Rachel Woods: There's a lot of talk in this industry right now, and frankly always around this idea of transformation. Things need to change. Folks might even say that things are broken, things are not working, we need to transform. My first question to you is transform to what? What is the end state that our industry could or maybe should ultimately be moving towards?

Alex Azar: One of the things that frustrates me in healthcare is that often people will start with the solution without diagnosing the problem.

So, when we talk about transformation as a concept or change, I think we need to talk about why are we changing and what's wrong that we're trying to fix. I teach down at the University of Miami in the business school, and the theme that I use in every class is how did we get our system so messed up? And it really starts from the fact that back in the 1930s with a third-party payer system, when you divorce the purchasing of a good or service from the paying for that good or service, you've created a fundamental economic problem because you lose the natural rationing mechanism of the price mechanism in microeconomics by that.

If I can walk into a Walmart, pay $20 and walk out with as much product as I would like, I will walk out with the whole store. I mean, it's just rational human behavior. So really the story of healthcare in America since the thirties has been the story of correcting for that and compensating for that.

And that's really where all of the weird distortions come from. So, if you ask me why is healthcare the only sector of the economy where quality doesn't go up and prices go down every year, that's why. Let's just say we're not getting rid of our employer-sponsored third-party payer system that has those issues. All kinds of utopians, whether it's Chicago economists or Berkeley socialists, have their visions of how you might change and blow up the system to get rid of those distortions or to come up with other distortions.

But I take that as a given, and I say, "Within that frame, how can we have healthcare in America operate in as competitive as market-responsive way as possible?" The way I think of transformation, and I think the way most people who are relatively serious about economics and about healthcare reform, healthcare transformation, think about it is, how do you put the patient at the center? How do you create market-like mechanisms that will get us to higher quality and lower cost in the system that delivers for the patient.

Woods: Which to your point is something that other industries can do. Healthcare seems to be the odd man out.

Azar: Yeah. Every other sector of the economy, wind it up and let it go. It just rolls. And the other message when I'm teaching, and I said this as secretary and I say it as a professor, is no matter what you think about healthcare goods and services, no matter if you think healthcare is a right, if equity, use whatever moral judgments you have around healthcare — if you fail to recognize and respect that healthcare goods and services are economic goods and services and will obey economic laws, then you will be sadly disappointed in outcomes.

So, the agenda I laid out when I came into office in really February of 2018 was for value-based transformation of healthcare was the terminology that we used. I'm not sure what the current au courant way of referring to it is, but that's what we used and that really was a legacy going back to HHS Secretary Michael Leavitt in the George W. Bush administration for whom I was his deputy. He started us on that journey.

Woods: Yes, and by the way, this is the way that most folks think about transformation. They use that word transformation to talk about transforming to alternative payment models, value-based care, value-based payment, payment transformation, etc.

Azar: Yes. So, Michael Porter from Harvard Business School and Elizabeth T. Singh at the time from the University of Virginia, wrote a book called Redefining Healthcare Towards a Value-Based Transformation basically, something along those lines, and they diagnosed these problems and they said, "We need to move away from paying for procedures with fee for service towards paying for outcomes, and how do we restore or build in market-type mechanisms."

So, Secretary Leavitt started us on this journey in 2005, and we've really been on that journey ever since. So, for almost 20 years now, both Republicans and Democrats have been on this journey. It's been a very bipartisan vision of healthcare. It's had a couple of iterations and people have been frustrated by the time it's taken.

But I mean, remember this is one-seventh of the American economy with very significant vested interests in healthcare and vested in the fee-for-service, pay for procedures way of doing things. And we have had to learn how to walk before we could run.

So, initially we had to figure out, how do you even, if you want to pay for an outcome, how do you define an outcome? How do you even define what the what is? What is a hip replacement? You want to pay for the best hip replacement. Okay, well, what is a hip replacement? How do you bundle things like diagnosis, rehab, the actual product going into the hip, the inpatient, the outpatient, all of that, the physician services, the medication? How do you bundle that? What is a hip replacement? And then how do you define what the quality of that is?

Woods: Which is incredibly difficult to do.

Azar: Exactly. So, we start on this journey and then we start thinking about, okay, then how do you reward for better quality lower cost? That leads us into notions of accountable care organizations.

All along, we're building muscle memory. We're learning how to do things in a way that's different from paying for procedures, the old fee for service way of doing things. And by the time I came into office in January of 2018, in February, I laid out the "we're going to burn the boats now."

Fee-for-service is done. It is, we are moving to value-based, and it's like we have the muscle memory, we have the baseline all set, it's bipartisan, and we're going there. And I said, so there are four key elements of how do you get to this transformed value-based paying for health rather than paying for procedures approach, first of which is transparency of price and quality information. You simply cannot have a market mechanism without price information. It's basic. So we mandated complete transparency of list prices, negotiated discounts and cash prices, and we did it with the authorities we had, basically doing that on hospitals and on insurance companies. There's legislation pending in Congress to maybe further that and as well as increase compliance, but that's the basic concept.

Then we needed to allow for coordinated, aggregated care. So, we had a very interesting system that really came about because of the pay for procedures, fee-for-service world where our anti-kickback statute and our stark self-referral laws literally could criminalize teams working together to deliver a health outcome and sharing the profit or the benefit of that work if they deliver a lower cost, higher quality product together.

So, we reformed our regulations to enable that. Interestingly, one of the reasons I think we've seen so much vertical and horizontal integration in healthcare was you're exempt from all of that if you're co-owned. They had a kickback statute. So, if you have the same owners, you can do whatever together, gain share, work together. But if you're separate, you're going to spend all your money on lawyers just trying to figure out how they could operate and do that together. Democrats, Republicans, we all agreed we want coordinated care so we enabled that.

Woods: So, you mentioned price transparency and coordinated care, but there were two other things that you said we needed to talk about.

Azar: The third element is we need the patient to be mobile, to be able to be a shopper. You cannot do that if you are handcuffed to a certain provider group or system because of health information technology. If all of your data, which is so critical to our ability to work in healthcare, to our patient safety even, you can't have a non-interoperable health information technology.

So, we mandated that your records are owned by you and are portable with you, and we mandated that they be interoperable and banned information blocking among providers. The idea being you should be mobile and your data should go with you, and that reduces the transactions costs of shopping and being a mobile consumer.

So, it'd be like saying you're shopping at Walmart, but your only credit cards are from Walmart and don't work at Target. You'd be locked in. So then the final element is change how we pay for things. Value-based payment because you get what you pay for. If you pay for procedures, what do you get? You get more procedures. If you pay for value, you'll get more value. And I'd say one of the key insights here was a shift from that early muscle memory development that we talked about of paying for bundles or paying for so-called outcomes to not worry so much about figuring out what the outcomes are and focus on total cost of care.

Woods: Which is a lesson I think a lot of folks are learning. You use the word bipartisan, and it doesn't surprise me that sitting across from the former secretary of HHS that you're using that word, bipartisan. In my world in healthcare, there's a different lens that I look at. The competing influences within my world of healthcare business is what providers, payers, life sciences companies. I perhaps think about it as tripartisan or that's what reaching across the aisle needs to actually look like when we talk about healthcare business.

A lot of the positive change that you're talking about is value for just one of those stakeholders, and it can actually mean a hit to another. Let's take providers for example. The number one reason that I still to this day hear that providers push back on payment transformation is that it's a hit to their bottom line. They barely have a margin. Maybe they're operating in the red and they're saying I can't take the financial loss. So, what factors do we need to put in place so that these different stakeholders in healthcare can at least be aligned or maybe willing to compromise to get to this vision that you're describing?

Azar: So, the key here is you have to make it worth people's while. You can do it with carrot or stick. I think carrot works a lot better with behavioral transformation than stick. So, the idea of total cost of care is reward providers, and it actually doesn't even have to be providers. It can be any entity willing to take risk.

We'll give you $12,000 a year to take care of a Medicare beneficiary, and if you keep them out of the hospital, keep them out of the nursing home, have them be healthy to take care of the social determinants of health, whatever it takes to keep them out of the hospital, which is where the cost centers are, you keep the savings.

Woods: You're describing a global payment, a capitated payment, or if we were looking at the procedural level, we're talking about a bundle.

Azar: Exactly. And if it goes over, you're going to eat that. And of course you have risk adjustments and you have quality measures to make sure that there's not incentives for bad behavior within that. But the key to all of that is if I have often had people say that this vision of the patient at the center of a competitive, functioning, efficient market is a vision of an itemized individual having to sit there being a super shopper on their iPhone in the back of the ambulance with their heart attack. But you say that because you get it but so many out there, they like to caricature this, that that is the vision.

Woods: I even push back further on folks in this exact example. The ambulance care example is an easy one where you're of course not going to be shopping for where you go for your heart attack care. I by the way, kind of reject the notion that there's that much shopping that can happen outside of very specific planned procedures in part because there's often a middleman.

I talk about the fact that if I have Aetna insurance, it makes a lot of sense for me to get convenient care at a CVS. If I don't have Aetna Insurance, my insurer, my employer perhaps might not want me to go to CVS. Maybe they want me to go to Walgreens. They're actually the ones who are helping to nudge or maybe even direct some of my patient care. And that gets in the way of some of these consumeristic ideals that I hear in healthcare.

Azar: We all need a helping hand. We all need learned intermediaries in healthcare. I, as a health secretary do not navigate the health system alone. I have a primary care doctor who helps steer me through the system. I have a payer that provides financial incentives to steer me in the system.

All of that works together to I hope fulfill an ultimate vision of every American having one form or another of what we might call concierge care of someone, some entity, holding your hand through the system to help guide you as opposed to feeling left alone and in that world. And I believe that four-way approach aligns incentives and creates the mechanisms to enable whether it's primary care doctors or payers or others to help steer one through the system in a way with aligned incentives.

Right now we get steered through the system often just to get more procedures done, just to get that second MRI, the third CAT scan, the 10th X-ray. If you fix the financial incentives there, that fourth element, you get aligned incentives and you're actually working for the benefit of what the patient wants, which is a healthy outcome of not going in the hospital, for instance, unless it's necessary to go to the hospital.

So, that's the vision is the patient at the center, the patient steered and guided through a system with aligned incentives where price is always going down and quality is going up, and we all feel cared for in that system.

Woods: And I love that you've laid out this vision. The practical challenge that I hear when I work with executives, even as we agree, and I think the industry does agree that we need to push further into this kind of transformation. The pushback is yes, the patient needs to be at the center, but I also have to run my business.

Azar: Yeah. The system is working for the existing market players right now.

Woods: Yes. And someone often loses at least a little bit when some of these specific changes happen. So, how do we manage through the fact that there is sometimes actual business loss? It might be on the provider side as I was describing in the case earlier, having to take a near term loss or having to manage multiple different kinds of contracts, some of which are fully capitated global payments, some of which look like value-based care with really just an upside and really just incentivize for that extra quality bonus.

Or maybe I'm thinking about the payer side. They have their own set of challenges and losses that they need to be thinking about with this transformation. So my question is how do we manage through the fact that business leaders might need to take a hit as we still want to push forward and accelerate towards this kinds of payment transformation?

Azar: I have found that it is very hard to transform behaviors when you're dealing with a zero-sum gain as you were just talking about. If somebody has to lose two for someone else to get two.

It's very hard to get there. I find that you need to make it a positive for people. So that's why with all of our Center for Medicare and Medicaid Innovation demonstrations that we did, especially around total cost of care, global payments, et cetera, we did two things. One was take our providers where they are. There are some who have IT systems, integrated approaches, record systems, heavy duty analytics, methods of practice where they are ready to take global or total cost of care risk.

Woods: And by the way, those people probably don't have a hospital.

Azar: But they're the ones who need the baby steps, who are just getting started and can't quite take as much risk. And when you do that risk, have it be asymmetric, so have more limited downside and a bigger scale on the upside in terms of potential for them.

Then you have things like what we did when we built the direct contracting or what they now call ACO Reach. If you're a provider under MIPS, you're looking at flat to declining revenue just on the old fee-for-service system. When we did DCE, we made it you could be, if you know how to perform and actually can deliver in a value-based system, you could deliver 15, 16, 17% increase throughout that period. So that's a big change. That's an incentive to rewire how you practice medicine and think it a different way.

But it's very hard because our hospitals, our doctors, our insurance companies, everybody, they're making money sometimes with different margins of course, but they're making money on a fee-for-service way. And look, I think we're going to see this right now with some of the things that are being done to the Medicare Advantage program and reimbursement rates there.

So, working in a value-based way doesn't work financially. What was my rule? What did we start with? If you ignore that healthcare goods and services are economic goods and services and will obey economic laws, you will be sadly disappointed. Well, guess what? If you make doing value-based coordinated care, not financially viable, guess what you're going to get? Reversion to fee-for-service because they sure as the devil know how to do fee for service and they know how to turn the crank on procedures.