S PRICE TRANSPARENCY HEARING BEFORE THE SUBCOMMITTEE ON HEALTH OF THE COMMITTEE ON WAYS AND MEANS HOUSE OF REPKESENTATIVE U.S. ONE HUNDRED NINTH CONGRESS SECOND SESSION JULY 18, 2006 Serial No. 109-78 Printed for the use of the Committee on Ways and Means U.S. GOVERNMENT PRINTING OFFICE 30-452 WASHINGTON : 2006 ForsalebytheSuperintendentofDocuments,U.S.GovernmentPrintingOffice Internet:bookstore.gpo.gov Phone:tollfree(866)512-1800;DCarea(202)512-1800 Fax:(202)512-2250 Mail:StopSSOP,Washington,DC20402-0001 COMMITTEE ON WAYS AND MEANS BILL THOMAS, California, Chairman E. CLAY SHAW, JR., Florida CHARLES B. RANGEL, New York NANCY L. JOHNSON, Connecticut FORTNEY PETE STARK, California WALLY HERGER, California SANDER M. LEVIN, Michigan JIM MCCRERY, Louisiana BENJAMIN L. CARDIN, Maryland DAVE CAMP, Michigan JIM MCDERMOTT, Washington JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts SAM JOHNSON, Texas MICHAEL R. MCNULTY, New York PHIL ENGLISH, Pennsylvania WILLIAM J. JEFFERSON, Louisiana J.D. HAYWORTH, Arizona JOHN S. TANNER, Tennessee JERRYWELLER, Illinois XAVIER BECERRA, California KENNY C. HULSHOF, Missouri LLOYD DOGGETT, Texas RON LEWIS, Kentucky EARL POMEROY, North Dakota MARK FOLEY, Florida STEPHANIE TUBBS JONES, Ohio KEVIN BRADY, Texas MIKE THOMPSON, California THOMAS M. REYNOLDS, New York JOHN B. LARSON, Connecticut PAUL RYAN, Wisconsin RAHM EMANUEL, Illinois ERIC CANTOR, Virginia JOHN LINDER, Georgia BOB BEAUPREZ, Colorado MELISSAA. HART, Pennsylvania CHRIS CHOCOLA, Indiana DEVIN NUNES, California Allison H. Giles, ChiefofStaff Janice Mays, Minority ChiefCounsel SUBCOMMITTEE ON HEALTH NANCY L. JOHNSON, Connecticut, Chairman JIM MCCRERY, Louisiana FORTNEY PETE STARK, California SAM JOHNSON, Texas JOHN LEWIS, Georgia DAVE CAMP, Michigan LLOYD DOGGETT, Texas JIM RAMSTAD, Minnesota MIKE THOMPSON, California PHIL ENGLISH, Pennsylvania RAHM EMANUEL, Illinois J.D. HAYWORTH, Arizona KENNY C. HULSHOF, Missouri Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are also published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions ofthe hearing record, the process of converting betweenvariouselectronicformatsmayintroduceunintentionalerrorsoromissions. Suchoccur- rences are inherent in the current publication process and should diminish as the process isfurtherrefined. ii CONTENTS AdvisoryofJuly 11, 2006 announcingthe hearing WITNESSES 6 17 22 26 30 SUBMISSION FOR THE RECORD i, Richard, American College ofPhysicians, statement CMS Library C2-07-13 7500 Security Blvd. Baltimore, Marytend 21244 iii PRICE TRANSPARENCY TUESDAY, JULY 18, 2006 U.S. House of Representatives, Committee on Ways and Means, Subcommittee on Health, Washington, DC. The Subcommittee met, pursuant to notice, at 10:10 a.m., in room 1100, Longworth House Office Building, Hon. Nancy L. John- son (Chairman ofthe Subcommittee), presiding. [The advisory announcing the hearing follows:] (1) 2 ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS SUBCOMMITTEE ON HEALTH FORIMMEDIATE RELEASE CONTACT: (202) 225-3943 July 11, 2006 HL-17 Johnson Announces Hearing on Price Transparency Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on Health ofthe Committee onWays and Means, today announced thatthe Subcommittee will hold a hearing on price transparency in the health care sector. The hearing will take place on Tuesday, July 18, 2006, in the main Committee hearingroom, 1100LongworthHouse Office Building, beginningat 10:00 a.m. In view of the limited time available to hear witnesses, oral testimony at this hearing will be from the invited witnesses only. Witnesses will include representa- tives from the insurance industry, the health care providercommunity, and the aca- demic community. However, anyindividual ororganization not scheduledfor an oral appearance maysubmit awritten statementforconsiderationbythe Committee and forinclusioninthe printedrecord ofthe hearing. BACKGROUND : This hearing will focus on efforts to develop greater price transparency in the health care sector and follows on a prior Subcommittee hearing in December 2005 in Milwaukee, Wisconsin. That hearingfocused on a report by the U.S. Government Accountability Office (GAO) on price variations for health services within the Fed- eral Employees Health Benefits Program. The GAO found significant price dif- ferences for hospital inpatient and physician services in different areas around the country, and that areas with the least competition amonghealth care providers had higherprices than areas with more competition. Congress needs to better understand the importance of increasing price trans- parency, its potential impact on slowing spending growth, and efforts undertaken to accomplish this goal. Health care is the only major sector ofour economy where consumers and providers have virtually no useful information on the true costs of medical goods and services. Greaterhealth care price transparencyhas the potential to increase competition and create pressures to contain or reduce health care costs. Some private health insurers and health care providers have recognized the impor- tance ofprovidinggreatermarket-based informationto their customers andthe pub- lic, both onhealthcare price and quality. In announcing the hearing, Chairman Johnson stated, "Rising health care costs and greatertransparency are two ofthe mostimportantissues confrontingCongress and the nation. Greater competition among health care plans and providers is an essential element in reducing costs. One tool that can promote competition involves greater price transparency forhealth care services, which will serve to provide valu- able consumer information. As Congress struggles with increasing costs and de- mands in all ofour health care programs, especially Medicare premium growth, it is essential that Congress continue to explore root causes and find ways to slow the growthinMedicare and overall health care spending." . 3 FOCUS OFTHE HEARING ; The hearing will focus on initiatives to develop greater price transparency in the health care sector and the impact and benefits ofprice transparency, including the potential forincreasedcompetition, lower costs, andlower spendinggrowth. DETAILS FOR SUBMISSION OFWRITTENCOMMENTS : Please Note: Anyperson(s) and/or organization(s) wishingto submitforthe hear- ing record must follow the appropriate link on the hearing page ofthe Committee website and complete the informational forms. From the Committee homepage, http:llwaysandmeans.house.gov select "109th Congress" from the menu entitled, "Hearing Archives" {http:lIway,sandmeans.house.gov/Hearings.asp1?congress=17). Se- lect the hearing for which you would like to submit, and click on the link entitled, "Click here toprovide a submission for the record." Once you have followed the on- line instructions, completing all informational forms and clicking "submit" on the final page, an email will be sent to the address which you supply confirming your interest in providing a submission for the record. You MUSTREPLY to the email andATTACHyour submission as a Word or WordPerfect document, in compliance with the formattingrequirements listed below, by close ofbusiness Tuesday, August 1, 2006. Finally, please note that due to the change in House mail policy, the U.S. Capitol Police will refuse sealed-package deliveries to all House Office Buildings. For questions, or if you encounter technical problems, please call (202) 225-1721. FORMATTINGREQUIREMENTS : The Committee relies on electronic submissions forprintingthe official hearingrecord. As al- ways, submissions will be included in the record according to the discretion ofthe Committee. The Committeewill notalterthe contentofyoursubmission,butwereservetherighttoformat itaccordingtoourguidelines. Anysubmissionprovidedtothe Committeebyawitness, any sup- plementary materials submitted for the printed record, and any written comments in response to arequestfor written comments mustconform to the guidelines listedbelow. Any submission or supplementary item not in compliance with these guidelines will notbe printed, but will be maintainedintheCommitteefilesforreviewandusebythe Committee. 1. All submissions and supplementary materials must be provided in Word or WordPerfect format and MUST NOT exceed a total of10 pages, including attachments. Witnesses and sub- mitters are advised thatthe Committee relies on electronic submissions forprintingthe official hearingrecord. 2. Copies ofwhole documents submitted as exhibit material will not be accepted for printing. Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material not meeting these specifications will be maintained in the Committee files for review and use bytheCommittee. 3. All submissions must include a list ofall clients, persons, and/or organizations on whose behalfthe witness appears. A supplemental sheet must accompany each submission listing the name,company, address,telephoneandfaxnumbersofeachwitness. Note: All Committee advisories and news releases are available on the World Wide Web athttp://waysandmeans.house.gov The Committee seeks to make its facilities accessible to persons with disabilities. Ifyou are in need ofspecial accommodations, please call 202-225-1721 or 202-226- 3411 TTD/TTY in advance of the event (four business days notice is requested). Questions with regard to special accommodation needs in general (including avail- ability ofCommittee materials in alternative formats) may be directed to the Com- mittee as noted above. Chairman JOHNSON OF CONNECTICUT. This is an important hearing, and I appreciate your attendance and participation. It is always hard to move into a future that is unlike your past, and we have an entire health care system built on insurance cov- erage and not built on either price or consumer choice. So, today's hearing does focus on the development of greater price trans- parency which I see as simply a natural component of any modern health care system in the future. We did have a Subcommittee hearing in December in Wisconsin to review the Government Accountability Office (GAO) report and geographic price variations in the Federal Employees Health Bene- fits program and the effects of competition on prices in the Federal Employees Health Benefits program. One of the most interesting pieces of information to come out of that hearing was information presented by Richard Blomquist of Blomquist Benefits Consulting in Milwaukee. He had formerly run a health care plan, so he was familiar with what prices really are charged to insurance companies. In the course ofhis testimony, he pointed out that one of the by- products of this evolution away from prices was a significant dif- A ference in the cost of similar services at different hospitals. $2,000 service in one hospital can cost $6,000 in another. A normal delivery ranged in the Milwaukee area from $4,681 at Waukesha Memorial to $9,045 in Aurora. A cardiac catheterization ranged from $60,000 at Waukesha Memorial to $146,000 at St. Joseph's. So, the examples that he gave and his testimony overall just re- minded us how very important it is for people, individuals, plans, groups, to have access to information about what plans are charg- ing customers. I have one hospital Chief Executive Officer (CEO) that says, "I am tired ofbeing the only one in the room that doesn't know what the other hospitals in the region are charging for a service and being told by the particular hospital I am negotiating with that they can get this service cheaper from everyone else, knowing full well that I run a very efficient outfit and I can't provide it cheap- er." So, the negotiations that go on now in the system are not hon- est negotiations, because you don't know who really is charging what for what. Congress is interested in providing consumers with greater health care information and has begun taking steps to do so. For example, the Medicare Modernization Act of 2003 (MMA) (P.L. 108-173) contained a provision that tied a hospital's annual Medi- care update to the reporting of quality information, has led to the development of the Hospital Compare Web site, which publicly re- ports the collected data on the reported hospital quality measures. The Deficit Reduction Act (P.L. 109-171) passed just last year expanded this quality reporting system and is ultimately expected to result in the collection of more sophisticated and detailed hos- pital data. Other provider groups would similarly be expected to develop and report similar health care information. Since price is not the only thing to be considered, quality is to — be considered; and there are lots of other things quality of com- munication with physicians and quality of services and so on. So, this is only one piece, never to be mistaken for the whole. We have heard much discussion about price transparency and what it can and can not provide; and we need to get a. better grasp of how we talk to each other about providers, what it means when we talk to each other about price and how consumers and other buyers can have better understanding about price. 5 Medicare recently disclosed payment information for certain pro- cedures. Although this is a good first step, in my mind much of that information was already available. Many recognized the lim- ited value of such information because the Government prices do represent a mandated price system with lots of adjustments, some of which are accurate and some of which are inaccurate. Various efforts are under way in the private sector and private insurance and provider sectors that are intended to help increase and provide the information available to health care consumers, and we will hear more about those efforts today. These voluntary efforts have been critical, but, to date, they have not resulted in a comprehensive system that provides adequate price and valuable information to the consumers of health care, many of whom are uninsured or those who take the responsibility to shoulder their own costs. I would also like to point out in my opening comments that the Health Care Financial Management Association has issued an in- teresting report on this issue oftransparency, and their report does demonstrate how many systems will have to change to achieve that outcome we are looking for which is some honest knowledge on the part ofthose who seek it ofthe costs ofmedical care. Today, our experts will provide us with a review of price trans- parency and health care. We will hear testimony from academia, the hospital sectors and the insurance sector. They will provide in- formation on private-sector efforts to increase the amount ofmean- ingful information to consumers, and suggestions for what can be done to improve the system. Mr. Stark, would you comment, please. Mr. STARK. Thank you. The topic today is, in an academic sense, kind ofinteresting, but I think we have many more important issues we should be consid- ering. Now the pr—imary focus of this hearing is on hospitals, and that to me makes I want to say the least sense. In other words, most hospital care isn't discretionary. You want to talk about should we be focusing on transparency on drug prices, physician fees, that makes—some sense, but relatively few people admitted to hos- pitals there are relatively few. Each year, 40 or 50 percent of them come into the emergency room. They don't have any choice. A cardiologist informed me recently that 70 percent of his patients are either emergencies or urgent cases in which the patient has lit- tle or no choice. Most people don't actually have a choice of hospitals anyway. In other words, they have to go to the hospital that is in their insur- er's network or at which their physician has privileges or else they have to change doctors. Hospital costs are so high that most patients would go through their deductible, even a high-deductible plan, with one admission and might even hop over their catastrophic tap. So, it doesn't make any difference. You go to the lowest-priced hospital in town and you are still out ofpocket a lot ofmoney. Now, having said that, I would think as between insurance plans and providers and large companies this information would be use- ful in helping them reduce the costs of their insurance programs, 6 but I want to urge the Committee not to think ofthis as doing any- thing for the consumers. I had fun with Mr. Evans last time he was here, and I spent al- most an hour online last night, delightful company, Clarian Health Partners, and I couldn't get the price of a mammogram or a colonoscopy. Mr. Evans, last time he was here, didn't know the price of a colonoscopy, but I'm sure he knows that now. I am going to ask about mammograms today. I got a long issue about my responsibility to pay my bills to Clarian, two pages of that; and, in mammograms, I was told how old I had to be and where I could go and what the risks were. No money. I put up here it says "search." I said, cost of mammogram. I couldn't get an answer. I said, charges for mammogram. I couldn't get an answer. Now he is going to hear them telling me I should know that and I can't get that out ofhis highly rated hos- pitals. I shouldn't have had a mammogram anyway. What I am suggesting is that if I were Blue Cross or Aetna, I think this would be important, but I think that we should focus on those areas in which the consumer could reasonably be expected The last thing is, if we want the consumer to take the lowest cost, we may be disadvantaging them in quality because they don't always equal. So, I hope we can focus on the importance of overall costs but not think that just to say, gee, if the consumer knows what the price list is, he or she will make better choices and save money. I think that is more than we can ask. Those ofus who more fortunate than us, who have not had a spouse to go to medical school, how is that Chairman JOHNSON OF CONNECTICUT. I thank the gen- tleman. Both ofyour comments are certainly valid. As we move forward on this, I think we do have to keep in mind that the plans have an honest level playingfield to compete on is important to overall costs and will matter; and, furthermore, pri- vate-sector costs and public-sector costs I believe need to be more public to hold the public sector accountable for the level of under reimbursing that in many areas is perpetrating the system. So, I am not bound into where this is taking us, but I do think it is im- portant knowledge that we have to know, and I appreciate the sig- nificance ofthe issues that you raise. Let us start today with Dr. Herzlinger. Welcome and thank you for being here. Ms. HERZLINGER. Thank you, Madam Chair. Chairman JOHNSON OF CONNECTICUT. I should mention for all ofyou that your entire testimony will be included in the record. Your opening statement time is 5 minutes, and then we will go to questions. STATEMENT OF REGINA E. HERZLINGER, PH.D., NANCY R. MCPHERSON PROFESSOR OF BUSINESS ADMINISTRATION, HARVARD BUSINESS SCHOOL, BOSTON, MASSACHUSETTS Ms. HERZLINGER. Madam Chairperson, Representative Stark, gentlemen, thank you for inviting me to testify. I am a professor at the Harvard Business School where I sepa- rately teach accounting and health care.