In every other sector of our economy, we don’t expect the government to set prices. We rely on the free exchange of information between buyers and sellers, among competing interests, to do it. We can get better outcomes from our healthcare system at a lower cost by putting patients, not the government, in charge.
As Prepared for Delivery
Thank you, Kay [Kay Cole James], for that kind introduction. It is always an honor to be introduced by a former member of the HHS family, and it is a privilege to be here with all of you today at the Heritage Foundation.
Heritage has played a vital role in so many of the important public policy debates of the last several decades. Many administrations, including this one, have benefited from your work on public policies that reflect the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense.
Today, I’d like to share how some of these principles can help address the most significant domestic policy issue of our time: reforming the American healthcare system.
America’s healthcare system is huge and immensely complex. It is the single largest sector of our economy, at more than one-sixth of GDP. The Department of Health and Human Services itself employs 80,000 people, with a $1.2 trillion budget and more than 300 individual programs.
But just because we have a complex system, and complex challenges, does not mean there are no simple principles for reform.
One of America’s greatest leaders, President Ronald Reagan, applied commonsense solutions to the supposedly intractable challenges of his time, such as an overly complicated tax code and a bloated, broken welfare system.
Like President Trump, he saw straight through how Washington works and had a pithy description of how problems are usually handled here. “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 There was even a tax on not buying the right kind of insurance—until President Trump and Congress repealed it.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.
We all come by these lessons in different ways. As many of you may know, I went to that bastion of conservative free-market thinking, Yale Law School. My land-use controls professor, Robert Ellickson, used to offer us a Reagan-esque lesson. 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 when 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, that means that government action may often 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 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 through choice, rather than having government decide what is best for the individual.
Today, I want to talk about how these principles apply to a few of the priorities I have laid out for HHS under President Trump: first, reforming the individual market for insurance; second, bringing down the high price of prescription drugs; and third, transforming our health system into one that pays for value.
Individual Insurance
Let’s begin with the individual insurance market. The Affordable Care Act created a thicket of subsidies, regulations and taxes to help Americans without employer insurance secure coverage on the individual market. In theory, it was supposed to not only expand this kind of private coverage, but also bring down costs.
It has come up short on both objectives. According to an HHS analysis, from 2013, the year before the most significant new regulations enacted in the ACA took full effect, through 2017, individual premiums in 39 states rose an average of 105 percent. They have more than doubled.
As prices skyrocketed, it is little surprise that the real market for individual insurance—that is, the part not supported by the ACA’s huge subsidies—has actually shrunk. From 2016 to 2017, HHS found that the number of unsubsidized enrollees dropped by about 20 percent. The only factor keeping the individual market alive is the tens of billions of dollars of subsidies supplied directly to insurers each year.
The fundamental flaw of the ACA is that it narrowed the competition for insurance options and laid down heavy-handed controls on the prices that could be charged.
One of the most notable price controls doesn’t, I think, get enough attention. In a free market, young people can buy insurance for about one-sixth of what it costs older people, because younger people use fewer healthcare services. But the ACA imposed a price floor: Younger Americans must be charged at least one-third of what older Americans pay.
This kind of price control chokes off private markets. Young people are by definition getting less than they pay for, so they opt out of the system. And then that’s not a good deal for older Americans, either. They’re the only ones left paying into the system, so their premiums rise.
Congress created this broken system, and it will take an act of Congress to undo it. But we have flexibility within the law to try out some free-market reforms, and we have done so in two significant ways so far this year.
Soon after I arrived at HHS, we issued a proposed rule to expand access to short-term insurance policies that are free of the strictures of the Affordable Care Act and, as a result, cost as little as one-third the price. The previous administration limited access to these plans in the hope that they could drive people back into the ACA market—remember, if it’s still moving, regulate it.
We care deeply about consumers having the information they need, so we’ve made it clear that these short-term plans aren’t for everyone, but Americans deserve all the affordable alternatives possible.
Second, earlier this summer, the Department of Labor finalized a rule to significantly expand access to association health plans, under which small businesses and individuals running their own companies can come together to buy cheaper insurance. The number of small businesses choosing to offer insurance to their employees has been declining for years, but getting government out of the way has the potential to help reverse that trend.
Another aspect of the Affordable Care Act that has been of great concern is its substantial expansion of the Medicaid program. To the extent that the ACA does cover more Americans, it is mostly due to the expansion of this taxpayer-funded program.
Medicaid has historically played an important role, covering low-income mothers and their children, the elderly, and the disabled. But the ACA expanded the program well beyond those populations, making it a free source of coverage for 15 million new able-bodied adults, including many without any children. In fact, the ACA offers more generous support for states to insure these populations, currently covering more than 90 percent of their costs, than it does for traditional Medicaid populations.
Supporting legislation to undo those perverse incentives is a priority for this administration. But in the meantime, we want to rethink how Medicaid serves able-bodied, working-age adults, which is why we have encouraged states to consider work and community engagement requirements for these populations.
For these enrollees, Medicaid should be not just a government insurance card, but a pathway out of poverty, to fuller purpose and better health.
This vision for Medicaid, laid down by our CMS administrator, Seema Verma, reflects our general principles for programs that support low-income Americans. Programs should take a holistic approach to better health and greater self-sufficiency; they should, to the extent possible, avoid work disincentives and income cliffs; and they should offer states flexibility in achieving these goals.
The importance of state flexibility goes beyond Medicaid. President Trump’s budget proposes to replace the entirety of the ACA subsidy structure, as well as the Medicaid expansion, with a flexible block grant. As many of you know, this is similar to a proposal put forth by state and think tank leaders, including some Heritage scholars.
It harkens back to the New Federalism approach of President Reagan, which was inspired by the Heritage Foundation’s Mandate for Leadership. Since the Reagan administration, significant amounts of HHS’s social service programs have been distributed by block grant, freeing states to use the funds in ways that meet their needs.
What President Trump has proposed is to apply state flexibility to much, much larger entitlements—a generationally significant shift back to the states.
I realize that proposing significant reform for two major entitlements is the kind of thing Heritage fellows might do in one morning before lunch. But it’s not very often that we have a President who is willing to call for such radical, necessary reforms.
Drug Pricing
The President has also called for historic changes to another piece of our healthcare system, our market for prescription drugs.
American private industry has produced so many of the world’s miracle drugs, like cures for hepatitis C. Today, we are on the verge of stunning advances in the war on cancer, through treatments that use our own immune systems to fight the disease. We also have access to cheap, effective treatments through the world’s strongest market for generic drugs, which actually delivers us lower prices for many generics than European patients pay.
But in some important ways, we do not have a real market for prescription drugs.
One fundamental aspect of a market is generally that if you cut your price, more people will buy your product. With apologies to the Ph.Ds in the audience, you don’t need to be an economist to know that.
And yet that is not, by and large, how drug prices work in America. If a company lowers its price for a given drug, the drug can actually become less desirable vis-à-vis its competition. Obviously, consumers wouldn’t look at it that way, but they don’t decide which drugs are available and at what cost—that is decided by insurers, employers and pharmacy benefit managers. This could work well if these parties’ incentives were aligned, but all of them are paid as a percentage of a drug’s list price. When prices drop, the consumer might save, but those actually negotiating for the consumer would then make less money.
President Trump has put this whole system on notice. We have the power to break up this arrangement ourselves through administrative action, because it relies on a loophole in federal law that allows these otherwise highly regulated entities to, essentially, double deal. Already, we have seen drug companies hit pause on price increases or actually cut prices, understanding that we are on the verge of significant reform.
Fixing the broken incentives around list prices is one piece of the President’s plan. But a real market also requires that consumers, competitors and other private actors are pushing down prices. The three other elements of our plan are, therefore, giving private negotiators more power within our system to negotiate with drug companies, empowering consumers to bring down out-of-pocket costs, and stoking competition in drug markets.
Delivering on this plan will involve taking some steps that may be unexpected. It took some by surprise last week when I directed the Food and Drug Administration to stand up a working group to examine how importing drugs from other countries could help address patient access problems caused by spikes in drug prices.
This shouldn’t necessarily have been a surprise, because the President and I were very clear when we rolled out our drug pricing blueprint earlier this year: We are open to all solutions that put American patients first—meaning they’re safe, effective and respectful of patient choice and the incentives that drive American innovation.
The FDA will be looking at situations where we have good reason to think importation could fit those requirements: where a company that’s the sole manufacturer of a drug in the United States takes a big price increase on a drug that no longer has any patent protections or exclusivities. Because there are no IP rights involved, manufacturers in other countries could help introduce new competition without undermining incentives for innovation. We have long had concerns about how broad-based importation could raise safety issues, but especially within the bounds of this proposal, we believe it may be possible to introduce more competition while keeping our drug supply safe.
Thankfully, we do have successful competition and negotiation in parts of our drug markets, including within Medicare, where Part D plans aggressively negotiate with drug companies to keep costs down.
Those insisting we must have quote, “direct negotiation,” between the government and drug companies aren’t really interested in negotiation. They are calling for the federal government to impose a formulary for all Medicare patients, with no right to choose another option, and use the possibility of denying coverage of certain drugs to drive prices down.
This doesn’t respect patient access, and violates one of the core principles of American healthcare. In our system, you have exit rights. To coin a phrase, the way our system works, if you don’t like your plan, you don’t have to keep it.
We know that we can respect this principle while expanding coverage and bringing down prices because we’ve done so in the past. Many of you here will remember the complaints during the 2000s that Medicare Part D’s negotiation system would be a giveaway to drug companies. But because it harnesses market forces and has driven thriving generic drug competition, Part D has actually come in tens of billions of dollars under budget, while providing seniors with the life-saving drugs they need. Let me repeat that, as I know those are words pretty much never heard in Washington: tens of billions of dollars under budget.
The good news is that there is certainly room for improvement within Medicare Part D: Some rules stand in the way of plans doing the best job they can negotiating for seniors, and we look forward to reforming them to generate savings for seniors and the taxpayer.
Value-Based
Part D has proven that market forces can deliver benefits to our seniors at a sustainable cost. Unfortunately, elsewhere in our programs, we have made very significant, important commitments to pay for healthcare for older Americans, without setting up a system that can sustainably deliver them.
Margaret Thatcher once quipped that the problem with socialism is that eventually you run out of other people’s money. We at HHS are told something similar every year by our actuaries, in rather more complex terms. But there’s no way around it: Medicare is 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 by 2026, necessitating large tax increases or benefit cuts. Meanwhile, the Medicaid program is on track to consume an ever-larger share of government spending. It already consumes more than one-third of many state budgets.
President Trump has made a solemn vow to protect these programs for today’s seniors and future generations. To do that, we need to reform these programs in the way we know works: introducing market-based competition.
For a while now, there has been a consensus that something has to change about how these programs work. As healthcare has grown more and more complex, the traditional model of paying doctors based on the volume of procedures they perform, as much of Medicare does, has made less and less sense. There has been some progress in the private market on moving payment from, quote, “volume to value,” and some useful innovations within Medicare. But everyone agrees we have a long way to go. And with today’s demographic and fiscal trends, we don’t have a lot of time to accomplish the changes we need.
The problem with so many efforts to pay for value, including those undertaken by President Barack Obama’s administration, is that they assumed central planners—the government—have to be the ones to determine value. But if the government writes the equation for value, the answer is never going to be cheap or simple, and special interests will find a way to manipulate it.
Americans know there is a better way. In every other sector of our economy, we don’t expect the government to set prices. We rely on the free exchange of information between buyers and sellers, among competing interests, to do it. We can get better outcomes from our healthcare system at a lower cost by putting patients, not the government, in charge.
Since arriving at HHS, I have laid out a vision for how to get there, which includes putting patients in charge of their own health data, boosting price and quality transparency, pioneering new payment models within Medicare and Medicaid, and undoing regulations that are impeding this transition and care coordination in particular.
As I said earlier, when there’s a place that our healthcare system isn’t meeting people’s needs, the first question we ask is, what might government be doing to prevent private actors from solving it? As it turns out, when it comes to paying for value, government is doing a great deal to get in the way.
One issue is just the sheer complexity of our billing systems. Earlier this month, under the leadership of Administrator Verma, the Centers for Medicare & Medicaid Services proposed one of the most fundamental reforms to Medicare that we have seen in decades. The most significant proposal is to simplify how doctors are paid for basic evaluation visits.
Currently, there are five different levels of visits, which allow doctors to get paid more if the visit is coded as a more complex kind. Five levels may not sound like much, but you don’t just get to check one of the boxes: You have to exhaustively document the characteristics of the visit that render it the type you’ve selected. CMS has now proposed to eliminate that burden by just going to two payment levels, a change that has been hailed by doctors across the political spectrum as a seismic shift. Just this change could save clinicians an average of 51 hours of paperwork per year—more than a whole work week of time they could use to deliver better quality, more personalized care to their patients.
Another key way to deliver value and bring down costs is better coordination among providers. Value-based payment, for instance, means paying providers based on the outcomes of their services, not the volume. But if someone is going to take on the risk of care outcomes, they’ll want to have some control over the inputs. A surgeon, for instance, can’t guarantee a good result just through their performance in the operating room; quality rehabilitation services will play a role too. But current interpretations of a number of federal laws stand in the way of healthcare providers, especially physicians, reaching these kinds of sensible, cost-saving arrangements.
That is why HHS is beginning a comprehensive review of regulations that impede the ability of doctors, hospitals and payers to coordinate in delivering better care at a lower cost.
CMS kicked off this effort by releasing a request for information regarding the Stark Law, which prevents physicians from making referrals to other doctors or practices with which they have a financial relationship, unless certain enumerated exemptions apply. In the coming months, under the leadership of my deputy secretary, Eric Hargan, HHS will be releasing requests for information regarding the Anti-Kickback Statute, HIPAA, and a federal privacy law called 42 CFR Part 2.
Following those requests for information, we will be taking regulatory action to reform these rules. As it happens, current interpretations of the two privacy laws I mentioned are not just impeding value-based arrangements in healthcare. They can also get in the way of communities and families working together to combat our country’s crisis of opioid addiction, another top priority for President Trump.
Conclusion
The laws mentioned, like our largest healthcare programs, are decades old. As the cost of American healthcare has kept rising, without commensurate increases in quality, it simply shouldn’t have taken us this long to stop talking about fixing them, and actually get down to doing it.
But one of the ironies of our politics today is that those who call ourselves conservatives are the ones who recognize the need for change. The political heirs of those who called themselves progressives too often no longer believe in progress, and instead propose expanding, even ossifying, programs that date back more than half a century.
Today, fixing American healthcare requires disrupting government-dictated systems, building new ones that encourage choice and competition, and heeding the principles I’ve laid out today.
Letting private innovators chart the future and refusing easy gimmicks takes some courage. But it is leaders with that kind of courage who have kept America exceptional, and President Trump possesses that kind of courage. With an openness to change, to innovation and to real economic dynamism, under this President, we can secure American exceptionalism in healthcare for generations to come.
Thank you again so much for having me here today.
