National Center For Policy Analysis NPC Newsmaker

September 22, 2004

by John C. Goodman

Testimony

SPEAKERS:

DR. Kenneth Thorpe Chairman, Emory University School Of Public Health

DR. John Goodman President, The National Center For Policy Analysis, DALLAS, TEXAS

Moderator:

Raul Medrano President and ceo, 4M-Medrano, Minority Marketing & Media

Raul Medrano: Good day to all of you and welcome to the National Press Club. I'm Raul Medrano, president and CEO of 4M-Medrano, Minority Marketing & Media, based here in Washington D.C., and I'm a member of the Newsmaker Committee.

Before I introduce our guests, a little about the ground rules of this particular event. Please -- if you haven't already, please sign in at the end of the event, or there is a sign-up sheet for all media. We will first have an opening statement from our invited guests, Dr. Goodman and Dr. Thorpe, and then we will take some questions. I will go into a little bit more details about the format before we begin. I would ask that all of you, if you can, please when you ask a question, to identify yourself and the agency that you are representing, or if you are a member of a club, please mention that when you are called upon in the Q&A session. I will remind you that the newsmakers are open only to members of the news media and members of the National Press Club. Please also make sure that all cell phones, pagers and beepers are on silent or on the off mode please.

There are some upcoming events in particular here at the Press Club. On Monday, September 27 th at 10 a.m. in the Zenger Room right here, "Elections in Afghanistan: A Bellwether for U.S. Plans for Democracy with Implications for Iraq." That will be here on Monday, and on Wednesday, September 29 th at 12 Noon here in the Zenger Room, "Trafficking to Terrorism" is another newsmaker that will be here on Wednesday at noon. Also, transcripts as well as archive video and audio events here at the club are available on our website at npc.press.org, okay?

And now - well, the reason why we are here today - I'm going to briefly explain the format. Basically, I will introduce each speaker. Each speaker will have an opportunity to speak for 15 minutes and the other speaker will have five minutes to reply, and vice versa. And then we will open it up for question and answers. Case in point, it's about 12:00 right now, so this particular newsmaker shouldn't last more than an hour. So time is of the essence. And if you have a question, be very specific in regards to the question.

Again, the topic here is "Bush versus Kerry: Who Has the Best Approach to Insuring the Uninsured?" And I would like to briefly introduce here bio highlights of Dr. Kenneth Thorpe: Chairman, Emory University School of Public Health. He coordinated all financial estimates and program impacts of President Clinton's healthcare reform proposals for the White House. As an academic, he has testified before several committees in the U.S. Senate and House on healthcare reform and insurance issues. Dr. Thorpe has also held visiting faculty positions at Pepperdine University and Duke University. He has authored and co-authored over 60 articles, book chapters and books. Dr. Thorpe is a frequent national presenter on issues of healthcare financing, insurance and healthcare reform at healthcare conferences, television and the media. And with that, I'll leave you with Dr. Thorpe, and then we will take it from there. Okay, thank you.

Kenneth Thorpe: Thank you. Good afternoon. Nice to be here. First, from the outset what I'm going to do is report on analyses I have been doing of the Bush and Kerry healthcare plans. I should say from the get-go that I'm not associated with any of the campaigns, so I truly have been doing this as an academic.

I'm going to evaluate the plans along several dimensions: first, to the extent to which the plans increase the number of insured, so how effective are they in reducing the number of uninsured Americans? Second, what incentives do they have and do they improve the efficiency in which we deliver healthcare services? Third, what effect do they have on the growth of healthcare spending? And finally, I'm going to look at them in the context of whether or not they provide incentives for restructuring how we deliver healthcare services. One of the things we know is that much of the healthcare spending in our economy is on chronically ill patients. They account for most of the growth in healthcare spending. And those patients today only get 50 percent of the recommended medical care. So those are going to be the four areas that I want to look at.

Overview. Clearly, this is the biggest domestic policy issue in the election between these two candidates, the issues of tax cuts and healthcare. And the set up I think really is, for me, both candidates want to pass tax cuts through beyond 2010. Senator Kerry has said he would do it for 98 percent of Americans - all but the richest 2 percent. President Bush wants to do it for all Americans past 2010. In the Kerry proposal, he would instead use those dollars -- $860 billion - to provide health care and to finance his education initiatives. And that is really the major difference in priorities between the two campaigns.

The Bush plan, I won't spend much time on. I'm going to let Dr. Goodman go through that. He has three elements to it: a refundable tax credit, allowing people to deduct the cost of certain high deductible plans, and he has been promoting association health plans. Just to give you a sense, in and of itself the Bush plan could enroll a lot of people or few people. By design of how the main part of his plan is set up through refundable tax credits, since he is only providing $1,000 for a single person and $3,000 for a family to buy insurance, it's essentially designed not to spend much money, and as a result, it doesn't provide much in terms of health insurance coverage. Certainly one could design a different version of this, increasing the size of the credits, and you would cover more people. But as it's set up right now, the credits are low; they grow over time at the rate of medical inflation, which is far below the growth and the cost of health insurance. So as you are going to see, the number of people covered by this plan declines over time.

Senator Kerry's proposal, where I will spend most of my time, really has several components. It starts with, I think, one that has bipartisan support, which is to use the current system to enroll the adults - parents, single adults and childless couples - and more kids into the existing CHIP and Medicaid programs. If you think about it, up until a couple of years ago, this has been the approach that governors favored. Several governors, several states have used this approach very effectively, championed by then-Governor Thompson with Badger Care. It's an approach that has bipartisan support among the governors.

Several states with Republican governors have used exactly the approach that Senator Kerry is talking about. The key difference is that the states ran out of the money, so they stopped expanding coverage. In the Kerry approach, these new populations would be financed 100 percent by the federal government rather than having to worry about the states pay for this. So it provides a substantial fiscal relief to the states and builds on an approach that is heavily favored by governors today.

Second is that he provides -- several parts of his plan expands access and would make health insurance more affordable. We will talk about those specifics. Third, he would open up the Federal Employees Health Benefits program through a new congressional health plan by developing purchasing tools for small businesses - 50 and under - and larger businesses could also take advantage of purchasing coverage through the FEHB. They would simply sponsor those benefits at their own worksite.

There are several parts of the plan that reduces the administrative costs of health care through some of the information technology initiatives. And the two, I think, important perhaps signature parts of this, in addition to the coverage expansions, is that he has designed a proposal that would reduce the cost of health insurance by 10 percent by basically taking the catastrophic expenses out of the private market. And finally, by expanding disease management, in both the public and private sector, it goes a long way in addressing the issues that the Institute of Medicine raised in crossing the quality chasm that shows that we have a dysfunctional and broken delivery system by providing incentives for plans to restructure how they deliver care to chronically ill patients.

In the Kerry plan, as I mentioned, the plan that most of the states and governors were moving along this track, he would enroll childless adults to poverty, parents to 200 percent of poverty, and kids to 300 percent of poverty. He does it by a simple mechanism; that is, the populations become eligible for this plan, the states would be relieved of what they spend on their kids' program for Medicaid. So they would not have to spend money there. They would have said use those dollars and enroll these populations in, and the federal government would match those payments at the existing CHIP and Medicaid matching rates. For the first three years of the plan, not only would the states be held neutral in terms of these coverage expansions, but they would get a $15 billion additional payment coming in in order to relieve a lot of the fiscal problems that states are currently facing. So it's a win-win for the states.

The congressional health plan I talked about. This would provide an opportunity for business 50 and under to buy into the FEHB. Employers that currently don't offer benefits today would pay half the premium. But they would get a 50 percent refundable tax credit. Workers that are in between jobs could also join, and they would get a 75 percent credit toward the cost of insurance. Individuals aged 50 to 64 up to 300 percent of poverty would get a 25-percent credit. And it does limit individual premiums. For example, for workers on their employee share of the cost to 6 percent for low-income workers, 12 percent for high-income workers.

The proposals for reducing healthcare costs are several. One, I think importantly, is by taking the catastrophic risks out of the insurance markets. This proposal is designed to reduce what employers and businesses and families pay for health insurance by about 10 percent a year. By taking this risk out of the market, I personally think, too, it reduces the cost of administering our system. There is less volatility in it. The administrative expenses associated with underwriting and trying to identify high-risk people are now out.

Second -- and this to me is - this is my personal take on this - has the most potential for, over the years, reducing the growth in healthcare spending, is by deploying disease management for chronic care - not only Medicare, but particularly Medicare, because that is where most of the chronic illness is, but also in the private markets. Again, as I mentioned, about 60-70 percent of what we spend on health care today is traced to people with chronic illness, and about 60 to 70 percent of the growth in spending over time is also traced to people who are chronically ill. These are people who need predictable expenses and predictable medical care that we do a very poor job of providing today. The Kerry plan would go a long way towards providing the type of systems and the type of delivery system reforms to do this. We will see in a minute the savings involved, but he basically would provide pay plans at 90 percent of risk adjusted payment rate for caring for patients with congestive heart failure and diabetes.

Third is that, you know, our healthcare system is incredibly inefficient. Health care is notoriously lagging behind other service industries that are modernizing. There is about 18 billion paper transactions a year, about 8 billion of them still on paper. They cost about five bucks a transaction. If you did this electronically, it would cost about 35 to 50 cents. So what the Kerry plan does is mandate that if you participate in any federal program by 2008, you have got to submit your plans electronically. The savings here and the efficiencies, I think, are substantial. It also provides the infrastructure for doing the care and disease management programs as well. So this is the proposal. I think it has taken the healthcare industry far too long to put in place.

Well, one of the things then that people always wonder about is what does it cost to do this? You know, what impact in the federal budget -- how many people would be covered? And I just want to make sure that people understand, because there's a bunch of numbers in events like this that always get thrown around and I want to make sure people understand why they differ. And there's three main reasons why they could differ. One is that the estimates out in the street all use different 10-year budget windows. The numbers I'm using use the current 10-year budget window in order to make it comparable to CBO's estimates of the Bush healthcare plan. Other estimates of this are using a different budget window - they are using next year's 10-year budget window.

Second, they model different plans. We have a variety of different versions of interpretations of what others have thought the Kerry plan was proposing. There are several shortcomings in them we will talk about. So we are not modeling the same plans, and they use different behavioral assumptions. That is legitimate. We can talk about that. People have different opinions about how firms and individuals respond to incentives, and that is a discussion at least we can focus on.

The most recent version of this - the Lewin plan, just for an example, that came out this week - was modeled from the Kerry website. Now, websites are not particularly compelling in terms of providing a lot of detail on how plans work. Those details were available in the analyses that I have done and laid out on our university's website, but there is a lot of detail also on the Kerry plan website as well. For example, when this particular analysis didn't find exactly how the plan would work, they made up their own assumptions. So we have a version of the Kerry plan which is really not what the senator has proposed, and there's a bunch of examples like this through the analysis.

So just to give you an example, my estimate of the Kerry plan over the first 10 years is $653 billion. Well, this number that came out yesterday, as well as some others, are much higher. Why? Well, one, you are using a different 10-year budget window -- $175 billion difference there. That matters because the senator said he is going to finance this by not pushing through the tax cuts for the top 2 percent. If you are using a different 10-year budget window, then you need to come up with a different estimate of what the value of that tax cut is. It's not $860 billion; it's a higher number. So to make an apples-to-apples comparison and not confuse people, we are using the current budget window.

They model a different plan. They make a number of assumptions on their own that they say are illustrative, but not what Senator Kerry has proposed. And they have different behavioral assumptions, which I think are on the little bit extreme side. But, you know, those three things together are $535 billion, so you can see how these things make a big difference in accounting for differences.

Real quickly here, if you look at four estimates of the Bush healthcare plan -- this is laid out in legislative respects because he proposed it in his 2005 budget submission. I use basically the same assumptions that CBO uses in modeling this. If you can look at the costs at CBO, my estimates and Treasury are virtually identical. To get at this behavioral assumptions notion, you can see in that plan that was done yesterday, it's 100 percent higher. So my way of doing this is by design tied into the way that CBP thinks about it in order to try to make sure that the variation in these estimates is minimized.

Savings - there are several: disease management. Eighty percent of Medicare beneficiaries have at least one chronic condition. Heart disease and diabetes alone account for 30 percent of Medicare spending. Several vendors have already shown that they can reduce spending substantially by care management programs. This $116 billion that I have built in there through an enforceable mechanism is only 2 percent of Medicare spending, so it's very, very small.

These are the savings that are published that vendors currently are getting on disease and care management. So for example, congestive heart failure - a cardiologist knows this work. You can reduce hospitalizations by 50 percent by appropriately managing a congestive heart failure patient. We don't do it today. Those numbers are from Pacificare. They are showing 28 percent reductions; 26 percent reductions in diabetes spending in a study published in Health Affairs nationally that CIGNA has put in place. So those numbers are there.

The senator has identified $300 billion in savings that, working with, obviously, the administration and CBO, would put in scorable and enforceable mechanisms to achieve these. These are a sampling of some of them here. Obviously, there is more detail in my analysis.

And finally, just to get to the bottom line here, net spending is just under a trillion - growth spending is just under a trillion dollars. He has $300 billion in scorable savings that he has identified, so the net cost of this to the federal budget is about $650 billion over the next 10 years.

If you look at the Bush plan, I think it covers about 2.1 up to 2.4 million people. It declines over time, again, since the value of the credits decline over time. Senator Kerry's plan provides coverage to 27 million.

In conclusion, the Kerry plan would cover nearly two-thirds of the uninsured and reduce private insurance premiums. It would improve the efficiency of how services are delivered. It would lead to a rapid acceleration and a very basic restructuring of how we deliver services to chronically ill patients. So for those of you who have not read the Institute of Medicine study, I would highly recommend it. This plan goes a long way towards meeting those recommendations. It would provide the rapid acceleration of efficiencies through electronic billing. And finally, by design really, the Bush plan covers relatively few individuals at a low cost - about $90 billion.

Thank you. I'll cede the podium to Dr. Goodman and look forward to your questions. Thank you. I'll even load his presentation for him.

Mr. Medrano: Okay, now bio highlights for Dr. Goodman. Thank you, Dr. Thorpe.

Dr. Goodman is president of the National Center for Policy Analysis in Dallas, Texas. By the way, don't forget the Monday night football game with the Redskins, to catch that. National Journal has dubbed Mr. Goodman "the father of health savings accounts." During the month of September, Rowan & Littlefield will publish Dr. Goodman's book, "Lives at Risk," which analyzes healthcare institutions in countries around the world. In addition, he has authored seven books, including "Patient Power: Solving America's Healthcare Crisis." Dr. Goodman regularly appears on C-SPAN's " Washington's Journal," "The News Hour with Jim Lehrer," CNBC, MSNBC and Fox News Channel. He has authored numerous columns and has been quoted in major U.S. newspapers and journals such as The New York Times, USA Today, and The Wall Street Journal and many others.

And with that, I'll leave you with Mr. Goodman for 15 minutes. Thank you.

John Goodman: Thank you, Ralph, for that kind introduction. I don't believe we have ever had a presidential election where we have had two candidates who differ more dramatically on health policy. Both these two candidates want to reform the system in fairly radical ways. They have very different visions about how they want to carry out the reform. They have very specific proposals, and both Ken and I agree that this is the most important domestic policy issue in this race.

Let me start with President Bush. I can illustrate the problem with a simple example. Imagine you have arthritic pain; you need relief. You can go for the brand name prescriptions of Vioxx or Celebrex and over a year's time you will spend more than $900. On the other hand, there are over-the-counter products with ibuprofen which will cost you a little over $100. So over a year's worth of time, we are talking about an $800 difference. Now, for many patients, the brand-name drugs are going to have some advantages. The question is, is this marginal benefit worth the marginal cost of $800? Well, I can't read your mind, you can't read mine, and drugs affect people differently. And so if people are not spending their own money, we have no idea of whether it's worth $800. When they do spend their own money, they reveal their preferences through their actions, and you and I are not going to spend $800 on a cure that does not provide us with at least $800 worth of value.

Unfortunately, that doesn't usually happen in our healthcare system. Most of the time we are spending an employer's money, insurance company money, or government money, and that means that we don't bear the costs of our bad decisions and we don't reap the benefits of our good decisions. And this is an example of a small decision, but this example is repeated again and again and again throughout the healthcare system, from the small cost to the large ones. And taking the system as a whole, every time we spend a dollar on the average, only 18 cents is coming out of our own pocket, and that means we all have an incentive to be wasteful. We all have an incentive to over-consume healthcare until the last dollar we spend creates only 15 cents of value for us.

And it is precisely this kind of problem that motivated us at the National Center for Policy analysis to create a plan for our own employees that looked like this, and we had it for about five or six years. We were discriminated against under the tax law, but we did it anyway. We created a $2,000 deductible for our families, we put $1,500 in their medical savings account. When they entered the medical marketplace, the first $1,500 came from their medical savings account, the next $500 out of pocket, and when they hit $2,000, the plan paid for everything above that. Anything left in the account at the end of the year people got to save. So if they didn't waste money on drugs that they really didn't need or didn't have that much marginal improvement, then they got the full benefits of their decisions.

Now, these are tax-free. Now, they can roll over and they will build up over time and become quite substantial, and so you might ask, well, where could it all go? And a good example is a market for cosmetic surgery where people have been spending their own money really for the last 15 or 20 years. Over the decade of the 1990s in the cosmetic surgery market, the real price actually went down while the price of everything else in health care was going up. You have package prices, you can compare prices - it's not a perfect market but it's a whole lot better than other markets. It's an example of what consumer-directed health care can do.

All right, what does the president propose to do? In the Medicare bill, which passed in December, as of January 1, all non-elderly Americans right now can have, in principle, tax-free health savings accounts. In his State of the Union message, the president said that he would like for the premiums for those HSA plans to be deductible for people who buy them on their own. Also in the State of the Union message, he proposed tax credits for low-income families for any kind of health insurance they buy. More recently, he said that for the ones who buy the health savings account plans, he would like for them to be able to take a third of their tax credit and put it in a health savings account. And also more recently, he has offered a tax credit, which is really a rebate for small businesses that make contributions to their employee health savings account. I want to point out to you that these are not neutral policies. They do not treat all forms of health insurance the same way. This is taking the tax law and putting it firmly behind the health savings account plan.

And finally, the president has called for a national market for insurance, which goes beyond the previous interest in association health plans. The idea is that people in any one state should be able to buy insurance, license it in any other state, or perhaps insurance licensed by the government.

Now, if we contrast this to Senator Kerry's plan -- in Senator Kerry's plan there are no health savings accounts, there's no managed care, and for all practical purposes, there's no cost control at all. Now, Ken has some ideas for making the system more efficient, and I like some of his ideas, but the fact is in the Kerry plan, no one is ever asked to choose between health care and other uses of money - no patient, no doctor, no employer, not anybody, and therefore there is fundamentally no cost control here.

As Ken pointed out, what is going to happen is millions of moderate-income families are going to go into the Medicaid program. In fact, this program will double in size, and most of the rest of the population will go into a system that we used to call - and I still call it - managed competition because it's very, very similar to what Hillary Clinton was talking about some years ago. It may look a little bit different on the surface, but every problem that Hillary Clinton had to deal with Senator Kerry is going to have to deal with, and most of these studies haven't pointed that out. Our own is an exception.

My problem with this approach - and there are a lot of minor problems. My major problem has to do with incentives. If you think about the federal employee plan -- if you think about federal employees here in Washington, the plans have a premium that they tell you once a year. Let's say a plan has a $10,000 premium to be paid partly by the employee, partly by the employer. Some people will join the plan; they will only spend a couple of hundred dollars a year. Those are the healthy people. You make a profit on those people. Some people will enter the plan and they will be sick and they will have expensive costs - they will cost $100 (thousand) or $200,000 a year, and the plan is losing it shirt on those kinds of people.

You don't have to be a genius to realize that if you want to make profits, you want to attract the healthy and avoid the sick, and that is what these plans do. If you think around open season time in the fall here in Washington, you look at the publications that federal employees read, The Hill and other publications, you see these ads, and the ads always show healthy families and healthy children, they talk about wellness programs and preventative medicine. They talk about things that healthy people are interested in. You never seen ad that says, if you have got cancer, come to us. You never see an ad that says, we are the best in town for AIDS or heart disease. And you don't see that because the plans are running away from those kinds of people.

Now, if this system were properly designed, you would see those ads. In a proper system, insurance would compete for the sick just as vigorously they compete for the healthy. But this is a system with perverse incentives, and it doesn't stop at the port of entry. Once they get in the plans, the plans realize that in order to keep healthy people, in order to attract more healthy people, you want to overspend on healthy - you would create more wellness programs, spa memberships, more preventative medicine. On the other hand, the sick people you don't want to stay, you don't want to attract more of them, and so the incentives are to challenge high-cost procedures, claim they are experimental, deny the pacemakers, deny the heart surgery and so forth.

You might ask, why, with these incentives, it isn't worse for federal employees? I think part of the answer is because this federal system is part of a much larger market in which the practice of medicine is dictated by the large market. But if that larger market were not there, if all we had was a system in which these were the only incentives, I believe that the quality of care would decline radically for people who need serious care.

Now, Ken mentioned the various subsidies in the Kerry plan, and whenever you have arbitrary subsidies and you withdraw them in arbitrary ways, you always have these hidden marginal cost problems. And people discover, when they earn an extra dollar they lose benefits, and in one case here people are losing 29 cents, almost 30 cents of benefits when they earn a dollar, and that is on top of their income taxes and their payroll taxes.

Now, you might say, well, look, maybe this is a price we have to pay if we are achieving some other goal like minimizing taxpayer costs or something, and here is another chart, again based on Ken's numbers, not mine. If the goal is to maximize the number of people who are insured with minimum cost to the taxpayer - if that is the goal, then all of these numbers should be the same. In other words, the last dollar we put into any one kind of subsidy should give us just as much return as the last dollar we put into any other kind of subsidy.

When the numbers are all over the map, you have to question what the point of this is. We have one form of subsidy that costs - this is by Ken's numbers -- $14,000 for each additional person insured as a result of that subsidy. For a family of four, that is almost $60,000. Well, that's a ridiculous number. So, again, what is the point here? I think you have to reject the idea that the goal is to insure the most people for the least money, and you have to question whether the real goal isn't really something different, which is to remake the healthcare system.

Ken mentioned the different estimates. I'm not here to defend them, except I will say, if you go to the AEI and you go to Lewin and you look at what they produce, it's more explicit, more complete, more voluminous, more detail than you will find if you go to Ken's website. And furthermore, if you take Ken's estimate - and Ken's estimate is really based on nine years of operation and the others are looking at 10 - so you have 10 full years and you ignore what the others felt like were phantom savings - you know, promises to eliminate waste and inefficiency -- then Ken's estimate gets above a trillion dollars, and I think that is probably the right range, between a trillion and 1.5 trillion, and I'm not really interested in arguing about the details.

This is important for a different reason, and that is because of the senator's claim that he is going to pay for this with taxes on the rich. What Senator Kerry is saying to the vast majority of Americans is, you are going to get something for nothing. I'm going to give you healthcare benefits and somebody else is going to pay for it. Well, by CBO rules, eliminating tax cuts for the rich gets you only $300 billion, and you need five times that, or you need three or four times that. It's nowhere near where you need to be. When Senator Kerry's commercial says, I'm going to lower every family's healthcare bill by $1,000, what he should say is that of that amount, $2 (hundred) to $300 will be paid by soaking the rich. I don't know where I'm going to get the other $700; probably I'm going to raise your taxes.

The AEI estimate gave these guys a benefit of the doubt, assumed that they are going to insure almost everybody that they insure - want to insure - and at the end of the day, you get this. You ask, well, what does it cost us in terms of the results? For each person that we insure, how much did it cost on the average? And the Kerry plan is way up above $5,000. This means it exceeds $20,000 for a family of four. That, by my way of thinking, is way, way too high, and what it means is that we are wasting money here. We do much better just giving health care away than doing something like this.

Now, I believe all three of these estimates -- Ken Thorpe, AEI, Lewin - I think they have all way, way overestimated how many people will sign up for Medicaid, and I'll talk about that more later. But another problem I have had is that they have ignored the crowd-out. A study in the mid-1990s concluded that every time we spend an extra dollar on Medicaid, the private sector contracted by about 50 to 75 cents. So Medicaid expands, private sector contracts, taxes went up, we spent more, but at the end of the decade we were not insuring any more people than at the beginning.

More recent data suggests there is almost a one-to-one tradeoff. Every time somebody joins Medicaid, someone is dropping their private insurance. So if there is a one-to-one tradeoff then you get a huge shift of cost to taxpayers but you don't achieve anything. Ken himself is assuming every time three people join Medicaid, one person drops their insurance coverage -- and there are more reasonable estimates - you get a much higher crowd-out and much higher costs relative to anything that is achieved.

I said that I think that all three of these people have way, way overestimated how many people will be insured just by expanding eligibility for Medicaid. I think they have underestimated what will happen under the Bush plan. And the reason for that is that we have some remarkable information coming from the IRS about the surveys they did with the medical savings account pilot program, and they found very, very large numbers of people - a very high percentage - were previously uninsured. And here, this is data from Assurant Health, just based on the first six months or so of this year. Forty-three percent of the people - and most of these are moderate-income families - buy into the health savings account plan previously uninsured. That is a remarkably high number. So I think what we are finding is there are millions of families out there that are basically healthy; they do not think they are going to get good value from previous products in the market. If, however, they can put a savings account together with a healthcare plan, then that is attractive and that causes them to buy in.

So, again, I think if we are more realistic we have got to bring way down the number of people Kerry thinks he is going to insure. I think we can actually raise a bit the number Bush expects to insure. They may come close to each other, but Kerry is still going to be far, far more expensive.

Mr. Medrano: (Off mike.)

Dr. Goodman: Okay. I'm going to cut a little shorter than that.

End of the day, we have, on President Bush's side, a plan where the subsidies are going to individuals, where the whole point is to empower the patient, and in the process restore the doctor/patient relationship, where there are good incentives to control costs and also good incentives to maintain quality. On the Kerry side, we have a plan where all the subsidies, they don't go to individuals. They go to institutions; they go to bureaucracies. Patients are not empowered. In fact, it's government that is controlling all the levers in this new system. And there are no incentives to control costs and there are perverse incentives to lower quality.

Thank you.

Mr. Medrano: Okay, thank you, Dr. Goodman. And now we are going to go into the five-minute response from each. I guess - okay, so Dr. Thorpe can come up here to the mike, and then we will do the Q&A.

Dr. Thorpe: Thank you. Just a couple of quick notes here, one on the Federal Employees Health Benefit Program - the congressional health plan. That program is the largest employment-based program in the country. Depending on where you live, you can have 10 choices, 15 choices, 20 choices of health plans. No other employment-based system has that kind of choice in consumer-driven - that type of system where you can choose different health plans. It includes consumer-directed health plans. So it has not only consumer-directed health plans in one extreme all the way to fee-for-service plans and everything in between. So in terms of choice, it lets individuals sort themselves out according to the plan design that they think most fits their needs. So it provides the ultimate in choice.

Second, if you look at plan satisfaction of people enrolled in the FEHB, even in the days when managed care in the late 90s was undergoing a lot of hits, by far people in this program are much more satisfied than people in other types of employment-based plans.

And finally, the plan is effective. In markets where there is a lot of FEHB plans available, they are highly competitive. It has kept the growth in premiums down, and it does so without any types of risk sorting. So there is not selection, there is not risk segmentation in the market, and we can talk about why that happens.

On the subsidy side, per newly insured - I mean, obviously the senator has two separate types of programs. One is a stop-loss pull, which is designed to reduce the costs of health insurance. So taking that aside - which has a different purpose. The other subsidies per newly insured are very quite similar. They reason they differ is that each of the subsidies is enrolling different populations. Some enroll kids, some enroll older adults; they have different expenses so obviously the expense is going to differ per newly insured.

On the detail that is put in these other estimates -- all the detail that you need is on my estimates on my website. Detail in size - like they say in class: just because you write more doesn't mean it's better. Their books are longer than my treatment of it. As I mentioned, much of what went into those plans is simply not only incorrect, but as they say throughout them, since we couldn't find exactly what the senator proposes, we assume nothing, or we assume an illustrative set of assumptions, or we make these set of assumptions. The bottom line is that it's not an analysis of what the senator has proposed; it's their versions of a Kerry-like plan. So as I have said, each of these different plans out there are modeling different things and they are not the exact specifications that are laid out in the piece that I did and what the senator proposed.

Budget window - we are using the current 10-year budget window. By that logic, if you wanted to look at the Medicare drug bill using administration numbers, pushing the budget window out, that would be not a $560 billion benefit, but a $7 (hundred billion) or $800 billion benefit. It's true that you need to line up the financing and the cost. The problem I have here is that the 10-year budget windows that I put together on the financing - here is what it would cost, here is how it's going to be financed - exactly match up. What is being presented on these other estimates is a different 10-year budget window on the cost but the old 10-year budget window on the financing. So you have got to do it apples to apples. Either way is fine with me. I could go to next year and figure out how much is available in terms of what the senator has proposed to finance the program. But you can't selectively mix and match this.

And finally on the crowd-out issue - the good thing about this is that we have a lot of experience at the state level, where states have expanded coverage to parents to 200 percent of poverty -- or to 300 percent of poverty. We know what the enrollment in those plans is. We have the data. We track the movement of populations from uninsured/insured into these programs. The extent of the crowd-out is very small. So we have the experience, we know what the numbers are, we know what the interactions are in the private market. I would just parenthetically say that the crowd-out opportunities are most likely to be biggest under the deduction proposal - the ability to deduct premiums - just because by design the biggest incentives to drop coverage and enroll in this happen with higher-income households because the value of the deduction increases with income. And there is a lot of crowd-out in that particular proposal that John Gruber and I have estimated as well.

So why don't I stop with that. Thanks.

Mr. Medrano: Thank you, Dr. Thorpe.

And now, Dr. Goodman, you have five minutes to reply.

Dr. Goodman: Let me talk about the problem of getting people to enroll in Medicaid and SCHIP. There are 14 million people right now who are eligible for Medicaid and SCHIP and haven't bothered to sign up. It's an incredible number. What is being asserted is that we can expand eligibility and somehow all these people and plus more will get signed up. Now, if I took a hundred-dollar bill and I put it on the sidewalk outside, it wouldn't stay there for very long. Almost everybody I know and you know would pick up that hundred-dollar bill. But If I walked into the emergency room at Parkland Hospital and I put down on the floor a sign up sheet for Medicaid, and if you qualify - it doesn't cost you anything, you just need to put down some information - and what is this worth? Well, it's worth maybe $5 (thousand) to $10,000 for a family, and yet this sheet probably wouldn't even be picked up. A whole herd of people would walk by and not even bother to look at the sheet.

Now, what happens in Parkland Hospital is they actually pay employees to go, person by person right there in the emergency room, and try to persuade them to sign up for Medicaid. More than half the time they fail. And then for those that get admitted to Parkland Hospital, they go room by room and try to get them to sign up, and even again, they are not always successful. The Parkland Hospital is a place that gets a lot of low-income people coming into its emergency room. Some are uninsured; some are on Medicaid. The uninsured and the Medicaid walk through the same emergency room door. They see the same doctors, they get the same care, they are admitted to the same hospital rooms. I think we can infer from the fact that all these people don't want to sign up for this program that they perceive it's not in their self interest. And why should they? It appears that very often they get the same care whether they sign up or not.

Now, next door to Parkland Hospital is Children's Hospital. At Children's Hospital we have the same exercise all over again. The children that come through the door are uninsured, they are Medicaid, and they are SCHIP. And again, we have paid people who go through the emergency room trying to get people to sign up for the programs -- again, more than half the time failing, and then they go room to room once they are in the hospital.

Now, I am just relating this to you because I think we all need a big dose of reality here. Just expanding eligibility doesn't get people insured. It will expand the number of people on the rolls but it will not necessarily reduce the net number insured.

Crowd-out doesn't work exactly the way Ken thinks it works. I mean, we don't have to trace an individual from employer to Medicaid. What happens is if you are an employer and you are employing low-income workers and you learn and they learn that they are eligible for Medicaid - and remember, in most states you can sign up for Medicaid three months after you get your care. So just being eligible causes the employer to drop his coverage because the employees would rather have wages, and that is what has been happening. That is what happened in the 1990s.

Let me talk about the estimates for just a moment. The AEI and Lewin are looking at 10 full years of operation, and that is important to the numbers that they present to you. Ken says in his estimate, the first of the 10 years is zero. It's almost like we are going to delay this program for one year. Well, if the first year is zero, obviously the 10-year cost then is lower. If you delay for two years, it would be lower still. If you delayed for three years, you can make it lower still -- you get three zeros. But delaying cost is not the same thing as avoiding costs, and what all these other - and we know those games are played on Capitol Hill all the time, but what the economists are saying is, we want to know what this really costs. And what it really costs, it looks like, is between $100 (billion) and $150 billion of new spending every year, and that is the reality.

Now, as for all the details, I don't fault these other estimators. Ken thinks disease management is - (inaudible) -- and I happen to agree with him. I think it's a good idea, but they have not come forth with a detailed proposal on how this going to work. Kerry, at the Democratic Convention, said he is totally against managed care and insurance shouldn't get involved in the doctor-patient relationship. They have also - Kerry has said he wants to rescind the subsidies to the HMOs that - the private HMOs for seniors, and those are the ones that are most likely to be able to implement disease management, so if you kick them out then it's hard to see how all of this would work.

As far as the FEHBP, I don't want to say a lot about it except that you have a control group and they are all employees, and they don't have any other realistic options. But once you give people options, once you say to people, well, you can go in this new program or you can go in the private market or the small group market, then you give people incentives to get in the system and to go into the federal programs if they are sick and stay in the private markets when they are healthy. And now we get back to what Hillary Clinton was thinking about 10 years ago. They went through all these scenarios on what incentives would people have, how would they react to them - that is how they got to the mandates, that is how they got to a lot of other things that were in the plan. This plan will morph into the Clinton plan very quickly because it's got all the same problems.

Mr. Medrano: Thank you, Dr. Goodman. Actually, in this next part now is the Q&A. I was wondering if both gentlemen would like to stand here. If you want to stand near the mike and respond, I think that might be better. And we can take that - we have got, I guess, about five or 10 minutes for that. Again, I would like to remind you, when called upon, identify yourself and the agency that you are representing, please, for everyone else.

Okay, the gentleman in the back there in blue.

Q: (Off mike) - with the American Banker newspaper, and I had two quick questions about health savings accounts. Dr. Goodman, you gave the statistic that 43 percent, I believe, of health savings accounts are going to towards people that were previously uninsured. Do you know what the total number is of health savings accounts that have been set up?

Dr. Goodman: I don't know because it has just really started this year. I can tell you it's the fastest growing product in the marketplace, and many people think that unless something radical happens, within three or four years, half the people in the country will have one of these plans, of the non-elderly.

Q: What will happen to health savings accounts if Senator Kerry is elected?

Dr. Goodman: Well, that is a very good question that we need to address to Ken here in a moment. Ken says he is happy to have them be part of the choices that the people make. At Kerry's website, it looks as though he is against health savings accounts, and apparently, he has voted against them a couple of times. I say it's a big question, but you are the expert here.

Dr. Thorpe: Well, again, I'm not speaking for the campaign or Senator Kerry, I'm just - if you look what is in the federal employees plan today, it has a broad range of those offerings, including consumer-directed plans that are already in place. So, again, I think the answer to that question is going to be, let's let the consumers choose. I mean, if that is really want consumers want to have, it's part of a broad set of plan offerings, they can choose that today as part of the FEHB. And, I think, again, the nice thing about the consumer choice piece of this is that we will let people sort according to their preferences in those plan offerings.

Mr. Medrano: Is there anyone else - gentleman right here up front? What is - you are with -

Q: (Off mike) - free lance, a member of the club since 1963.

Mr. Medrano: Very well, thank you.

Q: As I understood it from your first graph, if a physician gives me a prescription for Vioxx and I'm a little short this month, I should instead by ibuprofen. My question is, what does your plan do in real terms about controlling prescription drug prices and costs, about controlling physician charges and hospital costs?

Dr. Goodman: Well, what it does is it empowers for the first time the consumer. It gives consumers money instead of giving all that money to a third-party payer. That by itself puts pressure on the marketplace, and I think we can look to the market for cosmetic surgery as an example of how -- you know, the same doctors that perform cosmetic surgery often perform other kinds of surgery, but they practice in a very different way. And in the market for cosmetic surgery, you get a package price; you can compare prices. If you want an appendectomy, you can't do that; if you have hernia operation, you can't do that. You can't do that for any other operation. So the very same people - very same doctors, nurses, hospitals - act in a very different way if they know it's patients spending their own money.

Mr. Medrano: Okay. And gentleman up front here.

Q: Tom Schlafer (ph), free lance and member of the club, and also writing for - (off mike). I've got a couple of questions. Medical costs have been one of the fastest growing components of our CPI for decades. We also have burgeoning population size in terms of two-thirds of adults being overweight or obese, and now for the first time we are hearing about child obesity. So what can we do to cut down -- by prevention of serious disease in the first place as well as early detection - to cut down these mushrooming healthcare costs under either of these plans?

Dr. Thorpe: You have hit it right on the head. If you look at the top 10 or 15 medical conditions and look at what they contribute to the growth in spending, they account for almost two-thirds - 70 percent of the growth in spending. Look at what is driving those expenditures by medical condition, and for over half of them it's a rise in treated prevalence: diabetes, hyperlipidemia, hypertension, all the associated diseases with obesity. Again, that is why in terms of - if you think about what the Institute of Medicine has written about and what is essential to Senator Kerry's plan is that the way to get healthcare costs under control in terms of the growth, and the way to provide better value, better medical care, is to restructure how we deliver services exactly to those populations - point one.

And point two, we need to, at the same time, make sure that this rise in obesity - it's gone up by 10 percentage points, where 30 percent of the population is obese. The associated medical conditions, a link to obesity, continue to explode, and none of these approaches that I have heard in terms of negotiating prices or health savings accounts does anything at all to deal with that. We need to address the rise in treated prevalence of disease and get into the issues of obesity, and that is a different set of interventions. It's not a financing intervention, it's not an insurance intervention; it's going to require a whole set of different ways of thinking about where to intervene to control costs, and at the same time, on the treatment of chronic illness, we need to deliver integrated models that more effectively control and treat chronic illness if we are going to really get value out of our healthcare dollar.

Mr. Medrano: Okay, Dr. Goodman?

Dr. Goodman: Well, he didn't answer your question but I still agree with 80 percent of what you said anyway.

I don't know how to keep you from getting fat. I do agree that the way we treat diabetes and other chronic conditions is lousy, and what we need is - I like the idea of disease management and we need to have the patient in on that and we need to have the doctor in on that. And what happens is doctors are not paid to give advice; doctors are paid to give you treatment, and you get in trouble and you come back. A doctor is not trained to teach you, or they are not paid to teach you to recognize your problems and how to self-medicate.

We do need disease management. Health savings accounts are likely to be a very important part of that disease management. In South Africa, they have had health savings accounts for 10 years now. One of the innovations they have had with diabetes - you can go into - (unintelligible) -- where you do some of the things that Ken is talking about. People pay a third of the costs in their health savings account, the employer pays two-thirds, and that is the way it works.

In Florida and some other states, we have experimented in the Medicaid program - this is just a baby step - with allowing chronically ill to control some of their non-health expenses. We now need to take another baby step and start allowing them to control some of their medical expenses. But other than that, I agree with you.

Mr. Medrano: Thank you, Dr. Goodman. Question in the back - probably might be the last one. Yes?

Q: Howard Michael Dimsley (ph). The Lewin study suggested that neither of your - (off mike) - proposals would actually work, that neither AHPs nor the federal employee health model is actually going to do much to increase coverage among the uninsured. Could each of you respond to the - (off mike)?

Dr. Thorpe: Well, on the AHP side, we have got a variety of good studies from CBO that have looked at that, and the net impact on coverage is very small - $300,000, $600,000, depending on the year - largely because there's no subsidies in the Bush plan; it doesn't do anything fundamentally to provide, other than pooling, any subsidies to buy insurance.

On the congressional health plan, all I can point you to is the fact that in that particular study's analysis of it - I mean, there are so many fundamental misconcepts with respect to how they put it together that it doesn't really reflect anything that was originally proposed. The congressional health plan for businesses under 50 provides 50 percent refundable tax credits for businesses that are currently not offering benefits. The take-up right there in terms of getting new populations covered - I don't have the numbers with me, again, but - are substantial. The number of individuals who are between jobs, age 50-64 enrolling in at, who are uninsured, are also substantial.

So, again, you know, that was one of the examples in that particular report where they introduced their own assumptions about how it would work, and as a result - you know, I don't know what to make of the analysis one way or another. It's their version of some plan but it's not the one that I modeled, or my understanding of what Senator Kerry has put forth.

Dr. Goodman: I will just say something briefly. The problem with all pools - all voluntary pools - is that people have the choice to get in or get out. And so wherever voluntary pools have been set up, initially everybody joins and then some people get sick and other people stay healthy, and the healthy people find they can do better outside the pool and so they leave. And so the pools get sicker and sicker and higher and higher costs. That doesn't happen with federal employees because they basically have no other option, but it is a danger under this plan.

So Ken is saying, well, to entice people to get in and stay in, we will give them these subsidies. Will they be high enough? I mean, I don't know, but we may find that even with the subsidies, people are dumping their sick people on the pool and healthy people go outside. If that happens - and incentives may be there - then we will be talking about mandates. Then we will be saying, well, we have got to outlaw this private market; we can't give these people this other alternative. And again, these are all the same questions that the Clinton taskforce dealt with 10 years ago.

Q: (Off mike) - AHPs?

Dr. Goodman: Oh, well, we have a study - we are probably the only think tank that studied AHPs. We have a favorable study at our website. I do think it is a way to get competition into little towns and cities where Blue Cross is the only insurer around.

I'm worried about some of the bills. I don't like the fact that the American Restaurant Association can run an insurance plan and it's never been in the market before, but Aetna can't do the same thing. So if I were writing the bill, I would let any insurance company sell to an association, not just an organization who has never been in the business before.

So I'm concerned about some solvency questions and who's actually going to do it, but the idea of having a national market I think it is a very good one.

Dr. Thorpe: But just real quickly on the pools. In a congressional health plan pool there are some simple things that are built in this to mitigate selection. Number one is that if you're currently insured and you want to come in, everybody has to come in, so you can't cherry-pick people coming into a pool, and if you do come in you have to pay an additional 10 percent payment over and above what the cost of coverage is. Secondly is that the simple way to mitigate selection is that you have somewhat similar rating rules initially in terms of age and sex in and outside of the pool.

So there are some very simple ways to mitigate selection in a voluntary market like this, and those are the types of things, particularly the 10-percent assessments, that firms would have to pay - everybody has to come in - to the pool so you can't have a segmented situation where some people in the firm could come in and some people don't.

Mr. Medrano: Okay, on behalf of the Newsmaker Committee I'd like to thank Dr. Goodman and Dr. Thorpe for your presence here today. This pretty much concludes this session. I would like to remind everyone, if you haven't signed in on the media sheet, please do outside. If you would like copies, please contact me and we'll get those to you via the Press Club.

Thank you very much.

(Applause.)

(END)