Center for Studying Health System Change

Panel Discussion Continues

             DR. GINSBURG: As the panelists are coming up, let me reflect on where we’ve been as far as the tax credit option we’re designing at this stage.
             Beyond what I said about that tax credits would have to be used in a purchasing pool, as a result of comments from the panel, we modified that, that there would be a lock-in for a year, or something like that, and that others, those not eligible for tax credits, could use these pools, but perhaps at different payment rates than those eligible for tax credits, and perhaps even, I think as Rick had suggested, people with partial tax credits because they’re in the phase-out range might also get a different rate. And this is really designed to deal with the selection issue, the fact that for those that have substantial tax credits, selection is less a concern, as long as they’re locked in. And perhaps the selection is of greater concern with those who are not eligible for tax credits but see the pools as an attractive way to get insurance, that their rates would be different and perhaps would be reflecting--actually, not so much different, but they might be health rating for those people. They would not be for people on the tax credits.
             So the next topic I’d like to get into is state-federal issues that, you know, given this starting model of some entity of government authorizing different agencies to act as purchasing pools and to serve those getting tax credits, what should the federal or state governments do? And also cognizant of Stu Butler’s comments that, you know, conceivably this might be the system in some states but not in others.
             Mark, would you want to start us off?
             MR. HALL: Well, I think that--I hate to invoke HIPAA. It’s getting a bad name these days because of the privacy rules, but in its insurance regulation aspect, it has set a reasonably workable model, which is to set fairly broad federal standards and allow states then some diversity in terms of certifying or choosing options or, you know, having a default if states don’t respond. So something like that I think make sense, which would allow a great deal of diversity to emerge and address the comments from John McManus before the break, so that you have a variety of different approaches that could emerge, but sort of all oriented towards achieving a general federal objective.
             So that seems to be the best sort of federalism approach to take in the area of insurance regulation. Then, more specifically, what would those federal requirements be and how broad a range would states be allowed to diverge? I haven’t given those details great thought, so we might turn to some other folks who have.
             DR. GINSBURG: Rick, is that your sense, that you’d want to have the states do this under some broad federal guidelines requirements?
             MR. CURTIS: Yes, I think Mark articulated a sensible general framework. It seems to me that the federal policymakers do have an overriding concern that people who have tax credits can get affordable coverage, and there may be some sensible policies that say if the state goes the course, it has all sorts of extra administrative costs so that the coverage would be less affordable because of those state policies, that the states make up the difference in the administrative costs so that tax credit recipients aren’t hurt by them.
             But I think that overall construct makes sense.
             DR. GINSBURG: John, members of your committee, do you have any sense of their feelings about state roles in this area?
             MR. McMANUS: This is a prescient time to have this discussion. Just last week the Health Subcommittee of Ways and Means had a hearing on the uninsured. Our jurisdiction pertains to the tax credit itself. The insurance exchanges or health insurance purchasing cooperatives would be in the Commerce Committee’s jurisdiction. But we did hear testimony from Sarah Singer on combining tax credits with purchasing cooperatives, and it’s an idea that Mrs. Johnson is very interested in.
             Obviously, we have to work across committees, and to the extent possible, work in a bipartisan manner. That gets tough when looking at tax policy on how Ways and Means has been doing business recently with Democrats opposing most of the provisions. But I think this is one area where you have a bipartisan consensus that the tax code can be used to help people with insurance. It’s interesting that Pete Stark and Jim McDermott, members of the Ways and Means Committee who are by no terms--I wouldn’t even think they’d call themselves moderates, are very interested in the tax credit idea. And I think these new ideas that we’re discussing today really take the proposals on tax credits one step further. And I think it’s a very productive discussion, but there has not emerged a consensus within Congress on what’s the best way to approach this issue. I think we’re just at the beginning stages of that, and really with the hearing last week and with this discussion today.
             MR. BERTKO: Paul, I would just add that as one of many companies who cross several states, we’ve got operations in I think as many as 25 states. The more similarity we could have, the better. You know, there is a model using the NAIC on this, but I guess I would just encourage it to be as similar as possible while retaining that flexibility that states have.
             DR. GINSBURG: Yes. Any specific things that you think of that should be uniform?
             MR. BERTKO: Well, if we go back again, I’m an actuary, so risk selection is first and foremost, you know, to get affordable premiums. And if we can have the participation rules be as similar a possible, I think that would be very useful.
             DR. GINSBURG: These are participation for?
             MR. BERTKO: You know, as we talked about, who can come in, how long you stay in, whether there’s a lock-in. The whole debate we had about small employers being in or out, and so the employees of large firms who don’t offer coverage to either their employees or to subsets of their employees. These are a lot of details, but I would suggest they’re very important details that we’d want to work out to avoid these things blowing up in the future.
             MR. CURTIS: I think that’s very sensible. The one area where the flexibility would, I think, have to be retained is on rating for the partially or unsubsidized populations. I mean, there could be national rules that make sure that people, regardless of their age or health status, somehow can still get affordable coverage with the tax credit. That would be up to you. If you did that, it would be important to leave states and whatever these kinds of organizations are, if they’re e-commerce based pools or traditional ones, they need to be able to, for non-subsidized folks, be able to rate like the market does or they won’t work.
             MR. HALL: Well, I don’t know if you mean to get to governance and, you know, conflict of interest and board membership issues later or not, but this is, I think, one area where there might be disagreement, certainly would be disagreement, but in terms of whether there ought to be a uniform federal rule or state variations. So one approach would be to say that the pools have to be nonprofit, they can’t have any insurance industry representation on the boards, et cetera, versus an approach that says as long as they are following the rules and producing the general kind of results we want, they can have any kind of sponsorship that sees legitimate and reasonable.
             DR. GINSBURG: Yeah. Actually, I think this is useful. Rather than talking about whether that should be uniform or not, it would probably be wise to have some discussion what would be characteristics of a desirable pool--in other words, like the separation from the health industry or offering products from different carriers. I mean, should this be an element that we consider this as a key part of being a successful pool? Rick?
             MR. CURTIS: From my point of view, offering competing plans so that individual consumers can choose among competing plans is elemental, with the exception that states should be able to designate if they’ve got an area with very sparse populations where that kind of thing just isn’t sensible and can’t work.
             MR. BERTKO: So, Rick, let me jump in here and ask: Are you going to then prohibit COSE from becoming one of these authorized pools?
             MR. CURTIS: They actually do, as you well know, offer Kaiser as well as their dominant health plan, and employers can offer choice. But, yeah, for tax credit recipients, that has--there is a very unique history there that we don’t want to bore the audience with, but, in general, if a pool or a purchaser or whatever we want to call these things--hopefully we won’t call them HIPCs just because of the baggage of the term. Alliances. Actually, the first alliance in the country is doing well. It’s in Colorado, and Bill Coors was the genesis for it, who was on the Reagan--
             DR. GINSBURG: Actually, we should say that the term HIPC did not come from the Clinton plan but came from the Jackson Hole group, which was really the intellectual spur for this.
             MR. CURTIS: Yeah. It came from Alan Enthoven and Rich Kronat (ph), even predating the Jackson Hole group in a previous point in history.
             But, at any rate, where were we?
             [Laughter.]
             MR. CURTIS: I did have another point. We just--
             DR. GINSBURG: Well, you were answering a question, John’s question about COSE.
             MR. CURTIS: Yes. It seems to me if these pools can have just one carrier, that they are not--you know, there isn’t any real distinction. It’s an extra, unnecessary layer, and just don’t bother with them. They would be captured by the plan. They couldn’t actually be in a position of being a purchaser over time in most instances, and it would be an extra layer that had no real benefit, I think.
             DR. GINSBURG: Any other thoughts about--so, in a sense, we’ve talked about competing health plans in the pool. Should this be a nonprofit organization, or can entrepreneurial pools be okay?
             MR. BERTKO: Well, let me ask a different version of that question. My experience is, you know, with the side to Phil and other people who have been in existence for a long time, there is a fair amount of capital necessary to start one of these things up, and I think Rick well knows that a couple of them that have failed, I think, have failed substantially because they had very low backing and weren’t able to bring the necessary skills and talent to it.
             If you make a requirement of nonprofit, you may prohibit some folks from coming into it that would otherwise be able to help start and run these pools. In California, I knew of a large regional brokerage firm connected to the insurance industry, because it was as brokerage firm, but otherwise I would call them upstanding guys in beating down health plans, if you call that a term. And they had a very tough time for several years trying to bring up a medium-size--medium-employer-size purchasing pool.
             So I guess I’d just throw that out there as a question of start-up funds. If you’re not going to provide special funding for this, then why would you prohibit other organizations and entities from helping to get these off the ground?
             MR. VOGEL: Let me just say one thing here as well. In taking a look at this, it isn’t--from a high level, it looks like, geez, it’s very simple to administer. Then you get underneath the covers, and it gets very complex. And depending on the rules and regulations that we put in there, I would just, number one, look at saying the private sector has been moving forward, and I would hate to eliminate the private sector from this because there has been investments in doing this. But also trying to give flexibility that, you know, on one sense that, John, I know you would like from a health plan standpoint, have it broad enough that it’s pretty standardized across the country, but also the flexibility so that there is a--the efficiencies that we’ve gained in bringing a health purchasing cooperative together, we can actually utilize those without having to layer on on top of that more administrative rules that take away all those efficiencies, because, you know, we work day in and day out trying to bring four health plans, 18 different options, to a single employee, and you’ve got to try and do that as simply as possible, or very quickly any savings get eaten up. And, again, it’s a voluntary marketplace out there. The health plans can simply say I’ll compete outside the marketplace, as John was talking about, that Wellpoint does in California, others do as well. And we don’t want that to happen.
             MR. CURTIS: It seems to me a policy objective--by the way, for those of you who don’t know, he’s a not-for-profit private business association in the business of representing the best interests of the small employers and consumers. And that’s the test here.
             As John and Phil both know, most of these kinds of organizations, if they’re going to go up, will retain a for-profit vendor to handle the stuff that’s expensive that needs to be capitalized. Those kinds of vendors, they’re sort of voluntary. There isn’t any money there. This is no assurance of any volume, haven’t been willing to take the risks. But in the instance of tax credits being tied to this and a very substantial population buying coverage, that would change overnight.
             There would still need to be some start-up funds for the--you know, if they were to be something like not-for-profits. But I think some way of assuring they really are there to represent the best interests of the consumers, and if they’re small employers, the small employers, is important. And most people who sell health plans get paid by health plans. And if they’re paid by health plans, their allegiance is to them, and I think ultimately at the end of the day that can be problematic.
             So I’m one who still thinks it makes sense. I think they should be private. I think they should be organizations like Phil’s who are very market savvy and know how to operate, but by their very structure are representing the best interests of the consumers.
             DR. BUTLER: I agree with that. I think it’s very important to not sort of shut the door to innovation that could take place and new sources. And as Rick said, once you provide a tax credit, particularly if it’s substantial or if it’s a combination of a federal and a state tax credit, so we’re really talking about a big increase in consumer power among a certain group, it’s quite possible that all kinds of different types of systems could come into being as the core of pools.
             I mean, for example, you could see--I think you could see some of the large employers today which have very substantial health plans actually going into the business of covering other people. We already see that; the John Deere Company provides coverage for federal employees, for example, because federal employees come with a subsidy. And if people could come armed with a tax credit, I suspect that companies like John Deere and so on would find that potentially a very attractive market.
             I think also you’ve got other organizations, other nonprofit organizations that we ought to make sure are not precluded, that have already a core group of people that probably would be the kind of people that would be targeted by any kind of credit, some of the service unions, for example, church-based organizations, and so on.
             So, in other words, I think it’s important for us to make sure that once you change the economics of this market with the tax credit you don’t sort of just continue to think, well, only what’s available today might be available tomorrow, and so let’s sort of get the best of today and lock that in. It’s very important to be as open as possible. Even if that causes--you know, even if mistakes are made and even if there’s disruption, I think it’s--we’ve got to recognize that we’re going to be dealing with a very different market and potentially all kinds of different organizations. And some of those will be organizations that are very much acting in the interests of the people who are members of those organizations, such as church-based organizations.
             MR. McMANUS: That was exactly my point. In writing the legislation, we’ve got to be able to try to foresee or at least allow plans and those who are offering these types of purchasing pools to evolve and innovate. If we prohibit certain organizations because they’re for-profit or if we say only these kinds of structures with this kind of make-up can offer the purchasing pools, I think that really limits our ability to have the synergy that’s necessary and the innovation necessary to try to deal with this really monumental problem of the uninsured. And, frankly, the current system, even though who are insured, really are getting their insurance chosen by someone else, their employer, which doesn’t make a whole lot of sense to me.
             MR. HALL: Well, if we’re going to allow for-profit, I mean, just realize it’s going to require a lot more regulatory oversight. So you may have to regulate, for instance, the medical loss ratio, in effect, to avoid unconscionable profits. Or I’ll remind everyone of MEWAs, another unhappy acronym in the insurance industry, which were sort of fraudulent or poorly managed or fly-by-night operations that were purchasing pools for employers that require constant sort of regulatory oversight to allow them to continue to exist.
             MR. VOGEL: And it’s going to come down--John, you’ll like this. It comes down to risk selection.
             MR. HALL: Yes.
             MR. VOGEL: We’ve just got to make sure--I mean, Connecticut, I think one of the reasons we’ve been successful is because we had small case reform laws already in place. We had market rules that we were playing by, and it made it harder for people to opt in and opt out, depending on if they can go get a different price. It really kept the marketplace intact and now allowed just to really compete based on the goals of managed competition.
             MR. CURTIS: I mean, that I consider to be the core point. I don’t think anybody disagrees on objectives here. But if individuals with tax credit can willy-nilly move around all sorts of different things that call themselves pools and go in and out and those pools can rate them on different bases, it’s just not going to work. The individual market suffers for several fundamental reasons. One of them is, of course, that people go in and out of the market. It’s sort of a market-wide aggregate, demand-side risk selection problem. People tend to go in when they’re sick and go out when they’re healthy. And a tax credit could potentially address that for this population, so that people go in and have health insurance.
             But the other part of it is individuals, if they can move around to where the price is best on a day-to-day, week-to-week, or, I would argue, even on a year-to-year basis and they’re eligible for a gazillion different kinds of pools, none of those pools can ever be in the position that a big purchaser is now like the Federal Employees Program or a big private employer. They are in that position because they have a big contribution, they represent the people who get coverage there, and they get coverage there and only there because that’s where they have to take the contribution. And there is cohesion to the group. It’s a stable risk group, and they can be well represented by a purchaser.
             If there aren’t those key elements to this, then pools won’t achieve any of the goals that have been espoused. That does not mean there can’t be lots of room for lots of market innovation. It does mean, as Mark and John have alluded to, as well as Phil, there needs to be some structure around it.
             DR. BUTLER: But, Rick, would you agree that probably the most important element in that is the locking-in period? I mean, we’ve had--we discussed this in Medicare and with the same view. And if you look at something like the FEHBP, it’s true it’s one large employer, but it’s almost 10 million people, and they have wide selection and they have wide variations in benefits. It’s on the face--and it’s community rated. It’s almost on the face guaranteed to fail, and yet it works pretty well. And it may be that having that year-to-year lock-in is probably the most important element of putting some stability, certainly from the insurer’s point of view, in terms of assessing that market. And maybe if we focus on that, you can allow rather more variation in some of these other factors than on the face of it might be necessary.
             MR. CURTIS: Well, I agree with that in general. I know John has some comments on some of the premises. But it is true that you have--it is a purchasing pool with lots of choices within it, and the way individuals choose and the way the health plans that compete for their enrollment behave is monitored and structured. And that’s different from saying in a given state you’ve got 50,000 people with tax credits, and you can have 1,000 different things calling themselves a pool, and any individual with a tax credit can go to any one of them in any four-month period of time. Those are fundamentally different worlds, and I don’t think that a direct analogy can be drawn.
             But I know John has some observations about it.
             MR. BERTKO: Yeah. Just on FEHBP, we should be careful what we allude to there. Historically, as a footnote, the high-benefit plan priced itself out of existence during the mid- to late 1980s. We are participant--Humana, my employer--in several of the markets. We left a few, partly because our placement in the market--and I’ll say that’s partly risk selection, partly our cost efficiency--was insufficient. And I think there is a winnowing right now of health plans participating in the FEHB program.
             There still is a large amount of choice. The one-year lock-in and the high subsidy, the 75 percent subsidy, is fairly successful. But on the margin, for those folks that go above the 75 percent contribution, you begin to rethink your strategy if you are a health plan on whether you can succeed in that particular market.
             My prediction is that FEHBP will continue but that the amount of choice is probably going to be narrowed over the next couple of years.
             DR. BUTLER: But the amount of choice right now is substantially higher than anybody in most--almost anybody in the traditional employment-based system. And, you know, we’ve been hearing about how FEHBP is going to kind of run aground next year for about the last 25 to 30 years, I think, and it still seems to be trundling along.
             MR. BERTKO: No, no. It will not run aground, but selection--or choice may be narrowed. Those are two different things.
             DR. BUTLER: That may be so. That may be so, but even if it was halved, it would still be substantially higher than most people face.
             DR. GINSBURG: Why don’t we move on? John, is this on something else or on FEHBP?
             MR. McMANUS: Well, just on that FEHBP point, we’ve said plans which are highly priced moved out of the market. That’s a healthy thing.
             DR. GINSBURG: Sure.
             MR. McMANUS: That’s part of marketing and part of the private system. If you’re not efficient or if you’ve made some bad business decisions, you should not be rewarded. So I think that is a very productive part of that, and I think we shouldn’t see that as a bad thing.
             DR. GINSBURG: Okay. Let me just close off this discussion of FEHBP to say that, in a sense, the Office of Personnel Management is the manager of the purchasing pool, and one of the things that they have done over the years very quietly behind the scenes for the public, though very visible to people like John Bertko, is that they have told plans, no, you can’t offer that benefit; that they have--and all this driven to reduce the risk selection in the system, because in a sense, otherwise, the thing really could blow up. But I think it’s been the good work of the OPM that in a sense has prevented that from happening, but it’s come with a cost of a lot of freedom lost by plans as far as what products they can offer.
             MR. BERTKO: Let me only second that. We applaud the work of the OPM as an active and worthwhile manager of this purchasing co-op. But we occasionally get some bruises, as Paul has alluded to, but, in general, they’re a good partner.
             DR. GINSBURG: But in a sense, you know, this is my preface to, in a sense, the job that the purchasing pools are going to have to do that we’re talking about, in the sense that they can’t be laissez-faire. They can’t let plans just do whatever they want, or else they’re not going to have a viable market. So this is actually a way of getting to the next question, which is: Will or should purchasing pools and the products they offer conform to states’ existing regulations on small groups or the individual market? Or should they be permitted to develop their own rules for within the pool?
             So, for example, if a state has rating bands that are 20 percent, does that mean the purchasing pool should have rating bands or 20 percent? Or can the purchasing pool do something different because it has a different clientele?
             MR. CURTIS: It seems to me that with respect to full tax credit recipients, the federal government could say, if it wanted, that we’re only going to allow you to vary rates by this, that, and the other thing, and those rules could be tighter than what the state allows on the voluntary unsubsidized market. But the purchasing pools would need the ability for other non-subsidized or partially subsidized people to do what the market allows or they’ll suffer from risk selection.
             You know, I don’t care what you call these animals. Again, it could be an e-commerce-based thing that offers health plans. I would say the same thing has to be true. And as John said, for tax credit recipients, there need to be some fairly uniform rules on that kind of thing, or it’s not going to work.
             MR. BERTKO: Well, I would only add here that if you have too many special rules, it could make other parts of the market blow up. So, for example, if mandated benefits were eliminated for these special purchasing pools, they would be less costly. The amount of the cost decrease is, of course, subject to great debate, but to some extent there would be a magnetic effect as people would flow towards less costly benefits. The three important things in this end of the market are cost, cost, and cost. Phil knows that. We try hard on our side and Phil and others try hard on their side to keep it down.
             Any action that you take to give special treatment to these will, in fact, have some opposite and not necessarily equal reaction in other parts of the market.
             MR. HALL: Well, on this, I’ve written in terms of there being market gradients, to some extent natural, according to the size and the identity of the purchaser and their motives, but to some extent artificial, according to the different regulatory environments that attempt to respond to these natural phenomena. So right now we have a very large market gradient between the individual market and the small-group market. And I think we imagined these pools would sort of fit somewhere in between.
             So to say that the rules should be identical to either one or the other I don’t think is necessarily the case because there will be people who could potentially cross into the pools from either direction. Some attempt to minimize the gradient is good, along with John’s comments that you don’t want to create too many differences. But there’s already a big difference, and I don’t think there’s an inherent logic that it has to automatically match up with this level or this level, but it could be somewhere in between.
             But I think that the general sense is that it would be somewhat distinct. For instance, I think the ideas that the pools would be rated separately based on the experience from the credit holders as opposed to being rated as part of some other larger market. In other words, one idea would be to say carriers that sell to the pools must take that pool experience and include it as part of their small-group market experience for rating purposes, which is what we currently do with HIPCs. I think there’s a notion that it wouldn’t necessarily be required to make this a sustainable idea. Whether it’s advisable I think is probably subject to debate.
             Has that gotten us into the too technical area?
             MR. CURTIS: We probably are there, but I would point out, that depending on what proportion of a given carrier’s, what they call book of business, is tax credit or not, you could end up with some very wacky things if you require what you just suggested. So I don’t think it’s a good idea.
             DR. GINSBURG: What about interaction between pools and public programs such as CHIP or Medicaid. Is there something that could be done to deal with, say, the family whose child is eligible for CHIP and whose--where the family is also eligible for a tax credit based on their income?
             MR. CURTIS: I try to stay as subjective and even-handed as I can on all these issues, but this one is tough. This one is tough. To have a set of federal policies that in essence requires family members to go different places to get coverage so that they can afford coverage, I think would be unfortunate. I think medical homes logically start at home.
             So these kinds of mechanisms, several states are talking to organizations like this or like in Kansas, and "This is not a partisan thing, I’m not a partisan guy." In fact, they tend to be very Republican states, are looking at this kind of mechanism as a way to, in this case, combine the public subsidies available for kids, and in most cases, parents too, with employer dollars. And if there are tax credits available similarly, you should be able to pool this so a family can choose coverage, get coverage in the same place.
             And this kind of structure has the real advantage of being able to rationalize things on behalf of families, and have the dollars follow the families’ choice, rather than not only families running around chasing the dollars, but, you know, the 5-year-old kid one place, the 10-year-old kid another place, the mom someplace else, the dad someplace else, and, oh, by the way, all of them are going to have the change next year because somebody’s status changed somehow. I think there is real potential for this kind of organization to rationalize that.
             The other thing I would just mention here is, depending on how big the tax credits are, you know, most states add 200 percent for kids, a number of them have added parents, which I happen to think is a good thing. I’m very concerned that the way a number of them have done it is going to incent employers and employees to drop coverage and come over, but they’re starting to change that. But that coverage, on average nationally in the employer market for families, is worth $6,000, and usually the contribution requirement for a family, depending on the state, might be 500, $800.
             So if you have basically something worth $5,400 to the family and the employer, in some combination, sitting there, and then you’ve got a tax credit over here worth $800 or $1,000, people aren’t dumb, they’ll go to the public program.
             So I think having organizations of some kind able to act on behalf of consumers and rationalize this makes sense. Otherwise, you’re not only going to have people flipping back and forth between individual and small group market because of tax incentives, you’re going to have people flipping back and forth between public and private coverage because of level of subsidy differences over time.
             DR. GINSBURG: So you would imagine someone taking basically a voucher from the CHIP program to pay the premium for their child, as they buy family coverage through the pool?
             MR. CURTIS: Yes, yes.
             MR. BERTKO: Let me now add the problem of affordable coverage. It’s my impression--and Rick, you can certainly or anybody on the panel--that the SCHIP programs provide a fairly comprehensive benefit level.
             MR. CURTIS: Yes.
             MR. BERTKO: On the other side, most things in the individual market and small group market have very high deductibles. I believe that in our small group market, down at that end, the most common deductible is $1,000 deductible with 80/20 coinsurance following that. I don’t think anyone would describe that as comprehensive. And so how do you mix and match these things to get some relief?
             MR. CURTIS: Well, yeah. Well, I think there should be some more latitude here if parents choose something they think works better in terms of access for their kids. That’s my personal belief. But even under existing standards, Phil shortly is going to be talking to the folks in Connecticut about such a thing, because he has, as most major purchasers do, have standardized benefit levels. For the kids there can be a negotiated increase that meets the benefit standards. The states would pay for the supplemental coverage in effect, and the kids would have that, and the parents would have what they would normally have through the employer plan. The non-subsidized kids would have what they would normally have through the employer plan.
             DR. BUTLER: Well, I think the bottom line is, as you said, Paul, that one can envision certainly the SCHIP program as being, in certain states, converted essentially for certain people into a form of voucher that supplements the federal tax credit, which is getting you very close then to real affordability for those people. That’s sort of the--what we’re talking about here, and that’s why, I think, a number of the opponents of federal tax credits, you know, admit that in some cases that federal credit alone is not going to be sufficient, but they envision that as being a partnership with the state either by changing the rules, the federal legislation governing these programs, but even necessarily without that, allowing that to be mixed--the money to be mixed in so that people can join a pool or buy their own coverage through their place of work with a credit from the federal government, then on with the subsidy from the state. But that’s the kind of--the pattern that I think is widely envisioned as being most likely for people, particularly very low-income people.
             DR. GINSBURG: Okay. Well, let’s go on then to having--to pulling it together. Frankly, I found that our discussion of these design issues went a lot better, and there was a lot more consensus than I expected. So we can proceed to talking about, well, how attractive is this idea? If there’s going to be a tax credit, should tax credit eligibles be required to use their tax credit in one of the purchasing pools that is authorized and regulated by states? Or assess this in comparison with the tax credit policy without that provision?
             MR. BERTKO: Can I jump in over here? Mark and I began this debate at breakfast this morning. So given where we are that purchasing pools, today at least, don’t offer all that much administrative efficiency; secondly, that one of the great advantages of purchasing pools for small suppliers is choice, on an individual basis that choice is then available through an individual company. I think that there needs to be a variety of new rules here, but it might be a hard case to make to say there is an inherent advantage to having a purchasing pool there. I certainly am a fan of purchasing pools, as I said earlier, help set them up, but to me the case still needs to be made for mandating that they be there for this market where there is certainly a hyperactive individual market today that might need some quite substantial reforms to accept these, but I think--I look forward to having the panelists here argue the side that says purchasing pools are very worthwhile and worth imposing on the system.
             DR. BUTLER: Yeah, I certainly share your view on that. I don’t think you meant to sandbag us, but it sounded at the beginning that you were saying, well, let’s for the sake of argument, let’s assume that we’re talking about everybody having to go through a pool. And then you said that now there’s consensus of what were going to do. I think we don’t necessarily share that view, that that certainly may be a preferred option for even the vast majority of people, but certainly I think--I certainly feel that tax credits should be available to people to buy into their current employer-based coverage, for example, as the Jeffords’ bill done. There may be other options too. I think this is really a market test in the sense of--if this is the right way to go, it will tend to prevail over the long run, but the last thing we should do is say that a tax credit is only available if you go through this particular route. I just think that that’s folly in terms of discouraging other kinds of innovative alternatives. I think it creates all kinds of perverse incentives and all kinds of distortions in the market and so on. I think we should say that if these negotiated pools are highly effective and really are the solution, then they will drive out the competitors over time, if that is the case.
             DR. GINSBURG: Let me press you on that. First of all, when I was referring to the consensus, I didn’t mean that everyone was in favor of this, but that we had a consensus that--
             DR. BUTLER: Let’s just have the record say that.
             DR. GINSBURG: If there was going to be a purchasing pool proposal, that there was more consensus than I expected on what the details should be, but this is when we’re assigned to take up whether we should go with this. And well, I should probably ask Mark to--
             MR. HALL: Well, I was about to observe--I think the panel’s going to split nicely, 3 and 3 on this, but the other 2 in favor of pools, I think they probably both have vested interests in that, so I’ll speak as the sort of disinterested pool advocate. And not to impugn anybody’s motives, but I mean people whose livelihood is working with pools, as opposed to those who have just gotten the grants to study them. But in any event--
             [Laughter.]
             MR. HALL: I think that the points that have been made are pretty strong points. If you compare pools to the option of using your credit to buy into an employer plan that you’re eligible for, because the advantages of pools as compared to the small group market aren’t that significant. I mean, there are some, and we can tease them out, but by and large, the advantages we’re looking for are essentially already contained in the small group market. But if you compare using the pools as against shopping with your credit in the existing individual market, I don’t think there’s any question that something like the pools is required.
             And now I think I’ve split John’s vote, because he’s going halfway on the employer’s side and the other half on the individual side. And Stuart even--his primary argument was based on shopping as an employee versus shopping in the pool. But if you look at shopping in the pool versus shopping as an individual, I mean, you just can’t give people credit and say, "Go out to the unregulated, unstructured individual market and good luck."
             So really the only choice then is, do we sort of regulate the entire individual market in order to solve the problem, or do we create these special shopping forums that deal with the credits?
             MR. McMANUS: If I can get in, I think that the more fundamental question is not do we create these, but do you require it to be linked to the tax credit?
             DR. GINSBURG: Yeah, that’s really worth talking--
             MR. McMANUS: And I think that’s the unresolved question here. I think the burden is on those who want to require it to linked to show that you have to do that. For those of us who--and the legislative process working through these issues.
             Just recently--this is the first I’ve heard of requiring that link to be there, and it’s sort of out-of-the-box thinking, which I think is very helpful, but I think it’s going to require a lot more analysis and evaluation by policy makers as we go forward on this, before we make that critical link, particularly when we don’t want to, I think, box in and lock in a certain kind of product today which may not be appropriate for us 3 or 4 or 5, 10 years from now, and let’s face it, Congress tends to act on these things every 5 or 10 years, and not much more than that. For example, Medi-Gap reform in 1990, locked in a product which is completely antiquated and makes absolutely no sense for the current Medicare beneficiaries’ needs right now. And I would not want to repeat that mistake here.
             MR. HALL: So let me just quickly make the point the Rick made at the beginning, I think, before you got here, which is, if you’re going to provide the pool as an option to those who can also spend their credit in the individual market, unregulated individual market, the system will collapse because all the young, healthy people will go to the individual market and the pools will only get to old, sick people. So that’s the problem. We all agree it’s a nice idea to have this as an option, but if you create the choice down at the individual end, it just collapses due to risk selection problems, and the only way to stop that is then to regulate the individual market so that it basically mimics the pools, but then you’ve, you know, over-extended--
             DR. BUTLER: Well, let’s see if you’re right, rather than assume you’re right, and do this. I mean, there’s always proposals to have some monopolistic results. I mean, it’s--how long ago is it since we said that if only everybody was in HMOs, that costs would be low and they’d all be happy? You know, it’s only a few years ago. Now we’re talking about this can only function if we set up this kind of structure. I mean, I just--you may be right, but I think we ought to--we ought to investigate that in the real world and make a modification if you are right. I mean, I don’t think you are, but, you know, you may be.
             But I think if you start by saying the only way you can have this credit is to be in the system, then you’re going to set up a situation not dissimilar to what we have today, which is the only way you get a tax exclusion, a major tax break if you’re an employee, is have your employer pick your plan. We have high-on insurance and we have people who are dissatisfied. We certainly don’t--I think you’d agree--we don’t want to set up the potential for another rerun of that kind of a situation.
             MR. CURTIS: I think we’re speaking past each other. What I was hearing Mark say--and by the way, only less than 1 percent of our teeny institute’s funds has anything to do with these organizations these days, and that was a small grant to develop a paper on this. Mostly what we do is work on how basically publicly subsidized programs can coordinate with the existing private market so as to expand coverage rather than crowd it out.
             But I do think that, you know, a lot of people believe, and a lot of proponents like Stuart have, for a long time, said, "Gee, having purchasing pools available for people that have tax credits, so that they can have a sponsor who knows more than they do in negotiating with plans and so forth and so on, is a good thing, and let 1,000 flowers bloom."
             And I think Mark’s point is, "Well, again, if you’re letting 1,000 flowers bloom that are supposed to be doing what the Federal Employees program does, for example, as opposed to an unregulated insurance market where they can take the credit, if 1,000 flowers pop up, they ain’t going to bloom, they’re going to die before they ever bloom because of risk selection problems." So if I was hearing Mark correctly, he was saying, okay, you can do one of a couple thing. You could have market rules that are comparable for voluntary pools and for the other markets people could take these credits to, and that might work. Or you could just people go the individual market, or you could say, okay, there are a variety of a choice of pools you can go to, and that’s the only place you can go to and we’re not regulating the individual market.
             But it is--we don’t need a market test. We had a lot of them in the past, and they always failed. Where a policy maker said, "Okay, there are going to be these pool options, and they’re going to be good guys and sick people don’t have to pay any more, and oh, by the way, you can also go to this other place, the regular market, where there’s heavy health underwriting and so forth." It violates common sense, and in fact, history shows us that won’t work. There are lots of things that could work here. That won’t work.
             MR. VOGEL: I mean, the test is to sit down with--I mean, I was sitting with two individuals, both, you know, had small companies, but they were their own--you know, covering themselves. One had a health problem within their family, one did not. The one that did not has a high deductible plan, is in the individual marketplace. That one that has the health problem, goes to the group marketplace, into the guarantee issue programs, because that’s what they need to do to find this. So risk selection in the individual marketplace is going to take place. There’s no question about it, and what we have to do is segment this out into really the individual marketplace where people are opting in and out in that individual marketplace, and then talking about the people who are uninsured, who opted out of their employer-based, and had been offered programs. And I think there are two different sets of individuals here.
             MR. BERTKO: Yeah, absolutely. Let me just quantify what Phil said a little bit, because in a couple of our states we are forced to offer down to groups of one. That’s not an oxymoron.
             MR. VOGEL: At Connecticut, we do too.
             MR. BERTKO: Yes. And the size of the one and two range, the one-life and two-life, where people can make exactly those kinds of choices, the loss experience is about 150 percent of the 339 experience.
             MR. CURTIS: If you would just translate that for the audience.
             [Laughter.]
             MR. BERTKO: Sure. Let’s just say if the cost, not including any administrative issue, where $100 per member, you know, of a blend of adults and kids in the 339 group, it is $150 per member of the ones and twos who participate in there, and we believe it is strictly risk selection. You know, these are people that are more or less actively at work, but they are choosing in or out for just the same reasons that Phil said. That policy that the healthy person chose might have only been $75 or even $60 with an individually underwritten product and the same benefit level.
             DR. GINSBURG: Yeah. You know, one way of thinking of this issue is, I think everyone on the panel is agreed that the individual market today is not--does not have the characteristics that you’d want to send 10 million plus people into with tax credits, that one way or another, you would want to set up rules, and in fact, ironically, the tax credit perhaps gives you the ability to set up rules that you wouldn’t have had before, because before, in a sense, the--that market seems to be so fragile because it’s so small and the people are often on the margin of not going in.
             But if there are going to be rule changes in the markets, one could view either states are going to be regulate these markets or, in a sense, they could delegate the regulation of the markets to purchasing pools. In a sense, it’s almost like a quasi-privatization of the regulatory functions, even though it may strike you, oh, this is a mandate saying, in a sense, it could be seen as a delegation of regulation to organizations that might resemble the Office of Personnel Management and the Federal Health Employees Benefit Program, but they would be, organizations like Phil’s organization, would, in a sense, be charged with regulating the individual market. And their clout in effectively regulating it would come from the mandate that people have to use their tax credits to go in there.
             MR. CURTIS: Well, but I think everybody agrees, if there were such a thing, people should have a choice of different pools.
             DR. GINSBURG: Yes.
             MR. CURTIS: And if there is, the state has to monitor the behavior of the pools and--
             DR. BUTLER: I think maybe there is more consensus, but let’s try to disentangle this a little bit. I think, speaking for myself, I believe that, as part of a tax credit mechanism, of an effective tax credit mechanism, there must be some agreement between the federal government, from which this emanates, and the state as to how should insurance within that state be reorganized to make this effective because the objective is to reduce uninsurance by making insurance more available and affordable to people, and there has to be some plan to do that.
             One major element of this plan may well be the pools that we have been talking about. One of those pools might be a separated pool out of the FEHBP, for example, which is provided courtesy of the federal government, but this is a discussion and negotiation that takes place between those states. And I think these issues of the individual market and the potential for instability is precisely what is discussed at that point.
             But the bottom line is that you could well have a situation, I think it’s what I would favor, that the tax credit that is provided by the federal government would not have to be used exclusively through these pools. It could be used in other areas, maybe even including the individual market, but certainly the employer-based system.
             But what happens is that the state and the federal government discusses this and talks about what regulations are at the state level and maybe what federal regulations are needed to make this work. But you don’t say, "We’ve discovered, you know, the Holy Grail. It’s called a purchasing pool or the ones that we’ve designed, and we want everybody to be in these." It seems to me you must do that. It may be that in one or two states you allow that to be the negotiated result, but it would be unwise to impose that everywhere because you then will never know if some alternative is a better arrangement.
             DR. GINSBURG: So you’re talking about that the federal government and each state works out how the state is going to deal with the individual--
             DR. BUTLER: That’s what I think because I think it does deal with these issues that if you say, well, if you do it one way, then in certain states and in certain markets it’ll be unstable.
             MR. CURTIS: And that’s what Mark called the HIPA model, really. You have some federal objectives and make sure that people with tax credits can get affordable coverage.
             DR. BUTLER: The tax credit, you know, it’s designed to reduce uninsurance where it’s used--
             MR. CURTIS: Absolutely.
             DR. BUTLER: And by making it more affordable and available. And if it doesn’t do that, then there’s some breakdown. Therefore, it doesn’t strike me as being unreasonable to say, well, let’s now have a discussion, given the peculiar situation in each state, what is the best fine-tuning of this to work in that state. But our bottom line ought to be to try to make as many options available to people and certainly not lock anybody into one alternative. Because I think history shows that that’s, you know, alternatives always look attractive before you do them, and sometimes they work, and sometimes they don’t.
             MR. CURTIS: Benevolent dictators don’t work.
             DR. BUTLER: Pardon me?
             MR. CURTIS: Benevolent dictators, history shows, aren’t.
             DR. BUTLER: Yes.
             MR. HALL: Well, let me just try to break out, and cause a little more dissension than to sort of keep the see-saw going back and forth, which is I am sympathetic to that approach and to setting general goals and letting the laboratory of those states experiment in the market. But I think there are two things that pools could achieve that it’s unlikely that the market would achieve if you allowed the primary vehicle to be individuals picking among multiple different insurance companies.
             One is aggregated purchasing powers of forcing insurers to bid on a large block of business that they’re not going to get unless they have the best bid, which is what we get through the large employers and through the FEHBP.
             The second is, frankly, just the administrative cost of selling, and the primary component of that being agents’ commissions. And right now the individual market produces agent commission rates often as high as 20 percent; whereas, pools successfully deal with agents for amounts more like 5 percent. And, again, I think it’s probably because of the volume of business issue as well.
             And so those two advantages I think would be very hard to achieve without something resembling some kind of pool.
             DR. GINSBURG: Okay. Rick, you agree with that?
             MR. CURTIS: Yes, but I want to reinforce something Stuart said, that people should be able to use their tax credit towards employer coverage available to them.
             DR. GINSBURG: Yes. So, in a sense, what we’ve done is it sounds like, to the degree that a pool is a mandatory place to take tax credits, we are not talking about directing anyone whose employer is offering coverage any change in that coverage. To the degree that the tax credit, like the Jeffords bill, is available to people with employer-sponsored coverage, we are leaving them out.
             I think another point I should make is that we’re talking about predominantly pools that would be serving the individuals, even though, of course, our experience with pools has been to serve small groups, and this would be a change for them. But we certainly wouldn’t rule out what Stuart had brought up earlier in the meeting, that employers, even who don’t provide coverage, can still play a role through withholding and payroll deduction in the tax credit process.
             So I wasn’t intending to bring this group to consensus, but I really want to bring it to agree to disagree, but I think that perhaps where we are now is that the focus of this pool, you know, the greatest potential for this pool idea is in the individual markets, and there seems to be some feeling that perhaps it’s okay that some states choose that this is the way they’re going to implement the tax credits, not require--I don’t think there’s a consensus about requiring all states to do this, although I think there is a consensus that if this approach is going to be used, that the states have a very major role under federal direction.
             Let me just ask the panel if anyone has anything else to say before we go to the audience.
             DR. BUTLER: I would just, I mean, it seems to me what we’re trying to do here is to recognize that you’ve got, in the large employer market, something is working. There’s large pools of people, a sophisticated buyer, a big tax break, particularly for the middle or upper income, and so on. And what we’re, in a sense, trying to do is to construct something like that outside of that. So, if you don’t happen to work for GM, you still somehow have this.
             And that’s why the credit is such a critical element, and indeed, ideally, you’d want to have the identical tax treatment, whether you’re through an employer-based system, which will have market advantages, or some alternative. A credit is a step in that direction. You want to make sure that the person who is lower income preferably gets a bigger amount than they would get today, and that’s what the credit tries to do.
             And then you want to try to create for most people some pooling arrangement that gives the economies of scale that you mentioned, which is similar to what General Motors have or some other group. And that’s sort of what we are talking about, it seems to me, trying to construct. And the arguments really have just been at the margin on all of this--what about people who don’t want to be in this and so forth.
             And the role of the employer in the future, as I suggested at least, would be much like as people buying houses get mortgage deductions and so on, there’s a mechanical aspect of being an employer to make this easier for your employees. But they may be in pools and so on that are quite separate from anything you’re interested in. I mean, their church or their union or whatever.
             So it’s really I think we’re talking about what has to be done to create those elements of large employer-based plans in nonlarge-employer market. That’s kind of what’s going on here, it seems to me.
             DR. GINSBURG: Yes. Actually, the thing I should probe, Stuart, is, you know, with the potential of these organizations to provide pools, do you think they have a chance of doing it without their state designating, "We’re going to be a pool state, and we’re going to give pools this captive population with tax credits"?
             DR. BUTLER: That’s an interesting question, and I don’t know the answer to that exactly. I do think, however, there are certain kinds of organizations that people have a long-term affiliation with. A union is a good example. I mean, the African-American church is another example, and so on. There are things like that where you have what I call the core group of members anyway. And it may be in those kinds of situations, a credit alone might be sufficient. I tend to be skeptical. I think that either the organization itself has to impose certain rules, and we talked about private internal regulation, or the state may have to do that.
             But, certainly, I think very quickly any organization would begin to start looking at annual enrollment periods or something like that or a waiting period so you don’t get people moving in and out quickly, and it destabilizes. I think that would tend to happen naturally, but it may be that you require that to be done through state or even possibly federal regulation.
             DR. GINSBURG: Yes. I think the key thing is an organization can set up its rules under, say, broad outlines of state or federal regulation, but to the degree that one of those organizations is faced with insurers that don’t play by those rules, who can, in a sense, market to the healthiest people, I think that’s what Rick and Mark were getting at.
             MR. CURTIS: And there are a number of entities out there that can characterize themselves accurately and legally as having an affiliation with people who would very quickly, and adroitly, set up the kind of rules that were just described by Stuart in order to have a risk-select enrollment, and then everybody else would suffer. There are all sorts of things you can do.
             So, while it’s legitimate and important to protect against adverse selection in that way, if just relying on these kinds of organizations to pop up and develop their own rules limiting membership, there will be all sorts of organizations with all sorts of rules that result in a very risk-select group and very low rates, and nobody else is going to get those--
             DR. BUTLER: Yes, I agree with that. I wasn’t trying to suggest--I agree with that. I think that is, you know, and fiscal situation and information they provide there’s certain rules like that, as well as insurance regulatory rules, that I think you’d say have--or any organization that wants to do this has to abide by these broad cate--which, again, is not dissimilar from the way the FEHBP works, in a sense. I mean, there’s some basic rules.
             MR. CURTIS: The first is you are a federal employee and you have a federal contribution only.
             DR. BUTLER: That’s fine, but I’m talking about the plans, that they have to accept certain rules to get in. And, in a sense, what I’m saying is that you could say that to organizations. So, if you’re the First Baptist Church or something like that, there are certain things you’ve got to do, but there may be additional rules that that organization sets for itself within some parameters that respect its particular situation.
             I mean, religious organizations would be an obvious example, where, you know, maybe you’ve got to kind of go along with the program in the sense of what this church is for, to be a member, but even that I’m not so sure. There are many conservative Republicans in the Mail Handlers Union, for example, to get their benefits, and I guess they are good regular union members for their $30.

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