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Final Questions and Comments from the Audience

             
             DR. GINSBURG:
Would this be a good time to go to the audience?
             FLOOR QUESTION: I’m Conwell Smith with the American Medical Association.
            And I can appreciate that we were focusing today on the role of purchasing pools, but what I’m hearing the panel say is, okay, we’re not here to talk about reforming the individual market, we’re not really here to talk about reforming the employer-based system, we’re just going to talk about purchasing pools. And I’m finding it hard to listen to this discussion in a vacuum, if you will, because what I’m hearing is a classic case of why we do, in fact, need to reform the individual market and why we do, in fact, need to change the employer-base system.
            And as far as addressing the uninsured, they seem--and I could be missing the boat on this--but they seem to be in the highest-cost market, if you will, and many of which will have trouble accessing purchasing pools, as we’ve seen them discussed in Congress in the past because they might not be members of those associations or an employer-based pool.
            I am just wondering if you guys could speak, to some extent, to, for example, the large pool of money in the tax exclusion that goes to employers and using that for tax credits and also kind of the change to define contribution, if you will, and using that to promote the individual-based markets so that we don’t run into the problems of risk selection in those types of issues if all Americans were really purchasing their insurance on their own. Because that’s kind of what I hear this all coming to, in a head, to some extent.
             DR. GINSBURG: Before I let people answer your question, I wouldn’t want to say that this group has not been interested in reform of the individual insurance market. That’s really what our discussion has been about as to whether there is a way, other than having government do it, to reform the individual market. But let me turn to the panelists to answer the rest of your question.
            Rick?
             MR. CURTIS: I know that the AMA has long believed in choice of health plans. I happen to strongly believe in individual choice of health plans as well. To suggest that a solution to our nation’s ills is to blow up employer coverage and encourage everybody to go out into the individual market, I mean, hopefully, some of these ideas will work.
            We do need individual market rules, but I’ve been challenged in the past, and I’m sure other panelists have, to name one state in the country where the individual market works well. Tax credits will go a long way to infusing it with healthy lives, but you still have this incredibly fragmented market, with each individual making health insurance decisions on their own. You, by definition, do not have a good risk-spreading capacity there.
            Large employer groups are, I’m sure you know this, are called natural groups because people go to work there not because of their health status, but because they go to work there, and therefore the group represents a broad spectrum of risks, and it works for insurance purposes. I think doing things to take that apart is counterproductive.
            That said, I’ve long thought moving from the exemption and deductibility, I know Paul doesn’t like to take positions on anything, but he and I have known each other for a very long time, and I think I can safely say we both have long thought a progressive, responsible thing to do would be to change that to a tax credit system, and I know Stuart Butler has thought this, but I would not move it away from employment based in doing that, number one.
            Number two, I, personally, if I were the benevolent dictator, would tie big tax benefits from the federal government to employment based to some requirements for some meaningful choice on the part of employees. There are a majority of employees who have benefits from their employers who don’t have meaningful choice of plans. And I would have at least some choice required, as a requirement.
            Number three, with respect to the individual market, if you have tax credit, that is more than adequate, and you have lots of people coming into it, you can have market rules, and I think you should have market rules that make it more functional for people that are sicker, and at least largely deal with health rating, among other things.
            But there are all sorts of other things, as I think Mark pointed out before, that you can do to risk select, through benefit design, through selective marketing, through, okay, we’re going to have, in effect, healthy members of the community club. It’s been here for a long time. It was called something else. We just moved our headquarters to the fourth floor of a building without elevators, and people have to attend a meeting once a month to get discounted health insurance for half the price you can get any place else. That’s the kind of stuff that’s very easy to do in an individual marketplace, and that’s why I think it would be unfortunate to take apart natural grouping that occurs for other reasons.
             DR. BUTLER: If I can answer your question a slightly different way, and I’d probably argue with Rick a little bit about what he said. But I think what we’re talking about here is, in a sense, what is politically practical and possible right now, and I don’t think any of us are ignoring the fundamental flaws. I totally agree with you on the tax side and have written on that extensively. But I think that, you know, we’re facing a situation here where there’s an opportunity to move forward in an incremental way in a certain direction, which is towards a more fundamental reform, it’s consistent with a more fundamental reform, but we’re not ignoring, in any way, the problem.
            I think, you know, with all of these incremental steps what you want to try to do, obviously, is to take a step in the direction you want. You don’t want to take a step that then causes ten other problems to suddenly materialize and so on. It’s an art form trying to get this right. But there certainly is no disagreement of the, I don’t think, of the fundamental problems with the individual market, and I would say with the employer-based system, too, but I’ll let that go for now.
             MR. McMANUS: Let me comment on this. I’m in an interesting position because the full committee chairman, Bill Thomas, wants to get rid of the employer-based system and go to the individual-based structure or the refundable tax credits, and my other boss, the subcommittee chairman, Mr. Johnson, likes the employer-based system. So it puts me in an interesting spot because I report to both of them.
             DR. BUTLER: Take the Fifth.
            [Laughter.]
             MR. McMANUS: Let me just say this: When you’re looking at the employer-based system, it was not a deliberate policy of Congress to establish that. It was sort of set up by accident because of the wage and price controls. So, to make the argument that we ought to keep what we have, you know, and saying that it works very well, I don’t think that’s the case. When we talk about risk selection, well, who are the people who, in the employer-based structure, who are risk-selected out? Well, those people who, by definition, can’t work--the most unhealthy people of all.
            So I think there’s a number of faults with the current structure. I think what we’re trying to talk about here is, in fact, reforming the individual-based structure because even my boss, Mr. Thomas, would say I’m not suggesting that we get rid of group marketing. I just don’t think it ought to be tied to the employer, where there’s an arbitrary definition. So, having the risk pools I think really advances the discussion from where we’ve been in the past, where people just assume if you get rid of the employer-based tax exclusion, they all of a sudden go to the individual market.
            So I think this has been a very productive discussion in that regard.
             FLOOR QUESTION: If I could just clarify the AMA position because it was tied to AMA policy, and clearly that is where I get some of my thoughts, but I was more talking about it in a more comprehensive discussion of where insurance needs to go. And just to clarify, the AMA has been very supportive of purchasing pools and will continue to do so, as well as they have also been very supportive of tax credits. So, with regard to the incremental steps, I don’t think we’re in disagreement there, but I just thought there was a bigger picture that the discussion was moving toward. So thank you.
             DR. GINSBURG: Bob?
             FLOOR QUESTION: Bob Helms from AEI.
            I do have a question, but in response to this last discussion, let me say that I really object to the sort of terminology of blowing up the employment system or severing the link or whatever because every responsible academic, including Stuart Butler, that I’ve known about for the last several years, who have written about the effects of the exclusion, either capping it or eliminating it, have always said, Look, you had a policy in effect for over 50 years. There’s an institution of employment-based insurance, and nobody predicts it’s necessarily going to go away. They’re talking about a little more even treatment of the thing in those tax proposals.
            My question has to do with the individual market. As you all know, AEI has published, in Health Affairs, has published an article by Brad Herring and Mark Pauley, talking about the risk-pooling ability of the individual market. Now I know it’s difficult for contemporaries to always predict how markets are going to happen. That’s one lesson we get from economic history.
            But my question to you is why can’t, if you had a tax credit that really gave people an incentive go to the individual market, why wouldn’t you get, as Pauley and Herring have talked about, more efficient risk sharing, even in the individual market? Why wouldn’t you get economies of scale in the marketing? Why won’t a combination of a larger individual market, and the Internet, and new ways, even agents using the Internet or new ways to market individual insurance reduce this agency--the cost of the agency problem in terms of those commissions and so on? I mean, every market I know that’s relied on these kinds of agents, when the market has changed, that part of the market has declined.
            So my question to you is why wouldn’t you expect this individual market to become more efficient, as a method of pooling risk and providing insurance to individuals?
             MR. McMANUS: Well, John will say a lot more than I will on this, but you could, conceivably, if the market rules are right, and we won’t talk a lot about insurance rules, other than whatever John wants to say about it, but you started with people having tax credit and moving from employment-based systems.
            The employers that decide to drop coverage and the employees that decide to drop coverage are going to be, on the employer side, the incentive will be, I pay a lot, and they’re not getting the tax credit, and they should go over there. So, on the employer side, it’s going to be the ones with higher-cost employees who are going to save the most getting out of this.
            And on the employee side, you have the reverse, in terms of what their incentives are. The ones that are sick are going to want to stay with their employer-offered plan. That dynamic alone, for starters, is a complicated one, and I don’t want to pretend, you’re right, you know, none of us are real good at predicting this stuff, but I don’t want to pretend that I have some unique insight, but it’s complicated and needs to be worried about. Then--now, then, they go over to the individual market and--
             MR. BERTKO: Okay. Two things. Let’s just say that suppose that if you change the market rules substantially and required community rating and eliminated most, if not all, underwriting, then you could have a substantial reduction in cost internally to the insurance company and the brokers’ jobs would be much, much simpler because the agent wouldn’t have to know the exact underwriting rules of up to a thousand different companies to do this.
            Now, this would be a huge change, whether it’s done in a purchasing pool, whether it’s done in a reformed individual market or elsewhere. If you don’t make those kind of gains, I will tell you that my actuarial colleagues who do individual health insurance, and the underwriters, are very, very good at what they do. And the gains to be obtained by strict underwriting completely overwhelm any other efficiencies of scale that you get out of anywhere.
            So, if you have a continuation of a current individual, toughly underwitten market, the people who do the tough underwriting win, and they always win. I mean, it’s like playing keno up in Las Vegas or Reno. The odds aren’t even close to being 50-50. So you either do the job and fix it or you don’t.
             MR. CURTIS: Interpolating, if they are paying an agent 20 percent, and that includes effective field underwriting, for example, and the costs back at the office add another 10 or 20 percent, and it’s 40 percent, they still win against something that isn’t doing that.
             MR. BERTKO: Absolutely.
             MR. CURTIS: And may be much more efficient by your measure.
             MR. VOGEL: John, I thought some of the statistics I saw, and help me out, if I took my pool, and for some reason I could eliminate 2 percent of the sickest risks and just blot them out, can’t I reduce my premium something in the neighborhood of 35 to 40 percent?
             MR. BERTKO: If you took off 10 percent, and let’s suppose that you couldn’t be perfect, you’d have to take out double the amount because you’d miss some people, so if you took out 20 percent, then you’d probably drop your cost by 35 or 40 percent.
             DR. GINSBURG: Mark?
             MR. HALL: Well, I was going to defer to the other questions, but just real quickly, I mean, I think there’s different concepts of efficiency operating. And when you said "efficient risk pooling," I mean, from one point of view, the most efficient risk pooling produces the greatest spread in risk because efficient markets identify separately different risk levels, to the extent that the technology is available. But from a more sort of social objective point of view, the most efficient risk pooling produces the least spread of risk.
            So I think there’s a difference in perhaps Pauley’s view of what’s efficient versus sort of social views of what’s socially desirable that may be operating in the way the question was put. But, in terms of how that market will likely behave, I mean, it’s clear that this is still going to produce a massive amount of risk separation or selection. Whether you could achieve transaction cost efficiencies, I think their argument is much stronger, right; that if you eliminate the underwriting component, if you introduce new technologies, if you have a much bigger, thicker market, then I think there are efficiency gains to be had in terms of the transaction costs.
             DR. GINSBURG: George?
             FLOOR QUESTION: Yeah, John’s--your last comment got to my question about this. I thought, even when you talk about pooling small groups, that the underwriters still treated a large number of lives in a purchasing cooperative for small groups as there may have been marketing efficiencies, and there may have been some administrative efficiencies, but they were still underwriting as a bunch of small groups.
            And I’m just wondering why people seem to be talking about that somehow the individual market would not be treated as a bunch of individuals who are somehow given information, and protected, and represented by a purchasing cooperative that could provide them information, but still why would they all of a sudden--are we talking really about their being treated as a large group like GM? They are inherently different because they are not formed for the same purpose.
            So I’m a little bit confused by the discussion. It seems to me that there is a distinction between taking the tax credit to your employer, which is a group that’s formed on other than purposes for obtaining insurance, and having a cooperative among individuals who have credits, have not taken them to their employers, may not be employed and are, you know, there are efficiencies to be had, but I’m not sure you can ever get to the principle. If someone can enlighten me on this, I’d appreciate it.
             MR. CURTIS: Well, one objective is to try to get as close as you can, and the fact is one similarity is individuals are getting the tax credit regardless of health status. So now you have a broad spectrum of risk. It’s based on income. So now you have a broad spectrum of risk on those people.
            The premise that the discussion was around was, okay, now, if those people can take it to one of, gosh, a finite number, a limited number of purchasing pools, and the purchasing pool offers choice, then the purchasing pool is in a similar position to the large employer. The person gets coverage through there because that’s how they get the tax credit, just like the person gets coverage through GM because that’s where they get the employer contribution or from FEHBP.
            So that was how we were thinking you could end up in a somewhat similar place. You’re right. It’s not identical, but it’s a lot closer than the individual market.
             DR. GINSBURG: Carl, you’re the last question.
             FLOOR QUESTION: Well, it’s more of just throwing a point on the table. I think there’s a legal distinction here that brings out two models of purchasing pools and has ramifications for how you would change state and federal law, those that exist. And that gets to, yeah, you go to an employer because that’s where you go to work, but also because the employer makes a legal commitment, under federal law, to fund the plan.
            In other words, I’ve heard two different models up here of pools; one is where the pool or the entity would be legally responsible for solvency. They’d have to pay, if there’s a collective issue with the promise going bankrupt, they’d be responsible, as opposed to the carriers who are under contract with the pool. And, secondly, if an employee has a claims dispute, the entity or the pool would be responsible, as opposed to the model where the entity kind of arranges for all of these choices, but their ultimate responsibility lies with the carriers.
            And those have, in terms of how you’d refashion law the way it exists now, those are very different concepts.
            Does anybody have any comments on that?
             MR. CURTIS: Well, at least I am assuming it’s more analogous to an employer who buys an insured plan, and the plan is responsible for solvency issues. And if the carrier goes under, then you have a guarantee fund or whatever to handle that. I wasn’t talking about entities that are self-insured. Now I know that there’s pending legislation that creates those kinds of things, that creates all sorts of other issues. I wasn’t talking about that.
            With respect to the sort of what Mark called the employer benefit function, the ombudsman function, trying to intervene on behalf of the consumer if there’s a problem, I assume that it would play that kind of a role.
             DR. GINSBURG: Yeah. Thank you.
            I’d like to close the meeting now, and close it by first thanking a number of people at the Center that worked very hard on this conference, responsible for the success, including Sally Trude, Ann Griner, Roland Edwards, and Leslie Jackson.
            And then I want to thank this panel, which I think has done a phenomenal job taking a very complicated issue that they could very well have gone into real details, and they didn’t. I think they kept it at a very substantive, but very broad-enough level to introduce this audience to I think one of the key issues that’s going to be debated as we go, as to if a tax credit is done, and that is the--tax credit is very much the issue on the table--of how will we deal with the fact that individual insurance markets just, when they’re at least unregulated, don’t work as well as they need to, to deliver the goods that the tax credit proponents have in mind.
            Thank you.
            [Applause.]
            [Whereupon, at 12:03 p.m., the proceedings were adjourned.] - - -

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