George C. Halvorson Chairman and Chief Executive Officer, Kaiser Permanente May 15, 2008

1. Health Care Reform Now! What Will it Take to Improve the System?2008 NNPHI Annual Conference George C. Halvorson Chairman and Chief Executive Officer, Kaiser Permanente May 15, 2008

2. Kaiser Permanente • -- 8.5 million members • -- $35,000,000,000 in revenue • -- 165,000 employees • -- Hospitals, pharmacies, clinics, imaging centers, etc.

3. Ideally, care delivery and care financing should be closely synchronized --even choreographed -- as reform efforts

4. Most reformers focus on one or the other -- with “financing” getting the most attention most of the time

5. That is a mistake

6. We definitely need key elements of financing reform • Several approaches make sense: • (Universal Coverage -- Individual mandates -- Guaranteed issue -- Subsidized coverage for low income people)

7. We need to learn how other industrialized countries have achieved universal coverage -- • with a focus on the relevance of key European systems to American care and coverage approaches

8. BUT -- • Financing reform without care delivery reform would be a major operational and economic error

9. Health care cost increases are the major reason we need health care reform

10. Health care costs come from health care delivery

11. Care delivery in the U.S. is uncoordinated, unfocused, inconsistent, unmeasured, extremely inefficient, perversely incented, excessively expensive and sometimes dangerous.

12. Health care delivery is, however, the fastest growing and most profitable segment of the whole U.S. economy

13. As an industry -- as a business model -- health care is winning. It is taking everyone’s money with an amazingly low level of accountability for the product it sells.

14. We need to face the simple reality that -- Health care will never reform itself.

15. Very few business models exist in any industry that reward the sellers for selling less.

16. Health care in America has over one million independent business units that live on the flow of fees generated by selling care by the piece – not by the package. Reducing the number of pieces sold reduces their earning by the million business units.

17. The Business Model of American health care currently generates over $2.1 trillion in total revenue

18. Health care is • full of smart people

19. Smart people do not kill the geese who lay lots of golden eggs. • Health care is awash in both golden eggs and very smart people.

20. We need to simply recognize the reality that the people who depend on a cash flow of fees to stay in business and serve patients will not, voluntarily, take independent steps to reduce the flow of those fees

21. So what should we do?

22. Reform care

23. Fact One • Health Care costs are not evenly distributed across the entire population: • 1% = 35% of costs

24. Cost Distribution of Care Cost Population 35% 1% $300 per month average cost Break even cost insuring one percent: $12,000 per month

25. 50% = 3% of costs • 20% = 0% of costs • ½% = 25% of costs • ________________________________________________________________________________________________________________ • Costs are not evenly distributed

26. U.S. Population U.S. Care Costs 80% 10%

27. Fact Two • -- Some diseases cost a lot more than others • -- Acute care costs are not the key cost driver for American health care

28. Total Cost of Care In America • Chronic Care • 75% • Acute • Care • 25% Chronic Care vs. Acute Care

29. Chronic care costs • can be impacted • (Rand data -- only 30% to 50% of patients receive right care now)

30. Diabetes is the fastest growing disease in America -- • -- The number one cause of Kidney failure, blindness and amputations • -- The number one co-morbidity causing death from heart disease • -- Diabetics spend 32% of Medicare expenses

31. Rand Data • -- Barely 50% of American diabetics receive appropriate care -- measured by individual care protocols • -- Barely 10% of America’s diabetics receive the full package of needed care

32. Cost Drivers – Normal Inflation Normal inflation 2008 2010 2020 • Cost Mitigators • (Inflation)

33. Basic Inflation -- heat, light, salaries, benefits • Additional Pressure -- health care worker shortages (lab techs, nurses, etc.)

34. Basic Inflation • We start with a higher base and then add both normal costs of inflation (and inflation results from worker shortages)

35. Cost Drivers -- New technology, treatments, drugs, genetics, science New technology, treatments, drugs, genetics, science Normal inflation 2008 2010 2020 • Cost Mitigators • (Technology)

36. Number of MRI Machines Per Million People Source: OECD

37. Total Transplants Source: OECD, BMJ

38. -- New drugs and new technologies do not go through a value screen of any kind in the U.S. • -- Manufacturers’ profitability and provider profitability are the twin driving technology business models -- not value

39. We have new treatments and approaches for individual patients that now exceed $1 million per patient, per year, year after year

40. No other country provides those levels of expensive, extended treatment

41. Great Britain’s NICE • £30,000 • per year of life

42. Only the U.S. payment system uses and pays for whatever works. Only untested and unproven care is not covered

43. Cost Drivers -- Inefficient, uncoordinated, unlinked care Inefficient, uncoordinated, unlinked care New technology, new treatments, new drugs, genetics, new science Normal inflation 2008 2010 2020 • Cost Mitigators • (Inefficiency)

44. -- Co-morbidities drive most costs • -- Care linkage deficiencies abound • (Care coordination is sporadic and unfunded) • -- 10,000 fees for units of care • -- No reward for outcomes or results

45. We need to make care linkages a core competency of American health care

46. Cost Drivers -- Perversely incented caregivers/ zero performance data Perversely incented caregivers/zero performance data Inefficient, uncoordinated, unlinked care New technology, new treatments, new drugs, genetics, new science Normal inflation 2008 2010 2020 • Cost Mitigators • (Perverse Incentives)

47. In today’s world, more efficient and effective caregivers simply deprive themselves of income

48. Asthma Crisis Revenue Reality: • $200 to be proactive • $10,000 to treat • $0 to prevent

49. Many Treat • Few Prevent

50. Cost Drivers – Aging Population Perversely incented caregivers/zero performance data Aging population Inefficient, uncoordinated, unlinked care New technology, new treatments, new drugs, genetics, new science Normal inflation 2008 2010 2020 • Cost Mitigators • (Aging)