugs than some other wealthy countries.
But we could still use more competition and market forces. Today, we prevent Medicare Part D drug plans and private Medicare Advantage plans from using all of the tools that private insurance plans use to negotiate lower drug prices. We have already taken steps to allow these programs to use these same tools, and we’ll continue this effort.
In bringing down drug prices more broadly, we will rely on market forces, including providing transparency around prices and empowering patients as consumers.
But there are also places where, right now, Medicare pays for drugs with a price-setting system, and there is no practical alternative.
For some of the most expensive drugs Medicare covers, we currently pay a set price—and yet we set that price at a sky-high level, almost double what other countries pay.
So President Trump has put forth a model that will reset the prices we pay for many of these drugs, bringing it much closer to what other wealthy countries pay.
This is a market-based price—not determined by some expert’s idea about what the drugs are worth, but by using part of the discounts manufacturers voluntarily offer to peer countries. While such a price-setting system is still not ideal, we can at least make sure that we are paying a fair price, and no longer subsidizing other countries.
The reforms I’ve described today, in healthcare payments and prescription drug pricing, will deliver better outcomes for American patients by unleashing market forces and curtailing the footprint of government.
This is not, to put it mildly, the traditional vision for healthcare reform, nor is it one that large, incumbent market actors are always happy with.
But luckily, we have a president who is willing, on healthcare and much else, to stand up against the prevailing winds.
I don’t think this is because he’s surrounded himself with so many Fed Soc members—though I’m sure that doesn’t hurt.
The President is willing to deliver change because he understands the need for fundamental reforms to the programs our federal government runs. He knows our system isn’t delivering results for the forgotten men and women of America—and he’s willing to fix it.
It is an irony of history that we who call ourselves conservatives are willing to shake up a system that is not working, while those who call themselves progressives often stand in defense of the status quo.
Systemic reform means asking hard questions.
Just as textualists ask not what we want the law to say, but what it really says, we have to ask ourselves not what our government programs are trying to do, but what they are really accomplishing.
Asking these questions and executing on what we learn is the way to reform the important programs we run, bring real competition and freedom back to healthcare, and deliver the good government Americans deserve. Thank you very much.
