Market-Based Trends Noted

Published June 1, 2001

One of the “perks” I receive as managing editor is the opportunity to review pending legislation.

Some folks might view this activity as about as interesting as watching dandelions bloom in the lawn. But I find it rewarding, especially when I’m able to discern trends as they appear.

More HIPs on the Horizon

In assembling this issue’s State Legislative Update, I noticed an emerging shift in policy making, toward proposals that rely on the free market to provide affordable access to health insurance. There is growing interest in creating more state-chartered high-risk health insurance pools (HIPs) for persons deemed “uninsurable” because of pre-existing high-risk health conditions.

A few states are in the process of establishing new HIPs. Others are working on funding legislation that would allow “closed-enrollment” HIPs to re-open or expand enrollment. And the few states using the federal fallback provision in the 1996 Health Insurance Portability and Accountability Act (HIPAA) are rewriting their existing HIPs, or creating new ones, to allow for the HIPAA eligibility rule.

A couple of states have lowered their HIP premium caps to 125 percent of standard premiums charged in a market. Still others have deemed it appropriate to direct windfall money from the tobacco settlement into the high-risk pool fund.

Unfortunately, no state has yet thought to use the concept of a HIP insurance premium tax credit for individuals as a way to make high-risk health insurance more accessible for more people. There is, however, some initiative in the direction of allowing employers to pay the HIP premium for a high-risk employee and still qualify for a business tax deduction.

For a more complete evaluation of HIPs, refer to Heartland Policy Study #91, “Extending Affordable Health Insurance to the Uninsurable.” The executive summary of the study is available on the Internet at and it links to the complete text of the report.

Another emerging market-based reform trend is the private-sector approach to making the purchase of long-term care insurance (LTC) more affordable, using tax credits. The federal Health Insurance Portability and Accountability Act (HIPAA) already establishes a federal tax deduction for LTC premiums and for the distribution of insurance proceeds; that idea is finally catching on with state legislators.

Legislatures are full of bills that would offer premium tax credits to individuals who buy LTC and to employers providing LTC as an employee health benefit. Some states with in-force tax-favored legislation are re-writing existing rules and allowing higher percentages of the premium to be deductible.

A Disturbing Trend to Watch

In action modeled after the 1998 class action lawsuit against the tobacco industry, at least six states are poised to go to court in an attempt to force pharmaceutical companies to lower the prices of their products. The goal here is nothing less than price controls on prescription medications.

State Attorneys General in Florida, Georgia, Maine, Massachusetts, Nevada, and Texas are among those considering legal action. In an April interview with, a state health official, familiar with the issue and requesting anonymity, said there is a strong consensus for litigation across the country. The source went on to say, “As soon as there’s any kind of endorsement from the Health Care Financing Administration (HCFA), all 50 states are going to jump on it.”

According to a news report by, “The potential for litigation grows out of a three year-old Justice Department investigation of the Bayer Corporation that in January resulted in Bayer settling with the states and the federal government for $14 million.” In a January news release announcing the settlement, the Justice Department said the government’s investigation “revealed that the pharmaceutical company, beginning in the early 1990s, falsely inflated the reported drug prices referred to in the industry as the Average Wholesale Price” (AWP).

The AWP is the average price that wholesalers give to retailers for a given medication. Medicare and Medicaid programs use the AWP in determining the level of reimbursement given to doctors and pharmacists. At issue is the alleged practice of setting a high AWP and then selling the product to doctors at a dramatic discount.

The AWP was not, however, the drug industry’s idea, and many in the industry consider it a cumbersome and inaccurate device that lends itself to abuses. Pressure to inflate the AWP first came from doctors, not from pharmaceutical manufacturers; the doctors were reacting to price-cutting pressure from managed care programs.

“Pharmaceutical companies are being demonized,” said Heartland President Joseph L. Bast, “exactly as we predicted they would be a few years ago when writing about tobacco companies. This is an orchestrated campaign—a conspiracy, actually—against American businesses that has little or nothing to do with quality health care.”

Relying on litigation instead of legislation to achieve public objectives is always a mistake. Warns Bast, “The lawyers will walk away with billions of dollars. A settlement will direct what is left of the money to a new layer of rent seekers—nonprofits and for-profits created to take and spend the money on ‘research’ and ‘education’ rather than treating patients.”