PAUL HOWARD: I am a senior fellow and
the director of the Manhattan Institutes
Center for Medical Progress. Id like to
welcome everyone here, on behalf of the Manhattan
Institute and our cosponsor, the New York State
Health Foundation. The Center for Medical Progress
encourages the development of market-based public
policies to promote medical innovations and
improve public health. We are proud members
of the New York State Health Foundations
Coverage Consortium, which is dedicated to expanding
access to more affordable insurance options
for New Yorks uninsured. As our own Tarren
Bragdon has pointed out in his Rx NY
report, it is critical that we have a healthy,
well-functioning private-insurance market to
ensure that scarce public dollars are reserved
for providing health-care assistance to our
poorest and sickest citizens. But in maximizing
help for the needy, we must also be cautious
that regulation of private-insurance markets
does not exacerbate the problem of the uninsured.
Our first panel will examine how state regulation
of insurance markets affects the affordability
of insurance, and the panel will suggest innovative
ways to make New Yorks individual direct-pay
market more responsive to the needs of todays
workforce, including the young, relatively healthy
consumers who may find themselves switching
jobs frequently and thus poorly served by traditional,
employer-based insurance options.
Our second panel will focus on the entrepreneurial
companies and physicians who are changing the
ways that patients interact with the health-care
system. Physicians are opting out of traditional
insurance arrangements while creating new formats
that promote a true medical home. Convenient-care
clinics are springing up in retail outlets that
offer rapid access to routine and preventive
care, complementing the primary-care system
and, one hopes, reducing the strain on our overburdened
emergency rooms. We have heard a lot over the
last month, particularly from the Dartmouth
Atlas of Health Care, on pricing disparities
in the treatment of chronically ill patients,
even among Americas best hospitals. Today,
well hear how some companies are finding
ways to arbitrage these prices and quality differences
in order to lower health-care costs and improve
patient care. Our second panel will conclude
by looking at how one state, Georgia, is trying
to cover more of the uninsured by leveraging
Our keynote speaker is noted Harvard Business
School professor and Manhattan Institute senior
fellow Regina Herzlinger, who will offer her
reflections on how to unleash innovation in
health-care markets. Regina has recently written
a book titled Who Killed Health Care?and
I think that her answer is that we have all
had a hand in the death. The first thing I think
that shell ask us to do is to stop making
decisions for patients and to empower them to
make their own choices. But Ill let her
explain how she sees that happening.
Before we start, Id like to introduce
Jim Knickman, the CEO of the New York State
Health Foundation, whose support has been critical
to our participation in the Coverage Consortium.
Dr. Knickman is the first president and CEO
of the New York State Health Foundation, and
he comes to the foundation with tremendous experience
and expertise in public health and health-care
analysis. 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 evaluations
of national initiatives. Throughout his fourteen-year
tenure at Robert Wood Johnson, he also led grant-making
teams in the areas of clinical care for chronically
ill, long-term-care services and population
health. He is coauthor of a widely used textbook
on health policy and management, serves as chairman
of the Robert Wood Johnson Health System, and
is a member of the editorial boards of the
Milbank Quarterly and Inquiry.
In my experience working with Jim on the Coverage
Consortium, hes an exemplar of what we
need in our health-care debates today: someone
who asks tough, smart questions and is supportive
of good policy ideas no matter what partisan
label happens to be attached to them. Please
join me in welcoming Dr. James Knickman.
JAMES KNICKMAN: Recently, I felt very
proud when I was asked to be part of a panel
explaining the candidates health-care
reform positionsbecause after I finished
speaking, someone commented, I dont
think Ive ever heard anybody talk about
this stuff, and I cant figure out which
side youre on. And I replied, Good!
That means that I was successful. I think
its important that we look at health-care
reform in a broad way.
Why is health care such a complicated issue
to get right? I think its because four
factors come together in a baffling way: insurance
coverage; access to care; cost of care; and
quality of careand figuring out how to
pay for it. In our society, it is very hard
to get those four things working together in
a way that doesnt squeeze the balloon
in the wrong direction if you work on one versus
the other. Too often, we work on these issues
in isolationpeople working on coverage,
people working on access, people working on
cost, people working on quality. But theyre
all one problem. If we expand insurance coverage,
but costs go out of control, its going
to fall apart because were not going to
be able to afford that insurance coverage. That
is what has happened in some of the other states
that have made important first steps. If we
improve quality but its unaffordable,
we dont have access.
So trying to get these four issues right is
important. There are other complicating and
interacting factors as well: markets and government.
We must figure out how to bring those two forces
together. Its easy when you have an economic
good that can totally rely on the market, which
determines supply/demand or price. Its
also easy when you have an economic good that
comes totally within the realm of government.
But in health care, we need to bring markets
and government together. Its hard to do
that because while we may have a basic health-care
package of services, it can be so expensive
that 3040 percent of Americans cannot
afford it. So we must have some government role.
Americans are quite committed to using markets,
too. Trying to put those factors together really
Our foundation came out of the EmpireBlue
Cross conversion, and were here to improve
the health of New Yorkers and to make a better
health-care system and better public health
system. We think that expanding insurance coverage
is crucial. Insurance coverage is in our mission
statement. For over two years, in our efforts
to do something about coverage, we have made
four big bets.
First, we developed the Coverage Consortium,
which analyzes the choices for us to make as
a state about how to expand insurance coverage.
The consortium includes the Manhattan Institute
in addition to the Community Service Society,
New Yorkers for Accessible Health Coverage,
United Hospital Fund, the Rockefeller Institute,
and Columbia and Cornell Universities.
The second bet is a Medicaid initiative. Almost
a million people who are eligible for Medicaid
are not enrolled. We have to figure out how
to make it easier for those people to get enrolled
and to stay enrolled. So were doing administrative
studies and other work to figure out how to
get coverage for the people who are actually
Our third bet is in a small-group market. Many
of the working people who are uninsured are
in this market. It has been a big challenge
to figure out how to get small-business owners
to focus on insurance coverage. If you want
to grapple with this problem, you have to grapple
with the small-coverage market.
Our fourth bet on the coverage side is cost.
Unless you worry about cost and affordability,
the focus on coverage is not really worth it.
PANEL I: REVITALIZING THE
INDIVIDUAL (DIRECT PAY) INSURANCE MARKET IN
TARREN BRAGDON: I am an adjunct fellow
at the Center for Medical Progress. I have the
pleasure of moderating this panel, where were
talking about revitalizing the individual direct-pay
market in New York. Before we hear from our
esteemed panelists, I want to provide some perspective
on New Yorks direct-pay market.
For over fifteen years, New York has had one
of the most highly regulated, uncompetitive,
and expensive individual-insurance markets in
the country. In the early 1990s, 750,000 people
were covered in this market. Today, fewer than
100,000 are covered. Premiums in the direct-pay
market begin at over $500 per month for individual
coverage. By comparison, California, which has
a very competitive individual market, with almost
twice the population of New York State, covers
2.8 million people in its individual market,
according to its Department of Insurance.
In New York, there are 2.2 million uninsured
adults. Over half of them are young adults,
aged 18 to 35. A third are aged 35 to 49, and
the remaining ones are near-retirees. Almost
a third are noncitizens, a situation that is
[unusual], compared with many other states.
Some 90 percent report that they are in good
health. Two-thirds have no dependent children
at home, and 69 percent of New Yorks uninsured
adults are single. Their household budgets and
the types of coverage that they might be looking
for are likely very different from those of
someone with financial obligations beyond just
himself. Sixty-one percent of New Yorks
uninsured adults earn over $25,000 a year, and
a third have household incomes of over $50,000
a year. If we use the Swiss standard of affordabilityhighlighted
in Regina Herzlingers writingsof
10 percent of family income, the vast majority
of New Yorks uninsured would be looking
for out-of-pocket premiums of $200 a month or
We know from national studies that the majority
of uninsured are temporarily uninsured. Seven
out of every ten people who become uninsured
become reinsured within a year.
In summary, New Yorks uninsured population,
for the most part, is young, childless, and
healthy. It is an attractive population to insure
through the individual market. It is also a
very mobile population. We know from research
by RAND on Californias individual insurance
market that, when presented with an opportunity
to buy affordable coverage, individuals who
dont have access to coverage through their
workplace will buy coverage. According to this
RAND study, three out of ten who dont
have access to work-based coverage and are over
the age of thirty-five will voluntarily buy
coverage; that take-up rate does not significantly
increase with subsidies provided by the government
and is not projected to increase with subsidies.
We also know that four out of ten of the nonpoor
uninsured will voluntarily buy coverage.
For us, a revitalized direct-pay insurance
market in New York would be an important [contribution]
to maximizing the number of people with private
health-insurance coverage so that we can reserve
scarce public dollars for those who are truly
poor and uninsured.
Our first presenter is David Hyman, the Richard
and Marie Corman Professor of Law as well as
a professor of medicine at the University of
DAVID HYMAN: Insurance theorists talk
about insurance, regardless of the type of insurance,
as serving three distinct functions: risk-shifting
from the insured to the insurer; risk-spreading
through the insurer to the broader pool; and
risk distribution, by charging different premiums
based on risk. You basically socialize the risk
across the pool and decrease the variance of
the risk. Many risks are binary: youre
either hit by a hurricane or youre not.
The overall probability of that is somewhere
between zero and one. But you dont know
whether youre at zero or one, and youre
willing to buy insurance to reduce to a fixed
amount the associated risks and move away from
the zero-one, binary set of choices.
Insurance allows for risk distribution. We
charge different premiums to people based on
the element of risk that they are transferring.
So the paradigm case for insurance is a very
low probability of a really bad outcome, such
as getting wiped out by a tornado. And the more
you move away from that paradigmatic case, the
less youre dealing with insurance and
the more you are prepaying expected cost. Group
versus individual coverage is a very important
distinction; Ill have more to say about
Were going to be talking mostly about
individual insurance. Each arrangement has its
own advantages and disadvantages. Group coverage
is cheaper to underwrite, partly because you
dont have to deal as much with adverse
selection because its a prepacked socialization
of risk. On the other hand, if youre the
person who is bundled in with people whose risks
are higher than yours, you end up having to
foot the bill for their risks, rather than your
own. Individual insurance, at least in theory,
has a more tailored distribution of risk profiles,
but its significantly more expensive to
write. The last point is the basic regulatory
framework that applies to group versus individual
insurance. Individual insurance has a fairly
significant risk-pooling function built in.
Group insurance has its own elements of risk
distribution. So keep in mind that reality is
messy, and theory is neat.
Here are some facts about where Americans nationwide
get their health insurance, based on 2006 census
numbers. Private coverage covers about 68 percent
of the market. Employer-based coverage is responsible
for about 176 million individuals in self-funded
and insured plans. Individual insurance is about
27 million people, or 9 percent of the population
in the U.S. Public coverage is 80 million, or
about 27 percent of the population. The uninsured
are 47 million, or about 15 percent of the population.
That number has been going up steadily while
the number of people receiving private coverage
has been going down fairly steadily, although
it has stabilized in the employer-based side
of the market at about 60 percent.
The first key difference between employment-based
insurance and individual insurance is obviously
that the former is group-based coverage and
the latter is individual. Whether you can get
employment-based insurance varies greatly, depending
upon who your employer is, what sector of the
economy your employer is in, and whether you
have a large employer. There are certain areas
of the economy where its relatively unlikely
that youll have the opportunity to purchase
insurance from your employer. If you work in
the retail or agricultural sectors, the probabilities
are significantly lower than they would be in
other sectors of the economy. Size also matters:
the larger your employer, the more likely that
you will be able to obtain employer-based health
insurance and the more likely that you will
have a choice of insurers.
Another important distinction between employer-based
and individual insurance is the tax subsidy.
If you obtain insurance through your place of
employment because of some idiosyncrasies of
the tax law, you basically can purchase it with
pretax dollars. People who buy individual insurance
have to buy with after-tax dollars. Because
we have a progressive tax system, thats
worth more to people in higher-income brackets.
ERISA, under some circumstances, effectively
preempts all relative state regulations if youre
a self-funded ERISA plan. About 55 percent of
the employment-based health-insurance market
is in self-funded ERISA plans. There are limitations
on the [right to file a claim] against the plan
for coverage decisions. Private coverage is
regulated primarily at the state level, which
means that it varies tremendously. The states
vary tremendously in how aggressively they regulate
insurance. There is limited federal regulation.
ERISA is perhaps the last major piece of legislation
that affects health insurance. A series of focused
federal mandates includes: the Health Insurance
Portability and Accountability Act (HIPPA),
which imposed portability requirements; the
Mental Health Parity Act; and the Newborn and
Mothers Health Protection Act, which guaranteed
coverage of forty-eight hours postpartum for
vaginal delivery and ninety-six hours for a
A conceptual model for thinking about these
regulations includes three basic relationships:
insurer-physician, physician-patient, and patient-insurer.
We have three different types of regulations.
As I said, states have regulated fairly aggressively
here. The mean number of mandates per state
is about thirty-six. They primarily regulate
the insurer-physician and the patient-insurer
relationship. The states generally have not
tried to regulate aggressively the physician-patient
relationship, with forced disclosure arrangements.
Its important to recognize that states
also impose premium taxesthats the
source of a significant amount of revenue for
the states. Each state has a regulatory monopoly
over the terms of coverage that can be sold
to its citizens, except that ERISA creates a
very large loophole if your employer is self-funded.
Self-funded employers dont pay state premium
taxes and are not subject to any of the regulatory
mandates, including community rating, guaranteed-issue,
and coverage of specific benefits.
New York has about 13.2 percent uninsured,
with a margin of error of plus or minus five.
Thats compared with about 15.2 percent
nationwide, so it is slightly below average.
Thats a good thing, but it is above average
in the number of mandates it imposes: fifty-two
versus thirty-six, including community rating
and guaranteed-issue, in the small-group market.
Youve already heard about that from Tarren
and Paul. Apparently, there is concern about
the number of mandates and their impact on health-care
quality and cost containment.
The good news is that a state commission was
established to examine these and other issues.
The bad news is that no one has yet been named
to the commission, and it has not yet met. More
bad news: the cost of care in New Yorkwhether
you look at the volume of care or the cost per
unitis higher than average, and the quality
is nothing to brag about.
The point that I want to end with goes back
to the idea of social insurance versus risk-based
insurance, and private insurers versus public
insurers. No matter how you regulate private
insurers, you are not going to turn them into
public insurers. If you want public insurance,
you should enact it. Trying to get private insurers
to behave like public insurers is not, in the
long run, a particularly effective strategy.
And it doesnt provide any benefits for
its intended beneficiary: the consumers whom
we all care about.
TARREN BRAGDON: Next we will hear from
Sherry Glied, chair of the Department of Health
Policy and Management at the Mailman School
of Public Health at Columbia University.
SHERRY GLIED: I do most of my work on
group health insurance, so when I had the task
of talking about the individual market today,
I had to do some research. The first conclusion
I came to is that we need to have a functioning
non-group health-insurance market if were
going maintain the system of private health
insurance because there is a group of people
who naturally should be getting coverage in
the non-group market. These are people who live
in families that can afford coveragethey
dont need to be in public programsbut
they are either self-employed or work in tiny
firms that dont have much of a pooling
advantage; or they arent working, or they
are in the short-term or contingent work market.
That group probably constitutes 2025 percent
of the population under the age of sixty-five,
which is quite a big market, although clearly
the smaller part of the private-insurance market.
Two problems face non-group insurance markets.
The first is that expenditures on health care
are very highly skewed. One percent of people
in any population account for 2530 percent
of health-care expenditures in a year, and 50
percent of people in any health-insurance market
account for only about 3 percent. That a very
small number of people account for most of the
cost affects the way that many insurance markets
work. The difference in the health-insurance
market is that much of the information that
would enable us to predict whether youre
in that category of very expensive people is
known by people who would be buying insurance
but cannot be known by insurance companies.
Im struck by studies that look at everything
you can find out about a persons health
status, everything that can be gotten from his
or her health record, everything that can possibly
be given to an insurance company. Then you ask
a person, How do you rate your own health
on a five-point scale: excellent, very good,
good, fair, or poor? It turns out that
a persons rating of his own health has
a huge predictive value in telling us whether
he is going to have high expenditures next year.
Much private information exists in this market.
That is very problematic because it means that
people have the opportunity to select their
health plan, to decide to participate in the
market, to retain coverage or drop coverage,
and to choose what kind of coverage they want,
all based on private information. Insurance
companies naturally have to respond to the fact
that all this private information exists. So
private information is one big problem that
exists in non-group insurance markets.
The second problem, which is not recognized
enough in the non-group health-insurance market,
is that health-insurance markets are worse than
other kinds of insurance markets because they
dont pay off in cash. The contract pays
off in services, which means that the payoff
is not fungible. In a life-insurance market,
or even an automobile insurance market, you
could layer coverage or you could sell away
coverage, in effect, over time. The health-insurance
market is inherently less flexible. The rewards
of the health-insurance contract are not fungible.
That has one serious consequence. People want
long-term health-care protection. They dont
want health insurance for one year; they want
health insurance forever. Its essentially
impossible to sell lifetime health-insurance
contracts to non-group health-insurance markets;
they pay off in services. This market is fundamentally
flawed, but we need to have it working.
All these flaws in the market have created
a golden opportunity for regulators to mess
up the market even more. They have generated
regulatory capture. But Im going to argue
that these regulations dont matter so
much. The regulations are a mess but they dont
make much difference to the functioning of the
Probably the number-one thing that people worry
about concerning these markets is costly mandated
benefits. According to the Council for Affordable
Health Insurance, in the state that has the
most mandated benefitsMarylandthe
benefits add about 40 percent to the cost of
the health-insurance package. In the cheapest
state, which I think is Wyoming, the benefits
add only about 4 percent to the health-insurance
package. There is a big difference in the scope
of mandated benefits among states.
Economists say that mandates make sense in
some situations. Whether that is true or not,
mandates dont matter as much as we suspected
they would. To demonstrate this, I compare coverage
in big and small firms. Firms with more than
a thousand employees have ERISA plans. They
are exempt from all these state-mandated benefits,
and they do whatever they like. Overall, about
68 percent of people who work in very large
firms get coverage from their own employer.
So lets compare coverage in these firms
with coverage in firms that are strongly affected
by mandated benefits: small firms that have
no more than twenty-five workers.
On average, about 30 percent of employees in
those small firms get coverage from their employers
collectively. When you compare coverage in very
big and small firms across states, you see that
in states where many people in big firms get
coverage from their own employer, many people
in small firms also get coverage from their
own employer. There is a strong correlation
between what happens in the non-mandated ERISA
market and what happens in the mandate-affected
non-group and small-group markets, probably
because of similarities in the underlying demand
for coverage and price of care.
What happens in states with many mandated benefits?
Consider New York, a state in which about 71
percent of people who work in large firms get
coverage and about 34 percent of people who
work in small firms get coverage. That is similar
to the national average. The rate for small-firm
coverage is only slightly lower than it is in
states with comparable rates of large-firm coverage
and few benefits. In general, states with mandates
dont stand out at all. Maryland is the
state with the highest mandated benefits in
the country. It also has an unusually high rate
of small-group health-insurance coverage.
States with very few mandate benefits dont
perform consistently better. Mandated benefits
seem to cost a lot, but the insurance market
seems to have figured out how to deal with them.
They are not affecting coverage rates as much
as we would expect them to. They just dont
seem to matter.
Can eliminating rating restrictions fix this
market? Not much. The literature on rating restrictionsthere
is much economic and empirical writing on thissays
that rating restrictions shift the composition
of health-insurance markets. They lead older
and sicker people to be in the market, and they
lead younger, healthier people to be out of
the market. As Tarren said, there are many young
and healthy people who are shut out of the market
because of rating restrictions. The flip side
is that some older, sicker people are in the
market because of these same restrictions. The
restrictions have some effect at the aggregate
level, reducing non-group coverage about 2 to
The potential market for non-group health insurance
is self-employed people or people working in
small firms. Some statessuch as Montana,
Wyoming, South Dakota, and North Dakotahave
many people with non-group insurance. But thats
because those states have many farmers and many
self-employed people who have to be in that
non-group market. In states such as New York
and California, fewer people naturally belong
in the non-group market. New York, which has
community rating, does a little worse than a
place like California. Eliminating community
rating would increase non-group coverage in
New York. If we eliminated community rating,
though, we would introduce many new problems
in the non-group market because we would shift
the sick people out of what is now a protected
market. We need to think about how to do that.
Can better subsidies fix this market? Like
Tarren, I think not. The price elasticity of
demand for health insurance in the non-group
market is quite low, especially for inexpensive
products. There have been major expansions in
the tax-deductibility of health insurance in
the 1990s, in the HSA systemand what has
happened at the aggregate level? Between 1995
and 2003, we expanded the tax-deductibility
for the self-employed from 25 percent to 100
percent. In 1997, eHealthInsurance was founded,
which was important in bringing down administrative
costs. In 2004, we instituted HSA regulations.
But [despite] all these changes facing non-group
coverage, the percentage of people in the non-group
market remained virtually unchanged. We introduced
major new subsidies in the non-group market
over the 1990s, and it made no difference.
What to do? Start off with what not to do.
The non-group market is the residual market;
it is not the main market. It would be a disaster
to mess with the ERISA plans in order to fix
the non-group market. Second, more competition
is not, by itself, going to fix this market,
although it might lead to somewhat lower administrative
costs. We need to do more than that. Third,
community rating is costly, but suddenly getting
rid of it will create a major upheaval, so we
need to think about how to do that.
We do need subsidies in this market. Remember
that there are huge subsidies in the group market,
so we need to level the playing field in some
way. The evidence today suggests that probably
the best way to achieve those subsidies is through
reinsurance money, not tax credits. Reinsurance
would be particularly useful if we were going
to get rid of community rating because it would
soak up some of the variation at the high end
of the market.
TARREN BRAGDON: Next well hear
from Gary Lauer, president and CEO of eHealthInsurance.
GARY LAUER: We formed eHealthInsurance
in 1997. We market and sell health insurance
online as an Internet-based company. We focus
primarily on the individual markets, for people
buying individual products, and small groups
that typically have fewer than fifty employees.
In the spirit of full disclosure, I should say
that we are a profit-making company and a publicly
traded company on NASDAQ. So you can certainly
argue we have an economic interest in this market
and in this business. The majority of the business
that we do is for individualspeople who,
for many reasons, buy their own health insurance.
Several years ago, I spoke at a meeting in
Washington, D.C., along with a number of members
of Congress. At that time, a great deal of opinion
and emotion surrounded this topic but very little
fact. It seemed then that what we ought to try
to do, because we had a treasure trove of information
in our company about people buying health insurance,
is mine some of those figures and produce something
that explains what is occurring in the markets.
So every year since then, we have published
an annual Cost and Benefits of Health
Insurance Plans survey. We survey our
member base or customer base to ascertain what
people are paying for health insurance and what
kind of benefits they are receiving.
We market and sell health insurance in all
fifty states, and, as you have already heard,
it is a highly regulated business, regulated
state by state. We are licensed in all fifty
states. We do not underwrite health insurance.
We are not a health-insurance company. Rather,
we are a distributor or broker, so we represent
the major carriersAetna, United, GSI,
Oxford in New York, and so on.
You might be interested in taking a look at
The Costs and Benefits of Individual Insurance
Plans: 2007, available at www.ehealth.com.
We helped publish this with Forrester Research.
Weve also done this in the past with the
Kaiser Family Foundation. This report surveys
about 160,000 individual and family policies
purchased through eHealthInsurance. Weve
taken a look at how much people are paying for
health insurance and which benefits are being
provided. We give you information about age
and gender. We also break this out by families,
although Ill comment on individuals for
now. It is interesting to see how this business
looks state by state. On average, health insurance
for an individual in Iowa is about $98 per month.
Health insurance in New York, the most costly
in all fifty states, averages about $358 per
month, more than three times what people pay
in Iowa. The average across the United States
is about $140 a month. New York, among four
other states, is a guaranteed-issue state, which
simply means that no one can be denied for any
reason. The theory makes a lot of sense, but
in practice, it forces these products for various
reasons to become very expensivein many
cases, prohibitively expensivewhich leaves
many people out.
If nothing else, look at page fourteen, because
it lists all fifty states broken out by what
people pay on average for health insurance in
the individual market, what their average ages
are, and the kind of benefits that they receive.
These are fairly robust products and typically
have physician benefits for physician co-pay,
pharmaceutical co-pay, and, in many cases, maternity
benefits. The states that are guaranteed-issue
and/or community-rating are Maine, Massachusetts,
New Jersey, New York, and Vermont. Kentucky,
New Hampshire, and Washington were, but have
since either modified or repealed these mandates.
We have had an interesting experience in Washington
State. In 1993, at about the time the Clinton
administration was pushing hard for change in
the health-care landscape, Washingtons
state legislature took on many principles that
the administration was discussing and designed
a plan that reflected them. In fact, the legislature
was open about the fact that it had modeled
its plan after what was being discussed in Washington:
guaranteed-issue, community rating, mandatesone
mandate being that everyone had to buy health
insurance along with a number of other things.
In the first two years, the number of health-insurance
carriers providing health insurance in the state
quickly declined, because a business cannot
be forced to do business. They chose not to
participate in the market, so the choice of
products declined. Second, the ranks of the
uninsured increased in the first twelve monthsby
over 20 percent. Third, the price of these products
increased 4050 percent.
Later in the 1990s, there were small changes.
In 2000, the state legislature got together
and repealed the guaranteed-issue part of this
health-care reform. We came into the market
with several large carriers that had not been
there previously. Prices fell, interestingly.
Washington is one of the few states in the country,
over the last seven years, where the rates have
not increasedthey have actually stayed
flat. Youd like to think they went down,
but, given the trend of increasing premiums
in other states, staying flat is actually a
In California, my home state, Governor Schwarzeneggera
Republican governor in a Democrat-dominated
state legislaturein his State of the State
Address, in January 2000, proposed sweeping
changes to health care in California and the
landscape called the California Health Care
Reform Act. I was quite involved with the governors
staff and spoke with the governor many times.
California is very much an open-market state.
Its a vibrant market with many products
to choose from, and a large percentage of people
in this market buy individual health-insurance
and small-business products.
The governors plan was to put a guaranteed-issue
mandate or regulation in place to mandate that
everyone buy health insurance as well as a number
of other things. At first, it was applauded.
In January 2008, it was crushedthats
probably the right word to use in the state
legislatureby Republicans as well as Democrats
for a couple of reasons. One was that many characteristics
of guaranteed-issue seemed so appealing but
were not quite so appealing to the electorate.
Another reason was that the cost associated
with these things became staggering. We have
a large deficit in California; the cost of this
plan in the first year was going to be about
two times the deficit that the state was already
running, so it simply wasnt affordable.
In heavily regulated states with lots of mandates,
especially guaranteed-issue, these become very
expensive plans and programs to administer.
So [while there are] the moral reasons for trying
to get everyone covered, there are important
economic reasons that have to be considered
We have some real issues facing us, not just
in the state of New York but in our country
as well, regarding the number of uninsured people.
More than 47 million Americans have no health
insurance. We have a moral obligation to address
this problem. But we have an economic issue
here as well, along with an economic reason
to address it. This is not a problem that is
going to stay the way it is; it is growing every
day. The number of businesses offering health
benefits to employees has been declining for
the last several years. A recent Kaiser Family
Foundation study noted that in 2000, the number
of U.S. businesses offering health benefits
to employees was 69 percent, but by 2007 it
was down to 60 percent.
Where are these people going for health insurance?
Theyre either buying individual products
or joining the ranks of the uninsured. In 2006,
the ranks of the uninsured swelled by more than
2 million. The Kaiser Family Foundation also
noted that for every percentage point that unemployment
rises in our country, more than a million people
will join the ranks of the uninsured. This is
one more reason for us to think about these
markets, mandates, and regulations, and to find
sensible, affordable ways for people to get
TARREN BRAGDON: Last, well hear
from Sara Horowitz, founder and executive director
of Working Today, which offers health insurance
to freelance workers.
SARA HOROWITZ: Im going to talk
to you about Mary Jo, a self-employed graphic
artist. Mary Jo decides that shes going
to get health insurance. She telephones XYZ
Insurance Company and buys an individual health-insurance
plan. Then Mary Jo has a medical problemnothing
significantand goes to the doctor, who
takes care of it. She then finds that the condition
that she was quite sure was covered has been
denied by the insurance company. So she telephones
the insurance company and says, You made
at terrible mistake. This isnt the way
it should be. The 1-800-XYZ Company asks
Mary Jo to send in all the material again. After
a week or two, Mary Jo calls the insurance department
and says, Im Mary Jo, Im an
individual, I bought health insurance, and my
health insurance should cover it. They
say, Yes, thats a problem. You should
probably send us a letter. So that is
Mary Jo in the individual market.
Now Id like to suggest that this Mary
Jo is in the Freelancers Union. Mary Jo calls
us up with a problem. We start realizing that
not only does Mary Jo have a problem, but ten
other people just called us and e-mailed us
because they are having the same kind of problem.
This could be one of two kinds of problems:
either the error was in the infrastructure,
which can easily be worked out; or there is
a real misinterpretation of the plan. We believe
that we negotiated coverage of the condition,
but the insurance company said that we did not.
We dont call 1-800-XYZ Company; we call
our key person at that insurance company. We
have 17,000 people covered in New York. We switched
from HIP to Empire, but for both companies,
we are one of the biggest contracts because
we have 17,000 people. I can assure you that
when we hear of Mary Jos concerns, its
a top priority for us. We are going to get to
the bottom of Mary Jos problem. Either
Mary Jo is wrong or the insurance company is
wrong or there is a problem that has to be fixed.
We are making a fundamental mistake if we think
that Mary Jo is going to do well in the individual
market. We have to reframe this debate. Human
beings are not cars. When you buy insurance
for your car, the kind of driver you are is
relevant. But as my father would say, only the
lucky ones grow old. We can anticipate that
we are going to have illnesses, and we must
consider how to start risk- sharing. How should
we spread this risk around? Calling people who
are under thirty a group will not
I would like to review our experiences in New
York and demonstrate that when you get vertical
groupings of peopleby profession, skill,
chamber of commerceyou will do far better
than you would by pulling out your best risks.
There has been a change in the economy. People
used to work for a large employer, such as a
university, factory, or hospital, and the people
who had jobs were full-time employees. They
had health insurance, a pension, training, and
the right to unionize. In effect, the safety
net was attached to the two conditions of having
a job and having the legal status of an employee.
But in this new economy, work is short-term
and flexibleand the safety net is outdated.
Now there tend to be more independent contractors,
freelancers, consultants, and self-employed
people, and they work more. When theyre
employees in the short term, they are part-time
and temporary. The whole New Deal safety net
is not attaching to this part of the workforce,
which may not feel like a bad thing at the Manhattan
Institute. But we have to agree that we dont
have the coherent system for these things that
we used to have.
The Freelancers Union created our 501 (c) (4)
status, and Working Today is our 501 (c) (3).
We are a platform or online vehicle by which
people can come together and purchase insurance,
get jobs and education, and talk about new ways
that we can come together to purchase these
kinds of things as a group.
We are 72,000 nationwide. The states with the
most members are New York, New Jersey, California,
Pennsylvania, Connecticut, Florida, Texas, Georgia,
Illinois, and Massachusetts. In New York, weve
been able to group people together. Now, we
have to expand to states where there is an individual
We founded the Freelancers Union to group people
together in a market-oriented way. We are completely
independent, we are able to exist within the
market, and we receive no subsidies. We are
an example of something that works. We have
gone to other states with our strategy, and
the insurance experts there say that eighteen-
to twenty-four-year-olds can get better rates
than what we will offer. When state insurance
regulations allow the young and healthy to pull
out of insurance risk pools, it becomes very
difficult to pursue the grouping strategy. The
whole point of insurance is to pool together
different types of people, with different risk
profiles, to create a sustainable grouping.
But in those states where young adults take
themselves out of the insurance market, the
insurance companies become uninterested in forming
large groups for insurance purposes. What results
is a bifurcated market in which only large employers
can form insurance groups and everyone else
is left to face the individual market.
As we look toward the future, we must decide
whether we want individuals to be treated like
cars or whether we can be creative in our market
approaches. We have to be careful about how
we group people together. The Freelancers Union
is building the next model, for the next New
Dealby grouping people to have power in
markets and power in the policy debate so that
they can start talking about how individuals
can come together in mutual aid and negotiate
better rates in the market.
Jim Knickman said that sometimes you cant
tell which side someone is on. I think that
the next change will be that the same sides
no longer exist; its actually far more
complicated. Im interested in promoting
market solutions, but those markets are not
going to have the 18 to 30 percent returns that
are driving private equity as were merging
insurance companies. When we look at the economic
alignments that we are creating now, we have
to conclude that the insurance industry is not
going be able to make its profit in such a short-term
way and that it will instead have to pay back
that capital. The insurance industry also isnt
going to be allowed to promise such high returns
to shareholders that they are required to cherry-pick.
Mary Jo needs to find a group; that group has
to be a player in the market; and that group
has to be able to capitalize with market money
but produce returns of 8 to 12 percent. The
only way we can achieve that is by thinking
of the tax code as a vehicle by which we can
make a market functionnot as an auto-industry
market but as a civilized market for health
insurance that we can be proud of.
TARREN BRAGDON: Im going to ask
two questions of each panelist. First, in your
research into several states, or in your experience
particularly in states that have competitive
offerings and affordable plans, why dont
individuals purchase coverage when they have
access to it? Second, how much societal benefit
do you think there would be in requiring people
who do not voluntarily purchase coverage to
DAVID HYMAN: Why dont people buy
coverage who have access to it? Many people
have considered this question and have generally
drawn simpler conclusions. There are two distinct
categories: people who simply cant afford
it; and people who dont perceive a need
for itthe young immortals,
my children among them. They have insurance
because I buy it for them, not because they
would if I gave them the cash and they got to
decide what to do with it. Its related
to larger issues of the value of coverage, perceived
and actual. Geographical variations enter into
this as well.
On the issue of requiring purchase, Massachusetts
is taking a crack at this, and the numbers are
evolving. Requiring people to purchase involves
two separate issues: the first is whether youre
doing it because you want to get the low-risk
end of the pool in order to subsidize the higher-cost
risks; the second involves some moral theory
that [prevents] you from saying no to them when
they show up at the E.R., so youre going
to force them to fund it at the front end. There
are other variances, but those are the two ways
that Id explain whats going on.
GARY LAUER: Ill give you my practical
experience of why people dont buy coverage.
Some people cant afford it. Some people
apply for health insurance but dont qualify
because they are not healthy. Across the industry,
an estimated 15 percent of applicants in the
individual business, in a non-guaranteed-issue
market, are simply denied. Many people dont
know that the market exists; or they perceive
that health insurance is prohibitively expensive
and that only large corporations can afford
to provide it for their employees. Some younger
people think that they dont need to have
health insurance because they are not going
to need it. There is yet another group of people
who know that that they need it but also know
that they can go to an emergency roomespecially
in a nonprofit hospitaland receive the
care that they need.
Our approach has been to address each issue
incrementally as we look at the ranks of the
uninsured or why people dont purchase
health insurance. Most people dont understand
how strong the regulations and regulators are
in each state, [making it] fifty different businesses.
And in markets with more affordable products,
more people participate than in those markets
where products arent as affordable.
SARA HOROWITZ: How many of you want
to be dealing with your insurance in your retirement?
Some of us are great day traders who love figuring
out what to do with mutual stocks, but the vast
majority of Americans just want a trusted advisor
to help them figure it out. That factor is not
considered when we look at why people dont
buy insurance. Some say that they think of themselves
as young immortals, but I dont
buy that. Some say that its people just
dont know; I dont buy that, either.
I think individuals lack the tools necessary
to help them make decisions about retirement,
health insurance, and other essential protections
formerly provided by the social safety net but
that now must be procured by the individual.
The sophistication of these tools should be
commensurate with the amount of risk that people
are now supposed to be taking. We have moved
beyond the affordability issuethat is,
whether people can or cannot afford insuranceto
a question of value. Thats answer number
Whats troubling about mandatory is that
you have to pony up the money for enforcement;
and if youre not going to enforce it,
dont call it mandatory. We should have
a national system of vouchers that is market-tested
and wont scare people. We would have a
minimum amount of coverage for all Americans,
and then groups like mine and local chambers
of commerce and others would be allowed to come
together to provide basic coverage, plus additional
benefits. Bringing people together allows groups
to reduce administrative costs. You can then
also pool the costs of expertise and provide
advisors and experts to help make decisions
easier, without taking away individuals
decision-making rights. In this way you make
their decision-making process easier while adding
more value for people in the group.
SHERRY GLIED: How many people have failed
to do something on their to do list
and did something else instead in the last twenty-four
hours? In my view, this is the reason people
who can afford it do not buy health insurance.
It is fundamentally a to do list
problem rather than a problem of not wanting
coverage or being a young immortal; we see that
when the same people who do not buy health insurance
in the individual market take jobs, they sign
up for the coverage that their employer offers
them, even when the premium that their employer
charges is quite high.
The reason for that is, when you begin a new
job, someone walks into your office and says,
Here is the form for the health-insurance
plan; please fill it out. And everyone
fills it out, and its deducted from payroll.
We see this in countless situationsMedicare,
for example. A big reason people dont
buy health insurance is that they just havent
gotten around to it. They are figuring that
in, say, three months, they are going to have
another job, so why bother to go into the non-group
market and buy it now?
This inertia, and the fact that health insurance
is just one of the many items on the to
do list for most people, is a big issue
in terms of the non-group market. Ive
spent the last eight months writing papers on
individual mandates. I was initially skeptical,
but Ive come around full-circle and am
now a fan. This has been a very slow evolution.
Im not a fan of Massachusetts, because
I agree with Sarait is not putting the
money [into enforcement] that it needs to put
But Ive always been a fan of universal
health insurance, for a variety of ethical and
moral reasons. If you are also convinced that
you want to have a private health-insurance
system, you have to be in favor of mandates
because without them, you can never get from
here to universal coverage. The countries that
try to manage private health insurance, such
as the Netherlands and Switzerland, do it with
mandates. Whenever we want everyone covered,
we do it with mandates; they wont work
perfectly, but thats not the issue.
After I wrote a piece about mandates in the
New England Journal of Medicine, I received
a letter from a man at the Massachusetts Connector
that was exactly on point. He said that a young
man had come to him saying that he didnt
really need to buy health insurance, but his
mother said to him, Its the law,
sonny. You got to go buy health insurance in
Massachusetts. Thats why a mandate
will make a difference; not because theres
going to be a penalty but because all the mothers
in Massachusetts will tell their children that
they must buy coverage.
The seat-belt mandate works that way: kids
get into the backseat of the car, and their
moms tell them to fasten their seat belts. If
they do not fasten them and a policeman stops
them, they will receive a ticket for breaking
TARREN BRAGDON: Now we will take questions
from the audience.
AUDIENCE: Im a practicing physician
in Louisiana. Id like to ask the panel
to comment on the desirability, or lack thereof,
of having individuals buy their own insurance.
If I were to go to eHealthInsurance, I would
buy my own policy, much the way one buys a life-insurance
policy. If you move from one state to the next,
you can bring your life-insurance policy with
you. Obviously, there would have to be, as Congressman
[John] Shadegg [R-Ariz.] has said many times,
changes in the law necessary to make that possible
for health insurance policies.
Sara touched on my second question, which has
to do with defined-contribution plans: whoever
puts up the subsidy puts up the same amount
of subsidy, no matter what choice you make.
Please comment on the desirability, or lack
thereof, of defined-contribution plans.
GARY LAUER: One of the many tenets of
health savings accounts program is portability.
Once you have a health savings account, you
can own it for life. It is an intriguing idea,
discussed by Congressman Shadegg, to break down
the state market, so that we dont have
fifty state marketsone could buy health
insurance from any state. So I could live in
New York and buy insurance in Ohio, where its
much less expensive. Where it gets complicated,
however, is that each health-insurance carrier
contracts with physicians, hospitals, providers,
and so on. Insurance will work only in that
network. Health insurance [for a New Yorker]
is contracted with providers in New York, not
in California. California health insurance is
good in California but not in New York or Ohio.
It starts to fall apart when you look at it
from that standpoint, unfortunately.
In terms of incentives, many people dont
know that individual insurance is not tax-deductible.
Businesses can deduct 100 percent of the cost
of health insurance from their taxes; individuals
cannot deduct one cent. An interesting thing
about all three presidential candidatescurrently,
Barack Obama, Hillary Clinton, and John McCainis
that their platforms on health all talk about
incentives and reforms in the tax code. That
may address a bit of this inequity in the system,
which could be an incentive [to purchase health
insurance] as well as a bit of a stipend making
health insurance more affordable.
SHERRY GLIED: Im a big believer
in markets. In level playing fields, people
tend to prefer large-group coverage. We see
this in other countries as well as in the United
States. Even the self-employedwho can
deduct the cost of health insuranceif
given the opportunity, will get into the large-group
The rhetoric is bigger than the effect. I want
to second the point that Gary made: health insurance
is not like life insurance. It is not a cash
transaction. It is not a fungible benefit. A
health-insurance plan in New York is not the
same thing as a health-insurance plan in Hawaii.
If I buy health insurance, and next year I decide
I need more, I have to buy an entirely new contract.
With life insurance, if I dont feel I
have enough, I can supplement my life-insurance
contract. The analogies are not very clean.
SARA HOROWITZ: The point about the defined-contribution
plan is interesting. We should be looking at
what is happening with individuals, as we do
with pensions, where we say that instead of
having x dollars when you retire, we say you
will receive x dollars each year as a contribution.
Were asking individuals to bear a lot
of risk. Are we creating systems that enable
people to bear those risks successfully? There
is nothing wrong with the strategy of a defined-contribution
plan, if people have experts on pensions to
help them figure out how they are going to invest
and allocate the assets over time. With health,
we dont have those tools in place. The
institutions that people are connecting withhealth
insurance noware not aligned with their
best interests from the standpoint of health.
We should be realigning those institutions.
DAVID HYMAN: To recapitulate: by owning
your own insurance, you basically gain portability
and the potential to avoid state regulatory
frameworks that you dont like, if there
are cross-border sales. The trade-off is that
you forgo the advantages of group coverage,
which I talked about previously. Sherry mentioned
administrative expertise; you have a benefits
person worrying about this all the time instead
of having to worry about it yourself.
SARA HOROWITZ: Its not portable
because if you discover a preexisting condition
along the way, you get excluded by a new state,
even if it has community rating. Portability
means a person can go from job to job in a seamless
system that is separated from your health status.
In the individual market insurance is not portable.
That is a fallacy.
DAVID HYMAN: No, thats a separate
issueand maybe it depends on what you
mean by portability and where you plan on using
SARA HOROWITZ: I go from point A to
point B, carry my insurance with me, and I want
to know that when I leave A and get to B, I
brought it there successfully. I dont
want there to be a waiting period, or in three
years, when we know our genetic code, [to lose]
portability because of who I am.
DAVID HYMAN: I took the question about
owning your own insurance to mean that you maintain
the same individual coverage, which means that
its portable across your [various] places
of employment. On the subsidy issuethe
tax subsidy, or the amount your employer is
contributingmatter a lot, just as they
matter in other areas. Expecting people to buy
health insurance today because they will be
able to receive a tax subsidy in a year and
a half is probably expecting too much of most
peoples forecasting ability, even very
smart and sophisticated people with very good
AUDIENCE: Gary and Sara, by aggregating
individuals, you make them more powerful, correct?
But the two of you do it in very different ways.
Sara says that she fights with the insurance
companies and is an aggregate on their behalf.
Gary is a purely economic aggregator. He creates
a market where people can shop, and it is up
to them to decide if they need to buy. Would
you please debate the pros and cons of these
two methods of aggregation?
SARA HOROWITZ: Before we arrived here,
we said that we could be working together in
different markets and that we should meet afterward
to figure that out. I think its a good
debate. Your competitors are often your best
GARY LAUER: I dont know how much
of a debate there is. What Sara is doing is
fascinating, but there are some problems with
it: ultimately, the payer is the health-insurance
company. Its not Sara, and its not
me. Whether there are 17,000 people or 117,000
people, the health-insurance company is the
arbiter. It gets to decide what the price is
going to be. It also gets to decide what it
is going to pay for and what it is not going
to pay for. It gets to decide how to mitigate
A couple of years ago, we took a look at this
vertically. One of the verticals was car dealerships.
Manufacturers have fabulous health insurancethere
is a long history there. The dealers and dealer
franchises dont. One manufacturer asked
us to consider covering all its car dealerships.
We thought that it was a good business opportunity
and a way to help a lot of people.
But we found that they really werent
insurable because the people in the front sales
office have high rates of alcoholism and smoking.
This is a fact. And the people in the back who
repair the cars are very accident-prone, as
you might imagine: not a very good risk group.
Im giving you a bit of the extreme, but
my point is that when you get together a [particular]
group of people, you have [a certain level of]
risk, and that risk is going to be assessed
and priced by the health-insurance carriers.
If you bring a demographic or a group that represents
a level of risk that is attractive, it is going
to be priced attractively. If it is not attractive,
it will not be priced attractively. That is
the way that this business operates, whether
you like it or not.
The other point I wanted to make is about the
purchase of health insurance. This is not a
pleasant process. If youve never purchased
insurance for yourself, or your employee, or
your family members, I challenge you when you
go home tonight to pull out your health-insurance
policy and start to read it. It is complex and
daunting. Its much more fun to buy a car
or a flat-screen TV. One thing that we have
tried to do as a marketplace is to corral this
complex volume of data and reduce it to something
more understandable to people.
But analyzing health-insurance plans is not
something that people care to do, so they procrastinate.
If you are a member of Saras group, it
is easier simply to sign up than to go to the
individual market and buy a policy. But the
market today is changing in such a way that
more people are going to have to buy their own
health insurance. We have an obligation to make
this a market in which people can gain access
to programs that will work for them.
SARA HOROWITZ: The fundamental difference
is solidarity. What I mean by that is we didnt
create a group like Sams Club to just
come and buy, though there are definitely elements
of that. We found people who are a naturally
occurring group and started realizing how they
could come together. That is what we should
be thinking about. How do we encourage naturally
occurring groupsnot government-subsidized
groupsto come together? It is good not
just for health insurance but for democracy.
It goes back to an idea of Alexis de Tocqueville
and what our democracy is supposed to be about.
AUDIENCE: I have a question for Gary
on the debate over whats wrong with New
Yorks market and whats right elsewhere.
You are basing your average process on people
who purchased through eHealth. You dont
have a comparable sample in Ohio that includes
the [unhealthy] people who couldnt purchase
because Ohio doesnt have guaranteed-issue.
These people had to join a high-risk pool [and
pay a] 300 percent premium, unlike sicker people
in New York, who can buy insurance under the
guaranteed-issue system. Is that a reasonable
GARY LAUER: That is a very fair point.
Theres another side to it, however: dont
assume that sick people who have guaranteed-issue
can afford health insurance.
AUDIENCE: Thats the perfect connector
to the rest of my question, which is directed
to all of you. Youve all shown how there
are winners and losers when we change any one
of these regulatory characteristics. If we go
to guaranteed-issue, the older people whom I
represent are going to do better, and the young,
healthier people are going to do worse. If the
goal is universality and comprehensiveness of
coverage, why are you all clinging doggedly
to the virtues of the private market as a way
to resolve this, rather than the social-insurance
model that David mentioned but didnt really
discuss in this context?
SARA HOROWITZ: We are at a fork in the
road. The way the fork had been presented in
the past was the free market versus government.
The question had been whether individuals were
going to get a Medicaid system or, instead,
an individualized free-market system. The other
fork would be a non-employer-based, nongovernmental
There is no way that we are going to have a
government deliver this. [Or an] unfettered
free market. So lets reframe the issue
and ask, do we want individuals to [handle]
it, or do we recognize that people need trusted
groups? To me, that is the fork.
GARY LAUER: Ive spent a lot of
time on this question over the years and have
concluded that the old definition of universal,
which is a government-sponsored management system,
is not practical and is simply not affordable.
I also think that we have a moral and an economic
obligation to get everyone in this country good-quality
health care. It needs to be a combination of
the private sectormuch of which works
welland public programs, presumably for
people who [simply] cannot afford health insurance,
or who cannot afford it because of their health
condition. Were paying for them now, anyway.
SHERRY GLIED: I would agree. There is
no single model of a universal public insurance
system in the world today. All countries are
struggling with the division of public and private.
This is true everywhere: Canada, Germany, France,
the Netherlands, and Switzerland. The questions
are: What is the appropriate size of government?
And what is the appropriate role for the private
For social-insurance fans, this is a moment
for optimism. In the United States, we think
of universal health insurance as being a black
or white issue. Were either going to go
to universal single-payer, or were not.
But consider how other countries moved into
universal health insurance: mostly, they did
it incrementally. It took Canada fifteen years
from the time the first province brought in
universal hospital insurance until the last
province brought in universal medical care.
Theres no reason to believe that this
has to happen suddenly.
DAVID HYMAN: First, the rate of increase
in health-care spending is quite consistent
across different types of insurance systems
and across countries. All systems are struggling
with matters of demographics and technology.
Second, the only person who is advocating a
universal social-insurance system is Dennis
Kucinich, and we saw what happened to him. Youre
going to need a lot of years and reframing of
the debate for that to be one of the two options
you get to pick from.
PANEL II: INNOVATIVE SERVICES
IN HEALTH CARE MARKETS
PAUL HOWARD: For individual patients
trying to find the best, most cost-effective
health care, there are relatively poor metrics
concerning pricing and quality that are available.
If youre looking for someone to tell you
who would be a really good doctor in your area,
theres relatively little help for you,
aside from a few lists of the top-ten doctors
in New York. But the average patient doesnt
need to know who the top doctors in New York
are; they just need to find a reliable, convenient
option for routine care. Theres a Zagats
for New York restaurants. Why isnt there
a consumer friendly, Zagats-like guide
to doctors and health care?
At the system level, periodically Dartmouth
CollegeJohn Weinberg and his colleaguesreports
data on pricing disparities in hospitals across
the country, particularly for [treatment of]
chronically ill Medicare patients. In a study
released in early April, Dartmouth researchers
found that some of the nations leading
hospitals will spend about twice as much money,
close to $100,000, on patients in their last
six months of life, while other leading hospitals
are spending half that sum. To paraphrase Peter
Orszag, director of the Congressional Budget
Office: How is it possible that the worlds
best health care can cost twice as much as the
worlds best health care? If the experts
cant figure it out, what hope is there
for the average patient?
Our second panel this morning is going to try
to chart a way forward through all this confusion
to offer examples of how entrepreneurs, physicians,
and policymakers can make health-care options
more convenient, transparent, and affordable
Were starting off our second panel with
Kevin Kelleher, a physician in private practice
and cofounder of Executive Healthcare Services.
Kevin is going to give us a physicians
perspective on the crisis affecting primary
care in this country and explain why the decline
in primary care is hurting public health and
driving up health-care costs. Hell conclude
by suggesting some ways to reinvigorate primary
care by creating a new medical home for patientswhere
the primary care physician works with the patient
to develop long-term disease prevention strategies
or help coordinate team care for complex chronic
diseases like diabetes.
Webster Golinkin, CEO of RediClinic, will discuss
another aspect of the market: the expanding
role of convenient-care clinics, which complement
the health-care system while giving people rapid
access to preventive and basic health-care services.
These clinics have proven to be remarkably popular
and affordable, but they are being held back
by misplaced regulation in some states.
Our third panelist is Jim Ward, president of
Patient Advocates, who is going to talk about
the hospital pricing and quality disparities
that I mentioned a moment ago, and how we might
arbitrage some of those differences to offer
patients better care at lower costs.
Finally, Jim Frogue, project manager at the
Center for Health Transformation, will discuss
consumer-driven health-care reforms that are
emerging at the state level. Hell talk
about how the state of Georgia, in particular,
is embracing market forces to improve access
to affordable health-insurance options.
KEVIN KELLEHER: Im a practicing
family physician in Virginia, and I currently
own a traditional primary-care family practice
office as well as Executive Healthcare Services,
which is a retainer-style, or prepay, office
that was started four years ago.
Let me say first that any reform of the U.S.
health-care system needs to be founded on primary
care as the source and director of the health
care delivered. I am going to give you my perspective
on that and tell you about some of the things
that weve done at Executive Healthcare
There is ample evidence that health-care models
centered on primary care are the most cost-effective.
Outcomes improve, cancers are detected earlier,
and mortality is reduced. Money is saved in
both outpatient and inpatient care. So a system
founded on the concept of a patient-centered
medical home is touted in academia, medical
organizations, and even our own Centers for
Medicaid and Medicare Services, but it is not
often seen in the market.
Studies in the United States and abroad show
that outcomes are improved when doctors have
more time to spend with their patients and when
doctors are allowed to address preventive issues
that are pertinent to that patient during a
visit. When care is made accessible and relationships
are established, money is saved through control
of chronic disease, reduction of inappropriate
emergency-room visits, and decrease in redundancy
of testing and procedures.
Paul mentioned Dartmouth data, which are a
good source for tracking these specific numbers
and for demonstrating how, if primary care is
the center of care within a county, health-care
costs are usually lower than they are in counties
that arent as heavily occupied by primary-care
What is the current American medical office
like these days? The primary-care office tends
to be a model based on high volume, minimal
doctor-patient time, limited scope of visits,
and a knee-jerk approach to medical care that
is reactive, not proactive. Most of us have
experienced this in one form or another. The
office itself is focused on back-office functions
much more than on patient care. You can look
at Medical Group Management Association (MGMA)
data on how many full-time employee equivalents
support each doctor. Out of the 3.8 per doctor,
usually two are geared toward back-office functions,
not health-care delivery.
Medicare physician reimbursements have been
either flat or declining in recent years, and
their failure to keep up with the cost of living
and inflation have demanded more patient visits
during a day, just to keep a medical practice
running. Insurance follows most of Medicares
rates and has implemented further tactics to
reduce payments. Procedures are bundled: If
Im seeing someone for a physical who also
has a coldor worse, a new knee painI
wont get paid for the evaluation and treatment
of that problem; I can only do one or the other.
This impairs a doctors ability to offer
comprehensive care, including taking care of
an immediate problem.
By comparison, thirty minutes for a typical
specialist procedure is usually reimbursed at
a rate three to ten times higher than thirty
minutes for the discussion of chronic health
issues with a patient.
As large insurance companies swallow up smaller
ones, we have arrived at a system in which 60
percent of privately insured individuals are
covered by three companies. This oligopoly is
further reducing support for primary-care physicians
delivering good-quality care.
In the next ten years, approximately 35 percent
of our population will be over the age of fifty.
The need for good primary care and good preventive
services increases, and screening issues will
increase substantially, but who is going to
be delivering these services?
Just as the demand for primary-care doctors
is increasing, the supply is diminishing. Since
1997, the number of U.S. medical-school graduates
entering family-practice medical residencies
has dropped 50 percent. And 80 percent of internal-medicine
graduates are going into subspecialties, not
into primary care.
Practicing primary-care physicians basically
have responded by reducing services on site.
They are increasing problem-related referrals
for issues that they could have addressed but
that they dont have time to address, and
turning to high-volume, single-problem visits.
They are forgoing inpatient care of their own
patients. And they are choosing early retirement:
a recent study suggested that a third of doctors
over the age of fifty will either change careers
or reduce their services or their practice of
medicine in the next ten years.
So the majority of office-staff energy and time
is focused today on the insurance process and
accounts receivable rather than on patient care
and outcomes. This is not a model that any of
us wants to be part of.
Small and large changes are needed. We talked
about a lot of them on the first panel. We all
know that fundamental changes are needed in
payment systems, tax structures, and tort reform.
Health information technology should be encouraged
in all sizes of offices and needs to be founded
on data portability and on improved communications
between physicians and specialists as well as
with patients. We need to utilize proven remainder
and recall systems such as recare programs,
reminder cards, autodial systems, and chronic-disease
care algorithm forms that are effective in reducing
costs for chronic care. And we need to employ
chronic-care treatment models and decision-making
tools based on best practice.
The health-care system needs to shift toward
primary care as the foundation of health-care
delivery by realigning public policy and initiating
programs that encourage the brightest and best
medical students to go into primary care. Today,
these students are simply not choosing it.
Once in primary care, these doctors must be
allowed to practice the trade that they learned,
which is personalized, comprehensive, coordinated
care distributed to people in an ongoing manner.
The current system does not support this.
Compensation must promote cognition and quality,
not procedures and quantity. Compensation should
not be based purely on actual visits but should
be afforded to the coordination of care, office
communications among other providers, and third-party
medical serivce providers. Remote monitoring
of clinical data is very important and should
be compensated. Physicians who distinguish themselves
by efficiently providing medical care and by
achieving measurable and successive quality
objectives should be rewarded because, as ample
evidence shows, it saves money for the system.
In the short term, there are steps toward this
paradigm. My Executive Healthcare Services is
one small step, and youre going to hear
about others. But some primary-care physicians
offices are forgoing out-of-network insurance
contracts and contracting with the patient for
payment of services [in the form of prepaid
[policies] or retainers, but also [in the form
of] simple out-of-network fee-for-service.
Businesses have implanted worksite wellness
services and on-site clinics because they can
realize cost savings by focusing on prevention.
Both models begin to directly involve whoever
is paying for services with the services they
receive. This happens in most other markets.
In health care, weve gotten away from
In these new relationships, day-to-day options
and decisions arent dictated by third
parties. Instead, health-care relationships
are founded on partnerships with the shared
goal of improved health, and cost is measured
and becomes improvable.
The patient starts to become a major participant
in the financial and medical choices that affect
care. Time is of the essence in medical care;
but [doctors should spend] time dealing with
cultural and social obstacles that [limit] [a
patients] health choices and discussing,
coordinating, and offering follow-up care in
an expedient manner. Additionally, my officeand
this model generallyputs patient care
first and minimizes the need for back-office
functions and keeping the practice alive day
Not all these models are successful when they
start up, but thats goodit suggests
that patients take very seriously the extra
expenditures [they must make] for their health
care, and that they are scrutinizing the quality
of services theyre receiving. The disconnect
over many years between patients and doctors
has made paying for ones medical care
a foreign concept. My experience at Executive
Healthcare Services shows that people realize
benefits far beyond what they expected from
a model that delivers good care. We are extremely
accessible to patients. Over a period of more
than four years, our model has achieved a 97
percent patient retention rate with patients
who can choose to leave at any time they wanttheyre
month-to-month. I am happy that a patient said
to me recently, Good medicine takes time.
Once a patient experiences this, he often realizes
what he has been missing in the current system,
and the bond thats established between
patient and doctor guides him through all the
other health-care choices.
WEBSTER GOLINKIN: Im CEO of RediClinic,
which is one of the leading operators of health-care
clinics in the United States. Im also
president of the Convenient Care Association.
Id like to talk to you from the industrys
perspective rather than my companys perspective.
Ill briefly describe what convenient care
is, why its growing so rapidly, what can
slow its growth, and where I think this is all
Convenient-care clinics are small health-care
facilities located in high-traffic retail outlets
with pharmacies. In RediClinics case,
were in Wal-Marts Supercenters and
in H-E-B grocery stores, and we were in Duane
Reade drugstores in Manhattanbut thats
another story that Ill mention later.
These clinics are usually staffed by nurse practitioners
or physician assistants. Nurse practitioners,
as you probably know, are registered nurses
with masters degrees (or comparable training)
who are licensed to treat, diagnose, and prescribe
medication for a limited range of medical conditions.
Convenient-care clinics offer a limited scope
of practice, so they typically treat twenty-five
or thirty common conditionse.g., earaches,
strep throat, pinkeyethe kinds of things
that are not life-threatening but will certainly
get you down if they are not attended to.
Convenient-care clinics also administer a fairly
broad range of services, depending on the operator,
including health screenings, medical tests,
immunization (including flu shots), and basic
physical examinations. Simple things can be
done relatively quickly. Theyre open seven
days a week, one doesnt need an appointment,
and because of the limited scope of practice,
a visit typically takes about fifteen minutes.
Again, because the scope of practice is limited
and we have the luxury of specialization, its
quite an efficient process in terms of time
So theyre affordableusually less
expensive than other health-care-delivery outlets.
All prices are prominently posted at the clinic,
so patients know exactly what theyre going
to pay before they receive their treatment.
Increasingly, operators have contracted with
managed organizations or other third-party payers,
so mostly they will take your co-pay. Theyre
serving the stores shoppers and employees
as well as consumers in the trade areas of those
The industry has grown rapidly and quite remarkably
over the past few years. When the Community
Care Association was founded about a year and
half ago, there were about 150 of these clinics
in the United States; today, there are nearly
a thousand. The industry has treated more than
2.5 million patients since its inception, with
no safety issues that anyone is aware of. It
is projected that there will be about 1,500
of these clinics by the end of this year; some
say as many as 5,000 by 2010.
Why is this industry growing so rapidly? Frankly,
the growth has surprised even me, given the
various obstacles weve encountered in
making consumers aware of the concept, persuading
retailers to let us place clinics in their stores,
and getting third-party-payer contracts.
The answer is simple: there is tremendous consumer
demand for easier access to high-quality, affordable
health care. Consumers are just not receiving
it any other way. And there is a growing primary-care
physician shortage. Its hard to imagine
that this problem is going to get any easier
for consumers. If you look at the research thats
been done on preventive care, depending on the
survey, between seven and sixteen percent of
consumers have tried convenient care, and 30
to 41 percent say that they intend to try it.
That translates into millions of consumers.
The outlook is bright in that respect.
Other constituencies are embracing convenient
care. Retailers now say that they want these
clinics in their stores, and third-party payers
see this as an opportunity to cut some cost
out of the system while keeping members and
subscribers happy. Policymakers say the same
thing, which is that we have to do something
to stem rising health-care costs. This is certainly
not a silver bullet but is possibly part of
Basically, four things could slow the growth
of the industry. One is systemic clinical quality
issues. There has been some conversation about
whether the quality of care provided at convenient-care
clinics is adequate. There may be incidents;
remarkably, there have not been any so far,
but there are incidents in other health-care-delivery
systems every day. So I would be a fool to say
that this wont happen. But will there
be systemic clinical quality issues? I absolutely
dont see it, because the nurse practitioners
and physician assistants who are staffing these
clinics are very well trained for the limited
scope of services that they are allowed to provide.
They use evidence-based protocols and electronic
medical records, and their companies conduct
compliance and outcome studies. They have physician
oversight at every clinic and local referral
networks. Theyre in compliance with applicable
regulations. I think convenient-care clinics
are going to turn out to be better in quality
of care for the limited scope of services that
we offer. Its purely a function of specialization.
The second thing that could slow the growth
would be a shortage or increase in cost of nurse
practitioners or physician assistants. Clearly,
theres a nursing shortage in the United
States. There are about 140,000 nurse practitioners,
and maybe 40,000 physician assistants. The system
is graduating five thousand to six thousand
in each category annually. There has been an
adequate supply of what have been referred to
as mid-level practitioners to sustain the growth
of the industry because nurse practitioners
see convenient care as an appealing new career
track, where the compensation is competitive,
and they get more autonomy than they are accustomed
to and, in some cases, more predictable hours.
We have diverted some nurse practitioners from
other career tracks that they could have taken.
That has sustained the growth of the industry.
There are obviously issues here, such as the
need to do a better job of building educational
capacity in this country to fulfill a growing
demand for mid-level practitioners, and there
are various initiatives afoot to do that.
The third thing that could slow clinic growth?
Maybe the business model itself doesnt
work. There have been a number of highly publicized
failures of convenient-care operators over the
past year or so, mostly smaller companies. Clearly,
some have underestimated the capital requirements
of this business. It seems like an easy business
to get into because its not extremely
expensive to open a business, but it takes several
hundreds of thousands of dollars to sustain
unit to cash flow breakeven. Because the business
model hasnt really proved itself yet,
the probable path is uncertain.
There will be some consolidation in the business.
Success will come with increased consumer awareness
and third-party-payer acceptance, which is happening.
There will be some creative and appropriate
scope expansionagain, within the limit
of the fifteen-minute visit. I can assure those
who think that convenient care is a Trojan horse
for putting a full-service medical practice
in a grocery store that that would entirely
destroy the business model. If we didnt
have a limited scope of practice and if we werent
able to get a patient through in fifteen minutes
reliably and predictably, the value proposition
would fundamentally be destroyed. So there is
an upper limit on scope expansion.
Convenient-care operators are becoming more
efficient, and better at understanding what
kind of promotional vehicles work and dont
work and getting more support, not only from
retailers but from other elements of the health-care-delivery
system. RediClinic has partnered with leading
health-care systems in every market that it
serves. A couple of years ago, it was very hard
to get other health-care systems to partner
with us; today, we have a backlog of health-care
systems in every market wanting to partner with
The fourth thing that could slow growth, and
perhaps the [factor] most applicable to New
York State, is increased regulatory impediments.
There are already significant regulatory impediments
to the growth of convenient care, but theyve
been manageable in most cases. These come in
various shapes and sizes: clinic-licensing requirements;
restrictions on nurse practitioners scope
of practice or prescriptive authority; physician
oversight requirements; and, of course, the
deadly prohibition against the corporate practice
of medicine, which is particularly relevant
in New York State.
New bills have been introduced in various states
over the past couple of years that would put
up even more roadblocks to the expansion of
convenient care. Im pleased to say that
theyve all failedbecause the sponsors
of these bills are swimming upstream against
consumer need and very high levels of patient
satisfactionin excess of 90 percent industry-wide.
Theyre also swimming upstream against
an increasing number of studies that show that
the quality of care provided at convenient-care
clinics ranges from very good to excellent.
And they are swimming upstream against growing
third-party-payer acceptance. Recently, the
Convenient Care Association has been doing a
better job of educating various constituencies.
These efforts to constrain the growth of convenient
care will fail, but some states will be left
behind [anyway]. New York State is lagging at
this point. It has a strict interpretation of
case law, as it applies to the prohibition against
the corporate practice of medicine, which has
made it one of the two least attractive states
for convenient-care operators to function in,
the other one being California.
Ill give you my own experience in New
York State. RediClinic made a deal with Duane
Reade in 2005 and opened a couple of convenient-care
clinics in its stores in Manhattan. We had four
others under construction, but our legal bills
were higher than the losses we were sustaining
or were planning to sustain over the first full
year of operation. I finally decided that, much
as we wanted to be in the New York market, and
saw residents there with no easy access to affordable
health care, it just didnt make sense,
when there were forty-eight other states [excluding
California] where it was a lot easier and less
expensive to operate. So we decided to pull
We have been replaced at Duane Reade by another
company that private-labeled its clinics for
Duane Reade. It is a physician model, so it
is more compatible with the prohibition against
the corporate practice of medicine in New York.
I visited its website a couple of weeks ago
and looked at its pricing. It basically charges
40 percent more than what were charging
for treating such conditions as strep throat
and ear infections. Its expanded scope of practice
makes it hard to believe that it can get people
in and out reliably in fifteen minutes. Im
not saying that it doesnt do a good job
or that it doesnt provide a valuable service,
but it looks more like just another urgent-care
clinic, not like what convenient care is able
MinuteClinic is the only major operator that
is still here in New York State. It comprises
seven units and has no plans for expansion.
Other convenient-care operators have stayed
out. This is a passage from the report of the
New York City comptroller last year: The
city and state should encourage the growth of
drug and retail health clinics as a way of increasing
cost-effective access to routine care and taking
pressure off overburdened emergency rooms.
But no progress has been made. I wish it were
otherwise because RediClinic, for one, would
like to be in New York State. But right now,
its almost impossible for us to do business
Where will all this come out? I think the convenient-care
industry is going to continue to grow, albeit
at a somewhat slower rate than what some have
predicted. There will be robust growth but not
5,000 clinics in the next two yearsI dont
think there is enough capital out there to do
that. I agree with Kevin that not enough attention
is paid to primary care, but its going
to be hard to turn it around. In five to fifteen
years, convenient care is going to be one of
the most important portals into our health-care-delivery
JIM WARD: I want to thank the Institute
for this opportunity to come and share with
you some of the things that were doing
to manage health plans. When, I saw the title
of this session, Innovative Services in
Health Care, I thought of things like
the DaVinci Surgical Robot. So I went back to
our play book, which is entitled Who Killed
Health Care?, by Dr. Herzlinger, and somewhere
around page 70 she describes innovation
as that which lowers health-care costs
while raising quality. I felt a little
bit better after reading that because we have
been able to achieve that standard in our work
with employer health plans.
My company manages self-insurance health plans
primarily for employers in Maine and New Hampshire.
We have the administrative capability to handle
all the functions of the health plan. We enroll
people, terminate people, pay health claims,
send out COBRA notices, HIPPA notices, and pursue
third-party liability. And we also have a nursing
division, the heart of our company, which works
with patients as they go through the healthcare
system. I think what we do with our nursing
staff and how we do it is what is different
The fundamental premise of our company is that
we have to have complete agreement before we
can do business with a company. [One of our
principles] is that the least expensive health
care that one can buy is quality health care.
That isnt just a slogan. Nine times out
of ten, when we work with patients we will save
them money and enhance the quality of care.
One time out of ten we are going to increase
the cost of careand in some cases dramatically
increase the costin order to ensure that
the patient receives the proper care.
The marching order for our nurses is to advocate
on behalf of the patient throughout the system,
as though the patient were their mother, father,
spouse, or child. When you run into obstacles,
you come back to us, and our job is to remove
Long term, fifty to seventy percent of health-care
cost can be eliminated through wellness programs,
early detection, and prevention. Our nurses
go to the employers location and offer
wellness incentive programs. In the typical
program, at the end of the year employees will
get a check issued from the health plan if they
achieve certain wellness standards, such as
for weight, blood pressure, et cetera. The wellness
process also introduces employees to our nurses,
so that if and when the time comes that they
need to enter the health-care system, a relationship
has been established, and a basis for trust
has been established.
The bad news is that Maineand to a certain
extent, New Hampshire as wellis a very
restrictive market characterized by local health-care
fiefdoms and monopolies. Meaningful competition
is something you can find only in a dictionary,
and that dictionary does not happen to be located
in the local hospital.
The good news is that our clients are very
fortunate to live anywhere from one-hundred
to three-hundred miles north of world-class
centers of medical excellence in Boston: Mass
General, Brigham and Womens, The Lahey
Clinic, Tufts Medical Center, and Beth Israel
Deaconess, to name a few. What we have found
is that Boston is a very competitive health-care
market. It appears there is an excess of supply
down there, those hospitals compete with each
other, and they understand competition. So we
have worked that reality into the benefit structure
of our clients health plans.
The typical plan offers a deductible of two-hundred-and-fifty
to five-hundred dollars, with a co-payment of
twenty-five dollars per office visit, and reimbursements
of eighty percent of major medical [expenses],
to the point where the employees liability
maxes out. What we have experienced there is
a range of savings of anywhere from twenty to
For example, a total hip replacement in Boston
can cost $6,800. Thats about a $40,000
ticket in Maine. And were getting great
We have found that people are treated very
well going through the system, and Im
not talking just clinically. Theyre treated
with great respect. At The Lahey Clinic, for
example, if you get there early, they take you
The clinicals at these institutions are great,
were saving a lot of money for our clients,
and the outcomes are terrific. Most of the specialists
our patients see are hospital employees, and
they tend to treat in teams. So, for example,
if we have a patient with an eleven oclock
appointment for a breast cancer consultation
with a surgeon, it is not unusual for that surgeon
to ask the patient to stay until three p.m.
for a meeting with the treatment team. The patient
will meet with a radiation oncologist and a
medical oncologist along with the surgeon. This
sends a very powerful message to patients about
the respect in which they are held.
The local [situation] is quite often a contrast.
You see the surgeon and then get a referral
to see the medical oncologist in two or three
weeks, and then if youre lucky youll
get to meet a radiologist, but not necessarily
the one whos going to provide the actual
treatment. That can often take four or five
weeks. Meanwhile, the clock is ticking, and
theres a perception by the patient that
their cancer is continuing to grow. So its
been wonderful for our clients to get referrals
into a [different] environment from that.
Gradually, we removed any obstacles to people
receiving treatment in those referral areas.
Our referrals are not only to the Boston area.
We have referred people to Columbia Presbyterian,
to Johns Hopkins, in Baltimore, to the Mayo
Clinic, in Rochester, Minnesota, and as far
west as the UCLA Medical Center based on certain
medical specialties [they offer]. Were
trying to find the places where they do certain
procedures better than average. The results,
according to patient feedback, have been great.
Procedurally, if patients want to have treatment
in the Boston area, they contact our nurses.
We triagewe would not refer, for example,
simply for a routine x-ray. However, if its
a potentially serious case, we will make all
the arrangements and referrals for them.
Since weve been doing this so long, we
have developed relationships that enable our
patients to be seen within a very short window
of time. When a patient is referred to Boston,
we will pay the bill at 100 percentpay
their transportation costs and the lodging of
a family member or close friend while they are
thereand we still save money. Its
a way of passing savings on to the patient.
If you want treatment locally, well support
you in that process just as enthusiastically.
The net result is that were saving roughly
between ten and fifteen percent on total employer
health costs each year.
I looked at a case this past Fridaya
group of five hundred employees in Portland
in a very competitive business. This employer
has had a rough two years, and we added up what
weve saved it in the past year just by
sending patients down to Boston. The total was
$450,000. It would have to sell a significant
amount of product to put $450,000 on the bottom
The late speaker of the House, Tip ONeill,
once said, All politics is local.
I think to a certain extent all health care
is local as well, and were seeing huge
economic and quality disparities in different
local markets. Were always trying to find
JIM FROGUE: I want to talk about the
bill that just passed in Georgia, which could
potentially be one of the most impactful health-care
reform bills enacted in any state. We gathered
together all the leading health stakeholderspatients,
physicians, health insurers, and brokersin
one room to address the problem of the uninsured.
These groupswho are at each others
throats for just about everything elsecould
agree that there was a problem, and it was something
they wanted to help fix. So we asked, What
are some things on which we can agree? We cant
solve all the problems here in one sitting,
or in one session, or even in just one session
of the legislature. But what can we do to make
at least a huge dent in the uninsured population
We decided that one of the biggestif
not the biggestsegment of the uninsured
is people who make over $50,000 a year. In Georgia,
that number is almost a third of the 1.7 million
without coverage. Thats a little over
500,000 people, which is quite a high number.
These peopleat least by our definitionchoose
not to buy health insurance. They could afford
at least some kind of coverage, but they choose
not to purchase anything for a variety of reasons,
primarily because they dont see value.
We decided to aim our reforms at this segment
of the market: people who would likely buy policies
if they had better options.
This bill will be signed into law by Governor
Perdue next week. We think it will be pretty
radical and accomplish a handful of things.
First of all, it will eliminate state premium
taxes on high deductible health plans. The premiums
for high deductible health plans will be 100
percent deductible against Georgia income taxes.
Small employers, defined as anyone up to fifty
employees, receive a tax credit of $250 per
employee for high deductible health plans they
purchase. Considering that 70 percent of firms
with less than 10 employees in Georgia dont
offer coverage, we think this is the right kind
of incentive. Also the bill will allow Georgias
Health Insurance Commissioner to grant fast-track
approval to out-of-state HSA plans so that they
can be sold in Georgia. New York, more than
any other state in the country should do the
same. States like New York, New Jersey, or Maine,
that have major problems with their markets,
instead of going through the rigmarole of passing
a bill like this, all theyd have to do
is allow their citizens to buy products based
in Georgia. Thats one simple tweak: eliminate
the Berlin Wall and let them go buy in a different
state. Even if its just one state like
Georgia, let New Yorkers buy there. Wed
be happy for the business. If you cant
create the products and business in your state,
send people to Georgia.
But what were most excited about is that
the bill frees up health insurers to offer financial
rewards and incentives for specific patient
behaviors. The overwhelming majority of peoples
health status is behavior-based. The doctor
or hospital you go to, the health plan youre
in, the genetics you have, all of that combined,
makes up far less than half of your health status.
People always forget that. Political discussions
almost always miss that biggest point. Democrats
want to finance it this way, Republicans want
to finance it this waywhen behavior, more
than anything else, determines health status.
Can financial mechanisms affect health status?
We think the evidence shows that they can stimulate
the right behavior changes. Weve already
seen it with quite a few plans. High deductible
health plans reward people specifically, either
through direct payments or through reduced co-insurance
or deductibles, for healthier behaviors. Broad
studies of HSAs or HRAs show middling results
in patient satisfaction and health outcomes.
But were not interested in copying the
middle or the bottom half; were interested
in copying the best. And the best are very good,
much better than what currently exists elsewhere
in the private health insurance market.
The consumer-directed plans that work extremely
well do four things, which we call the four
Cs. Theyre cash, competition,
communication and culture. The first is cash.
People respond to cash or cash-equivalent rewards.
How many of you flew here and chose an airline
based on the miles you have on that airline?
Those little things have a huge impact. Competition,
at least in larger group plans, stimulates behavior
change as well when it is you vs. your officemates,
or your sections vs. the guys in accounting.
Communication is absolutely key. One of the
biggest problems in consumer-directed care plans
is the CEO will read an article in the Wall
Street Journal, probably written by Regina,
and hell go to his H.R. director and say
this is great; lets go do this. And the
H.R. director, whos 58 and about to retire,
thinks it sounds like so much work. So she half-heartedly
creates an HSA option, but nobody enrolls in
it. That happens all the time. Successful plans
have aggressive communication strategies from
the CEO on down that educate people on how they
can be rewarded by taking full advantage of
them. And then theres the fourth C: culture.
Culture must change in order to improve health
Ill walk through one example. The Alegent
Health System, based out in Omaha, put together
a very interesting consumer-directed plan that
started in January in 2006, and they now have
2 full years of data. The Alegent folks gave
their employees a choice of plans. They didnt
kick everyone into a consumer-directed plan
against their will. They kept the old PPO arrangement
for people who were comfortable with that. However,
over 75 percent chose one of the consumer plans,
and that figure is 92 percent today. The consumer
plans literally pay people $100 to take a health
risk assessment or pay diabetics $250 to meet
certain health metrics. Smart people with their
money at stake realized that these little payments
have huge impacts on the backend by avoiding
emergency room costs and other costs that are
much more expensive. So Alegent goes out of
its way to make sure people are completely covered.
They use over three times the national average
in preventive care. Their employees rolled over
$2 million in balances the first year and double
that in 2007. By the way, their overall cost
trend for 2006 was 1 percent while achieving
significantly better health outcomes. Thats
well below the national average. In fact, we
did an event on Capitol Hill on April 8th, and
we would encourage you to view the webcast archived
on our website at healthtransformation.net.
Again, were not interested in copying
the average or the bottom; were interested
in copying the top. Some plans are extremely
effective, so what is it about those that we
Our work in Georgia is not done. The bill has
passed and were waiting the governors
signature. We now have a working group of our
clients focusing on what kind of products can
be created under this new law. Our brainstorming
sessions will meet on a regular basis and walk
through what could work. I think the products
youre going to see coming out of Georgia
in the individual and small group market are
going to be the most innovative in the country.
So keep an eye on Georgia in the next few years.
PAUL HOWARD: What weve seen on
this panel is a continuum of innovative solutions
to health-care problems. We have a wide variety
of health-care services that consumers can utilize,
based on their health status or perceived need
for health care, from prepaid primary care and
RediClinics for chronic and routine ailments,
to consumer-friendly options for even much more
serious illnesses. Id like to ask the
panel what more we can do to raise public awareness
that these new products and services are out
there, and that they work.
KEVIN KELLEHER: People need someonea
trusted intermediaryto help them navigate
their health-care options. On the first panel,
Sara Horowitz brought up decision-making: Should
someone decide to spend money now on insurance
for himself? Is it a cost or a benefit to hold
that $3,000 himself in his pocket every year
instead of paying a higher premium for more
comprehensive insurance, or not to purchase
any insurance at all, given the chance he may
not need medical services? Its hard for
someone to decide that on his own, but the programs
we discussed today can at least enable someone
to look at what options are out there. Even
more creative marketing and education plans
are probably going to come up in Georgia over
the next couple of years.
What are the available options for health care,
and how would it be best to receive them and
utilize them? Entrepreneurs have to make it
easy for consumers to answer those questions
and understand how theyre going to pay
for care. I dont have all the answers,
but Im sure unique, creative business
opportunities are coming up.
WEB GOLINKIN: Let me suggest how convenient-care
clinics deal with this. We have supervising
physicians at each of our clinics who are available
to nurse practitioners 24/7, who enter into
a collaborative practice agreement with them,
and who regularly review patient charts. There
already is that kind of connector into the local
medical community. When we see someone who needs
ongoing care and has a condition outside of
our limited scope of practice or that we are
not set up to provide, we first refer him back
to his primary-care physician; if he doesnt
have one, we help him find one.
Some misconceptions exist in the medical community
about what convenient care is or isnt
doing regarding the increased fragmentation
of care. Were doing our part to minimize
it as much as possible, but we need collaboration
at the other end. We need primary-care providers
and other players in the health-care delivery
system who want to collaborate with convenient-care
clinics to create a seamless web of care.
All care providers who are members of the Convenient
Care Associationand that represents 95
percent of all the clinics in the United Stateshave
electronic medical-record systems, which serve
many purposes. One problem that we have in trying
to connect with primary-care providers is that
they might not have those systems or dont
have the resources or desire to connect. Ultimately,
we must have some kind of standardized electronic
medical-record system in this country so that
there is a common denominator. Without that,
providers will become increasingly fragmented.
JIM WARD: Ill comment on the employer-based
system, because thats what our experience
is. Were finding that with employers aggressively
managing their plans, only 50 percent of females
over the age of forty are getting timely mammograms,
and even a lower percentage of males over the
age of fifty are getting prostate-specific antigen
(PSA) tests. The plans have beefed up their
preventive-care plans tremendously. Its
not uncommon to for them [to offer] a thousand
dollars worth of preventive care. The message
is: well pay you more to prevent it than
were ultimately going to pay you to cure
it. Its manageable.
Now, upon enrollment, patients will qualify
for a discount up front if they agree to get
timely preventive-care tests appropriate for
their age and sex. They get the discount on
the employer contribution up front. Thats
the type of thing that, at this stage, employers
have to be aggressive about, but its also
the best business decision the employers can
JIM FROGUE: Our work has concentrated
on the uninsured and how to get more people
covered; but if we dont have new, creative,
and more efficient delivery systems, it doesnt
matter how many people are covered. A recent
article in the New York Times stated
that Massachusetts has about 300,000 or so newly
insured. But there arent more primary-care
physicians there; it interviewed one physician
who had a years backlog in new patients.
Having insurance is very good and helpful,
but you need someone whos going to treat
you first. Some of the new opportunities discussed
by this panel are going to help a lot in expanding
affordable, timely access to health care.
HOWARD HUSOCK: I am vice president for
policy research at the Manhattan Institute.
Its not often that someones thinking
and writing have changed a field. That, however,
is the case with Regina Herzlinger. Its
no coincidence that so many members of both
panels today mentioned her name and cited her
work. It was her insight that the disconnection
created by our current health-care financing
system between consumer and doctor drives cost
up and quality down. Her shorthand for the set
of solutions she sketchedconsumer-driven
health carehas entered the language of
both policy formulation and popular discussion.
The paradigm-breaking nature of her work is
what caught our attention at the Manhattan Institute
when we asked her to join the ranks of our senior
fellows. So, too, did the fact that she spoke,
as Adolph Ochs once put it, without fear
or favor. Professor Herzlingers
vision of a better health-care system for America
in no way advances any one interest over another
but rather seeks to secure the general interest.
I suspect that youll see that she spares
Regina E. Herzlinger is the Nancy R. McPherson
Professor of Business Administration at the
Harvard Business School. She received her bachelors
degree from MIT and her doctorate from the Harvard
Business School, where she went on to become
the first woman to be tenured and chaired at
that institution. Long before her groundbreaking
work on health care, she was well known and
honored for her expertise in nonprofit accounting
Her books on health care include Consumer-Driven
Health Care: Implications for Providers, Payers,
and Policymakers and, more recently, Who
Killed Health Care?: Americas $2 Trillion
Medical Problemand the Consumer-Driven
Cure. Her many honors reflect the groundbreaking
nature of her health-care research and writing.
Managed Healthcare named her one of the
nations top ten health-care policy thinkers.
Readers of Modern Healthcare selected
her as one of the hundred most powerful people
in health care, and Money magazine dubbed
her the godmother of consumer-driven health
care. Please welcome my colleague and
friend Regina Herzlinger.
REGINA HERZLINGER: Whats the problem
with health care? People seem to talk at cross-purposes
because they are addressing different problems,
so their solutions are very different. The major
problem with health care is that its a
very bad value for the money. The quality is
very uneven, though we have great doctors and
We are on the brink of an enormous scientific
revolution in medicine, which will enable medicine
to cure diseases through understanding the mutations
in our genes and by creating diagnostics and
therapeutics that deal with those genetic imperfections.
Yesterdays New York Times featured
a mind-blowing article about gene therapy, which
has been the holy grail of genomics. Gene therapy
was actually enabled in some people who were
congenitally blind. This article marks the beginning
of astonishing changes in the way that medicine
will be able to cure and reverse diseases. The
U.S. leads the world by far in investment in
that kind of research. But we also have uneven
quality. Nearly 100,000 people are killed by
hospital errors every year.
We also have issues with cost. That is demonstrated
by General Motors claiming that it costs them
$1,600 per car in health care, while Toyota
[spends] $100 per car. GMs is likely a
phony number that it has [inflated] to make
its caseGeneral Motors would love to dump
its health-care program and go to a single-payer
health-care system. However, the numbers are
in the right ballpark. Lets say that health
care costs General Motors about $1,100 per car
produced and that for Toyota, its about
$300. Thats still an $800 differential
in health-care costs between the two manufacturers.
Can General Motors engineer out $800 worth of
costs in areas other than health care in order
to be price-competitive with Toyota? I dont
In my long career, Ive been on the boards
of directors of many large companies. As our
other speakers have told you, in the United
States, uniquely, the employer community plays
a major role in buying health care. Employers
are burdened not only by our excessive health-care
costswe spend 17 percent versus the 912
percent of GDP that other economies spendbut
also by the fact that they pay much more as
a percentage of their total spending than do
employers in any other country.
The reason is the little tax wrinkle that allows
my employer, Harvard University, to take $15,000
of my salary and use it to buy health insurance
for me on a tax-[deductible] basis. I do not
have to pay taxes on that money. Harvard University
[buys my health insurance], but I wouldnt
have it buy my car, my clothing, or my housing.
Smart as it is, it has no idea what I consider
value for the money.
So American businesses buy health insurance.
Overwhelmingly, its large businesses with
big staffs to buy health insurance, though its
a big distraction for them.
I have never met a CEO who said to me, You
know what I love about my job? I love buying
health insurance. Ive met CEOs who
have said, Get me out of here. If only
the tax code could change, Id cash them
out and be rid of this albatross.
Buying health insurance is an albatross because
they dont know what you and I consider
to be value for the money. Here, in the richest
country in the world, more than 40 million people
are uninsured. People who earn over $75,000
a year are experiencing some of the fastest-rising
rates of un-insurance. That income puts them
in the top 20 percent of American wage earners.
[Such] people do not buy health insurance, even
though in theory they can afford it.
Why dont they buy it? It may be that
its inconvenient to do so, as Professor
Glied hypothesized, but it may also cost too
darn much, since $75,000 in Massachusetts, after
taxes, is $37,500. Health insurance in Massachusetts
[for a family] costs $15,000 if you dont
receive it through your employer and have to
pay for it out of pocket. No family is going
to buy health insurance [that costs so much].
They have their mortgage, their childrens
education, and their food and housing [to pay
We have another big economic problem: job lock.
Most of the growth in the American economy comes
from small businesses. Many people working in
big companies would love to work in small entrepreneurial
companies, but they dont leave; theyre
locked into their jobs because the small-group
and individual [health-insurance] market is
such a poor one. Theyre afraid of what
will happen to them if they have to go out and
buy health insurance.
What I mean by underinsurance can
be demonstrated by discussing the first great
drug for genomic mutations (SNPs), which is
made by Genzyme, a company located right next
to the Harvard Business School. Genzyme earns
$1.2 billion from this one drug. If you have
a [certain] genetic mutation and you take this
drug, you live. If you dont take the drug,
you die. Some 6,000 people take this drug. The
drug costs $200,000 per person, per year. If
a persons health insurance tops out at
$1 million, the person becomes uninsured and
uninsurable after five years on this drug.
Thus many people are underinsured, even though
they think they have insurance. New York State
has this problem. It spends more as a percentage
of its gross state product than the U.S. as
a whole, and its rate of growth of health-care
costs exceeds that of the U.S. as a whole.
So why is there erratic quality and high cost
in health care, whereas in industries such as
retailing, automobiles, and computers, cost
as a fraction of company income has gone down
and quality has substantially improved? I pointed
out the automobile and computer industries because
most people dont have a clue as to how
they work. I graduated from MIT, and when I
had to program a PDP-11, which cost $150,000,
I had to talk to it in machine language. Today,
my cell phone, for which I paid $99, has more
computing capacity than that, and I can talk
to it in English. So how does it happen that
complicated products like cars, which are essentially
a series of microcomputers, have gotten better
and cheaper while health care, which is also
very complicated, is of erratic quality and
has high costs?
The difference is that in cars, retailing,
and computers, consumers do the buying and use
their own money. As a result, we have a lot
of choice in automobilesthere are 250
models of automobiles. You cannot have a competitive
market unless products are differentiated so
that people can choose items offering different
value for the money.
Lets look at choice in the U.S. economy.
The number of books published [per annum] has
grown by 50 percent, to 185,000. More books
create more competition, and competition increases
Even the number of brands of chocolate, something
we hardly need, has gone up by at least 20 percent.
What is the underlying dynamic here? If the
Mars company introduces increased choice and
the marginal revenue turns out to be less than
the marginal cost, its not going to keep
doing it. So the fact that there is more choice
means that consumers are responding and that
it is worthwhile to be innovative in these very
Health care is very different. Employers and
governments do the buying. Harvard University
brilliantly manages a $30 billion endowment,
but when it comes to buying my health insurance,
it is not even close to giving me what I want.
And when I go into Medicare, its going
to be the same thing: Im just not going
to get value for my money, and it uses other
peoples money. People think that health
insurance is free; but your salary is being
lowered by the amount of your health insurance,
which is why income has remained flat.
When companies use your money to buy health
insurance for you, no matter how well intentioned
they are, you will be offered much less choice
than you would if you were spending your own
money. As a result, we have very little choice.
There has been consolidation among health insurers
all over the U.S. There are now three or four
very large health insurers. There has also been
consolidation among hospitals. In some parts
of the country, 80 percent of all admissions
occur in one hospital system. Theyre monopolies,
and when there are monopolies or oligopolies,
there is virtually no price competition. In
fact, costs increase, and sometimes there are
quality problems as well. In addition, there
is very little product differentiation in the
hospital, doctor, or insurance market.
Health insurance is a trillion-dollar market,
yet we have only two types of insurance policies.
One is called a PPO (preferred provider organization),
and you can see how incredibly consumer-unfriendly
this market is, because no one even knows what
it is. The second is called an HSA (health savings
account) or an HRA (health reimbursement arrangement)
and is sometimes given the misnomer consumer-driven
When you ate yogurt or whatever you had for
breakfast this morning, if you looked on the
side of the package, you saw a lot of information,
right? You have the price and nutrition information
right there. Suppose you had breast cancer or
prostate cancer and needed to find a hospital
or a doctor. How much information would you
have if you didnt have someone like Jim
Knickman on your side, even he is limited by
the availability of information?
If there is no information, there is no competition
on the basis of the metric that matters, which
is how good you are in delivering value for
money. The problem with health care is that
third parties are the buyers. In our consumer-driven
sectors such as cars, retailing, and computers,
consumers are the buyer, so the solution is
consumer-driven health care.
In my consumer-driven system, everyone would
have to buy health insurance. Is there a system
like this anywhere? Yes, in the non-wacko country
of Switzerland. If youre Swiss, you must
buy health insurance. But you can freely choose
from a wide variety of policies, including a
[low-cost] one offering a high deductible. There
is no Medicaid in Switzerland, so poor people
are not stuffed into a program in which up to
40 percent of providers will not give them care
because the system pays so badly. In Switzerland,
the poor buy health-insurance policies, just
as everyone else does.
Providers in the United States are terribly
constrained from being innovative by two sets
of regulations. One of them is the Stark Law,
a large set of laws that restrict the ability
of physicians to invest in certain ventures.
The reason for the Stark Law is that physicians
who invested in their own radiology or laboratory
facilities were shown to over-refer their patients
to those facilities. The law, named after Congressman
Pete Stark, was very well intentioned, but it
is the wrong solution. The right solution is
transparency and consumer control, not constraining
the very people who can be the most innovative.
The second kind of constraint that the federal
government places on providersthe Swiss
do it, toois setting prices. Can you imagine
what would happen if the federal government
set food prices or clothing prices? It not only
sets prices for health care but tells you what
it will pay for. So if youre a doctor
with an innovation that doesnt have a
code, you are not going to get paid for it.
This essentially blocks out all innovation in
our systemexcept for the brilliant innovators
we heard about here. But there is one difference
between the Swiss and us: they have universal
coverage and buy their own health insurance.
In Switzerland, no employer is buying, no government
is buying, and it is totally consumer-driven.
What is the result? Excellent quality of care.
I do not compare Switzerland with the U.S. because
the U.S. is so diverse. I compare it with the
state in the U.S. that is the Switzerland of
the U.S. What is it?
REGINA HERZLINGER: Thats good.
REGINA HERZLINGER: Utah is too poor.
Switzerland is a rich country.
REGINA HERZLINGER: Connecticut is number
one [in wealth]. The Swiss have much better
levels of care even than states similar in [degree
of] diversity and other things that determine
the quality of care. Yet they spend 40 percent
less than we do in the U.S. We spend $2 trillion
on health care. Thats the GDP of China.
Forty percent of $2 trillion is $800 billion
that we could save and still achieve excellent
results if we switched into a consumer-driven
If I were a healthy woman in my mid-thirties,
every insurer would want me because of what
is known as the Pareto principle, or colloquially
as the 80/20 rule. In health care, 20 percent
of the users account for 80 percent of the cost.
So, if [ratepayers] like me account for only
20 percent of the cost, all the insurers love
me. The top 1 percent in the United States [consume]
over $36,000 [worth of health care] every year,
and they continue to consume it because many
of them have chronic diseases.
What do the Swiss do about this? The Swiss
insurance companies have formed a consortium,
and they risk-adjust one another. The consortium
takes [some of] the profits earned by the insurer
that has cherry-picked the healthy versions
of me and gives them to the insurer that got
stuck with the sick versions of me. The reason
I like this solution is that, first of all,
it works. Sick people are not barred from the
market in Switzerlandin fact, they are
desired by insurers; second, its a private-sector
solution; and third, who knows more about risk
selection than insurers?
In the financial markets, the traditional role
of government has been to ensure transparency.
George Stigler of the Chicago school of economics
says that private competition can ensure transparency.
The problem is that we dont have any of
that in health care. We need a set of laws similar
to the securities laws. Health care will never
achieve transparency unless the government mandates
itbecause no doctor or hospital wants
to be measured.
Instead, the government sets prices. When the
government sets prices, it grossly distorts
resource allocation. In health services, we
have the buildup of many sectorscardiovascular,
ambulatory surgery, home healthjust because
the government paid unduly generously for them.
When the government pulled back, those sectors
The government also sets coverage and benefits
and now has a process that it disingenuously
calls Pay for Performance, which
tells doctors how to practice medicine. Pay
for Performance means that if your doctor follows
someones recipe for how to deliver medical
care, he is going to be paid more. But medicine
has very little knowledge of the connection
between cause and effect. Brilliant doctors
are really artists, and that kind of creativity
must not be suppressed in an age of revolution
in medical practice. I call Pay for Performance
Pay for Conformance.
We have a lot of bad ideas in health care.
Another one of them is single payer. I am for
universal coverage, but Id like it to
be done through consumers, not through the government.
No innovator wants to work in a single-payer
system. Its much too risky and much too
political. I have a class of eighty students,
twenty of whom are MDs, and one out of the eighty
goes into health-care services because its
so managed by the government.
Or instead of universal coverage, you place
the sick into a high-risk pool that is funded
jointly by the state government, the federal
government, and health insurers. Whats
wrong with this idea? First, you have the government
running the pool. Second, in the entire U.S.,
60 million people, or 20 percent of the population,
are sick, and roughly 20 percent of those are
uninsured, which is 12 million people. Yet we
have only 200,000 people in the high-risk pools
because theyre so expensive that the states
just wont fund them.
Hillary Clinton proposes public-private competition.
Shes the only candidate who has come out
for universal coverage, but shes going
to have the uninsured choose between private
health-care plans and public health-care plans,
including Medicare and the federal Employees
Health Benefit Program. There is nothing wrong
with that unless its not fairly priced.
Everybody loves Medicare because for every $8
it spends, it pays $1; the other $7 is paid
by the people in this room, and will be paid
by our children, our grandchildren, and our
great-grandchildren. If Medicare is priced on
the basis of an intergenerational transfer of
wealth, everyone will fall into Medicare and
defect to a single-payer system.
Senator Obama favors picking up the catastrophic
health expenses of private employers. The private
employers are saying, Thank you, get rid
of that expense, but as a result, the
federal government is [in the expensive business
of] covering sick people.
Massachusetts has managed competition, which
means that a government store offers a choice
of government-designed plans. The sell in Massachusetts
was that it would take the $2.2 billion that
we [already] pay to hospitals to take care of
the uninsured poor and give it to the poor people
[in the form of insurance]. What happened? The
subsidized pool has grown a lotthere are
176,000 people newly insured in Massachusetts,
and Im all for that.
But only 18,000 people have signed up for the
unsubsidized, managed-competition part, in which
the government store [supposedly] is able to
offer cheaper plans through brilliant sub-buying
of [health care]. In fact, the plans in the
government store are so expensive [because of
the extensiveness of the plans coverage]
that only 18,000 people have signed up. In fact,
the [state] took forty-three million dollars
away from the hospitals and neighborhood health
So where the money comes from is where it has
always come from: taxes. Does this government
pool have lower costs? If you compare the data
on Commonwealth Choice with the data on employers,
What went wrong in Massachusetts? The government
became much too involved in designing health-insurance
policies. When the legislature designs an insurance
plan, it bulks it up. The hospitals are very
powerful, and its very hard to take money
away from them.
Theres no way were going to cover
the sick and the poor unless we have universal
coverage. We can back-door the cost by taxing
the insurance companies, but taxing the insurance
companies essentially means taxing the people
who have insurance rather than taxing everyone.
If were going to cover sick peopleand
what is health insurance for, except to cover
sick people?we must either tax everyone
or establish an insurance market that subsidizes
I think that eventually, all people will be
required to buy their own insurance using tax-sheltered
income, the government will help by giving people
money so that they can go out and shop like
everyone else, and some real data will be produced.
But if we expand demand and dont permit
innovation in health care, we are going to be
in the same situation as Massachusetts, and
our costs will increase because supply is going
to remain static and there will be more demand.
AUDIENCE: Im from the U.S. Steel
Pension Fund. My understanding is that the Massachusetts
Group Insurance Commission for the last three
years has been offering insurance policies to
state employees, retirees, and their families
that group [medical] specialists into tiers
based on their quality and cost and supposedly
their success. Could you talk about the potential
for grouping not only specialists but hospitals
and primary-care doctors into tiers?
REGINA HERZLINGER: Medicare is not permitted
to do that. I wouldnt tier them by [specialty],
hospital, and so on. I would like to see them
tiered [according to patients medical
needs]. Doing so would make purchasing decisions
[simpler] for someone who, say, has diabetes
and needs fifteen varieties of doctors, a dialysis
center, and many kinds of surgical procedures.
That way, youre requiring patients to
[construct] a network for themselves. It makes
much more sense to offer them a couple of diabetes
teams accompanied by some outcome data and price
data. Tiering in pharmaceuticals has been tremendously
effective. Over 60 percent of pharmaceuticals
are now generics, and I think thats a
AUDIENCE: What are your thoughts about
federalizing the oversight of health-care insurance
as opposed to leaving it to the states, which
have balkanized everything?
REGINA HERZLINGER: The space for innovations
is the insurance market because its not
very expensive to get into that market. You
cannot start your own pharmaceutical company,
no matter how wealthy you are. You cannot start
your own hospital because were talking
about hundreds of millionsif not billionsof
dollars. But you could start your own insurance
company. In fact, the two innovators in the
high-deductible-policy space were entrepreneurial
companies backed by venture capital, and they
were just a group of ordinary people.
Connecticut is about the size of Switzerland.
Switzerland has ninety health insurers. You
can get a lot of innovation within a state market.
You dont need a lot of people to have
a very successful company.
The problem is that most states set prices
for you. There may be very good social reasons
for them to do so, but when you use an entrepreneur
as an instrument of social policy, the entrepreneur
is going to say, The heck with that! I
cant make any money at that price.
Or states can give people permission to buy
insurance elsewhere. Senator McCain is going
to war on this. But I dont know if he
understands the depth of the constitutional
and legal battles that he is facing, aside from
the economic battle.