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SENATE COMMITTEE ON LABOR AND HUMAN RESOURCES
"Effective Health Care Reform in a Changing Marketplace*
Witness List
March 14, 1995
Day One: The Changing Health Care Marketplace
Panel 1.
Mr. Leonard Schaeffer
President and CEO of Blue Cross of California
Woodland Hills, California
Mr. William Custer
Custer Economic Research
Washington, D.C.
Panel 2.
Ms. Kathleen Angel
Worldwide Manager for Benefits, Digital Corp.
Maynard, Massachusetts
Ms. Cristie Upshaw Travis
CEO, Memphis Business Group on Health
Memphis, Tennessee
Mr. Glenn Potter
Vice Chancellor for Hospital Administration
Kansas University Medical Center
Kansas City, Kansas
Dr. James R. Kimmey
Vice President for Health Services
Saint Louis University
Saint Louis, Missouri
from the office of
Senator Edward M. Kennedy
of Massachusetts
For Release: March 15, 1995
Contact:
Theresa Bourgeois
(202) 224-4781
STATEMENT OF SENATOR EDWARD M. KENNEDY AT A HEARING
ON EFFECTIVE HEALTH CARE REFORM IN A CHANGING MARKETPLACE
I thank Senator Kassebaum for holding these hearings and for
the cooperative spirit in which she has approached them. There are
few issues on which bipartisanship is more important than health
reform, and there are few issues of more concern to the American
people than improving health security for working families. Every
member of this Committee has heard from families in their states
who have either lost their coverage or are concerned that they will
lose it.
The crisis in health care has not gone away. Last year,
despite the economic recovery, the number of Americans without
health insurance increased by another million. The nation's health
spending rose by $100 billion. Per capita health expenditures
grew faster in 1994 than in 1993. Worst of all, no American family
can be confident that the insurance protecting them today will be
there for them tomorrow, if serious illness strikes.
The hearing yesterday focussed on many of these problems that
are continuing to worsen.
--By the year 2000, we will reach an unprecedented 50 million
uninsured. Only 52 percent of under-65 Americans will be covered
by employment-based insurance, down from 67 percent as recently as
1988. If current coverage had not expanded by 10 million since
then, the number of Americans without insurance would be even
higher.
The health care cost problem has not been solved. While
managed care and a more competitive marketplace may be generating
savings for some businesses and individuals, the underlying rate
of cost increases has scarcely changed.
The more competitive marketplace, combined with the growth
in the uninsured, is putting great pressure on academic health
centers and other institutions serving the needy. Without
government action, the uninsured could find themselves without
-more-
access even to charity care. Essential institutions could be
destroyed, and the nations' health training and medical research
could be seriously damaged, with drastic consequences for the
future of quality care. Medicare and Medicaid cutbacks could be
disastrous for these vital institutions.
The hearing today will discuss directions for reform. The
ultimate goal must be health security for every family and
effective cost control, and I hope we can make a significant
bipartisan downpayment this year.
Any meaningful program must have two components. First, it
must reform the insurance market so that we can end the practices
that put health care out of reach for millions of families. Pre-
existing condition exclusions should be abolished. No Americans
should be told they cannot buy the insurance they need because
they are in the wrong line of work, or they live in the wrong
part of town, or they are too old or too sick. No Americans
should find their coverage canceled or their premiums raised out
of sight when they develop serious illness and need coverage the
most.
But, insurance reform alone is not enough. It will not
substantially expand coverage or make it affordable for large
numbers of citizens. President Clinton has suggested steps that
would make a major difference and are consistent with Republican
and Democratic proposals. We should provide help to make
coverage for children affordable for every family. Coverage for
children is not expensive, and there is no better investment in
the future and no better way to help working families. A number
of states already have such programs, and we can benefit from
their experience.
We must also provide help when the breadwinners in families
lose their job. We help families deal with the loss of income by
providing unemployment insurance. It is time to extend that same
protection to health insurance. Finally, we should make a start
on better home care for senior citizens and their families.
It would be a mistake to slash Medicare or to attempt to
force senior citizens into managed care programs which deny them
free choice of a doctor. The elderly have worked for their
Medicare benefits; they have earned them; they need them; and it
would be wrong to try to reduce them or take them away.
Managed care is proving increasingly attractive to many
senior citizens, and we should expand options where possible.
But there is no excuse for cutting benefits to those who prefer
to stay with the program they have been promised.
We have many issues to discuss today, and I look forward to
the testimony of our expert witnesses.
95/44
###
tax TO
DAN
219-
7346
Maguire
AIMD-95-84. March 3.
SenateFutureMeetings
(Chairman Stevens. R-Alaska) will hold ar
Information Integrity: Using Technology to
sight hearing on the Smithsonian Institution
104th
Determine Eligibility to Work and Receive
plans for its future.
Benefits, by Frank W. Reilly and Hazel E. Ed-
habeas corpus process. by which death row in-
9:30am SR-301 Russell Bldg. March
30,
wards. directors of Information Resources Man-
mates challenge the constitutionality of their
6
agement Issues. before the Subcommittee on
sentences.
Government Management, Information and
Time TBA SD-226 Dirksen Bldg. date TBA
Control Act
Technology, House Committee on Government
Agenda:
"MOTOR-VOTER' OVERSIGHT
Reform and Oversight
S3 A bill to control crime. and for other purposes.
Senate Rules and Administration Commit
er 20. 1994.
T-AIMD-95-99, Mar. 7.
(Chairman Stevens. R-Alaska) will hold a
4
Financial Management: Indian Trust Fund Ac-
sight hearing on the so-called "motor-vote
counts Cannot Be Fully Audited, by Lisa
Labor & Human
which in part requires states to allow citi:
Jacobson, Director of Civil Audits, before the
register to vote when applying for or rene
Subcommittee on Interior and Related Agen-
Resources
drivers' license.
cies, House Committee on Appropriations
Time TBA SR-301 Russell Bldg. date
T
T-AIMD-95-94, March 8.
Note: This hearing was originally scheduled
HEALTH CARE
31.
IN CHANGING MARKETPLACE
General Government
Senate Labor and Human Resources Committee
ion: Results
Bankruptcy Professional Fees: Guidelines for
(Chairman Kassebaum. R-Kan.) will hold a hear-
Reviewing Fee Applications.
ing on health care issues. focusing on how to ad-
Select Intelligence
Serial No.
GGD-95-36FS, March 6.
dress the changing marketplace.
Federal Downsizing: The President's Fiscal
10am SD-430 Dirksen Bldg. March 14
PENDING INTELLIGENCE MATTER
7
Year 1996 Budget and Its Compliance With the
9:30am SD-430 Dirksen Bldg. March
15
Senate Select Intelligence Committee (C
Federal Restructuring Act of 1994, by Nancy
Agenda & witnesses scheduled:
man Specter. R-Pa.) will hold a closed h.
ier FTA and
Kingsbury, director of Federal Human Resource
March 14 See "Committee Meetings Scheduled To-
on pending intelligence matters.
Management Issues, before the subcommittee
day" section for witnesses
2pm SH-219 Hart Bldg. March 15 (CLI
on Treasury, House Committee on
March 15
erial
Appropriations
Potential for Constructing Targeted Market-Based
Health Care Revisions and the Role of Federal
CIA NOMINATION
T-GGD-95-105, Mar. 7.
and State Government:
Regulatory Flexibility Act: Status of Agencies'
Senate Select Intelligence Committee (C
PANEL 1. Models for Targeted Revisions:
Compliance, by Johnny C. Finch, Assistant
man Specter, R-Pa.) will hearings
C
Procurement
Dr. Paul Ellwood The Jackson Hole Group. Teton
nomination of Gen
Comptroller General for General Government
Carns
to
be
tall Business
Village, Wyo., Bill Gradison president, Health In-
4. Serial No.
Programs, before the Senate Committee on
surance Association of America: Dr. Diane Row-
of the Central
agence Agency
Small Business
land senior vice president. Kaiser Family Foun-
Time TBA SH-219 Hart Bldg. date TB
-9
T-GGD-95-112, March 8.
dation
Note: The Carns nomination was withdraw
Community Reinvestment Act: Preliminary
PANEL 2: History of ERISA and Its Effect on State Ef-
March 10.
forts For Health Care Revisions, Availability and
in the Drug
Results of GAO's Study on CRA Problems and
Delivery of Health Care Services:
Proposed Reform, by James Bothwell, Director
Frank Cummings Lebouf, Lamb, Greene. McCrae;
unities and
of Financial Institutions and Market Issues, be-
Lee Greenfield chairman, Steering Committee.
T 12, 1994.
fore the Subcommittee on Financial Institutions
Reforming States Group. Minnesota House of
.2
and Consumer Credit, House Committee on
Representatives
Banking and Financial Services
PANEL 3: State-Based Insurance Revisions and Bar-
and Private
T-GGD-95-113, March 8.
riers, Role of the Federal Government In Insur-
FutureLis
Resolution Trust Corporation: Implementa-
ance Revisions:
cunities and
tion of the Management Reforms in the RTC
Rick Curtis president, Institute for Health Policy So-
lutions; Josephine Musser insurance commis-
aber 21, 1994.
Completion Act
sioner, Wisconsin and recording secretary, na-
GGD-95-67, Mar. 9.
tional Association of Insurance Commissioners;
)-7
Border Control: Revised Strategy Is Showing
Rick Smith director, Health Care Policy, Associ-
Some Positive Results, by Laurie E. Elestrand,
ation of Private Pension and Welfare Plans
Associate Director for Administration of Justice
Issues, before the Subcommittee on Immigra-
SURGEON GENERAL NOMINATION
tion and Claims, House Committee on the
Senate Labor and Human Resources Committee
Agriculture
Judiciary
(Chairman Kassebaum, R-Kan.) will hold a con-
T-GGD-95-92, Mar. 10.
firmation hearing on the nomination of Henry
CONSOLIDATED FARM AGENCY
Federal Retirement Issues, by Nancy
Foster to be Surgeon General of the United
Resource Conservation, R
rch and
Kingsbury, Director of Federal Human Re-
States.
Subcommittee (Chairman Allard. R-Co
source Management Issues, before the Sub-
Time TBA SD-430 Dirksen Bldg. date TBA
House Agriculture Committee will hold
committee on Civil Service, House Committee
Nomination: Henry Foster to be Surgeon General of
ing on the information gathering techn
the U.S.
report is free.
the Consolidated Farm Service A
on Government Reform and Oversight
Note: This hearing may take place as early as April.
T-GGD-96-111, Mar. 10.
9:30am 1302 Longworth Bldg.
March
Education
Health Services
Rules &
PERISHABLE COMMODITIES
Multiple Employment Training Programs: In-
formation Crosswalk on 163 Employment
Administration
Risk Management and Specialty Crops
committee (Chairman Ewing, R-III.) of
Training Programs.
Agriculture Committee will hold a hea
HEHS-96-85FS, Feb. 14.
FUNDING FOR
the Perishable Agricultural Commodit
Veterans' Benefits: Basing Survivors' C
ARCHITECT OF CAPITOL
(PACA) and possible revisions to it.
pensation on Veterans' Disability is a Viable
Senate Rules and Administration Committee
9am 1300 Longworth Bldg. March
ent include a
to Superinten-
Option.
(Chairman Stevens, R-Alaska) will hold a hear-
HEHS-95-30, N ch 6.
ing on the Architect of the Capitol's req
for
for
new
projects
IDLING FEDERAL ACREAGE
enateCommittee.Meetings
Labor & Human
PANEL 1: Changes in Health Care Delivery System
and Trends In Health Care Costs and Coverage:
APPR
Resources
Leonard Schaeffer president and CEO. Blue Cross
Transp
of California Woodland Hills, Calif.; William S.
R-Va)
Custer Custer Economic Research
hold he
PANEL 2: Managed Care and Barriers to Market Re-
HEALTH CARE
form:
grams
overnmental
IN CHANGING MARKETPLACE
Kathleen Angel worldwide manager for benefits.
10an
ffairs
Senate Labor and Human Resources Committee
Digital Corp., Maynard. Mass.: Cristie Upshaw
Agen
Travis CEO, Memphis Business Group on
Feder
(Chairman Kassebaum, R-Kan.) will hold a hear-
Health, Memphis, Tenn.: Glenn E. Potter vice
David
ing on health care issues, focusing on how to ad-
chancellor. Hospital Administration, Kansas Uni-
ET
UCI
NON-PROLIFERATION
dress the changing marketplace.
versity Medical Center. Kansas City, Kan.: Dr.
REATY
10am SD-430 Dirksen Bldg. March 14
James R. Kimmey vice president, Health Sci-
nate Governmental Affairs Committee (Chair-
Agenda & witnesses scheduled:
ences and CEO, St. Louis University Health Sci-
FY96
an Roth. R-Del.) will hold a hearing to discuss
Current Health Care Market:
ences Center, St. Louis. Mo.
APPR
e p bility of giving a permanent extension
Treasu
the Nuclear Non-Proliferation Treaty.
ment S
10am SD-342 Dirksen Bldg. March
Iowa)
Witnesses scheduled: Thomas Graham U.S. Arms
Control Representative; Kenneth Edelman vice
HOUSE
hold h-
grams
president. Institute for Contemporary Studies:
10am
Andrew Goodpaster co-chairman, Atlantic
Agen
Council of the United States: James Schlesinger
10am
former Energy and Defense secretary
CommitteeMeetings
Office
Note: This hearing was originally scheduled for
Patsy
March 9.
A
2pm
Exec
Robe
Appropriations
Agenda & witnesses scheduled:
10am
Natio
udiciary
Department of Energy Solar and Renewables
Andr-
C
FY96 AGRICULTURE
Christine A Ervin . assistant secretary, Energy Effi-
Coun
APPROPRIATIONS
ciency
AMIGRATION ISSUES
Agriculture. Rural Development, FDA and Re-
& Renewable Energy 2pm
Josep
enate Judiciary Committee (Acting Chairman
Department of Energy Nuclear Fission, Uranium
S
lated Agencies Subcommittee (Chairman Skeen,
mpson, R-Wyo.) will hold a hearing on propos-
Supply & Enrichment Activities
R-N.M.) of House Appropriations Committee
S to reduce illegal immigration and to control
Ray A. Hunter acting deputy director, Office of Nu-
will hold hearings on FY96 appropriations for
nancial costs to taxpayers.
clear Energy
FY96
programs under its jurisdiction.
APP
9am & 2pm SD-226 Dirksen Bldg.
Witnesses scheduled:
1pm 2362-A Rayburn Bldg.
Vetera
9am:
Agenda & witnesses scheduled:
FY96 INTERIOR
ment
1pm
PANEL 1:
APPROPRIATIONS
(Chair
Sens. Kyl, R-Anz: Feinstein, D-Calif.; Hutchison, R-
Eugene Moos under secretary, Farm and Foreign
Interior Subcommittee (Chairman Regula, R-
tions
Texas: Bryan, D-Nev.
Agricultural Services; Grant Buntrock acting ad-
PANEL 2:
ministrator, Consolidated Farm Service Agency
Ohio) of House Appropriations Committee will
appro
hold hearings on FY96 appropriations for pro-
jurisdi
Janet Reno attorney general. Justice Department
grams under its jurisdiction.
10a:
PANEL 3:
Lawton Chiles governor, Florida
FY96 COMMERCE, JUSTICE, STATE
10am & 1:30pm B-308 Rayburn Bldg. March
14
PANEL 4:
APPROPRIATIONS
14
Ager
Agenda & witnesses scheduled:
Natic
Doris Meissner commissioner. Immigration and
Commerce, Justice, State, and the Judiciary Sub-
Naturalization Service; Shirley Chater commis-
Hazel O'Leary secretary of Energy
Neal
committee (Chairman Rogers, R-Ky.) of House
A
sioner. Social Security Administration: Dr. Susan
Appropriations Committee will hold hearings on
e
Martin executive director, U.S. Commission on
FY96 appropriations for programs under its
D
Immigration Reform
FY96 LABOR-HHS
2pm:
jurisdiction.
APPROPRIATIONS
PANEL 5:
10am & 2pm H-144 Capitol Bldg. March
Labor, Health and Human Services, and Educa-
Michael Fix Urban Institute; Lawrence Fuchs pro-
Agenda and witnesses schedule:
10am:
tion Subcommittee (Chairman Porter, R-III.) of
fessor, Brandeis University; Charles Keely pro-
House Appropriations Committee will hold a
Γ. Georgetown University: Mark Miller pro-
International Information; Cultural and Exchange
:, University of Delaware
Activities:
hearing on FY96 appropriations for programs
PANEL 6:
Joseph Duffey director, U.S. Information Agency;
under its jurisdiction.
Health
Dr. Elizabeth Ferris vice chair, Immigration and
Carl Gershman president, National Endowment
10am & 2pm 2358 Rayburn Bldg.
man B
Refugee Program, InterAction: Elisa Massimino
for Democracy; William Fuller president, Asia
Agenda & witnesses scheduled:
director, Washington Office, Lawyers Com-
Foundation: Kenneth Pyle chairman, Japan-U.S.
10am:
mittee
for Human Rights; Gregory T. Nojeim leg-
Friendship Commission; Ambler Moss Jr. direc-
Harold Varmus National Institutes of Health
in the
counsel, American Civil Liberties Union:
tor, North-South Center, Andrew Mason East-
2pm:
3pm
Simcox Negative Population Growth Inc.;
West Center
Tony Fauci director, National Institute of Allergy
Wite
Dan Stein executive director. Federation for
2pm:
and Infectious Diseases
n
American Immigration Reform: Cecelia Munoz
International Broadcasting Activities
Ken Olden director, National Institute of Environ-
vice president, National Council of La Raza
Joseph Bruns acting associate director, U.S. In-
mental Health Sciences
formation Agency; Kevin Klose president, Radio
Free Europe/Radio Liberty inc.; Richard McBride
executive director, Board for International
FY96 APPROPRIATIONS
Gov
Broadcasting; Geoffrey Cowan Voice of A
National Security Subcommittee (Chairman
ica
Young, R-Fla.) of Ho Appropriations Com-
Refu
UBCOMMIT
MARKUP:
mittee will hold hearings on FY96 appropria-
Effective Health Care Reform
in a Changing Marketplace
Testimony:
Directions for Reform
Senate Labor and Human Resources Committee
March 15, 1995
Packet Includes:
Witness List
Testimony from all witnesses whose testimony was submitted
to the committee prior to 3 p.m., March 14, 1995
"Effective Health Care Reform in a Changing Marketplace"
Witness List
March 15, 1995
Day Two: Directions For Reform
Panel 1.
Dr. Paul Ellwood
The Jackson Hole Group
Teton Village, Wyoming
Dr. Diane Rowland
Senior Vice President, Kaiser Family Foundation
Washington, D.C.
Mr. Willis Gradison
President, Health Insurance Association of America
Washington, D.C.
Panel 2.
Mr. Frank Cummings
Lebouf, Lamb, Greene and MaCrae
Washington, D.C.
The Honorable Lee Greenfield
Minnesota House of Representatives
Chairman, The Steering Committee
of the Reforming States Group
Minneapolis, Minnesota
Panel 3.
Mr. Rick Curtis
President, The Institute for Health Policy Solutions
Washington, D.C.
The Honorable Josephine Musser
Insurance Commissioner, The State of Wisconsin
Madison, Wisconsin
Mr. Rick Smith
Director of Health Care Policy
Association of Private Pension and Welfare Plans
Washington, D.C.
TESTIMONY OF
PAUL M. ELLWOOD, M.D.
PRESIDENT OF THE JACKSON HOLE GROUP
BEFORE
THE SENATE COMMITTEE ON LABOR AND HUMAN RESOURCES
HEARING ON EFFECTIVE HEALTH CARE REFORM
IN A CHANGING MARKETPLACE
MARCH 15, 1995
Madam Chairman and members of the Committee, I am Paul Ellwood, M.D., President
of the Jackson Hole Group. I appreciate the opportunity to testify before you today on
our recommendations for targeted, effective reform of the health care system.
The Jackson Hole Group is an informal and fluid group of leaders drawn from the
health sector, employers, and policy makers, who have been meeting in my living room
over the past two decades. Our focus has always been on how to make market forces
work in the health system, with an emphasis on competition and accountability under
governmentally-established ground rules. We address specific topics related to health
reform, develop potential solutions, persuade each other to apply them, and then keep
tabs on whether or not they are working. This informal process of consensus building
fostered the development of the managed care industry and of the document "The 21st
Century American Health System" (1991), better known as the managed competition
public policy proposals.
During the past six months, we have been revisiting the original proposals in light of the
instructive health care reform debate last year, as well as the rapidly changing private
health care market. We have included for our testimony a draft of the revised policies,
which we are calling "Responsible Choices for Achieving Reform of the American
Health System." The document focuses on those areas that are currently the greatest
barriers to a better-functioning marketplace:
Medicare and Medicaid recipients not being required to make value-based
choices;
Tax policy that fuels increased spending on health care, regardless of the value
of services provided;
Continued discrimination against small employers and individuals in the health
insurance market;
Lack of health system information in the areas of benefits, consumer
satisfaction, access, and health outcomes, to help individuals in choosing a
health plan, and to aid policymakers in monitoring health sector developments
and in deciding on the right direction for further reforms.
The proposals outlined in "Responsible Choices" represent the collective thinking of a
large number of purchasers and providers. These recommendations have been
reviewed and analyzed by 100 or more individual experts with practical experience in
these areas. We have included the full draft for the Committee's review, as the
recommendations together provide a unified approach to incremental reform. Given
the jurisdiction of this Committee, however, my remarks will focus specifically on
remedies for the small group and individual markets, and improvements in the areas of
health system information and health plan accountability.
RESPONSIBLE CHOICES
FOR ACHIEVING REFORM OF THE
AMERICAN HEALTH SYSTEM
A Draft Discussion Paper
from the
Jackson Hole Group
Paul Ellwood, MD and Alain Enthoven, PhD
March 1995
"Responsible Choices" is a living document that will change as the market changes and
in response to suggestions and criticisms. Comments should be directed to the
respective chapter author(s) or to the overall editor, Ellen Wilson, at:
Jackson Hole Group
P.O. Box 350
Teton Village, Wyoming 83025
Phone: 307-733-8781
Fax: 307-739-9312
TABLE OF CONTENTS
INTRODUCTION
1
21st CENTURY MEDICARE
6
Why Update the Medicare Program?
6
Parallels with the Private Sector
8
How Do We Get There?
8
Promoting Consumer Cost-Consciousness
9
Moving to Competitively Driven Prices
9
Transitional Techniques
10
Fast Track Option
11
Divided Track Option
11
Competitive Health Plan Prices to Drive Traditional Medicare Payments
12
Ensuring Plan Competition on the Basis of Price and Quality
12
Stage 1: Fiscal Year 1996
12
Stage 2: Fiscal Year 1997
13
Stage 3: Fiscal Year 1998 and beyond
13
Stage 4: Fiscal Year 2004
13
Benefits of Medicare Reform
14
ENCOURAGING STATE SOLUTIONS FOR ACUTE MEDICAID
14
Accelerating the Use of Competitive Managed Care for Acute Medicaid
15
The Federal Contribution
15
Minimizing Federal Reporting
16
INCREASING COST-CONSCIOUSNESS:
REFORMING THE TAX TREATMENT OF HEALTH INSURANCE
16
A Tax Cap
17
A Tax Credit
18
Tax Credit Structure
19
A Tax Credit Linked to Group Purchasing
20
Stage 1: A Tax Credit for the Self-Employed and Individuals in 1995
20
Stage 2: A Tax Credit for Employer-Based and Group Purchased Coverage
21
CATASTROPHIC COVERAGE AND MEDICAL SAVINGS ACCOUNTS
21
Tax-Favored MSAs with Catastrophic Coverage Could Damage the Market
22
INSURANCE REFORMS AND GROUP PURCHASING
23
National Standards
26
Insurance Reforms
26
Certifying Voluntary Purchasing Groups and Enforcing Standards
28
i
PRIVATE SECTOR INITIATIVES
29
THE FIRST INITIATIVE-BENCHMARK BENEFITS
30
The Need for Fair Disclosure and Comparability
30
Maintenance of the Benchmark Benefits Package
31
An Independent Approach
32
Target Goals
34
THE SECOND INITIATIVE-A HEALTH ACCOUNTABILITY SYSTEM
34
A New Quality Accountability System for a New Health Care System
34
What Would a Health Accountability System Look Like?
36
Health Accountability Foundation
36
Implementation of Private Sector Initiatives
37
Accountability Measures Clearinghouse
38
Completing the Health Accountability System
39
Target Goals
39
HEALTH SYSTEM INFORMATION
40
Why Is Coordinated Health Data Needed?
40
Why Are the Current Data Inadequate?
40
What Should Be Collected?
41
Cost
42
Coverage
42
Vital Statistics
43
How Can the Goal Be Accomplished?
43
Target Goals
44
CONCLUSION
44
TABLES
1. Proposed Insurance Reforms
27
2. ERISA Reforms
28
3. Functions of the Benchmark Benefits Group
33
4. Elements of a Health Accountability System
36
JHG Responsible Choices: Draft, March 8, 1995
ii
INTRODUCTION
Paul M. Ellwood, MD
"Responsible Choices" identifies the actions that the private sector and government
should take to improve the American health system and accelerate and expand the health
care revolution that is already underway. It spreads the benefits of and responsibility for
better quality, lower cost health care with a minimum of prescriptive interference by
government at no overall increase in cost. "Responsible Choices" is not based on
untested economic and social theory. The recommendations are taken directly from
actual clinical and operational experience gained in providing health care and health
insurance to over 100 million Americans. These suggestions refocus the Jackson Hole
Group's approaches outlined in "The 21st Century American Health System" (1991),
which called for accelerating value-based competition in the health care marketplace and
assured health care for all Americans.
We devised "Responsible Choices" as a set of practical, bold proposals to continue
pushing the public policy process and keep the health care revolution on track. It
identifies where progress can be increased while warning where it can be thwarted. It
does not promise health insurance for everyone since that is an impossible goal without
raising taxes, creating unfunded mandates, or prolonging the deficit. The Jackson Hole
Group has not backed off of its commitment to adequate health protection for everyone
but proposes that once the size of the problem is decreased and understood, we will be
better able to identify and deal with those still left out of the system.
The United States has been rapidly transforming health care by implementing a market-
driven system that works-a unique approach that has resulted in significantly reducing
rate increases for private purchasers and consumers of medical services. This evolution,
turned revolution, which has been underway for at least twenty-five years, is being
driven by corporate purchasers and cost-conscious consumers. It has created an
extraordinary array of health plans aggressively competing with one another on price and
quality. HMO enrollment has grown by 30 percent since "The 21st Century American
IHC Responsible Choices: Draft. March 8, 1995
1
Health System" was written. However, some consumers-such as most Medicare
beneficiaries, individuals with preexisting illnesses, and the employees of small
firms-are not fully benefiting from the health care revolution that is propelling us toward
the twenty-first century. And, despite being the largest single purchaser of health care,
the federal government has been particularly slow in bringing public programs into line
with those in the private sector.
It has taken at least twenty-five years for the new American health system to become
established. As it continues to evolve rapidly, care must be taken not to disrupt its
progress. In the United States, the market works in health care because multiple
purchasers, not just the government, are in a position to introduce bold new methods of
buying health care and because providers and insurers have substantial freedom to
respond with new approaches to organizing and paying for care. "Responsible Choices"
makes proposals to foster this market driven progress and innovation.
Keeping the market working in health care requires the consideration of factors that are
unique to the health sector. When a day in the hospital can cost thousands of dollars,
people need health insurance. But when this is fee-for-service insurance, there are few
incentives for sick individuals and their trusted physicians to try to save money. Those
who are poorly insured or with a high deductible have an incentive to avoid costly
health care but are too vulnerable to shop effectively for medical care based on price
once they become truly sick. Historically, medical care has been a product best
understood by doctors who were selling it and thus were in a position where they made
both the key clinical and economic decisions for their patients and their practices.
"Responsible Choices" intends to change this by enhancing the responsibility of
consumers with better information and more power to make choices about their own
lives. As in any industry, genuinely lowering costs means vast increases in productivity.
In this case, change threatens the livelihood of more than 100,000 specialist physicians,
one-half of the country's hospital beds, and hundreds of health insurers. The likely result
is resistance to competition from these sectors.
IHG Responsible Choices: Draft, March 8, 1995
2
"Responsible Choices" assumes that the combination of revolutionary change, health
insurance, consumer vulnerability, inadequate information, extraordinary oversupply, and
shared responsibility are factors unique to the health sector that cannot be ignored. It
calls for intervention in selected facets of the marketplace to make it function better,
while warning policy-makers that preventing or distorting further expansion of price and
quality competition will disrupt the progress that the market is making.
The U.S. health system has been transformed thus far by adherence to the following
principles:
Health plans and health insurance, including Medicare, should compete on the basis
of price and quality. Health plans that both finance and deliver comprehensive
health care competing on price and quality are pacing the new health market.
Combining health insurance with health care is perhaps the most important change in
the structure of the health system. It shifts the emphasis from increasing earnings by
subjecting the patient to more services to reducing demand for costly extended
treatment by keeping people well. To effectively lower costs and improve quality,
health plans must carefully select those providing care and match their numbers and
skills to the needs of their consumers. This practice has been criticized for restricting
doctor opportunities and patient choices, but shepherding resources remains as
critical to health care quality and cost as to the management of any enterprise.
Health insurers that offer more provider choices but greater consumer cost sharing
should be given the same equal opportunities to compete.
Consumers can be cost-conscious when selecting health insurance. Consumers can
be motivated to be cost-conscious at the time they select health insurance and will
choose lower cost plans when they are convinced that health care will be readily
available and of good quality. Cost-consciousness at the time of illness is less
predictable and can cause expensive and dangerous delays in seeking care. This is
making limiting premium contributions more powerful than high deductibles in
motivating consumer choice.
IHG Responsible Choices: Draft, March 8, 1995
3
Group purchasing of health care is essential to spreading risk and reducing costs.
Health care must be purchased by groups large enough to exert real leverage over
competing health plans. Size allows these groups to exploit their knowledge of
health plan performance and, above all, to spread the cost of insurance over both
healthy and unhealthy individuals. "Responsible Choices" requires shared
responsibility by those who are still well for those who are sick. As in any market,
the presence of many powerful buyers and multiple competing sellers has been
shown to be beneficial to consumers and encourages continued innovation and
vigorous price competition. Diminishing the clout of group purchasers or
inadvertently dividing consumers into good and bad risks will destroy the burgeoning
health market.
Information about the quality of care must be available to consumers. For the
health market to function properly, consumers, purcnasers, and providers need
understandable and comparable information on the cost and quality of care from
various health plans. The quality of care information currently available to
consumers is still incomplete and is perhaps the weakest link in the health care
revolution. Because reliable and objective information is not available, the
organizations providing the best quality of care are not necessarily attracting the most
consumers. This information gap jeopardizes the entire health revolution. The lack
of comparative information on quality also makes the system vulnerable to
unsubstantiated criticisms about costs being down because quality is deteriorating.
Without expanding entitlements or mandates, "Responsible Choices" expands the
revolution in health care by asking government to play by the same rules as the private
sector, by increasing the power of consumers, and by minimizing risk selection against
individuals and small employers. The various pieces of "Responsible Choices" can be
implemented as stand alone proposals. However, they will most effectively generate
progress and improvement in the health system if implemented in the designated
incremental manner.
JHG Responsible Choices: Draft, March 8, 1995
4
"Responsible Choices" has five objectives:
1. Align Medicare and Medicaid costs with revenues while expanding choices by
offering public beneficiaries the same cost-conscious choices now available to private
consumers through employers or purchasing groups. Use competition and consumer
choices to limit the per capita growth of Medicare and Medicaid expenditures to
revenue growth.
2. Make the tax benefits of health insurance coverage equitable, while increasing
consumer awareness of cost and quality through a value-based tax credit for health
insurance, health plans, and Medical Savings Accounts.
3. Give individuals and the employees of small firms, regardless of their health status,
the same opportunity to purchase reasonably priced health insurance as large group
purchasers. Insurance reforms mean all forms of health insurance-the self-insured,
sellers of health insurance, health plans, and Medical Savings Accounts-should be
subject to the same marketplace rules.
4. Ensure that consumers know what the various health plans offer in terms of benefits,
satisfaction, access, and health outcomes.
5. Set timely realistic targets and measure results as reform proceeds. Manipulating a
trillion-dollar enterprise may require a change in course if cost containment, health
outcomes, consumer satisfaction, and access to health care do not improve as
predicted.
IHC Responsible Choices: Draft, March 8, 1995
5
21st CENTURY MEDICARE
Graham Rich, MD, MBA
As the largest purchaser of health care in the U.S., the federal government is responsible
for the continual growth in Medicare cost by maintaining a dysfunctional payment
methodology and by failing to encourage intensive price competition and cost-
consciousness. Like any other purchaser, it needs to adopt some aggressive management
policies so that all taxpayers, including seniors, can benefit from better quality and
efficiency through competition among Health Plans and value based choices by seniors.
Even with the present underdeveloped system for encouraging enrollment in managed
care, the number of seniors choosing this option increased by 25 percent in one year to
2.3 million at the end of 1994. To enable new seniors to stay in managed care and to
offer more choice for current beneficiaries, we need a better Medicare payment
methodology based on competitive bidding, better access to comparative information,
and the option of enrolling in any participating Health Plan. Each senior should be able
to use a sum of money (a voucher or specific contribution which will be referred to in
this paper as a Medigrant) from the federal government to purchase health insurance
from traditional Medicare or competing Health Plans and thus make cost-conscious
decisions. Only then can seniors make responsible choices. This idea was originally
proposed for Medicare in 1970 but got caught up in gridlock. Instead, the private sector
successfully adopted the approach.
Why Update the Medicare Program?
Medicare expenditures were $160 billion, or 2.4 percent of gross domestic product
(GDP), in 1994 and are projected to grow to $460 billion, or four percent of GDP, by
2005 which is obviously an unacceptable prospect. When the private sector faced the
same prospect, and hence a threat to its own competitiveness, it completely changed the
way it bought health care and achieved a projected decline in private sector HMO
IHG Responsible Choices: Draft, March 8, 1995
6
premiums of, on average, 1.2 percent in 1995.¹ In addition, the one million member
California Public Employees Retirement System, by adopting consumer incentives and
price competition among Health Plans, achieved reductions in HMO premiums of 0.4
percent in 1993/4, 0.7 percent in 1994/5 and 5.2 percent for 1995/6.
If Medicare growth can be slowed to six percent per year, the cumulative savings
between 1996 and 2004 will be $401 billion, and annual savings in 2005 will be $129
billion.² Medicare's traditional indemnity insurance structure and its conflicting role as
purchaser and insurer have a negative impact on Medicare and the rest of the health care
market. The traditional structure cannot be sustained because:
Cuts in reimbursement cause cost shifting and drive up the cost of care for others.
Hospitals suffer unpredictable changes in reimbursement rates.
Physicians try to maintain income by increasing volume.
Medigap policies that drive up use by covering first dollars become more attractive
when consumer deductibles are increased in an effort to reduce program utilization.
Seniors already spend, on average, $502 (18 percent of their out-of-pocket health
spending) on additional Medigap insurance.³
The system rewards doctor's office visits and hospital stays instead of improvements
in the health of seniors.
Medicare cost problems will only get worse under the current system as managed
care Health Plans, using resources efficiently, force nonparticipating physicians
(perhaps as many as 165,000)⁴ to depend on Medicare to earn a living.
1
Group Health Association of America (GHAA), 1994 HMO Performance Report
2
Based on growth projections contained in "The Economic and Budget Outlook: Fiscal Years 1996-2000." Congressional
Budget Office, January 1995.
3
Public Policy Institute, American Association of Retired Persons, "Coming Up Short: Increasing Out-of-Pocket Health
Spending by Older Americans," 1994.
4 Weiner, Jonathan P., DrPH, "Forecasting the Effects of Health Reform on US Physician Workforce Requirement," JAMA,
July 20. 1994, Vol 272, No. 3.
IHG Responsible Choices: Draft, March 8, 1995
7
Parallels with the Private Sector
When unsustainable expenditures on health benefits threatened competitiveness,
employers made the transition from traditional health insurance to offering a fixed
payment for health care and a choice of competing managed care plans. As a result,
they have seen a consistent increase in managed care enrollment with a corresponding
reduction in costs. The government could experience the same savings by learning from
enlightened employers and adopting the same strategy.
How Do We Get There?
There are a number of political and programmatic difficulties inherent in making the
transition from a legally prescribed cost reimbursed Medicare indemnity plan with
minimal consumer cost-consciousness to a program where consumers make value based
choices. But, the practical problems in gearing up the private health system to compete
on price and quality to serve seniors are not as great. For example, 74 percent of seniors
live in an area where they have access to a Medicare risk contracting plan and, in 1995,
38 percent of HMOs are planning to develop new Medicare contracts. Early
implementation would bring the greatest savings but would require the most support
from seniors and a substantial managerial effort by the Health Care Financing
Administration (HCFA) to effect the changes.
This proposal relies on competition among Health Plans coupled with a fixed Medigrant
contribution for each senior. It expands the scope of benefits and offers beneficiaries
access to well managed health care. It requires competing Health Plans to offer a more
appropriate set of benefits than the traditional Medicare program, such as the federal
standard HMO package with a prescription drug benefit. As a result, seniors who join
Health Plans would not need to buy Medigap insurance. A Medigrant set at the average
premium charged by the least costly half of the participating plans will give seniors
access to a range of Health Plans.⁵ The option to stay with traditional Medicare would
still be available.
5 Competitive bidding to set the government contribution has been recommended by Bryan Dowc et al., in "Issues
Regarding Health Plan Payments Under Medicare and Recommendations for Reform": The Milbank Quarterly, vol. 70, no.3, 1992,
423.
IHG Responsible Choices: Draft, March 8, 1995
8
Promoting Consumer Cost-Consciousness
Each senior should be able to choose between traditional Medicare or a range of Health
Plans using a Medigrant. Seniors who choose a more expensive plan would be
responsible for making up the cost difference be it traditional Medicare or a Health Plan.
Those who choose a less expensive option would receive a refund. To ensure full
choice, all participating competitive Health Plans should participate in a coordinated
annual open enrollment.
The amount of the Medigrant for each Medicare enrollee who joins a Health Plan could
be initially limited to the amount the government currently spends on traditional
Medicare adjusted downward annually by at least a percentage point each year. It
should ultimately be based on the average premium of the least costly half of the
competing Health Plans in each market area. This could be calculated using the
previous year's enrol!ment to weight premiums.
Moving to Competitively Driven Prices
The current formula for paying Health Plans in Medicare is based on traditional Medicare
costs. Thus the more expensive traditional Medicare actually drives up government
payments to Health Plans. Instead, the reverse should be true with traditional Medicare
being required to compete with Health Plan prices. As long as this perverse linkage
between traditional Medicare and Health Plans is built into Medicare law savings from
competition will elude us. At some point, the program expenditure should become
pegged to competitive Health Plan prices. There are two options for making this
transition. The Fast Track option would require the government to set the same growth
rate, say six percent per annum, for traditional Medicare and Health Plan Medigrants
during a transitional period. The slower, or divided track would temporarily separate the
payment rates and growth rates of traditional Medicare from those of Health Plans.
Under this divided track option the growth rate for traditional Medicare using CBO
projections would be ten percent, on average, while the Medigrant for Health Plans
could be eight percent in the first year, seven percent in the second year, and six percent
in the third year, at which point enrollment should be sufficient to allow competition to
JHG Responsible Choices: Draft, March 8, 1995
9
set prices. Under both options, there ultimately would be a common method for
calculating the amount of money to be spent on traditional Medicare and Health Plan
payments which would be driven by competitive Health Plan premiums.
Transitional Techniques
Traditional Medicare can no longer be considered as a well designed or adequate
insurance policy. It tries to control demand by cost sharing and deductibles. There is a
need for a more comprehensive and appropriate set of benefits which should convince
Medicare beneficiaries that they are not losing out in the transition to 21st century
Medicare. The Health Plans competing for beneficiaries should be required to offer an
improved benefit package which should preferably eliminate the need for Medigap
policies.
Beneficiaries with preexisting illnesses are reluctant to leave the traditional Medicare fee-
for-service program which drives up the costs for this option during the transition.
Under this proposal, a richer set of benefits, lower out-of-pocket COSIS, and increased
quality accountability should encourage the higher risk beneficiaries to make the switch
to a Health Plan. However, beneficiaries with a higher risk will be attracted to Health
Plans that have a reputation for providing superior care. Therefore, some method for
identifying this uneven spread of risks and compensating for them by shifting Medigrant
dollars from plans with better risks will be necessary.
The availability of Health Plans across the country is uneven and costs are variable
between regions. Medicare is the last frontier for competitive Health Plans that are eager
to provide a service to this large sector of the population and are confident they can
provide better benefits for less. In 1995, the Medicare capitation rate is $467 in San
Francisco and $559 in Los Angeles while the premium for a non-Medicare, non-Medicaid
Kaiser plan is the same for northern and southern California. With the current formula,
HMO rates in some counties factor in excessive use of services and so are too high for
Medicare to realize the potential savings from managed care. In other counties with
lower service use, Medicare rates are too low to encourage HMO participation in the
JHG Responsible Choices: Draft, March 8, 1995
10
risk contracting program. In encouraging competition between Health Plans in areas of
the country where health care costs are lower or where the number of providers are
limited, some have suggested that there should be no initial limit on the government
contribution for Health Plans. "Responsible Choices" assumes that as Medicare is such a
large buyer and the oversupply of providers so great, competition will develop even in
those areas where traditional Medicare payments are low. If competition fails to develop
in those areas, the federal government might consider using savings from higher cost
areas to increase payments.
Fast Track Option
Under this approach, the growth in expenditure for traditional Medicare and Health
Plans could be explicitly budgeted for each year. These sums of money could be given
to seniors in the form of a Medigrant which they could use to purchase care from
traditional Medicare or a Health Plan. The method of calculating the federal government
contribution, or Medigrant, and its maximum growth could be specified in legislation to
be, say, six percent per year and adjusted for the increasing age of beneficiaries. The
growth rate for traditional Medicare would be the same and program costs would need
to be controlled using techniques such as high deductibles combined with Medical
Savings Accounts (MSAs). By adopting this approach, the government would be
defining, in advance, what it is prepared to spend per beneficiary on Medicare, as other
purchasers are increasingly doing. This would not be the same as introducing price
controls as set out in President Clinton's Health Security Act but would merely set the
limit of the government contribution. In fact, it would be analogous to the current
Medicare practice of setting provider fees or deductibles where individuals and providers
must make up any difference.
Divided Track Option
With this approach, the federal government would temporarily allocate different rates of
growth for traditional Medicare and competing Health Plans. Traditional Medicare could
be budgeted to continue increasing at the current predicted rates, (ten percent per year),
while the maximum Medigrant growth rates would be set at nine percent the first year
IHC Responsible Choices: Draft, March 8, 1995
11
and at one percentage point less each ensuing year until the market penetration is great
enough to determine payments.
Competitive Health Plan Prices to Drive Traditional Medicare Payments
Under both options, when more than, say, 30 percent of seniors in a particular market
are enrolled in competing Health Plans and are satisfied with the benefits they are
receiving, then the government's Medigrant payment for traditional Medicare and Health
Plans should be based on the average of the least expensive half of competing Health
Plan prices. It may be necessary to grant new managerial powers to HCFA to allow
traditional Medicare to adopt Preferred Provider arrangements and other managed care
cost containment developments that have been employed by transitional managed care
plans. This may include the setting of premiums for traditional Medicare or other cost
saving or revenue producing measures.
Ensuring Plan Competition on the Basis of Price and Quality
To enable Medicare beneficiaries to use their Medigrant wisely, the HCFA, or its
designee, should provide information, including quality and price comparisons of
traditional Medicare and Health Plans by market area. Health Plans should price and
offer a standard benefits package. Seniors should be given comparative information on
out-of-pocket costs for care of common conditions, consumer satisfaction data, etc. It
would be particularly valuable if government pursued the same health accountability
methods being used by the private sector (see Health Accountability System section,
page 34). Responsible marketing should be encouraged to ensure that seniors
understand the options.
Stage 1: Fiscal Year 1996
The Secretary of Health and Human Services should establish market areas to calculate
the value of the Medigrant, as counties are too small for stable prices. If Congress elects
to use the fast track option, the Medigrant value for traditional Medicare and Health
Plans would be set at the level of payment for traditional Medicare the first year with an
annual percentage increase of, say, six percent thereafter. If the divided track option is
IHG Responsible Choices: Draft, March 8, 1995
12
chosen, the growth rate for the Health Plan Medigrant would be one percentage point
less than traditional Medicare, as described above. Under both options, legislation
should allow Health Plans that cost less than the Medigrant to give consumers rebates.
A Health Plan that costs more than the Medigrant value should charge seniors the
difference. HCFA should simplify its approval and other regulatory requirements, such
as the 50 percent commercial rule, so that it is less costly for new Health Plans to enter
the Medicare market.
Stage 2: Fiscal Year 1997
HCFA, or its designee, should establish and coordinate an annual open enrollment
period to ensure that each individual can choose among all participating plans.
Medigrant payments should be risk adjusted to allow for the extra risks involved in
enrolling individuals with chronic diseases. All participating Health Plans should be
required to offer at least the new standard benefits package.
Stage 3: Fiscal Year 1998 and beyond
Under either option, many markets will exceed the 30 percent market penetration when
Medigrant payments to traditional Medicare and Health Plans are determined by the
average of the least expensive half of Health Plan prices.
Stage 4: Fiscal Year 2004
If competitively derived Health Plan prices are growing more rapidly than the economy
or if Medicare prices adjusted for health status are growing faster than private sector
prices, the whole program should be reassessed. It may be necessary to use a different
formula for calculating the government's contribution, such as paying 100 percent of the
lowest cost high quality plan or using a formula which is closer to the premium of the
lowest cost plan. If employers do not encourage retirees to make a cost-conscious
choice of Medicare Health Plan by giving them a defined contribution, legislative reform
of retiree benefits may be required. The federal government should consider
relinquishing its responsibility for providing indemnity insurance by asking private
IHC Responsible Choices: Draft, March 8, 1995
13
indemnity plans to take over this function, as long as there is no restriction on access to
providers.
Benefits of Medicare Reform
The phased introduction of premium competition, starting with areas of high managed
care enrollments and where Medicare costs have tended to be high, ensures competition
and early savings. Over time, there should be a reduction in regional Medicare price
and utilization variations. Prices in today's populous high cost areas should come down
first, while utilization and prices may go up in those areas (mainly rural) where seniors
seem to be underserved. Allowing seniors to make the same responsible choices as the
rest of the population will provide greater incentive for plans to improve their cost-
effectiveness while maintaining or improving quality. Seniors and the health system as a
whole will benefit from an expansion of choice and an end to the cycle of cost shifting.
ENCOURAGING STATE SOLUTIONS FOR ACUTE MEDICAID
Graham Rich, MD, MBA
The dramatic increase in, and unpredictability of, costs in Medicaid programs is a
persistent challenge to state governments. The nation spent $82 billion, or 1.2 percent
of GDP, on Medicaid in 1994; expenditure is projected to increase to $234 billion, or
two percent of GDP, in 2005. States should use the same methods as successful private
purchasers of health care by offering a choice of managed care plans to encourage
choice and effective price competition for the acute care portion of Medicaid. Although
states are already ahead of Medicare in adopting price competition, they have been
impeded by the federal waiver process and the lack of health plan availability.
The Jackson Hole Group is not certain that the concepts behind "Responsible
Choices"-that medical care volume can be decreased and efficiency
increased-necessarily apply to long term care. In addition, the Medicare health plan
package is likely to be comprehensive enough and offer cost sharing provisions that are
IHG Responsible Choices: Draft, March 8, 1995
14
low enough to allow states to cease supplementing Medicare for acute Medicaid or to
have their contribution be minimal. We do encourage state experimentation with SSI,
particularly if some satisfactory means of risk adjusting the premiums of this population
could be devised. For these reasons, the following recommendations are only for the
acute care portion of Medicare.
Accelerating the Use of Competitive Managed Care for Acute Medicaid
States that received section 1115 waivers from HCFA have introduced innovations
tailored to local needs and preferences. These changes brought variations in eligibility
based on income, categorical requirements, new services, and a choice of managed care
plans. In an effort to protect the Medicaid population from what it views as ill-conceived
or hasty reform, HCFA developed detailed criteria for approval and set goals for
implementation. Because criteria and goals can vary from case to case, the approval
process is lengthy and cumbersome, causing state dollars to support inefficient and
ineffective financing mechanisms while the application is pending. To stop such waste,
the 104th Congress should grant states the authority to make the transition to managed
care for Medicaid without obtaining waivers.
The Federal Contribution
The federal government should give states per capita grants for the acute Medicaid
program (i.e., the government would provide a fixed amount per eligible beneficiary).
To facilitate state management of the program, the federal government should specify in
advance the rate of growth in the federal share of the capitation rate. If the current GDP
growth rate and inflation remain the same, this could be set at 6.5 percent per year in
1996, six percent in 1997, and five percent in 1998. These ground rules would need to
be reconsidered if managed care premiums began to decline to the same extent that they
are currently declining in the private sector or if there were a drastic change in the
number of people eligible for Medicaid. States should face a maintenance of effort
requirement in determining their contribution based on fiscal capacity. Additionally,
disproportionate share payments to a state should be phased down to a level of around
four percent over a period of five to seven years from the current level of 12.5 percent.
IHG Responsible Choices: Draft, March 8, 1995
15
Medicaid eligibility requirements should be federally determined, but scope of benefits
should be set by the state. States could adopt the benchmark benefits package, as
suggested in the Benchmark Benefits section, page 30.
Minimizing Federal Reporting
Allowing states to define their own solutions puts at risk the comparison of quality, cost,
and coverage information essential to enhance consumer choice and aid policy-making at
the state and national levels. The problem can be overcome if states follow the example
of other purchasers by requiring standardized accountability for quality by the health
plans they use (see A Health Accountability System, page 34, and Health System
Information, page ?) and adopt the benchmark benefits package for state Medicaid
programs (see Benchmark Benefits, page 30).
INCREASING COST-CONSCIOUSNESS:
REFORMING THE TAX TREATMENT OF HEALTH INSURANCE
Alain Enthoven, PhD and Sara Singer, MBA
The internal revenue code excludes employer paid health care and insurance from the
taxable incomes of employees without limit. It also, through Section 125, allows
employees to tax shelter their premium contributions, as well as contributions to medical
spending accounts. The states generally conform. This exclusion will cost the federal
budget $90 billion in 1995. The exclusion provides a powerful incentive for employers
and employees to agree that part of pay will be in the form of health insurance benefits.
This has contributed to the rapid growth and persistence of employment-based coverage.
The exclusion, however, has negative consequences-the most important of which is to
make the additional cost of more costly coverage lower to employees, inducing them to
choose more costly coverage than they would if they were using their own money. To
motivate responsible, price sensitive choice of health plan and to limit the loss of
revenue to the federal government, this provision should be changed.
JHC Responsible Choices: Draft, March 8, 1995
16
A Tax Cap
The natural solution is to cap the exclusion: set limits for individual, couple, and family
coverage low enough that the premiums of most health plans exceed them, and legislate
that employer contributions above the limit must be included in taxable income. At the
same time, repeal Section 125 which allows employees to tax shelter funds spent on
health care, so that the total tax sheltered premium-not just the employer's part-
is limited by the cap. This would correct the current government-created lack of
cost-consciousness by motivating consumers to be responsive to the full differences in
premiums when they make choices. To be maximally effective, employers must limit
their contributions to a fixed dollar amount and should offer a choice of plans.
Employers would have to estimate the value of coverage in the case of self-insured plans,
making such employer contributions explicit.
Numerous issues arise in connection with the "tax cap" on health benefits. Should the
caps be adjusted for geographic variations in the cost of living, like Medicare prospective
hospital payments, or for medical costs? If they are not adjusted, people will argue
inequity. On the other hand, the tax code is not indexed for the regional cost of living,
and there is legitimate concern that to do so in this case would precipitate endless
technical arguments and open a new field for pork barrel politics. It may be better to
keep it simple. The categories in which the exclusions are allowed (e.g., individuals,
couples, head of household, etc.) would need to match the categories in which
insurance rates are quoted, both for equity and efficiency. There is no need to give
individuals a tax break sufficient for a family. To do so would undermine their
incentives for economical choice. So long as premiums may vary by age, the categories
would need to include "age bands" so that older, higher cost people would not be
disadvantaged by a tax cap set for the average. Some comparable limited tax-subsidized
treatment of health care benefits would need to be extended to the self-employed,
non-employed, and employed whose employers do not offer health insurance.
Substantive arguments against the tax cap include that it would perpetuate "job lock."
Job lock is a two-edged sword in that it helps perpetuate a desirable pooling of "good
IHC Responsible Choices: Dran, March 8, 1995
17
risks," with low expected medical costs with "bad risks," with high expected costs. A tax
cap would also give more incentive to become insured to higher tax bracket people who
need it less; less incentive to lower bracket people who need it more.
A Tax Credit
These shortcomings have led people to propose replacing the exclusion with a
refundable tax credit, available only to those who buy coverage meeting certain criteria.⁶
Again, Section 125 would be repealed. Taxpayers would be allowed to reduce their tax
bill by a fixed amount (or by an amount determined by a formula) if they met certain
conditions. Individuals would get cash refunds if the credit exceeded the rest of their tax
bill.
The tax credit approach offers some distinct advantages over the tax cap:
The tax credit would end job lock by providing portability of the tax subsidy. The
credit would be available to the self-employed, non-employed, and those employed
by an employer that does not provide health insurance. This seems particularly
appropriate since such a credit could help to reduce the burden of adverse selection
in the individual market by giving healthy people a strong incentive to maintain
coverage.
Both low and high income people would receive the same credit. The tax credit
could also be designed so that the poor could receive more.
The existence of a tax credit for the non-poor would ease the work disincentive
associated with the reduction of benefits as subsidies for low-income people are
phased out.
It could be characterized as giving people something in exchange for the abolished
exclusion, as opposed to a tax cap which has been perceived as taking something
away.
6 Alain Enthoven, PhD. "A New Proposal to Reform the Tax Treatment of Health Insurance." Health Affairs. Spring 1984.
IHG Responsible Choices: Draft, March 8, 1995
18
Tax Credit Structure
There are many variations on the tax credit theme that can result in a substantial
improvement in the efficiency and equity of our health care system. Under one version,
Congress would pick a dollar amount that reflects the price of an efficient comprehensive
health plan meeting federal standards in most parts of the country, say $4000 per family.
Next, it would pick a percentage for the credit that would make the whole program a
budget-neutral trade for the exclusion, say 25 percent. A family buying coverage of up
to $4000 could take a tax credit equal to 25 percent of the premium (i.e., up to $1000).
This would give everyone an incentive to buy coverage up to the $4000 amount. Above
that amount, people would be required to use their own money, so they would be cost-
conscious. In another version, Congress would set a fixed dollar credit amount for
individuals, couples, etc. that would be a budget neutral replacement for the exclusion,
say $750 per family per year.⁷ The whole credit would be available to anyone buying
coverage meeting federal standards.
Both proposals would require that, to qualify for the credit, the coverage purchased
would meet federal standards of adequacy. Both would require people to pay more for
more expensive coverage. Under appropriate conditions (see below), both could be
recommended by the Jackson Hole Group as a means of increasing consumer
cost-consciousness, reducing tax losses, and lowering the rate of medical inflation.
A switch to the tax credit approach risks creating other problems. The
employment-linked tax exclusion is an important part of the "glue" that holds insurance
purchasing groups together. Converting to a tax credit direct to individuals would
weaken the glue and could threaten the employment-based group purchasing system
because good risks might demand their employer contributions in cash and seek better
rates elsewhere. Pooling of health risks within groups might be destroyed, although
some employers might resist this, preferring to keep their risk pool together and their
7 This credit would be slightly less than in the first example because people buying coverage for less than $4000 would
forego some of the tax credit.
IHG Responsible Choices: Draft, March 8, 1995
19
average costs per employee down by refusing to turn employer contributions into cash.
Individuals not covered through employment groups (including those who successfully
took their cash out of the group) would face a market beset by the pathologies that we
observe today in the market for individual and small group coverage. To make this
market work well, institutions need to be created for small employers and individuals
that perform the functions now performed by large employers and purchasing groups
(see "Insurance Reforms and Group Purchasing" Section, page 23 for recommendations
for reforming the small group and individual market.).
A Tax Credit Linked to Group Purchasing
The tax credit should be structured so as not to dismantle the group purchasing based
system. Standards governing the use of a credit would be necessary. For example, if
your employer offers coverage, the credit should be available only if you buy insurance
through your employer. Employers might be mandated to offer, but not necessarily pay
for, several coverage options and could do this by contracting with a voluntary, certified
purchasing group. If you are self-employed, non-employed, or employed by an
employer that does not offer health care coverage, you should be able to use the credit
independently in the individual market, or through a voluntary certified purchasing group
that would agree to take all comers within the market in which the purchasing group
chose to participate (e.g., groups size 5-50 or 1-100) and to abide by the rules
established for the rest of the insurance market.
Stage 1: A Tax Credit for the Self-Employed and Individuals in 1995
Since there is mounting urgency to reinstate the 25 percent tax deduction for the
self-employed, this opportunity should be used to shift from tax exemption to a tax credit
for this group. Tax policy changes should start with a tax credit program for the
self-employed, non-employed, and employed whose employers do not pay for coverage
to go into effect in 1995. This is attractive for the following reasons:
A tax credit would give this group a greater tax subsidy than they received under the
limited tax deduction. A tax credit would give these people tax-subsidized health
benefits while making them price-sensitive. It would eliminate the tax code
IHG Responsible Choices: Draft, March 8, 1995
20
inequities that the self-employed currently face, without expanding the cost-increasing
incentives created by the present tax treatment of health benefits for employed
persons.
Anyone who does not currently receive employment-based health care benefits
would benefit from the tax credit without threatening employment-based health care
purchasing.
Stage 2: A Tax Credit for Employer-Based and Group Purchased Coverage
After successfully implementing a tax credit for individuals, employer-based tax
deductions of health benefits should be replaced by a tax credit with provisions to avoid
unraveling employment-based health care purchasing.
CATASTROPHIC COVERAGE AND MEDICAL SAVINGS ACCOUNTS
Alain Enthoven, PhD and Sara Singer, MBA
The Jackson Hole Group tended to object to the approach advocated by proponents of
the tax-favored MSA theory because it favors one form of health insurance, catastrophic
coverage, and because it would encourage good risks to leave the risk pool. But,
recently Mark Pauly and John Goodman (one of the architects of the MSA idea) proposed
a new version that is much more neutral and less likely to split the risk pool. Therefore,
the Jackson Hole Group regards this as an approach worth trying. Under the
Pauly-Goodman approach, Congress would set a fixed dollar tax credit amount
(presumably one for individuals, couples, etc.). The whole credit would be available to
anyone buying coverage meeting standards that would include a deductible no higher
than, say, $3000 and a requirement that anybody choosing a plan with a deductible
(possibly above another threshold such as $200) would have to fund the deductible
up-front with after-tax dollars in an MSA. The purpose of the account would be to
ensure that people would have the money to pay their bills up to the deductible.
Individuals could select first dollar coverage, $3000 deductible coverage with an after-tax
MSA, or anything in between. After-tax MSAs may still cause some risk selection
IHG Responsible Choices: Draft, March 8, 1995
21
problems because the $3000 deductible would continue to be attractive to the healthy
and wealthy. Risk selection should be monitored and an appropriate remedy employed
if a problem occurs.
Tax-Favored MSAs with Catastrophic Coverage Could Damage the Market
Recently, we have seen great enthusiasm for the combination of insurance coverage with
high annual deductibles (e.g., $3000, called "catastrophic coverage") and tax-favored
MSAs to encourage people to set aside the money needed to pay for care below the
deductible. The idea is that if consumers were using their own money to pay their own
bills, they would be much more cost-conscious in their use of care. If they could have
tax-favored MSAs, they would be much more likely to accept high deductibles.
Unfortunately, catastrophic coverage would do little to moderate cost growth in the long
run. Health care spending is concentrated on a few people with expenses that exceed
$3000. For them and their families the additional cost of more care is zero.
Catastrophic coverage would also increase costs due to lack of preventive services and
early detection and treatment. For example, a recent study of acute appendicitis patients
in California found that patients covered under indemnity insurance were 20 percent
more likely than those in prepaid (first-dollar) plans to develop ruptured appendices.⁸
The important opportunity for savings is not in deterring primary care, but in motivating
doctors to provide high cost care only when it is appropriate and to do that efficiently.
Catastrophic coverage has no impact on provider incentives.
Some of the enthusiasm for catastrophic coverage comes from the segment of the
insurance industry that would like to give indemnity insurance a better chance to survive
in competition with managed care. But, managed care organizations would easily be
able to develop products to compete with catastrophic insurance, taking advantage of
their superior ability to control the costs of high cost cases.
8 Braverman, Paula et al., "Insurance-Related Differences in the Risk of Ruptured Appendix," New England Journal of
Medicine, August 18, 1994.
IHG Responsible Choices: Draft, March 8, 1995
22
The $3000 deductible policy would be especially attractive to the healthy and wealthy.
Those who could afford to do so could save so long as they did not need to use their
deductible. This would reduce the costs of the healthy who take catastrophic
coverage-an ironic result when one considers that it is the expenditures of the sick that
need to be reduced. The bad risks would increasingly bear the burden of the additional
costs associated with their care. In a spiral of increasing costs and higher risks, first
dollar coverage would be driven from the market-a desired outcome in the view of the
proponents of tax-preferred MSAs. In the end, this raises a question of social policy: Do
we want people with costly chronic conditions (e.g., a woman in a five-year struggle
with breast cancer) to have to pay $3000 per year out-of-pocket more than those who
have the good fortune to be healthy?
Tax-favored MSAs raise a number of additional problems. A dollar increase in
deductible does not translate into a dollar decrease in premium. The additional money
to fund a MSA would increase tax losses to the federal government. Some proposals
effectively allow people to pass funds through tax-favored MSAs without limit, as long as
the money is spent on IRS-eligible medical expenses. Like today's limited Section 125
accounts, this effectively cuts the cost of goods and services by 30 percent to 50 percent
(depending on tax bracket), thus undermining cost-consciousness, and costing the
Treasury a great deal. Consumer out-of-pocket health expenditures in 1993 were $158
billion, much-though not all-of which would be eligible for tax shelter.
INSURANCE REFORMS AND GROUP PURCHASING
Jay Carruthers and Ellen Wilson
The rising costs of health care over the last decade have affected the large and small
group markets in two very different but instructive ways. Cost pressures on large groups
have inspired major innovation, including greater use of managed care, incentives for
cost-conscious purchasing, and better information for making choices. The same cost
pressures when applied to the small group and individual market have had a deleterious
IHG Responsible Choices: Draft, March 8, 1995
23
effect. Small groups are unable to spread risks, to achieve economies of scale, to benefit
from competition, and usually to offer multiple plans. As a result, the small group and
individual market is characterized by:
High premiums or unavailability of coverage to high-risk individuals.
Steep premium increases (especially for individuals or small groups with individuals
who get sick): small and mid-sized businesses faced an average increase of 14
percent over the last twelve months. Over the last three years, it totaled about 57
percent.⁹
High administrative costs: a carrier's administrative expense, by one estimate,
reaches 40 percent of claims in groups of one to four, compared with less than five
percent for groups of more than 10,000. 10
Segmentation of the market by risk (i.e., health status).
An inability to influence the development of the market to better meet the needs of
small groups and individuals.
A growing number of uninsured or partially insured workers.
Small employers and individuals need a purchasing infrastructure capable of putting the
same pressure to bear on the market as large employers. The recommendations that
follow encourage the formation of buying groups that would improve access to, and
affordability of, coverage in the small group and individual insurance market. A stable
insurance market, however, depends on the contributions of a broader population of
healthy individuals to pay for the costs incurred by sick members of the risk pool, and so
long as insurance remains voluntary, you need some mechanisms or incentives to ensure
that risk is spread sufficiently. We propose the following:
Group purchasers should be prohibited from selecting membership on the basis of
health status or past claims experience.
Receipt of the proposed tax credit (See page 18) should be linked to purchasing
through a group for employees of firms of two or more.
9 Arthur Andersen, - Survey of Small and Mid-Sized Businesses: Trends for 1994."
10 Congressional Research Service, "Private Health Insurance: Options for Reform," September 20,1990.
JHG Responsible Choices: Draft, March 8, 1995
24
There are two ways to spread risk-modified community rating or group purchasing. The
Jackson Hole Group favors the latter for several reasons. Group purchasing offers a
proven, powerful tool for structuring a competitive, well functioning market, including
creating a market with choices among competing health plans, side-by-side comparisons,
comparative information about cost and quality, standard coverage contracts, equal rating
rules, etc. Such institutions would spread risk more broadly and decrease the ability of
health plans to discriminate on the basis of health status. They would also significantly
reduce administrative and marketing costs associated with contracting with individuals
and small groups. If group purchasing is not extended to small groups and individuals,
this market will continue to be beset by weak incentives for competition among plans
and high costs, and the market will continue to favor large groups while being
disadvantageous for small groups.
While both community rating and group purchasing require some form of incentive to
keep good risks in the pool so that premiums remain affordable, group purchasing offers
a far more feasible way of spreading risk with minimal government intervention. We lack
the cost shifting mechanisms, technical expertise, and standardization of benefits to
implement an effective risk adjusted community rate in a perspective reimbursement
environment.
Although we favor group purchasing to spread risks, forcing purchasing groups, made up
of primarily small employers, to take individuals would put them at a significant
disadvantage. Therefore, we encourage purchasing groups to take individuals but at the
same time suggest that carriers serving the individual market be required to community
rate and not be permitted to select on the basis of risk. However, this may lead to a
situation where the premiums of individuals are excessive. If that becomes the case,
other policy options will have to be considered to extend access to coverage for this
population.
IHC Responsible Choices: Draft, March 8, 1995
25
National Standards
A prerequisite to effective group purchasing is a set of uniform market rules or national
standards. Despite current efforts to give states more power in developing local policy
solutions in areas like welfare, there are several reasons why health system standards
need to be national. First, health care markets do not adhere to state boundaries, making
it impossible for states to structure rules that apply consistently across markets. Second,
the preponderance of large multi-state employers reinforces the need for a federal
framework. Moreover, with the rapid change in the delivery of medical services and the
proliferation of varying levels of risk-bearing arrangements, state regulations designed to
monitor traditional insurance carriers are outdated. Enforcing uniform federal standards,
however, would be a logical extension of the state's traditional role as insurance
regulator. Finally, and perhaps most importantly, national standards are needed-in the
current system where there is tremendous variation in the regulation of health benefits
from state to state and between the state regulated insurance market and federal
regulation of self-funded plans-to uniformly shift the basis of competition from risk
avoidance to the delivery of cost-effective high quality care.
Insurance Reforms
National standards should begin with enacting those insurance reforms at the federal
level that have already been implemented in most states-e.g., guaranteed issue of all
products, guaranteed renewal, portability, limitations of preexisting condition exclusions,
and limited rating restrictions (not community rating). In doing so, the most blatant
forms of risk selection would be eliminated while providing greater uniformity to the
system and the necessary preconditions for the formation of purchasing groups. These
reforms are designed to prevent health plans from discriminating on the basis of health
status and claims experience-a widely accepted principle-and should apply to all
health plans regardless of risk-bearing arrangements, whether it is a traditional insurance
carrier, a health plan, or an ERISA self-funded plan. Guaranteed issue, for example,
would not mean that a self-insured plan would have to take anyone who wanted to join.
They would, however, not be able to deny coverage to a sick employee or family
member based on their health status. Portability and continuity of coverage provisions
IHG Responsible Choices: Draft, March 8, 1995
26
are particularly important because they not only reward those already in the system by
improving access to coverage, but also foster a more competitive market by allowing
people to change plans more easily-an essential component to any functioning
marketplace. As a result, health plans are less able to predict the health status of their
enrollee population and must therefore rely on spreading risk.
Table 1
Proposed Insurance Reforms
Guaranteed Issue of All Products - Health plans would be required to accept all
individuals and their dependents, and all groups that apply for coverage. Health plans
could not deny coverage based on health status. This would apply to all products sold
in the marketplace by health plans.
Guaranteed Renewal - Health plans would be prohibited from terminating or
otherwise failing to renew coverage for groups or individuals except under certain
conditions - e.g. nonpayment, fraud, etc.
Limit on Preexisting Condition Exclusions - Health plans could not exclude coverage
of treatment for a preexisting condition for more than six months from date of plan
enrollment. A condition is preexisting if it was treated or diagnosed in the 6 months
prior to the date of enrollment.
Continuity of Coverage - Health plans would be prohibited from applying preexisting
conditions restrictions to applicants with continuous coverage (defined as coverage
with lapses no greater than three months)
Limited Rating Restrictions - Health plans would be subject to limited rating
restrictions to ensure that coverage is not denied through price.
* General language for the above taken from 6-28-94 Chairman's Mark of the Health Security Act, Senate Finance Committee.
Clearly, insurance reforms are limited in what they can achieve. Applied uniformly,
however, insurance reforms serve as a critical step in shifting competition among health
plans from risk avoidance to risk management. In addition to insurance reforms, all
health plans, including ERISA plans, should adhere to uniform quality reporting standards
adopted by the health industry (see Health Accountability Foundation section page 36).
IHG Responsible Choices: Draft, March 8, 1995
27
Table 2
ERISA Reforms
ERISA plans should have to allow employee family members the option of
purchasing coverage through the plan. However, employers should in no way be
required to pay for such coverage.
ERISA plans should have to abide by marketplace rules relating to portability.
ERISA health plans should be subject to the uniform quality reporting standards
developed by the health care industry to allow employees to assess the coverage
they receive.
ERISA plans should be subject to solvency standards that ensure an appropriate
level of capital reserves.
States should be prohibited from taxing ERISA plans to finance efforts to expand
coverage. Doing so would penalize those employers already providing coverage
for their employees.
Certifying Voluntary Purchasing Groups and Enforcing Standards
To ensure compliance of national standards or market rules, the states should have the
responsibility of enforcing those standards through the accreditation of Certified
Purchasing Groups (CPGs). To receive accreditation and hence enable members to claim
a tax credit, a purchasing group would need to adopt certain standards, such as:
Accepting all who are eligible and wish to purchase coverage through the group.
(Eligibility criteria would be left to the purchasing group as long as they precluded
any discrimination on the basis of health status and past claims experience.)
Offering a choice of health plans.
Conducting an annual open enrollment period.
Experience rate the group as a whole, with adjustments for age, family status, etc.
Risk adjustment within the purchasing group (developing/adopting an actuarially
sound methodology would be left to the purchasing group and participating health
plans).
Surveying members about their experience with their health plans and provide quality
related information.
IHG Responsible Choices: Draft, March 8, 1995
28
Assure insurance reform compliance in contracting with health plans.
Purchasing groups should not be allowed to demographically risk select in defining
their service areas (i.e., split up Metropolitan Statistical Areas).
Many purchasing groups already perform several of these functions and could easily
receive state accreditation as a voluntary CPG. If multi-employer arrangements are
afforded ERISA protection, as some have proposed, the federal government should
enforce compliance of uniform standards.
By establishing uniform market rules and fostering the development of voluntary,
certified purchasing groups, access to, and affordability of coverage would be
significantly improved as small groups pool their purchasing power and are able to exert
more influence on the market.
PRIVATE SECTOR INITIATIVES
"Responsible Choices" assigns two important initiatives to the private sector. The first
initiative is the introduction and maintenance of a benchmark benefits package which
will serve as a reference benefits standard for comparative purposes. The second
initiative is the establishment of a new health accountability system which will focus on
the provision of understandable quality information to consumers, based upon plan
performance and health outcomes. Each function is described in some detail in the two
sections which follow. The two proposed private sector groups, the Benchmark Benefits
Group and the Health Accountability Foundation could function under a single umbrella
organization, funded primarily by user fees. Specific proposals for implementation are
addressed on page 37.
JHG Responsible Choices: Draft, March 8, 1995
29
THE FIRST INITIATIVE-BENCHMARK BENEFITS
Nancy Ashbach, MD, MBA
The Need for Fair Disclosure and Comparability
Health plans, consumers, pharmaceutical manufacturers, physicians, legislators, the
courts, and others have struggled in the past with benefit plan offerings. In particular:
Consumers have been unclear about the criteria for inclusion of specific benefits in
their health plans. This has led to suspicion that managed care plans are motivated
to skimp on needed care.
Consumers have had difficulty comparing health plan offerings with differing benefits.
Physicians and others have been unclear as to the benefit and technology review
processes in health plans, leading them to view the process as secretive and
unscientific.
Health plans have been hampered in their ability to deny coverage for specific
interventions clearly and concisely and to support such decisions with cogent
reasons.
Pharmaceutical and technology manufacturers have suspected that such decisions are
based upon cost alone and that their products are not receiving a fair and open
hearing by health plan policy-makers.
The courts and legislators have received conflicting advice from interest groups.
It is for these reasons that a benchmark benefits package is needed. This product should
be a voluntary, real, and valid offering of all health plans, but need not and should not
be the only offering. Plans can and should be able to offer packages both richer and
leaner to respond to the needs of purchasers. Many plans have had lengthy experience
with the federal HMO benefits package, and we recommend that until the process for
revising and improving upon it is in place, it serve as the initial benchmark package. A
specific benefits package with a high level of detail will be developed as quickly as
possible to deal with the ambiguity and lack of specificity inherent in the use of the
federal HMO benefits package.
IHC Responsible Choices: Draft, March 8, 1995
30
The process of defining and maintaining the benchmark benefits package should be
open, fair, understandable, and for information purposes only. The criteria for additions
and deletions should be available and the process should be clear so that coverage
decisions by the health plan would be protected from unreasonable challenge.
Physicians, drug manufacturers, consumers, purchasers, health plans, and others who
might wish to influence the process of coverage inclusion and exclusion would therefore
be able to do so. In addition, the public would be assured of appropriate care being
provided and of coverage for expensive therapies not being denied solely because of
cost. There should be no opportunity for collusion between health plans for the
inclusion or exclusion of benefits. For the purposes of avoiding antitrust law suits, health
plans may need to be excluded from the process.
In addition to disclosing criteria for coverage, a standard product must be available for
price and quality comparison. In the absence of a voluntary benchmark, plans will vary
benefits to satisfy the demands of various customers and comparability to the consumer
will remain elusive. By using a benchmark benefits package as a standard product
against which the differing needs and requirements of purchasers can be measured,
comparability of benefits and price offerings can be determined.
Maintenance of the Benchmark Benefits Package
The benchmark benefits package should be that collection of benefits that is most likely
to produce health in the population. While the federal HMO benefits package is an
excellent starting point, producing health in the population will require ongoing
evaluation, revision, and updating of benefits. Also, a high level of specificity and detail
will be required in the definition of the benchmark benefits package. Technology
assessment and cost-effectiveness analysis will be needed to achieve this objective in a
rational way.
Technology assessment and evaluation are necessary because:
Technology in medicine is in a constant state of flux, with new technology entering
the market at a staggering rate. The cost of such technology creates a strong
JHG Responsible Choices: Draft, March 8, 1995
31
economic requirement for a valid process to determine coverage under a typical
benefits package.
Much existing technology has not been evaluated for effectiveness. To date, we have
had no mechanism for doing so, and many interventions in medicine are covered
under existing benefits packages as a result of historical precedent.
Cost-effectiveness has not been a major element of technology evaluation in the past
but will surely become so in the future as group benefits are valued against individual
demands.
An open, clear, fair, and scientific process to include or exclude specific technologies in
the benchmark benefits package will benefit all parties. Since technology assessment is
currently done in several different organizations, expertise would be available from the
private market. This would mean purchasing technology assessment expertise from
organizations such as ECRI (Emergency Care Research Institute) or the Blue Cross/Blue
Shield Technology Evaluation Committee or networking current expertise. A principle of
the new organization would be to utilize expertise currently available in the private
market in the most effective way.
Additionally, individual coverage decisions on the part of health plans often require an
independent evaluation and recommendation, which plans could implement on a
voluntary basis. Such individual evaluations would be carried out by experts in the
appropriate field of medicine and would be free of vested interests to deny coverage
based on cost considerations. Independent expert reviews would support removal of
coverage decisions from the legal system, where judges and jurors often rule in favor of
coverage if there is uncertainty or urgency.
An Independent Approach
A new, independent organization, the Benchmark Benefits Group (BBG), should be
formed to address these needs in the health system. The BBG's proposed functions are
outlined in Table 1. It would be private and not-for-profit, although government
collaboration would be possible in key areas, such as clinical trials, Medicare, and
JHC Responsible Choices: Draft, March 8, 1995
32
Medicaid. Representatives could come from purchasers, consumers, managed care
organizations, self-funded employers, academic medical centers, physicians, and the
government. Funding for the organization would come primarily from user fees-that is,
per capita assessments of the participants and users of the organization's efforts. Special
projects funding could come from foundation grants.
Table 3
Functions of the Benchmark Benefits Group
Definition, updating, and maintenance of the benchmark benefits package using the
criterion of production or maintenance of health.
Recommendation of inclusion or exclusion of new technology into the benchmark
benefits package based upon technology evaluation done by recognized groups.
Recommendations regarding continuation, limitation, or exclusion of existing
technology.
Cost-effectiveness information and recommendations based upon information from
competent entities.
Individual disputed coverage decisions in defined situations. For example, an
autologous bone marrow transplantation case for breast, ovarian, or cervical cancer
denied as experimental by a health plan would be referred to a group of experts
entirely outside the plan for scientific review.
A critical element to the success of the BBG will be its independence and autonomy.
Many elements of the health care system are characterized by suspicion and doubt as to
the methodology regarding coverage decisions in the policy-making and in the individual
case. The autonomy of this organization will reassure doctors that an appropriate
process exists with adequate clinical input. It will reassure patients that their interests
are being dealt with fairly, and it will reassure new technology providers-e.g., drug and
device manufacturers-that a fair process exists, facilitating level playing field
competition for all. Thus, the processes and criteria of the BBG should be open,
published, and available for revision as the health care industry develops and matures.
JHG Responsible Choices: Draft, March 8, 1995
33
Target Goals:
90 percent of health plans offering the benchmark benefits package by 1998.
Reconsideration of decisions made in individual cases by the Benchmark Benefits
Group upheld by courts in 60 percent of cases by 1998.
THE SECOND INITIATIVE-A HEALTH ACCOUNTABILITY SYSTEM
Sarah Purdy, MD
A New Quality Accountability System for a New Health Care System
The expectation that consumers would be able to choose among competing health plans,
on the basis of comparable quality and cost information, has not been realized. This
failure is partly due to information about the quality of health care not being as easily
available, understood, or compared, as information about costs. Consumers have been
inhibited from assuming responsibility for their own health care choices by inadequate
information that does not facilitate side-by-side comparison of health plans or encourage
participation in decisions about health care and treatment. To evaluate the impact of
health care on the population, it is necessary to measure the result, or outcome, of the
interaction between individuals and health plans-to hold health plans accountable. At
present, there is a health care quality measurement industry that uses different definitions
of quality and differing methodologies to measure quality. While these initiatives are
admirable and more extensive than any previously undertaken, there is pressure from the
purchasing community to move forward at a more rapid pace. Therefore, we propose a
new health accountability system which would not rely solely on the traditional systems
of quality assurance that fail to disclose health outcomes or assure consumers of
receiving excellent care by choosing a specific plan. The principles and assumptions
upon which the new health accountability system is based are:
Comparable, reliable, valid quality accountability data must be available to
consumers.
A move toward outcome based accountability data is feasible.
IHG Responsible Choices: Draft, March 8, 1995
34
Purchasers, consumers, and providers may have different information needs. Quality
improvement activities should result from internal use of quality data.
A clear distinction should be made between defining measurement and disclosure
requirements and verifying that requirements are observed. Organizations that define
data disclosure requirements, and those that audit data, should be independent of
each other, with neither being subject to undue influence by the provider or
insurance communities.
Providers, health plans, and researchers create the capability for choices to be made
on cost and quality, but group purchasers and individual consumers should have
input on the requirements of the system.
The same data on quality should be demanded by, and be available to, both private
and public sector purchasers.
Uniform data disclosure requirements could lead to the formation of regional and
national data bases, which would inform providers, purchasers, and policy-makers.
These principles raise several potentially controversial issues. First, the intention of the
system is to compare health plans, not individual providers. Second, there is debate on
how to compare the results of care provided by different health plans when the health
and demographic characteristics of the populations they serve are not comparable. The
issues of severity adjustment, or case mix, and demographic variation require continuing
refinement. Third, the system would require health plans to collect additional
information about quality and use some form of standardized record keeping. By
cooperating with this, plans would potentially be putting themselves in a position of
being unfavorably compared with competitors. Finally, the degree to which consumers
want and understand information about quality of health care is still uncertain.
However, those whose lives are impacted by health care-patients and those who
represent their interests-must have the dominant input into the quality accountability
system.
The health accountability system would also require group purchasers, whether public or
private, to provide valid, comparable information to consumers. To achieve this, and
IHC Responsible Choices: Draft, March 8, 1995
35
avoid further increase in the number of data sets requested by purchasers, collaboration
is needed within the health industry.
What Would a Health Accountability System Look Like?
Table 2 outlines the proposed system, which suggests collaborative efforts to address two
areas: the research, design, and evaluation of health accountability measures, and the
selection and endorsement of uniform data disclosure requirements.
Table 4
Elements of a Health Accountability System
1. Accountability Measures Clearinghouse
Clearinghouse function, to collate and disseminate information about measures,
methodology, and previous experience. Identify areas that need further research.
2. Health Accountability Foundation
Select and endorse uniform data disclosure requirements. Purchaser and consumer
dominated board, permanent executive staff, input from other players.
3. Auditing of Health Plan Data Disclosure
Verification that data has been collected, analyzed, and interpreted in a reliable
and valid manner.
4. Selection of Health Plans by Group Purchasers and Consumers
On the basis of uniform, comparable data disclosed by plans.
5. Quality Improvement
Assist health plans to be proactive in the improvement of quality and to respond to
the results of the measurement process.
Health Accountability Foundation
A Health Accountability Foundation (HAF) should be established as an independent
collaborative body between the private and public sectors. Its responsibilities would
include setting quality accountability goals and selecting and endorsing uniform
measures of health plan accountability. These measures and the agreed methodology by
which they are collected would then form the core of all health plan reporting activity.
Care must be taken to ensure that standardization does not quash innovation, and that
IHG Responsible Choices: Draft, March 8, 1995
36
evolution of the core measures is assured as information capabilities improve. It is
important to consider the clinical implications for plans and providers, and to build
incentives and feedback mechanisms for quality improvement activities to result from the
internal use of quality data. Standard setting should not be isolated from the
implementation of quality improvement activities. The experience of the health plans
and the accrediting bodies will be vital to ensuring a link between the foundation and
clinical practice.
It is envisaged that the HAF would have a permanent staff of scientists, who would
systematically consult with outside experts. They would present recommendations to the
foundation's board, whose majority would be represented by purchasers and consumers
from the private and public sectors. A mechanism needs to be devised, by which health
plans, providers, researchers, the pharmaceutical and technology industry, and the health
care quality organizations would have input. The closest existing model for the HAF is
the Financial Accounting Standards Board (FASB). The recommendations endorsed by
the HAF should be scientifically justified and subject to scrutiny at public hearings. It is
important to link health plans into the system, in order to ensure that the data
requirements specified by the board inform quality improvement and the furthering of
medical knowledge, and are fair and feasible. Data that is valuable to providers is more
likely to be included in medical records and incorporated in computerized medical
information systems.
Funding of the HAF should preserve its independent status. Funding should be assured,
but not dominated by health plans. A possible mechanism would be an annual
subscription, and an assessment on the health plan premiums of those plans that choose
to participate.
Implementation of Private Sector Initiatives
The two private sector initiatives proposed in "Responsible Choices" are benchmark
benefits and the health accountability system. These two functions could work
synergistically under a private umbrella organization sponsored by a broad range of
IHG Responsible Choices: Draft, March 8, 1995
37
participants and involved parties, and funded by user fees. The organization would be a
not-for-profit entity. We propose to convene a representative set of purchasers and
consumers in June 1995 to determine if there is agreement on the idea of the Health
Accountability Foundation and the Benchmark Benefits Group and to get their thoughts
on how funding for these initiatives would be accomplished. Initial estimates of cost
suggest that funding in the range of $0.10 per member per month would be sufficient to
accomplish the task with a broad membership. It is intended that participants at the June
meeting will define and adopt a set of initial health plan benefit and accountability
requirements.
Once sufficient support is generated for the new organization, a board of directors
should be chosen and an executive director selected. The new organization should
move quickly to begin work on its primary goals. The proposed benchmark benefits
should be available by July, 1996. The goals of the Health Accountability Foundation
will be more difficult to accomplish due to the lack of uniformity of quality data in the
health system today but even if a single meaningful measure is chosen, the expansion of
goals can proceed from that starting point.
The other elements of the proposed health accountability system are as follows:
Accountability Measures Clearinghouse
Many groups and individuals have developed considerable expertise in devising and
implementing health plan performance measures. Currently, no organization documents
all of these efforts and evaluates them, or assists others with questions of methodology or
implementation. A collaborative approach would achieve economies of scale, resulting
in more funding for such projects, greater availability of information, and a reduction in
the duplication of effort. It is proposed that a scientific assembly be formed that serves
two main functions:
To act as a clearinghouse for the collation and exchange of information about quality
accountability measures and methodology.
IHC Responsible Choices: Draft, March 8, 1995
38
To call attention to the need for research, development, and continual evaluation and
improvement of performance measures.
The clearinghouse is not meant to engage in research. It should be a private/public
partnership, perhaps set up to collaborate with an existing organization, such as the
Agency for Health Care Policy and Research (AHCPR) or a consortium of government
and private research institutions. Funding would come from foundation grants and
government agencies.
Completing the Health Accountability System
The other criteria for the proposed system can be satisfied by well-established
mechanisms already in place. Because organizations like the National Committee for
Quality Assurance and the Joint Commission on Accreditation of Healthcare
Organizations have considerable experience in accrediting plans and providers, they
could play a major role in auditing the process and facilitating quality improvement
activities. The organizations that focus on internal quality improvement, such as the
Institute for Healthcare Improvement, would be an obvious medium for the quality
improvement role. Continuing education of physicians and other health plan staff
members is important to each stage of the process. There will be considerable overlap
between the components, and continuous feedback to the clearinghouse and HAF
functions will be necessary.
Target Goals:
Comparable information about the quality of care provided by health plans should be
available to 100 percent of consumers purchasing through groups by 1998.
Preliminary health plan data on condition specific outcomes by 1998.
IHG Responsible Choices: Draft, March 8, 1995
39
HEALTH SYSTEM INFORMATION
Robyn Lunsford, MSE, Nancy Ashbach, MD, MBA and Sarah Purdy, MD
Why Is Coordinated Health Data Needed?
Making responsible choices will require that better information be available on who is
insured, what it costs, and whether better health is the result. As the system changes,
data must be collected faster and from different sources: per capita expenditures by
health plans, for example, are becoming more valuable than the numbers of physician
visits and hospital days. Attempts at federal health care reform last year showed that the
data available was not sufficiently timely or accurate. In fact, inadequate data on
consumers' responses to price competition tilted some proposals toward price controls.
Congressional Budget Office estimates of the cost of various bills were hampered by their
inability to evaluate the effects of undocumented improvements that were under way and
differences in inflation rates from community to community. While in some areas
premiums are reported as declining, these figures do not show if there is a corresponding
increase in copayments. In order for policy-makers to address the problems of attaining
broader coverage while containing the cost of health care, they must have data about the
numbers and characteristics of the insured and uninsured and the cost of different
delivery systems. Though multiple sources of health care data are available, one of the
major obstacles is how to access, analyze, and compare this disparate information.
Why Are the Current Data Inadequate?
Multiple data sets are not comparable or accessible from one source: For example,
information about coverage and utilization of services is collected in the annual
National Health Interview Survey (NHIS), but it does not provide information about
household income or costs.
Data regarding costs and coverage is not timely: e.g., the information from the NHIS
takes twelve months to process. The National Medical Expenditures Survey is
completed only once every ten years.
The validity and accuracy of some sources of health data has been questioned; e.g.,
the medical care component of the consumer price index (CPI) does not measure
IHC Responsible Choices: Draft, March 8, 1995
40
costs borne by third-party payers, hence it reflects price to the consumer, not true
overall cost. In fact, the CPI is a poor measure of medical cost to the consumer.
Data are not available in useful formats: e.g., it would be very helpful to have data
sorted by state to deal with issues such as Medicaid reform.
The problems associated with the existing data sets and with setting up an alternative
system are acknowledged by federal agencies¹¹ and at the state level. We have set out
some basic principles for the development of a coordinated system in the following
sections.
What Should Be Collected?
Data will be required in four basic areas in the health system:
1. Cost-What is the per capita cost of health care, to third-party payers and to the
individual?
2. Coverage-Who is and is not covered by the health insurance system?
3. Vital Health Statistics-Morbidity, mortality, reportable diseases.
4. Quality-What are the measures of quality of services provided?
Quality of services (health status, outcomes, and consumer satisfaction was covered in:
A Health Accountability System; page 34). This section focuses on the data needs of
cost, coverage, and vital statistics.
The process of collection should be guided by some basic principles:
Confidentiality of records and privacy rights of individuals must be preserved. Use a
unique, encrypted identifier.
Data must be exchanged electronically, either directly or indirectly.
Data must represent the minimum required to serve the basic needs of the health
system.
The information needs of the health system will change as the payment system
changes.
11 Physician Payment Review Commission, Annual Report, 1994.
IHG Responsible Choices: Draft. March 8, 1995
41
Data collection must be timely.
The aim of the uniform data system should be to reduce administrative costs in the
health care system.
Determination of which data elements are collected should be driven by a clear
mission-to improve the health of the population.
Data should be collected at the state level, and then aggregated nationally.
Cost: Information is needed on per capita costs for all individuals in the health care
system. The purpose of information at this level is to determine the per member costs of
health care-those borne by a health plan and those borne by the individual. It will be
necessary during a period of transition to reconcile the methodology of data collection
between capitated systems and fee-for-service systems. It will be the responsibility of a
federal entity (see page 43) to define appropriate standards to integrate information from
the two payment systems.
Coverage: Information will be required from health plans and self-insured groups with
respect to numbers of enrollees (including dependents) ano member demographics.
Timely information on enrollment and disenrollment will be needed. Information will be
required both on the insured population and on the uninsured population. The basic
questions to be answered in this context are: "Who is covered?" "Is their coverage
adequate?" and "Who is not covered and why?" Surveys, using demographically
representative subsamples, should be conducted at least annually with the resulting data
forwarded to the responsible federal agency. These surveys should incorporate questions
regarding coverage status-including an accurate assessment of why an individual or
family does not have coverage; the cost of coverage-including premium amount and
health plan provider, deductible and copayment amounts, and out-of-pocket expenses for
the most recent one-week period; type of coverage-i.e., fee-for-service, managed care,
Medicare, and Medicaid; and the family's source of coverage (employer, purchasing
group, individual, other group plan, etc.). Data on the characteristics of both groups,
such as employment or lack thereof, income, and demographics, should be collected.
Information should also include an employer's size and industry classification. Data on
IHG Responsible Choices: Draft, March 8, 1995
42
the various health plans offered to an individual would also be helpful. Care should be
taken to ensure that data on the Medicaid eligible population is incorporated in any
survey.
There are two possible methods for conducting surveys:
The ideal means to collect this information would utilize a national sample size of
50,000 to 80,000 households and result in national average data. Difficulties
associated with this method are the expense and inability to analyze data with respect
to localized market areas. In order to eliminate the possibility of duplication, unique
identifiers should be used for each survey respondent and all family members
included in the survey with appropriate safeguards for confidentiality of the data.
Alternatively, surveys of discrete market areas, at differing stages of market reform,
should be conducted. Collecting longitudinal data in these areas would allow
analysis of the changing market. The effect of reforms in other areas could then be
more accurately estimated. Particular attention should be focused on states
undergoing policy changes.
Vital Statistics: The new health data system should continue to collect information on
morbidity, mortality, reportable diseases, births, and other issues, possibly including
immunizations. Such information should be collected in a standardized way and
integrated with information collected by providers and health plans for purposes of
comparability and to reduce administrative costs in the health care system.
How Can the Goal Be Accomplished?
We believe that the ability to collect uniform, timely, accurate health system cost and
coverage data is a goal that justifies a federal presence. Private industry collaboration
alone will be neither comprehensive nor sufficiently rapid. However, it is in the interest
of the health care industry to encourage federal financing of this endeavor. This function
could be performed by an existing agency, such as HCFA's Office of National Health
IHG Responsible Choices: Draft, March 8, 1995
43
Statistics or the AHCPR, or by inter-agency collaboration. It should be separate from all
purchasers, including Medicare. The agency should be advised by a broad group of
experts from the private and public sectors, to include those with expertise in
information systems, health care financing, health economics, and other scientific and
technical fields. We propose that the delegated agency take responsibility for reporting
on cost, coverage, and vital statistics. Information on quality reporting will fall within
the purview of the Health Accountability Foundation. Federal legislation will be
required to ensure reporting of the chosen data elements by all parts of the health care
delivery system as well as by states.
Target Goals:
Health data system should be functioning by the end of 1996.
Data on costs of health services should be available quarterly.
Data on coverage should be available annually, and within the first three months of
the following year.
CONCLUSION
"Responsible Choices" recognizes that the health care market is moving rapidly toward
reform and offers proposals to foster this restructuring. Private purchasers are driving the
market and causing health plans to compete on price and quality. However, not all
purchasers are exerting this force on the market. As the largest purchaser of health care
in the U.S., the federal government has tremendous potential to drive improvement in
the market which it has not yet exercised. Small groups and individuals have limited
access to group purchasing arrangements that pool risk, provide choice, and achieve
administrative savings that would enable them to be active, value purchasers of health
care.
This demonstrates that market mechanisms alone are not solving all of the problems.
"Responsible Choices" depends on the willingness of government and the private sector
IHG Responsible Choices: Draft, March 8, 1995
44
to work together to improve the American health system. Federal involvement is
necessary to bring public programs into line with the private sector, increase consumer
cost-consciousness, establish a fair market, promote group purchasing that offers the
small group and individual market access to reasonably priced health coverage, and
provide information. "Responsible Choices" recommends a tax credit as the means for
bringing structure to the market. Without the tax credit device, bringing order to the
health care market will be much more complicated and require considerable regulation.
For its part, the private sector must be willing to be more accountable. Benchmark
benefits and quality reporting are the first steps that the private sector should take to
voluntarily hold itself accountable. Implementing these policies would bring
comparability to the market and provide information enabling consumers to make
informed decisions and drive competition. If the private sector cannot follow through, it
may be necessary to link these proposals to the tax credit by requiring health plans to
price and offer the benchmark benefits package and report on quality in order to receive
tax credit eligibility for their plan.
"Responsible Choices" does not address the issue of achieving universal coverage but
recognizes that other primary problems must be solved first, such as building a better
marketplace so consumers and purchasers can make informed decisions. Other
important issues, such as malpractice and antitrust, are not taken up directly since they
are being actively addressed by others and dealt with in the market. These proposals are
the necessary incremental steps forward in containing costs and fostering effective public
and private purchasing. With these reforms in place, there will be more data and the
capability to effectively and efficiently deal with those left out of the system. The
elements of this proposal can be put in place rapidly and will accelerate the reforms
already taking place in the market.
IHC Responsible Choices: Draft, March 8, 1995
45
HEALTH CARE BENEFIT AVAILABILITY FOR EMPLOYEES:
THE ERISA FRAMEWORK
TESTIMONY OF FRANK CUMMINGS
prepared for delivery at a hearing before the U.S. Senate Committee on Labor and Human Resources, 9:30 a.m.,
Wednesday, March 15, 1995, in Room 430 Dirksen Senate Office Building.
Frank Cummings, now a Washington, DC, member of the law firm of LeBoeuf, Lamb, Greene & MacRae, L.L.P., was
from 1965 to 1967 Minority Counsel to the Senate Labor Committee, appointed by Senator Jacob K. Javits, and was
Javits' Administrative Assistant/Chief of Staff from 1968 to 1972. Before working for Javits, Cummings was a lawyer
at a New York law firm and was that firm's labor lawyer assigned to the Studebaker shutdown in South Bend, Indiana.
Cummings designed the original Javits pension reform bill, first introduced in 1967 (S.1103, 2/28/67), which was the
basis for ERISA in 1974.
Health reform hearings sometimes prove the adage that everyone has at least one "good"
idea that will not work. A corollary would be the 2400-year-old advice of Hippocrates to the
medical profession: "First, do no harm."¹
This Committee's agenda item - "Health Care Reform" -- targets a health care system
which, for those who are covered by it, is the envy of the world. Make it better, yes. Expand
coverage, yes. But first -- do no harm.
There are good things Congress can do about health care, without doing harm,
if Congress proceeds carefully,
if Congress listens to what the market tells you,
if Congress does not try to swallow too much in a single gulp, and
then choke on it, as in 1994,
and if Congress learns from the past.
ERISA -- invented by this Committee more than twenty years ago -- is your legislative
past. It is a good guide. By consensus among those who live under it, ERISA Title I works
well. In fact, it already works well for health benefit plans, though some carefully targeted
improvements may be worth considering now.
'Epidemics, Bk. I, ch. 11.
THE PRIOR, CHAOTIC, MULTI-STATE LAWS
THAT ERISA SUPPLANTED -- AND THAT
"ERISA WAIVERS" COULD RESUSCITATE
ERISA was not born in a day. It was almost 15 years after "the Studebaker problem"
before Congress acted. It took 7 years after Senator Javits' first bill² before the idea became
law. 3 But in the meantime, the States were passing laws right and left, without helping matters.
In the late 1960's and early 1970's, a number of states enacted state laws governing the content
of plans (mainly pension plans)4 -- just as they are doing now as to health plans.
The inherent limits of state jurisdiction made the system unworkable, and often did more
harm than good. Technical problems in enforcing benefit rights were often insurmountable
under state laws. Those hurdles included: inability to achieve service of process on necessary
parties outside the boundaries of a single state; choice-of-law uncertainty; insufficiency of the
law of equity since the real decisions were made by persons who were not defined as
"fiduciaries" (other than the trustee). Interstate businesses could not comply with these laws
separately, and yet benefit plans were most effective and efficient if they were company-wide
in scope.
A wondrously chaotic pretrial conference in Detroit in the 1960's displays all the troubles
that local employee benefit laws may generate. As one of the lawyers representing the old
Studebaker and Packard companies (which had merged), I appeared in a judge's chambers in
litigation challenging the shutdown of a pension plan when Packard automobile production
terminated.
The judge asked: Who are the necessary parties to this litigation? We
responded that we needed the trustee (in New York), the insurance company (in
Canada), the investment manager (in New York), the union(s) (in Detroit and
South Bend), the employees as a class (everywhere), the employer (South Bend),
and a number of other key players who had not appeared and over whom the
local court doubted that it could get jurisdiction under state law.
The judge asked: Whose law applies? The bank had a trust agreement
which said that New York law controlled. The union claimed it was all under the
Taft-Hartley Act. The insurer (Canadian) said it had a contract which said it was
S.1103, 90th Cong., 1st Sess. (2/28/67)
³Public Law 93-406, 93d Cong. (9/2/74).
"See Legislative History of the Employee Retirement Income Security Act of 1974 (Committee
Print, Senate Labor & Public Welfare Committee), V. 3, at 4745-46 (Sen. Williams), 4770-71
(Sen. Javits).
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governed by Ontario law. The plan said it was governed by state law (Indiana
law, I think).
The judge said: This litigation will go on forever!
Additional questions in our minds -- which were implicit in the judge's questions and which
would follow inevitably from them -- included:
Exactly what is the "claim" or "cause of action"?
A claim against whom?
The employer?
The plan?
The trustee, or investment manager?
The union? (the International? the Local? which Local?)
The insurer?
A service provider? (actuary, accountant, lawyer?)
Are there separate claims, and are they under the laws of
different states, depending on where each separate claim "arose"?
Who has "standing" to assert this claim(s)?
The participant?
The union? (the International? the Local? which Local?)
A class of participants? (more than one class?)
What sort of relief may be granted?
Equitable/injunctive relief? (against whom, and for what?)
Damages? (against whom? In favor of whom? the plan? the participant?)
What measure of damages?
Compensatory damages?
-3-
Consequential damages?
Punitive damages?
Attorney's fees?
Who decides -- judge or jury?
What are the preconditions of suit?
Exhaustion of the plan's
administrative claims procedure?
Exhaustion of administrative claims appeals?
What is the scope of judicial review of claims denial?
"Arbitrary and capricious"?
"Abuse of discretion"?
"De novo"?
Whose burden(s) of proof? To prove what?
Most of those questions either had no answers or uncertain answers under state law. What was
certain was that the state laws were all different. The parties (plaintiffs and defendants) were
dispersed in a number of states. The only certainty was uncertainty. It was a prescription
for a legal shambles. ERISA, in 1974, provided a single federal answer to every one of those
questions.⁵
How does a new local health law avoid all that, all over again? Surely nobody with
memory of the pre-ERISA situation would want to return to it.
⁵E.g., ERISA §§ 409 (fiduciary remedies), 502 (jurisdiction, standing, causes of actions, venue,
necessary parties, service of process, etc.), 503 (claims and administrative claims appeals), 514
(preemption).
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CURRENT ERISA TITLE I PROTECTIONS
FOR EMPLOYEE BENEFIT PLAN PARTICIPANTS
The enactment of ERISA in 1974 established a battery of administrative and procedural
standards governing all employee benefit plans -- both pension plans and health plans, as well
as other types of plans operating in the employment context. in addition, ERISA set substantive
standards for pension plans.
No employer was told, "you must have a plan." But if an employer chose to have a
plan, then Congress set some standards of what must be in that plan. Even then, no plan
sponsor was told how high the benefit level must be, how beneficial the plan must be, or even
what kind of plan it must be. But as to pensions, rates of accrual and vesting and minimum
funding standards were set, as were a few other requirements. Those were minimum standards,
however. The hallmark of the 1974 law, even as to pensions, was protection of the employer's
freedom of plan design.
It worked, and pensions (as well as other employee benefit plans) simply bloomed on the
American employment scene, voluntarily, vastly expanding the coverage and protection of
American employees. The reserves of private pensions, particularly defined benefit pension
plans, kept expanding -- until later tax amendments to ERISA Title II began to pile requirement
on requirement, and then the growth of private defined benefit pensions began to collapse under
the sheer regulatory weight of it all.
ERISA TITLE I ALREADY PROVIDES
BROAD PROTECTIONS FOR HEALTH PLAN PARTICIPANTS
ERISA has created a considerable array of protections for the participants in all employee
benefit plans, including all employee health benefit plans. Here are some (but by no means all)
of the ERISA standards which already govern every employee health benefit plan:
Plans must be in writing: Every plan must be established by a written instrument.
ERISA § 402(a)(1).
Plans must be run by named fiduciaries: Every plan must be controlled and
managed by named fiduciaries, who must jointly or severally have authority to manage
and control the operation and administration of the plan. ERISA § 402(a)(1).
Annual Reports must be filed: Plans are required to file annual reports with
exhaustive detail concerning plan finances. ERISA §§ 103, 104(a).
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Mandatory disclosure of plan documents and plan information: All the key
documents and necessary information must be disclosed to plan participants, on request,
subject to severe federal penalties for failure to disclose. ERISA § 104(b)(1) and (2).
Amendment Procedure: Each plan must state its procedure for making plan
amendments. ERISA § 402(b)(3).
Basis of payments: Each plan must specify the basis of payments into and out of
the plan. ERISA § 402)b)(4).
Claims procedures and claims appeals, with full and fair fiduciary review: Every
health benefit plan must provide that when a benefit claim is denied, the plan must
provide a written statement of the specific reasons for denial, written in language
calculated to be understood by the participant. And every health benefit plan must afford
a reasonable opportunity to any participant whose benefit claim has been denied for a
"full and fair review by the appropriate named fiduciary" of the decision denying the
claim. ERISA § 503.
Summary plan description in plain language: Every health benefit plan must
provide to each participant and beneficiary a "summary plan description," written in
language calculated to be understood by the average participant, describing all the details
of the plan under which a participant may receive a benefit, or under which a benefit
may be denied, the administrative structure of the plan, the source of financing, the
requirements for eligibility and participation, the identity of any entity through which
benefits are provided, the names and addresses of the plan and the key people who run
the plan, the claims procedures, and many other details. ERISA § 102.
Federal fiduciary standards, imposed on all the key players, including many who
would not be deemed "fiduciaries" under state law: Every health plan must be
administered by a named fiduciary, and the people with important discretion are deemed
"fiduciaries" under ERISA. Each fiduciary is subject to federal standards of prudence
and prohibitions on conflict of interest. ERISA §§ 404-409.
Procedure for allocating responsibility: A procedure for allocating administrative
responsibility among fiduciaries must be provided in the plan. ERISA § 402(b)(2).
Co-fiduciary liability and responsibility: A co-fiduciary is liable for another
fiduciary's breaches of duty if the co-fiduciary participates knowingly in the breach, or
enables the breach, or has knowledge of the breach and does not take reasonable efforts
to remedy the breach. ERISA § 405. Co-trustee liability is even greater. ERISA §
405(b).
Federal jurisdiction for enforcement of the plan and the requirements of the law:
Every plan and every plan fiduciary is subject to federal court jurisdiction to enforce the
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plan and the terms of the law. The types of actions which are allowed are carefully
circumscribed to allow the federal courts to do what is necessary and not to do what is
counterproductive. Restitution and other equitable remedies are allowed for fiduciary
breach, but punitive damages are not. Attorneys fees are allowed. National service of
process is allowed. Plan participants and fiduciaries, and the government, may sue, but
strangers may not. What is needed is allowed; what is superfluous is excluded. ERISA
§ 502.
Federal preemption displaces 50 state laws with a single national set of standards.
ERISA § 514.
COBRA continuation coverage: Participants losing coverage must be allowed to
purchase continuation coverage at reasonable cost. ERISA § 601.
Medical Child Support Requirements: "Qualified medical child support orders"
must be honored. ERISA § 609.
And over the last 20 years, a considerable array of court rulings, regulations, advisory opinions,
and administrative interpretations have filled in the interstices between these and other provisions
of ERISA, creating an effective protective cover for all health benefit plans.
The system is effective. Title I of ERISA, at least, works.
ERISA TITLE II (TAX QUALIFICATION REQUIREMENTS):
ANNUAL AMENDMENTS, GROWING CONFUSION, AND THE
GRADUAL UNDERMINING OF THE DEFINED BENEFIT PENSION SYSTEM
The greatest weaknesses in ERISA have arisen not from Title I but from the tax
provisions of Title П.
It was in Title II that Congress injected the infamous "Section 89" requirements for
employee health plans, only to repeal it after an uproar of protest from "the real world" forced
a retraction.
It is in Title II where Congressional "tinkering" year after year (sometimes twice a year)
has generated so much chaos particularly in the areas of defined benefit pension plans. If you
read the amendments to the Internal Revenue Code's qualified plan rules appearing in IRC
§§ 401-424, you will begin to understand why only this year, in 1995, is the IRS finally
beginning to catch up on reviewing and qualifying plan amendments which Congress required
under the Tax Reform Act of 1986, but which the Service has not yet reviewed because the
regulations under those tax law amendments were so far behind!
-7-
Keep in mind three of the most central features of ERISA Title II (tax provisions):
Licensing: When it comes to qualified plans, the Internal Revenue Code
is a "licensing statute" -- in the sense that a sponsor submits the plan to the IRS
and, if it passes, you get back a "determination letter" which is a kind of
"license" to run a pension plan.6 (Technically, a sponsor is permitted to run a
plan without such a "license," but that is ordinarily viewed as an act of madness.)
"Regulations Projects": ERISA Title II operates through a giant and
growing maze of tax regulations⁷ governing the contents of qualified plans.
Almost every sentence of ERISA Title II plants the seeds of one or more IRS
regulations projects.
Additional Bureaucracy: Because most individually-designed pension plans
must be reviewed for "determination letters" (again and again, as they are
amended), it takes a large federal bureaucracy to implement the statute.⁸
What caused the Title II "mess"? ERISA was not perfect, and it included some mistakes
-- most of them growing out of the parliamentary tangle that led to the ERISA "sandwich" of
labor and tax provisions. Indeed, a fair inventory of mistakes -- from which the current
Congress may well discern some useful lessons for health legislation -- would include the
following:
The largest 1974 ERISA mistake -- conflicting agency objectives: Congress
thought the IRS, a tax-collection agency, could be made to assist and foster a
benefit system based on tax deductions and exemptions that reduced the tax
revenue of the United States. Congress thought the fox would be the best
protector of the chicken coop. Wrong.
The largest post-1974 ERISA mistakes -- excessive complexity, "budget
balancing" in the guise of benefit "fairness," and member abdication in favor of
"technician takeover": Post-ERISA repetitive amendments and expansion of the
tax rules governing employee benefits have made the Code so complex that few
'E.g., Rev. Proc. 94-37.
As well as Revenue Procedures, Revenue Rulings, Private Letter Rulings, IRS Notices, GCM's,
Manuals, and the like.
8This comment is not intended to demean in any way the members of this division of the IRS.
They are extraordinarily dedicated and skillful people. But the possibility of needing to
develop yet another such bureaucracy for health plans ought not to be accepted if there is any
reasonably effective less bureaucratic alternative.
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if any members of Congress understand what's in the tax portion of ERISA.
Loss of understanding has combined with abdication of control in favor of
technician takeover. The only policy considerations that really seem to matter,
when it comes to employee benefits, seem to be budget consideration -- "revenue
loss" rather than benefit enhancement. Hardly anyone pays attention to the real
interests of the benefit delivery system -- benefit sufficiency, efficient
administration, an efficient market, workability, simplicity.
Compare that with ERISA Title I, which Congress had the good sense to design carefully
in the first place and then -- for the most part -- to leave it alone. If there is a moral to that
story, it is:
Do it carefully
Do it right the first time
Try to leave it in place long enough for the sponsors, the participants, and
the enforcement agencies to get the details worked out.
The latter point is not inconsistent with some gradual change, with Congress revisiting
certain rules from time to time. Even here, the ERISA history is instructive. The original rules
for pensions under ERISA required 10 year "cliff" vesting or 15 year "graded" vesting (ERISA
§ 203(a)(2), as enacted in P.i.. 93-406 (1974)), and 30 year funding for new plans (with 40 year
funding for old plan liabilities) (ERISA § 302, as enacted in P.L. 93-406 (1974)). In effect,
ERISA as originally enacted required pension plan vesting and funding only in accordance with
the standards that many of the better plans had already adopted voluntarity. In other words,
Congress knew it would work -- it was already working for the better plans. Then, later,
Congress revisited the vesting and funding rules, several times, tightening up the vesting
standards (now 5 years) and funding standards (now down to about 12 years for underfunded
plans catching up under "deficit reduction contributions" under ERISA § 302(d)), as the practices
prevailing in the industry gradually improved.
Pensions, of course, are quite a different funding problem compared to health benefits.
Pension money must be set aside, invested, and protected over a long period of time 30 that it
can be paid out in retirement. Health premiums are paid annually and cover benefits which are
for the most part paid in or shortly after the plan year in which the contributions are made.
Thus, if "solvency" of health benefit plans is to be addressed, it need not involve anything like
the long-term investment and security protections that have been at the core of ERISA's pensions
standards.
Nonetheless, the funding problems of health benefits are worth examination -- provided
that the cure is not worse than the disease.
-9-
"MARKET REFORM" UNDER ERISA
"Market reform" sounds innocuous, particularly when a bill proposes "only" to enact
market reform.
But the market is the thing that tells you what works and what doesn't work. Legislation
which directs the market to market the unmarketable is not "only" market reform, it is market
destruction. Beware. Market reform is possible, but effective and workable market reform
requires not just that the market listen to you -- you must also listen to the market.
How do you "target" health reform without fouling up the market?
When it comes to employee health benefits, "market reform" turns out to be a code
phrase for a set of requirements protecting employees who may undergo a gap in coverage when
they lose or change employment and then develop an illness which makes them currently
uninsurable. The components of "market reform" in this sense would be provisions for (i)
guaranteed issue, (ii) coverage of preexisting conditions, and (iii) so-called "portability," which
is really just a combination of the first two provisions, perhaps also incorporating COBRA
continuation coverage.
The core of the market problem you are dealing with is that insuring a very sick
insurance applicant is like buying insurance on a "burning building." Nobody sells insurance
on burning buildings, because the cost, as an actuarial matter, is equal to the cost of
reconstructing the building. And nobody sells insurance on one very sick applicant, if that
applicant is viewed as a single unit. But many (perhaps most) large employers will cover a new
hire without pre-ex exclusion (as part of a group), because the overall premium to cover a large
number of active employees is adequate to cover the risk.
What, then, would be a reasonable legislative requirement? That will not be easy to
design, but your guidelines ought to be based upon the best of current practice, and not
developed in the abstract by someone without a good sense of what the market requires. You
can't just say to the employer -- particularly the small employer -- that you must cover everyone,
well or sick, who applies for coverage whenever they apply. If you do it that way -- if you say
"you must insure all burning buildings" -- then there may be no incentive for well employees
to contribute for current insurance:
It would be too costly for the employer
It would be too costly for contributing employees
And it would invite participants to "game the system" -- inducing healthy
employees to wait for the moment when they are sick, and to buy-in then, when
they need it.
-10-
In other words, that just won't work.
But if you have limited guaranteed issue, limited market reform, then you might consider
saying to an employer: If you have a plan that covers all your employees, or a class of
employees, then the plan must cover all new participants when they enter the covered class,
without regard to "pre-ex," or at least with limits on the exclusion of pre-ex. At that point you
still have the problem of mutualizing the risk -- over a broad enough base to allow a smaller
employer to absorb the risk of a "large single cost" incurred because of pre-ex coverage. But
at least you may be able to solve the anti-selection problem.
Can you accomplish that? Probably, if you do not assume that it's easy and that you
already know how. Instead, if you spend the time and take the trouble to study the market, to
talk with insurers and employers and find out how they do it, you may discover that they are
already doing it, now, and so it can be done, and done right. It can also be done wrong, if
you're not careful.
The targeted health reform bill recently introduced in the House by Congressman
Harris Fawell (H.R.995) is a giant step in the right direction. On the positive side, this bill,
among other things,
Operates mainly as an ERISA Title I amendment.⁹
Provides for market reform, in the sense that it deals with portability,
limits non-coverage of preexisting condition, assures annual open enrollment,
limits certain exclusions, but nonetheless seeks to protect against "gaming the
system" -- and these rules apply evenhandedly to insured plans and self-insured
(uninsured) plans;
Enables voluntary formation of employer health coalitions and requires
that small employers have access to the market; 11
Facilitates optional use of State insurance regulatory agencies to enforce
federal standards;¹²
E.g., Bill § 1001(a), amending ERISA Title I, Subtitle B.
¹⁰Amending ERISA §§ 800-804.
"E.g., § 842.
¹²ERISA §§ 835-36.
-11-
Limits insurance premium rating variations to increase affordability. 13
In other words, it sets up health plan rules, within ERISA Title I, comparable to the pension plan
rules that have been there for 20 years.
The House Bill (H.R.995) also protects health plans from the threat of regulatory
balkanization, in that the bill
Blocks State law benefit mandates;¹ 14
Blocks State anti-managed-care laws, 15 and replaces them with a single
federal standard, and generally preempts State laws relating to insured plans just
as they have already been preempted for self-insured plans;
Leaves it to the employer to decide whether to have a plan;
Leaves it to the sponsor to design the benefit plan;
Leaves it to the market to price the benefit;
Imposes no new taxes or assessments;
Opens the door to more active development of multiple employer health
plans and "MEWA's", subject to federal uniform protection from certain
abuses;¹⁶
Seeks to avoid extensive "regulations projects" and the creation of
extensive new bureaucracies;
And restores full federal preemption to the field. 17
Will it work? If enacted, would it achieve its objective of better and broader coverage
on a voluntary basis, without damage to the market or to the health delivery system? The
13 Amending ERISA §§ 734-37.
"Amending ERISA §§ 823, 841.
¹⁵§ 843.
¹⁶Bill § 1203; Amending ERISA §§ 701-11 (including reserve requirements) (§ 707).
"Bill § 1202; ERISA § 823.
-12-
communities of providers, administrators, employers, employees, insurers and others who make
up the market must come forward and respond to such questions, in as much detail as they can
muster. The bill, after all, has been in the public domain for less than a month. But obviously
the bill was intended and designed to be responsive to those needs, and to build upon the ERISA
Title I model which has been so successful over the past 20 years.
CAN AN ERISA-FOCUSED MARKET REFORM
BILL EXPAND HEALTH CARE COVERAGE? --
WHAT ABOUT THE RECENT ADVERSE STUDY
OF "STATE MARKET REFORM" EXPERIENCE?
Clearly, market reform, if done properly and on a national basis, can expand coverage.
It can expand coverage by allowing employers to use MEWA's, "stop loss" insurance,
and other market-developed devices to provide coverage at a more reasonable cost.
It can expand coverage by allowing small employers who have no plans because they
have no bargaining strength, to exert more bargaining strength.
It can expand coverage by allowing employees between jobs or changing jobs to be
protected from coverage loss.
Other market reforms (e.g., limited protection for preexisting conditions, guaranteed
issue reissue, and the like) are all expansions of coverage.
In short, market reform can provide and expand and/or improve coverage to those
employers (and to their employees and family members) who want to provide and expand and/or
improve coverage, under improved market conditions.
Voluntary employer-provided expansion of coverage obviously will not be universal. But
it can be very substantial -- a lot more substantial than a recent study of state market reforms
would suggest. This month's release of state data by the George Washington University
Intergovernmental Health Policy Project¹⁸ ought not to deter or discourage legislative efforts
at the federal level. This would be an apples-and-oranges comparison: a study of 12 states each
with some aspect of market reform written into local law, compared to a national standard. Any
failure or weakness in local efforts in the same direction ought be viewed in two central
contexts:
¹⁸See BNA Health Care Policy Report, V. 3, No. 10, p. 381 (3/6/95); Washington Post, March
5, 1995, page A-10.
-13-
First, while a state law may regulate insurance, no state law can regulate
an employee benefit plan, because of ERISA preemption.
And second, no state law can get very far in providing a hospitable market
environment for an employee benefit plan which is subject to all the cross-
currents of competitive interstate business, described further above in this
testimony.
Of course those State efforts did not work. That is precisely the point of the ERISA initiative.
IDEAS THAT WILL NOT WORK:
STATE ERISA WAIVERS, STATE "FLEXIBILITY" AND
MULTIPLE EXPERIMENTAL "STATE LABORATORIES"
It has been suggested that, if only the states are given "ERISA waivers," they will each
develop small "health reform laboratories," and the nation will somehow get the benefit of their
trial and error.
That notion is dangerous, unnecessary, and it will not work.
It is dangerous because the odds on success at the state level are zero -- employee plan
problems cannot be solved at the state level, for obvious reasons. No state can deal with the
problems of interstate business, of multistate plans, of employees commuting from one state to
another, of all the procedural problems which ERISA § 502 was engineered to solve.
It is unnecessary because, if you want laboratories, you can get them -- indeed, you
already have them -- within the flexibility under ERISA that allows each employer to design new
and innovative programs. You can then see "what works," in practice, and what doesn't work.
And then Congress may wish to require -- as it did when it enacted ERISA's pension standards
in 1974- that all plans conform to the "better practice" (vesting, funding, etc.) which had
already become a widespread practice and therefore was clearly feasible, in fact and not just in
some state legislative "laboratory."
But most fundamentally, the "ERISA waiver" notion is simply unworkable. The
proposals to grant "ERISA waivers" for state health laws do not make ERISA inapplicable --
they simply allow state law, in addition to ERISA, to apply, without benefit of preemption.
But what does it mean to say -- as one bill with broad bipartisan support would say --
that, although ERISA applies in a state, it does not prohibit a state-mandated benefit package,
-14-
a common administrative procedure imposed by the state, and an electronic claims processing
procedure imposed by the state?¹⁹
How does a participant enforce that, one may fairly ask, if the plan is not
administered in the state which passes this law, and/or the participant commutes
from a state with this law into a place of employment in a state without this law?
Which court reconciles the provisions of this law with the provisions of the plan
itself, and of ERISA § 404(a)(1)(D) that make the plan binding unless it is
inconsistent with "the provisions of this Title" (ERISA Title I)?
Is the state claims fiduciary an ERISA fiduciary?
Do the ERISA co-fiduciary rules apply, so that one fiduciary has the duty to stop
another fiduciary from violating ERISA?
Who writes the summary plan description -- the plan administrator or the state
insurance commissioner?²⁰
This sort of proposal can only be written by someone who doesn't understand the problem. The
more closely you examine it, the more unworkable it appears to be. Nonetheless, it has broad
19The provisions are found in S.3180, 102d Cong., 2d Sess. § 2108 (1992), which would amend
ERISA § 514 to provide ERISA "shall not be construed to prohibit" state requirements so
providing. S.3180 had the sponsorship of Senators Leahy, Pryor, Mitchell, Rockefeller, Reigle,
Chafee, Danforth. Kerrey, Wellstone, Adams, Akaka, Bingaman, Graham, Inouye and Jeffords.
Senator Leahy and several colleagues have announced their intention to resurrect the proposal
in 1995. 21 BNA Pension & Benefits Rptr. No. 38, at 1839 (9/26/94).
20Other questions arising from provisions of the same bill could include: (1) If the plan provides
money (via "tax") to the state plan -- are the assets still "plan assets" (after all, the state is
paying "benefits" to an "employee" with money from the employer)? How does the plan
administrator keep track of it, and report it? Who is the "trustee"? (Must there be a "trustee"
as required by ERISA § 403?) And if the plan is a multiemployer or multiple employer welfare
plan, operating on a multistate basis, which law controls it? How is it enforced? Are attorney's
fees under ERISA § 502 available in enforcement actions against the state plan?
-15-
political support. 21 A Congress without memory of the procedural ills ERISA overcame can
drive employee benefits into a relapse.
RECONCILING ERISA PREEMPTION WITH
RESTORING REGULATORY POWER TO
STATE AND LOCAL GOVERNMENT
Wouldn't it be better -- more citizen-sensitive, more efficient, less bureaucratic -- to do
it by the exercise of state power? Definitely, if "it" is the same "it." The trouble with the
question is that it assumes an impossibility -- that there is a way for state laws to accomplish
what ERISA title I has accomplished: a law which works for interstate benefit plans, serving
interstate business, with beneficiaries, employers, employees, retirees, service providers
(doctors, hospitals, HMO's, pharmacies, service providers (lawyers, accountants, actuaries),
fiduciaries, insurers and spread out in different states. And there is simply no way that a state
law can govern an efficient interstate employee benefit system efficiently.
The "it" we are talking about is a single, comprehensive, carefully targeted employee
benefit law designed to bring all these competing interests, dispersed parties, and policy
objectives into a productive relationship without damaging the marketplace. You cannot leave
"it" to the states, because the states, try as they may, are inherently incapable of accomplishing
it.
Given that this type of legislation must, inherently, be done nationally, the challenge to
Congress is even more fundamental: to get this done with the absolute minimum of
bureaucracy, the fewest possible "regulations projects," and the minimal intervention in the
marketplace.
Congress' best model is ERISA title I, which has managed to do its work over the past
20 years:
by setting forth the rules in relatively simple comprehensible
fashion,
21 Just as mindless would be the enactment of "source tax" enabling legislation which, though not
framed in terms of ERISA waivers, would seek to enable states to tax pensions paid to non-
residents, if the state claims that the pension was earned in the taxing state. H.R.546, approved
by the House Judiciary Committee 9/29/94 (see also comparable provision in S.540, which
passed the Senate but was deleted in the House). But how does one determine the state in which
a defined benefit pension (a "final average" pension, for example) is "earned"? Just as
important is the administrative question: how does a multistate employer handle the disputed
withholding taxes? Local laws applied to employee benefits are harmful, counterproductive, and
they simply do not work.
-16-
by assuming that most people obey the law voluntarily and
therefore do not need a "license" or prior approval in order to go
about their business,
therefore, by avoiding the creation of new "licensing"
bureaucracies, and
by providing that, if the law is broken, liability will then be
imposed, and the offender will, if necessary, be sued. That is
essentially how ERISA Title I works, and that is how market
reform ought to work.
That kind of health reform is based on a model which works, and reform, if done right also
ought to work.
STOP THE CURRENT, ONGOING
EROSION OF ERISA PREEMPTION:
Small Plan Health Benefits: State Efforts
to Balkanize Regulation of "Stop Loss"
A small health plan frequently cannot afford full insurance coverage, particularly in light
of the Supreme Court's ruling that if a plan is fully insured, the states may regulate and mandate
the plan's benefits by mandating the content of the insurance policy. Metropolitan Life Ins. Co.
V. Massachusetts, 471 U.S. 724 (1985). The effect of the Met Life ruling has already been very
damaging to private plans, by forcing small plans into the arms of conflicting state regulations,
while allowing the larger plans to self-insure and gain the benefits of ERISA's full federal
preemption.
The availability of "stop loss" coverage has enabled many small employers to self-insure,
by protecting them from excessive risks in unexpected situations. The states, in turn, have
attacked these stop-loss policies by establishing state laws and regulations which "define" a plan
with stop loss as being an "insured plan" (and therefore subject to state regulation under Met
Life) if the employer's plan does not retain a certain level of uninsured risk (the "retention").
The state would in effect prohibit the purchase of such stop loss, because stop loss would be
deemed to be a health insurance policy, and therefore subject to state mandate as to its content!
That effort by certain states (legislators and regulators) is nothing but an attack upon
preemption. It is an effort to gut the protections of ERISA preemption and return employee
health and welfare benefits to their pre-ERISA balkanized and chaotic condition.
-17-
Reverse the Met Life Ruling
Can Congress protect health benefits federally, and stop that erosion of preemption?
Should it? Yes. Obviously.
In fact, why not legislatively reverse Met Life altogether? Why not assure that both
insured plans and uninsured plans operate under the same rules as to content (though of
course the business of insurance, insurer solvency, etc., would remain in state hands)? After
all, the Supreme Court has already found a way to preempt state efforts to impose state
standards on claims disputes -- even under fully insured plans. Pilot Life Ins. Co. v. Dedeaux,
481 U.S. 41 (1987). Why not go the whole way, and restore to plan content and plan
administration the very federal uniformity which was the cornerstone of ERISA's success from
the very beginning?
CONCLUSION
Using the ERISA model will not produce a perfect world. There will still be those whose
employers do not have the profits to justify this kind of coverage even after market reform. And
there will still be those left on Medicaid who have no employer and who cannot afford individual
coverage. ERISA, after all, is a law governing employee benefits in the employment context
only, and it is a law governing plans that employers decide, voluntarily, to install.
So whatever Congress does, there will still be those who demand "more." In fact, there
will still be more to do. But if 1994 taught anything, it was this: Demands for "more and
more" sometimes produce less and less.
There is an obtainable consensus now for targeted health and market reform now. That
presents a current opportunity. Why not do it now? And then stand back, assess the results,
and determine what more, if anything, should and can be done.
-18-
Testimony of
Kathleen Angel
Worldwide Manager, Corporate Benefits
Digital Equipment Corporation
on behalf of the
Corporate Health Care Coalition
on
Effective Health Care Reform
in a Changing Marketplace
before the
Labor and Human Resources Committee
United States Senate
March 14, 1995
CORPORATE HEALTH CARE COALITION
1133 Connecticut Ave.. N.W., Suite 1200. Washington, DC 20036
(202) 775-9834 Phone (202) 833-8491 Fax
AlliedSignal Inc.
Ameritech
Amoco Corporation
Atlantic Richfield Company
Bell Atlantic
The Boeing Company
Cox Enterprises
Digital Equipment Corporation
Dow Chemical Company
DuPont Company
Eastman Kodak Company
General Electric Company
Georgia-Pacific Corporation
GTE Corporation
Hershey Foods Corporation
ICI Americas Inc.
Intel Corporation
International Business Machines Corporation
McDonnell Douglas Corporation
MCI Communications Corporation
NYNEX
Pacific Telesis Group
SBC Communications. Inc.
United Parcel Service
U S WEST Inc.
Madam Chairman and Members of the Committee:
I am Kathleen Angel, Worldwide Manager, Corporate Benefits for the Digital Equipment
Corporation. I am here today also representing the Corporate Health Care Coalition, a group
of 25 self-insured, multi-state companies that actively purchase health care benefits for
employees and their families. Coalition companies operate health plans covering over 5.2
million workers, retirees, and family members (2.1 percent of the U.S. population) and
provide more than $10 billion a year in health benefits.
The Coalition is distinguished by its exclusive focus on issues of significance to self-insured.
multi-state employers. We approach the health care system as active purchasers of health
benefits for employees, not as vendors of insurance or health care products. Members of the
Coalition have been in the forefront of efforts to ensure high-quality and cost-effective health
care for employees. We have extensive experience in designing, administering. and
delivering employee health benefits and are a major force in ongoing efforts to restructure
the health care delivery system.
Today I would like to talk with you about the role that large employers are playing in the
market, how this is changing the way health care services are provided -- not just for our
employees. but for the community as a whole -- and where we are headed in the future.
The Employer Role as an Active Health Care Purchaser
Twenty years ago, around the time ERISA was enacted, nearly all employers were passive
purchasers of health insurance. A typical large employer had one indemnity health care plan
that covered their workers -- unless they had separate collectively bargained benefits. They
probably contracted with a Blue Cross Blue Shield plan or commercial carrier to provide
coverage. The role the employer played was to select the carrier. design the benefit
package, and oversee the activities of the carrier. The premiums were experience-rated.
based on some average of previous years' claims.
The employer's role has changed dramatically since then. Most large employers have gone
from passive purchasers of off-the-shelf insurance products to active and, in some cases.
aggressive purchasers of health care delivery system services.
Employers took the first step in this transition by self-insuring their own populations and
contracting with insurance carriers only to provide administrative services. Because their
large groups had fairly predictable risks, self-insurance did not really increase financial
exposure. It did lower administrative and other costs imposed by the carriers and enable
them to manage their cash flow. Self-insurance also offered the opportunity and the
flexibility for plan sponsors to manage their health plan costs.
Rapidly rising plan costs from unmanaged indemnity plans motivated employers to get more
involved in health plan management. Rather than cut benefits to save costs (which would
have compromised employee health. productivity. and morale). employers became more
discriminating and skilled as active purchasers. This stepped-up involvement of self-insured
employers in the market for coverage and services and has driven fundamental changes in
health care delivery. Over the last decade, employers have transformed the health care
marketplace.
In some cases, employers have become more active as purchasers of coverage by selecting
from existing health plans and provider networks and requiring selected plans to meet
employer-set guidelines. Employers dissatisfied with indemnity coverage have contributed to
the growth of HMO enrollment and increased incentives for new managed care arrangements
to enter the market. Employers unhappy with HMO premiums that seemed to shadow
indemnity rates and with the lack of HMO accountability have helped develop quality
measurement systems and encouraged HMOs to report regularly to their purchasers.
In other cases, employers have stepped directly into the health care market, setting up their
own provider networks, contracting directly with specialized facilities, and encouraging
competition among groups of providers. Employers searching for high-quality, cost-effective
providers to perform complex medical procedures have encouraged nationwide price
-2-
competition among the best medical facilities over the provision of these expensive
treatments. Employers concerned about the lack of information on hospital and physician
performance have helped develop data resources to measure medical outcomes. and have
used this information in assembling a quality-based network of preferred providers.
This ability of self-insured employers to engage as knowledgeable purchasers in the
marketplace has opened a dialogue with providers. It also has brought change and greater
competition among suppliers in a market that had become fairly entrenched and resistant to
outside influence. The single federal architecture -- ERISA -- under which self-insured
employers can operate flexibly has played a major role in large employers' transformation
from passive to active purchasers and in the emergence of competition in the health care
marketplace.
There are four key aspects to the employer role in today's health care market:
1)
Screening and Selection of Health Plans: Armed with data, experience, and
leverage in the market. employers are operating as agents for their employees.
They are screening health plans, negotiating with providers. and holding plans
accountable for quality and cost of care. Given their capacity to deliver large
numbers of enrollees, large employers are influencing plans to improve cost-
effectiveness and quality. They are stimulating competition among providers
and affecting plan operations in ways that would not be possible for employees
buying coverage as individuals. This is done in an environment in which
companies do not contribute to the problems of cost-shifting.
2)
Partnership with employees: Employers are expanding employees' choice of
health plans -- providing a carefully selected array of indemnity, point-of-
service, and HMO plans; improving the information employees have to make
choices; and encouraging them to use their choice of plans to help drive
competition in price and quality.
-3-
3)
Risk sharing with providers: Employers no longer are purely self-insured but
are increasingly sharing financial risk with health care delivery systems and
provider groups in the hopes of encouraging providers to develop more cost-
effective approaches to treatment. This change of incentives has the advantage
of encouraging cost management through physician-patient treatment decisions.
rather than through benefit restrictions and claims denials.
4)
Leadership in quality assurance: Employers are taking the lead in developing
measures of health care quality for plan-to-plan comparisons. and in
establishing standards for health care delivery systems. Employers are using
their leverage to encourage delivery systems to adopt these standards and
account to purchasers for their performance. Employers also are working with
health care delivery systems to improve data collection and analysis and are
conducting studies aimed at identifying medical treatments producing the best
patient outcomes.
By playing this role. employers have driven fundamental changes in the way health care is
delivered and paid for. The improvements health providers have made in response to large
employer demands for quality and accountability accrue to the entire community, not just to
the employers. When a plan, responding to employer concerns. alters operations to improve
quality, quality improves for all plan enrollees. For example, an HMO that changes its
procedures to eliminate unnecessary surgery changes them for all its patients. Improvements
in plan services, say, to decrease waiting time in doctors' offices or to speed communication
of lab results, apply to a plan's entire enrollee population. Nor do employers merely cause
cost-shifting to others when they help improve a managed care plan. Rather, the plan's
rivals are more likely to adopt similar changes to stay competitive.
Managed care organizations regard active employer purchasing positively. They appreciate a
sophisticated, articulate purchaser that can identify and explain its expectations. In response.
an HMO or other health plan can better prioritize goals to satisfy customer needs.
-4-
Active Purchasing at Digital
Digital Equipment Corporation is committed to the goal of ensuring that its health care
programs meet the needs of its 30,000 U.S. employees and their families, a total of 88,000
people, while being cost-effective for both employees and Digital. This includes offering
quality programs that provide flexibility and choice to its diverse workforce and to its
retirees.
Digital has responded to escalating health care costs by becoming an active and creative
purchaser of health care services. Based on its experiences, Digital believes that quality and
cost efficiency in health care can best be achieved through organized. technologically
advanced systems of care. These systems should integrate and be held accountable for the
delivery and financing of comprehensive. necessary and appropriate care to their members
and compete for membership based on comparable performance measures. Further. Digital
believes these systems of care offer the greatest potential to control costs and deliver quality
care. Digital has designed its current health care strategy around a model that encourages
partnerships with well-organized. well-managed. efficient Health Maintenance Organizations
(HMOs).
Background
In 1990, when Digital was considering implementing a managed care program, there was no
"off-the-shelf" program that could fulfill the requirements of the Company and its U.S.
employees, that is, giving its diverse workforce choice of quality, cost-effective health plans.
To achieve these objectives. in 1991 Digital developed a strategy to implement point-of-
service plans with the most efficient HMOs in those geographies which also had the highest
concentration of employees. Implementing those point-of-service plans involved extensive
negotiating arrangements with HMOs that were capable of meeting specific performance
criteria developed by Digital.
-5-
Through the Digital point-of-service program. employees retain the flexibility to choose any
doctor. hospital, or eligible health care provider. However, benefits and levels of coverage
depend on how members choose to receive their medical care. If employees choose a
provider outside the HMO, they are responsible for paying a larger portion of their medical
expenses through deductibles and co-payments as in a fee-for-service plan.
In addition to 26 point-of-service plans, during annual open enrollment, employees can
choose among 88 HMOs, two fee-for-service plans, and an Opt-out plan.
From a cost-sharing perspective, Digital's share of medical costs is based on the lowest cost
HMO in each geographic area that meets Digital's HMO Performance Standards. Employees
who choose less efficient, more costly health plans or fee-for-service plans must pay the
incremental difference in the cost of these programs. As a result. Digital's cost is the same
regardless of the plan the employees choose.
Measurable Results
Since the implementation of its managed care strategy in 1991. Digital has seen a dramatic
shift in the enrollment of its U.S. employees. Prior to 1991. 72 percent of employees were
enrolled in fee-for-service plans and 28 percent of employees were enrolled in HMOs. As of
January 1, 1995. 81 percent of employees were enrolled in managed care plans. 7 percent in
fee-for-service plans and 12 percent in the Opt-out plan. As a result of this strategy,
Digital's savings from 1991 through 1995 exceeded $100 million, or $765 per employee in
1995. In 1990 the weighted average HMO premium increase for Digital was 12 percent. By
1994. Digital's weighted average HMO premium increase was 4 percent and for 1995,
Digital will experience a 1 percent decrease in the weighted average HMO premium.
Digital's HMO Performance Standards
Digital's HMO Performance Standards are today the hallmark of the Company's quality
approach to managed care. The standards of care. which can be described as "purchasing
-6-
specifications" for health care services. have been developed by Digital for the management
of the participating HMOs. The standards provide the framework for developing new
relationships, recommending new HMO partners. and influencing the ongoing management
of the HMOs. The management process is based on the principles of Total Quality
Management (TQM) focusing on major areas of specific concern to Digital. These include
access of HMO members to services and member satisfaction; quality of clinical operations
and treatment; mental health and substance abuse: data reporting; and financial stability and
management.
Proven Leadership in Quality Health Care
In an effort to encourage continuous quality improvement in the delivery of health care to its
employees, Digital is partnering with several of its HMOs, and in some cases other
employers, in several leadership efforts:
Since 1989. Digital provided the impetus for developing a standardized data collection
instrument which has evolved into the Health Plan and Employer Data Information
Set (HEDIS). The goal of this data collection tool is to capture comparable data on
each HMO regarding utilization, quality and financial reporting. Additionally. Digital
drove the development of and provides leadership to the HEDIS Coalition. which
consists of employers and HMOs, to implement HEDIS V2.0 in the marketplace.
Under a project sponsored by the National Committee for Quality Assurance
(NCQA), a group of large employers. including Digital. and some of its larger HMOs
have been participating in a program to compare HMOs' performances in 60 key
categories. Digital also has representation on an NCQA Steering Committee to
develop "report cards" comparing HMO performance in these areas.
Digital has facilitated the collaboration among three major New England HMOs.
including Harvard Community Health Plan, Fallon Clinic and Matthew Thornton
Health Plan. in the design and implementation of the New England Psychiatric
-7-
Outcomes Project. This is a significant project that addressed the need for consistent
treatment approaches and outcomes measures in order to allow for the return of a
productive employee to the workplace.
Partnering with other FORTUNE 500 companies and the nation's leading HMOs.
Digital is participating in a landmark study on outcomes measures for the treatment of
angina and asthma.
Digital joined forces with GTE and Xerox to implement a standardized member
satisfaction/health risk assessment survey of employees across a broad spectrum of
health plans. The goal is to compare enrollee satisfaction levels across health plans
and model types.
Looking Ahead
Digital is implementing its strategy to provide a more viable, long-term solution to the health
care cost issues that continue to face the Company and its employees by:
focusing on the managed care delivery system:
holding plans accountable for the delivery and financing of quality, cost-effective
care:
developing long-term partnerships with HMOs: and
setting up a proactive management process utilizing TQM principles that clearly
articulate performance standards that balance quality and cost.
Digital also believes that its experience will serve as a working model for other health care
system planners. Appendix A outlines Digital's health care strategy in greater detail.
-8-
Coalition Member Activities
Digital is only one of the many Corporate Health Care Coalition members involved as active
purchasers in the health care market -- all approaching it a little differently. I would like to
take a moment to talk about some of these efforts.
General Electric Corporation (GE)
GE manages over $900 million a year in health benefits for over 450,000 employees.
retirees, and dependents associated with facilities across the country. Its strategy in
recent years has been to focus on managing local markets. In its Health Care
Preferred (HCP) plan, GE builds long-term partnerships with a selected health plan in
each area and invites the participation of other employers and public purchasers to
improve quality and lower costs. GE initiated this strategy in Cincinnati,
Cleveland/Columbus. and Louisville in 1992, and has since expanded it to 32 local
markets.
In each market, GE selects a single "best partner" health plan. based on the
capabilities and performance of that plan. GE builds enrollment by bringing in other
employers, and then actively manages each plan at the local level. By selecting one
health plan partner, GE can work cooperatively with that partner to improve quality
and costs over time. Active management means that GE has its own staff periodically
on-site at the health plan to work collaboratively with plan managers. The GE health
care team searches throughout the country for national benchmarks against which to
measure the performance of its plans in each local market. GE then provides on-
going consultation in developing strategies to bring plan performance up to these
benchmarks. The net effect is to improve quality and lower costs not only for GE
and its employees, but for all other enrollees in these health plans, and for other
members of the community who benefit from the increased local competition among
health plans.
-9-
The process of identifying best practices is a two-way street. In its relationship with
Tufts Associated Health Plan, GE has helped Tufts identify practices in other markets
that would improve Tufts performance, and has adopted practices from Tufts that it
can take to other markets. For example, GE brought in a consultant from a New
Jersey-based group with state-of-the-art case management tools and introduced Tufts
to a midwest vendor specializing in X-ray capitation and management. At the same
time, GE adopted a physician practice pattern software package from Tufts that it then
introduced to other GE partners.
Through its cooperative relationship with Tufts, GE established performance targets
for the plan. The targets for 1995 include a five percent reduction in GE premiums at
the same time that Tufts continues to meet its goals for customer service and steadily
improves the quality of its care. GE's benchmarks help Tufts to identify changes in
practices that not only will enable it to meet GE's performance targets, but also will
lower costs and improve quality for other Tuft plan enrollees as well.
GTE Corporation
GTE provides health plans for over 300,000 employees, retirees, and dependents in
association with its operations in 40 states. GTE has structured a comprehensive
approach to managing its health benefits that includes health plan selection, consumer
education, value pricing health benefit options, employee satisfaction evaluation, and
quality assurance.
HMOs that want to participate in the GTE program must comply with GTE's Health
Plan Requirements: they must be an organized delivery system and offer the standard
GTE benefit design; meet requirements for access to care; be able to provide data in
the HEDIS format; be accredited by NCQA (by 1996); agree to participate in GTE's
Quality Improvement Partnership (QIP); and have a demonstrated capacity to manage
costs.
-10-
GTE offers employees a choice of indemnity, HMO, and HMO/point-of-service
health plans. GTE contributes at a different rate for different types of health plans in
a way that creates "value pricing" of the employee premium. Employee contributions
are priced in relation to the ability of the health plan to deliver quality health care at
an affordable price. The ability to enroll the sickest beneficiaries in the highest
quality plans without an impact on employee premiums may raise costs for GTE in
the short run, but it will save money in the long run from better management of care.
Its purpose is to ensure that employees have an incentive to select health plans that
will give them the best value. Employees are provided detailed information on the
plan choices in the GTE Health Care Consumer Guide. The percentage of GTE
employees voluntarily enrolling in HMOs has increased from 32 percent to 60 percent
in the last four years, and is expected to rise to 75 percent within 2 years.
All HMOs that cover GTE employees participate in regional GTE Quality
Improvement Partnerships (QIPs). The purpose of the QIP is to manage quality
improvement activities with the plans. Regional QIP meetings focus on GTE
requirements and objectives, quality management, plan performance indicators, and
sharing of best practices. These groups identify problems in treatment rates, medical
outcomes, or patient satisfaction, and develop shared strategies for resolving these
problems.
In markets where GTE has not had a choice of managed health plans, it has
contracted directly with providers. In San Angelo, Texas, GTE had 1700 employees
and no managed care. Health care utilization rates were 50 to 100 percent above
their norms in other communities. GTE negotiated directly with the two local
hospitals to develop competition on price and access, and in the end developed the
beginnings of an organized delivery system, selecting one of the hospitals to serve its
employees.
In the Tampa Bay area of Florida, GTE created its own primary care center -- the
Family Health Center -- to meet the needs of employees, retirees, and their families
-11-
in that area. The Center provides preventative and educational services and primary
care, urgent care, laboratory services, pharmacy, and x-ray services for a $5 visit
copayment on a voluntary basis. The Center was well received by retirees and
employees -- saving them an estimated $431,000 in the first year -- at no additional
cost to GTE. Over the long term, the greater emphasis on preventative and primary
care should reduce GTE costs while improving the quality of services for its
employees.
GTE's active purchasing of plans and health care is changing not only its own health
plans, but the nature of the surrounding health care markets. The growing
accountability of plans for quality and cost and the increased competitiveness among
health care providers are measurable improvements that benefit the entire community
in locations where GTE is active.
Hershey Foods Corporation
Hershey Foods has played a direct role in developing state-wide reporting systems
that enable employers and health care networks to identify and select high-quality
providers, and in using this information to set up networks for its employees.
Hershey was a partner in the development by the Pennsylvania Health Care Cost
Containment Council of a state hospital effectiveness reporting system based on
clinical information collected and analyzed using the MedisGroups effectiveness
measures. In 1990, the state began reporting comparable data on treatment outcomes
in specific disease categories for every hospital in Pennsylvania with more than 100
beds.
Hershey combined the state hospital effectiveness data with data on hospital costs and
on other providers which it developed independently. Hershey then selected hospitals
and physicians for its own network on the basis of their cost-effectiveness and
physician practice data. Employees were offered the choice of continuing to use
-12-
their own providers with the full indemnity cost-sharing or using Hershey network
providers with little or no cost-sharing.
This network strategy coupled with viable HMO alternatives has allowed Hershey to
discontinue its indemnity plans in 1995 for all but a small portion of its employees.
Moreover, employee satisfaction with the health care program is at an all-time high.
The availability of Pennsylvania's hospital effectiveness data and Hershey's use of
cost-effectiveness data in selecting providers has helped to increase the sensitivity of
providers to price and quality differences -- creating a more competitive market for
medical care in their area. Hershey has also been able to improve the quality of
health benefits for its employees, with greater accountability from providers to
Hershey for the cost-effectiveness of the medical care provided.
The Importance of ERISA
The role that employers are playing as innovators and active purchasers is largely possible
due to their self-insured status governed under a single set of federal standards enacted in the
Employee Retirement Income Security Act of 1974 (ERISA). ERISA provides a set of
national rules and procedures that give employers the flexibility to structure coverage and
financial incentives to meet the needs of employees and actively manage plan costs. Because
ERISA preempts any and all state laws that would apply to employee benefit plans.
employers are able to operate their plans free from the need to condition each action on state
level approval or to demonstrate compliance with state law in every state in which company
employees reside. Given this flexibility, employers have been able to act quickly to develop
innovative solutions to health care problems and negotiate new arrangements with providers
to ensure that appropriate high-quality care is provided for employees at a reasonable cost.
The protection ERISA affords employers is substantial. It is protection from state taxation,
and thus regulation, of their health plans. It is protection from state anti-managed care laws
that would prevent them from selecting specific health care providers and excluding others.
-13-
It is protection from community-rating insurance regulations that would force them to turn
over the financial returns from effective management of their plans to a state pool. It is
protection from state rate-setting and cost containment laws that would eliminate risk-sharing
arrangements with providers. It is protection from state claims reporting and data collection
specifications that would force changes in their claims and outcomes reporting activities and
interfere with efforts to hold health plans accountable.
Lack of uniformity and administrative complexity are not the most serious consequences of
relaxing ERISA's preemption of state law. Far more serious are the societal implications of
the effects of state regulation on the private health care markets that have thrived within
ERISA's zone of federal oversight. The emergence of multiple. and sometimes contradictory
state regulatory schemes, perhaps separated only by a line on a map, could well stifle the
innovation of many national employers. jeopardizing the achievement of health care
modernization over the last 20 years. We have included for the record a Corporate Health
Care Coalition publication entitled "ERISA Preemption: The Key to Market Innovation in
Health Care".
Conclusion
The Corporate Health Care Coalition believes that the long-term solution to health care cost
issues involves the active participation of employers in the health care marketplace as
advocates. brokers. and sophisticated purchasers for their employees.
Turning individuals loose to buy their own health plans from among the hundreds of
available options would be pure folly in today's market. They are unlikely to get adequate
information to make educated choices about plans. as employers can. Nor can individuals
command the attention of large, sophisticated health care plans and providers. Only
purchasers representing many individuals, such as employers, have enough market power for
that. It would be quite easy for health insurers and HMOs to sway individuals' purchasing
decisions by promising amenities, marketing name brands, differentiating products and using
-14-
a variety of other marketing techniques that only serve to obscure true distinctions in price
and quality.
The employer is an important agent for the employee today -- negotiating financial risk
sharing with providers. developing long-term relationships with health plans to build
capabilities and improve quality. and holding plans accountable for the delivery of high-
quality care. The fact that we are selecting health plans enables us to deliver large numbers
of enrollees to the plans we select and encourages the plans to work constructively with us to
make improvements. We would not be able to affect these plans if employees shopped
individually for coverage among the multitude of plans available. Without our involvement
in the market, we believe this concentrated effort to improve quality and lower the cost of
care would flag, even as its success begins to show in declining health plan premiums and in
high employee satisfaction with managed care plans.
As employers we have much more work to do before we have truly established a vibrant
competitive health care market focused on improving quality and lowering cost. ERISA and
ERISA preemption of state law are critical factors that have contributed to the role of
employers as "laboratories of change". They must remain in place if we are to reach our
goals and contribute to your own hopes for better and more affordable health care for every
American.
-15-
APPENDIX A
Digital Equipment Corporation's
Managed Care Approach to Health Care Benefits
Digital Equipment Corporation has responded to escalating health care costs by becoming an
active and creative purchaser of health care services. Based on its experiences, Digital
believes that quality and cost efficiency in health care can best be achieved through
organized, technologically advanced systems of care. These systems should integrate and be
held accountable for the delivery and financing of comprehensive, necessary and appropriate
care to their members and compete for membership based on comparable performance
measures. Further, Digital believes these systems of care offer the greatest potential to
control costs and deliver quality care. Digital has designed its current health care strategy
around a model that encourages partnerships with well-organized, well-managed. efficient
Health Maintenance Organizations (HMOs).
Background
In 1990, when Digital was considering implementing a managed care program, there was no
"off-the-shelf" program that could fulfill the requirements of the Company and its U.S.
employees, that is giving its diverse workforce choice of quality, cost-effective health plans.
To achieve these objectives. in 1991 Digital developed a strategy to implement point-of-
service plans with the most efficient HMOs in those geographies which also had the highest
concentration of employees. Implementing those point-of-service plans involved extensive
negotiating arrangements with HMOs that were capable of meeting specific performance
criteria developed by Digital.
Through the Digital point-of-service program, employees retain the flexibility to choose any
doctor, hospital. or eligible health care provider. However, benefits and levels of coverage
depend on how members choose to receive their medical care -- either within the HMO
system or outside the HMO. If employees choose a provider outside the HMO. they are
responsible for paying a larger portion of their medical expenses through deductibles and co-
payments like a fee-for-service plan.
Since introducing 4 point-of-service plans in 1991, Digital has expanded its point-of-service
offerings to employees who reside in 28 different geographies across the country. Based on
a January 1, 1995 population of 30,000, 91% of employees are eligible for a point-of-service
plan. In addition to these 26 point-of-service plans, during annual open enrollment,
employees can choose amoung 88 HMOs (based on residence), 2 fee-for-service plans and an
Opt-out plan.
From a cost-sharing perspective. Digital's share of medical costs is based on the lowest cost
HMO in each geographic area that meets Digital's HMO Performance Standards. Employees
who choose less efficient. more costly health plans or fee-for-service plans must pay the
incremental difference in the cost of these programs. As a result, Digital's cost is the same
regardless of the plan the employees chooses.
Digital Equipment Corporation's
Managed Care Approach to Health Care Benefits
Page 2
Measurable Results
Since the implementation of its managed care strategy in 1991, Digital has seen a dramatic
shift in the enrollment of its U.S. employees. Prior to 1991, 72% of employees were
enrolled in fee-for-service plans and 28% of employees were enrolled in HMOs. As of
January 1. 1995, 81% of employees were enrolled in managed care plans, 7% in fee-for-
service plans and 12% in the Opt-out plan.
Digital has found that the managed care delivery system has already contributed significantly
to controlling health care costs. while maintaining the quality of care provided to employees
and their families. As a result of this strategy, Digital's savings from 1991 through 1995
exceeded $100 million. Per employee savings of $52 in 1991, $176 in 1992, $363 in 1991.
$572 in 1994. and $765 in 1995 account for this total.
Yearly cost increases for HMOs have risen considerably less than fee-for-service plans. For
instance, in 1990 the weighted average HMO premium increase for Digital was 12%. By
1994. the weighted average HMO premium increase was 4%. For 1995. Digital will
experience a 1% decrease in the weighted average HMO premium.
Digital's HMO Performance Standards
Digital's HMO Performance Standards are today the hallmark of the Company's quality
approach to managed care. The standards of care, which can be described as "purchasing
specifications" for health care services, have been developed by Digital for the management
of the participating HMOs.
Adherence to Digital's HMO Performance Standards is the key to the HMO management
program. The standards provide the framework for developing new relationships.
recommending new HMO partners, and influencing the ongoing management of the HMOs.
Digital has contracted with John Hancock Mutual Life Insurance company to play the role of
Network Manager to assist Digital in monitoring HMO performance against these standards.
The management process is based on the principles of Total Quality Management (TQM)
focusing on major areas of specific concern to Digital.
Access/Administration/Member Services and Satisfaction - choice of primary care
physician in defined geographic areas; established ratios of providers to patients:
availability of urgent care: telephone response time monitoring; implementation of
member satisfaction surveys.
Clinical Quality - integration of TQM principles into the HMO's clinical and
operational systems; maintenance of medical records. preferably automated:
commitment to outcomes research: maintenance of provider selection and credentials
process; monitoring and evaluation of provider practices and treatments protocols.
Digital Equipment Corporation's
Managed Care Approach to Health Care Benefits
Page 3
Behavioral Health - the ability to offer a continuum of care: the willingness to flex the
limits of coverage for inpatient and ambulatory visits: the availability of alternative
treatment settings: the presence of an active triaging and case management program:
the ability to track outcomes.
Information Management and Reporting - prescribed format on patient satisfaction
survey, patient utilization, and audited financial statements. (Health Plan/Employer
Data Information Set - HEDIS).
Finance and Contracts - detailed financial reporting and a statement of liability
protection.
As of October 1993, HIV/AIDS care standards were included in Digital's HMO Performance
Standards. These standards were developed by Digital. John Hancock, and Digital's HMO
partners to help ensure consistency of care for Digital employees and families who are living
with or are affected by the HIV disease. This leading initiative in HIV/AIDS care attests to
Digital's commitment to provide necessary and appropriate health care to all of its employees
and their families.
Proven Leadership in Quality Health Care
In an effort to encourage continuous quality improvement in the delivery of health care to its
employees, Digital is partnering with several of its HMOs, and in some cases other
employers. in several leadership efforts:
Since 1989, Digital provided the impetus for developing a standardized data collection
instrument which has evolved into the Health Plan and Employer Data Information
Set (HEDIS). The goal of this data collection tool is to capture comparable data on
each HMO regarding utilization, quality and financial reporting. Additionally, Digital
drove the development of and provides leadership to HEDIS Coalition, which consists
of employers and HMOs, to implement HEDIS V2.0 in this marketplace.
Under a project sponsored by the National Committee for Quality Assurance
(NCQA), a group of large employers. including Digital and some of its larger HMOs
have been participating in a program to compare HMOs' performances in 60 key
categories. Digital also has representation on an NCQA Steering Committee to
develop "report cards" comparing HMO performance in these areas.
Tufts Associated Health Plan. Harvard Community Health Plan and Fallon Clinic is
called the Clinical Indicators Project. Its goal is to establish benchmarks for cross-
plan comparisons of Caesarean section, prenatal care, asthma admission, hypertension
screening, mammography and mental health.
Digital Equipment Corporation's
Managed Care Approach to Health Care Benefits
Page 4
Digital has facilitated the collaboration among three major New England HMOs.
including Harvard Community Health Plan. Fallon Clinic and Matthew Thornton
Health Plan. in the design and implementation of the New England Psychiatric
Outcomes Project. The study has been designed to include all inpatient mental health
admissions at several local facilities. This is a significant project in that it addressed
the need for consistent treatment approaches and outcomes measures in order to allow
for the return of a productive employee to the workplace. In June of 1993. a "Special
Presidential Commendation" was awarded to Digital by the American Psychiatric
Association (APA) in recognition of outstanding leadership in providing high-quality
mental health services for its employees and their families. both at the work-site and
through HMOs.
In partnering with other FORTUNE 500 companies and the nation's leading HMOs.
Digital is participating in a landmark study, the Managed Health Care Association
(MHCA) Outcomes Management Study, for the treatment for Angina and Asthma.
The conclusions of Phase I were that outcomes measures can be collected and pooled
by HMOs, competing companies can cooperate for a common goal. instruments are
reliable and valid, and standardization of data collection processes across
organizations is needed.
Digital has representation on the Board of Directors of the Washington Business
Group on Health (WBGH).
Digital joined forces with a consortium of large national employers to implement a
standardized member satisfaction/health risk assessment (SF-36) survey (Employee
Health Care Value Survey) of employees across a broad spectrum of health plans.
The goal is to compare satisfaction levels across health plans and model types. as well
as to identify areas of improvement through performance monitoring and assess the
health risk of employees across these Plans.
Looking Ahead
Digital is implementing its strategy to provide a more viable. long-term solution to the health
care cost issues that continue to face the Company and its employees by:
focusing on the managed care delivery system:
holding plans accountable for the delivery and financing of quality. cost effective
care;
developing long-term partnerships with HMOs; and
setting up a proactive management process utilizing TQM principles that clearly
articulate performance standards that balance quality and cost.
Digital Equipment Corporation's
Managed Care Approach to Health Care Benefits
Page 5
Digital also believes that its experience will serve as a working model for other health care
system planners.
Digital is committed to the goal of ensuring that its health care programs meet the needs of
its employees and their families. while being cost-effective for both employees and Digital.
This includes offering quality programs that provide flexibility and choice to its diverse
workforce.
Digital Equipment Corporation is the world's leader in open client/server solutions from
personal computing to integrated worldwide information systems. Digital's scaleable Alpha
platforms, storage. networking, software and services. together with industry focused
solutions from business partners, help organizations compete and win in today's global
marketplace.
January 1995
Senate Labor & Human Resources Committee
"Effective Health Care Reform in a Changing Marketplace"
Testimony of
Richard E. Curtis, President
Institute for Health Policy Solutions
March 15, 1995
9:30 a.m.
Room 430, Dirksen Senate Office Building
First Street and Constitution Avenue, NE
Mr. Chairman and members of the committee, I am Richard E. Curtis, President
of the Institute for Health Policy Solutions, a not-for-profit, non-partisan
education and research organization that does not advocate specific legislation.
The Institute was established to objectively analyze and develop approaches to
solve health system problems, and brings special expertise and interest to policy
approaches that complement or harness private sector roles.
A broad range of states has enacted health insurance reforms to regulate
industry practices for the small-employer market and in some cases for the
individual market as well. These reforms generally require insurers to accept all
applicants regardless of risk, to guarantee to continue coverage, to limit
employer-to-employee or group-to-group premium variations (often requiring
modified community rating), and to strictly limit the practice of imposing
coverage waiting periods or denying coverage for preexisting conditions.
Nevertheless, Congress should consider federal health insurance market reforms
for a variety of reasons that include limitations in states' ability to extend such
protections.
Overview
There are three key reasons health insurance market reforms have been popular
at the state level on a broad bipartisan basis. First, they address the access
barriers and inequities that have been so often reported in the press. Second,
they are meaningful and popular reforms that do not require new government
spending. Third, such regulation was needed to harness competitive market
forces that in other sectors of our economy create incentives for efficiency and
quality. In the small-group and individual health insurance sector, these positive
incentives were often overwhelmed by incentives to compete on the basis of risk
Institute for Health Policy Solutions
1
selection, that is, attracting healthy persons and avoiding people who appear to
be at higher risk of needing medical care.
The need for such rules has been most acute in the health plan market for small
groups and individuals. (States generally have authority to regulate this portion
of the market through regulation of insurance; traditionally, very few small firms
are fully self-insured and thus exempt from state regulation under the ERISA
preemption. But a growing number of entities are apparently developing hybrid
partially insured plans to attract lower risk populations.) Because of the few
people in each small group, there is no natural spreading of risks within each
group, as there is for large employers. The risk profiles of small groups thus
differ greatly. When individual carriers can selectively market to and enroll
individuals and small groups, they can "pick off" low-risk populations and avoid
higher-risk populations. Insurers have strong incentives to spend resources on
such risk selection as a way to avoid the few people who need very expensive
care: 2 percent of the population accounts for 40 percent of health care costs,
and the top 10 percent accounts for approximately 70 pecent of costs.
In this highly fragmented market, then, health plans have strong incentives to
compete by focusing on attracting low-cost enrollees and avoiding high-cost
enrollees rather than by being effective managers of health care costs and their
own administrative costs. Even if a well managed HMO can achieve a real 10
percent to 15 percent saving on health care costs, it cannot compete against an
otherwise inefficient carrier that successfully avoids coverage of high cost people.
This helps explain both the relatively low market penetration of HMOs and high
administrative overhead costs in traditional small-employer and individual
insurance markets. Such risk segmentation also results in relatively lower
premiums for groups and individuals that are currently healthy, but it produces
higher premiums for other groups and individuals.
As a result of risk segmentation, premiums have varied widely, and many
higher-risk small groups and individuals have had to either pay prohibitively
high premiums for often less-than-adequate coverage or go without coverage
entirely. In either case, access to medical care is compromised, and people suffer
substantial financial hardship and inadequate care as a result.
In considering alternative approaches to insurance market reform, it is critical to
remember that people's health status can and does vary significantly over time.
Employers, employees, and dependent family members who are healthy and
generate low costs this year may become severely ill or have a serious accident a
year or two later. And people who need expensive medical care in one year may
have low costs in subsequent years. Actuaries refer to the tendency for different
peoples' medical costs to be more similar over longer periods of time as
"regression towards the mean." This phenomenon is documented in data
analysis by Medstat Systems, Inc., which found that of a group of individuals
who each incurred charges of more than $10,000 in 1987, over half incurred
charges of under $500 in 1989. 1
1 See "Tracking the Dollars," Richard E. Curtis, Figure 5, Health Care Management
Quarterly, Fourth Quarter, 1991.
Institute for Health Policy Solutions
2
To minimize their own costs, some employers are likely to look for insurers or
other entities that have been successful in employing risk-selection techniques.
But the apparent savings to such currently low-risk groups in reality puts them
and their employees at risk of either cancellation or unaffordable premium
increases when they need coverage most-for example, when they become
severely ill, experience a traumatic injury, or are otherwise likely to incur
catastrophic costs.
Insurance market reform rules are generally designed to solve such problems by
assuring access and continuity of coverage. But they need to create a level
playing field for all competing health plans. If market rules require only some
kinds of plans to guarantee access to affordable coverage for all small employers
or individuals while other plans are allowed to select only lower-cost
populations, another problem will result. If employers can belong to such select
groups when they are healthy and are then guaranteed access to (or continuity
of coverage by) other plans that are required to broadly pool risks when they are
sick, they are in effect guaranteed the ability to save money by shifting costs to
other employers. When their health care needs are low, they can choose not to
pool their costs with a broad community of other employers; but when their
health care needs are high, they join the pool and share those costs with that
community. In effect, they do not pay their fair share over time.
And the plans available to the broader community that are subject to
guaranteed access and rating rules are therefore at risk of experiencing "adverse
selection death spiral." As they enroll these cost-shifting populations only when
they are sick, their prices will have to reflect their higher cost experience. As a
result, more and more of their low-cost enrollees will seek price relief from
health plans that selectively enroll similarly lower-cost populations. This domino
effect will ultimately drive the regulated plan's costs to untenable levels and
force it out of business.
It is for these reasons that many states with guaranteed issue, continuity, and
tight rating rules do their best to extend the same rules to all health plans that
serve small employers. In general, it would therefore be unwise for federal
legislation to preempt these efforts by creating new categories of health plans
that can offer lower rates by selecting healthier employer groups. If such
categories were created, it would be critically important to at least carefully
develop appropriate rules, or allow states to develop such rules. In particular,
transition rules need to build walls between insurance pools to protect plans
serving the boarder community from such cost-shifting behavior. It is also
important to distinguish between proposals to preempt state laws that restrict
health care cost management techniques (e.g., state-mandated coverage of
provider groups or services or state "anti-managed care" legislation) and
proposals to preempt state laws that prevent competition based on risk
selection. Some interest groups advocate legislation that would actually do both
but provide a rationale only for those elements that would allow them to manage
health care costs.
I believe it is desirable to allow small employers to come together to exercise joint
purchasing clout and economies of scale, especially when their employees can
also benefit from a choice of competing plans. In fact, several states have
Institute for Health Policy Solutions
3
enacted legislation which both establishes tight market rules and authorizes or
permits health plan purchasing cooperatives to do precisely that. And we work
with employer coalitions as well as states to develop such workable approaches.
However, if federal legislation were to allow any of a plethora of organizations to
offer a health plan at a special price to only those small employers it brings
together, it would create huge incentives for them to compete based on risk
selection.
We now turn to a discussion of the market practices addressed by state
insurance market reforms.
Preexisting Conditions and Continuity of Coverage
Health plans often impose a waiting period before they will cover certain
preexisting medical conditions (typically defined as conditions for which a
person has sought, or a prudent person would have sought, medical treatment
in the last six months or year). In some instances, health plans permanently
exclude coverage for specific conditions. Some plans (often HMOs) impose a
waiting period for coverage of any services.
Such exclusions for preexisting conditions are justified as a way of preventing
people from waiting to purchase coverage until they need medical care, since
such behavior would unfairly drive up premiums for everyone. Insurance works
as a mechanism for pooling risk and making coverage affordable only so long as
people pay premiums when they do not use services as well as when they do.
On the other hand, if health plans impose excessively long limitation periods or
exclude certain pre-existing conditions entirely, some people will face high risk
of having to make large out-of-pocket payments. Moreover, for people who are
already in the insurance system and are simply changing carriers, such
limitation periods are disruptive and not necessary to preserve the insurance
principle.
States have attempted to respond to these problems by limiting health plans'
rights to impose waiting periods before covering preexisting conditions. Reform
legislation may limit the period for which coverage can be excluded to a
reasonable amount of time, for example, six months or a year (41 states have
such a provision that applies in the small-group market²). To deal with the
problems posed for people who are simply changing health plans (because of a
job change, a move to a new area, and so forth) states have stipulated that
individuals changing coverage sources should not be required to face new
preexisting condition limits or waiting periods. Specifically, states often require
that periods of coverage under a previous plan of comparable scope be counted
toward meeting waiting periods for succeeding coverage (40 states have such a
small-group requirement³).
2 Gretchen Babcock, Susan S. Laudicina, and Brice C. Oakley, State Legislative Health
Care and Insurance Issues: 1994 Survey of Plans, State Services Division, BlueCross and
BlueShield Association, December 1994.
3 Babcock et al.
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4
Guaranteed Issue and Guaranteed Renewal
As discussed earlier, health plans have strong financial incentives to keep
medical claims expenses down by insuring only lower-risk people. As a
consequence, health plans have often refused to issue coverage initially to
groups that they perceive as being likely to incur substantial medical expenses.
Similarly, they may decide to refuse to renew coverage for groups that appear to
have become more risky-for example, because someone has become sick and is
likely to need further care or because the group composition has changed over
time and includes more high-risk people.
It is common for state insurance reform laws to require that insurers in the
small-employer (and sometimes individual) market make coverage available on a
guaranteed-issue basis by accepting any applicant regardless of risk. Similarly,
insurers may be required to renew coverage for any group (except in the case of
non-payment of premium or fraud). Some reform legislation requires these
guarantees only with respect to one or two specific standard benefit plans (21
states for the small-group market⁴). Insurers are free to sell other plans on a
nonguaranteed issue basis. This approach presents an opportunity for carriers
to select lower-risk groups for these other products and thus poses the threat
that the guaranteed-issue plans will suffer adverse selection as a result of being
the only plans open to high-risk groups. Recognizing this problem, a number of
states require that all of a carrier's small-employer products be sold on a
guaranteed-issue basis (13 states for the small-group market5).
Full Disclosure of All Products
A requirement that health plans offer coverage on a guaranteed-issue basis may
have limited effect if health plans and their distribution agents do not, when
selling to a customer, affirmatively disclose all products available. If higher-risk
groups do not know that various plans are available to them, they may be
persuaded to buy a plan that is less desirable and/or more expensive (which
allows the health plans to "reserve" certain plans for low-risk groups). If only
lower-risk groups are made aware of certain plans, only they will buy them.
To solve this problem, some states have required that health plans and/or their
distribution agents affirmatively disclose all products that are available on a
guaranteed-issue basis. In some instances, this may be only one or two
standard benefit plans; in others, it may include all plans sold in the small-
group market.
Standardized Plans
As we summarize later, a number of states have required that carriers offer one
or more standard benefit packages. In part, this has been seen as necessary to
insure that other reforms have the desired effect of improving access.
4 Babcock et al
5
Babcock et al.
5
Institute for Health Policy Solutions
Guaranteed-issue requirements, for example, would not mean much if the only
products a carrier makes available on this basis are those that offer inadequate,
inappropriate, or excessively expensive coverage or coverage that would appeal
only to lower-risk groups (for example, plans with high deductibles). In addition,
the administration of state reinsurance pools could be prohibitively complicated
if insurers sought fair reinsurance prices for a very great variety of plans.
Standardized benefits have often been supported for a number of other reasons.
Many analysts believe that consumers can meaningfully compare plans and
make cost-effective choices only if the plans offer essentially the same sets of
benefits. Comparing plans that vary not only in characteristics and price but
also benefits is viewed as too complicated for people to do well. Moreover, it is
argued that if benefits are not standardized, health plans may be able to use
benefit differentiation as an indirect way of attracting low-risk enrollees and
thereby thwarting the risk-spreading purpose of insurance reform. States that
have accepted this view have defined standard sets of benefit plans (often five or
six plans) and have required that health plans offer only these standard plans
(at least four states have adopted this policy).
Specific Rating Factors
Carriers have used a number of factors for differentiating premium rates among
small-employer groups. The more common of these factors are defined and
explained in the following material. Later we will indicate the extent to which
states permit carriers to use these factors.
Health status/claims experience
Health status (or medical claims experience as a proxy) has often been used by
health plans to differentiate premiums among small groups. But the use of
health status has been heavily criticized because the number of people insured
within small groups is generally acknowledged to be too small to allow for
adequate spreading of risk, so that rates vary widely from group to group. Thus
individuals and groups pay very different amounts for similar coverage, even
though the basis for the difference-that is, health status-is largely beyond the
control of either the individual or the employer. Furthermore, the use of health
status or experience can result in very large rate increases for a group if one or
two employees get sick. Both results are often seen as being unfair.
A number of states have concluded that health plans should not be permitted to
use claims experience or health status of individuals in small-employer groups
to establish premium rates. Duration of the contract with a particular group
(which acts as a proxy for claims experience)⁶ is also often not permitted as a
rating factor.
6As the effects of preexisting condition limits and waiting periods wear off (and medical
underwriting wears off, to the extent it is used), claims experience will rise over time.
Some companies vary rates based on duration to reflect this claims phenomenon and in
doing so offer more attractive rates to new groups and less attractive rates to others.
Institute for Health Policy Solutions
6
Gender
The use of gender is commonly used in setting rates in the small-employer and
individual markets. Actuarial data indicate that health care costs for young
females are substantially higher than costs for young males, principally because
of pregnancy-related expenses.⁷ Females also tend to use medical services with
greater frequency than males through the middle-age years.
A number of states have concluded that the case for retaining gender-based rate
variations is weak. Individuals obviously have no control over their gender, and
while employers may have control over the gender of those they hire, few would
justify job discrimination based on gender as a mechanism for limiting health
insurance costs. Further, pregnancy-related costs, a major source of the gender-
based costs differences, are obviously derived from the actions of males as well
as females.
For these reasons, a number of states have determined that the use of gender as
a factor in setting premium rates is inequitable and have restricted or prohibited
its use.
Age
Health plans have generally used age as an important determinant of premiums
for small employers. Age is strongly correlated with use of medical services. For
example, individuals who are 60 years old incur roughly three to four times the
medical expenses of 20-year-olds. Not surprisingly, older workers tend to place a
higher value on health insurance and are more likely to be insured even through
their coverage is more expensive. Young adults, on the other hand, are most
likely to be uninsured despite the relatively low premium prices available to
them and their employers.
Since people cannot control their age, the use of age might at first seem to be
unfair. But younger individuals also tend to earn less. As a result, age rating
tends to be "progressive" in nature: lower-income (younger) people pay less than
higher-income (older) people. Of course, this is little consolation to those older
workers who have low incomes. But eliminating age rating entirely appears to
result in reducing insurance coverage among younger, less affluent workers
because the premiums for groups employing disproportionate numbers of young
workers would rise. (Although the data is not definitive, this appears to be what
happened in New York. 8) To put it another way, the use of age rating appears to
result in more people voluntarily purchasing insurance coverage.
All but four states that have passed insurance reform will permit the use of age
as a rating factor even when reforms are fully phased in. Only New York has
fully implemented flat community rating. But most have limited the extent of
Among other things, durational rating has been criticized for encouraging groups to move
from one carrier to another.
⁷According to one estimate, 20-year-old females are roughly twice as expensive as
males of the same age.
⁸Kala E. Ladenheim and Anne R. Markus, Community Rating: States' Experience,
Intergovernmental Health Policy Project, The "eorge Washngton University, July 1994
Institute for Health Policy Solutions
7
premium variation based on age-for example, allowing rates to vary by a ratio
no higher than 3 to 1.
Geography
Health costs tend to vary substantially from area to area, even within a single
state. Health plans have almost universally used these geographic cost
differences in determining premiums for small employers.
To the extent that cost differences reflect differences in the efficiency of the
medical systems in different areas, the use of geography as a basis for
determining rates could be useful to create incentives for people in high-cost
areas to work to make their medical systems more efficient. (Even the term
"community rating" with all of its implications of rate spreading suggests that
community-to-community costs differences are an appropriate basis for
differentiating rates.) Overly broad geographic areas may also create
disincentives for health plans to move into new areas. 9 Finally, use of geographic
rate variations may be more fair in some states, because areas with lower health
care costs (such as rural areas) also tend to be populated by individuals with
lower incomes.
On the other hand, geography, like other rating factors, can be used in ways
that may be inequitable or have undesirable social consequences. For example,
some insurers have used geographic adjustments to redline certain areas, such
as those with a high incidence of AIDS.
States that have passed insurance reforms have generally allowed geography to
be used as a factor in establishing small-employer rates but have sometimes
imposed constraints on how small the rating areas can be. For example,
insurers might be required to establish rating areas no more narrowly than at
the three-digit zip code level and might not be permitted to subdivide a
metropolitan area. A number of states have also established uniform geographic
rating areas for use by health plans.
Subscriber family type
Virtually all health plans vary rates according to family size and composition,
the justification obviously being that the cost of coverage increases with family
size. Health plans have not, however, used uniform methods for distinguishing
among families of different size. Some health plans have only a single and a
family rate (a common approach for larger employers). Other plans use
additional categories-for example, single; single and spouse; single and
child[ren]; and single, spouse, and child[ren]. The market trend has been toward
the use of more family unit categories. In general, this approach may be
financially progressive, since single-parent, lower-income families would tend to
9A plan operating in a lower-cost area may be reluctant to move into a higher-cost area,
because it would have to increase rates for its existing business to break even in the more
costly (but uniformly priced) new area. The opposite case could also be true. Health plans
in higher-cost areas may be reluctant to move into lower-cost areas because doing so
could require having noncompetitive rates in the lower-cost area (or underpricing the
higher-cost area).
8
Institute for Health Policy Solutions
pay lower rates (because they would not subsidize two-adult, higher-income
families).
The use of family size as a rating factor is largely noncontroversial, and virtually
all states have allowed its continued use. Some states have, however,
established uniform family categories that all health plans must use. The logic
for this policy is that uniformity makes it easier for people to compare plans on
the basis of price and value.
Industry and occupation
It is common for health plans to vary rates based on industry or occupation. In
some cases these practices are intended to reflect differences in underlying
health care costs; in others they are intended to reflect differences in
administrative or credit risk.
Although there are clearly real cost differences by industry and occupation, the
question is whether there is a justification for using such differences in setting
premiums. Should firms and workers in certain industries and types of
employment be penalized because of the nature of their employment? At first
glance it might seem that rate variation by industry and occupation would
encourage small employers to maintain safer work environments. But work-
related injuries and illnesses are generally covered by the workers' compensation
system. Moreover, industry or occupation adjustments do not provide strong
incentives for individual employers to improve worker safety because individual
employer behavior does not appreciably change the industry or occupation
premium. A disadvantage of industry- and occupation-based rating is that it
creates opportunities for insurers and health plans to select low-risk groups and
avoid high-risk groups. In the extreme case, this practice can be used to redline
higher-risk industries. As with other risk segmenting practices, efforts are spent
on identifying low-risk groups rather than improving efficiency as a way of
keeping premiums down and making the health plan competitive.
State reforms have generally curtailed and occasionally eliminated use of
industry and occupation as a factor in setting rates.
Association plans
On a related issue, many associations of employers in particular industries,
trades, and professions currently offer health coverage to their members and not
to others. Because of associations' membership limitations, they tend to
compromise the risk-spreading objectives of insurance reform. The intent of
guaranteed-issue requirements is to ensure that health plans accept all
applicants regardless of risk. Failing to apply this rule can give association plans
an unfair competitive advantage if the association can be defined to exclude
higher-risk employers.
A few states require association plans to conform to the same reform rules as
other insurers, essentially making them like other insurers in the market. That
is, carriers servicing the association business are required to make the same
products available on a guaranteed-issue basis to any small employer in the
9
Institute for Health Policy Solutions
community at the same rate. States passing insurance reform have generally not
required association plans to open their doors to all applicants, though they
have sometimes applied other reform rules to the association plans. But where
association groups can be selective in their membership, insurers
understandably argue that to maintain a level playing field, rating rules should
allow them to compete by adjusting rates to reflect the relative risk of a given
occupation or industry.
Summary of State Insurance Reform Provisions
During the past five years 45 states have passed insurance reform laws designed
to make insurance for small businesses more accessible, more reliably available,
and in some cases more affordable when needed most. In most cases insurance
reform laws contain a number of provisions that work together; and thus, it is
crucial to recognize the importance of the interrelationships of different reform
provisions. The following table indicates state insurance reform provisions and
distinguishes among states that have passed a combination of provisions
resulting in loose restrictions, moderate restrictions, or tight restrictions.
The size of groups covered by small-group reforms differ from state to state, as
summarized in the table. The table also indicates which states have passed
individual market reforms. Fewer states (8) have passed individual market
reform than group reform. This is in part due to apprehension that the
individual market might be overwhelmed with high-risk individuals not now
covered, thereby driving up the premium rates to unaffordable levels. However,
most states that have passed individual market reforms tend to be the same
states that passed the tightest small-group market reforms (Kentucky, Maine,
New Hampshire, New Jersey, New York, Vermont, and Washington.)
Continuity, rating restrictions, and guaranteed-issue requirements exemplify the
way a combination of provisions can significantly impact the small-group
market. In this case, the reform objective of providing better access and
affordability may be compromised if certain reform elements are not included.
For example, rating requirements may make rates more affordable for some, but
if carriers are allowed to deny coverage to small businesses perceived as high
risk, the rating laws will not ensure access to health insurance for those small
businesses that need it most.
It is for this reason that the second row of the table indicates states that have
the combined reform provisions of continuity, rate bands restricting the use of
certain rating factors, and guaranteed issue for at least some plans. (The sixth
row of the chart indicates which states have this same combination of provisions
in the individual market.) For the small-group market the second row also
distinguished states with tight bands (± 20 percent, that is, a band which allows
rates to vary only from 80 percent to 120 percent of the midpoint rate or a 1:1.5
ratio from the lowest to the highest rate).
Currently, 34 states require carriers to guarantee at least basic or standard-plan
coverage to small businesses in addition to requiring continuity of coverage and
at least some rating restrictions. Seventeen of these states have also passed rate
Institute for Health Policy Solutions
10
bands that limit variation to at most + 20 percent of the average pooled rate. In
the individual market, eight states have passed laws requiring carriers to
guarantee issue at least a basic or a standard plan in addition to passing
continuity requirements and at least some rating restrictions.
However, requiring guaranteed-issue of only some products may result in a
disproportionate number of higher-risk groups or individuals enrolling in the
guaranteed-issue plans. And if this does occur, the costs for the guaranteed-
issue plans would rise, and the goal of affordable accessible health insurance
may be lost. To prevent this type of segmentation of the market, 13 states have
required guaranteed issue of all benefit plans offered in addition to continuity
requirements and tight rating bands. 10 In the individual market, seven states
have passed continuity requirements, rating restrictions, and a guaranteed issue
requirement of all products. The third and seventh rows indicate the states that
have guaranteed-issue requirements for all products.
It is also important to recognize that even with guaranteed-issue requirements,
carriers may not be required to disclose all of their products and may subtly
attempt to steer higher- or lower-risk groups into certain plans. Recognizing
this, California, New Jersey, and Vermont not only require carriers to guarantee
issue all plans but also require carriers to disclose all of the products they offer
in the small-group market. Vermont and New Jersey also mandate disclosure of
all products in the individual market.
In addition to passing continuity and guaranteed issue requirements, some
states have passed rate restrictions prohibiting the use of certain rating factors.
This is shown in the fourth and last rows of the table. Currently, five states
(Colorado, Kentucky, Maryland, and New Hampshire) limit rating factors to age,
family composition, and geography, while the other three (New Jersey, New York,
and Washington) do not allow variations based upon age. 11 In the individual
market, seven states have passed rating restrictions in addition to continuity
and guaranteed-issue requirements.
Most states phased-in (or are in the process of phasing-in) the prohibition of the
use of specified rating factors, with the exception of New York. When age is
allowed as a rating factor, most states specify age bands and limit the variation
from one age band to another. For example, New Hampshire and Kentucky limit
the premium for the oldest age bracket to three times the premium for the
youngest age bracket.
¹⁰Texas also recently passed legislation containing guarantee issue for all products, but
allows rates to vary 2:1 based upon experience, health status, and the amount of time the
policy has been held.
11While Vermont is considered to have community rating, the rating factors age,
gender, geography, industry, experience, duration of coverage can deviate from the
community rate by + 20 percent. Maine and Massachusetts are also considered to have
community rating and variations may vary based upon gender and industry. Oregon does
allows the use of health status.
11
Institute for Health Policy Solutions
State Small-Group and Individual Insurance Reform Provisions
12
AL
AK
AZ
AR
CA
CO
CT
DE
FL
GA¹
HI
D
L
IN
IA
KS
KY
LA
ME
MD
MA
MI
MN
MS
MO
MT
Small Group
Market size
2-25
3-40
1-25
3-50
1-50
1-50
1-50
1-50
2-49
3-25
3-25
2-50
3-50
All
3-35
1-24
2-50
1-25
2-49
2-35
3-25
3-25
groups
Continuity, rate
X
X
XX
XX
XX
X
XX
bands, and
a
X
X
X
XX
X
XX 2
X
XX
XX
XX
XX
X
X
X
guaranteed issue
for all or some
products (XX
indicates rate
bands of ±20% or
tighter).
Guaranteed issue
Xᶜ
X³
of all products
X
X
X
X
Xᶜ
X
Rate adjustments at
most for age, family
X
X
X
composition,
geography.
Individual Market
Continuity, rate
bands, and
X
b
X
X
b
guaranteed issue
for all or some
products
Guaranteed issue
of all products
X
X
Rate adjustments at
most for age, family
X
X
composition,
geography.
The provisions in this chart reflect the law once fully implemented.
ᵃHas rating bands, but does not have continuity or guaranteed issue requirements.
rating bands and continuity, but does not have guaranteed issue of any product.
ᶜCarriers are required to fullv disclose all products offered.
dAge adjustments not allowed.
¹Georgia does not have portability or guarantee issue requirements, but rates can not vary from pool rate by +25% if based upon experience.
2 Rating requirements apply only to groups with 100 or fewer employees, individuals, and coverage purchased through the alliance.
3 Fo groups of 1 or 2, the guarantee issue requirement only applies to certain products.
Source: This chart uses information from the following reports: "State Legislative Health Care and Insurance Issues," BlueCross BlueShield Association, 1994; "Small Group
Enactments," The Health Insurance Association of America, November 1994; and "Small Group Market Reforms: A Snapshot of States' Experience," The Intergovernmental Health
Policy Project at the George Washington University; as well as phone conversations with several state insurance department officials and the National Association of Insurance
Commissioners.
13
State Insurance Reform Provisions
NE
NV
NH
NJ
NM 4
NY
NC
ND
OH
OK
OR
PA
RI
SC
SD
TN
TX
UT
VT
VA
WA
WV
WI
WY
Si
group
1-100
2-49
2-50
1-50
et size
3-25
2-49
1-25
2-50
2-50
3-25
1-50
2-50
1-25
3-25
3-50
1-50
1-49
2-49
All
2-49
2-25
2-25
groups
Continuity, rate
X
XX
XX
b
XX
XX
X²
b
X
XX
X³
X
b
bands, and
X
X
b
XX
X
XX
a
X
X
guaranteed issue
for all or some
products (XX
indicates rate
bands of ±20% or
tighter).
Guaranteed issue
of all products
X
Xᶜ
X
X
Xᶜ
X
Rate adjustments at
X
most for age, family
Xd
Xᵈ
Xd
composition,
geography.
Individual Market
Continuity, rate
X
X
X
b
X
bands, and
X
guaranteed issue
for all or some
products
Guaranteee issue
of all products
X
Xᶜ
X
Xc
X
Rate adjustments at
X
X
X
X
X
most for age, family
composition,
geography
aHas rating bands, but does not have continuity or guaranteed issued requirements.
bf rating bands and continuity, but does not have guaranteed issue of any product.
Carriers are required to fully disclose all products offered.
dAge adjustments not allowed.
4 New Mexico has continuity requirements, tight rate bands and limited rating factors to age after 1998, but does not have a guarantee issue requirement for any products.
2The guaranteed issue requirement applies to groups of 3-15.
³The guaranteed issue requirement only applies to groups of 3-50.
It is true that insurance market reforms alone will not cover the uninsured
population. But the experience at the state level indicates that signficant health
insurance market reforms can be enacted that extend meaningful protections
without driving younger and healthier groups out of the insured population.
While definitive data is lacking, the experience in New York seems to indicate
that eliminating premium adjustments for age will ultimately reduce the insured
population by causing price increases for younger groups, which will cause them
to drop insurance coverage.
On the other hand, the experience in some states such as California suggests
that adequately tight market rules, together with other measures, can make
lower health plan prices available for small employers. And of the 24 states that
enacted the original (1991) NAIC model health insurance market reform bill,
one-third have been so satisfied that meaningful reforms are workable that they
have gone back and tightened their rating rules. 12
Although many states have made great progress in implementing insurance
market reforms, there are compelling reasons why Congress should consider
federal health insurance reforms. Most obviously, only the federal government
can establish rules to assure that people moving from one state to another can
continue to be insured. In 1993 alone, 4 million workers moved from 1 state to
another and 1.5 million of them also changed employers. 13 In addition, states
cannot assure continuity of coverage for workers who move from a small-firm job
to a position with a large, self-insured employer. Further, federal policymakers
may want to establish baseline protections for residents of all states. For
example, the Congress may wish to ensure that a small-firm employee 14 can
continue to get affordable coverage even if she is laid off and has to seek
coverage as a non-working individual. And only federal legislation could extend
health insurance access or continuity assurances to all Americans.
12 Ladenheim.
13 Based on tabulations of the March 1994 current population survey by Mathematica
Policy Research, Inc. for this testimony.
14 Federal COBRA continuation protections pertain only to firms with over 20
employees
Institute for Health Policy Solutions
14