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BUDGET IMPACT OF PRESIDENT 
CLINTON'S HEALTH CARE PROPOSAL 



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HEARING 

BEFORE THE 

COMMITTEE ON THE BUDGET 
HOUSE OF REPRESENTATR^S 

ONE HUNDRED THIRD CONGRESS 

FIRST SESSION 



HEARING HELD IN WASHINGTON, DC, NOVEMBER 3, 1993 



Serial No. 103-13 



Printed for the use of the Committee on the Budget 




"-.-> .»t t"' '■■':■■ V'',*->v., 



U.S. GOVERNMENT PRINTING OFFICE 
73-795 CC WASHINGTON : 1994 



For sale by the U.S. Govemment Priming Office 
Superintendent of Documents. Congressional Sales Office. Washington. DC 20402 
ISBN 0-16-043559-5 



BUDGET IMPACT OF PRESIDENT 
CLINTON'S HEALTH CARE PROPOSAL 



Y i\. B 85/3: 103-13 

B>,*5.tInMOtofmsHe.tCU»to«'. 



HEARING 

BEFORE THE 

COMMITTEE ON THE BUDGET 
HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRD CONGRESS 

FIRST SESSION 



HEARING HELD IN WASHINGTON, DC, NOVEMBER 3, 1993 



Serial No. 103-13 



Printed for the use of the Committee on the Budget 







U.S. GOVERNMENT PRINTING OFFICE 
73-795 CC WASHINGTON : 1994 

For sale by the U.S. Government Prininig Offiee 
Superintendent of Documents. Congressional Sales Otlice. Washington. DC 20402 
ISBN 0-16-043559-5 



COMMITTEE ON THE BUDGET 



MARTIN OLAV SABO 

RICHARD A. GEPHARDT, Missouri 
DALE E. KILDEE, Michigan 
ANTHONY C. BEILENSON, California 
HOWARD L. HERMAN, California 
ROBERT E. WISE, Jr., West Virginia 
JOHN BRYANT, Texas 
CHARLES W. STENHOLM, Texas 
BARNEY FRANK, Massachusetts 
JIM COOPER, Tennessee 
LOUISE McINTOSH SLAUGHTER, New 

York 
MIKE PARKER, Mississippi 
WILLIAM J. COYNE, Pennsylvania 
BARBARA B. KENNELLY, Connecticut 
MICHAEL A. ANDREWS, Texas 
ALAN B. MOLLOHAN, West Virginia 
BART GORDON, Tennessee 
DAVID E. PRICE, North Carolina 
JERRY F. COSTELLO, Illinois 
HARRY JOHNSTON, Florida 
PATSY T. MINK, Hawaii 
BILL ORTON, Utah 

LUCIEN E. BLACKWELL, Pennsylvania 
EARL POMEROY, North Dakota 
GLEN BROWDER, Alabama 
LYNN C. WOOLSEY, CaUfomia 

Eileen M. Baumgartner, Chief of Staff 
Richard E. May, Republican Staff Director 



Minnesota, Chairman 

JOHN R. KASICH, Ohio 
J. ALEX McMillan, North Carolina 
JIM KOLBE, Arizona 
CHRISTOPHER SHAYS, Connecticut 
OLYMPIA J. SNOWE, Maine 
WALLY HERGER, CaUfornia 
JIM BUNNING, Kentucky 
LAMAR S. SMITH, Texas 
CHRISTOPHER COX, California 
WAYNE ALLARD, Colorado 
DAVID L. HOBSON, Ohio 
DAN MILLER, Florida 
RICK LAZIO, New York 
BOB FRANKS, New Jersey 
NICK SMITH, Michigan 
BOB INGLIS, South Carolina 
MARTIN R. HOKE, Ohio 



(II) 



CONTENTS 



Page 

Hearing held in Washington, DC, November 3, 1993 1 

Statement of: 

Feder, Judith, Ph.D., Principal Deputy Assistant Secretary for Planning 
and Evaluation, Department of Health and Human Services; and Ken- 
neth Thorpe, Ph.D., Deputy Assistant Secretary for Health Policy, De- 
partment of Health and Human Services 7 

Prepared statements, letters, supplemental materials, et cetera: 

Costs of Failing to Reform Health Care, The, Laura D'Andrea Tyson, 

Chair, Council of Economic Advisers, report dated October 6, 1993 129 

Feder, Judith, Ph.D., Principal Deputy Assistant Secretary for Planning 
and Evaluation, Department of Health and Human Services; and Ken- 
neth Thorpe, Ph.D., Deputy Assistant Secretary for Health Policy, De- 
partment of Health and Human Services, prepared statement of 22 

Health Security Act: A Financial and Distributional Analysis, The, report 
entitled 72 

Methodological Description of Health Care Reform Premium and Dis- 
count Estimates, report entitled 139 

Sabo, Hon. Martin Olav, a Representative in Congress from the State 
of Minnesota, prepared statement of 2 

(III) 



BUDGET IMPACT OF PRESmENT CLINTON'S 
HEALTH CARE PROPOSAL 



WEDNESDAY, NOVEMBER 3, 1993 

House of Representatives, 
Committee on the Budget, 

Washington, DC. 

The committee met, pursuant to call, at 9:45 a.m.. Room 210, 
Cannon House Office Building, Hon. Martin Olav Sabo, Chairman, 
presiding. 

Members present: Representatives Sabo, Stenholm, Cooper, 
Slaughter, Price, Johnston, Blackwell, Pomeroy, Browder, Woolsey, 
Kasich, McMillan, Shays, Snowe, Herger, Smith of Texas, Cox, Al- 
lard, Hobson, Miller, Smith of Michigan, and Hoke. 

Also present: Representatives Clayton, Johnson of Texas, 
Kreidler, Meek, and Watt. 

Chairman Sabo. The committee will come to order. This hearing 
is on the question of health care reform and the President's pro- 
posal. 

Let me make just a few opening comments and indicate to our 
witnesses that I commend you for the proposal that you have 
brought to the Congress. I think it is by far the most comprehen- 
sive proposal for fundamental change in this country and one of the 
most important ingredients that we deal with in our daily lives and 
in our economic lives in terms of reforming health care that we 
have ever seen. It is a proposal of historic proportions. It proudly 
rivals, in terms of basic ingredients of life in this country, the pro- 
posal to establish Social Security close to 6 decades ago, and I do 
not know that we have had any such comprehensive proposal since 
then. 

Clearly, we have a major problem. There are many pluses to our 
health care system. Its costs are growing too fast, too many people 
are left without coverage, many others left with uncertainty, won- 
dering what will happen with that basic ingredient of daily life. 

And I think the President's proposal, which is designed to control 
costs and use some of those savings to make sure that we have uni- 
versal coverage, to reduce private-sector costs which have been es- 
calating very rapidly and also to use some of those savings for re- 
ducing the Federal deficit is very important. It is a proposal which 
deals with lifelong health care security for all, universal participa- 
tion and very comprehensive cost control. 

So I commend you on this. Clearly, it builds on the current sys- 
tem, which is employment-based, fills gaps, requires all businesses 
to offer coverage, requires cost-sharing between business and indi- 
viduals and government and individuals in certain cases and, in 

(1) 



certain cases, cost-sharing between government and private busi- 
ness. 

This committee — I know there are many committees claiming 
various facets of jurisdiction — this committee does not have any di- 
rect jurisdiction over the plan, but we clearly are affected by what 
happens. Because what happens with health care has a major im- 
pact on what happens with the Federal budget in the near term 
and in the long term. So the focus of this hearing today is dealing 
on not our jurisdiction as it relates to your bill, but on the impact 
of what happens on this issue and this committee in the years 
ahead. 

As I look at your plan — and we are curious, I am really con- 
cerned about how the numbers fit. As I look at it, there are certain 
basic assumptions, and it is sort of a revolving circle. I assume that 
universal coverage is key to cost containment. On the other hand, 
cost containment is key to universal coverage. And I am curious at 
how you arrived at your final assumptions on what we can achieve 
in cost containment. As I understand it, you arrive at a target on 
insurance premium increases of CPI plus population, which — if it 
is a goal we can achieve — would be a great accomplishment. I am 
curious how you got there. 

The other key assumption to achieve universal coverage is cost- 
sharing between employers and individuals and government and 
individuals. Again, we are curious, both as to the actual numbers 
involved and how you arrived at your formula for cost sharing. We 
are interested, in other words, I guess in the totality of your num- 
bers and how they fit. 

While I have that interest as someone who Chairs this commit- 
tee, I also have concerns as a representative of a particular district 
from a particular State. And that is how you deal in your plan with 
States who have done a better job than others in terms of offering 
quality health care at lower cost. And we think that is where we 
are in Minnesota. We want to ensure that we are not treated un- 
fairly because both the private and public sector in our State have 
over the years done not by a long shot a perfect job but a better 
job than other places in this country in dealing with the health 
care question. 

So we want to be sure that the numbers involved work. I can 
think of no greater tragedy than putting a system in place and 
then having it fall apart in a year or 2 simply because the numbers 
did not fit or weren't accurate, and we have to start all over. 

[The prepared statement of Hon. Martin Olav Sabo follows:] 

Prepared Statement of Hon. Martin Olav Sabo, a Representative en 
Congress from the State of Minnesota 

Good morning. The House Budget Committee is in session for a hearing on the 
budget impact of President Clinton's health care proposal. We will have two wit- 
nesses from the Department of Health and Human Services — Dr. Judith Feder, the 
Principal Deputy Assistant Secretary for Planning and Evaluation and Dr. Kenneth 
Thorpe, the Deputy Assistant Secretary for Health Policy. Dr. Feder had a pre- 
viously scheduled engagement and will join us in a few minutes. 

Most Americans feel we have the best health care system in the world. We have 
the finest technology and the world's best doctors and nurses. People come from all 
over the world to receive care at our great universities, hospitals, and clinics. So, 
what's the problem that makes us want to change it? 

The problem is that too many people in our country do not have access to this 
great care. Too many people have no health insurance either because they can't af- 



ford it, their employer doesn't provide it, or they have some type of illness that 
makes them uninsurable. In fact, today 37 million Americans have no health insur- 
ance and many more have inadequate insurance for their needs. And the system has 
gotten so expensive that most people cannot afford to pay for adequate health care 
without insurance. 

These are the problems the President is trying to fix. The President's Health Se- 
curity Act is a bold, comprehensive package designed to meet the challenge of pro- 
viding all Americans with affordable, life-long, high-quality health care. 

There is no question that it is time to act. But we the Congress and the people — 
must have the best information available before we act. 

We cannot proceed unless the numbers fit. We must be sure that we have accu- 
rate estimates of the costs of achieving this ambitious goal. And we must know that 
we can afford it. 

Long-term reduction in federal deficits must be a part of the plan, as well as long- 
term savings for the private sector. Without effective cost containment, health care 
spending will keep on growing. Clearly, for this plan to succeed we must control 
health care costs. 

A key to the Administration's plan is its assumptions on cost containment. How 
did the Administration arrive at its long-term target of CPI plus population growth 
for the growth in health care costs? 

A second element that is necessary to achieve true universal coverage is cost shar- 
ing. This proposal requires all employers to provide coverage and all individuals to 
acquire coverage. Ana it sets out a formula for business and government to share 
the costs with individuals in paying for that coverage. How did the Administration 
arrive at the cost-sharing assumptions in its package? 

The Administration is asking everyone to control costs as if we were on a level 
playing field. Are we really? How do we deal with the questions of equity this pro- 
duces? For instance, some states have done a good job on health care and kept costs 
down, but because of the regional nature of this proposal people in those states 
could end up subsidizing states that did not hold costs down? Is this fair? How does 
the Administration justify this? 

Apart from the large budget questions, there are many other questions about the 
plan. People need to know more about how it will work. Particularly, people need 
to know how this plan affects them. 

I am happy to sav that the information now being made available by the Adminis- 
tration addresses these concerns in some detail. I nope that this hearing and other 
forums like it will help lay out information so that people can have their questions 
answered. 

I support the goals of the President's plan. I want it to succeed. Excellent as our 
health care is, it costs too much and the cost is rising. A national guarantee of uni- 
versal health care is a goal that we must strive to achieve. It is essential to the 
future well-being of our country. 

Chairman Sabo. Before I introduce our witnesses, let me call on 
Mr. Kasich, if he has any opening comments. 

Mr. Kasich. Thank you, Mr. Chairman. 

I want to first of all say that, starting back in 1989, I had, when 
I wrote my first budget against the budgets of the Democratic Com- 
mittee and the President, who was a Republican, in 1989 it was ap- 
parent to me that we needed to have health care reform. And I 
think it was in 1990 I wrote a letter to Bob Michel and Speaker 
Foley saying we needed to have health care reform because we can- 
not hope to control Federal spending, the deficit and everything 
else unless we have some health care reform. 

And, you know, I think it is a great thing that you got the issue 
on the table, you have made it part of the agenda. But my concern 
about it, of course, is that what we do in health care reform is 
something that helps us with our deficit problems, and I hate to 
have to go back to a few charts, but I have to. 

The first one I want to bring to your attention and to the Chair- 
man's attention, because — and I want to thank the Chairman for 
agreeing to have the meeting today for the simple reason that this 
is all really budget-related. This is what we have done with Medi- 



care Part A. We have projected in 1966, where the black line is, 
where it started. And we said that in 1990 — I don't know if you can 
see this, Doctor — but that the increase in Medicare would basically 
be about two inches of that chart. That is what the government 
projected was going to happen to Medicare. Medicare is actually up 
here. 

Now that shows that whether you are a Republican, whether you 
are a Democrat, whether you run 0MB, whether you don't, wheth- 
er you control CBO, whether you don't. You don't know what you 
are talking about. You might as well just put a blindfold on and 
stick on finger on the map to determine where you are going to go 
on vacation, and that is essentially what we did on Medicare. And 
it is a 640 percent margin of error. 

Now, the Clinton people said that you were going to try — and 
this is where I welcome the plan. But what Clinton said was, the 
President said that what he wanted to do was to reduce the in- 
crease in health care spending in an effort to control the deficit. 
But we took your numbers, and we put them together. 

The blue line represents the baseline. If we did nothing, if we did 
absolutely nothing with health care, the blue line represents the 
growth in health care spending. What I am shocked by, frankly, is 
that, under the Clinton plan, we actually increase Federal spending 
on health care, all areas of health care that the Federal Govern- 
ment is involved with. Medicare, Medicaid, veterans, the whole 
deal shows that, under the Clinton plan, contrary to what has been 
said about reducing the amount of money we spend on health care, 
it escalates faster than the baseline. This chart basically says if we 
did nothing, we would be better off with the Federal deficit. 

Now, you also said — you made projections on what your deficits 
were going to be. You said that the blue line represents the Clinton 
projections. The brown line represents what is actually happening. 

Now, we adjusted for one thing in here to be fair about this. You 
see, one of the provisions in your plan says that, because we are 
going to have lower health care costs, employers are going to make 
more money. Therefore, they will pay more taxes. And employees 
are going to get higher pay raises. So, therefore, they will pay more 
taxes. That is what we used to call voodoo economics. You will not 
get that scored by CBO. We took the $71 billion out. If we put the 
$71 billion in, it would make somewhat of a difference but not a 
big difference. 

But this is where the proof is in the pudding. You folks argued 
that the deficit was going to decline like this. The reality is that, 
using your numbers and what is currently happening, is that the 
deficit gets wider. This is, I guess, what you would call the Clinton 
budget deficit credibility gap, right here. And these are not — these 
are using your numbers. We didn't make these numbers up. These 
are using your numbers. 

So we have basically three problems. One, we couldn't project 
where Medicare was going to go, not a Democrat, not a Republican. 
Then you say you are going to slow the growth in Federal spend- 
ing, and you are worse in the baseline. Thirdly, you say you are 
going to use this health care reform to reduce the deficit, and the 
gap gets wider. So the way I look at it, that is kind of like one, 
two, three strikes, you are out. 



And then in your plan you have what is called caps. You say — 
just forget the global budget debate. But you have a cap on pre- 
miums paid by individuals, say an individual not paying more than 
a certain amount. You say there is going to be a cap on what small 
business pays. You say there is going to be a cap on the premiums 
paid by large business. And then you say that when you put these 
caps on the government will make up the difference with a subsidy. 
But then you come and you put a cap on what the government can 
pay. 

Now that would be bad enough, except that you also add three 
benefits. You add early retirees, 55 to 64. All of these people are 
going to be dumped out of the businesses and covered by the Fed- 
eral Government. You have a long-term care part of your plan, and 
you also have a new drug benefit. So you cap all of these things, 
including capping what the Federal Government pays, and then 
you add more benefits to it. Your health care spending is going up. 
Your deficit is widening. 

You know, I guess really the bottom line is that I don't quite un- 
derstand how this is going to solve any of our problems. I mean, 
it just doesn't seem to make much sense in terms of any way you 
look at this thing. So what I think we have to do is we have to sit 
down and work this thing out so that Republicans and Democrats 
who have been concerned about health care spending could write 
a plan, and I want to work with you on it. 

Under your plan you can see that your proposed U.S. Govern- 
ment-run health care plan is going to be larger than the entire 
GNP of Canada and who knows how much more larger than the 
Department of Defense. 

But the charts are illustrative of the problem that we have, Mr. 
Chairman. I think what we are doing under this health care plan, 
from what I can see here, is we are aggravating the deficit, not 
solving it, and that is what my great concern is, and I think the 
charts kind of speak for themselves. 

Thank you, Mr. Chairman. 

Chairman Sabo. Thank you, Mr. Kasich. I am sure our witnesses 
can respond to your questions, but, clearly, a good number of the 
charts that I have seen would indicate the plan has a significantly 
different impact on what happens, both on the Federal budget and 
as it relates to total costs. Clearly, we have had health care cost 
escalation far beyond expectations of the government of the early 
1980's and the government of the 1970's, and generally we sat by 
and did nothing. 

The problems escalated even more rapidly in the 1980's than 
what was happening in the 1970's. Clearly, in the early 1980's, we 
made certain decisions here which reduced governmental involve- 
ment in health care planning. I am not sure that is related to what 
happened, but I am curious about it. 

So we look forward to your testimony. We want the numbers to 
be accurate. We want them to be right. But we also know that if 
we do nothing the cost of health care is going to drive the deficit 
on the Federal level but, probably even more importantly, drive 
private-sector health care costs to a place where we are non- 
competitive in the world economy. And I think we constantly have 



to measure what is proposed against what will happen if we do 
nothing. 

We are pleased this morning to have as our leadoff witness Dr. 
Judy Feder, who is the Principal Deputy Assistant Secretary for 
Planning and Evaluation at the Department of Health and Human 
Services. 

And, Dr. Feder, let me publicly thank you for coming to Min- 
nesota for a health care forum, as you clearly are one of the leading 
experts in Washington on the question of health care reform and 
have been for many years and are one of the chief architects of the 
President's plan that we have before us now. We look forward to 
your overview of what the plan is and how it will impact the econ- 
omy and the Federal budget in the years ahead. 

Before I call on Dr. Feder, she is accompanied by Dr. Kenneth 
Thorpe, and let me ask our colleague, David Price, to make a few 
words of introduction. 

Mr. Price. Mr. Chairman, since one of our witnesses this morn- 
ing is a constituent of mine, I would like to add a word of introduc- 
tion and welcome to Ken Thorpe, who is Deputy assistant secretary 
for Health Policy with the U.S. Department of Health and Human 
Services. Ken is a nationally known health economist, and he is 
currently working with the White House to develop and interpret 
and promote the President's health care reform initiative. 

Dr. Thorpe is on leave from the School of Public Health at the 
University of North Carolina at Chapel Hill, where he has been an 
associate professor in the Department of Health Policy and Admin- 
istration since 1990. Prior to joining the UNC School of Public 
Health, he was an associate professor of health policy and manage- 
ment at the Harvard University School of Public Health and a di- 
rector of a health care financing and insurance program at Har- 
vard. Dr. Thorpe also has been an assistant professor at Columbia 
University School of Public Health. 

During the past few years, he has served as a member of the In- 
stitute of Medicine's panel on the future of employer-sponsored 
health insurance benefits, the Advisory Council on Social Securities 
technical panel on the future of income security in Medicare and 
the New York State Universal Health Insurance Advisory Council. 
He has also been a consultant for the National Leadership Coali- 
tion for Health Care Reform and the U.S. Bipartisan Commission 
on Comprehensive Health Care. That is the well-known Pepper 
Commission. 

Dr. Thorpe holds his doctorate in policy analysis from the Rand 
Graduate School, and he has a master's degree in public policy 
from Duke University and a Bachelor's Degree in political science 
from the University of Michigan. 

He is one of our Nation's most distinguished policy analysts in 
the field of health care. The administration is fortunate indeed to 
have him serving at this critical juncture, and I am pleased to wel- 
come him here today. 

Chairman Sabo. Thank you. 

Dr. Feder. 



STATEMENT OF JUDITH FEDER, Ph.D., PRINCIPAL DEPUTY AS- 
SISTANT SECRETARY FOR PLANNING AND EVALUATION, DE- 
PARTMENT OF HEALTH AND HUMAN SERVICES; AND KEN- 
NETH THORPE, Ph.D., DEPUTY ASSISTANT SECRETARY FOR 
HEALTH POLICY, DEPARTMENT OF HEALTH AND HUMAN 
SERVICES 

Dr. Feder. Thank you, Mr. Chairman. It is a pleasure for both 
of us to be here this morning. It was also a pleasure to be with you 
in Minnesota. I look forward to future opportunities to work with 
you, both here and in your home districts to make comprehensive 
health reform a reality. 

You indicated in your opening statement the urgency of health 
reform. The fact is that we cannot continue on our current course, 
that the worst action we could take is inaction, to do nothing. 

And I would like to begin my remarks by reminding all of us why 
it is that we are proceeding on health reform, comprehensive 
health reform now. It is the President's view that it is urgent to 
proceed on comprehensive reform, not only to deal with the human 
problems of those who are unable to get health care when they 
need it but also to deal with the fiscal instability of our current 
health care system. 

We cannot talk today about family budgets, business profitability 
or the stability — the fiscal stability — of any level of government, 
local. State or Federal, without addressing the issue of health care 
costs. And we cannot address that problem unless we proceed on 
a comprehensive solution, one in which everybody participates and 
everybody pays their fair share. To do otherwise would leave us in 
a system in which one payer, whether it be public or private, con- 
tinues to be able to shift costs from one to the other without achiev- 
ing either security of coverage or a stable, affordable system. 

The President's health security plan would guarantee us a com- 
prehensive reform in which everyone participates and everyone 
does their part. The proposal seeks to fix what is wrong with our 
health care system and preserve what is right. It seeks to strength- 
en all elements of that system so that those Americans who fall ill 
and those who want to preserve and improve their health can rely 
on a high-quality system that is affordable, portable and perma- 
nent. 

Our job this morning is to tell you how we are going to do that. 
I am going to give you an overview of the overall plan, and then 
Dr. Thorpe will present to you its financing. 

First, as the chart we have just put up shows, under the Presi- 
dent's plan, we are proposing a private comprehensive system. Sev- 
enty-six percent of the financing for the nonwelfare, nonmedicare 
payments will come from employers, employees and other individ- 
uals making their contributions to the cost of coverage. The re- 
maining 24 percent will come from government. 

[See Chart 2 on pg. 28.] 

Again, as I said, Ken will elaborate on the financing and the de- 
tail you have requested in a moment. Let me give you the overall 
structure. 

The President has laid out six principles that are at the core of 
our proposal and must be at the center of any health reform bill 



8 

enacted by this Congress. They are security, simplicity, savings, 
choice, quality and responsibility. 

If any of these principles is dominant, it is security. Under our 
current system, no American has true security. Most workers who 
lose their jobs lose their insurance. People who change jobs often 
lose their insurance or almost certainly have to change their cov- 
erage. Families stricken by illness face the added burden of trying 
to make sure their coverage won't disappear, and conscientious 
businesses and individuals who attempt to buy insurance are 
priced out of the market. 

To solve this problem, the President's plan builds on the existing 
structure of health insurance but makes sure that all of our citi- 
zens are covered by a quality health plan they can afford. To 
achieve that, the plan asks States to create regional health alli- 
ances to help consumers and employers purchase the coverage they 
need. It asks employers to pay at least 80 percent of the average 
premium cost for a plan in their area, and it asks workers to pick 
up the remainder. 

Every health plan will offer a comprehensive set of benefits to 
provide all Americans with the kind of care that our health profes- 
sionals tell us is best: a package that has strong emphasis on pre- 
vention, a package that covers inpatient and outpatient care, a 
package that offers specialty and primary care and a package that 
includes mental health and substance abuse treatment coverage to 
help remove the stigma attached to those conditions. 

We recognize these new requirements may pose a challenge for 
some smaller companies, particularly those that currently do not 
offer coverage, and that is why we provide discounts for employers 
that will hold the cost of coverage to no more than 3.5 percent of 
payroll for small, low-wage firms and 7.9 percent of payroll for 
companies with 75 workers or more. 

The majority of Americans should have no trouble paying their 
individual share, 20 percent, if they choose an average plan. They 
pay that much or more today. 

But for those with low incomes, people with incomes less than 
150 percent of poverty, and an additional cap for people whose 
costs would exceed 3.9 percent of income. Government would also 
provide discounts for part-time, part-year or unemployed workers 
who would owe some or all of the 80 percent share of premium. 

There are also discounts for the employers' (80 percent) share for 
people with incomes up to 250 percent of poverty not counting 
$5,000 of their wage income and any unemployment compensation 
they receive. 

To further reduce the cost of coverage, the plan reforms the in- 
surance market to eliminate underwriting practices that weed out 
the sick and cover only the healthy. No insurance company will be 
allowed to turn away anyone seeking insurance because of a pre- 
existing medical condition. And by returning to the historic method 
of community rating, we will make sure that individuals and small 
businesses are protected from sharp premium increases. 

Together, these changes will result in virtual universal coverage 
for our population. In contrast, if we do nothing, the number of un- 
insured will grow from 37 million to an estimated 55 million at the 
end of the decade or nearly 1 in 5 Americans. 



Another important element of security is predictability. Today, 
no person and no business owner can accurately predict what their 
insurance will cost them. Under the President's plan, all payers 
will know in advance what their coverage will cost and be able to 
plan accordingly. 

In order to preserve security and predictability, we must control 
the cost of health care. Through changes in the competitive market, 
our plan places restraints on growth that will still allow spending 
to increase but by an amount that is much closer to the rise in 
other consumer prices. To ensure that these changes achieve the 
necessary savings, the plan creates a backstop system of enforce- 
able premium limits to make sure no one will pay more for cov- 
erage than is appropriate. 

The President's plan extends the concept of cost containment to 
all payers, public and private, so that they no longer shift costs to 
each other. By applying reasonable limits to the growth of Medi- 
care, we will curb its rate of growth, and we will put those savings 
back into services such as a new prescription drug benefit in Medi- 
care. Without such coverage, many of our senior citizens are delay- 
ing the purchase of prescribed medications, changing their dosage 
to make prescriptions last longer and even trading unused portions 
of prescriptions among neighbors. 

The President's plan also ushers in a new era for our Medicaid 
population. They, too, will have health security cards that will 
make them indistinguishable from any other American. They will 
enroll in a mainstream medical system that gives them the same 
benefits enjoyed by everyone else, plus additional services tradi- 
tionally provided through Medicaid to enable them to use the 
health care system. 

We all know that the current system is too confusing, too intimi- 
dating and too expensive. We force our health professionals to 
waste their time filling out multiple forms and filing multiple 
claims. The President's plan will do away with the more than 1,500 
often conflicting claims forms now in use and substitute a single 
form that will be easy to understand and easy to complete. 

Another key to security is simplicity. The system we propose will 
make it easy for consumers to gain access, get the care and coun- 
seling they need and go on with their daily lives. It is structured 
from the consumer's viewpoint, to put consumers back in charge of 
their health care. It is a clear and concise system that, for most 
people, won't be much different than the way they get health care 
now, just that it will be guaranteed and with ready access. 

An important element of that system will be the new health alli- 
ances. They will provide consumers and business owners real clout 
in the often daunting negotiations with insurers. Through the alli- 
ances, small firms and individuals will gain access to high quality 
coverage at the same price as big firms and under the same rules. 

The alliances also will guarantee that it is people who choose 
their health plans, not employers, by making sure that a variety 
of plans are available, including at least one — and perhaps more 
than one — fee-for-service plan and a point of service option in every 
part of the country. 



10 

Once coverage is purchased, the alliances become consumer pro- 
tection watchdogs that help with any questions or problems that 
arise. 

Once empowered, consumers and businesses in a private system 
must be ready to take responsibility for their coverage and their 
care. The President's plan offers Americans a great deal, and, in re- 
turn, it asks us all to play our part. 

Now, I will turn to Dr. Thorpe, who will explain the financing of 
the system the President proposes. 

Chairman Sabo. Thank you. Dr. Feder. 

Dr. Thorpe. 

Dr. Thorpe. Thank you, Mr. Chairman, members of the commit- 
tee. Congressman Price for that kind introduction. 

I must say that not only am I constituent but I am a former stu- 
dent of Professor Price when I was at Duke. I know that it has 
been a loss to Duke but certainly a gain to the Congress to have 
Mr. Price serving up here in Washington. So thank you for that 
kind introduction. 

I am pleased to be here today to discuss with you the financing 
of the President's health security act and its impact on the budget. 
There are two points I would like to underscore with my testimony. 

First, as Dr. Feder has already pointed out, the health security 
act builds on the current private, employer-based health insurance 
system. Second, and I will spend a substantial amount of time on 
the second point, our assumptions in developing the estimates, I 
believe, are very conservative. 

Related to that, as you will see throughout, much of our esti- 
mates have been based on literally two decades of very extensive 
academic empirical research, looking at, examining, documenting 
the costs associated with providing health insurance to uninsured 
individuals. So this builds on literally dozens of studies in the aca- 
demic research literature looking at the cost associated with pro- 
viding coverage to uninsured individuals. 

The first point. Just as today, a majority of Americans will have 
a portion of their health insurance premiums financed by their em- 
ployers. 

Throughout my discussion, I will be referring to a series of charts 
which I believe have been passed out to members. As you can see 
from Chart 1, entitled Source of Revenue for Premiums, it does il- 
lustrate that fully 59 percent of the premium dollars come from 
employers, families would contribute 17 percent of total premiums, 
government discounts for small businesses and low-income families 
would constitute the remaining 24 percent. 

In response to consultations with the Congress and others, we 
have made several changes to the financing of the plan to guaran- 
tee fiscal responsibility and ensure the availability of necessary 
revenue before the addition of new benefits or programs. 

First, extended phase-in. The plan extends the amount of time 
States have to come into the program. States may come in as early 
as 1996; they must all be in by December 31, 1998. 

Second, the new long-term home- and community-based care pro- 
gram is now phased in over the 1996 to 2003 time period. 

In addition, we have increased what I will term a cushion to our 
basic estimates of the discounts to small firms and low-income indi- 



11 

viduals. When we originally calculated the discounts funding, we 
added a contingency as a safeguard. We increased this cushion 
from 10 percent to 15 percent to create a stronger safeguard that 
sufficient funds will be available with the capped entitlement. 

We estimated the increased amount of discounts needed under 
several scenarios, including, first, if the economy were to suffer sig- 
nificant downturn and if companies were to reduce their work force 
to qualify for additional discounts. The cushion that we have in- 
cluded in our estimates in the legislation has proved to be more 
than adequate to withstand either of these scenarios, in tandem, or 
individually. 

Even without the cushion, we made several very conservative as- 
sumptions in developing these estimates. Let me give you just 
three examples of the many that we have made in our modeling 
efforts. 

First, we had different estimates of the premium costs associated 
with providing our comprehensive benefit package from govern- 
ment as well as from outside sources. Within our government esti- 
mates from the Health Care Financing Administration and the 
Agency for Health Care Policy Research, we took the highest pre- 
mium estimate. 

Second, we estimated discounts for small employers using a 
threshold of employers with less than 100 employees, even though 
the policy only provides special protections to employers with 75 or 
fewer employees, thereby overestimating the amount of discounts 
that flow to small employers. 

A third example. Even though dual-earner families with one 
worker in a corporate alliance, the other worker in a regional alli- 
ance, have a choice of which alliance to join, we have estimated 
that all of these families would choose the regional alliance. Cor- 
porate alliances are not eligible for subsidies. They must self-fi- 
nance discounts for low-income workers. Therefore, we maximized 
the amount of discounts available to these dual-earner families. 

Those are three examples; others are a little bit more esoteric. 
On top of that base estimate we have added an additional 15 per- 
cent each year for an additional cushion to make it even more con- 
servative. 

The second thing that I want to point out is the internal review 
process we used to develop these estimates. A number of depart- 
ments and agencies have participated in the development and the 
review of the estimates underlying the President's health reform 
legislation. A team of actuaries and economists from the Executive 
Office of the President, the National Economic Council, the Council 
of Economic Advisors, the Office of Management and Budget; with- 
in HHS, the Health Care Financing Administration, the i^^ency for 
Health Care Policy and Research, and my office. Planning and 
Evaluation. 

In addition, we have had participation and estimates looked at 
internally, verified line by line from economists and others in the 
Treasury Department, in the Labor Department, and, as I am 
going to talk about in a minute, outside private, not-for-profit think 
tanks and consulting firms. 



12 

We also did something that is, to my knowledge, unprecedented. 
We had an outside external review of the process, the methodology 
and the assumptions which underlie our estimates. 

As you know, the normal course of business in the Federal Gov- 
ernment is to develop budget estimates internally. However, we all 
view that health reform is too important to proceed on a business- 
as-usual basis. Therefore, we used an unprecedented process of ex- 
ternal review. We organized an outside group of actuaries and 
health economists from nationally recognized health and account- 
ing firms and Fortune 500 companies. During our model building 
and estimating process we solicited their analyses, their sugges- 
tions, and we took, with few exceptions, their suggestions into con- 
sideration and implemented them, as I mentioned, without excep- 
tion. 

I want to make one other point along this line. In addition to in- 
ternally developing estimates of this plan within the Treasury De- 
partment and HHS, we also had estimates done by what I think 
is probably the most respected not-for-profit, private research group 
in the country that has a long history of doing these estimates. In 
fact, they have developed most of the methodology which underlies 
what we do in government as well as what the Congressional 
Budget Office does, and that is the Urban Institute. 

All through this process, we have had them developing estimates 
for us on the discount cost of this program. We have worked with 
them as an external check. We have made sure that our estimates 
internally were in line with what the Urban Institute estimates 
were. And I can say with great confidence that the numbers that 
you will see today are almost precisely the numbers that this pri- 
vate, not-for-profit research group has also produced. 

I think that members of the committee well know the reputation 
of the Urban Institute for developing such estimates. 

I would like to go now to an overview of the estimates, and let's 
spend a little bit of time on Chart 2, which is entitled Financing 
Health Care Reform. 

[See Chart II-A on pg. 84.] 

It is broken into two sections: sources and uses. I will start with 
the sources of funding. 

First, Medicare savings. As you can see, during the budget win- 
dow that we are looking at between 1995 and the year 2000, we 
have projected about $123.4 billion in savings to the Medicare pro- 
gram. The specific programmatic changes that the President has 
proposed are laid out in detail in the legislation. 

Let me summarize where the savings are coming from. Twenty- 
three percent of the savings are coming from proposals that are ex- 
tensions of expiring authorities such as the Medicare secondary 
payer provisions. Thirty-four percent of the proposals are funds 
currently paid to providers who serve a disproportionate number of 
low-income persons. Universal coverage renders this spending du- 
plicative. 

Just so that we are aware, Medicare is expected between 1996 
and the year 2000 to grow at about 10.8 percent per year. That is, 
the President's proposed savings would bring that rate of increase 
down to 7.4 percent per year. If you included the prescription drug 



13 

benefit spending in the Medicare total, that number would be 8.4 
percent per year. 

We also have for you summarized on the more detailed table 
where the savings are with respect to Part A, Part B of the pro- 
gram. 

Medicaid, is the second bank of savings. We have a substantial 
amount of detail there, but let me just summarize the biggest items 
that are there. First, the savings come from the Medicaid cash as- 
sistance recipients being covered through the alliance. The main 
reason is that there are lower growth in the outyears spending for 
the cash assistance population. We projected this to be about $22.3 
billion in savings. 

The second source of Medicaid savings has to do with phasing 
down what we currently pay for disproportionate share pajrments. 
That is $54.5 billion worth of savings. 

There are some other additions in there shown as negatives that 
we can discuss during the questions if we so choose. They basically 
have to do with, in part, moving the Medicaid program from a pay- 
as-you-go basis to a premium-based program which would entail 
some payment lags and some administrative costs associated with 
it. 

Down to the third bank, which is laid out as a tobacco tax and 
corporate assessment. With respect to the tobacco tax, the Federal 
excise tax on cigarettes will be increased by 75 cents per pack to 
99 cents per pack effective October 1, 1994. Comparable increases 
on other tobacco taxes will also be included. The Treasury Depart- 
ment has projected that that will increase revenues by $65.3 bil- 
lion. 

Second, with respect to the corporate assessment, an annual 1 
percent assessment on total payroll will be levied on firms that pro- 
vide health insurance through corporate alliances. The assessments 
will be effective January 1, 1996, are projected to raise $24.1 billion 
through that. 

Mr. Smith of Michigan. I am sorry. That is an assessment on 
what? 

Dr. Thorpe. Assessment on firms that provide health insurance 
through corporate alliances, here being defined as firms of 5,000 or 
more workers. 

The fourth bank is a line of other Federal savings, and you will 
see that there are some associated footnotes there. They come pri- 
marily from the VA, DOT and the Federal Employees Health Bene- 
fit Plan. The primary source of the savings have to do with the fact 
that the rate of increase in what the Federal Government spends 
for those health care programs will grow at a slower rate under the 
President's proposal relative to baseline. That is reflected in our 
projected savings. 

With respect to the VA, those are reductions in Federal pay- 
ments that would be offset by new receipts to the VA system since 
the VA will now be its own alliance, if you will, now open to have 
veterans as well as their families and employers making contribu- 
tions into the system. And the VA has mads some projections with 
respect to what those dollar flows on the private side would be. 

[The information follows:] 



14 



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16 

On the other revenue effects, let me try to summarize those 
quickly. This is something that, clearly, the Treasury Department 
has much more detail on, but let's go through the largest items 
here on the other revenue effects. 

The first one has to do with the effects of an employer mandate, 
cost containment and subsidies. What this is projected to be is a 
$23 billion increase in receipts into the Treasury, largely due to the 
fact that health insurance premiums under the President's plan are 
going to grow at a slower rate relative to what they are projected 
to grow. That slower rate in health insurance premiums would be 
reflected in either increases in cash wages or increases in corporate 
profits, both of which are taxable. There would be a rise then in 
tax receipts associated with that. The calculations that the Treas- 
ury Department has used to develop this are based on standard es- 
timating conventions that both Treasury and I believe the joint tax 
committee use to develop such estimates. 

The second piece of $30 billion has to do with excluding health 
insurance from cafeteria plans. That would be effective as of Janu- 
ary 1, 1997. Employer contributions for the comprehensive benefit 
package will continue to be excluded from income for purposes of 
calculating individual income and employment taxes, but contribu- 
tions of individuals to cafeteria plans will no longer be treated as 
tax-free. Those will be treated now as taxable income under the 
provisions that we have outlined. 

The third big piece in here has to do with a note here that says 
assessment on employers for retiree subsidies, which is going to 
raise $11.4 billion in revenue. As you are aware, the President's 
plan proposes to have the discount pool assume responsibility for 
the 80 percent piece of the premium that retirees and nonworkers 
would have had to have paid out of unearned income. That provi- 
sion comes into effect January 1, 1998. 

What this component of the revenue effect does is apply an as- 
sessment on companies that benefit from this provision. In essence, 
it is an assessment that would be levied on corporations that have 
reduced payments as a result of this. 

The precise calculation — just going to my notes on it so that we 
are clear — is that in each of the 3 years listed here employers will 
pay 50 percent of the greater of, first, the amount that firms would 
have paid for covering their early retirees in the absence of health 
care reform, and, second, the annual average of the actual early re- 
tiree health benefits paid by the employer during the period of 
1991 to 1993. This would be adjusted for medical cost inflation. 
This assessment would apply to both private and government em- 
ployers. 

As you will see, there are a series of other ones that have to do 
with tax incentives for health providers in shortage areas and so 
on, and we can provide whatever level of detail on those areas that 
you would like to receive. 

Moving to the next page, under Public Health/Administration, 
the President's plan is proposing a substantial expansion within 
the Public Health Service here listed as a total of $31.1 billion. I 
should be clear that that includes both public health as well as new 
administrative costs. I believe that the public health component of 
this is approximately $18 billion. 



17 

Let me give you some sense of what those public health initia- 
tives are. They include an expansion of capacity, including an ex- 
pansion of community health care centers. There are monies in 
there for work force development, including expansion of the Na- 
tional Health Service Corps and health professions. There are new 
monies for school-based clinics in the proposal. Most needed as we 
make major changes in the system, there are new monies for 
health services research initiatives in the plan as well. 

Those are basically the major programmatic areas, and we have 
a substantial breakdown of exactly what the year-by-year in budget 
authority outlay estimates are for the public service line items. 

You will see WIC enhancement. We are proposing to expand this 
program to fully cover kids aged 2, 3 and 4. We currently target 
spending on pregnant women and infants, so this will be a substan- 
tial enhancement of the WIC program. We believe fully funding the 
program over the time period shown here is a $3.1 billion increase 
in funding. 

The next line concerns new spending on academic health centers 
and medical education. This is a commitment in the plan to main- 
tain spending to academic health centers, both for what we tradi- 
tionally have called indirect costs as well as the direct salary costs 
at academic health centers. This is financed both by current Medi- 
care spending as well as by some premium financing that would go 
to academic health centers. 

The total new spending you can see is $46 billion over the time 
period, and it comes primarily from the two sources I have men- 
tioned. One is the existing payments that Medicare makes to teach- 
ing hospitals, both for indirect payments as well as direct payments 
for medical education. Second, a portion of what we pay currently 
in health insurance premiums would simply be used to finance 
about $18 billion of those expenditures. 

The last piece of this bank has to do with the administrative and 
start-up costs. As the system does get up and running, there are 
going to be some new Federal administrative costs involved with 
respect to helping to provide the data, the analysis and the infra- 
structure for health care reform. We have estimated those costs to 
be about $9.6 billion. 

The second bank has to do with long-term care. There are three 
basic program elements within long-term care. The first one has to 
do with our program for home- and community-based care for the 
severely disabled. As I have mentioned, this is a program which 
starts in 1996, will be fully phased in through the year 2003. 

There are two line items there. One is total spending, which is 
$74.5 billion. The second line is an offset to Medicaid. Essentially, 
this represents severely disabled who are being cared for and are 
receiving services through the Medicaid program who would now 
receive coverage through our new home- and community-based care 
program. The $17.8 represents the offset, if you will, to existing 
Medicaid programs for having the severely disabled now receive 
coverage through the new home- and community-based care pro- 
gram. So the net cost of this we projected to be $56.7 billion. 

There are two other items there within the long-term care bank. 
The first has to do with liberalized Medicaid eligibility, which is a 
provision that would increase the asset protection that individuals 



18 

have from $2,000 to $12,000. That is a State option. That is not 
a mandatory program. So it is up to the States, if they so choose, 
to avail themselves of this provision. We have estimated this to be 
a $5 billion item. 

Tax incentives for long-term care primarily have to do with the 
opportunity now that individuals would have to purchase long-term 
care insurance and to deduct the cost of those through an em- 
ployer, as they do other forms of health insurance today. 

The next bank down has to do with the new Medicare drug bene- 
fit. There are two pieces here. The first has to do with the costs — 
the benefit costs and the administrative costs — of the Medicare 
drug program, which we projected at $80.8 billion. In addition, 
however, as you will see in the plan, there is a rebate program that 
would be developed. Medicare would receive a 17 percent rebate 
from branded drugs. There would not be a rebate program for ge- 
neric drugs. So the effects of the rebate program are shown under 
the less rebate line item, so that the net cost of the Medicare drug 
program is approximately $66 billion over this time period. 

The last bank has to do with what I started out with in my testi- 
mony, which has to do with our estimates of the premium dis- 
counts in the plan. Let's spend a little bit of time walking through 
this so we can understand precisely what is in this. As I men- 
tioned, I spent a substantial amount of time walking us through 
how we came up with our base estimates, which I think are in and 
of themselves conservative, and, in addition to that, have built in 
an additional cushion for contingencies that I talked about during 
my earlier remarks. 

The first line here which shows premium discounts of $161.1 bil- 
lion over this time period is the net of two things. First, we pro- 
jected that our gross discounts, that is the total cost of providing 
discounts to small firms, low-income individuals, are $349 billion 
over this time period. 

In addition, however, as you will see from the following page 
there are a series of offsets to that gross subsidy amount. And 
there are really two types of offsets here. The first is for Medicare 
beneficiaries who are currently working. They will now receive 
their coverage for the time period that they are working and 
throughout the remainder of their enrollment year in the health al- 
liance. So they, as well as their spouses, will get coverage through 
the alliance during the time period that they are working. That 
represents then a direct savings to the Medicare program. That is 
an offset that we projected at approximately $28 billion. 

In addition, there are two other sources of offsets. One is that 
there are State savings, if you will, for Medicaid beneficiaries that 
are now receiving coverage through the alliance. These are pri- 
marily the individuals who are currently receiving Medicaid as a 
noncash beneficiary, so this is not the welfare population. We pro- 
jected that those savings have to be approximately $75 billion to 
States over this time period, and that indeed will constitute their 
maintenance of effort under the program. 

So the easiest way I think to think about the States' required 
maintenance as a buffer here is simply that States that are cur- 
rently making pa3rments today for noncash beneficiaries for the 
covered services in our plan will now simply make those payments 



19 

into the health alliance, and those pa3anents into the health alli- 
ance will grow at our budgeted rate of increase. So you can see that 
that truly is simply a transfer. 

States are making the payments today. They will simply make 
the payments into the alliances. Those monies will be used to fi- 
nance the discounts for low-income individuals within the alliance. 
So we are counting the $75 billion as a direct offset, the $28 billion 
in Medicare worker savings as a direct offset. And, in addition, 
there are savings to the Federal Government of $85 billion for dis- 
continuing their contribution under the noncash program as well, 
which is listed under the discontinued Medicaid coverage. 

So the offsets over this time period total $188 billion. They are 
the Federal Medicaid savings, the State transfers into the alliance, 
and the Medicare worker savings under our policy. So that first 
line item is, again, the $161.1 billion represents our best estimate 
of what the overall total cost would be of the discounts, which are 
349 minus these offsets. 

If we go to the bottom bank where it says total discounts and 
subsidies, you can see there that the 349 is outlined there again 
in detail. That is our estimate of the gross subsidies. What is un- 
derneath those is our estimate of what the subsidies are to employ- 
ers, households and discounts for out-of-pocket spending as well. 
You will see that each of those are shown without our 15 percent 
cushion built in. We are showing the 15 percent cushion as a sepa- 
rate line item, which over this time period turns out to be $44 oil- 
lion of additional money that we built into our base conservative 
estimates. So we have broken those out for you separately. 

Finally, let me just walk very, very quickly through the final two 
charts. I won't spend too much time on these, because I think they 
are pretty self-explanatory. 

First, if you look at Cnart 3, you will see that there is a total 
of about $161 billion in discounts. That traces back to the calcula- 
tion that I just went through. Just to give you a feel of where these 
go, approximately 29 percent will go to employers. Families will 
save about — households will receive about 53 percent directly. You 
will see that there is some additional discounts available for early 
retirees as well as out-of-pocket payments. There is a 13 percent — 
13 percent of the discounts are built into the cushion. 

Finally, let me end up by looking at where the discounts go in 
the employer sector of the economy by firm size. What this chart 
is showing is our estimate of what the discounts for employers 
would be if the plan were implemented during 1994. So this is a 
1-year estimate of what the discounts would be in 1994. We have 
estimated that it is about $22.4 billion. You can see that almost 
three-quarters of the discounts will go to the smallest employers; 
that is, employers that have firms with 25 or fewer workers, and 
you can then see the distribution of where those discounts go by 
other firm sizes. 

So, overwhelmingly, these discounts really are placed at exactly 
the areas that we were most concerned about and tried to design 
a structure to make sure that the discounts were focused on small 
low-wage firms, and you can see that three-quarters of them go 
there. 

[The information follows:] 



20 



Chart 3 

Distribution of Gross Discounts, 1995-2000 ($ billion) 



Type 


Amount 


Percent 






■ y. 


Gross Discounts 




Employer 


$100 


29% 


■ Private 


98 


28 


■ Slate/Local 


2 


1 


Household 


$184 


53% 


■ Non-retiree 


159 


46 


■ Non-worker discounts to retirees 


25 


7 


Retiree discounts 


12 


3% 


Out-of-pocket 


$9 


3% 


Discount "cushion" 


$44 


13%* 


Total 


$349 


100% 


Offsets 






Medicare 


$28 


15% 


Medicaid 


$160 


85% 


■ Federal 


85 


45 


■ State/Local 


75 


40 


Total 


$188 


100% 


Net Discounts 


Total 


$161 


100% 1 



' The cushion is 1 5% of the premium discounts, or 13% of total discounts 



21 



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22 

I know this is a very fast initial run-through of a very complex 
set of tables. We all look forward to working with the committee 
over the course of the next several months as we develop health re- 
form legislation, and I know Dr. Feder and myself would be happy 
to answer any questions you may have. 

[The prepared statement of Dr. Judith Feder and Dr. Kenneth 
Thorpe follows:] 

Prepared Statement of Judith Feder, Ph.D., Principal Deputy Assistant Sec- 
retary OF Health and Human Services, and Kenneth Thorpe, Ph.D., Deputy 
Assistant Secretary of Health and Human Services 

Good morning Mr. Chairman and members of the committee. It is a pleasure to 
be here this morning to discuss the President's Health Security Plan. This is indeed 
a momentous occasion and the beginning of a process that I believe will lead to a 
better, stronger, and more secure health care system for all of the people we serve. 

The President's proposal seeks to fix what is wrong with our health care system 
and preserve what is right. It seeks to strengthen all elements of the system so that 
those Americans who fall ill and those who seek to preserve and improve their 
health can rely on a high-quality system that is affordable, portable, and perma- 
nent. 

We in the Administration have worked for many months to craft a proposal that 
addresses the serious deficiencies in our current system. We have consulted with 
hundreds of experts, including nearly all members of the Congress; we have gone 
directly to the people of this country to hear their complaints and their hopes. 

The bottom line is that the quality of our current system is steadily eroding. You 
know all too well the fundamental problems: 37 million of our citizens have no 
health insurance, while another 25 million have inadequate coverage; skyrocketing 
costs increasingly place coverage and care out of reach for many Americans; our sys- 
tem is weighted down with too much paperwork and too many bureaucrats; manv 
citizens watch helplessly as their health care choices evaporate, leaving them with 
no say in where they get their care; our quality of care remains uneven, giving the 
majority of our citizens the best care in tne world, but leaving some others with a 
level 01 care no better than Third World countries; and employers, governments at 
all levels, and individusds continue to exercise less responsibility for our national 
health care system and their personal health care. 

The American health care system has lost sight of those who it is designed to 
serve — the patients. We must change the system so that it is clearly understood and 
so that it serves all Americans when they need care. 

We must get a handle on the cost of health care. We all know only too well the 
price we pay for uncontrolled health spending. While the overall budget of the De- 
partment of Health and Human Services has increased some 229 percent since 
1980, almost all of that has been swallowed up by inflation in our health care pro- 

?rams. Medicare spending, for example, has risen 363 percent in the past 14 years, 
he Federal share of Medicaid spenoing has increased even more dramatically — 526 
percent. As a result, health care programs have been the single largest contributor 
to our federal deficit and have systematically squeezed out resources that could be 
spent on other important priorities including education, job creation, infrastructure, 
and economic development. 

Rising health costs and uneven health care coverage have also taken their toll on 
American businesses. Over the last decade the annual amount spent on health care 
by the average American family has more than doubled from $1,742 to $4,296. And 
that amount will double again by the year 2000 if nothing is done. Even in the last 
year, as the health care sector has attempted to slow its growth, two-thirds of Amer- 
ican companies saw their health care costs rise; only 7 percent saw their costs fall. 
For many companies, health care costs are the single largest expense they incur; 
for many others, that expense is so great that benefits have been pared back or even 
eliminated. 

In the five weeks since the President addressed the Congress, we have spent 
much of our time listening. Listening to the comments and advice of lawmalters 
here on Capitol Hill and legislators and governors in our state capitals. Listening 
to those who are in the health care trenches — doctors, nurses, hospital administra- 
tors, and others. And listening to the people. 

What we've heard has helped us to improve our plan. But let me make one thing 
clear, the one thing that has not changed is the core set of beliefs that have guided 
us from the start. 



23 

SIX PRINCIPLES 

The President laid out the six principles that are at the core of our proposal and 
must be at the center of any health reform bill enacted by this Congress. (Chart 
1) They are Security, Simplicity, Savings, Choice, Quality, and Responsibility. We've 
seen wide bipartisan agreement on these principles. That's good. Now it's time to 
begin making them a reality. 

Today, I'd like to discuss some of these principles with you, starting with security. 

SECURITY 

It's not only the 37 million uninsured who lack health care security. They are only 
the most vivid evidence of this problem. Under our current system, no American has 
real peace of mind. Most workers who lose their jobs lose their insurance. People 
who change jobs often lose their insurance or have to change their coverage. Fami- 
lies stricken by illness face the added burden of trying to make sure their coverage 
won't disappear. And conscientious businesses and individuals who attempt to buy 
insurance are often turned away because the price is out of reach. At the same time, 
the lack of health care coverage in many low wage jobs frequently traps young 
mothers in welfare. 

To deal with this central concern, the President's plan builds on the existing 
structure of health insurance that has, for nearly 50 years, provided coverage to 
workers and their families. 

(Chart 2) Under the President's plan, the largest portion of financing for health 
care premiums — over three-quarters — will come from employers and households 
through their contributions to the cost of coverage. The remaining 24 percent will 
come from government. 

(Chart 3) We have calculated that the federal share, including our contribution 
to premiums, public health investment, long term care, and deficit reduction will 
amount to $389 biUion over the period of 1994 to the year 2000. We will produce 
that total in the following wav: $124 billion will come from savings achieved in the 
Medicare program. That will bring the annual rate of growth in that vital program 
more in line with growth in the private sector. Fully half of these savings can be 
achieved simply by continuing policies adopted by this Congress in the Omnibus 
Budget Reconciliation Act of 1993 and by reductions in payments to disproportion- 
ate share hospitals made possible by universal coverage. Another $65 billion will 
be saved in the Medicaid program, by enrolling remaining Medicaid beneficiaries in 
private health plans with lower cost growth and then a similar reduction in the dis- 
proportionate share hospital payments. We will produce another $40 billion in sav- 
ings in other federal programs, including the government employees, military and 
veterans' health care. Another $71 billion in federal revenue will come as a result 
of (1) slower growth in tax-exempt health spending that will produce higher wages 
and taxable profits; (2) excluding health insurance from cafeteria plans; (3) other tax 
changes; (4) the corporate retiree assessment; and (5) reduction in debt service. And, 
finally, we gain another $89 billion by increasing the federal excise tax on cigarettes 
and the one percent assessment on corporate alliances. 

How will these federal dollars be spent? The overwhelming majority of these 
funds will finance premium discounts for small employers, individuals, and early re- 
tirees. Another $66 billion will pay for the new Medicare prescription drug benefit; 
$65 billion will go for our long term care initiatives; $10 billion will pay for tax in- 
centives and deductions for the self-employed allowed under the plan; and $29 bil- 
lion will cover our investment in public health and some fairly minor start-up costs. 
That leaves another $58 billion in deficit reduction. I must point out to the Commit- 
tee that we have deliberately built in a cushion of $45 billion to deal with behavioral 
effects that cannot be modeled. 

UNIVERSAL COVERAGE 

A key to security is the assurance that all of our citizens are covered by an afford- 
able health plan. We achieve such coverage by asking states to create one or more 
regional Health Alliances to serve as the negotiators for consumers and employers. 
We ask our employers to pay at least 80 percent of the average weighted premium 
for a plan in each region with workers picking up the remainoer. The vast majority 
of American firms already provide such benefits; in fact, many do even better. 

(Chart 4) All health plans will be reauired to offer a comprehensive set of benefits 
to provide all Americans with the kina of care that our health professionals tell us 
is best. A package that has a strong emphasis on prevention. A package that covers 
inpatient and outpatient care. A package that offers specialty and primary care. And 



24 

a package that improves on our mental health and substance abuse treatment cov- 
erage and helps remove the stigma attached to these conditions. 

(Chart 5) We recognize that these new requirements may pose a temporary chal- 
lenge for some companies, particularly those that currently do not offer coverage. 
Our plan provides significant discounts for employers that will hold the cost of cov- 
erage to no more than 3.5 percent of payroll for small low-wage firms— defined as 
those companies with 75 or fewer workers with an average wage of $24,000 or less — 
and 7.9 percent of payroll for all other companies. 

Individuals will be eligible for discounts as well. For those required to pay the 
20 percent share of a health plan premium, discounts will be available for those 
witn income at or below 150 percent of the federal poverty line. Such individuals 
also will be protected by a limit of 3.9 percent of income on individual contributions. 
For the nonworking population that get no assistance from an employer with pre- 
mium costs, discounts are available for those with non-wage income at or below 250 
percent of poverty. And, finally, for retired workers between age 55 and 65, the fed- 
eral government will eventually pay the full 80 percent employer share of the pre- 
mium. 

To further reduce the cost of coverage, we will reform the insurance market to 
eliminate unseemly underwriting practices that weed out the sick and cover only 
the healthy. We will end the practices of cherry-picking and cream-skimming. No 
insurance company will be allowed to turn away a person seeking insurance because 
of a pre-existing medical condition affecting that individual or a member of that 
family. Nor will insurers be allowed to continue pricing those who are sick or dis- 
abled out of the market. We propose returning to the historic method of community 
rating that served our country well and offered all Americans coverage at a reason- 
able cost. 

(Chart 6) Together, these changes will result in virtually universal coverage of our 
population. In contrast, if we do nothing, the number of uninsured will grow from 
37 million to an estimated 55 million at the end of the decade, or nearly one in five 
Americans. 

During the last five weeks, we have gone over of the numbers in our plan, 
scrubbed them and rescrubbed them so that we can explain with confidence to you 
and to the American people how this plan will work. There are no rosy scenarios 
here, no magic asterisks. These are conservative numbers that will stand the test 
of public scrutiny. 

A key feature of the President's plan is predictability. It will be easy for all Ameri- 
cans to determine the cost of their coverage and the scope of that coverage. Health 
plans will be required to offer four distinct classes of premiums for each policy: one 
covering single individuals; one covering couples; one covering single-parent fami- 
lies; and one covering two-parent families. 

While the premiums charged by each Health Alliance will differ according to local 
community costs, we have determined the average national premium for each group 
in 1994 dollars. The national averages are as follows: $1,932 for a single person; 
$3,865 for a couple without children; $3,893 for a single-parent family; and $4,360 
for a two-parent family with children. 

For those families and individuals who must pay the maximum 20 percent of 
these premiums, monthly costs will range from a low of $32 to a high of $73. As 
I said, these amounts will vary from state to state and community to community, 
but these national averages give us a good idea of how reform will change our cur- 
rent system for the better. 

For employers, the new system will be predictable as well. According to our esti- 
mates for 1994, the average undiscounted cost to some employers will be as little 
as $1,546 for individuals and as much as $2,479 for two-parent families with chil- 
dren. With the premium discounts we offer, however, the cost to employers will be 
considerably lower. 

Stable, predictable health insurance expenses will be of great value to business 
owners — particularly small businesses — who today cannot know with any reliability 
what their annual costs will be. Under today's system, one illness in one family can 
devastate a year of financial planning by a grocer or a hardware store owner. This 
must change — and it will — if we're going to nave an economy in which small busi- 
ness can flourish. 

SAVINGS 

In order to ensure the kind of security I have just discussed, we must control the 
cost of health care. 

In the current year, the United States will spend approximately 14 percent of its 
gross domestic product on health care. That is far greater than any other industri- 



25 

alized nation. In fact, our closest competitor in the health care arms race is Canada, 
which spends only 10 percent of its GDP on health care. If we do nothing about our 
costs, health care will rise to 19 percent of GDP at the end of the current decade. 

Through changes in the competitive market, our plan places restraints on this 
growth that will still allow spending to increase, but by a much more reasonable 
amount — one much closer to the rise in other consumer prices. To ensure that these 
changes achieve the necessary savings, we will create a backstop system of enforce- 
able premium caps. That way, no company or individual will pay more for coverage 
than is appropriate. 

We extend this concept of savings to all payers of health care — public and private. 
By applying reasonable limits to the growth of Medicare, we can reduce the rate 
of that program's growth during this decade even while adding new coverage for 
prescription drugs. 

By applying these limitations, we will expand the Medicare program to include 
an important new benefit covering the cost of prescription drugs. Numerous studies 
indicate that, without such coverage, many of our senior citizens are forgoing pre- 
scribed medications, independently changing their dosages to make prescriptions 
last longer, and even trading unused portions of prescriptions among neighbors. All 
of this is done in the name of saving money; all of it endangers the health and lives 
of our senior citizens. The end results of our efforts will be a stronger Medicare pro- 
gram that will continue to serve all of our senior citizens. 

We also plan to completely transform our Medicaid program for acute care serv- 
ices. Medicaid beneficiaries have suffered too long with a system that offers, in 
many ways, second tier medical care. Uneven coverage and reimbursement rates 
have left too many of our needy citizens without coverage. And even those who are 
in the program are often turned away by health care professionals who refuse to 
accept Medicaid patients. 

Under our plan, we place all of these individuals in a mainstream medical system: 
They will be enrolled in Health Alliances, which will provide them access to account- 
able health plans. Each Medicaid beneficiary will get the same health security card 
as all other Americans. They will receive the same comprehensive benefit package, 
plus additional services traditionally provided through Medicaid to allow access to 
the health care system. Non-cash recipients also will gain access to these health 
plans with accompanying wrap-around benefits that will ensure that none of our 
neediest children will lose the services they now utilize. 

SIMPLIFICATION 

Another important element of a reformed health system is simplicity. We have all 
heard the complaints from the men and women who provide meoical care. They tell 
us that the current system is too confusing, too intimidating, and too expensive. We 
are wasting time and money filling out forms, filing claims, and flailing at an unre- 
sponsive bureaucracy. Nurses and doctors oftfin must take time away from patients 
to fulfill the demands of some faceless bureaucrat based 500 miles away. 

Our new system (Chart 7) makes it easy for consumers to gain access, get the 
care and counseling they need, and go on with their daily lives. It is structured with 
the consumers' viewpoint in mind. And from that viewpoint, it is a clear and concise 
system. 

(Chart 8) The Alliances will have important responsibilities but they will not be 
a new level of bureaucracy that gets in the way of business owners and consumers. 
Rather they will be a tool to cut through the bureaucracy of private insurance. The 
responsibilities of the Alliances are clearly specified in the legislation. Some of these 
are: enrolling individuals in health plans and issuing Health Security cards; trans- 
ferring premiums from employers and individuals to health plans; providing con- 
sumers with information about the quality and cost of health plans; working with 
health care professionals to develop fee schedules for fee-for-service plans; and serv- 
ing as an ombudsman for employers and consumers. 

The President's plan also assists health care professionals and institutions. We 
will do away with the more than 1,500 often conflicting claims forms now in use 
and provide a single form that will be easy to understand and easy to complete. And 
we will encourage greater use of electronic claims and speed the process of reim- 
bursement throughout the system. 

CHOICE 

One of the prices we have paid for our current patchwork system has been the 
loss of involvement of consumers in the choice of their health plan and their medical 
providers. 



26 

Our proposal guarantees Americans a choice of health plans, including at least 
one fee-for-service plan. In many areas of the country, we expect there to be a great 
deal of choice. We realize, however, that in some parts of our country such wide- 
ranging choice may not be quickly available. The President's plan calls for specific 
efforts to improve choice in rural areas of the country including the creation of new 
community health centers, a doubling of the size of the National Health Service 
Corps, provision of technical assistance to those who want to create new health 
plans, the training of additional mid-level practitioners, and designation of many 
rural hospitals and other health facilities as essential providers. 

But we must remember that the greatest benefit we can provide to the rural parts 
of our country is universal coverage. Our most recent data indicate that 30 percent 
of our rural population is uninsured. This creates a tremendous drain on rural com- 
munities ana tne facilities that serve them. That will change. 

The guarantee of choice goes beyond health plans. Americans are used to a system 
that allows them to select their health care professionals. This will be preserved. 
First, everv Health Alliance will be required to offer at least one fee-for-service plan. 
Second, all plans will be required to offer a point-of-service option that will allow 
consumers to go outside the plan for services they desire. And, finally, all physicians 
will be allowed to join multiple health plans. 

QUALITY 

There is no question that any health care system must be based on high quality 
medicine and must have built-in mechanisms to measure and protect that quality. 

The President's plan calls for the creation of a National Quality Management Pro- 
gram designed to improve access, effectiveness, and appropriateness of care. Work- 
ing with consumers and providers of care, we will develop national measures of 
quality performance; develop and improve consumer surveys; and recommend per- 
formance goals for the health plans. 

In addition, the work now being done by the Agency for Health Care Policy and 
Research on practice parameters will continue and that information will be shared 
with all health plans and health care professionals as well as the general public. 

RESPONSIBILITY 

Finally, no system that we design can work without the participation of all in- 
volved. We offer Americans a great deal through our health care plan; in return, 
we ask something of everyone. 

We ask employers to contribute to the cost of coverage for their employees. In re- 
turn, we make sure that all companies play by the same rules and we give assist- 
ance to those who need it. 

We ask employees to contribute to the cost of their coverage and to educate them- 
selves about the choices available to them. In return, we provide lasting coverage 
that moves with them wherever they go. 

We ask our caring health care professionals to provide high-quality care to all 
Americans at a reasonable cost. In return, we eliminate the incidence of charity 
care, and allow health care professionals to spend their time with patients, not pa- 
perwork. 

We ask our state and local governments to maintain their current efforts, particu- 
larly toward the poor and disabled. In return, we give states the maximum flexibil- 
ity in designing their systems to meet their local needs. 

CONCLUSION 

In conclusion, Mr. Chairman, I believe we have come to an historic crossroads. 
One that allows us, as public servants, to leave behind us tangible evidence of our 
work and our caring; to fulfill one of the great unfinished items on our national 
agenda; and to create a sense of lasting security for all Americans on one of the 
most personal of issues, health care. 

Working together, we can create a system of health care that is secure but not 
stagnant. One that is simple but not simplistic. One that saves resources instead 
of sapping them. One that offers choice instead of chance. One that guarantees qual- 
ity for all, not for some. And one that asks for responsibility while eliminating risk. 

We can do this. We should do this. And together I know we will do this. 

Thank you. 



27 



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30 



CHART 4 



BENEFITS: THE HEALTH SECURITY PLAN COMPARED 
WITH CURRENTLY OFFERED PLANS 



BENEFITS 


HEALTH SECURITY PLAN 


BLUE CROSS 
STANDARD, FEHBP 


FORTUNE 500 
COMPANY 




LOW COST 
SHARING (HMO) / 
m-NETWORK 

combination 
plan- 


high cost 
sharing (ffs)' / 
out-of-nhtwork 
combination plan 






Medical Plan 
Maxim um 


No lifetime dollar maximum 
Umil 


No lireliine dolUr miximum 
limJI 


Lifclime maximum for organ/ 
tiaauc tnniplanta. menul 
health and lubMancc abuse 


Lifetime maximum for 
inpalient cubsuncc abuse 


Oirt-of-Pockel' 


SISOO/ individual 
$3000 / family maximum 


$1500/ individual 
S3000 / famJIy nuximum 


$3000 / individual 
$3000 / family 


$ 1 ,000 per covered individual! 
- does not mclude deductible* 


UMluctibles 


None 


S200 J individual 
$400 / family 


S200 / individual 
$400 / family 


$200/ individual 
$400;family 


Inpabenl HospiuT 


Full coverage, no coinsurance 
No dollar or day maximum 


20% coiruuracwe 

DO dollar or day maximum 


$250 per admiuion deductible 
No dollar or day maximum 


Full coverage in-network. 
20% coinsurance out-of- 
network 


Doctor! Office 
Visits, Hospital 
j OulpatieiU 


SlOcopay per viftit 

No dollar or viiii maximum 


20» coinaurarwc 

no dollar or visit maximum 


25 % coiruurance 


20% coifuurance 


1 Outpati«al Labora- 
1 lory, Radiolofy, 
1 and Diasoostic 
1 Serricei 


Full coverage 


20% coinsurance 


25% colnaurmrKe 


Full coverage m-nciwork 
20% coinsurance oul-of- 
network 


Eiatrgeacy 


$25 copay per visit, waived 
in emcrgerKy 


20% coiniursrKC 


Full coverage within 72 hrs, of 
accident 


Full coverage - required plan 
ratification within 48 hours 


Prvrentive 

Serrica' 


Full coverage, bated on 
periodicity schedule 


Full coverage, baaed on 
periodicity tcbedulc 


25% coiniurartcc 
100% well childcare 


not specified 



1 . SSI arkJ APDC recipients, and families with adjusted family IrKome below 150% of the applicable poveny level, are eligible for 
reductions in cost sharing, if alliances determine that there are insufncicnl numbers of low or combination cost sharing plana available. 

2. FFS ■ fee for aervice. 

3. Deductiblct counted toward out-of-pocket limits. 

4. Menul health and aubitance abuae have separate provisions, see below. 

5. Including well-«hitd and prenaul care, periodic health exams, targeted tests and vaccinea. 

6. Tht National Health Board, in consultation with expcru in clinical preventive services, will review and define specific Krvices as 
prevemive services for high risk populations, and will defme appropriate periodicity schedules. 



31 



CHART 4 {cont. ) 



1 BENEFITS 


LOW COST 


HIGH COST 


BLUE CROSS 


FORTUNE 500 




SHARING (HMO) / 


SHARING (FFS) / 


STANDARD, FEHBP 






IN-NhlWORK 


OUT-OF-NHl'WORK 








COMBINATION PLAN 


COMBINATION PLAN 






Prcacriptioa Drags 


$5 per preKripUon 


$250/year deducuble 
20% coinaunnce 


$50 deducuble 
40% coinsurance 


20% coinsurance 

50% coinsurance for drugs for 
treatment of tnental or nervous 










conditions 


Inpatienl MeaUl 


Pull covenge 


1 day deductible 


$250 per admission deductible; 


20% coinsurance pre- 


HealUi (MH)and 




20% coinauTvtce 


40% coinsurance 


certification rex^uired 


SubstADce Abuse 










(SA)' 


30 day limit / epiiode 


30 day limit / ^iaode 


Unlimited daya 


Substance abuse: Full coverage 




60 day annual limil 


60 day annual limit 


$3,000 maximum for subsUnce 
abuse treatment program - 28 
day max. 

$50,000 lifetime maximum 


in-network 

20% coioiuivice out-of- 

nctworit; 30 days per stay. 2 
suys maximum 


Outpatient Mental 


All outpaiicnl except 


All outpatient except 


40% coinsurance; 25 viaiu 


20% coinsurance for employee 


Health 


psycbolhenpy - $10 / vibiI 


paychothcrapy • 20% 


aniuul maximum - includes 


ll 






coinsurance 


partial hospiuUzation and visiu 
for outpatiem subsUnce abuse 


50% coinsurance for dependent 




Piychotherapy - $25 / viiii. 


Paychotherapy • 50% 








30 viaiu annual maximum; 4 


coiniurmrtce; 30 viaiti annual 








viaita / I inpatient day at 


maxintum; 4 viaiu / 1 inpa- 


$50,000 lifetime maxinuim 






plan'a diacretioo, beyond 30 


tient day at plan's discretion. 








vtsita 


beyotid 30 visiu 








Inienaive nonreaidential - full 


Intensive nonresidential - 








coverage; 120 day annual 


20% coinsurance, 120 day 








maximum Available al plan 


annual maximum. Available 








diacretjon: fira 60 daya a& 


at plan discretion; first 60 








trade againn inpalieni benefil, 


daya as trade against inpatient 








remaining 60 days aubject to 


benefit; remaining 60 days 








plan diacreuoQ 


subject to plan discretion 






Oatpatkol 


30 group therapy visiu subse- 


30 group therapy visiu 


Subject to menul health limiu 


20% coinsurance; 30 visit 


Substance Abuse 


quent to irealmcnt in inpatient 
or intensive nonreaidential 
aettinga 

For iodividuali not initially 
treated on an inpatient or 
inteoaive oonreaidential basis. 
4 viaiu for 1 inpatient day 
trade 


Bubse<iuent to treatment in 
inpatient or intensive nonresi- 
dential aetitnga 

For iodividualt oot irutially 
treated on an inpatient or 
intensive nonreaidential basis. 
4 viaiu for 1 inpaUeni day 
trade 




maximum 


Hospice for 


Full covenge 


20% coiiuurancc 


100% coverage for bome 


Not specified 


TemuiuDy ID 






hospice; $250 per admission 
for inpatienl hospice with 5 
conaecutive day limit 





7. In 2001, iiqiatient aod outpatieitt MH/SA Umiutions and higher cost sharing are phased out. 



32 



CHART 4(cont. ) 



BENEFITS 


LOW COST 


HIGH COST 


BLUE CROSS 


FORTUNE 500 U 




SHARING (HMO) / 


SHARING (FFS) / 


STANDARD, FEHBP 






IN-NETWORK 


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20% coinniraoce aa inpaiicni 


25% coinsuraiKe 


20% couuurvrwe 


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tlicmttiivc tftcr tcute Lllnesa 


alurrwtive after acute iIlncM 






(ECF - SNT sad 


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ruue umcnl 

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care racUiiiei 


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care 




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20 9E coiniuraDce 


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only 


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only 






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205E coinsurance, $50 






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Full Coverage 


Full Coverage 


25% coinsurance 


20% coinsurance 


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$10 copay per viiil; 


20% coinninnce; 


25% coiiuuraoce 


Not specified 


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reaaacued at 60 day* for 


rcaaaeaaed at 60 days for 








conunuing improvcnicm 


conuauii^ improvenienl 


25 viail limit 




Home Medical 


Full covcrBgc 


20% coinsurance 


25% coinauraiKe 


Not specified 


Equipment 











8. Id 2001, adult prevention tod treauneoi, and oithodoniia for aeverc tnalocclusioo id children are added 



33 



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38 

Chairman Sabo. Thank you very much. 

Let me get back to the question of cost control because that 
clearly is key for numbers staying in place in outyears. I assume 
you take a photo of where you think the country is today and make 
assumptions for that for the future. Now, am I right that your limit 
on health insurance increases is roughly CPI plus population? 

Dr. Feder. We actually phase down to that, Mr. Chairman. It 
phases down, beginning when the constraints go into effect, and it 
hits CPI plus population in 19 

Dr. Thorpe. Nineteen ninety-nine. 

Dr. Feder. Nineteen ninety-nine. Our concern is to change the 
way in which our health care system is operating today. We talked 
earlier about entitlements. You might say today that the entitle- 
ment the health care system now has is on our wallets. We clearly 
need to make a change in that regard. 

The constraints we have assumed expect that, by changing the 
health care marketplace, we can have a dramatic impact on the 
rate of health care cost growth in the immediate term and that we 
need to do that in order to achieve the fiscal stability that I talked 
about in my opening remarks. 

We have also, though, looked at the longer term beyond the year 
2000 and feel that once the incentives in the system have changed, 
that we may want to look again at the rate of growth in our sys- 
tem. We may be, like other nations, able to keep our expenditures 
in line with the growth in our overall economy. And our proposal 
allows for greater flexibility once we have changed the system. 

Chairman Sabo. How are your reductions in Medicare reim- 
bursements tied to your assumptions about the general cost control 
of general health care? 

Dr. Feder. Well, we have looked to achieve a slowdown in the 
rate of increase in Medicare growth that is comparable to the slow- 
down we are achieving in the private sector. I think it is really im- 
portant in that regard to contrast the President's plan from the last 
decade of reductions in Medicare spending where essentially we 
pursued some of those reductions without any changes in the pri- 
vate sector and so proceeded to shift costs to the private sector. To 
continue in that vein could ultimately threaten access for Medicare 
beneficiaries. We find that an unacceptable route for the future, 
and, consequently, pursue them in tandem. 

Chairman Sabo. How quickly do you bring down that cost esca- 
lation and insurance premiums to CPI plus population? 

Dr. Feder. The phase-in that we described is from 1996 through 
1999. Is that correct. Ken? Yes. 

Chairman Sabo. What is it year by year? Do you have those 
numbers? 

Dr. Thorpe. It starts out at CPI which we are using in our num- 
bers to be — again, these are the estimates from the Council of Eco- 
nomic Advisors of 3.5 percent, which you will see CBO is at 3.1. 
So we have used some higher inflation numbers. 1996 it goes from 
CPI plus population, plus 1.5 percent, and then it slowly phases 
down to 1 percent, V2 percent, and then CPI plus population 
growth in the year 1999. 

Just as a very quick follow-on, two issues here. We felt that since 
we are making a substantial investment in new spending during 



39 

this time period that the actual rate of increase in health care 
spending is, of course, going to be higher than CPI plus population 
growth because we are covering the uninsured. We are providing 
a new Medicare drug benefit as well. So to be clear, those rates of 
increase are really for health insurance premiums, once everybody 
has received coverage. 

So that is not a limit on year-to-year growth from today's base- 
line. That is to say, that everybody has a health insurance pre- 
mium — so there is a lot of new spending that goes in up to that 
point. Once people do have the new health insurance coverage, the 
year-to-year growth in those premiums would rise at that rate. 

We have also talked separately about the rate of increase in the 
21st century, which we think in terms of a long-term rate of 
growth, that once we have achieved what we think are substantial 
savings that we can get in the system today in terms of adminis- 
trative costs and so on, the long-term growth really should reflect 
not only the growth in inflation and in population growth, but 
would also incorporate estimates of changes in aging as well as 
changes in productivity. We have had several discussions with a 
number of economists across the country on what that long-term 
projected rate of growth should be, and we continue to work with 
them on developing a more precise formula for looking at growth 
in the 21st century. 

Chairman Sabo. We would be interested in those projections as 
you develop them. 

Would you speak to the issue of cost variations among States, or 
regions within the State, and how you deal with it? Because those 
variations are substantial, and I would expect substantial vari- 
ations from your average national premium. 

Dr. Feder. There are substantial variations, and although many 
of them have to do with differences in the cost of living or the de- 
mographics, they also have to do with differences in the nature of 
the health care systems and in the patterns of practice in those 
areas. As we move forward with health reform and really change 
the system to give health providers of all kinds incentives to oper- 
ate more efficiently, we expect to see a diminution of the variations 
across States as we learn to do things more efficiently and effec- 
tively. 

But you have expressed concern, as we have talked privately 
about concerns, about their being — all areas of the country being 
held to a rate of growth that is the same in terms of our safety net 
system, our fallback premium cap. No, sorry 

Chairman Sabo. No, my concern is not the rate of growth. I don't 
want to escalate the growth for folks who have done a good job. 
But, as I understand the system, we build in several subsidies to 
firms who are located in high-cost States. While it is a small em- 
ployer cap, the impact of the 7.9 premium cap which then the gov- 
ernment cost-shares, clearly will be of substantial benefit to em- 
ployers in certain States and significantly less so in other States. 
And, in effect. States who have done a good job are being asked to 
help pay for high-cost States or high-cost regions. 

Dr. Thorpe. The discounts for employers are 7.9 percent of the 
firm's total payroll. So to the extent that there is a correlation be- 



40 

tween payroll and region of the country, I believe that that would 
be correct. 

My second statement is that, by design, we are directing these 
discounts to smaller, low-wage firms to make sure that as they 
come into the system, that the coverage is affordable. So it is 7.9 
percent of payroll; it is not a premium-based calculation. It is based 
on payroll. 

Chairman Sabo. That doesn't answer my question, but think 
about it. 

Mr. Kasich? 

Mr. Kasich. I just have this one question. I need to go back to 
the chart. I don't know what we do without charts any more. 

You know, these, again, are these projections, and this is why 
this is not a partisan deal. This is really the fact that there has 
been nobody — 1967, I was barely bom then. We have a whole 
stream of Republicans and Democrats just like you folks, and you 
know what? You are working like the dickens, and you deserve all 
the credit in the world for cranking out stuff — I mean, I can just 
imagine what you have been doing down there trying to crunch all 
these numbers out. 

But no human being, it is pretty obvious, over the last, you 
know, 34 years, has been able to project anything right on this — 
in this area of what the government is going to do and what the 
ultimate result is. I mean, I think that is pretty devastating and 
really is — it is not directed at you folks. It is directed at the fact 
that you can do it probably much better than they can do it. 

The thing that bothers me, and this is what it comes down to, 
it comes down to whether we are going to level with people about 
the plan. What I hear you saying is we are not promising to slow 
this growth in spending. You see, what troubles me is we wanted 
to have this health care reform because we wanted to slow the 
growth in health care spending, but the problem is is that the 
health care spending goes up faster if we do what you want as op- 
posed to nothing. 

These are your numbers. These aren't my numbers. These are 
your numbers. And I think Dr. Thorpe said that we expect things 
to get better after the year 2000. That is fine. What we are now 
telling people is that the situation is going to worsen when we 
come to total health care spending by the Federal Government, but 
it will get better after the year 2000. 

Secondly, though, and this is what is equally troubling. President 
Clinton said in his State of the Union speech and everywhere he 
goes that we have to do health care reform because we have to fix 
the deficit. These are your numbers, okay? Minus the $71 billion, 
because we don't think you are going to get credit for $71 billion. 
If I wrote it in my budget, I can promise you we couldn't count it, 
because we couldn't get credit for $71 billion. 

But your deficit, your deficit widens. I mean, this is where you 
said that the deficit was going to go. I didn't say it. You said it. 
And this is where it is going. I mean, the only question is is that 
how is this plan going to fix our budget deficit, our economy and 
prepare us for the 21st century, out of the blueprint you got here, 
vision for change, if, in fact, we are spending more on health care 



41 

and the deficits are getting wider? I mean now — and creating 
more — ^yes, and to say that we got everybody 

Leon Panetta, great American. I love Leon. I do. He is a great 
guy. Leon is like, you know, bashing himself every day about these 
entitlement programs, and you want to create three more. I mean, 
I don't understand this. How can we create three more entitlement 
programs, have higher health care spending and wider deficits and 
you say this is a great plan? Where? Who is this great for? 

Dr. Feder. Okay. 

Mr. Kasich. Yes. 

Dr. Thorpe. Why don't we go back through the charts. 

Mr. Kasich. Good. 

Dr. Feder. I wanted to start with this one. I think that when we 
look at the Medicare program essentially and the rate of increase 
we have experienced, alongside, probably equally great, increases 
in the private sector, what we are dealing with is if problem that 
brings us here today, and that is a health system that is out of con- 
trol, that is accountable, essentially, to no one. It is not just a pub- 
lic problem. It is a private problem as well, and in many periods 
a bigger problem in the private sector than in the public sector. 

Essentially, what the Medicare system did when we put it into 
place was simply pay the prices, whatever were charged or what- 
ever was spent in the health care system. It was open-ended in the 
truest sense. 

And the critical issue we must address in health reform is hold- 
ing that health care system accountable. Now, as I said at the out- 
set, that means bringing everybody in. You leave people out, you 
leave benefits out, you leave people unprotected, and what you 
have is people with inadequate care and holes in the system that 
continues cost shifts. So with a comprehensive system you make a 
major step to holding the system accountable. You must also 
change that system. 

And our plan, as you know, makes major changes in the market- 
place and holds the system accountable, holds health plans ac- 
countable for providing a guaranteed package within premium 
bids. 

I will stop. We have more to say, but I know Ken wants to talk 
about the improvements in estimating. 

Mr. Kasich. Let me just say those are very good points. The only 
problem is that this is a projection. This demonstrates govern- 
ment's inability to project. It is not illustrative of health care 
growth. It shows that bureaucrats can't predict. 

And, secondly, you just said that we have to stop cost shifting. 
Of course we do. But everyone knows that it is not cost shifting 
from the private sector to Medicare, it is cost shifting from Medi- 
care to the private sector. So it is just the reverse of what you said. 

Dr. Thorpe. Let me do a slightly different tack on this, and let 
me talk about this in two respects. First, let's talk about the esti- 
mating issue, and, second, let's talk about why the rate of increase 
in spending will not and cannot grow faster than we predict. But 
let's go to the estimating issue first. 

Go to the state of the world of government, as you call it, bureau- 
crats and actuaries in the early 1960's. This is a state of the world 
with respect to understanding how people behave who are largely 



42 

uninsured. They become insured, and it may have one or two minor 
articles in an academic journal. We fundamentally understood very 
little at that time period about what happens when you provide in- 
surance to an uninsured individual. 

So if you go back and look at the original projections, they were 
quite off. 

Let me simply say that, starting after that experience with both, 
not just Medicare but Medicaid as well, that the Federal Govern- 
ment, recognizing this, initiated the first of several massive experi- 
mental programs and studies to precisely understand. The first one 
was the Rand Corporation, called the Health Insurance Experi- 
ment, which examined how people react in terms of their spending 
patterns, their utilization, their year-to-year growth, when they 
move from being uninsured to insured. 

We literally have compendia of studies now that understand by 
income, race, region of the country, age, health status, how much 
people spend at a point in time as well as over time as they move 
from being uninsured to insured. The numbers in terms of those 
projections, I don't care who is doing it now, if you look at the Rand 
results, if you look at experimental program results, the last two 
decades of our understanding of how to make these projections is 
apples and oranges from where you are starting in 1960. 

We know, first of all, how to make the projections largely because 
we learned from exactly this set of circumstances. That is my first 
point. 

The second point has to do with the structure of how we have 
cost containment set up in this program. And there are really two 
critical pieces on this. One is that we know the costs of taking 
somebody who is uninsured, making them insured. We know the 
change in private spending, we know the change in Federal spend- 
ing, would have added a 150 percent cushion. We know that. 

Second is that the year-to-year growth in that has two pieces 
that we know — ^you never know anjrthing with certainty, but I 
think with a high degree of accuracy, why the rate of increase is 
going to be within our budgeted projections. 

One is that we believe that competition, as we have structured 
this with the health alliances and the health plans, will work. We 
have looked at experiments throughout the country in competitive 
bidding, whether it is the program in California, CALPERS, State 
employee programs in Minnesota, MRMIBS, there is a variety of 
published academic empirical research that shows what happens in 
these competitive bidding programs. 

But, second, if for some reason the rate of increase in the average 
premiums rises slightly higher than what we projected, we have an 
automatic, indisputable mechanism to adjust the premiums down- 
ward and to reduce the pajmients. That is, an automatic adjust- 
ment occurs. 

Mr. Kasich. Of course, this is precisely what Danforth said. Let 
me say to you your administration is $50 billion off your budget es- 
timates, and we are not even — we are 1 year through your term, 
and you are already $50 billion off on your budgets. This was the 
most honest budget estimates ever devised by man. Now, if you are 
$50 billion off your budgets already, you are asking me to have 
faith in you? 



43 

I think you are good, and I think you are smart, and I think you 
are trying hard, but I think Cap Weinberger, when he was Sec- 
retary of HEW did the same thing. But, of course, then have you 
the caps, and, as Danforth said, and I know Dr. Feder said, well, 
then the government will come to the rescue. Well, I mean we are 
back to the fact that you don't have control. But let's — you want 
to keep looking at charts. Let's look at a couple more charts. 

Dr. Feder. Let's look at the one you have up there now because 
you just raised that. 

Mr. Kasich. Sure, sure. 

Dr. Feder. Essentially, we are talking about — Ken went through 
the cost containment system that we have. And what you are allud- 
ing to, I believe, are the caps on the entitlements, on the discount 
pool that is available for low-income people 

Mr. Kasich. No, no, no, I am talking about the caps you have 
on everything. 

Dr. Feder. All right. So am L Excuse me. I am seeing your en- 
tire list, I am going down it. What we have done, by saying that 
the subsidy pool is limited, is essentially hold the system account- 
able. Now, Ken has been through why it is that we believe firmly 
that those caps will not be hit. But we, too — the President is quite 
concerned about open-ended entitlements and believes — do you 
want me to continue? 

Mr. Kasich. I hear you. 

Dr. Feder. Okay. Essentially, that he feels very strongly that we 
have a mechanism that holds the executive branch and the Con- 
gress accountable for the efficient operation of the system, and that 
is the mechanism that we have put into place. 

Mr. Kasich. You do have a cap, and that is why the hospital in- 
surance people are worried about the fact that we are going to run 
out of money, and they are not going to have any choice. 

Dr. Feder. The insurance people I think are worried about truly 
changing the system, so I disagree with you about that. 

Mr. iSvsiCH. What they are worried about is if you have a cap 
on everything and you keep providing more benefits, you got the 
benefits and you don't have the money — guess what happens when 
you are passing benefits out but you don't have the money to pay 
for it? 

Dr. Feder. We see it very differently. May I respond to that or 
not? 

Mr. Kasich. Sure. 

Dr. Feder. Essentially, the problem right now is not the scope 
of the benefits. The problem is how we are paying for health care. 
Essentially, we have got to hold health plans accountable for the 
package — for providing those benefits efficiently. When you look at 
the package of benefits we now have, it is a legitimate, reasonable 
expenditure or set of benefits that actually provide people the secu- 
rity they need. 

What is wrong right now is that in an unfettered insurance mar- 
ket the insurance companies are able to hike the premiums when- 
ever anybody gets sick. They are not held accountable for working 
with doctors and hospitals to find ways to deliver health care ap- 
propriately. They are focusing on avoiding risk, not on delivering 
health care efficiently. 



44 

We changed that. We can afford, as every other Nation can, to 
deliver health care that people expect. 

Mr. Kasich, I don't disagree with that. Let me just tell you that 
our plan, the Republican plan — see, I think the difference is — and 
I don't want to take everybody's time here — but the difference is 
that it depends on whether you want to have a lot of government 
and a little bit of free market or a lot of free market and a little 
bit of government. 

You have opted for a lot of government and a little bit of free 
market, but we have opted for some government. And the govern- 
ment we have opted for kicks the insurance companies in the back- 
side and says you are going to have limits on what you do for peo- 
ple with preexisting conditions. You are going to insure them. 

We would agree with you that there are appropriate places to use 
government, but dumping everybody into these alliances, creating 
all of these new entitlement programs, we may be able to reach in 
middle ground — and I am glad Jim Cooper is here because he has 
got a great way to try to move us towards the middle ground. 

Let me just conclude by saying. Doctor, I respect your commit- 
ment to this, and I tell you, since 1989 I have been yelling about 
it, and I think George Bush came with a plan too little, too late, 
in an election year, didn't have any credibility. I just want to get 
the thing solved. And as we go through all of the numbers, this is 
a healthy debate. We will reach in conclusion, some middle ground, 
because everybody knows we have to do something about health 
care because everybody is going to be in the Catch-22 in the future 
if we don't. 

Thank you, Mr. Chairman. 

Dr. Feder. Absolutely. 

Dr. Thorpe. Just for the record, I would be happy to provide you 
our estimates of the next couple of charts. (Reference is to Chart 
2, Sources and Uses of Funds.) 

Mr. Kasich. Yes. 

Mr. Price [presiding]. I am taking over the gavel for a moment. 
It is also my turn to pose a question so I would like to focus on 
the question of cost controls. 

I think we all know that if we do nothing, this health care sys- 
tem is going to eat us alive financially. The question is, how can 
we — in doing something, in reforming the system, how can we be 
assured that in expanding access we are not also going to face im- 
possible financial pressures? 

A lot of this comes down to a debate on what are the mechanisms 
for cost control and how well are they going to work? As I under- 
stand your plan, the main mechanism is managed competition. The 
main mechanism is to form these health alliances that will spread 
the risk and will give increased purchasing power to individuals 
and small businesses and that of competing health plans will bar- 
gain with these alliances and bring those costs down further. The 
main mechanism is competition. 

But you do have a backup system of caps. You do not anticipate, 
as I understand it, micromanaged price controls on services or on 
drugs or on anything else. But you do put in place various kinds 
of caps. A global budget limit that will be parceled out to the alli- 
ances, limits on premium increases and caps on overall Federal 



45 

support. As you know, a lot of the debate has focused on these 
caps. 

Now, it seems to me that debate betrays a certain anxiety, and 
the anxiety is not just on your part, the anxiety is on the part also 
of the proponents of so-called pure managed competition, a certain 
anxiety that maybe this competition isn't going to work. Otherwise, 
why are we so anxious about the caps? Why are you so eager to 
put the caps in place and why are the proponents of pure managed 
competition so spooked by the caps? There seems to be a lot of anx- 
iety about how well-managed competition really is going to work in 
bringing these costs down. 

So that is what I want to ask you. What makes you think the 
caps are necessary? How likely is it that the caps in the end will 
have to be invoked? Can we rely on increased competition among 
health care plans to bring the costs down as projected? Why don't 
you feel safe in relying solely on that? 

And then, finally, how do these budget cap proposals differ from 
the kinds of cost controls that you find in other plans such as the 
single-payer plan which, as I understand, would require a great 
deal more micromanagement? And why did you choose your ap- 
proach? But, first of all, why this cap mechanism and how realistic 
do you think the projections for cost control through competition 
are going to be? 

Dr. Feder. All right. Well, I think you put it very well, Mr. Price, 
when you talk about anxiety in this system, and I think that what 
we want to do is put some of that anxiety to rest. 

First, just before I turn to the question that you want me to focus 
on. In your initial statement you talked about a concern about 
what expanding access would do to health care costs. I want to re- 
mind all of us that essentially, when it comes to people without in- 
surance coverage today, we are already paying many of their bills. 
So those are already in the system. WTiat we are doing is develop- 
ing a fairer and better system of paying for that health care. 

The second thing to remember is that we are creating a system 
in which we are gaining the revenues to pay for that care by hav- 
ing those who are now without insurance participate in the financ- 
ing. Remember that 85 percent of the people without insurance 
coverage are connected to the work force and that they and their 
employers will be contributing to the financing. So I just wanted 
to establish that as a backdrop. 

Now, your real question is, what are our expectations about com- 
petition? As Ken indicated earlier, we believe very strongly that 
competition in parts of the country that sustain it can have a dra- 
matic impact on slowing the rate of increasing health care costs. 

Once we give everybody a guaranteed package so that all plans 
are offering the same package, we give people incentives and the 
capacity to choose among health care plans, knowing that if they 
are provided with information they have an incentive to choose a 
plan that provides them value for their dollar. And once we hold 
health plans accountable for delivering that package within their 
premium bid, we believe that the patterns of cost increases in the 
current system will be changed dramatically. 

But we are talking about something that is, based on evidence 
from various parts of the country. We have not had that system in 



46 

place throughout the country. We have had Hmited but not exten- 
sive experience. And if we are going to require everybody to partici- 
pate in this system, as we beHeve we must, we have got to guaran- 
tee them the predictabiHty of their obligations. 

It is for that reason that we feel that we need to have this back- 
stop mechanism so that everyone's anxiety can be alleviated to 
know that there really is a backstop that guarantees that afford- 
ability. 

You asked how the premium caps differ from the cost contain- 
ment mechanisms in a single-payer plan, and you rightly said that 
we are not proponents of micromanagement of the health care sys- 
tem. A single-payer system relies on a government-determined pay- 
ment mechanism for providers in which government sets all of the 
prices. We have some experience with that kind of system in the 
Medicare program. It has in some cases been somewhat successful, 
but there are concerns, one, when we try to set all the prices about 
our ability to do it, and, two, that in addressing only prices, what 
we don't address are the use of services and the volume of services 
provided so that we set up no system in which providers really 
have an interest or stake in delivering services truly efficiently. We 
need to change that. 

And underlying our reforms are the critical changes in the sys- 
tem that hold health plans involving all of the providers account- 
able for delivering services based on a premium bid which takes 
into account both prices and volume and lets plans and their doc- 
tors and hospitals work out the terms of payments and the man- 
agement of efficient quality service themselves. So we would distin- 
guish ourselves in that way. 

Mr. Price. What do you say to critics who suggest that it all 
amounts to the same thing? It all amounts to governmental price 
controls with all of the distorting effects that that has had on mar- 
kets in the past? How do you defend — in other words, the accusa- 
tion is that this is really price controls once removed, and the effect 
of these caps is really going to be indistinguishable in the end from 
that kind of micromanagement? 

Dr. Feder. Well, I would first tell them they are wrong and then 
tell them how they are wrong. Essentially, as Ken indicated, we 
have spent extensive time and energy estimating what premiums 
are likely to be. They are premiums based in part on — in large part 
on today's system, although allowing for changes, some administra- 
tive savings and some other savings. So we are taking the current 
system into account and then essentially allowing the system to 
work. 

Our cost containment relies on bids from health plans. It is a 
ground-up approach based on truly making the market work, al- 
lowing the competition to work both in terms of the health plan's 
participation in the system and in making a marketplace. That is 
the role of our health alliances. So what we think is we are truly 
enabling a market to operate in the health care system rather than 
building a regulatory system. 

Mr. Price. Let me ask one final question about an apparent ex- 
ception to this in your plan. You may want to answer briefly and 
then submit a fuller answer for the record, because I know we do 
need to move along. 



47 

Let me ask you, though, about the cost of prescription drugs. 
Now, presumably, the cost of prescription drugs in this plan would 
not be micromanaged, as you say. 

Dr. Feder. That is correct. 

Mr. Price. They would rely on the overall caps and the competi- 
tive pressures to bring down the cost of drugs to the alliances and 
to the health plans. There do appear to be a couple of instances, 
however, where you envision a more direct regulatory intervention 
in terms of the pricing of drugs. First, you propose to empower the 
HHS Secretary to impose a manufacturers' rebate or to exclude a 
drug from Medicare coverage if she regards the price as excessive. 
And, secondly, you authorize a new HHS committee to examine the 
prices of what you call new breakthrough drugs. 

Now, to concentrate on the latter, how would this work? How 
would this committee work? Why is it necessary? Could it poten- 
tially have a chilling effect on research or on the development of 
breakthrough drugs? As I said, this appears to be an exception to 
your general pattern of relying on competitive pressures. 

Dr. Feder. Well, let me emphasize that that committee is essen- 
tially an informational committee. It is not a regulatory committee, 
and there is not regulatory power associated with the breakthrough 
drug committee or commission. Its job is essentially to provide in- 
formation on the cost of breakthrough drugs, essentially to inform 
the private system on which we are relying for health care to con- 
trol our rate of increase in health care costs. So we would not see 
it as a departure in that regard. 

With respect to the Medicare program, although we are moving 
ultimately toward a single system in which all Americans will be 
in the same kinds of health care delivery systems, the Medicare 
system remains distinct at the outset. It is then, therefore, appro- 
priate as Medicare covers prescription drugs that it have a pricing 
mechanism, and we have developed that mechanism and its re- 
bates in line with recognizing that the market for prescription 
drugs is greatly expanded by the — will be by the enactment of uni- 
versal coverage, and that as a large purchaser in that marketplace, 
though still a minority purchaser, that the Medicare program is en- 
titled to those discounts. 

Mr. Price. But on that breakthrough committee and the infor- 
mational role that it would play, surely you would expect that to 
have some effect on the alliances and on the purchasers of drugs. 

Dr. Feder. Well, absolutely. And I think the issue here is that 
as purchasers, purchasers need information, and that enables pur- 
chasers in a private marketplace to deal effectively with those from 
the — the suppliers. And it is to provide them that information that 
the breakthrough committee would be created. 

Mr. Price. All right. Thank you. 

Mr. McMillan? 

Mr. McMillan. Thank you, Mr. Chairman. 

Let me express my thanks to both of you. I issued a plea for can- 
dor in getting the benefit of your analysis up front in financial 
terms last week after hearing from Secretary Bentsen and you, Dr. 
Feder, and others, and I think you have responded to that, and I 
appreciate that. 



48 

The chart that we have here today, while we may disagree over 
policy implications and assumptions therein, certainly lays it out, 
and I want to spend more time examining this. 

But I do appreciate you doing that because, regardless of wheth- 
er we are talking about the administration's proposal or any of the 
alternatives, we need to get up-front with the financial analysis be- 
cause, in part, that is where the elevation of the problem began. 

I am going to subject you to one more chart, which I brought in 
here, not knowing what others would do. 

CBO Baseline Projections 
For Medicare & Medicaid 

(by fiscal year in $billions) 

Medicaid 

\992 1993 1994 1995 1996 Totals 

Jan. !99l* $57 $64 $72 $80 $90 $363 billion 

Jan. 1993** $68 $80 $92 $105 $118 $463 billion 

Difference, 

1993-1991 +11 +16 +20 +25 +28 $100 billion 

$100 billion added to Medicaid CBO baseline between Jan. 1991 & Jan. 
1 993 Budget Outlooks due to "technical corrections." Technical 
adjustments not subject to PAYGO requirements. 



Medicare 



1992 1993 1994 1995 1996 



Totals 



Jan. 1991* $127 $140 $156 $173 $194 $790 billion 
Jan. 1993** $129 $146 $167 $188 $211 $841 billion 

Difference, 

1993-1991 +2 +6 +11 +15 +17 $51 billion 

$51 billion added to Medicare CBO baseline between Jan. 1991 & Jan. 
1993 Budget Outlooks due to "technical corrections." Technical 
adjustments not subject to PAYGO requirements. 



; The Economic and Budget Out/ook: Fisca/ Years 1992 1996, January 1991, Congressional Budget Office, p. 91 
" The Economic and Budget Outlook: Fiscal Years 1 994- 1 998 , January 1993, Congressional Budget Office, p. 49 



49 

And if you can see this — this basically is two of the more recent 
CBO projections on Medicare and Medicaid made 24 months apart, 
one in January of 1991 and another in January of 1993. The same 
basic programs being projected, 24 months apart. 

I put this out there to illustrate how out of control those two pro- 
grams are. To boil it all down between the two of them, the projec- 
tions 24 months apart over a 5-year period were $150 billion apart, 
and I suppose if we added your projections here it would cover, I 
guess you cover 5 years as well, is that correct? 

Dr. Thorpe. Yes. 

Mr. McMillan. Anyway, it shows you that, given the nature of 
the way we have been doing business, just how far off we can be. 
Those are reflective of a lot of different things. 

Now, I would like to bring that back to really the first point and 
that has to do with some of the things that we were discussing 
with respect to Medicare savings and Medicaid savings. I think 
what you are proposing, including caps and managed competition 
and so forth, could well lead to an enhanced element of control over 
what we would classify today as Medicaid cost, plus all of the addi- 
tional subsidies that you will add to the program. And, frankly, I 
don't argue about adding the additional subsidies. I would go about 
it in a different way. 

But I do think that the system that you put together will not en- 
courage competition. It will discourage competition. It will consoli- 
date purchasing, forcing the government to be the final arbiter, so 
that the caps will be far more important in that component than 
what you might envision. Frankly, I think caps might be needed 
anyway, regardless of what system we have, so I am not going to 
argue that point so much. 

But, under Medicare, which is $100 billion and $150 billion in 
this 24-month projection, it seems, if I read your figures right, that 
most of your savings are going to be derived by altering the reve- 
nue side of Medicare. Changes in premiums, perhaps we need more 
details on this, that individuals would pay perhaps some adjust- 
ment in co-payments. But I don't see much there on the cost con- 
trol side. 

You mentioned. Dr. Feder, that ultimately Medicare might fold 
into the total system. But starting at the outset we would, it seems 
to me, essentially be faced with the same out-of-control cost pres- 
sures that exist in Medicare today, a whole host of them. And I am 
not going to try to elaborate on them, but they clearly include ex- 
cessive administrative costs. They include excessive terminal 
health and misapplied terminal health care costs, defensive proce- 
dures and a whole host of things. 

Would you care to address the issue of your capacity to control 
cost in Medicare under what you are proposing? 

Dr. Thorpe. I would just like to spend 10 seconds on that chart 
and then we will go right to this question because I think that Con- 
gressman Kasich also raised the issue. I would just make three 
points again on this. 

I have already made one about our capability to make estimates 
of the costs of providing insurance to people who were previously 
uninsured. The state of the art is radically different than it was in 
1960. 



50 

Second, the structural components of the program would allow us 
to stay within the projected rate of increase that we have talked 
about. 

The third point, which is related to this. Let me give you a sense 
of how changes in economic assumptions will affect what I have 
called our net subsidies, which really is the issue. Suppose that 
there is a change in economic assumptions. How would that affect 
our net subsidies? 

What happens is the following: We have done obviously several 
projections, but we changed and updated our economic projections 
to use the most recent inflation projections we could find, which are 
the highest 3.5 percent. We had been using, based on last winter's 
CBO projected inflation numbers prior to this, 2.7 percent. As it 
turns out, in terms of the net effect on our discounts, this works 
in offsetting ways. 

On the one hand, the costs of the discounts rise. On the other 
hand, the savings that we achieve rise as well when we move from 
inflation of 2.7 to 3.5 percent. 

When you look at our 5-year subsidies, our 5-year discount totals, 
when we had a 2.7 percent inflation versus our 3.5 percent infla- 
tion assumption — and look at it over exactly the same time period, 
the difference in our net subsidies over a 5-year period was under 
2 or 3 percent. 

We had something like $161 billion in this program. We had esti- 
mated earlier like $164 billion or $163.8 billion, I can't remember 
exactly, but it was within $5 billion. And the reason is that the 
way that the savings that are most important here work is due to 
changes in the economic assumptions as we have developed it, in 
contrast to this, which is simply an increase in cost due to tech- 
nical corrections, and these factors work in countervailing ways. 

Mr. McMillan. Well, I think that is part of the answer. But an- 
other part of the problem here is a lack of precision in the defini- 
tion of the benefits under the program. And I think under what you 
are proposing, both in your modification for Medicaid and in your 
subsidized or discounted program, you are going to be very precise 
in defining the standard level of benefits, and I think that is good. 
I don't care what comes out of here, whether it is a Republican pro- 
posal, or whoever's plan, it has to be very precise in defining what 
standard benefits are. I think that is, as far as your proposal is 
concerned, then gives you a lot more certainty in terms of making 
projections. 

On the other hand, we are not getting precise, I don't think, in 
defining what the level of benefits are under Medicare. 

Dr. Feder. Congressman, I think that the issue — I appreciate 
your sharing our views, essentially, on the effectiveness with which 
we are addressing the private sector and the younger population. 

Mr. McMillan. I just said in the definition of benefits. 

Dr. Feder. I am sorry. I didn't mean to overstate. I think that 
I take my support where I get it. 

The question that you are raising, though, I think is not so much 
the definition of benefits. I think it is the operation of the health 
care system and the way we are purchasing nealth care. Medicare, 
the Medicare system is a fee-for-service system, primarily, although 
we are making many changes to allow Medicare beneficiaries a 



51 

choice of health plans that we believe will be able to manage health 
care effectively. That is not a change that can occur immediately, 
nor is it a change that is likely to get scored, and, for that reason, 
we need some specific changes in Medicare policies in order to 
achieve the slowdown that we have put forward. 

And you rightly noted there are some changes on the revenue 
side, but there are also changes on the payment side. They are list- 
ed in the legislative language, and we would be happy to provide 
you more detail on those specific proposals. 

Mr. McMillan. Well, I will study those more carefully. I would 
make the argument on a rational basis and maybe on a political 
basis that this is not a good argument that Medicare should be 
folded into the entire system right at the outset because we have 
an opportunity here, when we are dealing with the problem com- 
prehensively, to do that. And I understand the political difficulties 
of doing that. 

But you are making some major trade-offs in terms of long-term 
care and pharmaceuticals to senior citizens that are really an enor- 
mous extension of benefits. And I think that that would be the time 
to fold them into the entire system, which then would enable you 
to perhaps exercise the same scrutiny over costs. And I say that in 
a constructive sense of trying to manage costs down, not just fix 
prices and force a top-down solution. I think you have an oppor- 
tunity to do that, and I think we are missing that in the proposal 
here. 

Dr. Feder. I think we share your interest in moving in that di- 
rection. I think that there are issues as to speed, and, essentially, 
as new plans are developing and have not had experience with an 
older population, I think there are some issues there. 

But let me also comment on the long-term care program, because 
it was mentioned earlier by Congressman Kasich, and I wanted to 
clarify its design. It is not an individual entitlement program. It is 
a program that essentially provides funds — it is a Federal-State 
program that provides funds for the expansion of home- and com- 
munity-based services. 

But it operates through grants to the States, rather than entitle- 
ments to individuals, and we have done that for a couple of rea- 
sons. We have done it, number one, because we don't think we are 
in a position to prescribe precisely what it is that individuals are 
entitled to in terms of a home-care benefit. In fact, there needs to 
be flexibility to tailor what are largely nonmedical benefits to indi- 
vidual circumstances and needs, and there needs to be tremendous 
flexibility to do that efficiently and effectively. And that is the ap- 
proach that we have taken in the design of this program. So I 
think we have been sensitive to concerns both fiscal and oper- 
ational in the design of that program. 

And, finally, let me just say that the benefits in that program is 
not a Medicare 

Chairman Sabo. We are trying to get the mikes fixed. 

Dr. Feder. Essentially, the benefits are for people of all ages 
with disabilities, and so that is not a part of the Medicare program. 
That needs to be understood as well. 



52 

Mr. McMillan. I think I am out of time. I hope I may have the 
privilege of making a direct request for additional information with 
respect to this. I thank you again for your testimony. 

Thank you. 

Chairman Sabo. Mr. Pomeroy? 

Mr. Pomeroy. I want to echo my congratulations to each of you 
for the important part you have played in this vital undertaking, 
attempting to contain costs and fix the tough problems that pres- 
ently plague our health care delivery and financing system. 

There are some assumptions in your program that I have not 
been able to understand: first, trying to get costs in line with CPI 
by the turn of the century or 1999. How can you accomplish that 
objective, knowing as we do that the older people get the more they 
utilize medical services and, therefore, the more they impact costs? 

Secondly, the advent of medical technology adds to costs, does 
not reduce costs. We can expect some wonderful advances in medi- 
cal technology between now and the end of the decade. In light of 
these two forces which push costs up, how do you bring costs actu- 
ally down and in line with CPI? 

Dr. Thorpe. I think it is important for us to make sure we clear- 
ly demarcate two time periods in this: The short run that is — here 
I am defining as our program becomes fully implemented through 
the year 2000; and, in some cases, post-2000 — I think the answer 
is a little bit different in terms of what growth is. 

Let's take the near term. Remember what is going on uhder the 
proposal in the near term. We are making some substantial invest- 
ments in the short run with respect to covering the uninsured; pro- 
viding better benefits for the underinsured. We have our Medicare 
prescription drug program. Each of these will increase spending in 
the health care system. At the same time, we are projecting sub- 
stantial savings as the system becomes implemented. Savings are 
achievable from reductions in administrative costs, reductions in 
inefficient and wasteful practice patterns, bringing into the plan 
cost-conscious choice of health care by individuals, both with re- 
spect to how plans are organized and with respect to how individ- 
uals make the choice of health plans. 

All those are going on simultaneously. All the plan, as I men- 
tioned before, says is that once people are insured, that the growth 
in their premiums would over time rise at CPI plus the schedule 
that I laid out, 1.5, 1, .5, and so on. 

We recognize that between 1995 and the year 2000, the actual 
growth in health care spending will not keep pace with population 
growth. It will be higher than that because there is new money 
coming into the system. So, for example, the actual growth between 
1995 and the year 2000 is likely to be something that could be 6, 
7 percent — we can quote you the precise figures, that is just an il- 
lustration. 

So the actual spending in the system is not CPI plus population 
growth because we are making new investments. 

Pertinent to the chart Congressman Kasich showed on credible 
spending, it is clear as we implement the program, the national 
health expenditures for a short period of time — we think maybe 2, 
at most 3 years — will slightly increase; that is, Federal household/ 



53 

business spending in the aggregate will increase slightly because 
we are making new investments and phasing in the program. 

Past 1999, national health expenditures, given the cost contain- 
ment program we have outlined, will fall relative to the baseline. 
Indeed, as you can see from our projections, there will be a reduc- 
tion in the deficit; and the — in the first 2 years. By 1999 and 2000, 
we can see the deficit reduction features of the plan really start to 
accumulate. 

We think in the near term, that having premiums rise at CPI 
plus the schedule we laid out is clearly doable, because we are si- 
multaneously getting a substantial amount of one-time savings as 
well as making new investments in the system. 

I think the real issue is what is a long-term growth rate. I con- 
sider "long term" here being the 21st century. As a result, provi- 
sions in the plan state that the factors we think should be included 
are CPI, plus population growth, plus — which we have in there as 
real GDP, things such as aging, changes in productivity, which do 
relate in part to changes in medical technology. 

I completely agree with you, the long-term growth rate needs to 
account for those factors. We have them in the legislation. We 
think in the short term, however, given the fact we are making a 
substantial investment in spending and getting savings, that the 
schedule we put forward is clearly achievable. 

Mr. POMEROY. Do any of these other plans that are presently in 
existence, in your view, produce even short-term savings in medical 
spending? 

Dr. Feder. Yes, some of them do. I think there are savings, some 
of the savings in administrative costs that are included in some 
proposals, that are substantial, significant and share 

Mr. PoMEROY. That would be the single-payer system? 

Dr. Feder. That has substantial savings in administrative costs. 
Yes, I think other plans would achieve savings in administration 
for small group insurance through greater efficiencies, as would we. 
I think what our plan does that is a combination of some of those 
mechanisms, is to achieve administrative savings and delivery re- 
form, to a considerable extent, as a way to change the system over 
the long term and have everybody in it, which is the difference 
from some of those other proposals. 

Mr. POMEROY. Thank you. 

Chairman Sabo. Before I recognize Mr. Miller, do you have 
charts that project costs, revenues, costs, deficit reduction out 
through, say, 2005, that you can give the committee? 

Dr. Thorpe. We are working on those. 

Chairman Sabo. That would be useful for the committee to know 
what assumptions are used as you project out beyond the year 
2000. 

[See Chart II-A on pg. 84.] 

Chairman Sabo. Mr. Miller? 

Mr. Miller. That was one of my first questions, the details of 
your sources and uses. You don't have them right in there, more 
details as far as explanations and how they are derived. 

Dr. Thorpe. We would be happy to supply them to you. This is 
a summary. We, obviously, have very detailed backup for line 
items, how it is estimated. As we mentioned, we will be making 



54 

available to the public and the staff and the committee the assump- 
tions underlining the models, how they work, how they generate 
the estimates and so on. We are close to having all of those ready. 

Mr. Miller. How close? 

Dr. Thorpe. One thing I have learned is not to make predictions 
in this game. We do have what we think is very close — we have 
drafts of each of those. We are in the process of having them being 
reviewed by 0MB, Treasury right now. We think we can share 
them with you very soon. 

Mr. Miller. We have been saying a lot of times the devil is in 
the details. The more I see details, the more scared I am of this 
whole system. I am more scared all the time because of these num- 
bers, because of these assumptions. 

Are you aware of CRS studies? Mr. Kasich said when you looked 
at the original projections of Medicare in the early 1960's — and I 
understand we did not know the ability of projecting back there, 
projecting into the future. Every time we make changes in the sys- 
tem — the dialysis changes in the early 1970's, catastrophic in the 
late 1980's, little changes in the Medicaid program that makes peo- 
ple more eligible for certain benefits, the comparison of projections 
to the actual costs shows that the projections never live up to the 
reality. 

Someone was passing out catastrophic in the late 1980's, how 
the — that was in existence for 18 months or something. The ques- 
tion goes back to John Kasich's question, the credibility of projec- 
tions. 

Dr. Feder. Mr. Miller, I think as we looked over changes in the 
health care system on the public or private side over the last sev- 
eral decades, what we have seen are changes that do tend to ex- 
pand benefits with limited attention to changing the delivery sys- 
tem or promoting a system for cost containment. 

We are very concerned about that, which is why cost contain- 
ment, changing the health care delivery system is so fundamental 
to our reform. I think that is very different from the experiences 
you cited. 

Mr. Miller. I think you have to see what the assumptions are 
that have been made and see the projections. You are making pro- 
jections, too. These are much more dramatic, significant than a 
change in a dialysis program or even the catastrophic programs. 

I am interested if there are such studies that have been done by 
academics, those type studies? That would suffice. 

I have one other question. As a businessman, I remember when 
we took one of my businesses and created a separate insurance 
fund. There were 60 employees in the fund. Basically, you self-in- 
sured at first, $20,000, such. One of the concerns I had as a busi- 
nessman is the tail effect, the 1 year — the cash flow standpoint. 
Say I started the plan January 1, 1994 and ended it after 12 
months. From a cash flow standpoint, you put money in the sys- 
tem, cash flowing in, but not much going out during the first 3 
months. 

After you got out of the system after 12 months, another pro- 
gram, you have no cash inflow but cash outflow. That was a tail, 
we had funds for the tail, buying insurance for the tail. That is just 
a small situation with 60 employees. 



55 

You know, just from a cash-flow standpoint, businesses in it, that 
are not funded properly for that tail, if this program started, you 
know, national plan started, say, the first of the year, the claims, 
that the amount of money being paid in January for claims in 
1993, I can see tremendous bankruptcies and financial problems for 
insurance companies, small companies, medium-sized companies 
that have self-insurance funds paying claims usually paid for by 
the current cash flow. 

What kind of analysis of that type problem has been done? 

Dr. Feder, Essentially, there have been extensive analyses done 
of capitalization required of plans and expectations of health plans. 
We do not have with us today our insurance expert. We testified 
yesterday, with Gary Claxton, he was addressing that issue, how 
it was considered in the plan. 

One of the pieces he mentioned or addressed is that essentially 
going to electronic claims processing you are dramatically reducing 
the risk in terms of a tail because you are speeding up the claims 
payment dramatically. That significantly lessens that problem. 

I think you are also alluding to self-insurance, and the risks 
faced by the smaller and mid-sized firms that have gone to that 
kind of self-insurance. Concerns about that kind of arrangement is 
one of the reasons that we are essentially putting all but the larg- 
est firms in a pool in which they are purchasing insurance as op- 
posed to relying on self-insurance, limiting the self-insurance ap- 
proach to large firms that are able to manage their risks. So we 
could provide you more information on that subsequent to the hear- 
ing. 

[The information follows:] 

Moving from the current health care financing system to the new system envi- 
sioned under the Health Security Act will require existing payers to essentially 
"close the books" on their current operations. Insurers ana self-funded plans will 
need to identify claims and expenses incurred prior to new system implementation 
and set aside funds to pay them when they become due. Insurers and other "funded" 
plans routinely establish reserves for such future liabilities. Self-funded arrange- 
ments will need to set aside additional funds, either from tapping into company 
funds or borrowing. These plans will essentially be repaying the savings they res- 
ized in the first few months after the unfunded arrangement was established. 

Mr. Miller. Did you say whether there are studies on the projec- 
tions and how effective they have been? 

Dr. Feder. I know there are individual studies. I actually did one 
myself. So, I think that there are some of those; and if we — we 
would be happy to look at that. 

Mr. Miller. The track record is not good on projections versus 
reality. 

Dr. Feder. I think we have some differences of opinion as to 
what determines those inaccuracies and difficulties in estimating. 

Mr. Miller. Thank you, Mr. Chairman. 

Chairman Sabo. Ms. Woolsey? 

Then will be Mr. Hobson and Mr. Cooper. 

Ms. Woolsey. Thank you, Mr. Chairman. 

I thank both of you for being here and being so patient with our 
questions. 

I have been holding a series of town hall meetings. One thing I 
want you to know is there is a considerable amount of support for 
the single-payer system out there. At the same time, there is a lot 



56 

of public skepticism. We have a lot to do to educate our public 
about what this plan covers, where it is coming from, and who is 
going to benefit and who is going to pay. So I had both ends at two 
different meetings I had; one very supportive, one not at all. I have 
five more meetings to go in the next month. The more we know 
about it, the more they know about it, the better off we will be. 

One of the areas that was questioned in both town hall meetings 
that I had concerned business and small businesses. The questions 
that were raised had to do with the subsidies — how they work, 
what percentage of the businesses we thought would be subsidized, 
and how many people in this country does that affect. I didn't have 
an exact answer for them on that. 

They also wanted to know how a part-time worker plays into the 
formula; and there was a concern that this formula could encour- 
age hiring lower-waged workers. 

I have other questions, but do you want to respond to those two 
first? 

Dr. Thorpe. In terms of the specific distribution of where the 
subsidies go, as you could see from my earlier chart, three-quarters 
of the subsidies are tailored towards small firms, most of which are 
low wage. We do have data we can share with you. I would be 
happy to provide that to the committee, on the distribution of how 
many workers by firm size would receive employers' discount and 
how many workers would receive employee's discount. We would 
share that information. 

[The information follows:] 



57 



Breakdown of Workers According to Subsidy Levels 










in fleqi 


onai Alliance 








;orporate 




Percent 


Firm Cap 










C 


Workers 


Distibulion 


3.5% 


4 4% 


5 3% 


6 2% 


7,1% 


7.9% 


NoCao 


Alliance 


(thousands) 


All WorVers 


S% 


3% 


3% 


4% 


4% 


16% 


45% 


19% 


116.841 


By Firm Size 




















Less than 25 


23% 


10% 


9% 


12% 


10% 


5% 


31% 


0% 


26.989 


25-99 





S 


S 


Z 


9 


17 


48 





15.345 


100-499 














C 


44 


5G 





18.D25 


500-999 

















38 


62 





7.145 


1.000+ 

















27 


73 





15.734 


5.000+ 




















31 


69 


32.603 


By Industry 




















Ag/Foresiry/Fish 


20% 


21% 


15% 


3% 


5% 


13% 


16% 


3% 


1.938 


Wining 








1 


1 





4 


59 


35 


739 


Construction 





1 


6 


12 


13 


15 


45 


7 


6.755 


Man Durable Goods 








1 


2 


3 


15 


46 


32 


12.531 


Man Non Durable Goods 


1 


1 


2 


3 


4 


24 


34 


30 


9,132 


Trans/Comm'Public UiiliTles 





1 


1 


2 


3 


9 


51 


32 


8.547 


Wholesale 








1 


2 


4 


10 


65 


19 


4,823 


Retail 


15 


9 


5 


5 


2 


19 


14 


32 


1S.815 


FIRE 








2 


4 


5 


17 


47 


25 


7.754 


Bus.'Repair 


3 


4 


8 


9 


8 


20 


31 


18 


5.786 


Personal Services 


35 


13 


4 


3 


1 


18 


6 


20 


3.649 


EnfRecreation Sen/ices 


13 


13 


5 


3 


1 


16 


37 


12 


1.911 


Prolessional Services 


4 


2 


3 


3 


3 


20 


62 


4 


27.572 


Public Administration 











Q 








100 





5.S37 


By Coverage 




















Single 


7% 


5% 


4% 


4% 


4% 


18% 


39% 


19% 


39.727 


Not single 


4 


3 


3 


4 


3 


16 


47 


19 


77.114 


By Wage Income 




















cISK 


U% 


6% 


5% 


5% 


4% 


18% 


34% 


16% 


41.797 


15-25K 


4 


3 


3 


5 


4 


19 


44 


17 


25.41 1 


25-3SK 


2 


2 


2 


3 


i 


15 


52 


20 


18.974 


3S-45K 


1 


1 


1 


2 


2 


13 


56 


23 


12,078 


«5-55K 


1 


1 


1 


2 


3 


11 


54 


27 


7.614 


:.55K 


1 


1 


2 


2 


2 


11 


56 


25 


9.965 


By Hour Status 




















Part time 


12% 


5% 


4% 


4% 


3% 


16% 


37% 


13% 


13,872 


Fulltime 


4 


3 


3 


4 


4 


16 


46 


20 


102,968 


By Region 




















Northeast 


4% 


3% 


3% 


3% 


3% 


24% 


42% 


18% 


24.097 


Midwest 


6 


3 


3 


4 


3 


18 


43 


20 


28.824 


South 


6 


4 


4 


5 


3 


14 


43 


21 


29.833 


West 


5 


4 


3 


4 


4 


11 


51 


13 


24.087 


By Age 




















-:2s 


7% 


S% 


4% 


3% 


3% 


16% 


40% 


22% 


18.182 


25<3S 


S 


4 


3 


4 


4 


18 


42 


20 


33.437 


3S-<4S 


S 


3 


3 


4 


3 


16 


48 


18 


31.147 


<5-<55 


5 


3 


2 


4 


4 


15 


48 


IS 


20.517 


S5+- 


6 


4 


4 


4 


4 


17 


44 


17 


13.508 


Source: The UrtJan rnsiituie 




















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59 

Dr. Feder. Clearly, the Chairman is interested in those subsidies 
as well. 

I think the key thing, Congresswoman, is that while we are ex- 
pecting them to pay 80 percent of the premium, their obligations 
are capped, and they can look at themselves as individual busi- 
nesses as to how that cap affects them, based on their size, the 
number of employees they have, and the level of their payroll. 

So the smallest businesses with relatively few workers are 
capped at that 3.5 percent. That is, roughly, 15 cents an hour for 
employers of minimum-wage workers. We can certainly provide you 
the numbers. 

But I know my experience in talking to the town meetings is that 
people are very concerned with exactly how it affects them. We 
should provide you the schedule so you can tell them. 

Ms. WOOLSEY. That would be very helpful to have. Another ques- 
tion they had I heard more than once is, if an employer hires a stu- 
dent — a college student or a high school student — and that student 
is covered on their parent's insurance or by their parents' em- 
ployer, does the student's employer have to pay for the student 
also? 

Dr. Feder. No. They continue to be on it. You asked about the 
part-timers. Essentially, employers contribute for part-timers based 
on the — on a pro-rata basis. If we think of 30 hours a week as full- 
time, and you have a worker who is working 15 hours, then you 
make half the contribution you would otherwise make. So they are 
part of the system, but the contribution is adjusted so that there 
is no particular advantage to part-timers as full-time workers. 

Ms. WoOLSEY. But if the student is covered by the parent's plan, 
they don't 

Dr. Feder. That is right. 

Ms. WooLSEY. That is good. 

Are we going to subsidize small employers that are extremely 
profitable? Is there any profit test in this? 

Dr. Feder. You know, we looked. As we looked at, and are con- 
cerned about, small employers, and targeted the subsidies, as Ken 
indicated, there, we looked at a number of ways to do that. Profit- 
ability is very difficult to measure. We did not find a way to target 
them in that direction. 

What is of primary importance is not increasing the labor costs 
associated with low-wage workers. So that is the way we targeted 
them, and we did not find a better way to do that. 

Ms. WoOLSEY. I am sure there is concern about workers with 
families having a greater health insurance contribution made by 
the employer. Would this encourage an employer to start hiring 
workers without families? 

Dr. Feder. Essentially, that is — ^they will have that incentive 
today. If anything, I think we are improving that in terms of the 
way we are distributing the burden. So we think we are making 
things better, not worse. 

Ms. WoOLSEY. Well, we need the public to hear all the answers 
and not just all the questions. 

Thank you. 

Chairman Sabo. Mr. Hobson? 

Mr. Hobson. Thank you, Mr. Chairman. 



60 

Good to see you both again, doctors, Ken. 

You may not know this, but Ken came out to a health care semi- 
nar I did a couple of years ago when he was in the private sector. 
At that time, he was the expert on pay-or-play. He may have got- 
ten what he was looking for. 

I appreciate. Dr. Feder, your meeting with us as you did earlier 
with the Repulalican Leader's Task Force on Health. 

Let me just talk a minute about these cost estimates and the fu- 
ture, and whether John is right or you are right about the accuracy 
of the targets. I think you say you are keeping the system accurate 
because you are going to put in the caps and force it to conform 
with your numbers. I guess even if you are incorrect, you are going 
to push it back. 

The problem is that you may push it below what the market is 
actually doing. If you do that, you are going to lead to questions 
of rationing and excluding benefits to people; and then you begin 
to affect the quality of care. That is one point I would like to make. 

The other point comes back to what Ms. Woolsey is talking 
about. Are we going to subsidize Wal-Mart? 

Will Wal-Mart — which makes money, which has a lot of people 
who are part-time, or any corporation like that — get a subsidy 
under this? 

And third, you a have a chart that talks about fee-for-services. 
I wonder if we are being intellectually credible when we discuss 
fee-for-service. Basically, if I understand how the alliance works, 
eventually, with your global budgeting and community-based budg- 
eting, fee-for-service is probably gone. You may disagree with that, 
but I would like to talk about it. 

The last item I will talk about is identifying accurate numbers 
on cost. I went to the Rules Committee on this, and Mr. Sabo and 
I had a little discussion on the floor. I think this is good what we 
are going through today. I want to be sure that all the numbers 
compare apples to apples and oranges to oranges. I think at some 
point I would like to talk about whether or not we really are doing 
that. Are we leaving out the cost of the mandates and the shift of 
funds in the private sector? Are we really including all the dollars 
in there? 

With that, I will let you respond and do what you want. 

Dr. Thorpe. Let me start with the first issue on savings. As I 
mentioned, having seen the set of charts up here, we will be happy 
to provide that, based on our estimates of what the change in Fed- 
eral spending is in the deficit, because I am not sure what 
underlies those, but in particular, is — as the congressman men- 
tioned be — things such as revenue effects, which are scorable 
changes in the budget which were excluded from that, I think, in- 
correctly, will be included in our charts. I want to be sure we get 
that right. 

Second, with respect to the savings, we do have documentation 
that we will be coming forward with, with specific savings on the 
private side in terms of changes in the system, administrative sav- 
ings, changes in practice patterns that we think will happen as we 
move into the new system, changes in areas such as duplication of 
technology, and so on, year by year, where we think as the pro- 



61 

gram comes on, where the savings are on the private side as well 
as the public side. 

As you will see, our year-by-year estimates of the private savings 
that we think will happen with the competitive system as we are 
developing true competitive bidding through negotiation between 
alliances and health plans, that those savings are sufficient to gen- 
erate what our projected growth in spending is. So they do gen- 
erate sufficient savings without the reliance on the backup mecha- 
nism in order to achieve year-to-year growth. We will be happy to 
share that with you. We do have them outlined in detail. 

So we do have specific savings that we think are going to occur, 
the savings are sufficient on the competitive side to achieve the 
rate of growth that we outlined in the President's plan. 

[See Chart III-A, pg. 97 and Chart III-D, pg. 102.] 

Mr. HOBSON. You do not think you will get to the cap problem 
that will cause, or could cause, the problem with quality and ra- 
tioning? 

Dr. Thorpe. Absolutely not. We think the backup mechanism is 
simply there as a backup mechanism. The likelihood as the system 
is implemented of having to rely on that, we do think is not very 
high. We think the savings we will get through the program of alli- 
ances and health plans, negotiating through administrative savings 
will be sufficient to generate the year-to-year growth. 

Mr. HoBSON. There can be honest disagreement about that be- 
cause of things that happened in the past. There is some skep- 
ticism, you know, about what these costs really are, or what they 
will be in the future. We have to see where we are when we get 
there. 

Dr. Feder. I think, as Ken indicated, I think our concern is that 
we need to promote the changes in the delivery system and enable 
us to pursue those savings. 

Mr. HoBSON. We do not disagree. 

Dr. Feder. To go to your other two questions, essentially on Wal- 
Mart, Wal-Mart will be treated like all other businesses. Essen- 
tially, it is required to provide coverage to its workers. As a large 
business, it has the option to either self-insure, to add its own alli- 
ance — I believe it has 5,000 employees nationwide — or it has the 
option to come into the alliance. If it comes into the alliance, then 
its access to the discounts, the 7.9 percent discount occurs at a 
later date, because we are concerned about having a problem in 
which some businesses who would benefit enormously would select 
in and out. We have been attending to that. 

The part-time workers would — part-time workers do obtain cov- 
erage through the regional alliance because that makes it easier. 

Mr. HoBSON. So there is a theory that they could get subsidized, 
or if you took a 900-employee company, they could get subsidized, 
even if they were extremely profitable. In part because of the 
makeup of their work force 

Dr. Feder. The focus is on the worker and the wages of the 
worker and affbrdability. 

Very quickly, should I answer the fee-for-service question? 

You raised the question about the validity of a fee-for-service 
promise. Actually, in the discussions we had with many economists, 
there are some arguing that changing the system the way we are 



62 

doing allows the survival of fee-for-service plans. We are holding all 
plans, whether they are HMOs, fee-for-service plans accountable 
for delivering the guaranteed package, based on their premium. 

Now a fee-for-service, an open fee-for-service plan that does not 
have contracts and has more difficulty negotiating or managing its 
providers in that regard, does have tools. It essentially has a couple 
of kinds of tools. One is that it uses a rate schedule, and holds the 
providers accountable for delivering services based on that rate 
schedule. 

It also has the capacity to focus, if rate reductions are needed, 
to focus on the providers who can be identified as delivering exces- 
sive services. There are systems included in the proposal that will 
enable providers and managers of any plan to know what services 
providers are providing and to essentially adjust payments appro- 
priately for providers that are out of line. That is a tool that is not 
used widely today and would be available under this approach. 

Mr. HOBSON. I would be interested in knowing who is talking 
about fee-for-services surviving under your plan. I would be inter- 
ested in knowing who the outside economists were that you talked 
about earlier who looked at your overall plan. I think for credibility 
that that is a good list for people to know. 

Thank you, Mr. Chairman, 

Chairman Sabo. Let me ask you this question: I assume as one 
looking at this, clearly for employers who offer no insurance today, 
they are going to have increased costs? 

Dr. Feder. That is right. 

Chairman Sabo. Or individuals who have no insurance today, 
they are going to pay more to have insurance? 

Dr. Feder. They are a little different. They may be paying out- 
of-pocket. 

Chairman Sabo. Maybe. Yes. 

Dr. Feder. Often are. I think that is a different proposition. 

Chairman Sabo. But there are a significant number of people 
who today do have comprehensive health insurance and the impact 
of controlling health care costs should be significant private savings 
for both those businesses and those individuals? I assume some- 
where you have that collective estimate of total savings for those 
kinds of people? 

Dr. Thorpe. As I mentioned, we are in the process of looking at 
the change in national health expenditures over time as well as 
looking at the change a business spends, change in household 
spending, as well as the change in the Federal Government's 
spending. 

I don't have the chart with me here today, but I can say that for 
each of those sectors, that the level of spending is going to be and 
will be lower by 1999 under this program than it is relative to the 
baseline. As you go out into the out years, 2000 

Chairman Sabo. Just so I understand baseline, that means rel- 
ative to doing nothing? 

Dr. Thorpe. Relative to doing nothing, using the CBO estimate 
of health care expenditures that came out last week. 

Chairman Sabo. In your program, there is no method of directly 
redirecting any of those savings for access or cost saving with busi- 



63 

nesses except the indirect fact you think additional revenues would 
be raised because of it? 

Okay. 

Mr. Smith? 

Mr. Smith of Michigan. Mr. Chairman, maybe a little bit of a 
follow-up. Let's say, for example, the wife works at one company 
and the husband works at another company. If one of those individ- 
uals says I would prefer additional leave time or additional salary, 
I am not going to take the health care benefits, that will result in 
an increased tax or reduced benefits because both of them are 
going to be obligated to pay through their company; is that correct? 

Dr. Feder. I would state it somewhat differently. I think essen- 
tially the employer who has been bearing the full burden and es- 
sentially carrying the obligation of the other employer, will now be 
sharing it with the other. 

Mr. Smith of Michigan. Some employers say if you do not want 
the health care plan, we will actually increase your salary to the 
extent it doesn't cost us any more money. Some emplovers do have 
a menu. In this case, in this plan, that option is no longer there. 
That family is going to have to pay more, even if they previously 
had the option of taking money instead of insurance? 

Dr. Feder. No. The family will not pay more. 

Mr. Smith of Michigan. But the business 

Dr. Feder. One of the employers will pay less. Essentially, I 
would say the family comes out fine. There is a fair sharing across 
employers. 

Mr. Smith of Michigan. Now both parties have to pay towards 
that? 

Dr. Feder. Yes. 

Mr. Smith of Michigan. On the tobacco tax revenues, did you 
consider the impact of a 75-cent increase and its effect on CPI? To- 
bacco products make up about 2 percent of the total of CPI. An in- 
crease of about 75 cents per pack of cigarettes alone will result in 
a CPI increase of between .7 and 1 percent. If it is .7 percent, it 
will cost the Federal Government because of its effect on COLA 
payouts, $4 billion a year over the next 5 years or $20 billion. And, 
if States follow that lead, which many States are now proposing be- 
tween a 55- and 75-cent sin tax on tobacco products, even that fig- 
ure would increase. The result is an increase in outlays because of 
the effect of a CPI increase on COLAs. In addition. Federal income 
tax returns for the earned income tax credit would increase as well 
because of stair-stepping that is now geared to inflation, or an an- 
nual total cost of $6 billion for the 75 cent tax increase. Has that 
all been computed and subtracted out of your anticipated revenues 
for a tobacco tax increase? 

Dr. Thorpe. I don't think the premise is correct. I think that that 
is — in order to be precisely — to give you the precise answer you 
need, since the estimates of this were done by the Treasury Depart- 
ment and will be done by joint tax, we used similar conventions. 
The specifics about the assumptions of change in CPI, if any, which 
I do not think— but that type of detail would best be provided by 
them. 

Mr. Smith of Michigan. CBO says tobacco represents 2.3 per- 
cent of the market basket of goods now used to determine the 



64 

CPIW used to inflate government payment programs. I am intro- 
ducing a bill that would develop a new CPIG that takes tobacco out 
where it is used for expanding COLA benefits for Social Security, 
SSIs and other programs. 

Dr. Thorpe. To get the precise answer, I think you would be bet- 
ter off with them giving it to you, to recognize what is built into 
their capacity is looking at changes in utilization. As utilization 
changes, those weights over time will change as well. 

Mr. Smith of Michigan. You would hope so, but I understand 
they haven't changed for the last 8 years. 

Let me ask you a question about young people, the low-risk, and 
probably the most likely to gain from being self-insured. We are 
going to require that younger person to pay the cost of these bene- 
fits even though it does have a cap of 3.5 percent of their wages? 

Dr. Feder. For the smallest business and lowest-wage workers. 

Mr. Smith of Michigan. For that young person, we are now 
going to require them, in order to — ^your words were, I think, 
"spread the risk" — we are going to require these low-risk individ- 
uals to start carrying insurance to help "spread the risk" which 
means that a young person who previously was not paying is going 
to have to start paying? 

Dr. Feder. The low-risk does not mean no-risk. I have a 22-year- 
old son, for whom I purchase health insurance. 

Mr. Smith of Michigan. Do I understand that my statement is 
correct? All of the young people that have decided, in some cases, 
at their own decision, that they would rather be self-insured than 
pay the $300 a month, or whatever it costs, that they are now 
going to be required to carry insurance? 

Dr. Feder. Everybody is required. There are discounts to busi- 
nesses and individuals to enable them to afford their responsibil- 
ities. 

Mr. Smith of Michigan. The other part of the problem with 
making people pay that usually don't use the service quite so 
much, is that I haven't seen a table, or any computations, that 
show the amount we are increasing the charge to these young peo- 
ple. In the sources of revenue you provided, we are increasing the 
charges to small businesses that currently are not paying anything. 
It might be the straw that breaks a small business' back. Is there 
any table that shows, here is the additional amount both the man 
and wife would have to pay and how much more revenue would 
come in? Is there any table that shows the additional amount 
young people would have to pay to carry insurance or the addi- 
tional amount small business would pay? 

Can you help me find the revenues that would come in because 
of those extra insurance payments? 

Dr. Thorpe. If I understand the thrust correctly that you are 
asking, what happens to somebody who is not insured, either the 
business doesn't provide insurance or the individual doesn't carry 
it, what happens to the amount of money they spend, the change 
in spending on health insurance, who are currently uninsured busi- 
nesses and firms that currently do not provide it? 

Mr. Smith of Michigan. That is part of it. 

Dr. Thorpe. Those estimates as Judy mentioned, are complex be- 
cause people who are uninsured today do spend a lot of money, in 



65 

some cases, for health care. They just spend it out-of-pocket. But 
we do have the changes in health spending for the currently unin- 
sured. 

Mr. Smith of Michigan. I can give you a Congressional Re- 
search Service figure on that. An uninsured person uses only 24 
percent of the health care services compared to those that are in- 
sured; and of that 24 percent — in other words, a person paying this 
reaches into their own pockets, they do not use as many health 
care services as those that are covered by insurance. I am dis- 
appointed you do not have more of a co-pay on every case as we 
go into this. 

Here again, the estimate is that of the 24 percent of the health 
care services they use, compared to those tnat carry insurance, 
they paid for half of it themselves and the other half, or 11 percent, 
is passed on to those insured. 

Dr. Thorpe. I have to check the numbers. That does not seem 
to be consistent with the numbers I have seen in the research lit- 
erature. Just to be clear, that does underlie our estimates. We are 
looking at people who do not have insurance today. What happens 
to the change in both public and private spending when they do 
have health insurance. As we get more detail, we would be happy 
to supply the information. 

[The Health Security Act: A Financial and Distributional Analy- 
sis, appears at pg. 72.] 

Chairman Sabo. Mr. Hoke? 

Mr. Hoke. Thank you, Mr. Chairman. 

I had a couple of questions just for clarification. Is there a ceiling 
on the 7.9 percent of payroll? Are there any ceilings on that? 

Dr. Feder. In terms of level of payroll? No, I don't think so. 

Is that what you mean? 

Mr. Hoke. Individual levels? In other words, a physician who 
makes $400,000 in payroll income? 

Dr. Feder. No. Essentially, this is a ceiling, as Ken indicated 
earlier, a ceiling on what is paid as an employer. They pay 80 per- 
cent of the premaum or that 7.9 percent of payroll, whichever is 
less. So essentially if the payroll is very high, that cap becomes ir- 
relevant. They simply pay the premium, 

Mr. Hoke. To the health alliance? 

Dr. Feder. That is correct. 

Mr. Hoke. But not to the insurance company? 

Dr. Feder. If they are in the regional alliance, they pay to the 
alliance; that is correct. 

Mr. Hoke. In the line item on page 2, financing health care re- 
form, uses of funds, new Federal administrative start-up costs, $9.6 
billion in there. How many jobs, how many new employees does 
that require or does that contemplate? 

Dr. Thorpe. I am not aware we have made any projections of 
that. Of course, there's going to be 

Mr, Hoke, How did you come up with that amount? 

Dr. Thorpe. I think you are asking about the net new jobs. We 
have not done projections about the impact this would have on 
change in jobs within existing agencies that oversee health pro- 
grams. This would be sort of newly targeted money. But in terms 
of changes in spending and other HHS, Labor, Commerce, and so 



66 

on, I don't have those figures here with me. I don't have the net 
job 

Mr. Hoke. How many gross new jobs? 

Dr. Thorpe. I don't have the backup on the line item with me. 

Mr. Hoke. Could you get that to me, please? 

[The Costs of Failing to Reform Health Care, by Laura D'Andrea 
Tyson, dated October 6, 1993, appears at pg. 129.] 

Mr. Hoke. In the Medicare drug benefit, benefits, administration 
of pharmacists costs, less rebate. There is a new administration, 
also. Can you tell me how many employees are contemplated in 
that line? 

Dr. Thorpe. My recollection is that we assumed the administra- 
tive costs are approximately 10 percent of the program benefits. 
But, again, in terms of specific changes in organization or jobs that 
are focused on that, I would have to provide the information to you 
for the record. 

Mr. Hoke. I would like that. We have on the one hand a reinvent 
government program that is supposed to eliminate as many as a 
quarter of a million jobs; and so I think Congress is intensely inter- 
ested in how many new Federal employees are contemplated in the 
administration, lines that would not be. 

If there are any other new Federal employees, gross, not net, and 
if you want to net it out against jobs for jobs lost in other areas 
of HHS, that is great. If there are any other areas within the Presi- 
dent's health reform package, where there would be new employ- 
ees, I would like information on that. 

[The Health Security Act: A Financial and Distributional Analy- 
sis, appears at pg. 72.] 

Mr. Hoke. One other clarification, with respect to the 17 percent 
rebate, from drug companies to the Federal Treasury for Medicare- 
branded drugs, I just wanted to explore that a little bit. 

How exactly does that work? Somebody sends in the reimburse- 
ment to Medicare for the drug or — explain that. 

Dr. Feder. Well, I think essentially this is a calculation that 
does lead to a — it is essentially — leads to a reduction in the price 
Medicare would pay. I don't know whether — I cannot answer your 
question. 

Is there anybody on the staff? 

We will have to get that. I am sorry. We will get back to you on 
that. 

[The information follows:] 

The basic rebate under the Medicare outpatient drug program is paid directly to 
the Medicare program (HCFA) by manufacturers for eacn product sold to Medicare 
beneficiaries. Pharmaceutical manufacturers wanting coverage for their products, 
must sign rebate agreements with the Secretary of HHS and report what the aver- 
age retail and average non-retail prices are for their products. Based on claims data 
submitted by pharmacists, Medicare determines beneficiary utilization for each drug 
product. The basic rebate is then calculated; the greater of 17 percent of the average 
retail price or the difference between the average retail price and average non-retail 
price; and an invoice is sent to manufacturers. Manufacturers pay rebates on a 
quarterly basis. 

Mr. Hoke. You use the word "rebate." "Rebate" is different from 
"discount." Rebate implies somebody pays for something. 

Dr. Feder. Again, I can speak to you very generally about it. It 
was originally a design — although this is quite different in design 



67 

from what has been put in the law with re^. .c;ct to the Medicaid 
program, that arrangement would no longer be in operation be- 
cause Medicaid is part of the premium. 

Are you saying it is a discount and not differently calculated? 

We will get back to you on it. 

[The information follows:] 

The Health Security Act will make the Medicare program one of the largest pur- 
chasers of medications in the world. The Administration believes it is essential to 
assure that Medicare receive a price benefit as a large purchaser to help it contain 
its prescription drug costs. Because Medicare is a fee for service program, it does 
not bulk purchase drugs up fi"ont for Medicare beneficiaries. Beneficiaries purchase 
drugs for their own use on an as needed basis. Due to administrative ease, the re- 
bate program is better suited to assure prescription drug cost containment for Medi- 
care, because the rebate is calculated once utilization quantities are known. 

Mr. Hoke. Have you done any studies with respect to that on the 
impact on research and development for new drugs that is going 
to result from clipping brand drugs from large pharmaceutical com- 
panies by 17 percent? 

Dr. Feder. Just broadly. I will let Ken follow up. We have been 
very concerned about that. Essentially, when you look at that, what 
happens overall to the pharmaceutical industry under reform, what 
you can see is a significant improvement in demand for pharma- 
ceuticals, once everybody is covered, which they are not now. 
Whether they are young or old, they will have coverage. That in- 
creases the demand. 

The bulk of the system will be operating in terms of the 
deliveries 

Mr. Hoke. Your health plan increases demand. It does it on 
paper. Are you suggesting there are a lot of people who are not get- 
ting the drugs they need? 

Dr. Feder. I will provide you for the record the precise assump- 
tions that have been used. I think essentially there is some in- 
crease in use. 

Mr. Hoke. All the people that are older, they have got a Part B? 

Dr. Feder. They do not have drug coverage right now on Medi- 
care. We are adding that. Some of them have it through medigap 
coverage. We know there are many seniors who cannot afford drugs 
today. 

We would be happy to provide that to you as there are uninsured 
younger Americans or Americans of limited insurance who do not 
have that coverage. So there is — just as your colleague was indicat- 
ing, there are changes where people get coverage in terms of the 
services they provide. So there is an expansion. A lot of it is han- 
dled through the private sector health plans dealing with drug 
companies and negotiating the prices, as they are increasingly 
doing today, and so we are relying on that system. As the pharma- 
ceutical industry — I am sorry, too long. 

[Methodological Description of Health Care Reform Premium and 
Discount Estimates, appears at pg. 139.] 

Chairman Sabo. I am sorry. We have Mr. Cooper and Mr. Shays 
left. Our witnesses have to leave by 12:30. 

Mr. Cooper? 

Mr. Cooper. I am going to be brief. Now, I really have to be 
brief. I appreciate the panelists work in this very complicated area. 
It is not easy to do. I appreciate your expertise. 



68 

It seems to me like we are moving beyond the car sale stage into 
the mechanical stage now, actually lifting the car and seeing how 
it will work. These are, as I see, very complicated, detailed ques- 
tions. 

I was particularly interested in Dr. Feder's testimony on Page 
12, where I think you say, virtually universal coverage. It seems 
there was a striking note of increasing realism in the debate. I 
think everyone acknowledges universal coverage is the goal we 
should have, but it is very difficult to achieve. It is not a black or 
white issue. 

I think the sentiment is together these changes will result in vir- 
tually universal coverage of our population. It is not stated there, 
but I imagine the target date is January 1, 1998? 

Dr. Feder. End of 1997. You do recognize. Congressman, on un- 
documented immigrants, workers do not have the guaranteed pack- 
age. Otherwise, I believe we do achieve universal coverage. We 
were being quite precise in that. 

Mr. Cooper. How does the employer achieve coverage of every- 
one except undocumented aliens? 

Dr. Feder. Essentially, the system as a whole achieves universal 
coverage by establishing a payment system in which everyone con- 
tributes, and an obligation on employers and individuals to enroll. 

Mr. Cooper. It was my impression in Hawaii, for example, 
where they had coverage for 20 years, they still do not have univer- 
sal coverage in the sense of 100-percent coverage. It is easier to 
know that in Hawaii than in the District of Columbia. 

Dr. Feder. In Hawaii there have been limits on the coverage of 
employers. We cover all employers and dependents, all sizes of em- 
ployers and do provide supports for people when they lose their 
jobs. I think it is a more comprehensive system. 

Mr. Cooper. It was my impression that 30 percent of the unin- 
sured today have no contact with an employer whatsoever, no fam- 
ily member works. How does an employer mandate reach those 
people? 

Dr. Feder. What we have established is that some of the people 
who are most difficult to reach, are people who are not operating 
in the workplace and who are in disadvantaged circumstances. We 
have what we call a "point-of-service" enrollment, to guarantee ev- 
erybody service when they need it and providers payment when 
they arrive. We have a mechanism for enrolling them at that point. 

Mr. Cooper. At that point, which is when they need care? 

Dr. Feder. Yes. Essentially, if there are resources involved, with 
obligations to make up the payments that were not made. 

Mr. Cooper. If you are a healthy individual and do not need 
emergency room care for 10 years, then you would be enrolled in 
the 10th year. 

Dr. Feder. If you never have gone near a job, you would owe a 
heck of a lot of money when you got there. 

Mr. Smith of Michigan. Better go to Canada after that. 

Mr. Cooper. We ought to figure out a way to reach universal 
coverage in a cost-effective way. I have iust been concerned the em- 
ployer mandate might not necessarily be the best way to do it, to 
be sure, the same way of getting part way home, but it is not a 
way of getting all the way home. 



69 

I realize time is short. I don't want to make my colleague, Chris 
Shays, delay any longer. 

I appreciate the hard work and expertise you contributed to this 
process. 

Dr. Feder. Thank you, Congressman, as usual. 

Chairman Sabo. Mr. Shays? 

Mr. Shays. I thank both of you for being here. Your responses 
were very helpful. I appreciate your open attitude. 

I also want to say that I think we are dealing with this issue for 
the very reasons my Chairman described, that too many people 
have no health insurance and the system has gotten so expensive. 
Those who do not have health insurance are still being covered. I 
buy on to those two arguments. 

I mean this in all sincerity, that I am extraordinarily grateful to 
the President and his staff for the fact that they have focused the 
Nation's attention on this issue. It is a delight to be dealing with 
real and important issues in Congress instead of some we have 
been dealing with for the past few years. 

Having said that, I have a concern that I will commit the same 
mistake I did as a freshman legislator when I voted for the Cata- 
strophic Health Care Bill. I want to say to you that the thought 
in 1998, that it will cost $30 billion over 5 years, and in August 
of 1989, finding it was going to cost $48.3 billion, a 50-percent in- 
crease in our estimates, is very unsettling. It is unsettling to me 
when we see technical changes to entitlements which can mean 
that we underestimated the number of people involved. But there 
were changes we had to make that saw the numbers change in 
Medicaid by $100 billion and Medicare by $51 billion over 5 years. 

It is unsettling to me when we insert in the 1990 agreement 
changes Henry Waxman wanted to Medicaid, and allowed certain 
people, young people to be phased in from age 5 to 17, and finding 
that that is much more expensive than we thought. 

So I don't have a sense of being comfortable with estimates. 
These are modern-day people making these estimates, the same 
people that are helping you. 

I just was going to say that to you. Which leads me to the ques- 
tion, why don't we prove the savings before we expand the bene- 
fits? 

Dr. Thorpe. Again, let me start with the first part of your ques- 
tion. I would just refer back to the initial part of my testimony 
about the process of how the estimates were derived, both inter- 
nally as well as 

Mr. Shays. I heard those. I am just sharing my concern with 
you. The question I am asking, though, is why don't we prove the 
savings before we expand the benefits? 

Dr. Feder. I think. Congressman, it is very difficult to achieve 
the savings that we are talking about without having everybody in 
the system. As we have indicated several times, we feel that the 
critical change that needs to occur to achieve the savings in the 
health care system, is a change in the delivery system, a change 
in which we are able to hold practioners responsible for delivering 
care efficiently, in which they can expect to be paid; but they, then, 
are responsible for managing care efficiently. 



70 

We also need to have a system in which we cannot cost shift 
from one payer to another. And that requires that everybody be in 
the system. 

To move incrementally leaves chasms in this system. In fact, that 
was part of the reason Medicaid costs went up so dramatically, as 
you indicated. That was one of the problems. 

Mr. Shays. That was part of the problem. I buy part of that ar- 
gument. There are certain savings that could go into effect and cer- 
tainly we would not have to expand some of the benefits, the early 
retiree benefit, the long-term care benefit, pharmaceutical benefits; 
these are new entitlements. 

What I am troubled with as a budget person, is I say 50 percent 
of our budget is entitlements, 34 percent is discretionary, 16 per- 
cent is interest on the national debt. 

And we need to control the growth of entitlements, and at the 
same time I am telling people that we need universal coverage. 
How do I get around the argument with my constituents that I am 
saying we need to see less entitlements and now being asked to 
vote on a gigantic new one? 

Dr. Feder. I think what you need is responsible protection for in- 
dividuals, and I think that your constituents are also seeking secu- 
rity of coverage. 

When it comes to your senior constituents, the absence of protec- 
tion in long-term care is bankrupting families, and I think they are 
well aware of that. And the design of that program, as the rest of 
the system, is not open-ended. It is designed in a responsible man- 
ner that holds the system accountable for living within its esti- 
mates. 

Mr. Shays. Let me just deal with that, though. I mean, I read 
the article in the Post today where my colleagues, Mr. McMillan 
and Henry Waxman, questioned you on the whole issue of caps. 
What benefit is a cap ii we exceed the cap? We come to the Federal 
Government and say you have to come up with the money? 

Dr. Feder. I think, essentially, what the cap does — and I think 
that we indicated earlier why it is we don't expect to reach that 
cap — but should that happen, it is essential that elected officials be 
held accountable for assessing the system. 

You have raised — ^you and your colleagues have raised a number 
of questions this morning about the operation of the system and 
whether it is working, and if it weren't, why it isn't working. We 
need to have a mechanism that enables those questions to be 
raised should it be necessary. That is why we have it. 

Mr. Shays. The problem is. Doctor, that once I vote in this pro- 
gram and there is an expectation — if the individual who doesn't un- 
derstand there is a cap, the government is going to come up with 
the money. I respect the fact that you believe that your estimates 
are 15 percent under. I respect that. But a cap is really not a cap. 
What you are really saying to me is, when we reach that number 
we will come to Congress to appropriate additional monies. 

Dr. Feder. Well, I think that, essentially, one would have to look 
at what the difficulties were that led the cap to being breached, 
and I think that that would be the issue, and I think that that is 
the job of elected officials, to take responsibility for the programs 
they are operating. 



71 

Mr. Shays. Just one last point, and that just deals with my sense 
that you get universal coverage by the fact that 85 percent of those 
who aren't covered by health care are employed, and, therefore, if 
you tell employers they pay for it, they will be covered. How do you 
get at the argument that a lot of these businesses that are mar- 
ginal will do two things: They will cut back or they will simply go 
out of business? 

Dr. Feder. Essentially, we have been quite concerned, as we in- 
dicated throughout, about the obligations on businesses who have 
not previously been paying. That is why we have developed a dis- 
count schedule that protects those — the wages and jobs of those 
employees who most need protecting. 

Mr. Shays. I would just say to you in speaking to some of these 
businesses they don't feel they are protected, and I think this is an 
issue that I am going to pay a lot of attention to. The bottom line 
for me is I don't want to vote for a program and then have someone 
come to me 3 years later and say you bankrupt the country. Your 
numbers weren't accurate. 

So I just hope we haven't built overexpectation on the part of the 
public that the President's plan is going to provide all of these ben- 
efits. I hope there is a realistic assessment on the part of the public 
of what it is going to cost. 

Thank you both very much. Thank you, Mr. Chairman. 

Chairman Sabo. Thank you. 

Without objection, questions and statements submitted by mem- 
bers will be included in the record. 

I want to thank both of you for your testimony today. You truly 
have done a remarkable job in answering lots of very, very detailed 
questions. 

What you are about is incredibly important. Clearly, we have to 
control costs in the system. My own judgment is that to move to 
universal coverage is incredibly important. To move to universal 
access would be important but not nearly — and not all that difficult 
to do. But to deal — to move to the position where we do have uni- 
versal coverage I think produces lots of the questions that members 
have of you, of how we fund it and how the system works, and I 
think you have done a great job in responding to those questions 
today. 

I expect our committee and its members will continue to have 
questions of you and other members of the administration in the 
months ahead, and we look forward to continuing to work with you. 

Dr. Feder. Thank you, Mr. Chairman. 

Chairman Sabo. Thank you very much for a very productive 
hearing. 

[Whereupon, at 12:35 p.m., the committee was adjourned.] 

[Additional material submitted for the record follows.] 



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129 



THE COSTS OF FAILING TO REFORM HEALTH CARE 



L HEALIH CARE SPENDING FER WORKING,AMERICAN WILL BE OYER $7,000 
IN 1994. '^ 

Workiiig Amencans will, on aveta^ pay $1,864 diiedly for heaUh care in 1994. 
Hidr employers will pay $3,409 fat health insur^o^ and other mcdicaJ^^aymcats. 
Ffedeial, State, and Local taxis for health care vto total $2,149. 

n. WnHODT HEALTH CARE REFORM, AMERICAN WORKESS' WAGES WILL 
CX)N1TNUE TO STAGNATE. 

The rapid growth in health care costs relative to the rest of the economy may have 
dqjresscd wages by up to $1,000 since 1975. If current treads continue without 
reform, real wages may be further reduced by over $600 by the end of the decade. 

m. THE LACK OF SECDRTIY AFFECTS EMPLOYMENT 

Many individuals are afraid to leave tiieir cuneot job, for fear that they will be unable 
to obtain insurance on a future job. Some individuals do not work for small 
businesses or do not become self-enqdoyed because of the high cost of health 
insurance for diese groups. Many individuals on welfare would like to work but 
cannot talce a job without losing Medicaid benefits. 



130 



Hie Costs of FaOing to Refora^Heattb Care 

by 

Laura D' Andrea Tyson 
Chair, Council of Ecanomic Advisers 

October 6, 1993 



131 



L EXTeds oa Individuals 



Our health caie system is costly and does not provide sectui^ to people If a person loses 
a job, changes jobs, or gets sick, there is no guarantee of h^th coverage. 

A. Health care speading per working American wfflbe over $7«000 in 1994. Tlustotal 
includes (Chart 1): 

i. Out-of-pockEt speading and the waiter's shaie of Che insurance premium ($1,864 
in 1994). 

ii. Employer-paid premiums ($3,163). 

iiL Employer-paid workers' compmsatioQ, disability iasuiance, and industrial 
insurance to their worioos ($246). 

iv. Payroll taxes to pay for Medicare ($926). 

V. Other taxes, fees, and payments (Medicare and Medicaid predominantly) paid to 
the Federal government ($654). 

vL Taxes, fees, and payments (Medicaid and stale employees predominantly) to state 
and local governments ($S69). 

If we do not have health care reform soon, bcaldi care spending per working 
American will rise to $12,386 by the year 2000, or 25 percent of compensation. 

B. Ihe cxirrent insurance system does not provide true security. 

i. Insurers focus on risk selection rather than pooling groups of people. 

• Almost 40 percent of insurers exclude pre-cjdsting conditions from their 
coverage of newly insured people. 

• Insurers also price by the experience of the group. This means that people 
cannot get one of the most iiiqwrtant types of insurance coverage they want 
the right not to have to pay more if tt^y get sick- 

• Insurers *red line' or refuse to cover specific industries that they find to be 
hazardous, including many small businesses. 

iL TTie number of people who are uninsured is high and rising. 



132 



• Three-quarters of the uninsured are in working families. Thirty-two percent 
of the uninsured arc in families with at least one full -time year-round worker. 

C. Fear of losing coverage causes people to keep jobs they would like to leave or to stay 
on welfare. 

i. Up to 30 percent of caqiloyees iqxwt that they are aftaid to leave thdr job for fear 
of losing continuous health insurance coverage. This reduction in mobility, or "job 
lock," can be a major impediment to tiic cfBdeacy of tlie economy. 

ii. One of the most important reasons people do n^'kavc APT>C is tfae-^SSof losing 
health care coverage for themselves and their children- This "welfere lock" traps 
people into public programs and raises government costs. 

iii. Health insurance creates a substantial barrier to many people chooang to become 
self-employed or to start a small firm. Self-employed people fecc higher 
administrative costs than people in large firms for h^th insirrance coverage. In 
addition, because groups are experience rated, even self-employed people in good 
health risk having high premiums in future years if they become sick. 

D. Currently Insured people are paying for the costs incurred by the nnlnsured. 

• Current estimates suggest that about $25 billion of UDcompeosatedcaie is paid for 
by the insured. It is estimated (hat, in 1994, tiiere WQl be about $217 billion 
of business and household spending on health insurance. Providing health 
insurance for all Americans will allow for savings that exceed 10 percent of 
existing insurance spending. 



n. The Total Costs of Health Care are High and Rising. 

A. Current and Projected Health Care Costs 

i. In 1992, the United States devoted 14 percent of GDP to health care. In 1980, the 
share was 9 pcrccnL No other cotmtry in the world spends more than 10 paoent of 
GDP on health care. Without health care reform, it is estimated that healdi care 
spending will consume 18 percent of GDP in the United States by the year 2000. 

s 

ii. The United States spends as much on health care as it does on fuel oil, electricity, 
natural gas, other household operatioas, oil and gasoline, transportation (including 
all new and u.sed car purchases), furniture, and other household equipment oorabined. 

iii. Over forty percent of the grov.'th of real per capita GDP between 1993 and 1996 
will be accounted for by healtli care spending. While some of this growth is 



133 



warranted, this unusually high rate crowds out other items of consumption. 

iv. Health care cost growth will continue to ouqnce growth in other segments of the 
economy. 

• Federal Medicaid growth is esqwcted to be over 16 percent in 1994, and to 
dedine to only 12 percent in the rest of^ decade. Medicare growth will be 
between 9 and 11 percent and private health care costs will grow at between 
7 and 8 percent fbrde rest of Ac decade. Growth in the rest of the economy 
is espected to be between 4 and 6 percent. 

B. The htgh cost of heahh care is driven by several mailcet Allures. 

There are numerous instances where the current system cncouiages wasteful and 
incffidcnt medical practices. 

L There is a lack of price competition in the martrt for insurance, because many 
individuals do not have a choice of health care plans. 

• Only 29 percent of companies with fewer than 500 employees offer any 
choice of plans. 

iL Administrative costs in bealdi insurance are extremely high, in part because tiiere is 
little or no coordination across insurers in the forms tiiey require or their 
reimbursement systems. 

• Over 5 percent of health care ©qicnditures ($45 billion in 1992) went for 
administrative Gq}enses. Tliis exceeds the total amount spent on all public 
health service programs. 

D. The health care system has a great deal of waste. The current system of 
reimborsement encourages providers to orer-otilize tests and procedures. 

i. Researchsuggeststhatuptoone-balfof some procedures that are performed may 
be either inappropriate or utmecessary. For example, it is estimated that the 
United States spent $1 billion on imnecessary Cesarean sections in 1987 alone. 



iL Fraud and abuse may account for about 10 percent of U.S. health care costs. 



134 



m. The Cost to Business 

A. Baslncsses pay for health care through premium contributions and other programs 
such as workers compensation. 

L Real business qjending on health care has risen from $774 per employee (in $1992) 
in 1970 to $2,345 in 1992, a 200 percent inc^wse. ■ 

ii. Real workers* compeosatibh per employee has more than doubled since 1970, liang 
from $149 (m $1987) in 1970 to $326 in 1992. Health care costs are the fastest 
growing component of workers' compensation, /f" ■ -~^ 5 -,- 

B. Small firms are partlcnlatly hart by the cnrrcnt system, because many do not have 
access to affordable health care. 

L Small firms face administrative loads of up to 40 percent, compared to about 5 
percent in large firms with 10,000 or more employees. 

IL Because of e;q)erience rating, many small firms most pay exorbitant amounts for 
insurance or are unable to get insurance at all. 

iiL Small firms often carmot afford to provide any ch<rioc of health care plan to their 
employees. 

C Here is cost rfitfting from goTemment health care programs and people ^vbo are 
privately insured to the uninsured. 

• Currently, Medicaid pays providers at about 82 percent of costs, and Medicare pays 
at 88 percent of costs. The uninsured pay at 20 poceot of costs. The resulting cost 
shifting ($26 billion of hospital costs alone) results in liigher premiums in the private 
sector (Chart 2). 

IV. The cost to the Government 

Our health care system is a growing burden on the government and leads to increased 
deficits. 

A. Goyemments arc responsible for 44 percent of health care spending, 

• At the Federal level, most of this spending is for Medicare and Medicaid. State 
and local spending is predominantly for Medicaid, and for health care for state 
and local government workers. 



135 



B. Rising health costs crowd out other govenunent spending and contribute to the 
deficit. 




i. Health care spending accounts fot ^2 pezc£np 6pP6^al spaing. Under current 
projections, that share is C3q)ected to rise to ov^^ jOpercg iUfl the next five years. 
As health care continues to consume a larger shaicoF the budget, Fedeial qxaiding 
on education, traimng, employment and soc^ servioes will actually decline as a 
share of total Federal spending over this peiiod. The rate of return to many 
government investments -r such as education — is very high. 

C Health care will absorb mudi of sorenuneiit spendlag ia4b6 next sev^O^yeats. 

• Almost two^hiidsofthc growth in federal spending between 1993 and 1996 will 
be accounted for by health care spsnding. 



V. The Cost to Families 

A. The bottom line for workers is that they ultimately pay for most of heahh care 
spending, either out-of-pockrt or indirectly, throng^ higher taxes and lower wages. 

• Empirical reseaidi suggests that the dominant respoose of businesses to hi^er 
health insurance costs has been to lower the wages they pay their employees. 
Similaily, the taxes lequiied to pay for government health ^)eoding are bom to 
some extent by wcrkers in the form of lower wages. One of the reasons that real 
wages have barely grown for the past 20 years is the increased costs of health 
caie for businesses. 

B. Without reform, wages of American workers will cootimie to lag. 

• If employer contributioos to health insurance remained constant at their 1992 
share of compensation through the rest of the decade, and emplm'es&^i^ssed all 
of these savings on to workers, real wages per worker would be<$^5,Wgher in 
2000 than they arc otherwise projectcd-to~be- If thqr had remained at their 1975 
share, real wages would have been $l,034Jligher in 1992 than they actually were 
(Chart 3). " 



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139 

Methodological Description of 
Health Care Reform Premium and Discount Estimates 

Contributions to this paper were made by: 

Department of Health and Human Services' Office of the Assistant Secretary for 
Planning and Evaluation 

The Office of Management and Budget 

Health Care Financing Administration's Office of the Actuary 

Agency for Health Care Policy and Research 

The Urban Institute's Center for Income and Benefits Policy 

Contents 

I. Background 

II. Description of the Major Models 

A. The Urban Institute's Transfer Income Model (TRIM2) 

B. The Health Care Financing Administration's Special Policy Analysis Model (SPAM) 

C. The Agency for Health Care Policy and Research's Simulation Model (AHSIM) 

III. Premium Estimation Under Reform 

A. Health Care Financing Administration 

B. Agency for Health Care Policy and Research 

C. Choice of Premium Estimates for Budgeting Purposes 

IV. Discount Estimates 

A. Employer Discounts 

1. TRIM2: Employer Discounts 

2. HCFA: Employer Discounts 

3. AHSIM: Employer Discounts 

B. Discounts for the Self-Employed 

C. Discounts to Low Income Families 

D. Retiree Discounts 

E. Choice of Discount Estimates for Budgeting Purposes and Distrbutional Analyses 

V. National Spending Impacts 



Appendix A: Example of the Application of an Induction Factor to a Change in Insurance 
Status 



140 



I. Background 

Estimates of premium costs, national health spending, and government program costs 
under health care reform have been necessary in the decisions leading to a health care reform 
bill. During the basic policy development process, exploration of alternative policies required 
estimates of the cost impacts of each possible variation. Specific areas included analyses of 
premium caps, the impacts on businesses of reqiured employer payments, the effects on 
households of required purchase of coverage, and the budgetary effects of the discount 
schedules. 

The development of estimates of this type is obviously a complex task. Given that no 
single authoritative data set exists which captures all spending for all services through all 
sources of funding, numerous data sources were used in this process. Federal surveys, 
especially the National Medical Expenditure Survey (1987), offer the best characterizations of 
national spending. The National Health Accounts generated by the Health Care Financing 
Administration (HCFA) summarize the best available data on total national spending by type 
of service and source of fund. Producing estimated spending under health reform, however, 
requires developing a comprehensive baseline summary for literally hundreds of affected sub- 
populations, and then estimating the future spending patterns associated with the reform. 

Estimates of future costs of reform are primarily derived through modeling transfers of 
current spending among the various channels of payment. Estimating the impacts of changing 
primary payers is relatively straightforward, given a baseline of national health spending. 
More difficult is estimating the net impacts of fee upgrades and paying for uncompensated 
care, since reimbursement levels will be set to achieve some amount of recapture of these 
increased outlays for current services. Also difficult is estimating the induced spending 
attributable to new or enriched insurance coverage. Estimates have been based upon 
experiences of government and private insurers as well as the results of academic studies of 
the demand for medical care. 

Multiple data sources, methodologies, and models were needed to produce estimates of 
premiums, discounts, and the overall effects of reform options. Major contributors included 
the Health Care Financing Administration's (HCFA) Office of the Actuary (OAci), the 
Agency for Health Care Policy and Research (AHCPR), the Treasury Department, and other 
government agencies. Numerous consultants assisted in the process, with major modeling 
contributions provided by the Urban Institute. This paper provides an overview of the major 
models and their ways of estimating premiums, discounts, and overall health spending under 
health care reform. 



141 



II. Description of the Major Models 

A. The Urban Institute's Transfer Income Model (TRIM2): 

The Urban Institute has developed a microsimulation model called the Transfer Income 
Model (TRIM2). This model has been used to analyze the financing of national health care 
reform plans, and has particularly focused on the distributional effects of such proposals. 
TRIM2 is based upon the March 1992 Cunrent Population Survey (CPS) and combines data 
from a number of other sources in order to provide a complete basis for assessing acute care 
health spending by the non-elderly in the U.S. population.' The complete model has been 
aged to 1994, and all results are presented in 1994 dollars. The following description of 
TRIM2 and its capabilities has been adapted from Zedlewski, Holahan, Blumberg, and 
Winterbottom (1993). 

The TRIM2 model simulates the employer-based group health insurance system, nongroup 
or individually purchased health insurance, out-of-pocket spending, and the Medicaid 
program. The model assigns spending under these programs/systems at the individual and 
family levels and adjusts for regional variation in premium levels. It is then possible to 
assess the distributional effects of the financing of the current health care system. Detailed 
tax calculations allow the analysts to examine health spending on an after-tax basis and to 
calculate the after-tax value of employment-based health benefits. TRIM2 can also be used to 
simulate the distribution of health spending and healdi care financing burdens under 
alternative assumptions about how insurance would be provided and financed. Each 
component of the basic model is presented below.^ 

1. Employment-Based Group Health Insurance. TRIM2 examines reported insurance 
coverage for individuals and families on the CPS to determine the number of family members 
who share coverage under an employment-based policy.' The model assigns an employment- 
based health insurance premium, including the shares paid by the employer and the employee, 
to each covered worker based on two 1989 private, employer-based surveys (from the Health 
Insurance Association of America and Foster-Higgins) and federal health insurance plan 
documents. These private surveys represent firms of different sizes, in all major industries 
(including stale and local government), and in all regions of the country. Federal health 
insurance plan documents include information about premiums for single and family coverage 
and how these premiums are distributed between the employer and worker. TRIM2 
statistically matches workers to health plans based on variables that the employer insurance 



'Historically, TRIM2 has been used to analyze current and alternative tax and transfer programs. See National 
Research Council (1991) and Lewis and Michel (1990) for a more complete descripuon of the properties of this 
model and its recent applications. 



HjiannarelU (1992) describes the full TRIM2 model. 
'Zedlewski (1991) describes this model in more detail. 



142 



plans and workers on ihe CPS have in common. These include the type of coverage (single 
or family), location, industry, the sire of firm, and whether or not the worker has to pay part 
of the insurance premium. 

2. Private, Nongroup Health Insurance. TRIM2 estimates premiums for the families 
and individuals on the CPS who report insurance coverage through private, nongroup, health 
insurance policies. It does this by matching these people with plan data collected from Blue 
Cross and Blue Shield Plan offices across the U.S. Plan documents included premiums for 
typical health insurance plans covering single individuals, families, and dual (adult and child) 
insurance units in each state. The method does not, however, capture differences due to 
families' insurance preferences or income levels. For example, if low (or high) income 
families reporting private, nongroup health insurance are more likely to purchase catastrophic 
policies, the model will overstate their premiums. Conversely, the model will understate 
premiums for families who prefer broader coverage than that included in the prototypical 
plan. 

3. Medicaid. TRIM2 uses detailed sets of algorithms to replicate the rules of state 
Medicaid programs.'' These algorithms identify Medicaid eligibles as all persons who meet 
the states' categorical, asset, and income criteria in effect July 1991. The model has 
procedures for selecting Medicaid enrollees from those who are eligible. The second part of 
the model imputes the insurance value of Medicaid. Separate estimates are made for adults, 
children, and the disabled; estimates also vary by age, sex, race, urban or rural residence, 
reason for enrollment, and number of months in the program. The model uses Medicaid state 
expenditure data to adjust for differences among states in program generosity and the cost of 
health services. 

4. Out-of-Pocket Spending. The model uses data from the Consumer Expenditures 
Survey to predict out-of-pocket spending (other than health insurance premiums) for families 
on the CPS.* Separate equations were estimated for persons with private insurance coverage, 
Medicaid, and for those uninsured. The equations predict the incidence and levels of 
spending as a function of families' socioeconomic characteristics including region of 
residence, income, the age-sex distribution of family members, and the family head's marital 
status, education, race, and work status. 

5. Income and Payroll Taxes. The model calculates family disposable income and 
estimates the amount of income and payroll taxes required to finance health care spending by 



'See Holaban and Zedlewski (1989) for a full description of [his model. 
'See Wade (1991) for a full description of ihis model. 



143 



the federal government through the Medicaid and Medicare programs. Other federal taxes 
(such as corporate, estate, and excise taxes) are not included.* The portion of Medicaid and 
Medicare spending that is financed through the federal personal income and payroll tax 
systems is calculated and can be allocated to families. The model can also calculate income 
and payroll taxes under the assumption that employer-paid health insurance premiums are 
taxable to estimate the tax value of this employee benefit. 

6. Total Health Care Spending for the Nonelderly. The TRIM2 baseline distribution 
of direct spending from various sources accounts for most health spending for the nonelderiy. 
The TRIM2 model excludes the institutionalized population. In addition. Medicare benefits 
for the nonelderly and military health benefits are excluded. Nevertheless, the model 
accounts for nearly all of the spending under systems that would be most affected by health 
care reform alternatives currently under debate. 

7. Adjustments to TRIM2 Baseline Output. Two significant adjustments were made to 
the TRIM2 baseline health spending simulations at the request of the office of the Assistant 
Secretary for Planning and Evaluation (ASPE), Department of Health and Human Services 
(DHHS). Both employer health insurance premiums and private nongroup health insurance 
premiums in TRIM2 were downwardly adjusted to reflect health care reform premiums 
estimated by the Office of the Actuary (OACT). The TRIM2 employer plan data include 
employer spending for dental care and a few other benefits that not fully covered by the 
reform package. Without this adjustment for differences in coverage, employer and family 
spending under reform as calculated in TRIM2 (using HCFA OACT premiums) would not be 
comparable to employer and family spending under the current system according to TRIM2. 
Thus, estimated changes in spending under reform compared to current spending would be 
distorted without reconciling the spending levels. 

B. The Health Care Financing Administration's Special Policy Analysis Model (SPAM): 

The Health Care Financing Administration's (HCFA) Special Policy Analysis Model 
(SPAM) database is also based upon the March 1992 Current Population Survey (CPS). The 
March 1992 CPS acts as the host file, with each person on it being statistically matched to a 
person on the 1987 National Medical Expenditure Survey (NMES). Health expenditures and 
utilization from the NMES person record are then linked to the CPS record, and the entire 
data set is controlled to be consistent with 1994 National Health Account data. 



'However, the TRIM2 mcxlel does have the capacity to simulate excise tax payments on alcohol and cigarettes. 



144 



The parameters used in the linking the NMES file to the CPS were disability status 
(disabled or not), age and gender (male adult < 19, male adult 19-44, male adult 45-64, male 
adult 65-K, female adult < 19, female adult 19-44, female adult 45-64, female adult 65+, 
dependent child < 19, and dependent child 19-i-), family income (family under 1(X)% of 
poverty, family 100% to 185% of poverty, family at or above 185% of poverty), and 
insurance class of the person (employer sponsored insurance and Medicare, employer 
sponsored insurance and Medicaid, other employer sponsored insurance. Medicare and 
Medicaid and other private insurance. Medicare and Medicaid, Medicare only, Medicaid and 
other private insurance, Medicaid only, other insurance, and uninsured). 

For a CPS person to be considered disabled, one of the following situations had to be true: 
(a) person was a veteran, collecting veteran's disability, (b) person collected over $10,000 in 
workers compensation, (c) person had disability income, or (d) person was under 65 and had 
SSI income. For a NMES person to be considered disabled, one of the following had to be 
true: (a) person was a disabled veteran, (b) person didn't work due to disability/illness, or (c) 
person was without a job due to disability/illness. 

The determination of adult vs. child was made from "insurance families," which were 
appended to both the CPS and NMES files. These families were created using standard 
insurance industry definitions. Within an insurance family there can be one or two adults 
(single or married couple), and any number of dependent children (or none). 

The insurance classifications were hierarchical, and made on the person level using the 
appropriate variables on both the CPS and NMES. NMES insurance classifications were 
converted from round data' to "ever insured" data (for example, if a person had Medicare in 
one of the rounds of the NMES survey, they were coded as having Medicare). Poverty 
classifications were calculated by adding income of all insurance family members together 
and comparing it to the appropriate poverty standard for the year in question (1991 for the 
CPS and 1987 for NMES), for the appropriate family size. 

Once each CPS person was linked to a NMES record, expenditure data by service 
(hospital inpatient, hospital outpatient, etc.) and source of payment (out-of-pocket, private 
insurance. Medicare, Medicaid, etc.) were attached. This file was then aged to 1994 through 
two steps. First, the 1992 CPS population was weighted to sum to the 1994 Social Security 
Administration (SSA) non-institutionalized population (about 20 million more than Census 
estimates). This was done by age (20 age groups), gender and marital status (single, married, 
divorced, and widowed). 



NMES-2, described more fully in the following section, involves 4 surveys of each family 
over a period of 16 months. Each of the 4 interview sessions is referred to here as a "round." 



145 



Second, the total national health expenditures by this SSA-weighted CPS population (the 
SPAM population) were then "benchmarked" by service category, channel of payment, and 
age category to the aggregate totals in the projected 1994 National Health Accounts. There 
are 13 service categories: hospital inpatient, hospital outpatient, hospital emergency room, 
physician inpatient, physician outpatient, physician emergency room, physician office visit, 
other professionals, prescription drugs, home health care, dental, vision, and other durable 
medical equipment. There are eight channels of payment: private health insurance, out of 
pocket. Medicare, Medicaid, other federal, other state and local, workers compensation, and 
other private. There are three age categories: under 19, 19 to 64, 65 years and over. 

An example of how this benchmarking worked is as follows. Suppose the ratio of current 
SPAM out-of-pocket inpatient hospital spending for persons under age 19 to NHA-consistent 
spending for the same cell is 0.9. Then each SPAM person's inpatient hospital spending total 
is multiplied by 1.11. The only divergence from this logic was that out-of-pocket spending 
for the uninsured was controlled separately from out-of-pocket spending for the insured 
population (which was thought to have risen at a rate closer to the rate of inflation in 
insurance). 

C. The Agency for Health Care Policy and Research's Simulation Model (AHSIM): 

AHSIM is based on AHCPR's 1987 National Medical Expenditure Survey (NMES-2), 
which is the most recent national effort to collect comprehensive, person-level profiles of 
health care use, spending, and insurance coverage. AHSIM currently is designed only to 
analyze the nonelderly (under 65), noninstitutionalized civilian population residing in the 
United States. Although the NMES-2 data were collected in 1987, demographic variables 
have been aged forward by reweighting individual records. New weights take into account 
changes in the distribution of the population by age, race, sex, insurance status, and poverty 
status observed between the November 1987 and March 1992 Current Population Surveys. 
Additional demographic aging is based on Census projections of the population by age, race, 
and sex beyond 1992. Real growth in service-specific health expenditures and insurance 
premiums have been incorporated through adjustments based on the appropriate rates of 
changes in HCFA's National Health Accounts and its projections. 

AHSIM draws primarily on the NMES-2 Household Survey and its two derivative 
components, the Health Insurance Plan Survey (HIPS) and the Medical Provider Survey. The 
Household Survey sample is representative of the civilian noninstitutionalized population of 
the United States in 1987. Each family in the Household Survey was interviewed four limes 
("rounds") over a period of 16 months to obtain information about the family's health and 
health care during calendar year 1987. Roughly 35,000 individuals and 14,000 households 
completed all rounds of data collection. The Medical Provider Survey obtained information 



146 



directly from the physicians, hospitals, and other providers used by a portion of the household 
sample. These data were used to edit and supplement household survey data describing use 
of and spending on health services. HIPS data were collected from employers, unions, and 
insurers and include premiums paid by all sources and specific provisions of baseline private 
insurance coverage. They also provide information about the organizations offering insurance 
coverage and include in the case of employers, firm and establishment size, industry, and 
location. 

Other data sources were incorporated when needed for specific purposes. For example, 
survey data from the Health Insurance Association of America were used to project market 
shares for fee-for-service, HMO, and preferred provider health plans by region. Annual 
survey data from the American Hospital Association were used to determine the allocation of 
hospital spending between inpatient and outpatient services and to identify local areas in 
which at least one HMO is operating. County Business Patterns data were used to impute 
average payroll for employers, using a statistical match based on industry, location, and firm 
size. The Internal Revenue Service (IRS) Statistics of Income (SOI) data were used to 
expand NMES-2 income data and to calibrate the AHSIM tax module. Further details of the 
basic AHSEM Model are presented below. 

1. Employment-Based Group Health Insurance. AHSIM does not model employers, 
only households and individuals. HIPS and Household Survey data measured the scope of 
employment-based insurance in 1987, as well as the allocation of premiums among 
employers, employees, and other sources (primarily unions). AHSIM assumes that any 
changes in the pattem of availability, benefits, premiums, or other plan provisions between 
1987 and 1994 are controlled for in the aging process, using CPS and HCFA aggregate data. 

2. Private, Nongroup Health Insurance. AHSEM handles people with private, nongroup 
insurance in the same way as it does those with employment-based insurance. This means, 
for example, that a tendency for people with systematically higher medical expenditures to 
purchase private, nongroup health insurance will be captured in the model. 

3. Medicaid. NMES-2 measured Medicaid program participation directly. Since 1987, 
however, Medicaid eligibility has been expanded to include low-income pregnant women and 
children who are not otherwise categorically eligible. This Medicaid expansion was 
incorporated into the ASHIM model by identifying household survey respondents who would 
have become eligible for Medicaid benefits by 1994 and modifying their baseline insurance 
status accordingly. Baseline health spending for new Medicaid recipients was also modified 
to reflect the effect of a changes insurance status, using the same methods that were used to 
project estimates for the uninsured after reform. 

4. Out-of-Pocket Spending. NMES-2 directly measures baseline out-of-pocket (OOP) 



147 



spending on cost-sharing and noncovered services for all household survey respondents. 
However, because the AHSIM model cannot use actual NMES-2 expenditure data directly, 
data on OOP spending reported in the household survey are used to develop a set of estimates 
that can be incorporated into the model.* In particular, a system of equations was estimated 
to predict the percent of expenses paid out-of-pocket in the baseline as a function of 
demographic characteristics, insurance coverage, health status, and other relevant explanatory 
variables. These equations were then used to impute baseline OOP spending as a percent of 
imputed total spending, by type of service. While baseline expenditures are imputed in the 
AHSIM Model, they are still internally consistent with the rest of the 

NMES-2 data because the estimation procedures preserve the pattern of spending observed in 
the original household survey data. 

5. Income and Payroll Taxes. The AHSIM model distinguishes between households and 
tax filing units. The effect of wage changes induced by employer mandates on federal 
personal income and payroll taxes can be calculated with respect to the 1991 tax treatment of 
employer paid premiums. 

6. Total Health Care Spending for the Nonelderly. The AHSIM baseline includes 
most health spending by the civilian, resident population of the United States under the age of 
65. AHSIM excludes the institutionalized population. Medicare beneficiaries among the 
nonelderly, and spending by active-duty military personnel. 

7. Adjustments to AHSIM Baseline Data. Because the aggregate health insurance 
premiums reported in the HIPS component of NMES-2 are not consistent with the benefits 
paid by private health insurance according to either the Household Survey or the National 
Health Accounts, the NMES-2 HIPS-based premiums are calibrated to these other data 
sources. Tax estimates and wage income are calibrated to SOI data, as described above. In 
general, according to extensive analysis by HCFA and AHCPR staff to account for 
differences in definition and coverage, the NMES-2 expenditure data and the National Health 
Accounts yield similar estimates. 

in. Premium Estimation Under Reform 

Two agencies, the Health Care Financing Administration and the Agency for Health Care 
Policy and Research, estimated the cost of health insurance premiums under reform. Their 



'Actual NMES-2 expenditure are not used as baseline spending in the AHSIM Model for two 
reasons. For some people, e.g., those affected by the expansion of Medicaid eligibility, baseline 
insurance status is different than what is was in 1987 when the NMES data were collected. In 
addition, it is important that reform expenditures only differ from baseline for reasons related to 
reform. Because reform expenditures must be predicted for people based on their "new" 
insurance status, it is helpful to predict baseline spending with the same methodology. 



148 



estimates are in 1994 dollars and reflect the benefits included in the standard benefit package. 
The premium estimation methodology used by each of these agencies is described below. 

A. Health Care Financing Administration: 

The first step in HCFA's simulation process was to determine each individual's insurance 
status. The modelers used CPS indicators for this, and considered a person to be insured if 
he/she was covered by employer-sponsored insurance, other private insurance, CHAMPUS, 
Medicare, or Medicaid. Insurance could be either in one's own name or through inclusion in 
a policy held by an adult in the insurance unit. Also, some dependents are covered by private 
insurance policies owned by people outside the family (for example, a child of divorced 
parents may be covered through insurance carried by the parent who does not live with the 
child). 

HCFA modelers then adjusted health expenditures to reflect the coverage offered through 
the regional alliance plan. That coverage is restricted to hospital care, physician and other 
professional services, prescription drugs, and durable medical equipment other than vision and 
hearing products. Therefore, the analysts excluded all other National Health Accounts 
expenditure categories. The cost of coverage for mental health, dental, and preventive care in 
the standard benefit package was estimated separately, from aggregate data, and added in at 
the end of the process. Once expenses were adjusted for coverage differences, the modelers 
applied the fee-for-service plan deductibles, coinsurance, and cost-sharing limits to each 
person covered through the regional alliance. 

An insurance-induced demand adjustment was applied to all those enrolled in the regional 
alliance. The basis for the induced demand was the difference between out-of-pocket 
spending under current law and that determined by the reform simulation described above. 
The induction factor varied by type of service. The application of the factors and the specific 
values used are described in appendix A. Post-induction spending is equal to the expenditures 
calculated previously plus (minus) the induced spending calculated as described. 

Following these steps, HCFA analysts imputed expenses to currently uninsured people. 
Existing patterns of use for the uninsured person were discarded, because those patterns are 
influenced by the absence of insurance. An imputation file was created for each service 
covered under the regional alliance. To create the file, insured people (excluding people who 
received SSI cash payments) were divided into groups according to gender, four age classes, 
and three poverty status classes. Expenditures were tabulated for each group to determine: (a) 
the proportion that had no expenditure and (b) mean expenditures and use for each decile of 
the user distribution. 

Expenses were imputed for an uninsured person using these imputation files. For each 



149 



type of service, the person was assigned a random number ranging from to 1. If that 
random number fell within the nonuser proportion for the service, the person was given no 
expenditure for the service. Otherwise, the person was given the mean expenditure and use 
for the decile of users into which the random number placed them. Analysts assumed that 
facility and physician use was correlated for hospital services, and used the same random 
number for hospital inpatient and physician inpatient use. They did the same for hospital 
outpatient and physician outpatient, and for hospital emergency room and physician 
emergency room use. 

Analysts performed a final simulation to determine which people were covered by the 
alliances. Typically, they excluded people who received AFDC or SSI cash payments. 
Similarly, most Medicare enroUees were excluded; only those who worked or whose spouse 
worked were included in the premium calculations. The remaining people were divided 
between the corporate alliance and the regional alliance according to the worker status of the 
adults in the insurance family, and were assigned to one of three policies: individuals (and 
couples with no dependents), one adult plus dependents, and two adults plus dependents. In a 
final pass through the family's health expenditures, analysts applied the family limits on out- 
of-pocket spending to determine the plan benefits and copayments. 

In order to generate an upper-bound discount estimate, whenever a two-earner couple had 
one worker in a large firm (5,000 or more workers) and one in a firm that would be covered 
through a regional alliance, the couple was assumed to choose coverage in the regional 
alliance. This maximizes the potential cost of the discounts costs given that no government 
discounts are available through the corporate alliances. 

After plan benefits had been determined, premiums were calculated for each of the policy 
types and alliance types. An offset was applied to expenses to reflect current-law cost- 
shifting attributable to uncompensated care. Under the current system, private sector 
premiums are higher than they would be if there were no uncompensated care in the system 
since providers pass these unpaid costs on to insured, paying patients. Under reform, all 
persons will be insured; consequently, baseline premiums should be reduced to reflect the 
elimination of non-payers from the system. A load factor was appUed to the (reduced) 
benefit cost per policy. The load factor was 15 percent for the regional alliance. 

B. Agency for Health Care Policy and Research: 

AHCPR's method of generating premium estimates has seven steps. First, following 
conventions in health economics, AH SIM estimates a two-part model of expenditures for each 
service. The unit of observation is the person. The first equation in each service's set of two 
equations estimates the probabiUty of using the service at all as a function of demographic, 
income, insurance, employment, and health status measures from the 1987 NMES-2. The 



150 



second equation estimates annual expenditures on the service for all users of the service, as a 
function of the same explanatory variables. Combining the result of these equations (i.e., 
multiplying the probability of use times the coefficients in the second equation) yields an 
equation that predicts expenditures for each type of person. Predicted expenditures are aged 
to 1994. 

Health expenditures for each person are then predicted for each of the ten services 
included in the AHSIM Model using this system of equations. Predictions for both the 
probability and the level (given any use) of an expense were made for each person based on 
these regressions. The procedure assigns the same expected values to people with private 
insurance and similar personal characteristics, based on a hypothetical "average" insurance 
policy. Expected values are modified to take into account specific plan provisions using 
information from the RAND National Health Insurance Experiment about the effects of such 
provisions. Reform expenditures are imputed to all people in the model using a stochastic 
process that maintains observed correlations in expenditures across service types while 
controlling for the demographic characteristics and health status of individual NMES-2 
respondents. 

Every individual included in the AHSIM Model actually had three types of reform 
expenditures assigned to them, indicating their (assumed) behavior under fee-for-service 
(FFS), managed care (HMO), and preferred provider (PPO) insurance arrangements. 
Expenses for benefits paid, cost-sharing and noncovered services were calculated separately 
for each type of plan by applying claims-processing logic to the appropriate estimated 
expenditure. Premiums for each type of msurance plan were computed on the basis of 
average benefits paid per insurance policy plus an administrative load set at a percent of 
benefits paid. In this way, each person was taken into account in computing initial premium 
levels. Premiums were adjusted for current regional variations in prices. 

Individual choice of health plans under reform was modelled by randomly assigning health 
insurance units to one of the three types of plans (FFS, HMO, PPO) described above. The 
assumed probabilities of selecting particular plans were based primarily upon market shares 
observed by HIAA in their annual surveys, trended forward to 1994. These estimates were 
modified by assuming a 10 percent reduction in FFS under reform as a result of managed 
competition. Market shares were allowed to vary on the basis of region, urban/rural location, 
and the availability of discounts for out-of-pocket (OOP) expenses and premiums. 

Two passes through the data are made to compute the final set of premiums. The first 
pass implements decision rules regarding the distribution of premium payments under reform. 
It also computes the cost of noncovered services and cost-sharing requirements borne by 
individual households. Based on these calculations, the model determines the extent to which 



151 



a household's direct costs will be offset by supplemental insurance and OOP discounts. In 
the second pass through the data, expenditures are increased to reflect additional spending 
induced by supplemental insurance and OOP discounts. Insurance premiums are then 
adjusted to reflect these higher expenditures. 

C. Choice of Premium Estimates for Budgeting Purposes: 

One set of premium estimates had to be chosen for final budgeting purposes. Although 
AHCPR's premiums were used by that agency in their estimation of discounts to employers 
and households and those discount estimates were used as a check on estimates done by 
HCFA and the Urban Institute, the Administration opted to use the HCFA premiums for 
purposes of final federal budgeting and distributional effects analyses. 

This choice was made for two reasons. First, the premiums estimated by HCFA were 
higher than those estimated by AHCPR, and it was viewed as desirable to have an official 
estimate that was more conservative (i.e., that would lead to higher costs associated with the 
program — see Table 1 below). Second, the HCFA estimates are benchmarked to the 
National Health Accounts, the most reliable measure of aggregate spending in the current 
health care system. Given that the National Health Accounts are considered to be the "gold 
standard" in measuring total health expenditures, it seemed most appropriate to keep the 
official premium estimates consistent with that standard. 





' 


Table 1 




Alliance Premium Estimates 


Policy Type: 


HCFA 


AHCPR 


Single 


$1933 


$1735 


Couple 


$3865 


$3471 


One Adult Family 


$3894 


$3647 


Two Adult Family 


$4361 


$4262 



IV. Discount Estimates 



The national health care reform plan includes a number of different discounts, targeted at 
different payers. There are two employer discounts: one directed at all firms in the regional 
alliance, and one directed at small firms with less than 75 employees. There is a discount for 
the family share (20 percent of the actuarial value) of premiums and for out-of-pocket 



152 



payments for both working and nonworking low income families. There is also a discount for 
the 80 percent premium share for those families who do not have at least one full time 
worker (or equivjilent), including early retirees. The major models are similar in how they 
estimate most components. 

A. Employer Discounts: 

The general firm discount consists of a 7.9 percent of payroll cap on all firm premiums, 
regardless of firm size, provided the employer is in the regional alliance. If the cost of 
providing 80 percent of the adjusted premium per worker exceeds 7.9 percent of firm payroll, 
the share paid by the federal government is equal to the difference between the two amounts, 
or; 

[N^.iPs) ^N^i.iPc) *N^i-SP,p) */^z)^(-8Pb/.)] -(-079 *Jirm payroll) 

where N is the number of workers of each contract type (S=singles, C=couples without 
children, SP=single parent families, and DP=dual parent families) and P is the adjusted per 
worker premium for each contract type. 

The small firm discount schedule provides lower payroll caps (less than 7.9 percent) for 
firms with less than 75 employees and average pay below $24,000 per year. The small firm 
schedule is shown in Table 2. 

Table 2 
Small Firm Discounts 



Average Firm Payroll 


Size of Firm' (Number of Employees) 


Less Than 25 


25 to 50 


50 to 75 


Less $12,000 


3.5% 


4.4% 


5.3% 


$12,000-15,000 


4.47t. 


5.3% 


6.2% 


$15,000-18,000 


5.3% 


6.2% 


7.1% 


$18,000-21,000 


6.2% 


7.1% 


7.9% 


$21,000-24,000 


7.1% 


7.9% 


7.9% 


Greater Than $24,000 


7.97o 


7.9% 


7.9% 



"Because 75 workers was not a rirm size break included in tJbe daia sets being used, modelers were asked to use 
a finn size of 100 for this subsidy calculauon. Given that the subsidies will apply only to firms up to size 75, the 
results overestimate the subsidy costs. 



153 



1. TRIM2: Employer Discounts. In the TRIM2 model, employer obligations (either 80 
percent of the adjusted premium for each worker or a percent of total payroll) are calculated 
for each worker ; there are no fums per se on the CPS, although each worker has employer 
information associated with them. TRIM2 assigns firm average payroll information from the 
County Business Patterns (CBP) data to each worker, using a statistical matching procedure 
that relies on industry (the 3-digit SIC codes), state of residence, and establishment size. 

In addition, an average firm premium is imputed to each worker. Take, for example, retail 
firms with 100-500 workers. Assume that according to the CPS, of the workers who report 
being employed by that type of firm, 40 percent are singles, 20 percent are married but have 
no children, 30 percent are married with children, and 10 percent are single parents. The 
weighted average firm premium that an employer of that type faces is equal to 

where Pj, Pc, Pgp, and P^p are as described earlier. 

The employer's payment is proxied by the comparison of average pay times the 
appropriate percentage cap (3.5 percent to 7.9 percent) to 80 percent of the average firm 
premium. If the 80 percent of the average firm premium is less than capped average pay, the 
employer would pay 80 percent of the correct adjusted premium for each worker. If, on the 
other hand, capped average pay is less than 80 percent of the average firm premium, the 
employer would contribute 7.9 percent (or the appropriate percentage less than 7.9 percent) of 
total payroll to the alliance. 

If the firm cap is the less expensive option, the worker's record is appended with an 
employer payment equal to the appropriate cap times average pay in the firm. The amount 
paid by the federal government on behalf of the employer is also added to the record in the 
amount of: 

(.MP)-(CAP*(Avg. Firm Pay)) 

where P is the adjusted per worker premium for the worker's health insurance unit type i 
(single, couple, single parent, dual parent), CAP is equal to the appropriate percentage cap 
(ranging from 3.5 percent to 7.9 percent) and Avg. Firm Pay is equal to the firm's average 
payroll as imputed from the CBP data. 

If, conversely, 80 percent of the adjusted per worker premium is the less expensive option, 
the worker's record is appended with an employer payment equal to .80*P,, where i is equal 
to the appropriate health insurance unit type for that worker, and there is no government 
employer discount. 



154 



2. HCFA: Employer Discounts. In the SPAM model, the basic calculations of 
employer discounts are similar to those in TRIM2, other than the development of firm-level 
average payrolls. While TRIM2 imputes payroll data from the County Business Patterns data 
set, SPAM uses payrolls created by synthesizing firms from employees on the CPS. For each 
record of an employee on the CPS, one of the firms created using that employee is linked 
back to serve as the firm description for that employee. The resulting payroll distribution is 
similar to that implied by the CBP. 

3. AHSIM: Employer Discounts. In the AHSIM model, the calculations are also 
similar to those in TRIM2. AHCPR uses County Business Pattern data for estimating average 
payroll. The links to NMES-2 make use of the Household Survey detailed responses by firm- 
size, industry, and other variables, confirmed by the NMES-2 Health Insurance Plan Survey. 

B. Discounts for the Self-Employed. 

Those individuals who are self-employed are obligated to make a contribution to the 
alliances based upon the same schedule used to determine small business payments. Those 
with self-employment income between $0 and $12,000 per year, for example, pay the lesser 
of 3.5 percent of self-employment income and: 

(.80*P;)-£C 

where P, is as before and EC is the credit received by the self-employed person due to 
employer contributions made on their behalf while doing wage work. So, for example, a self- 
employed person who is also employed by a firm and who is working a full-time, full- year 
job for wages/salaries has no further obligation with regard to the 80 percent/employer share. 
An individual who works full time for wages for 8 months and then quits that job and 
becomes self-employed is only obligated up to a maximum of 4 months of the 80 percent of 
the adjusted per worker premium for his/her health insurance unit type. 

C. Discounts to Low Income Families. 

Low income workers and non-workers (those with family income less than 150 percent of 
poverty"*) are eligible for government discounts to assist in the payment of the family share 
of the premium and to assist with family out-of-pocket payments (co-insurance and 
deductibles). The family premium share discounts work as follows: 



"The famUy size specific poverty guidelines used are as follows: 
single — family size is 1 
couple — family size is 2 
single parent family - family size is 3 
dual parent family — family size is 4. 



155 



1. Those with family incomes at or above 150 percent of poverty are responsible for paying 
the full 20 percent share, subject to a maximum of 3.9 percent of family income. 

2. Those with family incomes below 150 percent of poverty have their premium obligation 
calculated as: 

A14/?G,(WC,-1000)+MA/?G2(/NC2-///C,) 

where INCj is equal to the family income up to the appropriate poverty guideline, INCj is 
equal to family income if it exceeds 100 percent but is less than 150 percent of the 
appropriate poverty guideline, MARG, is the contribution rate applied to family income below 
poverty, and MARGj is the contribution rate applied to family income between 100 and 150 
percent of poverty. 

The two contribution rates are such that families below poverty do not pay more than 3 
percent of income for their family premium share contribution, those with income below 
$1000" have no premium contribution. Families at 150 percent of poverty pay the full 20 
percent share, or 3.9 percent of family income, whichever is less. The government payment 
is equal to 20 percent of the actuarial premium for the health insurance unit type, less the 
family contribution calculated above. For purposes of this calculation, family income is equal 
to adjusted gross income less unemployment compensation plus non-taxable interest income. 

For each marginal rate (MARGj and MARGj), there are two sets of rates to be used. The 
first set (MARG,5„g,,, MARGj^^^J is applicable for single health insurance units and uses the 
poverty guidelines for a family of size one. The second set (MARGiou,cr' MARGjotta) 'S 
applicable to all other health insurance units and is based on the poverty guidelines for a 
family of size four. 

Set one is calculated as follows: 

MARG, ={0.03*POVG,)I(POVG.-1000) 

MARG. ={{Q2*PREM\ -(0.03 »/»OKG. ))/(0.5 *POVG,) 

whens POYGj is based on the poverty guidelines for a family of size one, and PREM^ is the 
premium for a single individual. In 1994, these rates are estimated to be 3.5 percent and 4.8 
percent, respectively. 

Set two is calculated as follows: 



"in 1994 dollars. The income "disregard" is indexed by the CPI in future years. 



156 

MARGi^-{0.03*POVG^)/(POVG^-lOOO) 
MARG^^HiO.! *PREM^p)-{0.03 •POKGJ)/(0.5 *POVG^ 

where POVG4 is the poverty guideline for a family of size four, and PREMp, is the premium 
for a dual parent family. In 1994, these rates are estimated to be 3.2 percent and 5.8 percent, 
respectively. 

These rates result in singles and dual parent families paying their full 20 percent premium 
share at 150 percent of poverty. At 150 percent of poverty, singles pay 3.69c of their income 
and dual parents families pay 3.9 percent. When the second set of marginal rates are applied 
to single parents and couples, these families are paying approximately 3.9 percent of their 
income at 150 percent of their appropriate poverty guideline (family size set at three for 
single parents and two for couples); however, that amount is less than 20 percent of their 
respective premiums. Consequently, couples and single parents with incomes in excess of 
150 percent of poverty will be required to pay the lesser of 20 percent of their premium and 
3.9 percent of income. 

An out-of-pocket spending discount is available for those families below 150 percent of 
poverty who live in an area that does not provide access to a low cost sharing (HMO) plan. 
In such cases, the family is only obligated to pay the cost sharing that would be required if 
the family had actually enrolled in an HMO (i.e., $10 copayment for outpatient services); and 
discounts will be available for the remainder. 

Families without at least one fuU time worker or equivalent'" may be required to pay at 
least some portion of the 80 percent adjusted premium share that is covered for workers 
through their employers. Families with non-wage income below 250 percent of poverty are 
eligible for some subsidization of this obligation. If eligible, a family's payment for this 
portion of the premium is equal to: 

MARG^iNWINC^ - 1000) *MARG^(NW1NC^ -NWINC^) 

where NWINC, is equal to the family non-wage income up to the appropriate poverty 
guideline, NWINQ is equal to family non-wage income if it exceeds 100 percent but is 
below 250 percent of the appropriate poverty guideline, MARG, is the contribution rate 
applied to family non-wage income below poverty, and MARG4 is the contribution rate 
applied to family non-wage income between 100 and 250 percent of poverty. MARG, is set 
such that families below poverty do not pay more than 5.5 percent of their non-wage income 



'*Two examples of families with a "full time worki^r equivalent" are: 

1. each spouse works half time for the full year; 

2. one spouse works full lime for 8 months and the other works full time for 4 months. 



157 



for this portion of the premium, and families with less than $1000 in non-wage income have 
no required contribution towards this portion of the premium. The federal payment is equal 
to 80 percent of the appropriate adjusted per worker premium less employer payment credits, 
less self-employment contributions, and less family contributions as defined above. 

Non-wage income is calculated as Adjusted Gross Income (AGI) less wages and salaries 
less unemployment compensation and less self-employed income." Income in this category 
includes: rents and royalties, interest (including non-taxable interest income), dividends, 
alimony, capital gains/losses, the taxable portion of social security, partnerships, and trusts. 
Aside from items mentioned above, other categories of excluded income are: welfare 
payments, VA benefits, worker's compensation, child support income, inherited money, and 
proceeds from life insurance. 

There are four sets of contribution rates which can be applied to non-wage income: one 
each for single, couples, single parent, and dual parent families. They are calculated using 
the formulas shown below, using the family sizes of 1, 2, 3, and 4 respectively to determine 
poverty guidelines. 

For family type 'i': 

MARG, =(0.055 *POVG)/{POVGr 1000) 

MARG^HiO.S *P,) -(0.055 •P0KG,))/(1.5 *POVG) 

where POVG, is the poverty guideline for the appropriate family size, and P, is the 
appropriate adjusted per worker premium. In 1994, these rates are estimated to be as follows: 
for singles, 6.4 percent and 10.7 percent; for couples, 6.1 percent and 10.9 percent; for single 
parent units, 6.0 percent and 9.8 percent; for dual parent units, 5.9 percent and 7.5 percent. 

These rates were calculated so that families pay their full employer share of the premium 
at 250 percent of poverty. 

D. Retiree Discounts. 

Families with retirees''* are eligible for a special discount. When fully phased in, 
government discounts cover the full 80 percent/employer share for non-working retirees. 



"The acnial legislation excludes wages and salaries up lo 560,000 per year. Wages and salaries in excess of 
this amount count towards this calculation. The S60,000 exclusion cap was not modelled, making the subsidy 
estimates somewhat over-stated. 

'*The policy defines retirees as-those nonworkers who have fulfilled a requirement of a minimum number of 
working quaners and who are between the ages of 55 and 64. inclusive. However, the models being used to simulate 
the cost of the plan do not have data on quarters worked. Consequently, all individuals 55 to 64, who are not 
working or work pan time or pan year, are modelled as being eligible for the special retiree subsidy. 



158 



Government discounts are offset to some extent by the employers of retirees who work pan 
time and the employers of working spouses. For example, a 58 year old man who is working 
half time will have half of his employer contributions made by his employer and half of his 
contributions will be made by the federal government No government discount is necessary 
when a retiree has a full time working spouse, as the spouse's employer's contributions will 
fulfill the coverage responsibility. However, if a retiree is married to a non-worker, the 
government contribution will cover the couple (or family). 

E. Choice of Discount Estimates for Budgeting Purposes and Distributional Analyses: 

For reasons noted above in the section on premium estimation, the HCFA premiums were 
selected as the official Administration estimates. This choice necessitated that a model using 
the HCFA premiums be used as the official Administration discount estimates. For this 
reason, the discount estimates used for budgeting purposes are from the HCFA simulation 
model. It should be noted however, that all three discount estimates were within 7 percent of 
each other. Consequently, all estimates are well within the discount "cushion."" 

For purposes of distributional analyses, the Administration's official estimates come from 
the Urban Institute's TRIM2 model, which was benchmarked to the National Health Accounts 
and which used the HCFA estimated premiums. The Urban Institute is the most experienced 
of the three groups in doing the type of complex distributional analyses needed for the reform 
process. 

V. National Spending Impacts 

The change in spending produced by health reform can be summarized in terms of the 
impacts on businesses, households, and governments. Present business spending is here 
limited to employer contributions for employer-sponsored health insurance and for active 
workers and retirees. Under reform, employers are required to pay 80 percent of the average 
worker premium in their area (net of discounts) for most workers. Beyond the required 
outlays, it is expected that there will be supplementation of the required coverage. Those 
employers currently paying more than the required employer contribution percentage, or 
buying richer coverage (e.g., lower cost-sharing) are assumed to continue to pay more than 
the required minimum. 

The calculations of changes in business outlays are similar in TRDvl2 and SPAM. If an 



'*The HCFA discount estimates were increased by 15 percent in an effort to budget a more 
conservative level of discounts. 



159 



employer currently pays more than 80 percent of premiums, TRIM2 increases employer 
spending under reform to match the proportion contributed by the employer currently, as long 
as this does not exceed current spending. If maintenance of the current proportion would 
exceed current spending, it is assumed that employers increase their spending only to the 
point of current spending. Worker contributions are reduced accordingly. This first part of 
supplementation is then increased to add the cost for enhancing the richness of coverage up to 
the current level of plan richness associated with each currently insured worker. The cost of 
matching the current richness of benefits is paid by the employer and the worker in 
proportion to current premium contributions. 

In the SPAM model, additional coverage is assumed wherever current payments are better 
for the family than modeled future payments under the mandated benefit package. 
Supplementation amounts are accumulated equal to the difference between current and 
required benefits. Employer contributions are assumed to cover the supplement, although 
employer payments for the required coverage are held to the mandated minimum. 

The AHSIM Model assumes that both employers and households attempt to hold their 
spending on health insurance constant from baseline to reform. To the extent that baseline 
spending on employer-sponsored insurance exceeds expenditures required under reform, 
employers are first assumed to buy down their employees' required contributions. If baseline 
spending exceeds reform requirements for either households or employers after taking this 
transfer into account, the AHSIM model then allows both households and employers to buy 
supplemental insurance. For each health insurance unit in AHSIM, the actuarial value of 
supplemental insurance purchased under reform cannot exceed baseline levels. The total 
amount of supplemental insurance is also limited by the level of potential out-of-pocket 
expenses (cost-sharing plus noncovered services) under reform. Supplemental insurance is 
also assumed to carry a higher administrative load than basic health plans, 25 percent in most 
recent simulations. Any employer excess that remains after buying supplemental insurance is 
assumed to increase other tax-preferred fringe benefits. 

Household spending is defined to be the employee contributions for employer-sponsored 
health insurance, direct premiums for non-group coverage (under the current system) or direct 
purchase of alliance coverage (under reform), and cost-sharing payments. In the baseline, the 
employee contributions are defined to include employee payments irrespective of tax status; 
pre-tax employee contributions are counted as employee payments despite IRS treatment of 
such sums as employer contributions. To the extent supplementation implies higher business 
payments, household spending is reduced by like amounts. Total changes in cost-sharing are 
calculated as the net of reduced payments due to new and enriched coverage, against 
increased cost-sharing attributable to required purchase of insurance leading to increased 
utilization and some personal payments (rather than reliance on uncompensated care 
mechanisms). 



160 



Government spending changes reflect transfers between the Federal government and other 
levels of government, as well as increased Federal responsibilities (particularly in arranging 
discounts for low-wage firms). Baseline Federal spending is primarily Medicaid and 
Medicare. Under reform, Medicaid non-cash populations move into alliance plans, with some 
direct business payments. Similarly, more Medicare recipients fall under working aged rules, 
with direct employer contributions reducing Medicare responsibilities. 

State and local baseline spending is primarily Medicaid, although significant sums are 
currently spent on other programs, most notably direct payments to hospitals. Under reform, 
Medicaid savings will be redirected under maintenance of effort requirements for use in 
paying for discounts for low-income populations in the alliances. 



References 



Burner, S. and D. Waldo. "Using HCFA's Special Policy Analysis Model to Simulate 
Benefits in a Health Reform Scenario". Health Care Financing Administration Internal 
Memorandum, March 1993. 

Doyle, P. "Microsimulation and Health Care Reform." Proceedings of the American 
Statistical Association 1993 Annual Conference. Alexandria, VA: American Statistical 
Association, 1993. 

Giannarelli, L. (1992). An Analysts' Guide to TRIM2. Washington, D.C.: The Urban 
Institute Press. 

Holahan, J. and S. Zedlewski. (1989). Insuring Low-Income Americans Tliroueh Medicaid 
Expansion. Washington, D.C.: The Urban Institute. 

Lewis, G. and R. Michel. (1990). Microsimulation Techniques for Tax and Transfer Analysis. 
Washington, D.C.: The Urban Institute Press. 

National Research Council. (1991). Improving Information for Social Policy Decisions. 
Washington, D.C.: National Academy Press. 

Wade. M. (1991). "Out-of-Pocket Expenditure Model (revised). Urban Institute Research 
Memorandum. (October). 

Zedlewski, S., J. Holahan, L. Blumberg, and C. Winterbottom (1993). "The Distributional 
Effects of Alternative Health Care Financing Options," Washington, D.C.: The Urban 
Institute. 

Zedlewski, S.R. (1991). Expanding the employer-Provided Health Insurance System: Effects 
on Workers and Their Employers . Urban Institute Repon 91-3. Washington, D.C.: The 
Urban Institute. 



161 



APPENDIX A 



Example of the Application of an Induction Factor 
To a Change in Insurance Status 



Induction Factors Used in SPAM Simulations 



SOURCE: Office of the Actuary 
Health Care Financing Administration 



Current law spending 
Multiplied by copayment rate 
Out-of-pocket spending 

Initial change in out-of-pocket 
Multiplied by induction factor 
Equals change in total spending 

Current law spending 

Plus induced demand 

Equals new total spending 

Less new out-of-pocket (20%) 

Equals new benefits 194 



Before 


After 


Change 


Change 


$200 


$200 


X 50% 


x20% 


$100 


$40 




$60 




xO.7 




$42 




$200 




42 




242 




-48 



Hospital inpatient (facility and physician) 0.3 

Prescription drugs 1.0 

Emergency room services and DME 0.0 

All other services 0.7 



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