Health Care Reform----Observations

My views on this issue are shaped by my experiences, as with most people.

Particularly, they have been shaped by working as a lawyer, and before that a law clerk and low-level functionary in the health care industry, beginning in the late 1990s, which was a time of great change.

Here are some things I saw and the conclusions I draw from those things.


Years ago, I represented an Independent Practice Association (“IPA”), an organization of independent physicians that bargains with payors collectively or, sometimes, offers their services to the public directly as a health plan.  On one occasion, I sat with the IPA manager in a negotiation with a large, for-profit payor that was entering the state.

The IPA manager talked about how little overhead these practices had (a “low medical loss ratio,” most money went to treating patients not overhead), about how much this particular group of primary care physicians, specialists and sub-specialists could add to the payors’ provider panel in the region and the modalities for diagnosis and treatment that many of the affiliated groups brought to the table, all in hopes of getting something more than the very low level of reimbursement (sometimes lower than the Medicare fee schedule) this payor usually paid.

The representative of the big, for-profit payor looked at us and said:

“We’re winning.  Why would we want to win less?”

A couple of years later, I represented a not-for profit that offered insurance plans. They were accused by the government of running an unregistered Multi-employer Welfare Arrangement (“MEWA,” these are typically union plans and require a lot of record keeping).

We were able to prove that the not-for-profit:

a)  did not get a group discount;

b)  did not
guarantee coverage for those with pre-existing conditions;

c)  did not
design its own plan(s) to benefit its members;

d)  did not
help to manage people’s interactions with the insurance companies or their doctors or institutional providers’ interaction with the insurance companies; and
e) that all the insurance policies they sold were regulated by the state insurance department.

We had a good result: the not-for-profit was not determined to be a MEWA.

However, in a perfect world, the not-for-profit should have been able to do all those things, just as USAA can do many of those things in auto insurance or the Screen Actors’ Guild Health Care Plan can do all those things in health insurance now.

Prior to that, I obtained an MBA in Health Administration while getting my law degree. Following from the idea that you should eat where the truck drivers eat, I attended a B-School where a lot of doctors got their MBAs.  One friend of mine in the program, which we attended beginning in the period when intrusive HMOs were the dominant managed care product, was an Endocrinologist.

HMOs generally regarded Endocrinologists as specialists, rather than primary care physicians.  They did not generally allow them to be “gatekeeper” physicians, even through this is the treating physician who is probably most critical to a diabetic’s care, a group of afflicted people that grows ominously larger in the population.  This gentlemen also told me that he frequently was able to use medical malpractice fears to get HMOs to authorize tests he believed to be medically necessary on “defensive medicine” grounds.

During this period, I worked for an Integrated Delivery System (“IDS”), which formed from an elder care/long term care institution’s merger with community hospitals.  IDSs were an outgrowth of fear of capitation, a global budget financing system that HMOs in California were experimenting with, but which never became common nationally. IDSs were based on the idea that HMOs would capitate these entities to provide “womb to tomb” care to a patient population, called “covered lives.”

As a very wise health care executive said often, in health care:

“Form follows finance.” and “It’s the covered lives, stupid.”

No one, not doctors, not hospitals, not institutional providers, liked the HMO model, which put an administrator between the doctor and the patient.

Soon after I worked for the IDS, but before I graduated from law school, I clerked for the legal and regulatory affairs office of a large physician practice.  One of my tasks was to review participation agreements with managed care entities, including the new Preferred Provider Organization/Point of Service Plan (“PPO/POS”) products.

While doctors liked the lack of intrusiveness, even “gatekeeper” physician and referral requirements for specialists were often dispensed with, the payment mechanism was still the discounted fee-for-service approach that HMOs used.  While you might see 1.25 x the Medicare Fee Schedule for a given “code,” you might also see 1.15 or even .85 times the Medicare rate.

The rates were low, but what could physicians really do?  The payors had the “covered lives,” or what doctors continued to call “patients.”


PPO/POS products, generally offered by large, for-profit payors, are a success story.
They provide a product that patients and employers want (less intrusive health care coverage) in return for a premium price (co-pays and premiums are higher than with HMOs and have risen steadily since the late 1990s), while, as with the fellow the IPA manager and I were negotiating with, paying a low price to the supplier, here doctors and hospitals.

Capitalism is built on buying low and selling high and that is exactly what we have here.

Employers aren’t in the benefits business.  Under the Employee Income Security Act (“ERISA”), an employer has a fiduciary duty to “participants and beneficiaries” of their Plan.  However, employers also owe a state-law fiduciary duty to their shareholders, partners, investors  or owners.  Under ERISA law, a business decision to eliminate or reduce a plan, if made in good faith, is not a breach of fiduciary duty under ERISA.  If it comes to what an old Louisiana acquaintance of mine used to call “nut-cuttin’ time,”  an employer can always drop coverage, if the decision is made in good faith.
Although there are many exceptions, like GE and Safeway, a lot of employers are not as good as they want to be at managing their health plans.

The only way we can cause these payors to “win less” (but not to lose, which would benefit no one), is to have better buyers.

ERISA and its implementing regulations trap in legal amber the notion that most people are employed by large employers with self insured plans. Based on my experience with the not-for-profit, there are entities that are trying to offer alternatives to employment-based or government provided health care.  However, the current legal and regulatory structure of ERISA and the MEWA rules prevents these entities from reaching their true potential as those better buyers.

Based on this, I suggest a couple of options that might work to break the deadlock on health care reform.


  1. Pure Market Based Reform Repeal the McCarran-Ferguson Act as a restraint on interstate commerce.  This would allow people to purchase health insurance across state lines without being burdened by intrusive state regulations.  (Obviously, underwriting differences would come into play.)   Revise the tax code to allow individuals to purchase health insurance with pre-tax dollars.

Allow individuals who cannot afford insurance or who have pre-existing conditions that would block them from obtaining insurance in an individual market to join the Federal Employee Health Benefit Program (“FEHBP”), with financial assistance, if required.  Merge other government health care programs, such as Tri-Care and the Indian Health Service, into FEHBP.


  1. Co-OP Based ERISA Reform Revise ERISA and the MEWA rules to allow not-for-profit organizations like the American Legion and the American Bar Association to offer ERISA plans which could:

a)  get a group discount;
b)  guarantee coverage for those with pre-existing conditions;
c)  design its own plan(s) to benefit its members’ particular needs;
d)  help to manage people’s interactions with the insurance companies or their doctors or institutional providers’ interaction with the insurance companies as USAA does in auto insurance; and
e)  not be be subject to state insurance laws, as with current ERISA Plans.
Revise the tax code to allow individuals to pay their premiums in pre-tax dollars and employers who wish to help subsidize those plans their employees belong to to make these contributions in pre-tax dollars.

Use these arrangements to replace Medicaid, State Child Health Plus and the Indian Health Service.  Merge Tri-Care into FEHBP.

These new buyers would negotiate with payors, leveraging their membership numbers into substantial discounts and better service because, “It’s the covered lives, stupid.” and “Form follows finance.”  The Federal Government should have NOTHING to do with rate setting, unlike the otherwise laudable French and German systems.


The former option is a pure market-based solution which would make the health insurance market like the auto-insurance market.

The latter option takes the highly effective model of USAA from the auto insurance market and applies it to health care in the context of ERISA.  The fact that not-for-profit entities are currently trying to do something similar against the current legal and regulatory structure imply this would likely work.

In either case, state level reform, such as Medical malpractice reform to reduce defensive medicine and reduce medical errors using root-cause analysis, should also be passed.  Thought should be given as well to eliminating state regulation of the business of health care, rather than the practice of medicine, that restrain inter-state commerce, such as fee-splitting and corporate practice laws.