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Panel Discussion

           DR. GINSBURG: Thanks. I think that’s really presented a great framework for our panel to begin. So if the panel could come up now, and Rowan, if you could flip their name tags up so they know where to sit, and I’ll start introducing them.
           Let me begin the introductions with John Bertko, who’s sitting on my right, and who’s Vice President and Chief Actuary at Humana, Incorporated, a major national health insurer. John directly oversees the corporate actuarial group at Humana, and also he assists the Government Relations Department with actuarial input on legislative and regulatory proposals. John has had extensive experience with risk adjustments over the last ten years in all sectors of the health care market, and this includes the Medicaid market and state employee purchasing agencies.
           And on my left is Stuart Butler, who is the Vice President of the Heritage Foundation for domestic and economic policy studies. Stuart recently completed a policy brief on how health credits for families would supplement employment-based coverage, and I’m sure that’s available on the Heritage website. And he’s also co-authored the Heritage Consumer Choice Health Plan.
           Rick Curtis, over there, is President of the Institute for Health Policy Solutions, which is a nonprofit organization that was found in 1992, and he has extensive background in health insurance strategies and issues, and he has done a lot of work on assisting purchasing pool developments to give small firms’ employees meaningful choice of competing health plans, as well as to facilitate coordination of public and private funding for the uninsured. Rick previously served as Director of Policy Development and Research at the Health Insurance Association of America, and is Founding Executive Director of the National Academy for State Health Policy.
           Mark Hall is Professor of Law and Public Health at Wake Forest University. He specializes in health care law and public policy, with a focus on economic, regulatory and organizational issues. And he has recently completed a major investigation of health insurance market reforms for the Robert Wood Johnson Foundation.
           Someone who will be joining us a little bit later is John McManus, the Majority Staff Director of the House Ways and Means Health Subcommittee. And he previously served as the health legislative assistant for Congressman Bill Thomas, and before that was a senior associate in Government Relations at Allow Louis & Company.
           And finally, Phil Vogel is Senior Vice President of CBIA Service Corporation, which is a division of the Connecticut Business and Industry Association. He runs a real purchasing pool. Prior to joining CBIA, he spent 12 years with two major health insurance companies, and he’s responsible for all products and services offered to small businesses throughout--through the CBIA Service Corporation, including a health insurance program for small businesses that uses the corporation’s purchasing power.
           I am really pleased that you are all here. We want to tell you truth-in-packaging, I’ve shared in advance the questions that I’m going to be asking the panel members, but we’re expecting a lot of interaction and perhaps going a number of places that were not planned.
           And I want to start the discussion talking about the experience with current purchasing cooperatives, and maybe Mark Hall would be someone I could start off with. Mark, you’ve done a lot of research. What’s your assessment of the experience of current purchasing cooperatives in the marketplace?
           MR. HALL: I’m trying to think of the right phrase. I think limited success would be about as optimistic as one could put it. I think there’s also been some noted failures, you know, measured against their goals. I think clearly a failure would be the right term measured against was it worth the effort at all? Then I think you might think in terms of a limited success. Clearly, they haven’t achieved the goal of making the small group market work essentially the same as the large group market in terms of administrative cost savings and purchasing power.
           On the other hand, they have provided some degree of standardization and simplification, some degree of improved choice, and sort of a means to essentially police the market, particularly at the low end of the small group market, the one and two, and up to five life groups that have faced some of the more difficult barriers in obtaining insurance.
           DR. GINSBURG: I noticed that California, where we had done a site visit in Orange County, we interviewed two statewide purchasing pools that I think are considered very successful. But then we looked at the number of lives they covered, and it was something like 4 percent of the potential of people who worked for small employers or who were insured by small employers. What would you make of that?
           MR. HALL: Well, several points. I think first, most people purchasing insurance in the small-group market already have--you know, are continuing to keep the insurance they had, and so there wasn’t a strong reason to switch, because the pools simply didn’t offer a distinctly superior price. Also, the distribution system, the agents that small employers rely on, weren’t big fans of these pools, partly because of the relationship at the beginning was antagonistic between pools and agents, and small purchasers rely heavily on the advice of agents, and agents weren’t inclined to send business to the pools.
           DR. GINSBURG: Paul?
           MR. BERTKO: Could I add a couple words?
           DR. GINSBURG: Sure.
           MR. BERTKO: I’m a California resident, and other than Phil, had a small company for three years. We joined what was then the California HIPC, now PAC Advantage, and in the process of which the California Health Care Foundation asked us to evaluate the prices in and out of the HIPC. It turns out that in that last part, the prices in the HIPC were actually slightly more expensive than outside of it, a couple of percent. Now, part of this was driven by Blue Cross of California, Well Point. It chose to be outside the HIPC, and I think any time you have a very large, very successful competitor outside, it probably reduces its success.
           Now, putting on my old employer hat and sponsor, we went from three employees up to 20. Having the ability to offer 10 different health plans in the Bay Area to the 20 employees, my associates who work with me, was very, very much of a bonus, and the fact that there were three of us who had families, and about 17 young nerds running the computers, you know, we were able to get the right mix of health plans that we wanted. But again, price there just was not one of the major advantages of the purchasing pool.
           DR. GINSBURG: Rick, what’s your sense of the experience to date?
           MR. CURTIS: I don’t disagree with anything Mark says. I would clarify a couple of points. The failures like in Florida--and he’s not going to disagree with anything I say, I don’t think--were almost inevitable given the policy constructs enacted by the state. In the case of Florida--and this was replicated in North Carolina, where it was even worse because the state required of the purchasing pools that they do things that carriers in the market overall don’t do, which doesn’t work. I’m going to come back to that as the major lesson.
           But in Florida, these organizations were set up sort of as political animals. There were--I can’t remember how many, Mark, 11 of them around the state or something, originally?
           MR. HALL: Right.
           MR. CURTIS: They each had their own separate boards. They were not allowed to act as purchasers. They could not selectively contract with health plans. They were not the ones that contracted with health plans even, as Phil does, for example. They weren’t the ones that paid the agents. They didn’t even determine how much the agents were paid. Each of the health plans did that. In fact, they didn’t even know how much the different health plans paid the agents. They were completely gutted as purchasers.
           So of the failures I know of, there are circumstances like that or like a North Carolina or a Texas--and this is the key lesson, I think, in terms of federal policy implications--where somehow state policy makers in this case--and I hope federal policy makers don’t do the same things--expected these purchasing pools to where the white hat, to accept bad risks on the same basis as good risks, to charge them the same amount, and meanwhile, the rest of the market didn’t have to do that. And inevitably, that does not work, it cannot work. And the analogy here would be if--with tax credits, the expectation would be that everyone with tax credits has an option to take them to a purchasing pool, which would charge the same to sick and healthy people, but they could also take it to an individual carrier who could charge a lot less for healthy people. That is not going to work.
           DR. GINSBURG: Rick, to what extent would you say that the policy makers in Florida were very naive, or to what extent did they know some of these issues, but just in the course of compromise, had to make big concessions to get this off the ground?
           MR. CURTIS: I think it’s a combination of the latter explanation, and of wanting to have appeared to have done great things that could be touted within the state and nationally. In some cases it was self-delusion rather than naivete I think. But this was--there are several of us on the panel that way back, when this was enacted, said it couldn’t work, and it ultimately didn’t. The only reason they survived as long as they did is the former governor and one of his key appointees sort of used the bully pulpit to sort of force plans to stay in and carry the thing along. As soon as they were gone and there was not that artificial impetus, they died.
           DR. GINSBURG: Sure. Phil, I wanted to ask you, as someone who runs a purchasing cooperative, which presumably is successful, that’s why you’re here, because of the reputation of the--
           MR. VOGEL: We still think the audience knows differently.
           DR. GINSBURG: What would you say are either the--both the reasons for your success, and what are the factors preventing you from being more successful?
           MR. VOGEL: I think Sally did a good job of setting some of the framework. One of the things that I think we did right was, from day one we looked at the distribution system and knew that the individual agent and brokers were very important to small businesses from an explanation standpoint, enrollment, being involved totally throughout the decision-making process, and we embraced--
           FLOOR: We can’t hear back here.
           MR. VOGEL: Is that better?
           We embraced the broker and agents immediately and worked with them to train them, to get them to understand the concept because it is different. It can be construed to be more complex a sale, but we got them to really understand it and move forward, and I think that’s one of the critical pieces of the success.
           The second part is working with the health plans to get them to understand also that we were not trying to do what Rick was talking about and really just trying to have an adverse selected business development piece. I think, when you take a look at why we are not more successful, it would also come to--it’s voluntary. It’s voluntary from the standpoint of the health plans. We were very successful, had tremendous growth in the first couple of years, but I think also, when Sally said, from a health plan standpoint, they want to avoid a purchaser getting too big. They want to avoid the clout. They want to avoid really being compared apples to apples from a price-comparative standpoint, so they have reacted in the marketplace.
           We have seen networks that were relatively narrow networks become--really have, you know, all providers included in the networks so that some of those pieces became--were not as important any more. And so they are reacting outside the market, and they are shadowing us with plan designs, as well. So you have an open market outside of the purchasing pool, and they will, as I always say, our strength is we have four health plans in the marketplace with four different plan designs. So our strength is four health plans, but our weakness is four health plans in the sense of our ability to react, too.
           DR. GINSBURG: You said, in a sense, that some of the plans competing that were outside of the pool were expanding their networks. So, in a sense, has that meant, I mean, this is a trend we’ve seen throughout the country of plans expanding their networks. Does this have implications that, at least at this moment in time, this could change, that choice isn’t as important as it was when some of the purchasing pools were conceived?
           MR. VOGEL: Yes. I think choice is still the number one selling piece, but it’s not quite as important. We always termed it that the small business owner is the owner and the employee. So wherever the physicians were that that small business owners, for themselves, for their spouse, wherever the pediatrician was, whatever network matched them, their employees were "stuck with."
           It’s expanded now so that they aren’t quite stuck because there is greater choice, but in our surveys, still, we do a customer satisfaction survey each year to about 400 of the companies participating in CBI Health Connections, and the satisfaction rates are very high.
           DR. GINSBURG: One final question. What would you say is your, among the success you’ve had, how would you characterize the most important things you’ve delivered to the businesses that subscribe?
           MR. VOGEL: Oh, I think they’ve never had the choice options that we offer. We actually over 18 different options to each employee. So the employees have never had that much choice before, and it shows I think in our satisfaction rates. I think we’ve been able to embrace the broker community so that they can explain it and simplify what can be a complex sale, and over time gotten the health plans to embrace this as something that is good, and they can work with in this structure.
           DR. GINSBURG: Sure. Given the history that Sally sketched and you were talking about, the notion that brokers can be friends to purchasing cooperatives, in a sense, for someone, say, the Rick or Mark that looks at them nationally, would you say this is something that is kind of learning that’s been accepted now or is that still very controversial?
           MR. CURTIS: No. Any of them that are successful small employers have, over the years, listened to Phil on this and have done everything they can do to have good relations with agents and brokers. But one thing Phil alluded to was the satisfaction rates being higher, which I’m surprised health plans haven’t paid more attention to that.
           The other thing, I don’t know if you have recent retention rates. That’s how many of the people who are in this year stay there. And with small employer markets, traditionally, there’s very high churning, which results in high administrative costs, this continuity of care, and so forth. And one unique thing about the California, what was the HIPC PAC advantage, and CBIA in Colorado, is very high retention rates, much higher.
           MR. VOGEL: Yes, we actually, when we take a look at retention rates, we also include companies that have moved out of Connecticut, who have gone out of business, and we still have retention rates in the 90-percent range, which in the small business market, John, you probably know the stats better than I do--
           MR. BERTKO: Yes.
           MR. VOGEL: But they can range anywhere from 70 to 80 to 85 percent, something that health plans are happy with, I think.
           MR. BERTKO: Yes. Absolutely. Anything in the mid 80s or higher is wonderful. The 70- to 85-percent range is normal retention, meaning that you are churning that much business every year.
           MR. VOGEL: Yes, and over the last year we’ve been running in the 90s again.
           DR. GINSBURG: So this sort of thing has significant benefit for the employees who are policyholders, as far as they don’t have to switch plans that often, as their company does.
           MR. VOGEL: The company doesn’t have to change everything. The employees have an open enrollment period so that if, for some reason, they’re unhappy as an individual, they can change.
           DR. GINSBURG: Sure.
           MR. CURTIS: Well, and an important related thing, we were surprised by this--John’s probably looked at this--small employers in many parts of the country themselves have a fair amount of turnover and who is in their workforce. And that means, as they are interviewing a potential employee, they have a health plan they’re offering that’s going to be attractive to them, and it’s not going to be a reason they don’t come there.
           So, despite this incredible stability of employers, if you actually look at the employees, there’s a fair amount of turnover in who the employees are.
           MR. VOGEL: And one more point just on the broker side, and Rick knows that I’m always on my high horse on this piece, but step back for a second and think about who is a small employer because we sit here, you know, with technology, being able to hook up the computer and show power point presentations and have technology at our fingertips, but if you go back and you think about possibly a small manufacturer or the gas station or the hair dresser or the restaurant, and the technology is not there, and you aren’t just sitting there saying, "Okay, I’ll go on the Internet and make my election," it’s a completely different population.
           There are high-tech companies that are small, but there are also very, very limited technology companies on the small side, and that’s when I come back to somebody’s got to explain it, somebody’s got to help them through it. They want to either make their widgets or do whatever they’re doing in their business, and that’s what the small employer wants to do, that’s what they want their employees do. They want somebody else to handle it for them, and that’s where the agent really comes into place.
           MR. HALL: I’ve used the analogy or the observation that, for the small employer, the insurance agent is essentially the employee benefit manager, and the large employer has an expert full-time staff to shop the market, and smaller employers use their agents in that capacity.
           But just a word or two more on the agent point, if that’s where you want to stay with the conversation, Paul, is that everybody knows that the purchasing pool concept was enacted at the same time that the Clinton health care reform proposal was being debated, with its health alliances, and so the whole idea was linked with large government takeover of the insurance industry or what have you. So that political climate made it extremely hostile.
           I think, once we got past that in my interviews, what I detected is that there is still a degree of agent resistance because they still saw the pools as linked with government. They were state subsidized. Sometimes they were sort of sort of quasi-state entities. But other agents saw the pools more favorably, and it tended to turn on whether the agents saw the pools as a source of new business, basically. So that if an agent had a clientele, had a set of developed small businesses and was happy dealing with carriers directly, they didn’t see any reason to change, and they saw it only as a threat.
           But if an agent was trying to develop new business could use the pool as a source of new business, and the pools would make referrals to favorite agents, they would actually gain business. Then the agents saw the pools very favorably, and you got these dichotomized reactions. Some agents thought they were just wonderful because of the ease of selection, the ease of shopping, the retention, and the other things that make agents’ lives easier versus those who were opposed to it for a mix of economic and political reasons.
           All of which I think sheds light on the issue being debated today, which is that for the tax credit population, this would overwhelmingly be brand-new business and not be taking existing business and moving it to some other type of location. So I think the prospect that agents would view it favorably is fairly high.
           DR. GINSBURG: Yes, and I gathered some of the public purchasing cooperatives have really been hindered by the compromise they had to make over the opposition of agents to the legislation, and that perhaps, in this setting, given the experience of the private pools of now moving towards using agents more, that this would be less of a stakeholder that would see themselves being highly disadvantaged.
           I wanted to go into a little bit more, as some of you have mentioned, this issue of risk selection. I think what a number of you have alluded to is the fact that, under a voluntary system, any employer always has the option to compare what’s available under the purchasing pool and what’s available directly through an insurer. And, presumably, if something more attractive is going to be obtained through a regular insurer, that’s the way they’ll go.
           So, in a sense, you’re having, and I guess this interacts with state laws a lot, but I wanted some of you to talk more about the potential pitfalls of a voluntary purchasing cooperative with a selection phenomenon.
           Rick?
           MR. CURTIS: Well, it is not a coincidence that where these have been successful, relatively successful--in California, Colorado, and Connecticut, and a couple of other places--there are market rules that say marketwide insurers can age rate, but they cannot health rate. And they have been tried in some markets with loose health rating, and the reality is, if you’re a purchasing pool that offers individual choice and the people that come to you have a choice of going to an outside market with health underwriting, then you have sort of three broad options. One of them is you don’t health rate anyway, and that’s the kiss of death. It’s just not going to work.
           Second, is you let each of your participating carriers underwrite each individual in the pool that might come to them. And if you do that, you’ve recreated all of the administrative costs and inefficiencies, and there are people on the panel who disagree with this characterization, but the market dysfunction of a market, where people don’t know what the price of competitors are until they go through a lot of work, which makes it very hard for consumers to compare.
           And the third option is to try to get participating plans to agree on common underwriting standards and to use sort of a common administrative apparatus so that people only have to be looked at once, in terms of what their risks are. Now this is a lot more workable than an esteemed colleague of ours’ approach, Mark Pauley, where the IRS is going to risk assess people and give a tax credit based on that which I can’t imagine ever working.
           I mean, this can work, but it can never work as well, from a risk selection standpoint. From an insurer’s standpoint of each insurer protecting themselves with their own underwriting, it’s kind of a least-common denominator approach and won’t work as well. So we don’t have a case, at this point in history, of a consumer choice of competing plan purchasing pool for small employers that is highly successful in a state with loose rating rules, that allows a lot of health rating, and again it’s not a coincidence. I think it can work, but it’s not been successful yet.
           DR. GINSBURG: Sure.
           MR. BERTKO: Let me just add, being a little bit more specific about the California pool, I was one of the actuarial consultants helping to set up the California HIPC. What Rick said is absolutely true, but if the rules are tight enough, sometimes you can get by with some flexibility. In California, the rating rules were plus or minus 20 percent on the outside, at the very start, and they shrunk to plus or minus 10-percent rate bands; that is, I’m using some shorthand here to say that health risk underwriting was allowable for certain factors.
           The California HIPC, at the start-up, chose to not have any health underwriting. It greatly simplified the presentation of the materials, particularly when we had 10 health plans in several reasons. And it turned out, because we got reasonable prices, to be mostly competitive. Now I will tell you that one of my colleague consultants was actually sitting in a lunch room shortly after we had this pass, and a broker was sitting at the next table, unbeknownst to the broker. We were sitting there, and the broker said, "Well, you know, I’m just going to take all of my bad risks and send them over to the HIPC because they, of course, will have to accept everything, and they’ll get lower rates."
           This kind of behavior is, it’s going to happen. I mean, the job of a broker, in fact, is to find the best rates for his or her clients. And as Rick said, if the bands are wider than that, the effect is going to be yet more serious.
           Let me only add, within the health pool, there is yet a different type of risk selection issue that we haven’t talked about too much. If you have standardized benefits with standardized delivery systems, much of the risk selection across health plans is less evident. We started out in the California HIPC with one or two PPOs, and they almost immediately disappeared because the PPOs were more desirable by people who had higher health needs, and there was no amount of risk adjustment we can do to save them. So we ended up very quickly with just HMOs in the HIPC.
           DR. GINSBURG: And presumably, to clarify, those PPOs presumably would have had similar problems if they were offered by a large employer that was having them compete with HMOs.
           MR. BERTKO: Well, the answer is they would have attracted the same sort of risk, but the much, much higher subsidy of the large employer would have most likely overruled that, and the large employers make a practice to retain the PPOs by being willing to offer that greater subsidy.
           DR. GINSBURG: I see. Rick?
           MR. CURTIS: And that plan, as John probably knows now, is newly offering a PPO option again, but with a leaner benefit package than the HMOs, and they’re hoping that will solve the problem.
           It’s worth observing. I can’t prove this to be true, nor could John, I’m sure, but one of the reasons I think he found a very small price difference between the HIPC in California and the outside plans is, in the outside, they can health rate, and that’s probably why they have a slightly smaller price. If you had a tax credit population, it becomes a different deal.
           Again, if you could take your tax credit to a pool, then a pool can, and you have to go to a pool, and the pools are subject to the same kind of rating standards for people with tax credits, you can make something work. Even if people in the individual market that aren’t subsidized are facing health rating, it could still work inside the pools, as long as the people with tax credits have to go to entities that are subject to uniform rules across those entities.
           MR. BERTKO: We’ll save more debate on that for later.
           [Laughter.]
           DR. BUTLER: If I could just sort of weigh in a little bit on this. This whole issue, I think, of risk selection has a lot of curiosities to it and a lot of ways of potentially dealing with it. You’ve got a number of options or a number of situations that sort of need to be part of this equation and need to be thought about.
           I mean, for example, you have within the federal employee system, you have 10 million people who are each seeking plans. The plans are community rated. They offer different benefits, and yet somehow it functions. And I think we might want to explore a little bit about why a situation like that is relatively stable and what lessons that has for any kind of tax credit approach.
           I think, in addition, and I would say pretty broadly that all of the people I know, including myself, that are proponents of tax credits, recognize that there has to be some kind of underwriting restrictions and so on, combined with some way of dealing with the risk-selection issue. Risk adjustors that look at the sort of portfolio of risk of each of the plans and look at ways of compensating over time is certainly one way of looking at this. Creating high-risk pools and taking out the highest risk group as one’s separate group so that you get much less of a problem, in terms of risk selection, is another way.
           So, in other words, I think there are a lot of ways to look at this and a lot of approaches that need to be explored between the federal government and the states, as you look at any kind of tax credit approach.
           I think the underlying conclusion I think maybe to draw from a lot of this discussion is that there is no one solution. There may be one solution, but we don’t know what it is, and therefore it’s very important for us not to lock ourselves into sort of one approach. And that is why I favor, particularly with any tax credit approach, having some kind of negotiation between the federal government and the states to explore and to actually analyze how this operates and to see what the federal government can do as its part of the bargain, in terms of making this work.
           And I think that is the only way forward for precisely these reasons, but there are a lot of options I think in how to deal with this.
           MR. CURTIS: Just a general observation here, I think that’s very sensible, but in order for that to work at the state level, a state would need to have the latitude to identify where people could take tax credits within the state.
           DR. BUTLER: Oh, I agree with that, and I think that’s why it has to be a negotiable situation. You have to have something like a tax credit that is available, and as a condition of having that available within a state, the state and the federal government has to come to some kind of agreement about how it’s going to operate, and there will be differences in different states. And the differences are partly to adjust for differences in states, of course, but also because we don’t know precisely what the best method is.
           I think this is analogous to what we did for many years in the welfare area, where we said we don’t quite know what the right--so let’s give waivers, let’s give--and even now there’s diversity between the states and how they approach that, within a general rubric of what the federal government is trying to achieve, and I think that’s what’s got to happen in this area too.
           DR. GINSBURG: Actually, we’re going to return to that in the second half of the meeting. Mark?
           MR. HALL: At the risk of losing the audience on these technical questions of risk selection, I think we are trying to draw some lessons from what we observed with purchasing pools, and I thought I might just offer one more observation that I think would be relevant, as we move into the second half. And that is I guess the general question is why do purchasing pools become magnets for high risks, either actually or perceived, and does that then give us concern for how the tax credit idea might be implemented? I think that’s the general line of discussion.
           And Rick’s point is correct, that to the extent that the purchasing pools had more generous or different rating and underwriting rules than the rest of the market, they became magnets for high risk. But even where they had the same basic underwriting and rating rules, as the rest of the market, they were still magnets for high risks in the following way, and this has to do with the very small groups.
           So, in a states like North Carolina and Florida, the pools became magnets for the smallest of the small groups--the one-, two-, three-, four-, five-life groups, which is an irony because the biggest advantage that they offer is choice, but choice is more meaningful when you’ve got more employees. If the owner is the only employee or the owner and his wife or children were the only employees, then, you know, the choice feature is not that meaningful. So they become most attractive for those for whom the choice feature is the less important.
           Well, why did that happen? Simply because those size groups were seen as presenting the highest risk in a community-rated market because of selection concerns because those are the businesses that make their purchasing decision depend on their perceived health needs. So mom and pop decide we have an anticipated health need. We’ll buy insurance for our business or we don’t, so we’ll drop it. And on that account, they are seen as high risk.
           Now, why do they end up in the purchasing pools rather than in the rest of the community or guaranteed issue market? Well, one reason has to do with some of the more subtle rules that did differ. So, for instance, whether or not a self-employed purchaser qualifies as a legitimate business, there are various rules for testing that, and the carriers could be stricter on that in the outside market and the pools were somewhat more generous or simply agent commissions.
           So, in Florida, we saw a situation where carriers dropped their commissions for the smallest groups down to 1 or 2 percent, whereas, the pools continued to pay 5 or 8 percent. Usually, the commission are at a higher rate the smaller the group because there’s more work for selling the equivalent amount of business, but it went just the opposite direction in order to actively discourage agents from sending that business to the carriers, whereas, the pools didn’t.
           So these kinds of fault lines inevitably develop, even if you have the basic same market rules if choice exists between purchasing in the pool or purchasing in the outside market.
           DR. GINSBURG: Thanks. And before we leave this issue of risk selection, and we’re going to be coming back to it time and time again, let me just reinforce one of the comments that was made about we’re really talking about two different types of risk selection. We’re talking about, first, the risk selections that go into a pool.
           So, in a sense, the incentive for employers who have a healthy workforce to get into a pool that’s healthy to keep the price down and avoid the pools that have more sick people. But then once you’re in a pool, then you have the issues of risk selection among the various plans, the choices that you’re offered. And in some ways they are distinct, and in some ways they are related because choice is one of the prominent advantages of purchasing pools.
           Before we leave the existing thing, I want to ask are there any other thoughts?
           John?
           MR. BERTKO: I will only add one more that I think complements what Mark said earlier. The operation of the very toughly underwritten individual market also means that folks on that intersection of individual market and guaranteed issue small group can choose, if they are very healthy, to participate at perhaps half the cost of what the guaranteed issue product is.
           And so there is a very natural dynamic there of folks who need insurance, want insurance, but are healthy, to go in one direction when they’re healthy and the other direction when they are sick or in great need. So it really exacerbates everything, in terms of the risk dynamics.
           MR. CURTIS: And depending on how big the tax cut is, this could be an issue even for tax-credit recipients, even if they could only take the tax credit to a given place.
           MR. BERTKO: Yes.
           MR. CURTIS: If the tax credit is $500 and the premium is $2,500 for a healthy young person, that $500 is a rounding error, in terms of the discount on the premium they can get if it’s underwritten.
           DR. GINSBURG: Okay. Good. Now let’s talk about the potential of marrying tax credits with pools. And what I wanted to set out is somewhat of a basic option that we’re going to be talking about. And, in a sense, this option I’ve assumed that individuals using tax credits would be required to purchase insurance through a limited number of authorized pools, and I think that’s the key thing.
           Let me also say that let’s also assume that the tax credit is substantial enough to make a difference, and I recall an article by Mark Pauley in the January Health Affairs where, through simulations, was talking about a tax credit that covered about half the cost as what he thought is needed to get a significant change in behavior according to it.
           So let’s assume for this discussion, although with the caveat that Rick mentioned, that tax credit is going to be, say, roughly half of the cost, although realizing that when a tax credit is half the cost of someone that gets the full tax credit, that through the phaseout of tax credits, for those with incomes that are fairly high, those people are not going to be getting as large tax credits.
           So, anyway, with that kind of basic thing, and we’re going to be requiring people to use their tax credits in pools that have been authorized by either the state or the federal government to do that, and that there are going to be a limited number of these authorized pools. The first design issue I would like to talk to the panel, I mean, that’s as far as I could go, as far as what I thought the panel might agree on as a reasonable option, and then I want to get the panel to work out some of the other elements.
           So the first question is who would be eligible to participate in these pools? Should it be just the individuals with tax credits or should other individuals be eligible to use the pool?
           DR. BUTLER: I don’t see a particular logic for limiting it to people with a credit. I mean, what a credit does is enhance the buying power of certain individuals to make it more comparable to the buying power of other individuals. So to say we’re going to select out this curious group of people and say only they can go through this particular mechanism and somebody in an equivalent purchasing capability, if you like, and health situation is going to be barred from this, I think not only there’s no logic to it, but I think sets up all kinds of perverse dynamics in terms of qualifications and so on.
           MR. BERTKO: May I jump in at this point?
           Actuaries are perhaps noted as having too much logic so let me say Paul didn’t completely specify this. So I will take on I think that there’s a separate new individual market that doesn’t have the problems of the past. My worry on this is the ins and outs. So, if you have a tax credit, and, Paul, I’ll add to your background that the tax credit has got to be used for the full year; that is, there is no in or out. You essentially have a tax credit with a lock-in. Then, Stuart, I would suggest that without a corresponding lock-in, no plan, in its right mind, would participate in that if other individuals could come in or out of the market.
           DR. BUTLER: But if other people are locked in under the same circumstances--
           MR. BERTKO: If they are.
           DR. BUTLER: Well, that’s a rule of the group itself--
           MR. BERTKO: So that--
           DR. BUTLER: --of the pool itself. I don’t have any big objection to that. The only issue is whether you are saying we’re going to create yet another system now, regarding traditional employment-based system, we’ve got individual market and so on, and now we’re going to segment out another group of people and create a completely different system, in a sense, for them, I don’t think that makes a lot of sense.
           MR. BERTKO: I would agree with that, but then you are saying, instantly, we have got to reform the whole existing individual market, and I am not sure that was part of today’s topic.
           MR. HALL: Yes. Let me just chime in as well, that I think what, Stuart, you are saying makes sense. If the other options they have are roughly comparable, which is true for small groups, down to groups as low as one, and I hope everybody knows what a one-person groups means to all of us insurance-minded people. It means a self-employed person that buys their own insurance as their own employee benefit. But, in any event, we can think about a two-person group if that makes it easier.
           In any event, the market rules in that small-group market are roughly the same as what we’re contemplating for these pools. But if you allow in folks who otherwise are purchasing in the nongroup market, so employees who are not self-employed, who aren’t getting insurance through their employer, then coming into the pool, the market rules are so radically different that you’re going to create huge selection issues at the boundary of choosing which of these options to shop in.
           MR. CURTIS: Well, this is just one observation. I didn’t hear Stuart say that necessarily the people without subsidies would have to pay--get to pay the same rate as the people with--I don’t know what he thinks about that, but this could only work--and I agree it’s good not--we’re talking about the same people. One year they make $50,000, the next year they make 80 or 30. And for them to have to be going different places to get coverage based on whether they’re qualifying for a tax credit would be unfortunate, on the one hand. On the other hand, for the reasons Mark’s pointing out, it would be important that in the individual market healthier people paid a lot less and sicker people paid a lot more, that for people with no tax credit or only a small tax credit on a phase-out basis, as Paul pointed out, the pool could have some health rating in that instance for those people that don’t have tax credits. Otherwise, it could not work.
           DR. GINSBURG: Okay. Now, if we’re going to--okay, so we’ve talked about two options, either the pool is open to everyone, but with people without tax credits perhaps having health rating, presumably the people with tax credits wouldn’t have to have health rating.
           DR. BUTLER: Well, I think it depends on the design of the credit. I mean, you know, if you have a flat credit, that’s one issue. If you have a credit which is related to the cost of health care, a sliding scale credit or something like that, then I think you don’t have quite the same level of issue there.
           DR. GINSBURG: That’s right.
           DR. BUTLER: That, you know, is something Rick mentioned, you know, Mark Pauley and ourselves and others have looked at that, and I know the pros and cons and so on. But, you know, one of the purposes of having a tax credit related to the cost of your actual coverage is essentially to modify or to lessen the issue of rate setting according to health status.
           MR. CURTIS: Paul, I think that kind of approach can work with respect to age rating, which is pretty standardized and it would be easy to do. With respect to health rating, to say "dubious" is an understatement. I just don’t think it’s practical.
           MR. BERTKO: Yeah. Let me echo Rick’s words. I spent a large number of years, as you noted in the bio, Paul, on this, and collecting the data necessary for it is difficult. Then, secondly, the prediction of future cost based on what you know today still has relatively low predictive power when it comes down the individual selection issues and what people know about their own health status and projected health needs. So the market rules on this have to be extremely strict and organized to allow this to happen. I agree with Rick; on average, it has something to do with age and probably gender, given that you’d have selection for people who were--families that were going to become pregnant and can do some prediction there. I think that is much more workable.
           MR. McMANUS: I’m John McManus. I’m with the Ways and Means Committee. I apologize I’m late to join the discussion.
           Just a comment on having the credit be a percentage of the cost of the premium, I think that would be the wrong way to go given the current structure we’re in now in which you have an open-ended employer subsidy, and the more health care you buy, the more subsidy you get, and the richer you are, the higher marginal tax rate you are, the more you get.
           Part of why I think we want to go towards a tax credit is because it’s a discrete amount that would force an individual to be a little more cognizant of how to spend their health care. And above that amount would be after-tax dollars. So I would not want to structure a system in which people would be rewarded by picking Cadillac plans and, therefore, get a higher tax subsidy. I just don’t think--
           DR. BUTLER: Well, but it’s not a trade-off. It’s one or the other. I mean, look at the way the FEHBP works, which is you get--what is it?--75 percent, whatever the figure is, up to a limit. And then if you go beyond that, if you want the Cadillac as opposed to the pretty serviceable Chevy, then you are on your own. So it’s not that these are mutually exclusive. I’m just merely making the point that if you’re looking at the concern of risk rating and so on within plans, one of the advantages of a credit which is related to what you actually pay is that, you know, sicker individuals who are going to--not necessarily just pay more for the same plan, but want a more elaborate plan because of their actual situation, will, in fact, get a higher subsidy up to some limit. And that’s the sort of argument for going in that direction. I’m not saying that that’s what we should enact necessarily because of other issues, too. But I’m just saying in terms of this risk issue and how you underwrite and so forth, a variable credit does allow you to permit some greater variation of pricing without unduly hurting financially the person who has to buy it, because you’re subsidizing that person in a more direct way.
           MR. VOGEL: John, if you take a look at it, you’ve got a wide range of premiums that are charged throughout the country. You’ve got some very high areas and low areas. And so the higher-cost areas, if you just have one set premium amount, it becomes almost as if the tax credit doesn’t come into play because of some high premiums.
           Most of the purchasing pools--and I run a purchasing pool in Connecticut--offer a wide range of benefits, and the tax credit can be pegged, if it’s a varied amount, at, say, a lowest-cost plan. Then if somebody wants to opt up to the Cadillac, as we’re talking about, they would pay more. But it can be targeted at some plan, some basic rough plan design that we think fits the bill.
           DR. GINSBURG: Let me move us along to the next issue about who can participate in the pools. And maybe this is a detail, but I think it’s pretty important.
           Let’s say you have a law firm, a small law firm, and they have health insurance coverage, but some of their employees, secretaries, office staff, they would be eligible for tax credits. What should those employees do under a plan where people with tax credits, and perhaps some others, went to the purchasing pool?
           MR. CURTIS: I might not pick a law firm an as example. I’ll start with what I think is a no-brainer, a retail store where a majority of the workers are low wage that doesn’t offer coverage now. I believe it would be a win-win to allow those people to use their tax credit through the employer group to come to the purchasing pool as an employer group. There could be no crowd-out of existing employer contributions in that instance. Very few low-wage small firms now offer coverage. Those that do are very likely to drop it within a couple of years. They simply can’t afford it.
           So I think that if that were an option, it would be a win-win because it’s easier for people to have the payroll deduction to make their contribution. There is some conveniences of getting coverage through work, so long as there is still choice through the pool.
           And just as importantly, you leverage coverage of some people who now may be uninsured who aren’t quite eligible for the tax credit, but can’t afford coverage on their own, but could be brought along as part of the group.
           The law firm I think is no different than a big corporation in that it may have some low-wage workers or some ineligible workers that don’t have coverage through the workplace. And, you know, then the question is: Do you make a tax credit workable for them to be able to get coverage through wherever their employer does get coverage, or do you not and allow them to go on their own? To have an employer sort of have a subset of employees who are eligible for the tax credit and then for those employees the employer brings them to the purchasing pool seems to me an extra layer that’s unnecessary if the employer is otherwise covering their other employees some other way.
           DR. GINSBURG: Okay. But what I wanted to clarify is that, you know, the starting assumption was that you had to go to a pool in order to use a tax credit. So we’re now talking about a low-wage employee of a firm that we want them to benefit from the tax credit, if it’s a design like the Jeffords bill that has some tax credits for people whose employers offer coverage. How do we reconcile that?
           MR. CURTIS: I personally think those people should be able to use that tax credit to buy into the employer coverage they’ve declined so far.
           DR. BUTLER: I totally agree with that, and I think that’s the argument and the logic that was used behind the legislation, both to make sure that you didn’t lead to a situation where people were discriminated against because they had coverage available, particularly for dependents, which I think is the bigger, the major issue, and so on. But I think, you know, this issue about low-wage employees in these kinds of firms that don’t currently provide coverage, I think it begs the question as to why you necessarily have to require the individual, the employee to go through a pool or any plan that is selected by the employer himself.
           I mean, we’ve made the assumption up to now, I think, which we ought to challenge, as to whether you’re in or out of this pool and which pool you’re in, is a decision made by the employer. I don’t think you have to do that. I mean, the point Rick made of a very practical nature, which is it’s very convenient to, quote, get coverage through your place of employment because everything’s handled by the employer, the tax is handled through withholding and so on, I don’t think that requires you to necessarily then say that that employee then must select a plan or a pool that is selected by that employer. They’re not connected. There’s a practical issue.
           MR. CURTIS: Well, I think there’s a simpler or practical issue. A small employer with employees that don’t want the employer to do this won’t do it. The employer would only say, okay, I’m going to take you as a group to this pool where the employees want them to do that. I’m not talking about requiring people who are eligible for a tax credit who happen to work for a low-wage small firm to get their employer to offer coverage and then to go as a group to a consumer choice pool. It’s where the group decides to do that. That’s the practical reality with small employers.
           DR. BUTLER: But if we’re going to have different pools available to people, those pools may differentiate themselves in various ways.
           MR. CURTIS: Yes.
           DR. BUTLER: And they may--a certain pool may be much more attractive for a certain employee and another pool for another. And I think it’s very important to allow people to make that choice, because I think one can envision pools specializing in certain types of individuals--I don’t mean medically, necessarily--and one must allow that to be open. And I think if you delink the practical aspects of employment-based coverage in terms of payments and withholding and all that sort of thing from which pool that individual employee can join and which plan within that pool, I think that’s--you want to really end up with that result so that you can give people the maximum choice and have--
           MR. CURTIS: We’ve found a place we actually disagree about. I think that the pools should have real consumer choice so they can meet the needs of most employees. Again, where that’s not true, the employer would not decide to do that and let their individual employees take the tax credit where they want. I would, in effect, let the market decide that rather than presupposing that you couldn’t have a group go together to a consumer choice pool.
           DR. BUTLER: I wasn’t--if there’s agreement with the employer, that’s fine. I don’t have that--and if that’s the argument, we don’t have an argument. And if everybody agrees they all want to go in one pool and they’re quite happy to have the employer pick it for them, that’s fine by me. If you don’t have that situation, I think it’s just very important that the individual’s selection of pool and plan is not determined by the employer in any way, even if the employer has an obligation to make payments and to adjust taxes and so on.
           MR. CURTIS: Well, here’s how the market would decide that, Stuart. I’m assuming in the small-employer market there would still be a participation requirement, and--
           MR. BERTKO: Under ten, absolutely, without a doubt.
           MR. CURTIS: And if the employee has the choice of taking the tax credit as an individual elsewhere, then the employer isn’t going to meet the participation requirement if they have a couple of employees who think that and the thing isn’t going to happen. You don’t need a bunch of new special rules to make this a reality.
           MR. BERTKO: Right. And I just would like to add here, to echo what Rick said, if there is a chance that there would be selection issues linked to whether you choose with the employer or with the pool, back or forth, it’ll happen. And the market, subject to any other constraints, will say those groups of one to ten employees that are allowing their folks in or out, again, won’t be offered coverage.
           MR. McMANUS: I think we have to look at this from a different perspective than we have in the past. The health insurance purchasing--HIPCs have been around, talked about for over a decade now, but we see new things emerging now, for example, e-health insurance on the Internet, in which you can choose health insurance, you know, an array of options. You can immediately and in real time get rates and what your coverage options are and so forth. And 40 percent of those who have gotten insurance through this e-health insurance were uninsured previously.
           So I just think we should not lock in legislatively--I know we are talking here in an academic framework, but my job is to help put legislation together. Let’s not lock into ways that we’ve done things in the past, necessarily, and not allow for new structures to evolve and have people available themselves of those structures.
           MR. CURTIS: In that sense, I would mention that a number of these things you referenced as HIPCs had exactly that kind of data, that 40, 50, 60 percent of their enrollees were previously uninsured. It was probably correct. It’s probably correct in e-mail--I mean e-insurance. But that doesn’t mean that either reduced the number of uninsured. Probably in the bigger picture, they’re not. These new mechanisms are more attractive to people that don’t already have connections in the market. It’s probably the previously uninsured who are newly coming into the market, anyway, and they’re more prone to trying something that they think is new and better.
           But without the tax credits or something, it’s unlikely any of these things is really going to make a dent in the uninsured population. I know you know that, and that’s why you guys are working on tax credits.
           MR. McMANUS: What I was suggesting is, as we put the tax credit package forward into legislative language, we ought not lock into structures that we think have been effective but then prohibit us from going forward on new and emerging technology and ways of doing business. That was the point.
           Obviously, you need tax credits--I mean, the biggest reason people who are uninsured cite, I think 73 percent who are uninsured cite why they can’t--why they’re uninsured is because of cost. What’s the biggest way to address cost? Well, let’s provide them the resources.
           I think what’s valuable in what we’re talking about here is costs aren’t just how much money you have but how much does the insurance product cost. And so it’s marrying those two, and in a way that doesn’t prohibit you from going forward in new and innovative ways in the future that’s going to be difficult when you’re legislating on this.

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