MR. PAUL HOWARD: The Manhattan Institutes
Center for Medical Progress encourages the development
of market-based public policies that promote medical
innovation and improve public health. In addition
to hosting conferences like this one, the Center
for Medical Progress publishes original and periodical
reports, books, and op-eds that remind policymakers
of the connection between healthy, well-functioning
markets and high-quality, affordable health care.
Our published material can be found at the Manhattan
Institutes website: www.manhattan-institute.org.
Our title today, Looking Back and Moving
Forward, was meant to convey that current
New York policymakers have to look backward before
they move forward with comprehensive or universal
health-care reform. Todays health-care markets
have been constrained in many ways, for better
and for worse, by the decisions of previous regulators,
governors, and legislators. Gridlock in Washington
over health-care reform has thrust states back
into their time-honored role as laboratories for
new social policies. This is, in many ways, a
welcome development. Just as Wisconsin led the
way in welfare reform, states like Massachusetts
and perhaps even New York can help guide the nation
toward a workable consensus on issues such as
covering the uninsured.
Our intention today is twofold. Our first panel
will explore the history of insurance reform in
New York, discuss the demographics of New Yorks
uninsured, explore why insurance remains so expensive
in the individual and small-group markets, and
consider how various reform proposals can create
more affordable access to health care. Our second
panel will discuss reform experiments in other
states and explore the lessons that those efforts
hold for New York policymakers.
Douglas Holtz-Eakin, our luncheon keynote speaker,
is a former Congressional Budget Office director.
He will discuss whether health-care reform should
include an individual mandate to obtain health
insurance. Democratic presidential candidates
have proposed it, Republican governors have imposed
it, and health analysts have debated it. Ill
let Doug decide where he stands.
It is now my honor to introduce Dr. James R.
Knickman, the first president and CEO of the New
York State Health Foundation. Dr. Knickman comes
to New York State Health with tremendous experience
and expertise in health-care analysis and policy
development. Prior to joining the foundation,
Dr. Knickman was vice president of research and
evaluation at the Robert Wood Johnson Foundation,
where he was responsible for external evaluation
of national initiatives. Throughout his fourteen-year
tenure there, he led grant-making teams in the
areas of clinical care for the chronically ill,
long-term care services, and population health.
From 1976 to 1992, Dr. Knickman served on the
faculty of New York Universitys Robert F.
Wagner Graduate School of Public Service, where
he was active in community service directed at
improving health-care delivery to vulnerable populations.
He also served on a wide range of advisory boards
and published extensive research on issues related
to improving health services for homeless families,
frail elders, and individuals with HIV. Today
he serves as chairman of the Robert Wood Johnson
Health System and is a member of the editorial
boards of the Milbank Quarterly and Inquiry.
DR. JAMES KNICKMAN: We are pleased today
to formally announce and kick off the New York
State Health Insurance Consortium. An important
element of our foundations mission is to
assist efforts to expand insurance coverage in
New York State. Another element of our mission
is to increase public awareness among New Yorkers
about pressing health-care issues. Our support
for this six-institution consortium is motivated
by our interest in expanding insurance coverage
and in improving public awareness about health
issues. The consortium will focus on options for
In the book Good to Great, Jim Collins says that
the first step to being an effective organization
or bringing about positive change is to get the
right people on the bus. We have engaged five
excellent institutions to help us in this task:
the Manhattan Institute, the United Hospital Fund,
the Rockefeller Institute in Albany, Cornell University,
and Columbia University. We are pleased to build
on what has happened in Massachusetts, Maine,
California, and Colorado, and we hope that these
organizations can make a difference in our state.
Much misunderstanding exists about what will
happen if one approach to coverage is taken rather
than another. There are also many disagreements.
A reporter who called me yesterday asked if our
consortium was for universal coverage. I almost
didnt want to answer because the question
of whether you are for universal coverage is politically
charged. I said that what were interested
in is expanding coverage; were interested
in universal coverage. We also want to look at
the downsides if every last person is covered.
We have to begin to build a consensus that will
take us from ideas to policy that actually helps
people get coverage.
We also hope that this group will do a fair amount
of convening, as we are doing today. Our consortium
will work closely with state decision makers:
analysis that is not tied to the policy debates
in Albany is probably worthless.
What types of work will we do? First, the group
needs to model the implications of alternative
options. We need to consider what makes New York
different from other states. Many models are based
on national data sets that you massage to look
a bit like your home state. In fact, New York
doesnt have an average health-care system.
But its important to learn from other states.
Were not the first state to think about
We also need to develop market incentives to
ensure that people use health care efficiently
and that providers deliver health care efficiently.
We need to work on understanding the market for
individual and small-group coverage. A fundamental
part of the problem is making that market work.
We will be launching a website that will present
many of our findings to a broad audience.
PANEL 1: NEW YORKS UNINSURED: A HISTORY
OF GOOD INTENTIONS AND UNINTENDED CONSEQUENCES
MR. HOWARD HUSOCK: Im vice president
for policy research at the Manhattan Institute.
We are pleased to be part of this new consortium
with the New York State Health Foundation. We
are glad that the foundation has gotten the consortium
The current presidential campaign has, more than
any other in recent years, highlighted the federal
governments approach to health-insurance
policy. But as Dr. Knickman pointed out, for years
to come many key health-insurance policy decisions
and innovations will probably occur at the state
level. Weve already seen Massachusetts implement
a very ambitious reform program based on a mandate
for all citizens to purchase state-negotiated
insurance plans. We hear that California may be
considering a similar plan, and we know that Governor
Spitzer is interested in this option as he ponders
how to address the challenging combination of
very high Medicaid costs and a significant pool
of the uninsured, each of which is pulling in
a different direction.
How should we think about the role that states
play in health insurance? More specifically, what
are the choices that New York faces? What are
the key factors that will influence those choices?
Were very fortunate to have for our first
panel a group that can provide just this sort
of informed analysis. We see Jim Tallon, Tarren
Bragdon, and Mark Scherzer as a team complementing
Jim is going to provide historical context. Tarren
will offer some creative solutions focused in
part on the individual small-group plans that
Jim will discuss. Mark will critique both of them
and address the question of how their proposals
affect the most vulnerable, the group that we
always have to keep in mind when we go forward
with any health policy.
Well begin with Jim Tallon, president of
the United Hospital Fund in New York. Jim is the
former majority leader of the New York State Assembly
and former chair of the Assemblys Standing
Committee on Health. He also headed Governor Spitzers
transition team, Healthcare Policy Advisory Committee.
He chairs the board of the Commonwealth Fund as
well as the Kaiser Commission on Medicaid and
MR. JAMES TALLON: I served for nineteen
years as an elected official in New York and for
the last fifteen years at the United Hospital
Fund, an independent organization focused in New
York City. It is a small analytic organization
that looks at health-policy questions. We are
not the trade association representing the hospital
community. A very active and effective trade associationthe
great New York Hospital Associationrepresents
hospitals in New York City; Pat Wang, its senior
vice president, is here today.
Many people in our discussion today would like
to see the balance between government and markets
shift more in the direction of markets. Philosophically,
I dont necessarily start there, but I always
enjoy a conversation with people who have a different
point of view. Im representing a mixed market
and government system in this conversation. Ive
just done six public hearings around the state.
Mark Scherzer has been with me, at the request
of the governor. On health-insurance questions,
there is a strongly held point of view that government
should take on this responsibility. This point
of view is rooted in the experience of sitting
through hearings and listening to testimony from
patients who get caught up in the complexities
of our current payment system.
Also testifying are health-care providers, hospitals,
and particularly physicians, who say that the
bargaining relationship between insurance and
health care is balanced in favor of the insurance
industry. Some physicians argue that the insurance
industry varies administrative procedures and
practice standards not to achieve efficiency but
to systematically be able to deny claims. Were
not going to spend a lot of time on that subject
Upstate New Yorkoutside New York Cityhas
a fairly traditionally organized health-care system
of community-based physicians, community-oriented
hospitals, and referral centers. It has a traditional
pyramid structure, which serves 910 million
New Yorkers who are outside the New York City
Downstate New York is very different. The downstate
system did not emerge from 1965 with Medicare
and Medicaid. There has been a societal presence
and sense of obligation for the provision of health-care
services in the New York metropolitan area, whether
manifested by a tradition of public hospitalswhich
in 1970 became the Health and Hospitals Corporation,
still operating the largest public hospital system
in the countryor the voluntary, not-for-profit
hospital system, which has its roots in the ethnic
and religious communities of the nineteenth and
early twentieth century. This not-for-profit system
developed an academic orientation and significant
teaching focus. Upstate, I may be looking at community-based
physicians and providers of care; downstate, Im
looking at access points largely in hospital clinics
and community health centers with staff physicians,
faculty practice physicians, and a residual community
In the principal orientation of health care,
the insurance side in New York developed from
the 1930s. The United Hospital Fund actually incorporated
Associated Health Services of New York, which
became Empire Blue Cross Blue Shield in 1934.
From the 1930s through the mid-1980s, we had a
dominant not-for-profit insurance structure. State
law includes a prohibition on ownership of health-care
facilities by publicly traded corporations. Interestingly,
that prohibition did not extend to the financial
side. While there was a tradition of not-for-profit
provision of health-insurance services, the commercial
insurance industry developed as an adjunct to
the life-insurance industry in the 1950s through
the 1970s. Therefore weve had a mixed for-profit
and not-for-profit orientation in health insurance.
Another trend line is state oversight growing
from this social welfare tradition of responsibility
for community services. We see increasing activism
by state government. In 1965, New York adopted
health planning and the nations first certificate
of need law. In 1969, it required Medicaid rates
and Blue Cross payment rates to be set off a common
pool to guarantee Medicaid beneficiaries access
to city hospitals. In the early 1980s, when I
was in a leadership role in the State Assembly,
we adopted a rate-setting system in which government
sets the overall payments for all insurers from
Medicare to city hospitals.
The final trend line is based on Nelson Rockefellers
guidance on the state of New Yorks responsibility
to take an active role in health care. If one
wants to go back to Rockefeller and Reagan as
the governors representing the left and the right
coast, moving forward from the 1960s, they develop
different visions. Medicaid came along, and Nelson
Rockefeller said to a former governor of New Yorkand
this is a gross oversimplificationWe
have a tradition of doing all these things in
New York. Do you mean that the federal government
is going to pay for half of them? We took
that opportunity and that vision from Nelson Rockefeller
and carried it through on a bipartisan basis to
this very day.
We have a significantly developed Medicaid program.
Forty-three percent of the states expenditures
go for long-term care services, while 7 percent
are direct subsidies into the health-care system
to enable it to care for large numbers of uninsured
patients. In the long-term care side of about
$20 billion in expenditures, about $10 billion
is what might be called traditional long-term
care, for the elderly and the younger disabled.
The other $10 billion is for the severely mentally
ill, the mentally retarded, the developmentally
disabled, and former substance abusers, who, in
an earlier time, were the direct responsibility
of the state.
The states decisions on insurance laws
in the early 1990s were well intended, but an
unintended consequence occurred in 1987, on my
watch. We had an all-payer rate-setting system.
Medicare had withdrawn after some initial years,
but the state was responsible for setting Medicaid,
Blue Cross, and HMO rates. The system that made
Blue Cross the dominant carrier was about to expire.
Blue Cross was writing 77 percent of hospital
insurance in New York City in 1987. The HMOs came
to us and argued that managed care is more efficient,
using services paid on a diagnosis-related group
(DRG) per episode admission rate. They noted that
they were actively reducing the length of stays
and needed the ability to gain that value back
in the market for themselves. They wanted to negotiate
rates with the hospitals, and we decided to allow
them to do so. To build protection, we put into
law a provision stating that those rates as negotiated
had to represent the totality of costs for caring
for the population for which they were responsible.
The unintended outcome was that the state government
never enforced that provision. The state essentially
said that if two consenting adultsthat is,
the hospital and the insurance companyagree
that it is a fair deal, who are we to second guess
them? In the following four to five years, two
aggressive HMOsone focusing on a good doctors
market, the other on a tight cost-control strategyin
effect ate Empires lunch and significantly
diminished the number of Empires enrollees.
In the early 1990s, a large number of the states
residual enrollees in Empire Blue Cross Blue Shield
were almost trapped, because as they looked for
other opportunities they met the commercial health-insurance
industry. Our state legislature also met the industry.
But as we looked at this challenge, the practices
that we found surprised members of the legislature,
who had been living in this New York pooled environment.
Women pay more; even in current assigned high-risk
pools, women pay double what men pay. Occupations
were blacklisted. Ill never forget the combination
of construction work and interior design that
was on the list. We found the exclusion of body
parts. We also found that insurance companies
used lengthy questionnaires where an applicants
mistakes became the basis for denial of subsequent
claims. Part of the question in todays debate
is whether a private health-insurance industry
that doesnt serve sick people is still relevant.
The first rule of health-insurance school
is to cover healthy people. Those who are chronically
ill and at higher risk should go somewhere else.
In 1995, the legislature did its first round of
community rating, a guaranteed-issue open enrollment,
and a subsequent round of insurance reform leading
to the current law. The legislature wrote the
law in response to the large number of enrollees
facing huge rate increases under their residual
Empire plan, while the health-insurance industry
was not welcoming those who fell into any of the
Based on testimony from the carriers and brokers,
my sense is that, even if the small-group market
in New York tends to be more costly than it is
in other places, it is an open and competitive
market. People have said: Dont touch the
small-group market in New York; you have a competitive
environment now. The direct-pay market is clearly
broken. Whether that is because we have not executed
on our own subsidy strategy, or whether that market
ought to be pooled into larger markets, will be
debated in the remainder of this conversation.
MR. HUSOCK: Our next speaker, Tarren Bragdon,
is a health-policy analyst at the Manhattan Institutes
Empire Center for New York State Policy in Albany.
He is the author of a publication being released
this very day: Rx New York: A Prescription for
More Accessible Health Care. He is also a former
member of the House of Representatives of the
state of Mainethe youngest person ever elected
to that body, where he served on the Joint Standing
Committee on Health and Human Services and subsequently
played a role in the development and enactment
of the Maine Consumer Choice Health Plan, a state-administered
consumer-choice exchange. In addition to his ongoing
role at the Empire Center, Tarren will become
the chief executive of the Maine Heritage Policy
MR. TARREN BRAGDON: I want to talk about
the uninsured in New York and discuss some characteristics
that are too often overlooked. What are some characteristics
of states that are doing a better job of covering
the uninsured, and how can we expand private insurance
options for individuals in New York?
There are two approaches to reaching the uninsured.
One is to expand public programs to higher income
levels. The second approach is to maximize private
coverage, reserving scarce public dollars for
very select populations who most need subsidy
or assistance. These two approaches are not always
mutually exclusive, although they appear to be
in New York, particularly as of late. I had the
opportunity to attend some of New York States
Partnership for Coverage hearings and testified
at the Rochester hearing. I was surprised at how
much emphasis was placed on public program expansion,
with very little discussion on how to make private
insurance options more affordable and accessible.
When we look at the reality of public program
expansions, we need to remind ourselves of how
large New Yorks Medicaid program already
is: it costs $48 billionas much as the Medicaid
program in Texas, Florida, and Pennsylvania combined.
Im not sure how much larger you can go,
in theory and in practice, in an attempt to cover
the uninsured. In fact, many states have a lower
portion of their population uninsured compared
with New York. Those states have more people with
private coverage, not more individuals on public
coverage. If you look at top-performing states
at covering their populations, they are top-performing
because they maximize private opportunities, not
because they have larger public programs than
New York has.
If you look at just one populationchildrenyou
can see this even more dramatically. Eleven states
have a lower rate of uninsured kids than New York
has. Nine of these states had SCHIP or Child Health
Plus eligibility levels below New Yorks
before the expansions. Nine states with a lower
rate of uninsured have SCHIP income-eligibility
levels below 250 percent of poverty. The strategy
to maximize coverage of individuals is to maximize
private coverage opportunities so that you can
target scarce public dollars to populations that
particularly need assistance.
Its important to understand that the uninsured
are a diverse population. There is a notion that
all the uninsured work for one particular small
business and that if we could only find that small
business and cover them, we could pat ourselves
on the back and go home. But in reality, it is
a diverse and dynamic population.
What weve seen in New York over the last
seven years is not an erosion of employer-based
coverage. Weve seen the uninsured rate hold
fairly steady: about 17 percent of New Yorkers
under 65 were uninsured in 1999, and today its
about 16 percent. Thats different from what
other states are experiencing. As weve shrunk
options for people who dont get coverage
through their employer, and made it more difficult
for people to find private coverage opportunities,
weve had to expand public programs but have
really just shifted people from private to public
without getting a significant portion of that
I want to go through the statistics that pertain
to the uninsured population, because theyre
often overlooked when we try to simplify solutions
to covering the uninsured. About half of the uninsured
are young adults, aged 18 to 34. About one-third
are aged 35 to 49, and only one in six is near
retirementaged 50 to 64. The average age
of the uninsured adult is 36 in New Yorkthats
five years younger than the average person with
Almost a third of all the uninsured in New York
are noncitizenslegal as well as illegal
immigrants. If you look at public program expansions,
many of the federal Medicaid rules and regulations
do not allow you to capture this population, and
this is a significant uninsured population at
all income levels. Almost one in three noncitizens
earning over $75,000 a year in New York State
is uninsured. These are individuals who, for whatever
reason, dont have access to employer-based
coverage and have no place else to go.
Some 90 percent of the uninsured are in good
health. Jim talked about how past legislative
efforts have focused on protecting the sick and
those most in need of health insurance to pay
claims. Thats critical. You need to have
a functioning safety net that takes care of those
populations, but you dont want to penalize
everyone else with a nonfunctioning private-sector
safety net so that these healthy, young individuals
have no place to go but their employer to get
Two-thirds of the uninsured have no dependent
children. About two-thirds of the uninsured are
single. If you have no dependent children, the
consequences of not having health-insurance coverage
are less significant. We need to understand that
because the coverage options that are attractive
to single individuals who are not parents may
be very different from the coverage options that
are attractive to individuals who are older, have
dependent children, and are in different life
circumstances. We also need to recognize that
health-coverage options change over time. The
health insurance that you are interested in at
age 25 might be very different at age 35, 45,
or 55. We need to recognize that this one-size-fits-all
approach may be very simple and equitable, but
its not effective or realistic for what
people actually need and what they can afford.
Sixty-one percent of the uninsured have incomes
of over $25,000 a year. One-third earn over $50,000
a year, and this is household income. Again, the
vast majority of the uninsured are single and
are not parents.
The majority of the uninsured lack coverage for
a very short period of time; seven out of ten
adults who become uninsured will become reinsured
within a year. This is a temporary situation for
a large number of people who find themselves uninsured
on any given day or month. What people need temporarily,
when they are between jobs or when they are working
through a waiting period before they can get health
insurance through an employer, is very different
from what they might be interested in having as
their permanent health-insurance plan.
Jim highlighted the death spiral of New Yorks
individual market. The individual direct-pay market
is where those who dont have access to insurance
through their employer can go to buy coverage.
Indeed, it is the only place where one can go
to buy private, nonsubsidized coverage.
In 1993, there were 750,000 people in this market
in New York. Today there are 57,000: thats
a [92.4] percent drop. If you look nationally,
the individual direct-pay insurance market is
the only growing private insurance market. A functioning,
affordable, private-sector safety net is critical
if youre going to give people affordable
unsubsidized insurance options so that states
can direct scarce public dollars to those individuals
most in need.
About 2.2 million New Yorkers dont have
access to health insurance through their employer.
They are working, but either their employer does
not offer coverage, theyre in a waiting
period so they cannot sign up for coverage, or
they choose not to sign up for coverage.
Sometimes I think that as policymakers, we too
often try to be innovative when we need to be
effective by learning what other people are doing
well and replicating it.
My Rx New York report provides seven policy recommendations.
One, we need to have more flexibility and allow
more competition and innovation in New Yorks
small-group and direct-pay markets. Large companies
in New York pay premiums at the same rate as large
companies in the other 49 states. However, the
small-group and direct-pay markets are paying
a much higher premium.
Two, we need to provide people with temporary
insurance opportunities. Seven out of ten uninsured
adults are uninsured for less than a year. New
York is one of five states that does not allow
temporary health-insurance plans.
Three, we need to ensure that people have access
to tax-free health insurance through a Section
125 plan through their employer and encourage
as many employers as possible to offer health
insurance. If you look at employers who simply
offer and pay a very small share of the premium,
the vast majority of employees do enroll. Its
a very efficient way for them to get health insurance.
Four, we need to ensure that we have incentives
that encourage employers, particularly small employers,
to offer health insurance.
Five, we need specific strategies to reach out
to noncitizens with targeted private insurance
plans that respond to their unique needs, which
may be very different from those of other uninsured
Six, we need to look at Medicaid eligibility.
For example, we have an odd formula driven by
the federal government offering a fertility bonus.
The more kids you have, the more you can make
and still qualify for the program, which is ridiculous.
It doesnt reflect cost-of-living differences
or account for who is truly poor versus who is
middle-income but has a lot of kids.
Finally, we need to take a new approach when
we look at Medicaid eligibility and move to fixed-income
levels that may even vary by region.
MR. HUSOCK: Our final speaker is Mark
Scherzer, an attorney in New York and the legislative
counsel for New Yorkers for Accessible Health
Coverage, which is a coalition that has advocated
for health-insurance reform at the state level
for the past fifteen years. He serves as cochair
of the Consumer and Patient Rights Committee of
the New York State Bar Associations Health
Law section. Mark has been awarded Lambdas
Liberty Award for his work on insurance cases
involving HIV/AIDS patients.
MR. MARK SCHERZER: New Yorkers for Accessible
Health Coverage is a coalition of voluntary health
organizations serving the seriously and chronically
ill and disabled in the insurance system. It was
organized in 1991, when we faced a crisis in New
York with Empire Blue Cross. It was formed because
we had many high-cost consumersour constituentswho
are a small minority of the overall population
but spend a very large majority of our health-care
dollars. They are the bane of any insurance system,
of public policy, and the Medicaid system. While
many of these constituents are covered through
public programs such as Medicaid or Medicare,
many of them also rely on private insurance. They
are people who worked for 20, 30, and 40 years
and suddenly found themselves ill but were able
to enter the marketplace through their employers
or on their own.
Our concern has been very closely tied to the
individual market that Tarren spoke about. Tarren,
to some extent, was comparing apples with oranges
when he talked about shrinkage in the individual
market. I dont think we had 750,000 people
in that market at any given time. Thats
based on census figures, and if you looked at
the same census figures today, you would find
that they still think that we have several hundred
thousand people in that market. We know how many
people are in the market based on assessments
from insurance companies in our insurance pools.
There has been significant shrinkage, and its
a very broken market, which is a great concern;
but it hasnt been of quite that dimension.
The individual marketfor people who dont
get coverage through their employersis a
residual market. It tends to go down in size,
for example, when the economy is better and more
people are getting jobs. It increases when people
lose their jobs and have to get coverage on their
own. Its a market in which people have to
buy coverage without getting it through an employer
at those favorable group rates and usually without
If you have a voluntary market and you have one
with easy accessas New York does, which
we think is a good thingits clear
that the people who are going to buy insurance
under those circumstances tend to think theyre
going to need it; and the young, invincible
people who may think theyre never going
to get sick are not going to purchase it. Its
what the insurance industry calls a situation
of adverse selection. Youre going to attract
sick people to that market.
I agree that we had good intentions and unintended
consequences, but this framework connotes a certain
narrative. It says that we thought we were going
to solve the problem through regulation, but we
didnt, so we need to go back to market-based
approaches. There are a lot of nuances in this
situation, and I want to go into the particulars
of the evolution of the market because there are
important questions. Is it a problem with the
basic architecture? Did the architect screw up
the design? Is it a problem of how the builder
built the design and whether the builder followed
the architects plans? Is it a problem with
maintenance? There are different ways a system
can go awry, and all those elements have some
role to play, but I would probably differ with
Tarren on the source of the problem.
Im not sure that there were good intentions
underlying every decision. Just after 2000, there
was an ideologically driven devotion to the idea
that an insurance market with very generous benefits
open to sick people, instead of one where people
took personal responsibility for their own health-care
costs, was not a good thing.
Lets pick up the chain where Jim left off
in 1991. At the time, the state had an underwritten
health-insurance market. Many other states now
have a system in which insurance companies can
turn down people based on their health, can exclude
body parts, or insure the family but exclude a
kid with asthma. We had a variation in premiums
based on health. Empire Blue Cross proposed as
a remedy for that situation that it was going
to act more like a commercial insurer. This is
where my constituents really became activated.
Empire Blue Cross decided to resolve the problem
by accounting for the population of insured people
at the timepeople who may have been paying
premiums for the last 30 years but had recently
become sickand telling them that if they
were now unhealthy, their premiums would increase
dramatically, and if they were healthy, their
premiums would be reduced. That way, Empire Blue
Cross could continue to compete for business with
commercial insurers without taking the financial
hit it had been taking.
Our peopledriven largely by AIDS activists
in coalition with people with multiple sclerosis,
cancer, and other serious and chronic illnessessaid
that that was not fair. The whole idea in the
insurance system is that you pay in when youre
healthy, and then, when you need the benefit,
its there for you. You dont get punished
down the road by an increase in your premiums
because you happened to have become sick. Why
not make the commercial companies look more like
Empire? Thats where we came up with the
idea that in New York, everyone would pay in the
small-group and individual markets and pay the
same rate, regardless of age or sex. Everyone
would have an opportunity to enroll, and thats
how wed resolve the problem.
The policy seemed to work fairly well in the
small-group market. Admittedly, New York has problems
in the small-group market, and we can discuss
some of the ways that those problems can be addressed.
In the individual market, the solution was very
market-basedeveryone plays by the same rules
in the same market. Every insurance company other
than Empire left the individual market so that
they wouldnt have to take on all this adverse
By 1995, Empire was losing $10 million a month
on its individual consumers and felt in financial
jeopardy. We debated whether we could take care
of sick people through high-risk pools, which
many other states have, and which Tarren recommends
we think about again for New York. Consumer groups
like ours looked at the high-risk pools in other
states. We found that states like Florida had
basically closed their poolsif you were
a sick individual, you could not purchase a policy.
States like Illinois had very long waiting lists,
while South Carolina excluded coverage of HIV/AIDS
in its high-risk pool. Other states made people
in those high-risk pools pay premiums of up to
five times the standard average premium.
We found that, based on what we saw in these
states, high-risk pools would be at the mercy
of political decisions, instead of being a market
where the welfare of a much larger group would
be at play. We rejected that notion strongly and
advocated trying something else. We suggested
distributing that social function of covering
the sick across the whole marketplace, and asking
every HMO to give everyone a standardized policy
and deal with the problems of adverse risk through
risk adjustment. We are still largely trusting
in the marketplace. There was a trade-off for
industry, which was that we deregulated rate-setting.
We allowed the industry to bypass rate hearings
if it wanted to increase rates. But even that
was not enough to control costs in the individual
market, which still had about twice the incidence
of very high-cost diseases as in group markets,
and twice the expense to be covered.
By 2000, when we were seeing rate increases of
60 and 70 percent a year in the individual market,
we decided to do something else in New York, which
was to subsidize through a broadly based scheme
a stop-loss system. The idea of the stop-loss
was to remove the financial effect of the sick
people from the market by covering the high-cost
claims. When you got to a certain point of expenditure,
the system would cover a good portion of high-cost
claims using publicly financed pools generated
by assessments on insurers. The Healthcare Reform
Act of 2000 ratcheted up the subsidy for the high-cost
pool over a period of three years. Then we stopped
with the Healthcare Reform Act of 2003.
The market remained relatively stable in size
from 2000 to 2003. The dramatic drop-off, from
more than 110,000 people in the individual market
down to the 57,000 in that market today, took
place in the last four years.
In the last four years, though health-care costs
increased at the rate of 1415 percent a
year or more, we stopped increasing the subsidy
for the stop-loss pools. Insurance markets are
fairly precarious, and that market then fell apart.
I think that Tarren and I both assume that the
voluntary market cannot sustain the presence of
a whole lot of sick people on its own and requires
a subsidy from a very broad source of financing.
In other words, you cant ask a market of
sick people to subsidize one anothers costs
effectively and continue to operate as a market.
Tarren and I would differ on where a stop-loss
system should be used to fund the high-cost claims.
In New York, were funding only about 40
percent of the claims that are eligible for subsidies
now. How can we think we have an effective system
if were only financing 40 percent of the
costs that might be eligible?
And there are questions about whether the design
is sufficient in what we consider eligible costs.
Do you remove the people, or do you remove the
financial effect of those people? Do you want
to reintroduce to New York something that weve
eliminated, which is the administrative cost of
underwriting people? After all, we hear about
administrative costs being a big part of the problem
of the cost of insurance. Are we going to provide
enough to finance it? The assessment that Tarren
reported of $54 million is barely more than were
providing now, which is an ineffective subsidy
for the high-cost claims. Would you do it through
an adequate benefit structure, or are you going
to do it through a comprehensive one?
If you want an effective insurance system, youre
going to need to deal with the problems of the
sick people who drive the cost in that system.
Sick populations are not going away, and we need
to have a solution that provides them with adequate
care in a way that allows them to continue to
contribute to the cost through their premiums
and not rely entirely on the public system. You
cant have it both ways. You cant attack
a public system and then force people into it
by removing the possibility of continuing to participate
in the private one.
MR. HUSOCK: With regard to how we deal
with the high costs of the present system: in
last weeks Washington Post, Robert Samuelson,
in a provocative column titled Rx for Health
Care: Pain, said that we have no incentives
in the present system for containing cost. Jim
referred to this wink-and-nod relationship between
insurers and providers, with government not taking
an active role. Mark is saying that we have to
find a broad-based way of supporting these costs.
Tarren is implicitly saying, No, we have
to find a way to give people incentives to control
costs. But Samuelson makes the very broad
point that the absolute level of cost is so high
that, as he put it, its crowding out
a tremendous number of very important other public
needs that government should be investing in.
How can we think about controlling costs in a
MR. TALLON: Obviously, whether we are
at 16 percent GDP, or move to 17 or 18 percent,
there are trade-offs. But in an aging society,
with the technological promise that health care
offers us, it is not wholly clear that spending
less money on health care is an absolute value
to be sought. I understand the dilemma. All our
mechanismswhether theyre government
taxation or market mechanismsare strained
by that growth.
America works on the cost-controlling model,
which is based on a belief that the physician
asks himself each day how he can reduce health-care
costs. Maybe some doctors do decide to go into
primary care and not one of the specialties that
attract them. Along comes the patient, who is
forced to spend a lot of money on health care.
Going forward, the tough issue is whether in this
environment market competition can control cost
growth, or whether we need the aggregate power
of society exercised through government to take
out those excesses that, at least when you compare
us with the other OECD countries, seem to stand
My sense is that the debate going forward is
about throwing more risk at the patients. Doing
so essentially discriminates against sick and
lower-income people, and we as a society choose
not to confront that systematically, sector by
sector, in health care.
MR. HUSOCK: To paraphrase Jefferson, were
getting the health care we deserve or that were
implicitly asking for. Mark, should we care about
MR. SCHERZER: There are ways to do so,
although some involve spending money on public
health preventive-care and primary-care initiatives
that could bring down the incidence of chronic
and serious illness or avoid their complications,
recognizing that preventive care and primary care
are important elements in the system. But those
are very difficult decisions to influence and
control in a system that relies solely on individual
decisions in the marketplace and that is hesitant
to use governmental mechanisms. There are ways
to reduce costs. Other countries reduce costs
much better; their ways dont involve shifting
a lot of cost to the sick people, although they
may avoid creating the sick people to begin with
MR. HUSOCK: Can we reduce costs, Tarren,
without shifting costs to very sick people?
MR. BRAGDON: Absolutely, but what you
need is, on both the provider and the insurance
side, a functioning market. We have the same dilemma
in every other aspect of the economy, where there
is a push-pull between what consumers are willing
to pay and the cost of providing a particular
service. Other services are just as life-sustainingwhether
its food, shelter, clothing, or having a
joband for some reason, we trust the free
market and the economy to function in a way that
creates balance between the two and allows innovation.
But in the health-care world, we lose our basic
understanding of economics and say that only government
can wring out these savings under a command-and-control
structure. Weve tried that here in New York.
Jim has articulated a multi-decade strategy. Maybe
we need to try a more rational approach and at
the same time recognize that we need to give people
more options. Sometimes, whether it comes down
to health-care providers or to health insurance,
people will make choices that are different from
the choices you and I might make. Thats
what happens in a free society.
MS. ELIZABETH BENJAMIN: Im from
the Community Service Society of New York. I thought
you began your statement by saying that the states
with lower rates of uninsured tend to have large
privately insured populations and very small Medicaid
populations. But it seems to me that Maine has
the largest Medicaid population, according to
your chart. Rhode Island, also on your list of
low uninsured states, also has a large Medicaid
population. Is there a disconnect in your analysis?
More important, I want to know more about Maines
Dirigo health plan. Maine is often talked about
as one of the three New England states that first
moved forward on universal coverage, and I thought
you might have insights on that, since youre
from the state.
MR. BRAGDON: The consequence for Maine
of not having a functioning private market is
that it has had to expand Medicaid, because people
dont have any kind of affordable private-sector
The best-selling plan in Maines individual
market is a $5,000-deductible plan available for
$260 a month for an individual in any state of
health who is under age 30. The odds of their
using that plan are less than 5 percent, so only
very sick people are in that market. Medicaid
has been expanded to provide them with coverage.
Maine, like New York, is dysfunctional. Its
one of five states with guarantee issue and community
rating in this private-sector safety-net market.
We need to become more functional in both New
York and Maine. Dirigo tried to correct this by
subsidizing the current insurance regulations.
It has a tiered subsidy formula, up to 300 percent
of poverty. Some 60 percent of people are in the
highest subsidy category, and 80 percent of people
are in the highest two subsidy categories. Maine
has spent $45 million a year and reduced the uninsured
population in Maine by less than 10 percent.
MR. STEVE ELKIN: Id like to know
why I cannot get a high-deductible health-insurance
policy or a medical savings plan in New York State.
MR. TALLON: You can buy one if you are
in any of the group markets in New York. You cannot
buy it in the direct-pay market in New York. We
fully concede that the direct-pay market needs
to be broadened. One proposal is to blend the
small-group and direct-pay market into a broader
poolput 60 thousand people into 2.2 million.
Youd have to have some subsidies.
Another proposal is to pool the direct-pay market
and run it as a separate, adjunct pool administered
on a statewide basis. There are several other
proposals. But clearly, in New York you cannot
get a high-deductible health-insurance policy
or a medical savings plan now.
If I sell you that high-deductible product directly
in New York, then by definition my public policy
is going to be that those who are older or have
a higher health risk and dont benefit from
that policy are going to end up paying more. The
arithmetic from a public-policy point of view
leads me to question that solution.
MR. SCHERZER: The idea behind New Yorks
requiring uniformity of policies in that market
was to avoid segmentation, in which healthier
people would peel off. Weve allowed segmentation
in other ways. Weve allowed sole proprietors
of businesses to peel off into their own separate
pool so that theyre no longer supporting
individuals who are not sole proprietors of business.
I dont think that the population of seriously
and chronically ill people particularly cares
whether people are allowed to have these high-deductible
plans. Our concern is that every time more people
are allowed to peel off into some other productand
its the healthier people who are going to
do sothe sicker people are going to be left
without other cross-subsidies that they need.
Its perfectly fine and justifiable if that
subsidy is coming from a much broader financing
basefor example, the tax systembut
it should be coming from somewhere. It is our
inability to state that this will be a private
market system because it involves individual insuranceversus
stating that this is where government has a rolethat
has inhibited us in allowing more variation in
the marketplace. Were insisting that the
marketplace solve the problem and not saying that
it is a broad governmental responsibility to solve
the problem of how to pay the cost of sick people.
PANEL 2: PUBLIC SECTOR EXPERIMENTS: MANDATES,
MEDICAID, AND MARKETS
MR. PAUL HOWARD: States have taken the
lead on health-care reform, and none in a more
prominent or interesting way than Massachusetts.
We have with us today as our first speaker Jon
Kingsdale, the executive director of the Commonwealth
Health Insurance Connector Authority. Jon will
be discussing the Connector Authority. He will
be followed by Ed Haislmaier of the Heritage Foundation,
who will discuss what aspects of the Massachusetts
experiment may be applicable to other states.
Len Nichols of the New America Foundation will
follow on the politics of health-care reform initiatives
in other states, particularly California, Utah
and Colorado. David Gratzer, a senior fellow at
the Manhattan Institutes Center for Medical
Progress, will conclude the panel by talking about
market-oriented reforms and private-sector initiatives.
Please join me in welcoming Jon Kingsdale.
MR. JON KINGSDALE: Thank you, its
a pleasure to be here. About three years before
the Massachusetts legislature passed its second
health insurance reform proposal, in 2006, the
Massachusetts Blue Cross Foundation sponsored
a similar set of conversations and initiatives
[to todays]. Maybe thats a propitious
sign for you.
Im the executive director of a new, independent
authority which we refer to as the Health Connector.
Ill briefly describe its several functions
and focus on the more innovative ones, particularly
our function as a commercial exchange or marketplace.
People often ask me how reform is going in Massachusetts.
I usually say about as well as can be expected.
Were doing fantastically well, yet we have
huge bumps in the immediate road ahead. Number
one, we have reached a lot of people. We thought
there were somewhere between 372,000 to more than
600,000 uninsured people in the state when reform
started. Weve now revised the lower estimate
to about 400,000 people. We believe that, as of
January 1, we will have newly enrolled over 300,000
of them. Thats a big dent over the last
eighteen months. And of that group we estimate
about 100,000 are in private commercial insurancenet
new enrollment and a substantial amount
in partially subsidized insurance.
The program has been successful in terms of reforming
the non-group [insurance] market. The prior panel
on the uninsured in New York (See New Yorks
Uninsured: A History of Good Intentions and Unintended
Consequences) addressed the issues of shifting
dollars around between insurance companies with
reinsurance pools and all the dysfunctions of
the non-group market. Im going to make a
bold claim, which is that we have the only functioning
non-group market in the country now, as a consequence
of reform; that it is an absolute necessity for
making an individual mandate work. What I mean
by functioning is you can get a choice
of products, ease of purchase, and the value of
benefits comparable to what you can get in the
group insurance market. Let me give you a couple
of numbers on this. Pre-reform, the group market
in Massachusetts had guaranteed issue, guaranteed
renewal, and offered very few products. It was
hard to shop and a terrible value; you had to
call and hope you could find somebody at an insurance
company willing to answer your phone call.
The typical uninsured individual in Massachusetts
on April 1, 2007, before reform of the non-group
market, was a 37-year-old male Bostonian. We dont
rate on gender, but uninsurance is definitely
gender-linked. Weve done a lot of focus
groups, and clearly there is a bunch of guys who
think chronic illness only happens to women. And
they dont want to be spending $4,000 a year
for a high-deductible health plan with no drug
coverage. They get that something could fall on
them, but they dont really believe in chronic
After July 1, 2007, that same 37-year-old could
buy a policy for $184 a month. Its still
a lot of money, but just over 50 percent of $335,
with a $2,000 deductible, full drug coverage,
and coverage of ER and office visits before the
deductible kicks in. So people pay literally half
the price and receive twice the benefitsa
very concrete demonstration of the success of
Third, and this is very important, public and
political support for reform was high when we
passed it. Every representative but two and every
senator voted for it. Theyre virtually all
Democrats. A Republican governor championed it,
and its being funded by a Republican administration
in Washington. I maintain you do not want to reform
the financing of 16 percent of our GNP on a 51
to 49 vote. Since then, support has grown: a September
2006 Kaiser poll found a three 3 to 1 margin of
support among likely voters61 percent for,
20 percent against, with the remaining undecided.
Redone in June 2007, 67 percent were for, 16 percent
againstfour 4 to 1. Over 90 percent of the
public is aware of reform, and even a majority
of employers, according to a poll released in
November, support it.
I would also point to the fact that we have a
very diverse board at the Connector, to which
the legislature passed the buck, addressing questions
like whats minimum credible coverage, and
whats affordable insurance, and things that
they just didnt want to be torn asunder
over. And we span the entire political spectrum
in Massachusetts, from center to far left, and
have had unanimous votes of that board on all
those contentious issues, which I take as real
political capital. Were dealing with things
that you know cost huge amounts of money and are
We have a bunch of different roles at the Connector.
Were a policymaker and a regulator. If youre
going to mandate coverage, whats the minimum
credible coverage somebody has to have? If you
have to have it, as long as you can afford it,
what does affordability mean? If were going
to make employers offer this tax dodge through
pretax, payroll-deduction contributions to fund
premiums, what are the rules and regulations?
Were a big insurance purchaser, so we decide
on behalf of hundreds of thousands of people what
the benefits are and what their contributions
are, and we negotiate that with MCOs [managed
care organizations] and do the enrollment rules.
Were a cheerleader. We have grants to do
outreach with community-based organizations. We
partner with the Red Sox, Bank of America, CVS,
Comcast, the MBTA and the Greater Boston Interfaith
Organization, and anybody we can find to go out
and find the uninsured because, frankly, theyre
not always easy to find. You dont find a
lot of them on the train reading the New York
Times. They might have multiple jobs, and health
care is number seventeen on their list of priorities.
We also serve as the Travelocity of health insurance.
Were a commercial exchange for the subsidized
insurance program that we run, but also, for the
non-subsidized commercial insurance. So we have
specific target markets: non-group and a subsetsomebody
called it direct pay hereof that non-group
market, which is lower-priced, somewhat lower-benefit
plans for young adults who were trying to
lure. This is largely about getting them to help
support the rest of us.
Another target market is voluntary benefits.
Its one thing to make employers offer a
Section 125 pretax payroll deduction plan. These
part-time workers, and others who have been left
out of the contributory scheme, arent necessarily
highest on employers priority list. Theyre
not necessarily plugged into the media. Its
a retail battle to find them and get them to take
advantage of what is actually an over 40 percent
government subsidy. With an average, marginal
federal tax rate of 28 percent, the tax subsidy
for employee provided insurance, as the Manhattan
Institute people know, is huge in Massachusetts.
The total tax subsidy on average for the individual
who shifts a dollar from wages to premium is 41
percent, plus the employer makes 7.65 percent
on that deal as well. So thats another target.
The small-group market is the third target.
We make shopping easy, and I have lots of grandiose
visions of fancy things we can do. We have a very
pedestrian website, yet it is virtually universally
applauded as a breakthrough. Its really
a commentary on how badly the market functions
in health care, where people dont have information
on the products and the prices available to them.
You put in three pieces of informationage,
size of household, and zip codeand we have
forty-two options for you, approved by a competitive
bidding process. We make it easier for you as
a shopper. You may want no cost sharing and the
highest premiums, or more cost sharing and a lower
premium. People can see the three lowest-priced
options side by side and a comparison of network
We have an estimated commercial enrollment for
January 1 of 100,000. Twenty thousand are coming
through us, but were also moving the rest
of the market. The health plans themselves are
now trying to imitate us by offering more options.
The biggest health plan virtually copies our website,
which I just said was pretty pedestrian.
I think weve had some impact, and were
doing about as well as you could expect. There
are tough problems coming our way, so wish me
well. Thank you.
MR. EDMUND HAISLMAIER: Thank you very
much. This conference applies the typical formula
for addressing the topic of health reform. It
is focused on the problem of the uninsured and
the subsidiary issues of cost and access. However,
those are really symptoms of the larger problem
we must address if we are to significantly improve
the health system.
I would argue that the better starting point,
not only for developing an effective set of policies
and reforms, but also for reaching broad agreement
on both goals and methods, is to ask the question,
How do we improve the value proposition
in health care? Value is the
expression of the relation between cost and benefit.
I think we can all agree that at both the societal
and the individual level we dont seem to
be getting good value in our health system.
When we consider not only the number of the uninsured
but also the wide variations in treatment costs
and outcomes and the resulting escalation in health-care
spending, we get the sense that we are either
spending too much for what we are getting out
of the system or were not getting what we
should be for all the money were spending.
Viewed from this perspective, we can quickly see
that seeking and providing better value
that is, more and better for lessseems to
be well down on the list of factors motivating
decisions in our current health-care system. Rather,
both current market competition, as was discussed
in the previous panel, and government regulation,
as was also discussed, seem focused on doing more
at higher cost, and simultaneously constraining
costs by doing less. The single most effective
way to control health-care cost is to not treat
people. Weve mastered that not only in the
public but also in the private sector, as has
everyone else. And if you must treat them, dont
pay the provider. That too we seem to have mastered.
Where all this leads us then is to what is now
a growing debate about how to ration or allocate
the benefits of new medical technologies to keep
the total cost under control. Now if this strikes
you as similar to the dynamics of government-administered
single-payer systems, youre right. The reason
is that both our system and their systems are
payer-centered. We just have more payers than
they do. The result is to produce what Michael
Porter and Regina Herzlinger of Harvard Business
School talk about as zero-sum competition. That
is competition centered on finding ways to shift
cost onto somebody elsegovernment, insurers,
providers, consumers, employers.
In short, the health-care system is a trillion-dollar
game of hot potato. In a recent visit to Anchorage,
I encountered a slogan of a local business that
summarizes a common practice in our health-care
system. The slogan was, We cheat the other
guy and pass the savings on to you. In contrast,
what would we think of as a slogan for a value-maximizing
system? Let me suggest, We do the best job,
at the best price, of keeping you healthy, and,
if you are sick, of getting you the best treatment.
A value-maximizing system creates competition
at the individual patient and disease level. This
is Michael Porters point. Who does the best
job of treating this condition? Who will do the
best job for me, given who I am and my preferences,
not just my illnesses?
The key to getting that result is to shift from
a payer-centered system to a consumer-centered
system. The key characteristic of a consumer-centered
system is that it is the consumer, not the employer
or the government, who controls the dollars and
picks the plan that best suits him. Consumers
also have a regular opportunity to choose a plan
without medical underwriting, and thus transform
what is a sellers market into a buyers
market. In this kind of system, the role of the
government and employers becomes assisting the
consumer with financing that arrangement. The
government has a role in setting the basic rules
and organization for the system, but the plans
and providers must compete on value in order to
get the consumers dollars.
Do we have experience with this? The answer is
yes. Professor Herzlinger points to the Swiss
system, which works very much like this. We often
point to the Federal Employee Health Benefits
Program, covering 9 million Americans, including
300,000 retirees who have no Medicare because
theyre in the old federal civil service
system. Every year they get a chance to pick the
plan, and the employer doesnt. In this case
the federal government doesnt even go so
far as the Massachusetts Connector in determining
which plans are allowed in. Its pretty much
any willing plan that meets basic standards. As
the president of the National Association of Retired
Federal Employees says, There are no bad
plans. There are just plans for different people.
What are the results? Despite a much older workforce,
it turns in a consistently better record in cost
control and patient satisfaction than private
coverage in the employer market. When you adjust
for differences in benefits, it does a better
job than Medicare in controlling costs. They had
drug coverage for decades at FEHBP, because you
wouldnt be able to sell a plan without it,
but nobody told them to put it in there. It took
an act of Congress and three attempts over twenty
years to get it in Medicare. Two years ago, the
average premium increase was 1.8 percent; it was
just about 2 percent this past fall. So we have
some successful models.
Can a state engineer such a transformation in
its markets? Here are four ways a state could
One, the state, using its powers to regulate
insurance, creates a consumer-choice insurance
market for as much of the states population
as possible, with a level playing field for insurers
and as much latitude as possible for insurers
to vary the design of benefits.
Two, the state transforms as much of its existing
spending on health-care services as possible from
a provider-centered system, where the relationship
is between Medicaid and the doctor or hospital,
to a consumer-centered or patient-centered premium-support
system, where public dollars are used to buy the
disadvantaged into the system.
Third, the state needs to create and apply a
market-wide risk-adjustment mechanism to address
some of the issues that were mentioned on the
previous panel, such as the disparities between
sick and healthy. In this case, New York is a
little closer, because its an inclusive
mechanism; you dont put the sick people
off in a corner and say, Thats all
you get. [Insurers] would have to compete
for the sick people as well, and the sick people
would have choices leading to more specialized
coverage and the best treatment for diabetics
or for cancer patients. Right now, if youre
good at that, you dont want to tell anybody,
because [the sick people would] all come to you.
But for all of this to work, you have to have
a backdoor mechanism that transfers money from
people who are healthy and are buying cheaper
premiums, based on some other factor like age.
Where New York goes wrong is expecting that the
money should come from the taxpayer, rather than
a pool throughout the whole statea back-end
risk-transfer reinsurance pool.
Once youve done these first three things,
remove any remaining regulations or subsidies
that protect providers or plans that fail to deliver
better value to patients. Congress solved the
problem of the uninsured in this country by mandating
that hospitals treat them. But the hospital goes
broke doing it, so we subsidize them, and we then
prevent competition. We [get in the way of], as
Regina Herzlinger says, the people who focus on
doing the best job at the best price. In other
words, we take the only people who are focusing
on value and we cut them out of the market to
prop up the other people. Isnt that kind
of backward? First you have to fix the market.
Once youve done it, there ought to be some
hospitals and doctors that go out of business.
The significance of Massachusetts is that it was
the first state to do the first two of these four
things, and they did so in a limited fashion.
Any other state can apply these basic concepts
and principles, but they will have to tailor them
to their own unique circumstances. States can
also learn from some of the details in Massachusetts
because it was a prototype, and with any prototype,
you learn to do things better in the second or
One thing we discovered in moving away from a
payer-centered system to a consumer-centered system
is that when you look at the data on the uninsured
and coverage patterns, the vast majority of people
who experience uninsurance are in and out of coverage.
Let me leave you with the thought that the data
suggests that nationallyand this will vary
by stateabout 40 percent of the people who
experience uninsurance are most of the time insured
and above 200 percent of poverty. If we move to
a system with the insurance attached to the person,
instead of the job, about 40 percent of your problem
might simply go away with no new spending. That
is a message that attracts a great deal of interest
in bipartisan state legislators around the country.
Thank you very much for your time.
MR. LEN NICHOLS: Im going to discuss
markets, mandates, and Medicaid. Ill start
with markets because I might be the token member
of the center left on the panel. Ill just
say Ive come not to bury markets, but to
praise them. In fact Im a big fan of markets.
I spend most of my day job actually trying to
make markets work better.
And I will point out a couple of optimistic things.
One, if you look at all the presidential candidates
proposals, only one is actually anti-market, and
that is Kucinichs. I dont know if
this will pass as news in this group, but Kucinich
is not going to win the nomination. And so, from
the point of view of those of us with scar tissue
from various state and federal struggles, it is
heartening to see how many Democratic candidates
have embraced some form of market competition
as the centerpiece of their proposal.
The key here is: How do you make markets work
for everybody? How do you make markets for all?
And I would certainly bow to Massachusetts as
a catalyst. Theres no question in my mind
that we wouldnt be having the conversations
were having in Colorado, California, Utah,
and even Washington D.C. without Massachusetts,
where you had two very interesting factors come
together. You had a Republican presidential aspirant
willing to use the word all it
hasnt been since Richard Nixon that this
was trueand a Democratic legislature, with
the exception of California, willing to accept
the word limit. That was an appropriations
bill, not an entitlement. With this we can work
out a bipartisan compromise, and thats what
everybody else on this stage thinks. But I couldnt
agree with Jon more that this cannot be done,
and should not be done, on a 51 to 49 [basis].
In making markets work for everybody there are
always going to be tradeoffs and winners and losers.
But whats interesting to me, as I look in
California, Colorado, and Utah, is that theyve
all come to basically the same conclusion: Youve
got to make the individual market and the small-group
market function far better, and you have to have
mandates. Yes, mandates are going to be what make
markets work better.
Let me just say a little about the differences
in these states and then well get into why
I think the mandate case makes sense. California
is the bluest legislature on the planet. Its
actually not correct to call their legislature
rank and file Democrats; theyre more like
Trotskyitesthey take the unions talking
points and go off and make their speeches. There
is leadership there, thank God, and it is at the
top. They do have power and wisdom and a few sticks
and carrots of their own. I think there will be
a deal. California has also elected Republicans
to the legislature, and anything Grover Norquist
puts forward they will sign. You could have a
million Al-Qaeda lined up on the Oregon border
and they would not raise their own taxes to defend
themselves. They would send public school teachers
out to do the battle. They will not raise taxes.
It turns out that in California the only elected
moderate in the whole state sleeps in Arnolds
bedroom, and this turns out to be useful because
Arnold is a big guy and hes hard to ignore.
In fact, he is smart and, believe it or not, he
gets it. It was hard for him to get to the philosophical
place of crossing the Rubicon and saying, You
mean a mandate is necessary? But he got
there, and in a way that makes a lot of sense.
Whats going on in Colorado? There you have
an almost perfect purple statevery slight
[Republican] R majorities before, very slight
[Democratic] D majorities now. It has the full
human family in the legislaturethey are
all representedand they have an awareness
that to do something serious about health-care
reform theyre going to have to go to the
people and ask permission to raise taxes. Im
not sure whats wrong with their constitution,
but the legislature doesnt have the authority
to do that. In my simple, scar-tissue ridden view
its useful because it means their entire
process of talking about what they might do has
been done in the public eye, with the intention
of making sure all major stakeholders are at the
table and both parties are indeed deeply involved.
What they have right now is a commission made
up of folks across the spectrum who say youve
got to have mandates to make these markets work.
And finally, on Utah, I got a call from them
in mid-May, and they said were coming to
Washington and would you meet with us. I said
sure. I told them that when I do these sorts of
conversations I usually insist on its being bipartisan.
They said they had some Democrats in Utah, but
they tend not to bring them to Washington; theres
no real reason to because they dont really
have any power. And so I met with them. Utah has
now been working for four or five months. Utah
wont have a public process. Itll all
be behind closed doors. Jon joked about Massachusetts
being center-left. Utah is right of center to
far right, but those guys get that the business
community is paying for the uninsured right now.
You may not know it, but Utah has exactly the
same uninsured rate as the nation as a whole.
And to be blunt, the chairman of the United Way
board, who happens to be the owner of the biggest
bank in Utah, is not happy about paying for the
insured right now. He wants to figure out how
to buy smarter. To make those markets work in
Utah, as in California, Colorado, and the nation,
youve got to have mandates.
I submit to youand this is extremely important
politicallymandates are required to make
everyone pay their fair share. The panel this
morning made clear the uninsured are quite a diverse
population, but the poster child tends to be the
low -income population. Actually, at least 10
to 20 percent, maybe 30 percent, of the uninsured
are fairly high income and could afford to buy
insurance now and choose not to. Those are the
free riders that Governor Romney started talking
about early on, and theyre not paying their
share, and their costs are also being shifted
to the rest of us, and its an absolutely
pure public finance principle to make them pay
their fair share.
Second, and this is maybe the most important
technical point, requiring people to buy enables
your insurance market to work far more efficiently
and fairly. Ed talked about the adverse selection
problem. The Blue Cross meltdown in New York is
a perfect example of how trying to impose excessive
regulations in the absence of a mandate is a stupid
idea because when you do that, you raise the premium
for the healthy and they play roulette and dont
buy. But when you have a mandate, you make the
healthy buy. You reduce the fear of adverse selection
sufficiently, and you can get insurance consumers
to accept rules like age-rating.
At the Utah discussion, probably the single most
conservative human being Ive ever sat next
to for six consecutive hours blurted out, about
four hours in, Okay, I get it. We have got
to do this. But man, do we have an education task
in selling the mandate to our people!
But I would submit it is a venerable philosophical
position to oppose a mandate. It can lead you
to an analytically defensible health policy. Doug
Holtz-Eakin is going to be anti-mandate and explain
why. In fact, McCains plan may be the best
Republican plan. However, if you oppose mandates,
what youre basically saying is you are against
market-based solutions to solve the health-care
problem. It doesnt say youre not going
to make improvements, but youre not going
to solve it.
Everything weve talked about in this panel
on solving the health-care problem means buying
smarter across the board. Were going to
need to turbocharge incentives for the consumer
and provider to make this work. Markets are essential,
but you cant get an insurance market to
work unless you have rules to purchase and requirements
to buy. It doesnt have to be one-size- fits-all.
I totally oppose that. What I recommend is you
pick an actuarial value target and allow the market
to vary products based on that. The target probably
has to be a scaled down packagemaybe even
more scaled down than the Massachusetts package.
In Utah it will be even more scaled down, as it
should be. People have different views of affordability.
But youve got to have a target and force
people to buy.
The third plank is Medicaid. Watching governors,
state legislators, and policy people in the various
states and Washington, talk about financing, as
Ed knows, is the least fun day in all these discussions.
It takes about fourteen milliseconds for the governors
to figure out they have to increase this Medicaid
batch, they have to use this Medicaid lever.
As Jim Tallon said, in New York they discovered
the federal government would pay for half of this.
If a governor wants to expand coverage without
hitting the taxpayers too hard, he has to maximize
that federal leverage. Thats why every states
thinking about this proposes taking kids to 300
percent of poverty under SCHIP, taking adults
up as well. Medicaid is the financing lever. I
agree with Jon completely: The best thing is to
reform it by using the tax system. Were
spending $180 billion now. Thats enough.
Give me $180 billion and Ill solve the problem
and take Ed to lunch.
But to do that, youve got to have federal
government involvement, and that makes my last
point. States cannot do this on their own. If
Massachusetts, California, Colorado, and Utah
work it out, there will be a huge federal role
in making all these financial packages possible.
I submit to you that the SCHIP battle we just
had is instructive, depressing, and, at another
level, hopeful. What you had was a bill that engendered
18 eighteen Republican senators voting yes,
enough to override the veto, by the way. That
is the most bipartisan piece of legislation since
World War II. Forty-four Republicans voted yes
in the House. The White House chose to veto it,
but look at Republican support for that scaled
This is not a partisan struggle between Democrats
and Republicans on how to use public and private
markets together to cover children. This is a
civil war within the Republican Party over what
federal policy should be on health care in general.
Thats the rhetoric the White House is throwing
out. [Charles] Grassley, ranking member of finance
from Iowaa good, earnest, Midwestern Republicanis
unhappy with the White House for pulling the rug
out from under him, when what he thought he was
doing was solving a problem. My simple point is
that the Republican civil war will play itself
out, and we will come back and have a bipartisan
conversation going forward. Those eighteen who
voted for SCHIP will vote for comprehensive reform
in 2010 if were lucky. Thank you very much.
DR. DAVID GRATZER: Sir William Osler was
one of the most important Canadian physicians
in the nineteenth Century. He crossed the 49th
Parallel and became arguably one of the most important
American physicians of the twentieth Century.
Sir William Osler has many achievements to note.
Perhaps foremost is his medical textbook, used
for sixty years after its first publication. He
was also the founding dean of the Johns Hopkins
School of Medicine.
Osler, besides being a tremendous writer and
a keen intellect, was an extraordinary clinician.
Most of the patients he treated actually were
elderly. He was a geriatrician before medicine
really subspecialized. Oslers writing is
as lucid as it was a century ago, when he wrote
it. Osler observed, with the best of intentions,
that doctors prescribe medicines and treatments
that make their conditions worse. Osler would
see patient after patient and take people off
medicine, and his patients tended to do better
as a result.
I had my own Osler moment when I saw a patient
who had bipolar affective disorder and had been
prescribed lithium and then had seen a couple
of internists and a couple of family doctors who
prescribed a battery of other medicines that,
among other things, undermined kidney function.
I simply took the patient off a slew of meds.
Were talking today about New York and the
uninsured. To take a step back, I cant help
but feel that, after decades of reform, what New
York needs is less interventionan Osler
moment in public policy. Before I talk specifically
about New York, and solutions one might be able
to find in other states, I want to mention two
major ideas Im not going to discuss.
Im not going to talk in a very substantive
way about moving away from an employer-based health
insurance model. We have a system that no one
in the Western World has. I dont think anyone
on our panel, left, right or center, would design
an employer-based system today. [It is a benefit
that] arose in response to wage and price controls
in the Second World War.
It worked relatively well in the day when you
were born [in Hershey, Pennsylvania]you
went to work for the Hershey company, your kids
swam in the Hershey swimming pool, you stayed
in the Hershey house, and eventually you retired
on the Hershey pension plan. That doesnt
work in a labor force that is constantly changing
The second important idea that Im not going
to talk about is what were really doing
about uncompensated care in the United States.
Ed talked about money that gets spent on hospitals
rather than on patients. Not unlike the old welfare
system, weve created a bureaucracy to help
people, instead of helping people directly.
I am not talking about those two central points
because they would require a Washington-based
system. If you favor moving away from an employer-based
system to a single-payer system, you might like
the Heritage model of tax credits or President
Bushs idea of a standardized tax deduction,
which is my position.
In New York, unfortunately, rather than taking
a careful look at other states for new ideas,
were going to look at three or four decades
of reform and simply push in the same direction.
We now spend more in New York on Medicaid per
capita than any other stateabout double
the national average spending more than Texas,
Pennsylvania, and Florida combined. And yet one
finds that the percentage of uninsured, and its
very complex and difficult to make such a comparison,
is only slightly lower than the national average.
The big initiative of Governor Spitzers
was simply to expand childrens health insurance,
which makes for great photo ops. I like children.
I think giving children health insurance is splendid.
But expanding it into a middle-class entitlement
is problematic. The only reason it works is that
children are cheap to insure. But doing that doesnt
really get at fundamental problems. I do applaud
reforms the governor has made in other areas.
What are the fundamental problems, and what are
the ways we can address them? Let me speak in
non-ideological terms. I think we can agree that
if we want to help the uninsured, were going
to have to do four things:
First, were going to have to have a good
market for individual insurance. Weve spoken
before about the young and invincible, and one
shouldnt forget how many uninsured Americans
are like that, despite their depiction on the
show ER or in Robin Cook novels. You
find about 50 percent of the uninsured are between
the ages of 18 and 35. And theyve decided
not only do they not need to wear a seatbelt because
theyre never going to get into a car accident,
they dont need to buy health insurance because
its costly and theyre never going
to get sick.
Second, we need a robust market for small employers.
Millions of Americans are employed by mom-and-pop
grocery stores and restaurants. We want to make
it attractive for those small businessmen, the
engine of creativity and innovation of the American
economy, to offer health insurance.
Third, we need a smart Medicaid program that
does more than spend a lot of money or cover a
lot of people. We need to spend the money intelligently
on health rather than health care. We should do
it in such a way that its easy for people
to get on the Medicaid rolls, but also get off
the Medicaid rolls, so that there isnt a
Medicaid trap the way, for instance, there was
a welfare trap not long ago.
And the fourth thing I think we can all agree
on is that we need an open and competitive market
for health services. You should have some knowledge
of your doctor, not simply about the pricing that
the doctor offers, but also some knowledge of
how good a physician he is and so on.
Some of you have bigger ideas in mind like single-payer.
But I think we can agree that right now, those
are the four things we ought to pursue in New
York State. And despite the fact that I think
we can all agree on these four worthy goals, were
gunning zero for four in New York State. The reality
is that the individual market is extraordinarily
dysfunctional, expensive, and regulated, pricing
many people out of the market.
eHealthInsurance did a study a couple years ago,
which I wrote about in the New York Post. If you
were a family in Kansas City in relatively good
health and sought a policy for your family of
fourtwo adults, two childrenyoud
pay about $171 a month. In Long Beach, California
its about $180 a month. In New York City,
its $1,730 a month. Obviously there are
differences among markets and so on. Still, youre
looking at costs in New York that are multiples
of costs in other states.
Part of the reason for that is the mandates.
In New York State, you just cant buy a bare-bones
policy. You have to buy a policy that covers off-label
drugs, surgical second opinions, and midwives.
All those mandates drive up costs. Guaranteed
issue and community rating were added with the
best of intentions, but they simply dont
work well within a health insurance model because
they dont work well with any insurance model.
If we had guaranteed issue and community rating,
slightly modified, for homeownership insurance
or tenant insurance, you could buy a policy after
your apartment had caught fire.
Second, the small-employer market is dysfunctional.
Its costs are at least 15 percent higher than
the national average. The number of carriers involved
in New York State is small compared to what it
is in, say, Illinois or other states, and this
limits peoples options and limits competition.
Third, Medicaid is now approaching $48 billion,
a vast sum of money without as much to show for
it as we would hope. Because the individual insurance
market is so problematic, and Medicaid isnt
particularly well thought through, it has become
a trap. Many people stay on Medicaid because they
couldnt afford health insurance if they
left its rolls. Exactly the opposite of what you
And finally, we want a competitive and open market
for health services. New York is just as bad as
every other state. There is little price transparency,
never mind the lack of attempts to look at value.
What are some ideas one can find in other states?
Here are some ideas I like:
South Carolina has suggested that the cost of
any future mandate would have to be studied before
the legislature would approve it. There are a
couple of states now, none I can name off the
top of my head, that have suggested that if you
want to add a mandate to health insurance, you
need approval not in one but two sessions of the
legislature. I would suggest that the better approach
is to look at what states like Colorado and Florida
have done. They allow people to buy a bare-bones
policy. For the most part, if you want a high-deductible
plan, you can simply buy a high-deductible plan.
In other words, we ought to deregulate the individual
insurance market. There are people who are chronically
ill who would have difficulty affording an insurance
policy, but other states, like Massachusetts,
focus aid specifically on those individuals, rather
than distort the entire individual insurance market
to address their needs.
What to do about the small-group market? I dont
have much to add to the discussion about the Commonwealth
Connector. I think thats a worthwhile project.
As you probably gathered from the earlier presentations
by Jon and Ed, there are also some tax fairness
provisions that I think New York would be well
advised to plagiarize.
Medicaid is a huge issue deserving a conference
of its own. Were focused on the uninsured
today, so Im going to focus on plans that
are relevant to that issue.
What do I mean by getting away from the Medicaid
trap? Florida and South Carolina have exciting
initiatives. Medicaid has a menu of private competing
health insurance options in two counties in Florida.
In South Carolina, there is a health-savings account
type of plan. In both states, younger, healthier
people who might be on Medicaid rolls just transiently,
are able to save some money so that when they
leave those rolls they are able to better afford
health insurance, getting around that Medicaid
What should one do about transparency and pricing?
Some experimentation is worthwhile. In Florida,
Im excited by the disclosure of prices thats
now required. Im interested in whats
going on in Wisconsin with regard to hospital
pricing as its being discussed right now
within the legislature.
Ultimately, whether or not you believe in whats
going on in Massachusetts or in other states,
youre going to have to accept that more
of the financial burden is going to fall to the
individual. And providing them with basic information
is the key. New York does a nice job, incidentally,
with its report cards on cardiac surgery. It is
not enough simply to expand Medicaid; you have
to arm people with information and reform other
sectors of the economy.
Im a psychiatrist. I know that often you
dont come up with a perfect solution, but
sometimes you come up with a functional solution
for a patient, and that ought to be your goal.
We can do far more for the money were spending.
Thats not simply the good dollars-and-cents
analysis; its the compassionate thing to
do. Thank you.
MR. HOWARD: Id like to thank the
panelists for those tremendous presentations.
I think people might be surprised by how much
agreement there is on the panel, at least on some
key issues relating particularly to insurance
I wanted to pose one or maybe two questions to
the panel. An article in the Wall Street Journal
back in July touched on the problemwhich
is certainly not unique to Massachusettsof
a shortage of primary-care providers in the state.
One of the trends weve seen as health-care
costs have risen is public and private insurers
squeezing reimbursements, particularly for primary-care
providers. At the same time, states want to expand
access to insurance and primary care. Another
issue the panel didnt dwell on is the problem
of costs and cost shifting. My impression is that
covering the uninsured with a couple of mechanisms
might not be all that hard, but lingering in the
background is this problem of cost, which is creating
other headaches. Perhaps, starting with Ed, you
could address those two issues.
MR. HAISLMAIER: I attempted to lay out
my view that we have a system thats all
about cost shifting at every level, with every
player. The result of that system is it costs
more and delivers less. And thats fundamentally
what needs to be reversed.
With respect to the specifics of the primary-care
providers, this is actually a much bigger problem
in a number of states. Yes, its partly driven
by reimbursement. Its also partly driven
by the way we skewed the system of medical education.
Let me comment on the first one, and this is
where I think Len and I would agree on the elements
but disagree on the sequencing. My standard for
evaluating state reforms is that if youre
talking about mandates and money first, youre
missing the point. If youre talking about
mandates and money after everything else, then
youre doing what I would recommend. There
are enormous amounts of money sloshing around
in this system, but we havent got a clue
how were spending it.
According to a national study, for every 100
Medicare patients, there are collectively about
forty-seven visits to the ER on average in a year.
The comparable figures for the uninsured are about
44 per 100, for the privately insured 20 per 100,
and for the Medicaid population its 80 per
100. When the data suggests that your Medicaid
population is using the ER at twice the rates
of the uninsured, and four times the rates of
the privately insured, you need to rethink what
youre doing before you go to Washington
to ask for more money.
When every legislator has to deal with the inevitable
Medicaid crisis, theyll face three ugly
options: throw people off the rolls, cut the benefits,
or pay the providers less. When you pay the providers
less, you [end up with] fewer providers, so patients
go and use the ER. Youre shunting these
people off to the single most expensive place
on the planet to get medical care. Until you tackle
that, you really wont get a handle on it.
MR. HOWARD: Jon, do you have any thoughts?
MR. KINGSDALE: Yes, its an interesting
conjunction of issues that you pose, Paulthe
shortage of primary care and the cost issue, which
I dont often hear conjoined, but Im
glad you did. Lets start with cost. The
dirty secret of our health-care system is we use
fewer drugs, we see the doctor less often, we
spend fewer days in the hospital, [but] were
actually not that much sicker than a lot of other
countries that have much better smoking rates
and alcohol consumption rates. But it costs us
two to three times as much for a unit of service
here because were slopping around in money
like none of the other OECD Countries. A day in
an acute-care hospital in the U.S. costs four
times as much as it would in the other ten OECD
countries, not counting Japan, because its
not apples to apples.
So how does that apply to physicians and primary
care? The primary-care shortage is a conjunction
of our mushrooming demand for care and the imbalance
in the way we pay specialists and chronic-care
We clearly ought to have a system that pays specialists
maybe one-and-a-half times what they make in Canada,
Britain, France, Israel, or Germany, rather than
three times what they make in any other civilized
country, because they do have extra medical school
costs. We should pay primary-care physicians maybe
twice what they make in other countries because
in America we want to reward people. So I believe
the way to contain costs and increase primary
care is some kind of a rational pricing system
so that when folks go into residency programs,
they dont feel they have to choose dermatology,
cosmetic surgery, orthopedics or some other very
To deal with increasing demand, non-physicians
need to provide primary care. It can be done more
efficiently and effectively by clinicians who
are not trained for seven to ten years, so that
those who are that highly trained can concentrate
on something more interesting then otitis media
MR. NICHOLS: I agree with my friend Ed
that you have to do cost and coverage at the same
time. The good news is these governors get it.
In Schwarzeneggers proposal, one of the
big planks is to increase Medicaid payment rates,
because California is notorious for having very
generous income-limited eligibility but it pays
providers roughly thirty-three cents on the dollar.
For OB-GYN it is lower than twenty cents, and
so patients go to the ER to find somebody that
will treat them when theyre pregnant.
So you have to raise Medicaid payment rates to
rationalize the system. Im for making sure
we get coverage along with cost because it concentrates
the mind. If you make a social commitment to cover
everybody, you have to worry about cost. And Ive
watched enough in Washington and the states to
know that if you dont force them, they will
avoid it, and so Im in favor of turning
up the heat on the moral case and getting the
commitment. Then well get serious about
how to deal with costs.
The way to move toward [more available primary
care] is to do it in a market-based way. A number
of different little experiments are popping up:
pay primary-care providers for a consultation
or help patients navigate the system; spend time
with patients to learn what their problem is or
take longer histories; pay primary-care providers
more for evaluation and management; give patients
a premium reduction if they sign up for a medical
home; and get people into a primary-care setting
where they can get well-managed preventive and
chronic care. That kind of incentive is part of
one of the big proposals in Congress. Senators
Ron Wyden from Oregon and Bob Bennett from Utah,
who are not typically ideological soul mates,
have come together on this. Youve got to
pay primary-care doctors more, and youve
got to pay them for what they do.
DR. GRATZER: On Medicaid, historically
speaking, the policy, as Ed pointed out, is to
control price. The people who are the easiest
to squeeze at the provider end are those who do
primary care. Is that what you want? A young asthma
patient who grows up in certain parts of Manhattan
would [usually] have access to a respirologist.
Unfortunately, if hes on Medicaid, Im
not sure he would because of price and wage controls.
Wouldnt it make more sense if we had a primary-care
doctor seeing these patients, rather than the
HOWARD HUSOCK: Douglas Holtz-Eakin is
currently a senior fellow at the Peterson Institute
for International Economics. From 2003 through
2005, he served as director of the Congressional
Budget Office. Prior to that, he served as chief
economist of the presidents Council of Economic
Advisers. In both positions, he was widely recognized
for his thoughtful views on fiscal policy generally,
and specifically on health care and entitlement
programs, which are certainly our meat here today.
He is the former Trustee Professor of Economics
at the Maxwell School of Citizenship and Public
Affairs at Syracuse University, where he chaired
the economics department, and was also associate
director of the Center for Policy Research. He
currently serves as the policy director of John
McCains presidential campaign. Please join
me in welcoming Douglas Holtz-Eakin.
MR. DOUGLAS HOLTZ-EAKIN: Thank you very
much for the chance to be here. This is obviously
a very interesting moment for the issues of health
care and health-insurance reform. I confess I
am not one of those people who came out of the
womb deeply interested in health care. But a couple
of things happened to me along the way. On December
31, 1990, I had a right renal autotransplant.
They take your right kidney out, you donate it
to yourself, and then they put it on your left
side. And I was lying in my hospital bed after
[the procedure] and reading the New York Times,
and it said that 50 percent of the population
couldnt change jobs because of their health
insurance [situation]. And I thought, wow, am
I ever going to go to another job, or is this
So I started doing a little work on health insurance,
and then I made the mistake of accepting a job
at the Congressional Budget Office, where all
you do is health care. There are some side issues,
like the military and taxes, but all I did was
health care. So I started thinking about it a
Then John McCain asked me to work on his campaign,
and so I resigned from my nice little think-tank
job with the Council on Foreign Relations and
went to work for the campaign. In July, money
got tight, and for the first time in my life I
got fired, and I was unemployed and uninsured.
It was shocking. My son had finally gotten out
of school and had a job, so I thought maybe I
could go on his health insurance. But I didnt.
So I started thinking about different issues
associated with [coverage]. Individual mandates
for health insurance are a big part of that debate.
There are many Democrats who have proposed it.
Senator Clintons proposal has it, Senator
Edwards has a proposal for an individual mandate,
Barack Obama has a partial individual mandate.
Its not an exclusively Democratic issue.
Governor Romney imposed an individual mandate
during his tenure in Massachusetts. There are
senators of stature on the Republican side who
have health-reform plans that include individual
Ive talked to a lot of people who are very
interested in pursuing reform in the United States,
and they come down on different sides of this
issue. I thought I would think out loud today
about individual mandates because we rarely hear
much public discussion about how you decide whether
to have them. In the interest of full disclosure
I should mention that Senator McCains health
reform plan does not include an individual mandate,
but the following remarks are my own.
Ill give away the punch line, which is
that I dont think there should be an individual
mandate. And I want to walk you through how I
came to this conclusion.
Why not a mandate? General principles started
to leave me unable to sleep when I thought about
proposing an individual mandate. Principle number
one was freedom. Its literally that simple.
The core of what I believe to be the uniqueness
of America is that it is a place that offers an
opportunity for the ceaseless pursuit of personal,
political, and economic freedom. And that has
carried this country for over two centuries, and
it is something that we should be proud of and
embellish and not diminish. Any intrusion on that
as a matter of public policy should be done not
casually but with a great deal of thought.
Theres a corollary to that, which is that
a federal mandate steps on the states toes.
There are cases, obviously, where federal preemption
of state authorities has proven to be a sensible
way to go. But going to a federal mandate for
individual health insurance is one of those policies
Id want to be really convinced of first.
The second general principle that I appeal to,
and its still a vague notion, is [a wariness
toward] interfering with market flexibility. There
isnt yet a rock-solid, ironclad case, but
there is a lot of suggestive evidence that the
United States has entered into a period of great
moderation in its overall economic fluctuations.
Regardless of whether we are now entering into
a slowdown that ends up with the dreaded r
word attached to it, weve had, since 1985,
only two mild recessions. Weve been in recession
much less over that period than in comparable
periods prior to it. I think that can be attributed,
to a great extent, to the kinds of deregulatory
efforts that were undertaken in the 80s,
the globalization efforts that followed on that,
and the broad use in public policy of flexible
market mechanisms such as the auctioning of permits
under the Clean Air Act [to control emissions
causing] acid rain.
Those flexible mechanisms should be interfered
with as little as possible. This is a slippery-slope
argument. I dont think an individual mandate
is going to cause a recession. But you should
always be careful before you pull the trigger
on something that reaches in and reduces that
kind of flexibility, because if you do it too
often, too casually, you undo something very special
weve benefited from.
Those two general principles stack the deck against
a mandate. But in the end Im not a philosopher;
Im an economist. Principles get me only
so far. I have to do benefit-cost analysis. So
I took out my spreadsheet and started thinking
of other reasons we might not want an individual
The first thing is that its a distraction.
It focuses on the wrong problem, in my view, which
is coverage, instead of focusing on health-care
spending. In my CBO days we discovered the Hubbles
constant of health care, which is that over a
variety of periods, no matter how you measured
it, health-care spending per capita outstripped
income per capita by 2.5 percentage points every
year for decade after decade. The number isnt
exactly 2.5 all the time, but there is this big
mismatch. Thats the premier problem in American
health care, because its the reason so many
people lose their insurance.
Many employers, who are basically self-insured,
have one problem, which is that their bill keeps
going up. They can pass some costs to their employees,
but they may or may not be able to pass all of
them, so they start dropping their coverage. Individuals
stop taking up coverage thats offered, and
it makes it harder for people to get alternative
insurance, whether it be individual market or
This causes great government programs to come
under tremendous stress. Look at whats going
on with Medicaid in some states. The outlook for
Medicare at the federal level is the premier problem.
Its important to focus on that problem,
particularly given the evidence accumulated by
people like this group that were not getting
quality commensurate with that kind of spending.
If we were spending all that money and were thrilled
with the outcomes, that would be one thing, but
were not, and I think a focus on an individual
mandate really misses the point. It focuses the
public on the wrong problem.
Theres also a dangerous follow-on to that,
which is, Suppose you just go do the mandate.
This is an unfair caricature of what went on in
Massachusetts, but to make the point, lets
say you impose the mandate but dont do anything
about the cost side. You have a mandate for people
to buy a product that they cant afford or
didnt want to buy to begin with. Youve
imposed this tax on them that will go up every
year. You might try to shift it around with subsidies,
but youve got a big tax on people that comes
from the mandate, because you havent dealt
with the primary problem. So deal with the problem;
dont lead with the mandate.
Then I started wondering what problem is actually
solved by an individual mandate. What I started
to ask was, What do people want to get out of
this? Number one, it is the quickest way to solve
the political problem of the uninsured. This has
become the report card for success in many settings.
And the quickest way to get it is to assert youll
have 100 percent of the people.
But that, of course, is entirely illusory. Youre
never going to get to 100 percent of the people.
So the real question is, Would the individual
mandate provide more effective coverage than an
It offends my instincts as an economist to think
the uninsured are remarkably heterogeneous. The
duration of their spells of uninsurance, their
health status, their income, and their employment
status are remarkably heterogeneous, yet we have
this one-size-fits-all solution. That almost never
works. People assert that mandates will control
costs. Theyll say you need to cover everybody
to control costs because it would stop this cost
shiftingyoure going to be able to
spread costs across more people.
Suppose we have about 50 million people, round
numbers, who are uninsured. Suppose we have a
mandate that means all those people have to have
insurance. And suppose you can get $3,000 out
of each of them, about a quarter of a $12,000
policy. I think thats an upper-bound estimate,
given what we know about these people, but suppose
we can do that. Youve just received $150
billion. Thats what you have to solve the
cost problem. One hundred fifty billion
in a two-trillion-dollar health spending bill
is about a year-and-a-halfs worth of cost
And then youre back to reality. [Another
way of looking at it] is it is going to cost you
about $150 billion to solve the uninsurance problem.
Remarkably, all the national proposals end up
with a $150 billion price tag at the start.
Theres also the problem that all the people
you cover might spend more, not less. The third-party
payer problem raises its ugly head, and we dont
know where that will end up. On the list of things
universal coverage is supposed to do, which is
cover everybody and control costs, Im unconvinced.
The geek communityIm a lifetime membersays
you have to get adequate pooling. We need all
these people in [because of] adverse selection
and moral hazard. But on the ground right now,
In the United States we dont have textbook
insurance markets where this mandate might actually
put everybody in the pool. We have the majority
of people in employer-sponsored insurance, where
most are self-insured, and thats the pooling.
And that really isnt going to change dramatically.
It would be stunning if the purpose of the individual
mandate, particularly to some of its strongest
proponents, was to push people into the individual
market, or the small-group market. There arent
robust insurance markets in the United States.
We need serious insurance-market reforms that
generate better competition.
Fourth on my list of problems that mandates are
supposed to solve is the fairness issue. Youve
got young and healthy people and theyre
not buying insurance, and then they wait till
they get sick and impose costs on everyone else.
Its just not right.
I thought, Is this really whats driving
our problems? I dont think so, because I
dont think people want to make that assertion
about the sick. I dont think they want to
make that assertion about low-income folks who
cant afford [insurance]. I dont think
its a problem with the elderly. The question
is how many high-income young people, only about
20 percent of whom dont have insurance,
have an acute-care episode and then free-ride?
The problem just doesnt look big enough
[to require] a big blunt instrument like the individual
mandate as the solution.
Theres another solution to this problem
that just proves Im an economist and have
literally no regard for human feeling and shouldnt
be allowed to give lunch speeches. Its the
solution that the market would deliver. Lets
let those [uninsured] people who free-ride go
to the hospital, get health care, and go broke.
Insurance is a financial product, and its
a financial product meant to insulate you from
the financial consequences of a health episode.
If these folks are trying to take advantage of
the financial product, they [may not] have to
buy it, but they dont have to walk out of
the hospital solvent either. Bankruptcy can solve
this, and if the word gets out that if you play
this game, then youre going to be bereft
and owing everybody for years and years and years,
people will buy insurance and the problem will
be solved. But thats the heartless economist
solution. Ive not really pushed that with
any political superiors. I dont think its
a campaign proposal.
What problems are you going to cause if you do
the mandate? Thats the flip side. You should
always worry about what could come out of doing
it. I think there is a very real set of problems
that could arise.
The mandate is a demand-side regulation. Thats
what it is, period. The proponents like to think
of it as a demand-side regulation in isolation,
but it doesnt stop there. Because if you
start regulating the demand side, and you have
a vision of the outcome, youre going to
have to start interfering on the supply side to
get things to line up where you want.
First and foremost, if you say you have to have
it, someone has to provide it. Youre going
to get play-or-pay provisions. Employers have
to offer this to you, or else. Or you have to
tell the insurers [to comply with] guaranteed
issue, and you go into the supply side on that
front. You start to go after the two pools we
have in the employer and non-employer areas and
tell them how to do their business.
Once you put it in the political arena, there
is no question that health insurance becomes a
political animal. What constitutes adequate coverage,
what benefits will be in the policyall of
those questions will now be determined by a political
market, not an economic market. And well
see an array of additional kinds of potential
mandates. And the last point is, once youve
made it a political football, the price is going
to be politically determined. Since most of our
health-care problems are reflected in the inadequate
pricing of things, I dont think thats
a good place to go. Youre going to create
worse pricing in a lot of ways.
I think back to what I believe was my most depressing
moment as CBO director. I was testifying in front
of the Senate, and someone asked me, What
is the right price for inhalation therapy in Alabama?
And I said, The fact that youre asking
that question reveals just what kind of trouble
were in. If you make that kind of
price-setting part of the political agenda, you
will have outcomes, I assure you, that you really
Moving into demand-side regulation leads you
to supply-side regulation. It doesnt mean
these markets will work betterthats
the idea in the textbook. We pool the risks, we
stop the free-riding, we do all this stuff. I
dont think the dynamics work that way in
a political setting.
Finally, Ive never really seen anyone,
with the exception of Massachusetts, lay out how
theyre going to enforce this. Enforcement
costs are real. We have other mandates. We have
the U.S. individual income tax, and enforcement
costs are a real part of that. The last time anyone
checked, the compliance cost, broadly defined,
for the U.S. income tax was $140 billion a year.
Thats a serious cost for the economy. To
somehow perceive the mandate as a costless intervention
understates its impact. We ought to be serious
about asking people who want to impose the individual
mandate how exactly theyre going to enforce
it: What will be the penalty structure; who will
do it; and what are the associated costs. If there
are young people free-riding today, some of these
same people who arent buying insurance probably
wont comply with the mandated costs. And
enforcement isnt going to be automatic by
One of the striking moments in my political activities
recently was looking at some polling data on Republican
voters in early-primary states. In that sample,
health-care reform was the number-one issue. Does
the next president have to change the health-care
system? Yes, absolutely. The individual mandate
will be perceived as a quick fix to the problem.
The question I have is, Is it durable as a fix?
If you believe its the right fix, will you
take care of cost so that its not just a
mandate to buy something you cant afford
or dont like? For those who are less enthusiastic
about it, as I am, what are the costs from the
point of view of our principles? What are the
costs from the point of view of the functioning
of health markets and the potential to make them
function better? What will be the cost of adopting
a policy that, in the end, wont meet what
we promised and disappoints the American public?
Ill stop there and take any questions you
MR. HUSOCK: Doug has done a masterly job
of anticipating objections that might be raised.
I was wondering whether Jon Kingsdale or Mark
Scherzer are still in the audience, since they
were both somewhat mandate-oriented in a panel
discussion this morning.
MS. BETSY MCCOY: Is your emphasis on cost
control misplaced? Perhaps many people would rather
have, instead of a third car or a third television
set, an extra year of life.
MR. HOLTZ-EAKIN: I tried to focus on one
little piece of the health-reform landscape. Theres
a completely different set of issues involving
the cost of care and whether its too much
relative to what you get. The U.S. system is characterized
by fabulous medical science, but in many cases
extremely low-cost, high-value opportunities are
underused, because we dont have a system
that channels dollars effectively.
The analogy is Medicare. Part A is for hospitals,
Part B is for docs, Part C is for insurers, and
Part D is for drug companies. Were making
sure everyone gets their money, but patients are
nowhere in there. We need a system that is coordinated
around the patient. And one that doesnt
guarantee a fee for every service or device but
rather pays for the delivery of high-quality care.
EDMUND HAISLMAIER: I dont necessarily
disagree with you about mandates, but the fact
is I cant drive my car unless I have insurance.
I dont see enforcement as the problem. What
I do see are some real problems at the federal
level, so I hope you can advocate some fixes there.
One possible fix is to give employees a portable
health-insurance voucher that is worth a certain
number of dollars and let them choose whom they
want to buy their coverage from and how comprehensive
it should be. Also, instead of giving deductions
worth different amounts to people in different
tax brackets, why not give everybody the same
tax credit, so that poor people get the same benefits
as rich people?
MR. HOLTZ-EAKIN: I want to endorse consumer
choice but not belabor the point. I think on tax
policy you are exactly right. One of my jobs at
the Peterson Institute was to answer questions
about how we get from here to the year 2030 without
going bankrupt. And a key part of that is a tax
formula of exactly the type that you described.
The key to making U.S. health care work better
in general is to put the money in the hands of
families. The way I would do that would be to
repeal the exclusion of employer-sponsored insurance
and provide a tax credit that is $2,500 for an
individual, $5,000 for a family, and available
for purchases in both the employer and non-employer
On enforcing the mandate: I didnt say it
couldnt be enforced. I hope there was a
little more nuance than that. I would like to
know how you will do it. We know that it will
be costly to get every last person. States that
have mandates on auto insurance dont get
100 percent compliance. Its not a black-white
issue. The issue is how costly it can get. We
can get pretty far with vouchers, tax credits,
and lots of other things that will reduce the
number of uninsured. The question is which of
them is more effective, and at what cost.
MR. HAISLMAIER: There were actually two
variants in Massachusetts. There was what then
Governor Romney proposed and then what the Massachusetts
legislature passed. What the governor proposed
was not a requirement that people buy insurance.
He said that if you dont buy insurance,
then the alternative is that you set aside money
so that we can be assured that you will in fact
pay your bills and that the providers will have
at least some initial money to go after.
MR. HOLTZ-EAKIN: So market-insure, or
MR. HAISLMAIER: Essentially, yes. What
prompted this question were your comments about
bankruptcy, because the governor said you could
buy a bond or set aside the money in an escrow
account paying interest. If you failed to do either
of those, the state would withhold any money it
owed you, like a tax refund, and set it up in
your personal account. The other thing he did
is propose to change the law relating to judgments
so that in the event you knew this wasnt
enough and you wound up in court, and there was
a judgment against you, there would be an automatic
order of wage garnishment against you, as happens
in child-support cases. So the creditor, the hospital,
or the doctor wouldnt have to go to court
a second time to go after you.
The legislature didnt buy that and put in
what John Goodman calls a play or pay
mandate, which is, You buy insurance or we fine
you. I would add that this was in the context
of other changes. For example, some of the pooling
arrangements that we rely on today, such as that
an employer wont get to participate if it
doesnt make eight out of ten of its employees
buy insurance, were being taken away. Id
like you to address the question of personal responsibility
versus [such requirements].
MR. HOLTZ-EAKIN: I havent thought
about this at all. But it seems to me that if
someone says you should buy insurance or self-insure,
and if you dont youll face financial
consequences, thats letting the market work.
Why do you need the governor proposing it?
MR. ALEX LUBARSKY: I went to a meeting
about two months ago where a New York senator
was present who said that health care in America
right now costs $1.6 trillion. A month later,
five U.S. senators said it was $2.3 trillion.
Today I hear that its $2.4 trillion, so
it seems to be growing by the week. If we take
a more market-driven approach, will it impact
the actual health and well-being of the nation?
MR. HOLTZ-EAKIN: A different set of health-care
and insurance markets should reward low-cost prevention
in ways that this one just doesnt. Medicare
is a prime example. Medicare does not pay for
prevention or diagnosis of diabetes. It does pay
for amputations, which is crazy.
We could have a system in which we did the low-cost
preventive thing and used technological innovations
we hear so much aboutyou know, a cell phone
that measures blood sugar level and sends it in
automatically so that you can monitor itbut
theres no financial incentive. Theres
a lot of talk about coordination of care, preventive
care, health IT for low-cost collaboration. But
theres no business model to make it happen.
MR. HOWARD: In conclusion, please join
me in thanking Mr. Holtz-Eakin for sharing his
reflections on the advisability of individual
insurance mandates. I would also like to thank
our panelists, our audience, and our co-sponsor,
the New York State Health Foundation, for helping
to make todays conference lively and thoughtful.