Statement of Sara J. Singer, Executive Director, Center for Health Policy,
Senior Research Scholar, Institute for International Studies,
Stanford University, Stanford, California

Testimony Before the Subcommittee on Health
of the House Committee on Ways and Means

Hearing on the Nation's Insured

April 4, 2001

To reduce the number of people who lack insurance requires both a health care system that delivers good value health insurance products given the dollars available and makes them accessible to all, as well as subsidies for individuals for whom the price of coverage is out of reach. Competitive models like the Federal Employees Health Benefits (FEHB) Program, the California Public Employees Retirement System (CalPERS), or Stanford University contribute to the first of these goals by offering multiple choices, structuring the competition among them, and providing incentives for individuals to select high-value plans (e.g., defined contributions). Though prominent and important examples, these purchasers represent a small minority of the health insurance market so by themselves they cannot be expected to transform the delivery system. Most employers offer one or few choices and pay more for more expensive health care plans thus weakening or eliminating incentives to choose economical health plans. Transforming health care delivery will require that providers actively seek ways to cut costs without harming quality. This, in turn, requires that a significant portion of their patients demand value.

My colleagues Alan Garber and Alain Enthoven and I, at Stanford University's Center for Health Policy, recently formulated a proposal to achieve near-universal health insurance by satisfying both requirements. We carried out this work as part of a project organized by the Economic and Social Research Institute and sponsored by the Robert Wood Johnson Foundation. In doing so, we sought to make a wide range of health insurance choices available to all Americans, to encourage consumers to seek high value coverage through improved competition and personal economic responsibility for choices, to increase support for care to those who remain without insurance, and to accomplish this without mandates on employers.

Our plan would provide near-universal coverage among the non-Medicare population by making private plans more affordable. It would do so by using insurance exchanges to promote competition among plans. The exchanges would provide information about plan prices and plan quality, enabling consumers to make informed choices and obtain good-value health insurance. Our proposal includes the following key features:

• Insurance exchanges (public or private entities or employers) would offer individuals a choice of at least two health plans (one that provides some coverage for treatment by most providers, and a low-priced alternative) in every geographic region. Considerably more choices would be desirable, including point-of-service (POS) or preferred provider organization (PPO) products as well as closed-panel health maintenance organizations (HMOs) and newer alternatives such as defined-contribution "care groups." Non-employer exchanges would accept all individuals not eligible for Medicare and groups in their service area (guaranteed issue) at a flat premium rate (community rating), with adjustments only for covering additional people, such as a spouse or dependents. Exchanges would perform at least minimal risk adjustment (initial risk adjustment would be based on age) and/or rely on other mechanisms to limit the financial rewards to plans for engaging in practices that encourage risk selection, to preserve choice among plan types and create incentives for plans to enroll and care for high-cost patients. Exchanges would also participate in risk adjustment between insurance exchanges in a region or state. Exchanges would require quality measurement and would make available comparative information to help members make informed choices. Substantial incentives would encourage development of private exchanges. These include tying new subsidies to purchase of insurance coverage through an exchange, preemption from state insurance mandates (i.e., ERISA protection), and protection from adverse selection.

• The U.S. Insurance Exchange (like the Federal Employees Health Benefits Program) would serve individuals and firms with fewer than 50 enrollees in areas in which private exchanges do not emerge.

• Refundable tax credits for health insurance valued at 70% of the median cost plan for lower- and middle-income Americans (individuals with incomes up to $31,000/families up to $51,000, phased out for individuals with incomes between $31,000 and $41,000/ for families with incomes between $51,000 and $61,000) who purchase insurance through an exchange.⁽¹⁾ In contrast to families in higher tax brackets, today such households have limited financial incentives for purchasing private health insurance plans.

• Individuals, eligible for tax credits, who do not enroll in a health plan, will be automatically enrolled in a default plan designated by the state to provide basic health care services. Default plans will be federally funded through performance-based grants initially equal to 50% of the tax credit. They will enable states to provide new financing for public hospitals, clinics, and other providers who meet standards of open access, as part of their default plan. States will receive incentive bonuses or reductions based on the extent to which they improve performance on a set of preventive care measures (e.g., childhood vaccinations, first-trimester pregnancy visits, hypertension control) and reduce the percentage of the population that remains uninsured. The goal is to ensure that every eligible individual is enrolled in a health plan.

• Other individuals would continue to exclude from taxable income their employer- or individually-paid health insurance, but a phased-in cap would limit this exclusion from taxable income for employer- or individually-paid health insurance benefits to encourage value-based purchasing. Individuals eligible for both the exclusion and the subsidy could choose which of the two tax benefits to use. The dollar value of the cap would be set high enough to represent a substantial subsidy, yet low enough to provide substantial new financing for expanding health insurance coverage and other purposes.

• A new, independent Insurance Exchange Commission (IEC) with narrow, specific powers, similar in function and structure to the Securities and Exchange Commission, would be created to distribute new subsidies and default plan payments, accredit insurance exchanges, conduct risk adjustment across insurance exchanges, and serve as a clearinghouse for public information on the quality of health plans. This agency would have an appointment procedure and organization structure similar to that of the Securities and Exchange Commission, and would have a similar function - to encourage smooth information flow and functioning of insurance exchange markets.

This proposal contains many similarities with the proposal offered by President Bush as a candidate. The President's proposal, like ours, would use tax credits to expand coverage. The President's proposal differs from ours in that it offers smaller subsidies, targeted to lower-income individuals in employment groups without coverage. Unless they are larger, tax credits are unlikely to reduce substantially the number of uninsured due to low take-up rates and crowding out of employer-provided coverage. Even for individuals who receive tax subsidies, there may not be a viable market for these individuals to purchase coverage.

Adverse selection has made it nearly impossible to guarantee access to coverage and choice of plans to unaffiliated individuals in a system of voluntary health insurance. This is true despite attempts by the federal and state governments to ameliorate the problem through legislation providing for continuity of coverage for those who leave or change jobs and programs such as high-risk pools. The low level of subsidy proposed by President Bush would likely do little to improve the selection problem in an unstructured market.

The creation of a structured and competitive market through insurance exchanges can facilitate expanded coverage at little cost. Further, it can be an important part of any strategy to increase insurance coverage, whether subsidies are large or small. In addition, a system based on insurance exchanges would require little change if subsidies were expanded in the future to include more people.

The simplest approach to creating the benefits of an insurance exchange at the national level is the creation of one similar to the one available to federal employees. In our proposal, USIX would be a national exchange that would serve as an entry point for low-income, uninsured individuals, who would become eligible for new subsidies to purchase coverage. Like the FEHB Program, CalPERS, and Stanford University, USIX would offer competitive insurance choices. USIX could encourage development of high-quality coverage priced within reach of those eligible for subsidies. USIX would mitigate many of the market imperfections that plague the individual market (for example, through risk pooling, community rating, guaranteed issue, and competition). USIX could also determine limited benefit standards to provide reasonable comparability among plans and to prevent risk selection and segmentation. USIX would achieve economies of scale in brokering plans and would be capable of providing information about plan quality to individuals. Tax credits would promote higher-value health insurance options offered through USIX by exposing consumers to price differences.

A second feature of our original proposal worth consideration is automatic enrollment in default plans for subsidy-eligible individuals who do not enroll in a health plan. States would receive a payment initially equal to 50% of the new tax credits for these individuals and would apportion these funds to providers, such as public hospitals and clinics that they designate as default providers. States will receive bonuses or reductions based on performance. This mechanism would provide needed financing for safety net providers to care for those automatically enrolled in default plans as well as incentives for preventive care that should reduce hospital costs and expansion of coverage among subsidy-eligible individuals.

Any serious proposal for reform of health care financing should include elements of competition that encourage consumers to seek good value given the dollars available and subsidies for lower-income individuals. Our plan, like several similar plans, offers both and provides a path for further expansions in coverage in the future.

1. Any phase-out of subsidies will create high marginal tax rates in the phase-out zone. This is a problem that must be addressed. We recommend beginning the phase-out at income levels above the phase-out of earned income tax credits and other means-tested benefits. Extending the phase-out range would further alleviate the problem, but would also be more costly.