Thank you very much for that kind introduction. I appreciate the opportunity to deliver the Rosenthal lecture at this time and I want to thank the IOM and its President Dr. Harvey Fineberg for selecting me to be this year’s speaker.

As we meet here today we all have a shared sense of urgency: our health care system is in serious trouble, and Washington is engaged in a great debate on health care reform. Many people have diagnosed the system’s illnesses, and more than a few have predicted worse problems in the future if we don’t change course. But let me make something clear at the outset: I believe strongly that we can and must find a cure to what ails our health care system.

In truth, we don’t have any choice. It is a fiscal necessity and a moral imperative. This will not, however, be an easy task because our society suffers from several cultural maladies-myopia, tunnel-vision and self-interest — all of which undermine our ability to tackle large, known and growing systemic challenges.

The fact is, if a crisis isn’t unfolding right before us, many tend to ignore the problem, no matter how much risk it might represent. In Washington, policymakers often do not act until the patient has suffered a major heart attack and is on life support. That has to change.

Everyone here knows what’s at stake. Our nation is headed for a fiscal cliff, and health care costs are a huge part of the problem. We are spending billions on government programs in many areas that are outdated, ineffective, not properly targeted and unsustainable. We have the same problem in connection with a number of major tax preferences as well.

Our federal budget deficit for 2009 was a mind-numbing $1.42 trillion, or $3.9 billion a day. Our total debt has more than doubled over the past nine years and it now amounts to over $12 trillion and is rising rapidly. If you include unfunded promises like Medicare and Social Security, our real federal financial hole is currently over $60 trillion and growing at breakneck speed. Meanwhile, we have a tax system that causes us to forgo hundreds of billions in revenue that we desperately need — much of it disproportionately benefiting the wealthy — in the form of numerous tax breaks.

According to the GAO’s latest long-range budget simulation, federal interest payments could be the largest single line item in the federal budget within just twelve years. And what do we get for those payments? Nothing! And who are we paying this interest to? Increasingly, it’s to foreign lenders rather than Americans.

It is simply immoral to shackle future generations to such a massive debt burden. Pete Peterson, founder and Chairman of the Peter G. Peterson Foundation, has a devastating way of characterizing our selfish, short-term mindset. He notes that former Louisiana Sen. Russell Long once famously described our approach to taxes as “Don’t tax you. Don’t tax me. Tax that fellow behind the tree.” Pete has adapted that quote to fit our times: “Don’t tax you. Don’t tax me. Tax that baby on your knee.” In 2040, that baby will be a young parent, and his or her family will be in financial hell — paying exorbitant taxes, struggling to buy a house, save for their children’s college or put anything aside for their own retirement. That’s the future unless we act now.

There’s no more important place to start than health care reform. Our out-of-control health care spending is the single largest driver of our federal fiscal challenge and it is also the one thing that could bankrupt America. We spend $2.5 trillion a year on health care, twice as much per capita than any other industrialized nation, and with no better — and often worse — results. In our system, there is no real correlation between cost and quality. And somehow, despite gobbling up about 17% of our economy (up from 6.5% forty years ago) we still have almost 50 million Americans without health coverage. Our health care system is getting more and more expensive while providing poor value for money. What a deal!

Clearly, we need radical reconstructive surgery to make our health care system effective, affordable and sustainable. What we should not do is merely tack new programs onto a system that is fundamentally flawed.

Candidly, our current health care system is like a condemned house built on a sinkhole of sand and mortgaged for more than it is worth. Who in their right mind would build a new wing onto a collapsing structure that is headed for foreclosure?

Only in Washington! Just six years ago the Bush 43 administration pushed — and Congress passed — a Medicare prescription drug benefit without having a clue as to how to pay for it. We’re short on the amount of money needed to pay for the current promises under that program by more than a bit — about $7.2 trillion. And that’s only a portion of the over $38 trillion in unfunded Medicare obligations. Ah, but that’s for the young family in 2040 to worry about, right?

It’s not hard to find other examples because, again and again, our elected officials have shown a breathtaking lack of leadership and a recurring exhibition of laggardship. They know what we know — that health care costs are on track to cause a potential financial meltdown that could undercut our competitive posture and diminish our quality of life for generations. However, elected officials have not had the courage to tell the truth and take the tough steps needed to avoid a possible Thelma and Louise fiscal ending!

It’s no secret what many of those tough steps need to be — and I’ll discuss some of them shortly. But before we enact any major reforms, we first need to ask a fundamental question: will any given health care reform plan make our nation’s financial condition better or worse? To answer this question, I suggest we put every proposed reform to a four-pronged test that will make clear whether it’s fiscally responsible or not.

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First, the reform should pay for itself over ten years. Second, it should not add to deficits beyond ten years.

Third, it should significantly reduce the tens of trillions of dollars in unfunded health care promises that we already have.

Fourth, it should bend down — not up — the total health care cost curve as a percentage of GDP.

Taken together, it will be difficult to clear all of these hurdles. At the same time, it’s important that we do so. After all, in doing so we would still have a long way to go to ensure that our country has a successful and sustainable system. As a result, health care reform will have to be an ongoing process, not a one-time exercise that allows politicians to say, “Thank goodness that’s done…now on to other things…”

One way to help ensure that these four tests are met is to require that any initiative to expand coverage pay for itself not just over 10 years but also into the future. Under this approach, Medicare reforms would be used to reduce the tens of trillions in unfunded promises associated with that program rather than paying for any coverage expansion. This approach may, however, be a bridge too far for Washington policymakers given the current political environment.

I do give President Obama credit for insisting he wouldn’t sign a plan “that adds one dime to our deficits — either now or in the future. Period.” At least his Administration is talking the talk — and, to the extent that they’re pressing for a plan that pays for itself over the next ten years, they’re, in part, walking the walk. However, I’m less sure they’ll concern themselves with costs beyond ten years…only time will tell. Two things are clear, you can’t reduce health care costs by increasing coverage. In addition, the future involves a time frame far beyond ten years and our federal fiscal challenges will only get worse with the passage of time absent tough choices and transformational reforms.

At the same time, none of us can afford to be naive. If legislators on Capitol Hill or White House officials say that a bill is fiscally responsible, we should check the numbers and compare them to the four part test that I have outlined. We should also watch for mathematical sleights-of-hand that Washington has become infamous for.

The Peterson Foundation commissioned a study by The Lewin Group to analyze the House Energy and Commerce Committee’s plan. It came close to meeting the first test but failed the other three by a wide margin. While we are waiting the results of a new study, we expect the just passed House bill will have similar outcomes on the four tests as the Energy and Commerce Committee’s plan. Recently, we asked the Lewin Group to analyze the Senate Finance Committee’s health care reform bill and the results are now in. The bill passed the first two fiscal responsibility tests. Chairman Baucus and the committee should be complimented for their hard work designed to pass the first two tests. The Senate Finance bill also makes progress towards meeting the third test relating to achieving a significant reduction in unfunded Medicare obligations. However, it clearly does not reduce total health care costs as a percentage of GDP. In fact, total health care cost would be higher than under pre-reform projections. At least we’re partway there, right? Hold on. Dig into the details and you discover that the Senate Finance Committee’s bill meets the first and second measures of fiscal responsibility only because it includes assumptions that are totally unrealistic based on past history. For example, it assumes that the Congress will get tough of provider reimbursements when history shows that, time after time, they have failed to do so in the past. It also assumes more years of revenue than years of new program expenses during the first ten years. The recently passed House health care reform bill employs some of these same approaches.

These approaches represent the politician’s way to dispense good news and pretend the bad doesn’t exist. All too often elected officials make assumptions and use accounting and scorekeeping practices that make them look good but don’t pass a straight face test as to realism. But trust me: in the end, there’s no upside to fooling ourselves.

What we need is truth, transparency, candor and commitment if we’re going to solve our fiscal mess. The good news is there are quite a few worthy ideas out there for overhauling our health care system. To really succeed, though, they will have to adhere to a set of principles that I call the Four Pillars of Reform.

The most critical pillar is financial discipline. Namely, how can we reduce health care costs and the future rate of increase in such costs. No surprise. But what does surprise many people is when I inform them that we are the only major industrialized nation without a health care budget. There are no spending limits built into our federal health care system. When it comes to health care, the federal government signs a blank check.

That not only opens the door to reckless spending but it involves significant opportunity costs. For example, in Britain, the various regions of the country must stay within an overall health care budget, therefore, money spent on ineffective treatments for one patient results in an inability to provide more effective procedures to other patients. From a broader perspective, if we spent about the same percentage of GDP for health care as Britain does, our federal government could significantly increase its investment in basic research, critical infrastructure and other items that can help to create a better future for all Americans.

But let’s get real, we won’t be able to stay within any sort of overall federal budget for health care, until we move away from our current fee-for-service payment system. This, more than anything, is the reason we can’t control costs.

By basing payments on the volume of procedures — diagnostics, tests and so on — and having a vast majority of direct health care costs paid by third-party intermediaries, our fee-for-service system incentivizes providers and patients in all the wrong ways. The more procedures, the more revenue that goes to doctors and hospitals. Patients, meanwhile, have few qualms about getting more care since their insurance provides the illusion someone else is paying for it all.

A few years ago, my wife and I experienced the perversity of this system firsthand. Mary fainted at the wheel of her car and wound up in a collision that caused significant damage to the vehicle but, thankfully, didn’t put a scratch on her. Still, Mary’s doctor was so intent on discovering the cause of her fainting that he and a number of specialists ran test after test after test — with no clear result from any of them. At Mary’s final appointment with the doctor, he ordered another three tests — the last ones he could think to try. At that point, I asked the doctor if he knew the total cost of all those tests. He just shrugged and said, “Don’t worry. Your insurance will cover it.” He didn’t seem to realize the way insurance works — that we all ultimately wind up bearing the cost of expensive treatments over time in the form of higher premium costs. In the end, the tests and procedures he ordered for Mary came to nearly $20,000.

It’s an insidious cycle: Patients want doctors to try everything possible to heal them — and they’re grateful that insurance picks up the bulk of the cost. Doctors want to heal patients any way they can — and how convenient that more procedures mean more money as well as greater protection against malpractice. Who in this entire process is worrying about the ultimate cost to taxpayers — to you, me, and our families — of a system with such perverse incentives? No one! Is it any wonder we have six times more imaging procedures per capita in the U.S. than in Germany and five times the coronary bypasses as in France?

A number of people have proposed various alternatives to fee-for-service, including “capitation” systems that would have providers take a flat fee to care for a patient or group of patients each year. We also could bring down costs by promoting more of an integrated and team approach to patient care — having hospitals, clinics, family doctors, therapists, specialists, and pharmacists share patient information and coordinate their services. Whatever alternatives there may be to fee-for-service, let’s get them on the table. Now, and before the patient has a fatal heart attack.

While we’re at it, let’s press for malpractice reform since that is also a cost-driver. The specter of exorbitant jury awards is one big reason doctors and hospitals can’t seem to order up enough tests and procedures. I suggest we take a lesson from bankruptcy proceedings and set up special medical courts to handle malpractice claims. It makes no sense that we’ve put such critical decisions, involving potentially huge costs to society, in the hands of jurors with no relevant expertise. We also need to employ more evidence-based medical approaches since they can also help to reduce defensive medical practices. After all, these represent a much greater cost than jury awards.

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And what about referrals by physicians to entities they have an equity stake in? These activities should be subject to the same type of “prohibited transaction rules” as employer sponsored pension and employee benefit plans under the Employee Retirement Income Security Act.

Yet another challenge to health care system’s fiscal viability is our current tax system. You might say that when it comes to health care, our government not only gives but it fails to receive. I’m referring here to the fact that most people don’t have to pay income or payroll taxes on the value of the health insurance provided by their employer. That’s a tax incentive that hits our treasury hard: each year, it causes the government to lose almost $300 billion in federal tax revenue. [And, by the way, it also diminishes the coffers of state and local governments, because they, too, don’t tax employer-provided insurance.]

It’s bad enough that we’re digging a deeper fiscal hole by insisting on these tax breaks. But it turns out our current tax policy disproportionately benefits CEOs and other top earners. Since they’re in the highest tax brackets, the subsidies they get are worth far more than those that go to workers at lower salaries. Even worse, people who are working, earning near the poverty level and not covered by an employer sponsored plan receive no help at all. At the very least we need to start capping those tax incentives so that the system is more equitable and less costly.

And what about health insurance reforms? It’s clear that changes are needed to allow for additional alternatives to employer and union sponsored health insurance pooling arrangements as well as the ability to offer plans across state lines. Action should also be taken to enhance portability, address pre-existing conditions and correct unreasonable insurance caps.

Our second Pillar of Reform is better standards of practice. It’s inexcusable that there are wild fluctuations in cost and quality of care in different parts of the country. Think about this: some areas in the U.S. have six times more back operations and prostate removals than in other areas of the country. At the same time, there are huge gaps in quality of care caused by patients in some places not receiving clinically proven and effective treatments.

So how do we address our obvious need for evidence-based standards to guide the practice of medicine and the dispensing of prescription drugs financed by taxpayer money? Here’s what I propose: an independent “health care Fed,” modeled on the Fed that supervises our money supply, that would determine which medications, devices and treatments are effective enough to be covered. This entity would be as free from political and lobbying pressures as possible to ensure that taxpayer money is spent only on medications and treatments that have proven their worth.

The outrageous claims of government “death panels” by some must be refuted. However, every major industrialized nation also realizes that the dispensing of care, including in “end of life” situations, must be addressed by physicians considering evidence-based approaches and overall resource limitations.

Importantly, the end of life issue is about more than money. It is also about patient rights. Patients and their family have the right to information regarding various treatment options and the relative costs and likely outcomes of each. In many cases, if they had such information, they would not want some of the current and very costly treatments to take place. In the end, everyone wants to know the truth, be treated with dignity and pass in peace. Finally, end of life issues are not just about seniors. The can be relevant at all ages. Therefore, they need to be handled in an appropriate and consistent manner no matter what age the patient is.

The third Pillar of Reform is one that we can only urge, not legislate. Individuals need to take more responsibility for their well-being. We must build a culture of healthy living.

Health care costs will come down if more people lead healthier lives. That’s just common sense. While these are ultimately personal decisions, there is a role that parents, government and schools can play — after all, think of their effective campaigns to get us to wear seat belts and recycle. We need them to promote the basics of well-being — such behaviors as responsible and nutritious eating, taking vitamins, and getting adequate exercise. To ensure credibility and effectiveness, the prescription for healthy living must be clearly and transparently based on sound science, and supported by appropriate federal government spending, tax, regulatory and information policies. We cannot let interest groups subvert this effort in order to shield their causes or promote their business interests.

The fourth Pillar of Reform could easily have been included under financial responsibility. But its importance in today’s political debates, and its outsized impact on health care’s future, argue for its own separate place in the discussion. We must achieve universal coverage for basic and essential health care.

The words we all tend to focus on are “universal coverage.” I want to move your attention to different words. I said we have to achieve universal coverage for basic and essential health care. I have chosen these words very carefully for a reason: universal coverage can only be implemented and sustained if we focus not just on who gets covered, but also on what gets covered.

Make no mistake, the Peterson Foundation is four-square behind the goal of universal coverage. But taxpayers cannot be asked to fund an almost unlimited range of care and services. “Basic and essential health care” would include preventive and wellness care — such as annual physicals and mammograms — as well as coverage for chronic conditions and potentially ruinous catastrophic illnesses or accidents. If you wanted additional coverage, you should be able to obtain it and there should be plenty of choice and competition to ensure that you can get it at a reasonable cost. I’m for Americans having access to any level of coverage they want. But you would have to pay for that additional coverage yourself. At some reasonable point, we have to limit what taxpayers are expected to do or universal coverage will spend itself into bankruptcy.

There has been considerable controversy over a whether or not to include a so-called “public option” in any health care reform bill. It seems to me that including such an option after a period of time, based on a trigger when private sector options have not met certain coverage and cost targets, should be acceptable. Importantly, defining the trigger would likely be the subject of significant controversy, and any public plan option should not include additional total public subsidies beyond traditional Medicare payment systems. It must not result in the creation of a Medicare Part C option on steroids.

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Finally, I want to address the 800 pound gorilla in the room that too many politicians are trying to ignore as they debate health care reform. Medicare.

There’s an alarming pattern among some legislators who want to see reform of Medicare (and Medicaid) as an irrelevant aside in the debate over how to restructure health care. How is it possible that an entitlement program that’s already paying out more in benefits than it’s taking in — that has saddled us with over $38 trillion in unfunded obligations — is unrelated to our efforts to reform health care? With our urgent need to corral health care costs, how can we glibly speak of a Medicare “fix” that would add $247 billion to our deficit over the next ten years — and maneuver to exclude this cost from the Senate Finance Committee Bill? This is a prima facia case of fiscal irresponsibility.

Medicare is a program that is wholly unsustainable right now and its problems, if not addressed soon, will make a mockery of the fiscal integrity of any health care reform effort.

Fortunately, we do have ideas for reforming Medicare.

First, there’s no good reason Medicare — and Medicaid — shouldn’t be able to negotiate more aggressively for better deals on behalf of its benefit recipients. After all, it’s worked for the Veterans Administration, which has managed to negotiate lower prescription drug prices for veterans.

Second, we can take costs out of the Medicare Advantage program, also known as Part C. This was supposed to save taxpayers money by offering benefit options through competing private plans. It hasn’t worked that way. The plans cost more on a risk-adjusted basis because the people covered under them tend to be healthier than the typical American senior. The congressional proposals do include some revisions in this area.

Third, Medicare should simply charge more for people like me and others who can afford to pay more. As you know, we all get Medicare Part A — hospitalization insurance — once we’re eligible and rightly so — we paid for it over the years through payroll taxes. But Medicare Parts B (doctor payments) and D (prescription drug benefits) — are voluntary plans that you have to pay a premium to get. But that premium is a small price to pay for the sweet deal you get — on average about 75% of the total cost of these programs is picked up by taxpayers. While Part B premiums do vary with income, higher income beneficiaries should pay more of the cost of their coverage than they do now. To the extent that tax money is subsidizing the well-to-do, we need to shift the financial burden. We can’t afford those sorts of middle and upper income welfare support systems at this time in our history. After all, given current and projected deficits, that means our kids and grandkids will pay the bill — with interest! Finally, we should move to consolidate and integrate Medicare’s multiple programs. It is difficult to coordinate and integrate care when inpatient physician services have health care and other types of care are fragmented into different programs with different rules and cost sharing arrangements. And Medicare should lead by example in connection with payment system reform, administrative simplification, electronic medical records and other key reform areas.

As I said at the beginning of this speech, I believe we can cure all that ails our health care system. We have the means — and a number of ideas how to do so. What we have been lacking for way too long is the will to act. And, I have to add, the guts to tell the truth and face the problem honestly.

Unfortunately, we are likely to again see a triumph of short term thinking. Namely, health care reforms in the coming months that do some good, but fail to address the deep, and serious structural problems that will only grow worse with the passage of time. To make progress, federal action will have to be informed by various experiments conducted by various states and others. Hopefully, any final legislation this year will provide for and encourage such experiments. Fortunately, current health care reform bills include support for pilots to develop and test innovative approaches, and a special Medicare Commission for implementing successful innovations. Real reform will clearly have to happen in stages, over time. And it is why we need a process that will ensure that we take the next step, and the next step, and the next step.

My hope is that we can establish a Fiscal Future Commission that would push us forward by forging the “grand bargain” that President Obama has said he seeks. It would be created by law to ensure the support of both the President and Congress and everything would be on the table, from statutory budget controls to entitlement reforms to spending constraints, taxes, and next round of health care reform.

The Commission wouldn’t be part of the typical Washington echo chamber, either. It would engage representative groups of citizens across the country, leverage the Internet and other digital technologies to educate and engage the American people on our need to act quickly and decisively. Most important, if the Commission achieved a super-majority vote on a package of recommendations, it would be guaranteed both Congressional hearings and a vote in the Congress — allowing for limited amendments as long as they wouldn’t gut the bottom line fiscal impact of the Commission’s recommendations.

Without a mechanism like this Fiscal Future Commission, we risk staying trapped in the politics of the moment, where narrow interests rule, and the fuse on our debt bomb gets shorter. Failure to act is likely to eventually result is a crisis that could overwhelms our ability to solve it and result in a global depression.

We simply can’t let that happen. Our children and grandchildren don’t deserve to inherit a lower standard of living caused by our shortsightedness and selfishness. We owe them far better than that. After all, passing on a better country to future generations is part of what America is all about.

I hope that, like me, you’re thoroughly sick of hearing the clang of a de-fiscal responsibility can being kicked down the road. It’s past time we did the right thing. We can reform health care responsibly — we know how to do it. The great challenge before us is to get it done. The time for credible approaches and tough choices is now!

Thank you very much for your attention. I would be happy to answer any questions that you may have.