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Health economist seeks ‘revenue-neutral’ approach

Stephen Parente, a former policy adviser for John McCain’s presidential campaign, describes ways to improve access and bring about substantive reform in the health-insurance industry.

Health economist Stephen Parente had a very busy summer, testifying [PDF] on Capitol Hill about health-care reform early on and analyzing the costs of various proposals in Congress through his private consulting firm, Health Systems Innovations, of Wayzata.

At one point, he appeared on Fox News after a Health Systems Innovations’ micro-simulation [PDF] found that one of the Democrats’ bills would cost several times the $1 trillion limit envisioned by President Barack Obama over 10 years. He has crunched numbers for compromise plans for Republicans and Blue Dog Democrats. 
Parente also has advised politicians in both major parties about health-care policy, most recently Republican John McCain in his 2008 presidential campaign. In the early 1990s, while the Clinton administration took on health reform, he advised Jay Rockefeller, a Democratic senator from West Virginia.

An expert on Medicare and Medicaid
If McCain had won the presidency, Parente might now be director of the U.S. Centers for Medicare & Medicaid Services, an agency he has studied since the early 1990s while working on his PhD in health finance and organization at Johns Hopkins University. Parente, an associate professor of finance, is currently director of the Medical Industry Leadership Institute, which offers a specialized MBA in the Carlson School of Management at the University of Minnesota. 

Other areas of expertise include health insurance design, health information technology and medical technology evaluation. While pursuing his master’s degrees at the University of Rochester-New York, he was a senior analyst at Blue Cross and Blue Shield, seeing firsthand how insurers work.

Stephen Parente
Stephen Parente

Though the insurance industry is often cast as the villain in the reform debate, Parente says critics don’t realize that insurers administer federal programs like Medicare and health services for military personnel and their families. “If you say you want all the insurers to die, who takes their place exactly? This is the conversation that bothers me the most,” he says.

Make no mistake: Parente thinks the industry can do a better job to improve access to health care for all Americans. He also thinks there are plenty of “revenue neutral” ways to improve the industry and to bring about substantive reform.

He explains those ideas in the fifth installment of MinnPost’s “Best hopes, worst fears for health-care reform” series with thought leaders. 

MinnPost: What are your best hopes and worst fears for health-care reform?

Stephen Parente:
My best hopes are that we actually do something that’s going to be meaningful to people, that really will help people who are in need. Health insurance isn’t free. It’s a real financial struggle, but my hope is we do it in a way that makes good economic sense for the country; that it’s affordable in the short term and sustainable in the long term.

I’m less concerned about what the medical profession can do because I think the medical profession always has as its priority that they want to heal people as a profession, and everyone involved — nursing and health care professionals — they’re driven to do that. I’ve worked with them for years to believe in their mission. But the financing is tricky because the technology and the system are both so labor-intensive and knowledge-intensive; it’s just not something that can be done very easily in a frugal way.  

Fears? That we end up passing something just to say we passed it and it doesn’t do anything. In the worst case, it makes things worse. I’m on record on this in congressional testimony in a heated exchange, but more or less I’m saying that if health reform ends up not really helping anybody and furthermore actually creates a lot more spending that doesn’t help many more people, it could very well damage the macroeconomic position of the United States.

The reason why I think we have health-care costs that are twice as high as any other country is that in the United States historically we’ve had the luxury of a wealthy society to do that. To the extent the economic vibrancy of the United States is damaged by additional resources that can’t be sustained, that’s going to be an issue.

MP: You’ve told me in the past that “you can make the insurance market work” so that health-care policy is improved in this country. How would you go about that, and which reform proposals are the most promising in your mind?

I guess the things that could make the insurance market work better is for the pricing of the individual insurance policies to be more robust so that there’s greater competition and that consumers get more direct value out of them. The concern I have right now is that there are tax distortions in the insurance system that weren’t so big before, but just because of the magnitude of the insurance, they have crept up and become gargantuan.

The employer subsidy, which really goes to employees, is big. It’s $300 billion per year and the problem with it is that on the one hand people look at that and go, “Wow, that’s a huge amount of money; let’s just redistribute it.” That was the McCain idea. On the other hand, that’s going to hurt potentially someone else when you redistribute it, in the sense that fixing the alternative minimum tax is not exactly going to be costless. So, trying to find a way to have the insurance markets work better has been a big part of the health-insurance discussion.

In the current bills you’ll see the public option, for example, be put in that context. You’ll see things like having health-insurance exchanges or connectors or other things that create a cleaner market design for health insurance. What concerns me a bit is that some of these things that are being put into place could achieve those aims to make the market more efficient, but they could easily reverse course and make the market less efficient and even more regulated and less dynamic than the problems we already have.

To be specific, one thing that’s become a signature research study for me and has gotten more activity as a white paper (“Consumer Response to a National Marketplace for Individual Insurance”) [PDF] than anything else … is this issue of shopping across state lines to buy insurance. Ostensibly it has some great traction to say, “Why can’t I do that?” But the devil is in the details in how do you execute it. The simplest way is to say, “Let it be done: People can buy insurance across state lines.”

The problem is that all that prevents it from happening is the McCarran-Ferguson Act of 1945. The act applies to all insurance, not just health insurance. So, there is a long list of companies and professions and anybody in the financial-services industry that are tied up in the insurance business. Even though AIG was a problem, all this stuff starts resurfacing: “Does that include us? What’s really going on?” and so on because people don’t necessarily want to exempt it.

It’s a Pandora’s Box, in theory, that could be opened by that. Then there becomes all these sort of side agreements and bilateral, trilateral agreements, safe havens for exchanges and almost language that sounds like it’s setting up a European Union over 10 years for states to create health-insurance contracts, which on the surface of it sounds like, “Well, these people are being pragmatic; they’re thinking about it.” Yet at the same time it’s frustrating to hear because if you look at, say, the self-insured marketplace, where large corporations have been exempted for health-care insurance, they’ve been exempted by McCarran-Ferguson since 1974.

So, clearly there are exceptions to the rule. In the case of health insurance, those exemptions are the dominant way people get insurance under the age of 65. So, for me personally, it’s hard not to get a little jaded about this. It’s like when they’ve wanted to be pragmatic about it, they managed to find a way without retreating into constitutional law.

What else could you do? The idea of exchanges makes sense if they literally are exchanges, and once again this is sort of a concern: Why can’t an, just become broader? It already is pretty broad now, meaning you can go online, plug in some statistics and you find out what insurance options you can get.

In my ideal world, consumers would have the opportunity to contribute more information to get a better risk profile the same way that if you’re applying for a mortgage, if you withhold certain information, you’re never going to get as good an interest rate than if you provide complete information. If people are concerned and they say, “Whoa, if I give too much information then I’ll get a lousy premium,” well, that’s true. But there are distortions from that just like with mortgage companies. If people don’t fully comply with that, the bank doesn’t quite know how to underwrite the risk and then you have other issues.

Granted, the subprime market makes that story a little less tangible than before, but in a well-functioning credit market that story still applies.

So, I think the key to fixing a lot of these issues is what everybody points to. When people talk about fixing health care, I think they’re mostly saying they want access to health insurance that doesn’t bankrupt them. They see it as right to a certain extent, and ideally they don’t want to pay for it. That’s the heart of this, which if you think about it, if you go buy a car, ‘Cash for Clunkers” is a great program. You bring in a minivan that has been beat to death, or some Ford Bronco that’s dying, and you walk away with a Ford Escape hybrid and it’s shiny and it smells new and you’re happy. There’s no like equivalent with health insurance, where you say, “Yay, thanks,” you know?

Health care has some of it. If someone is really in pain, and they’re looking toward a knee arthroscopy to alleviate the pain, that does have a similar sense of euphoria to getting the new car — at least in terms of relief that’s offered. But health insurance, unless you’re just intrinsically a risk-averse person and you can’t sleep at night until you have this thing, and there are a lot of people who are this way — most have insurance but there are those who don’t and it’s an issue.

MP: Why do some economists prefer the individual mandate over an employer mandate?

I have a hard time with either mandate, to be honest with you — just because I think there are distortions that can happen with either one. But if I had to choose between the two, I would probably pick the individual mandate.

If you just look at the sense of job mobility, the individual mandate probably has less distortion for the job market than the employer mandate; at the same time the employer market has some efficiencies in the sense of aggregating risk together with the ERISA market the way it’s structured right now. That’s why it has survived so well basically. ERISA [the acronym for the Employee Retirement Income Security Act] is guaranteed issue and community-rated, meaning that if someone’s working for a large corporation and they’re fearful that “if they know my health history they’re going to deny me coverage,” what they don’t realize is that’s against the law.

I think the individual mandate pretty much allows the targeting of the subsidies that the federal government wants to apply in a more direct fashion. It allows for course corrections more easily for Medicaid programs, if you want to use that as your vehicle to get the insurance component.

The other concern I have is, if you look at the generosity of health benefits by firms, how wealthy the firms or how good their margins are usually determines the amount of generosity. If you have, for example, some industries that are in great transition, automotive being one of them, or under competition where their margins are being eroded by globalization or just technology change, those are workers that are really at risk staying with their employer and they probably feel the most that someone “moved their cheese.”

Whereas if you just made the contract out to basically say, Look, the expectation is just like life in the 20th-21st century: You probably need a car and some sort of transportation. If you walk on your own feet, that’s fine; you might want to have personal life insurance, liability insurance, whatever you want to have. But if you’re driving a car, the expectation is you’re going to have auto insurance with at least collision coverage to be operational. If you’re in the U.S., here’s the expectation: You need to have some individual insurance policy; maybe your firm offers it to you but otherwise you need to cover it.

MP: Why do you think there is so much opposition to a public option?

There are several reasons. The folks who are opposed purely on political grounds, I think are seeing it as a Trojan horse for essentially easing most of America into a Medicare system for under-age 65 folks. I’ve even seen some Op-Eds from folks that are suggesting that’s OK, that’s fine, let’s have it happen; let’s just get on with it. The interesting thing is that folks who say that are sort of talking out of two sides of their mouth, which strikes me as sort of odd: “On the one hand I wouldn’t mind if the world went to single-payer Medicare and this is the way to get to it.” On the other hand they’ll say, “but I think we need to put a public option in place to introduce competition,” which to me sounds like code for “let’s get rid of the private insurance market and get on with this Medicare thing.”

What people sort of miss is that Medicare itself, or its lifeblood, moves through the private insurance industry. I was on a Minnesota Public Radio forum about a month and a half ago, mostly with physicians and Kerri Miller, and this comment came up: If we only go to Medicare for all, things will be so much more efficient. As doctors they think they would only have to deal with one payer. To a certain extent that’s true, but they think that if you just get rid of the private insurers, everything will be fine.

My comment back to them was that the private insurers are the contractors for the federal government. They move all of this for all of Medicare. Medicare itself, the federal government, does not touch anything in terms of paying doctors or moving the money or anything else like that.

So how do you reconcile that? Do you say, OK, there are some private insurers that are good guys because they’re under contract with the federal government? At which point, you kind of say to yourself, how do you feel about UnitedHealth, because increasingly UnitedHealth’s portfolio of business is under government contract. They just won a DOD (Department of Defense) contract to provide insurance — I think it’s the southeast region of the U.S. — for military personnel, kids and spouses and their retirees. It’s a government program, but they’re going to handle all the administration. They handle a lot of contracts for Medicaid for the states; they handle a lot of contracts for Medicare. They are AARP’s partner. Is that OK?

If you say you want all the insurers to die, who takes their place exactly? This is the conversation that bothers me the most. I got into this long ago because I really had an interest in health policy, and when I went to work for Blue Cross and Blue Shield (in Rochester, N.Y.), I thought, well, this might not be where I want to end up for the rest of my life, but it’s really good to know how the world works, and when I walked out of that, I thought, well it was good to know how the world works.

And to this day I keep on looking for other people like me that actually understand this —  and I just don’t find them. It’s frustrating. It’s the niche I have as an academic, that I happen to handle the claims. It’s kind of disturbing because I’m waiting for someone to give me the alternative to let’s say private insurers go away tomorrow, all of them, who runs this?
MP: Any ideas?

[He laughs.] No, not really. There’s really no like analogue. I wish I could have an interview with some of the folks who set up some of these systems. The people I’d love to interview would be the folks who built the Medicare program back in the ’60s. I’d say, “When you guys designed this, did you do it this way with the Blues plans principally because you wanted to move as fast as you could and avoid the startup costs of the Social Security Administration, where you had to suddenly salary all these additional people to get this program to operate plus the bureaucracy of moving it and training as opposed to saying, “Trust us,” did you guys all think about that?

Or, was there a lobbyist from the Blue Cross Blue Shield national association knocking on the door, going “Psst, Psst. Hey, we’ve got a deal.” Or was it the AMA [American Medical Association]? Was it the AMA saying, “We like the Blues. The Blues are our friends. They just pay the cost” like they did before the era of preferred provider systems and all this other stuff. “We like the Blues. The Blues are our friends. Let’s get this thing going.”

I would love to know. My guess is it’s a combination of all those things. As I’ve become sort of an ad hoc student of health policy and who the agents were, if you look at some of their documentation and you look at some of their motivations, it becomes clear that these were very smart people. They were very strategic. They’re just as strategic as us and it was just a different context they were operating in. 

MP: What are the advantages and disadvantages of Minnesota’s nonprofit health-insurance industry vs. the rest of the country’s for-profit industry?

Remember, I’m not from Minnesota. I’m from the East Coast. I’ve been living here for 10 years. There are times when I think I’m happy here and I’m not looking to move necessarily, but I respect the culture that said that that law must be in place. It reflects the culture of the state, but I’m not quite sure, as things go on, that that culture is still always fair.

I think the weird part is for people to say publicly that they are in favor of this law, saying that nonprofit health insurers only should be operating in this state and yet we have UnitedHealth Group that is a for-profit health insurance firm located in the state that is clearly providing a tax revenue source to the state. So, there’s part of me that says, “You can be pure about this but if you are really, really, really pure, then don’t take the money or something.” It’s just weird to me that that persists.

Furthermore, you have large employers in the state that have UnitedHealth Group as one of their choices for providing health insurance through ERISA that’s outside of the state regulation and that’s fine. No one’s really chirping about that, so it seems like it’s a somewhat inconsistent and muted policy in terms of actual application and tax financing. United, think of it what you will, but it has grown into a very large firm that provides a substantial amount of corporate tax revenue to the state of Minnesota.

MP: If the nonprofit Blues in Minnesota have nearly 70 percent of the individual market and 46 percent of the small-group market, are consumers and small businesses in those pools getting a fair shake?

That’s a really good question. Maybe not. That sounds similar to some of the concerns of other markets where there’s not as much competition. … It does raise a question that if it’s at that level, it doesn’t say that the prices are unfair but it would raise the concern that there’s the opportunity to be less competitive than they otherwise could be.

Keep in mind one of the economic principles, when people talk about pricing and  price theory, there always could be the perfectly pricing monopolist and the perfectly pricing monopolist can be just as efficient as a competitive firm in perfect competition. The difference is that the perfectly pricing monopolist has a sense of the willingness of what the consumer will pay is, so whether it’s by income or their need, they calibrate what they’re offering as a product based on what they think the market dynamic is and offer a fair price based on this. If they do that successfully, they’re not doing that much more of a disservice than a firm with more competition.

MP: What is the key point you’ve tried to make to Sen. John McCain’s presidential campaign and to Congress in your recent testimony on Capitol Hill?

The key point has been there are reforms you can make right now that would do a lot of good and that could be revenue-neutral. They won’t fix everything, but they will address a lot of shortcomings in the system. …

In the case of the McCain folks, one of the positions in my congressional testimony that I talked about was Medicare and being the administrator (if McCain had been elected) of Centers for Medicare and Medicaid Services. The thing I was trying to do or wanted to do … was to put in something that private insurers already have but do much more on a full basis, which was sort of a [smart] card technology that can be very simple to apply. It would do two things: It would pay physicians a little faster but in return get some of the clinical information about the quality of care that patients are getting. … Generally, these are things that doctors already have in their hands to begin with. It’s nothing new they have to collect; they’d just submit along with the claim.

In return, instead of getting paid in 60 days, they’d get paid in three. That was a pretty serious tactical proposal that I had, talking to the McCain people saying what would we do that’s kind of different to the point where McCain himself wanted to do that technology for the VA and the thought was, “Can we do it in Medicare, too?” That’s exactly my point. That’s what we should do.

MP: Can you give an example of how it would work?

Let’s say, for example, that diabetes is a big deal in the senior population as well as the under-65 population. … Right now, what we know is that the Hemoglobin A1c test is either done or not being done. … But what you really want to know is the result of the test. Some later research I’ve done more on an exploratory basis shows that of those people getting tests, half are out-of-control diabetics. And the thought is, if it’s out of control that would be nice to know to maybe figure out a way to help. But even more specifically, maybe there are doctors that don’t even know they’re out of control because they’re not necessarily seeing the full results of what’s there.

What the card technology would do is provide a vehicle where any physician seeing that patient, with the patient’s permission, would be able to see across a wide variety of data inputs and who are the different providers treating the patients.

Right now the only model that’s being held out to do this is to say, “We need to build Mayo Clinics everywhere in the United States and fix it.” That’s going to be hard to do. The Mayo Clinic is a unique culture that’s taken 100 years to evolve. To legislate that is going to be difficult.

So, a softer approach is to say, let’s show that there’s a need and the best way to show a need is to look at the information clinically to say, “Wow, this person needs some help. What can I do as physician to take them to the next level?” Right now, that’s just not there and the federal government has a helluva lot more flexibility right now to at least put those tools into physicians’ hands.

MP: You say there are a lot of things that could be done right now that could be revenue neutral. Could you explain further? 

One thing that’s being discussed is not to take back all the employer or employee tax exclusion, but basically take a look at the actual value of federal employee benefits and say anything above that level should be taxed. The benefits should be taxed and that money would be used to provide subsidies for people [making] up to 300 percent of the Federal Poverty Guidelines to let them buy health insurance. Up to 200 percent, they’d get pretty much a generous tax credit, which is age- or risk-adjusted and also different depending on family or single contracts. From 200-300 percent, it fades to zero.

If you did that, it would not fix the uninsured problem [entirely] but it would certainly make a big dent. It could be done in a way that’s effectively budget-neutral, certainly more budget-neutral than what people have been proposing. I’ve run some of these models myself. I get the question a lot: “If you could be czar what would you do?” I’m trying to find a price tag that’s half of the trillion dollars that Obama is talking about because I just don’t know where you’re going to come up with the rest.

The other thing I’m trying to do is to find things that don’t rely on savings from Medicare to fund the expansion of health insurance because the savings from Medicare are going to be needed to save Medicare. The tax exclusion could help do that; it would help some other people. That’s one thing,

I think people should be allowed to buy insurance across state lines. I think there should be guaranteed issue. This is stuff the insurance industry is embracing now so you can never be turned down for coverage. They already have that in the small business market; why not the individual market? If you do those things, it’s not going to fix everything but it certainly is going to be a big improvement than where we are today.  

One last thing: On the Medicare side, even though I didn’t get a chance to be czar (of CMMS), they should put the card in place, they should pay the doctors faster, they should get a more robust stream. If they did that on the commercial side, you could underwrite risk premiums so much faster, so much easier.

Insurance brokers would hate me but what I think would be the ideal situation is that consumers would let their own information be used to score their premiums to effectively eliminate the need for an insurance broker to set up the contract for you. They make a pretty good cut off that. That could save you 5-10 percent, maybe more, of the insurance premium if you just were allowed to buy on the same way you go to Amazon. You might say, “I don’t know if I want my insurance that way,” but if you’re looking at a $15,000 premium, is it worth $1,500 to have the relationship with your broker? If it is, great; if not, there’s an avenue for you.

MP: What brilliant solution do you think is missing from the health-care reform discussion?

I don’t think there’s anything serious in there about fixing Medicare, which is a big ticking time bomb. I think it’s unfortunate that the advance directive thing became such a lightning rod. … My mom got sick last summer, and she’s older and she passed away, and I remember going through that, just trying to find her living will so we could see what’s going on, and realizing this would have been an interesting conversation for people to have before this moment, which I think was the point of the legislation basically.

But Medicare, aside from that issue, has a lot of opportunities to be used as a best-practice model to drive efficiencies and changes in the system. What’s the most discouraging thing is, as I’ve gotten to learn more about Medicare, it’s that everything that you propose to talk about changing Medicare always gets couched under the term “demonstration.” At first I thought, well, that’s pragmatic. We’re going to experiment; let’s see what’s going to happen.

But the interesting thing is that with every few exceptions, not much changes in the Medicare program. The systems that people are discussing to put into legislation, they do talk about long-term changing the reimbursement system, but they leave a huge number of details to be worked out.

I just wish there would be something in there, whether it’s a white paper that someone’s pointing to, or if [White House health-policy adviser] Zeke Emmanuel said, “I have toiled to come up with a fix for Medicare and this is how it will deploy” and it’s in a business plan style and there’s a team and there’s a go to strategy — that would be great. That’s what’s missing. And given that $700 billion a year flows through that program, just getting a CMS administrator would be a good start. If they actually had a plan as well, that would impress me more.

The thing that’s bothering me is I understand the rationale politically of letting the Congress do it because I was there when it went the other way with Hillary (Rodham Clinton), but at the same time something should be there on the administration side that’s being vetted to say that, “You know, we’re smart people, we thought of how tactically this is going to look.” …

A friend of mine told me there are a lot of chiefs, not many Indians. I don’t know if I want Indians per se, but at least I want to have engineers to be there thinking through tactically how to do some of these really important changes that need to be done to the system.

Casey Selix, a news editor and staff writer for, can be reached at cselix[at]