HHS leader addresses health care in AEI speech

Health and Human Services (HHS) Sec. Alex Azar recently discussed the Administration’s plans to promote greater choice and competition in the health care system during a speech that he gave at the American Enterprise Institute (AEI) in Washington, D.C. on December 4.

He discussed the “Administration’s interest in advancing significant reform of the health care system to put the patient at the center” and the “value of consumer-directed care, and impediments caused by third-party financing of health care services, including higher prices for prescription drugs and reduced consumer interest in pricing transparency.”

Sec. Azar justified the Administration’s proposal to give Medicare Part D plans more flexibility to negotiate in the protected classes, asserting that the current policy was intended to be temporary and has resulted in Medicare receiving substantially lower discounts than the private sector. He also noted that the Administration is re-examining interpretations of the Stark Law and Anti-Kickback Statute to enhance care coordination, and he urged states to undertake a robust examination of laws such as certificate of need (CON) and scope of practice.

The following are some key takeaways from Sec. Azar’s speech…

Goals and Principles

Sec. Azar emphasized that he has a goal of reforming the health care safety net and all federal health care programs to work for the people they serve. He called for a better-run safety net that is focused on affordable, quality health care for every American. He asserted that this approach requires an ambitious vision that examines every aspect of health care, including insurance, services, workforce, and elements of care such as prescription drugs. He noted that the release of the Administration’s report on competition and choice reflects the broad scope of reforms that may be necessary. He suggested that health care reform should rely, to the extent possible, on competition within the private sector, the source of innovation that is the only way to drive down costs while improving quality. He emphasized that patients should be at center, the federal government should defer to states to innovate, and care must be delivered in an affordable, fiscally-sustainable way while maintaining a safety net.

He also challenged key aspects of the status quo, particularly the dominant role played by the government in health care financing and delivery – with patients removed from decision-making and insulated by third-party payments focused on procedures not value. He asserted that this leads to high costs while leaving many Americans without access to the health care they need. He specifically stated that the Affordable Care Act (ACA) expanded and reinforced the current system with its focus on new spending and subsidies for the existing system. He briefly outlined the Administration’s efforts to address these concerns, including expanding new options such as short-term, limited-duration plans, and new state innovation waivers that give states the ability to modify the structure of the premium tax credit system to determine eligible plans and protect especially high-cost consumers.

Consumer-Driven Plans

Sec. Azar noted that the most “interesting” possibility advanced by the Centers for Medicare & Medicaid Services (CMS) in the ACA state waiver guidance is the model permitting states to use ACA tax credits to fund new consumer-driven savings accounts to pay for premiums and out-of-pocket costs. The goal is to protect individuals from catastrophic costs without insulating them from being price-conscious consumers. He stated that fundamental reforms are needed as rising health care costs are the result of rising prices, with utilization remaining flat. He noted that employers and the government have run into the limits from “tweaking” health care financing.

Medicare Reforms

Sec. Azar also discussed the need for new approaches in Medicare, given that it is the single largest health care spender, which pays set prices for procedures rather than paying for value and driving competition. He criticized “Medicare for All” as repeating the mistakes of the ACA, by assuming more financing means better health care. He asserted that the current approach to financing health care impedes competition, citing Medicare payment differentials between hospital-owned facilities versus outpatient centers, leading to greater consolidation. Sec Azar stated that the Administration is acting on a long-standing problem, advancing site-neutral payment proposals estimated to save $380 million next year and restore a more level playing field for providers. With respect to providers, he also stated that micromanagement is not needed if providers are willing to take on risk and have incentives to deliver the outcomes patients want.

Stark Law and Anti-Kickback Statute

Sec. Azar cited federal regulations that impede competition, stating that smaller providers need to band together to deliver comprehensive sets of services; however, interpretations of the Stark Law and Anti-Kickback Statute have made it “almost impossible” for providers to band together. The Administration is looking to reform how these laws affect care coordination without weakening fraud protections.

State Policies

Sec. Azar said that state policy changes could also improve competition, emphasizing that states impose a “thicket” of rules such as CON and scope of practice requirements. He called on states to engage in a “robust debate” on appropriate regulation and expressed his view that consumers do not need protection from a nurse practitioner writing a prescription or the opening of a new MRI facility.

Prescription Drug Pricing

Sec. Azar described what he termed a “broken system” of prescription drug pricing based on third parties. He asserted that the current system contradicts the economic principle that reducing a product’s price results in more consumers purchasing the product. In contrast, under the current system, in which a third party is between the consumer and the product, companies that lower drug prices can see their products become less desirable because insurers, employers, and PBMs are paid as a percentage of a drug list price. Sec. Azar stated that ideally, patients should be at the center of the system; shifting to this approach requires development of incentives for navigators and independent decision makers.

Medicare Part D Changes

Sec. Azar indicated that some parts of the drug pricing system are working well, including Medicare Part D, which harnessed the private sector, empowered consumers and has been more fiscally sustainable. Despite its success, he said that there are opportunities for improvement, which is why CMS proposed new flexibilities for plans to negotiate prices in the six protected classes. He asserted that the protected classes rules, which essentially require plans to cover all drugs in these classes, were intended to be “temporary” and that the approach undermined the ability of plans to negotiate lower prices. He cited evidence of lower discounts for these classes in Medicare Part D – at an average of six percent, compared to discounts of 20 percent to 30 percent in the private sector. He asserted that drug companies are using these protected classes to “take advantage” of seniors. He noted the proposal will allow plans to use the same innovations already in use by the private sector. Sec. Azar also stated that patients can choose a different plan, which serves as a safeguard in the system.


Sec. Azar concluded that the report released yesterday examines every factor and regulation driving up prices and focuses on reducing the cost of health care rather than simply addressing the financing of health services.

Q&A Session Highlights

Medicare: Sec. Azar emphasized the need to reform Medicare, which continues to pay for procedures and sickness and is indifferent to outcomes. He emphasized the importance of using market proxies to determine rates and value rather than setting prices at the government level. He stated that Medicare FFS is a government-run insurance system, with rates set by HHS; he urged a shift in focus to use Medicare Advantage (MA) and Medicare Part D as the model of how things can and should work. He envisions a future (i.e., in five to 10 years) in which the majority of seniors will be in MA, making it the dominant part of the Medicare system and the center of innovation. He did not provide specific policies.

Transparency: Sec. Azar emphasized the main challenge is on the demand side, stating that consumers with first dollar coverage or set copays do not care about transparency. He urged rethinking health care financing to reinforce incentives to a value-driven system.

Generic Competition: An audience member suggested competition in the generic market is driving production to China, with potential quality and security issues, and asked whether some medications should be considered strategic assets. Sec. Azar stated HHS does consider these issues, including the strategic and national security aspects of medical supply; however, he described the generic drug market as almost “hyper-competitive,” which has led to supply dislocations. Sec. Azar indicated that the drug pricing blueprint seeks input on whether generics are “undercompensated.” He also noted that some of the most high-profile pricing issues have occurred in generic markets with only one manufacturer.

Medicare Advantage: Asked about options for a Medicare “buy in” given the value of the MA program, Sec. Azar cautioned that this approach would result in provider payments at lower Medicare rates, which would result in the “complete and utter destruction” of the employer-sponsored health system, and would harm doctors, hospitals, and access to higher quality health services.

Click for Sec. Azar’s full AEI speech