Private Management, Inc.

P.O. Box 5907

Eugene, OR 97405
Tel: 541.510.2042

February 2010
SUPPORTING PUBLIC POLICY

HEALTH INSURANCE REVENUE BONDS®

The HIRB® program is predicated upon the fact that funding health care is a high budget priority. As
public policy, the program is a strategic structured financing management framework providing the
fiscal space government needs to facilitate an efficient and equitable health financing system.

Fundamentally, the public policy in support of the HIRB® program is not new. For the past one
hundred years, capital infrastructure projects such as school buildings, water and sewer systems, power
generation facilities, hospitals, airports, port facilities, toll roads and bridges, mass transportation
systems and most recently some “green technology” projects, all fulfilling and serving a public need,
have been financed through the issuance of revenue bonds. All the aforementioned capital projects are
“bricks and mortar” projects. They are tangible and they have a determined useful life.

The HIRB® program as a public capital project consists not of bricks and mortar but rather an
integrated information management system operated and managed as a non profit public entity. This
public entity will be governed by a Board. Board members may be elected by the constituency it
serves and/or appointed by elected public officials.

Typically, it is the law of the State in which the project is domiciled that governs the statutory authority
to issue revenue bonds, the kind of projects that may be financed and the procedures and/or process
which must be complied with in order to issue the revenue bonds.

Health care, as a benefit, constitutes a promise; an obligation made by one party to another party. By
its nature, utilizing health care services is consumptive. The idea of using debt to finance and pay for
health care does not fit conventional wisdom in finance. The reason is once you consume what was
purchased with borrowed money you have nothing left except the outstanding debt. What do you do
when you need to utilize health services again? It easily paints a scenario of an increasing burden of
debt. This is exactly what the HIRB® program is not.

The HIRB® financing strategy turns such conventional thinking upside down. Although the HIRB®
program is using debt to fund the expansion and utilization of health services, the time period for the
amortization and repayment of the money borrowed with interest and the time period for paying for the
utilization of health services is conterminous and contemporaneous. As with other public purpose
capital projects, the amount of debt issued is the amount necessary to construct the project and initiate
its operation. However, under the HIRB® structure, any new revenue, regardless of source, (currently
incorporated in every legislative proposal contemplated) is allowed to accumulate, earning

Health Insurance Revenue Bonds® program

(patent pending)
© 2009-2010 Private Management, Inc., All Rights Reserved
Supporting Public Policy
February 2010
page 2

compound interest. The cumulative amount of this earned interest income typically exceeds the
amount of bond interest paid over the same conterminous and contemporaneous time period.

The amount of debt issued is repaid over a time period not exceeding the useful life of the project (e.g.
the term or time period for which the health benefits are being funded and paid for). The public policy
supporting these projects is that the users of the Project are the ones who should pay for it over the
useful life of the project. It is this same public policy which supports the adoption and implementation
of the HIRB® financing program. The HIRB® program operates on a “pay as you go” basis within the
context of a funding mechanism, similar to what occurs with a pension plan.

In 2006, The International Bank for Reconstruction and Development/The World Bank published a
study entitled “Health Financing Revisited – A Practitioner’s Guide”. In this study, The World Bank
states: “Risk pooling is the collection and management of financial resources so that large
unpredictable individual financial risk becomes predictable and is distributed among all members of
the pool.” [1]

Additionally, the study promulgates three principles of public finance:

(1) “Raise enough revenue to provide individuals with a basic package of essential health
care services, which provide financial protection against catastrophic medical expenses
caused by illness and injury in an equitable, efficient and sustainable manner.”
(2) “Manage these revenues to pool health risks equitably and efficiently.”
(3) “Ensure the purchase of health services in ways that are allocatively and technically
efficient.” [2]

In large measure, the structure of health financing in the United States does not follow these
principles. If any of these public policy principles were uniformly and consistently followed, our
country likely would not be facing such a severe health care crisis. It is widely accepted that the United
States’ health financing structure collects and spends more than enough revenue to meet the needs of
the risk pool. However, revenues are not managed equitably or efficiently and as a result the existing
financing structure does not ensure the purchase of health care services in an allocatively or technically
efficient manner.

The World Bank study further states that:

“Risk pooling and prepayment are critical for providing financial protection… There are various
ways for governments to finance public health insurance programs and each should be assessed
on the basis of equity, efficiency, sustainability, administrative feasibility and administrative
costs…Governments should strive to reduce fragmentation… to lower administrative costs and
provide basis for more effective risk pooling and purchasing.” [3]

Health Insurance Revenue Bonds® program

(patent pending)
© 2009-2010 Private Management, Inc., All Rights Reserved
Supporting Public Policy
February 2010
page 3

To the contrary, the existing fragmented financing structures in United States may be described as a
complex patchwork quilt of minutia which is fraying, to varying degrees, at all of its seams.

In the aforementioned study, the World Bank further proclaims that: “Large proposed increases in
public health spending must be considered in the context of the available fiscal space-the budgetary
room that allows a government to provide resources for a desired purpose...” “Governments can
create fiscal space …borrowing resources, either domestically or from external sources.” [4].

In the context of the HIRB® program, the government serves as the organizing facilitator of the Project.
This should not be construed to necessarily mean the creation or expansion of government bureaucracy.

As with any new business venture, operating capital is required. The purpose of the bond issue is to
provide upfront capitalization to immediately expand health benefit coverage to vulnerable populations
and to help absorb the anticipated spike in claims. In great measure, the spike in claims costs will be
driven by deferred health care maintenance. Deferred health maintenance accrues when people have
had a need for health care services which they have not been able to satisfy. How high the spike in
claims costs will be and the duration of such a spike are the remaining questions.

The United States has had a health financing structure based upon market competition along with
various public programs for at least the past 40+ years. It certainly appears that a 40+ year track record
of rising costs is more than sufficient evidence to declare the fact that market competition does not
work effectively amongst health insurance benefit plans. If it did work effectively to reduce cost, the
United States would not currently be facing such a health care crisis or at least not as exacerbated as it
presently is. The reason market competition amongst health insurance plans does not effectively work
is commercial insurers do not take risk.

Espousing the freedom to choose a health benefit plan from a plethora of health care benefit plans
and/or health insurers appears to advocate market competition to help reduce the costs of health care.
Market competition does work remarkably well for manufacturing widgets; however, in the context of
health financing, it does not and cannot work. Why? Market competition is based upon friction. Risk
pooling is based upon homogeneousness. Akin to trying to make a square peg work in a round hole.

Competition in health care may occur amongst health care providers such as hospitals, doctors,
laboratories, clinics, manufacturers and distributors of medical supplies and durable equipment. That
competition is embedded in how well and expeditiously their patient/customers are served; their hours
of service availability; attractiveness and type of facilities available, in many cases specific services
and/or products provided and many times, the known quality of reputation of the individual(s) or
institutional health care provider.

Health Insurance Revenue Bonds® program

(patent pending)
© 2009-2010 Private Management, Inc., All Rights Reserved
Supporting Public Policy
February 2010
page 4

There may be, either by desire or necessity, a systemic form of “checks and balances” more commonly
called “managed care” operating to oversee the prudent and effective use of resources in managing a
patient’s health care. Including the “checks and balances” mechanism does not necessitate or require
that it has dominion or control over assets used for funding payments to those providing the health care
services. This eliminates the inherent conflict of interest that many commercial insurers currently hold.
This may mean commercial health insurers need to adapt, just like the rest of society.

The employer sponsorship for distribution of health care benefit plan(s) perpetuates the severe
fragmentation that exists with the current structures of health financing. Many people hold the position
that an employer based distribution system for providing health care benefit coverage is an obsolete
model for the financing distribution of health services benefit plan(s). Even if this were accepted by
every part of the political spectrum, the significance is not the employer’s “sponsorship” of a health
care benefit plan but rather the art and efficiency of collecting revenues (health care premium
contributions) via the existing payroll/tax system. Considering the recent high degree of mobility amid
changing demographics in American society, an employer based financing distribution model makes
less and less economic or financial sense. The HIRB® program makes health care benefits easily and
seamlessly portable.

Severing the employer sponsorship distribution is not a direct influence on the HIRB® program
financing structure. However, it will have an influence on how the HIRB® program is implemented
and the nature of administrative functions.

The HIRB® financing program’s genesis is in the private sector; it represents “the competition” and by
design costs less to fund in comparison to existing health financing structures.

Endnote:
1. “Health Financing Revisited”© 2006 The World Bank, Pablo Gottret and George Schieber p.4
2. Ibid, p.2
3. Ibid, p.5
4. Ibid, p.6

Health Insurance Revenue Bonds® program

(patent pending)
© 2009-2010 Private Management, Inc., All Rights Reserved