An Inconsistent Picture: A Compilation of

Analyses of Economic Impacts of

Competing Approaches to Health Care

Reform by Experts and Stakeholders

June 1993

OTA-H-540

NTIS order #PB93-203719

GPO stock #052-003-01327-4
Recommended Citation:

U.S. Congress, Office of Technology Assessment, An Inconsistent Picture: A

Compilation of Analyses of Economic Impacts of Competing Approaches to

Health Care Reform by Experts and Stakeholders, OTA-H-540 (Washington,

DC: U.S. Government Printing Office, June 1993).

For sale by the U.S. Government Printing Office

Superintendent of Documents, Mail Stop SSOP. Washington, DC 20402-9328

ISBN 0-16 -041808-9
Foreword

H

ealth care reform has become the focus of intense debate in government and in the private sector. But reform of the health care system,

which represents about one-seventh of the Nation’s economy, will pose

daunting economic, as well as social and political, issues.

In their efforts to address these issues, health care policy experts and

stakeholders have developed several general approaches to reform and sundry

variants on those approaches. Numerous analyses of these approaches and proposals have yielded a multitude of quantitative estimates intended to measure

their potential economic impact. Yet this abundance of information is not without its pitfalls-in terms of clarity and consistency—for policymakers attempting to weigh various routes to reform.

This Report reviews numerous analyses of the economic impacts of the

major approaches to health care reform addressed in this Report-Single Payer,

Play-or-Pay, Individual Vouchers or Tax Credits, and Managed Competitionand identifies some of the key issues and significant assumptions behind the

estimates provided in these analyses. Through this review, OTA endeavors to

facilitate policymakers’ understanding of how various provisions tend to influence the economic impact of the approaches and proposals, thereby assisting

them in their efforts to sort through the profusion of information provided as

well as specify additional details they may require.

The request for this Report came from Senator Ted Stevens, a member

of the OTA Technology Assessment Board at the time of his request.

OTA was assisted in this review by the advisory panel for the OTA

assessment Technology, Insurance, and the Health Care System, and by numerous other health policy experts. OTA gratefully acknowledges the contribution

of each of these individuals. As with all OTA reports, the final responsibility for

the content of the Report rests with OTA.

h-.

Roger C. Herdman, Director
Advisory Panel

James C. Hunt, Chair

University Distinguished Professor

University of Tennessee-Memphis

Memphis, TN

Henry Aaron

Director

Economic Studies Program

Brookings Institution

Washington, DC

Robert Brook

Director

Rand Health Sciences Program

Rand Corp.

Santa Monica, CA

Arthur CapIan

Director

Center for Biomedical Ethics

University of Minnesota

Minneapolis, MN

Deborah Chollet

Associate Director

Center for Risk Management and

Insurance Research

Georgia State University

Atlanta, GA

Olivia Cousins

Associate Professor

CUNY-Health Education

New York, NY

Jane L. Delgado

President and CEO

National Coalition of Hispanic Health

and Human Services Organizations

Washington, DC

Paula K. Diehr

Professor

Department of Biostatistics

School of Public Health and

Community Medicine

University of Washington

Seattle, WA

M. Joycelyn Elders

Commissioner of Health

State of Arkansas

Little Rock, AR

Jack Hadley

Co-Director

Center for Health Policy Studies

Georgetown University

Washington, DC

Douglas E. Henley

Physician in Private Practice

Hope Millss, NC

William Hobson

Executive Director

Central Seattle Community Health

Centers

Seattle, WA

John Lewin

Director of Health

State of Hawaii

Honolulu, HI

Barbara J. McNeil

Ridley Watts Professor and Head

Department of Health Care Policy

Harvard Medical School

Boston, MA

David Mechanic

Rene Dubos Professor of

Behavioral Sciences

Director

Institute for Health, Health Care

Policy, and Aging Research

Rutgers University

New Brunswick, NJ

Joseph Morris

Vice President for Information Systems

Delaware Valley Hospital Council

Philadelphia, PA

Patricia Nazemetz

Diretor of Benefits

Xerox Corp.

Stamford, CT

David G. Pockell

Senior Vice President and

Regional Manager

Kaiser Foundation Health Plan

Oakland, CA

Carl Scott

Senior Vice President

Mutual of Omaha

Omaha, NE

Gordon R. Trapnell

President

Gordon R. Trapnell Consulting

Actuaries, Ltd.

Annandale, VA

Cheryl B. Travis

Professor of Psychology and

Assistant Department Head

Department of Psychology

University of Tennessee

Knoxville, TN

Special Consultant

Stephen H. Long

Senior Economist

RAND Corp.

Washington, DC

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members. The panel does not,

however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the report and the accuracy of its contents.

iv
Clyde J. Behney

Health Program Manager

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Beckie Erickson

Office Administrator

Carolyn Martin

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PC Specialist

Project Staff

PRINCIPAL STAFF

Denise Dougherty

Senior Associate

Project Director for Technology,

Insurance, and the Health Care

System

SARA J. FREY

Principal Analyst

Matthew Hahn

Research Assistant

Eric Gille

Secretary
contents

PART 1, Summary and Overview of Competing

Approaches to Health Care Reform, 1

1 Summary and Overview of Competing

Approaches to Health Care Reform, 3

Summary of Findings, 3

History of Request, 6

OTA’S Method of Review, 6

Organization of Report, 6

Major Approaches to Health Care Reform, 7

Caveats Concerning the Analyses Examined by OTA, 13

Other Policy Considerations, 14

Summary of the Estimates, 14

PART II Potential Economic Impacts of Selected

Reform Approaches, 27

Introduction to Part 11, 29

2

3

Impacts on National Health Care Spending

and Savings, 31

Introduction, 31

Impacts of Single Payer Approaches, 32

Impacts of Play-or-Pay Approaches, 32

Impacts of Approaches Employing Individual Vouchers

or Tax Credits, 33

Impacts of Managed Competition Approaches, 34

summary, 35

Impacts on Federal, State and Local

Budgets, 37

Introduction, 37

Impacts of Single Payer Approaches, 38

Impacts of Play-or-Pay Approaches, 39

Impacts of Approaches Employing Individual Vouchers

or Tax Credits, 40

Impacts of Managed Competition Approaches, 40

summary, 41

1

. $

I I

I

vii
4 Impacts on Employers, 43

Introduction, 43

Impacts of Single Payer Approaches, 44

Impacts of Play-or-Pay Approaches, 45

Impacts of Approaches Employing Individual

Vouchers or Tax Credits, 45

Impacts of Managed Competition Approaches, 46

Summary, 47

5 Impacts on Employment, 49

Introduction, 49

Impacts of Single Payer Approaches, 50

Impacts of Play-or-Pay Approaches, 50

Impacts of Approaches Employing Individual

Vouchers or Tax Credits, 51

Impacts of Managed Competition Approaches, 51

Summary 51

6 Impacts on Households, 53

Introduction, 53

Impacts of Single Payer Approaches, 55

Impacts of Play-or-Pay Approaches, 56

Impacts of Approaches Employing Individual

Vouchers or Tax Credits, 56

Impacts of Managed Competition Approaches, 57

Per-Capita and Per-Family Estimates, 57

Distributional Effects, 57

Summary, 5 8

7 Impacts on Other Costs in the Economy, 59

8 Impacts on Administrative Costs, 61

Introduction, 61

Impacts of Single Payer Approaches, 63

Impacts of Play-or-Pay Approaches, 63

Impacts of Approaches Employing Individual

Vouchers or Tax Credits, 63

Impacts of Managed Competition Approaches, 64

Summary, 65

PART ill. Additional Policy Considerations and

Conclusions, 67

9 Additional Policy Considerations, 69

The Health- and Health-Care-Related Goals of Health

Care Reform, 70

Other Social, Political, and Economic Values, 70

. . . Vlll
10 Conclusions and a Provisional Checklist for

Policy makers, 73

Conclusions, 73

A Provisional Checklist to Guide Policymakers, 75

Box

1O-A Provisional Checklist: A Guide for

Policymakers, 76

Figures

1 Flow of Funds To and From Areas of the U.S.

Economy, 5

2 Major Approaches and Specific Proposals in Analyses

Reviewed by OTA: Strategies to Achieve Universal

Coverage and Cost Containment, 9

Tables 1 Quantitative Estimates of the Impact of Competing

Approaches to Health Care Reform on National Health

Care Spending and Savings, 16

2 Quantitative Estimates of the Impact of Competing

Approaches to Health Care Reform on Federal, State

and Local Budgets, 18

3 Quantitative Estimates of the Impact of Competing

Approaches to Health Care Reform on Employers, 20

4 Quantitative Estimates of the Impact of Competing

Approaches to Health Care Reform on Households, 22

5 Quantitative Estimates of the Impact of Competing

Approaches to Health Care Reform on Administrative

Costs, 24

APPENDIXES

A Overview of OTA Assessment: Technology,

Insurance, and the Health Care System, 81

B Summaries of Specific Analyses of the Economic

Impacts of Competing Approaches to Health Care

Reform, 83

C Acknowledgments, 112

D Acronyms and Glossary of Terms, 114

REFERENCES, 123

INDEX, 129

ix
PART I.

Summary and

Overview of

Competing

Approaches to

Health Care

Reform
Summary and

Overview of

Competing Approaches

to Health

Care Reform 1

I

n this report, the Office of Technology Assessment (OTA)

examines available analyses of the anticipated impact of

selected competing approaches to health care reform—

Single Payer, Play-or-Pay, Individual Vouchers or Tax

Credits, and Managed Competition-on the following areas of

the economy:

■

■

■

■

■

9

■

national health care spending and savings;

Federal, State and local budgets;

employers;

employment;

households;

other costs in the economy; and

administrative costs.

The report is not a detailed critique of the analyses discussed,

nor does it provide an independent OTA assessment of the

economic impacts of the selected health care reform approaches.

The estimates provided are those reported in the analyses without

adjustment to a common year.

SUMMARY OF FINDINGS

Below is a brief synopsis of the report’s major conclusions:

w While the selected approaches to health care reform may be

grouped together under the names Single Payer, Play-or-Pay,

Individual Vouchers or Tax Credits, and Managed Competition, significant differences in specific proposals exist within

as well as across these categories. Key factors contributing to

these differences include what a particular approach does, if

anything, with respect to: 1) extending access to coverage

and/or services, and the scope of benefits provided; 2)

D $

8QI

a

3
4 I An Inconsistent Picture

controlling the rate of growth in national health

care spending and savings; and 3) redistributing the burden of financing health care coverage and services. The name of any one approach is not sufficient to alert policymakers—

or the public-to how the approach deals with

all of these key factors.

m Regardless of the approach to health care

reform, the only way analysts appear to have

been able to project savings in national health

expenditures is by assuming one or more of the

following:

—a cap on total health expenditures at a certain

level and/or provider price controls at, for

example, Medicare payment rates;

—the approach will not provide universal

coverage or will provide universal coverage

but will substantially cut back on the scope

or depth of coverage; or

—strikingly high levels of savings derived

from restructuring the institutions and processes related to health care delivery (e.g.,

managed care and/or administrative savings).

■ The reasons proposals, or analyses of them,

need these assumptions to achieve savings are:

—increased availability of coverage will likely

increase the use of, and the total amount

spent on, health services; and

—administrative reforms alone are not likely to

save enough money to expand coverage,

especially to those people who are currently

uninsured.

■ There is a startlingly wide range of estimates of

the impact of the selected approaches to health

care reform on the areas of the economy

examined. For example:

—Estimates of the impact of Single Payer

approaches on national health care spending

and savings in a single year range from $21

billion in increased spending to $241 billion

in savings in 1991.

—Estimates of the impact of Managed Competition approaches on national health care

spending and savings in a single year range

from increased spending of $47.9 billion (in

the year 1993) to savings of $21.8 billion (in

the year 1994).

—Estimates of the impact of Play-or-Pay

approaches on households in a single year

range from increased spending of $2.3

billion (in the year 1993) to $19.3 billion in

savings (in the year 1990)0

—With respect to the impact of a Play-or-Pay

approach on employment, one estimate suggested that 25,000 to 50,000 low-income

workers might be displaced but others suggest much greater employment losses, for

example, 710,000 jobs lost in the first year of

plan implementation.

■ Policymakers should be aware of the fact that

the analyses of the health care reform approaches and proposals and, thus, the resulting

quantitative estimates, are not comparable to

one another. Therefore, policymakers should

be wary of giving too much credence to any one

analysis or estimate of an approach to health

care reform, of comparing various analyses or

estimates of an approach, and of comparing

economic impacts across approaches. In order

to properly evaluate such analyses, policymakers

should be aware of: the specifics of the reform

approach; the details, assumptions, and data

used in the analysis; and, perhaps, on whose

behalf the analysis was conducted. OTA suggests that policymakers use a guide containing

factors likely to affect the economic impact of

approaches to health care reform to assist them

in reviewing analyses. OTA provides such a

guide in chapter 10 of this report.

■ Many analyses are based upon proprietary

analytic models so that policymakers may not

have all the relevant information available to

them. OTA urges policymakers to request

detailed information about the assumptions

used by the analysts in their studies in order to

avoid making inappropriate comparisons. If

policymakers want to make comparisons among

competing approaches to health care reform,

they could facilitate the development of comparable analyses by asking analysts to compare
Chapter l-Summary and Overview of Competing Approaches to Health Care Reform I 5

FIGURE 1: Flow of funds to and from areas of the U.S. economy

The two facets of health care financing

Facet I Facet II

Extracting funds Disbursing funds

Direct subsidies

Capitated

premiums networks

and/or higher

prices , 1

L

A

Copayments and other out-of-pocket payments by patients at point of service

a In this report, the term ‘health insurance” is used broadly to include various types of health pans that are designed to reimburse or indemnify

individuals or families for the costs of medical care, or (as in HMOS) to arrange for the delivery of that care, including traditional private indemnity

fee-for-service coverage, prepaid health plans such as health maintenance organizations, self-funded employment-based health plans, Medicaid,

and Medicare.

SOURCE: Adapted from figure developed by Uwe Reinhardt, 1993. A version of this figure appeared in Health Affairs 12 (Supplement): 174, 1993.

their analytic approaches and results with those

of others, as appropriate, using similar assumptions (e.g., regarding: numbers of people covered; the share of the gross domestic product

(GDP) expected to be devoted to health care;

ascribed Federal and State responsibilities for

Medicaid, if relevant; payroll tax rate; scope

and depth of the benefit package; and premiums

or the actuarial cost of covered health care

services).

Policymakers should resist using estimates

when they are provided for only 1 year, usually

the first year of plan implementation. Such

estimates, even if provided for the various areas

of the economy, do not indicate the medium- or

long-term impact of an approach on the economy.

Policymakers should also be wary of making

comparisons among approaches by looking

only at their anticipated impact on discrete

areas of the economy (e.g., Federal, State and

local budgets; employers; administrative costs).

Instead, policymakers need to look at all areas

of the economy simultaneously and in relation

to one another. While a reform approach may

increase spending in one or more areas of the

economy, it may decrease it in one or more

other areas. For example, a proposal m a y

decrease employers’ health care expenses that,

alone, may look quite impressive, but the same

proposal may increase government expenditures tremendously. Thus, if policymakers do

not look at all areas of the economy simultaneously, decisions will be made absent full

information. However, the relationships between areas of the economy are complex and

not fully understood, and few analyses examine

the totality of change. Policymakers could use

a visual aid such as that in figure 1 to help focus

attention on the potential for competing impacts.
6 I An Inconsistent Picture

HISTORY OF REQUEST

The congressional Office of Technology Assessment is conducting an assessment entitled

Technology, Insurance, and the Health Care

System. Appendix A provides an overview of the

full assessment.

Given the increased attention to health care

reform in Congress, Senator Ted Stevensl 

of

Alaska requested that the project provide an

additional analysis related to the major health

care reform approaches under congressional consideration, in terms of their anticipated economic

consequences. Specifically, Senator Stevens requested that OTA assemble, and briefly describe,

the findings of available analyses of the impact of

basic reform approaches on:

national health care spending and savings;

Federal, State and local budgets;

employers;

employment;

households;

other costs in the economy; and

administrative costs.

OTA’S METHOD OF REVIEW

For purposes of soliciting analyses, the basic

health care reform approaches were initially

characterized as ‘‘single payer, ” “play-or-pay,’

and ‘‘market-based/consumer choice. ’ Because

the term ‘‘market-based/consumer choice’ is

used to refer to a wide array of approaches, the

term was broadly defined to include tax credits or

vouchers for individual consumers as well as

‘‘managed competition. ’ In October 1992, OTA

staff sent a letter to a wide array of individuals,

think tanks, special interest groups, and government agencies requesting copies of existing

analyses of these reform approaches. OTA also

obtained materials identified through a literature

search. A draft of this report was sent to those who

provided relevant materials and other experts for

review in February 1993. Those solicited demonstrated considerable interest in the project, and

this report summarizes pertinent information

provided to OTA staff. Appendix C lists the

names of those who were particularly helpful to

OTA during the development of this report.

It is important to note that this report is not

intended to be a detailed critique of the analyses

discussed, nor does it attempt to provide an

independent OTA assessment of the economic

impacts of the selected health care reform approaches. The estimates provided are those reported in the analyses without adjustment to a

common year. While the report does provide

some explanation of why the estimates presented

differ from one another, it does not try to fully

explain the bases for such variations. As noted

above, OTA provides a list of key questions that

policymakers might ask before accepting any

reported projections (see chapter 10).

ORGANIZATION OF REPORT

This report frost describes the major health care

reform approaches examined and major caveats

concerning the approaches and analyses of them;

these descriptions are in the next sections of this

chapter. Throughout this report, the major approaches are referred to as Single Payer, Play-orPay, Individual Vouchers or Tax Credits, and

Managed Competition. Tables summarizing the

quantitative estimates of the impacts of these

approaches to health care reform on the economy

1 Senator Stevens was a member of the OTA ‘lkchnology Assessment Board at the time of his request.

z This paper does not address every approach to health care reform. Instead it focuses on the approaches included in the request to OT&

expanded to include major reforms of particular interest to the present Congress. ‘IIus other approaches, e.g., Medical Savings Accounts

(MSAs), agovemment-owned and -operated health care Systew and the full array of approaches sometimes labeled managed competition (e.g.,

greater permission or encouragement for small employers to form health insurance purchasing groups), are not discussed in this report. Those

interested in exploring them further may wish to look at the following sources: M! MU+21,73); H.R 101 (Action Now Health Care Reform

Act of 1993); Oovernrnent-owned and -operated health care system-H.R. 3229 (U.S. Health Sewice Act), 1992; Managed Competition-

(8,16, 17,70). Numbers in parentheses refer to OTA accession numbers for references listed at the back of this report.
Chapter l-Summary and Overview of Competing Approaches to Health Care Reform I 7

follow. Part II of the report summarizes the

potential effects of the implementation of the

selected reform approaches, providing discussion

of the findings of available analyses by area of the

economy, including various issues and assumptions involved in estimating the impact of the

reform approaches on that area (chapters 2

through 8). Part III of the report addresses

additional policy considerations that may be of

interest to those concerned with health care

reform (chapter 9) and concludes with a series of

key questions-in the form of a provisional

checklist-that may be useful to policymakers as

they contemplate health care reform (chapter 10).

MAJOR APPROACHES TO

HEALTH CARE REFORM

The major approaches to health care reform

attempt to address the fundamental issues of cost,

access, and quality. Many factors may influence

how the approaches deal with these issues (e.g.,

philosophy of government, belief in the effectiveness of market forces), and the approaches maybe

categorized in diverse ways depending on the

criterion of interest (e.g., whether and how the

plan provides for universal coverage, whether and

how it addresses cost containment).

An example of a strategy for categorizing

reform approaches devised by Henry Aaron of the

Brookings Institution addressed two objectives of

health care reform and analyzed three different

approaches to achieving each of the objectives;

Aaron’s strategy compared “national health insurance, “ ‘‘tax credits, ’ and an “employmentbased, public backup” system as approaches to

achieving universal coverage, and ‘ ‘competition, ’ ‘‘managed competition, ’ and ‘‘budget

limits’ as approaches to controlling the growth of

health care costs (l). According to Aaron, “No

necessary connection exists between cost control

and extension of coverage, but most who advocate national health insurance espouse budget

limits to control costs, and most who advocate tax

credits support market competition to control

costs. Advocates of extending employment-based

insurance support managed competition or budget

limits” (1)?

Terms Used in This Report

There is increasing agreement

available terminology such as

Play-or-Pay, Individual Vouchers

that the use of

Single Payer,

or Tax Credits,

and Managed Competition to describe any approach to reform is problematic. For example, the

assumption may arise that the term ‘‘play-orpay” has a particular definition that clearly

distinguishes it from other reform approaches.

Marmor and Boyum, among others, have urged

participants in the policy debate to question the

use of such terminology:

The classification of proposals into . . . broad

categories-play-or-pay, single-payer, procompetitive--is clearly useful in organizing the

debate about medical care reform. There are so

many plans out there that we must group them in

order to make sense of what would otherwise be

hopelessly confusing. . . But if these classifications illuminate, they also obscure. Since classifications, by their very nature, stress differences

between groups and similarities within them, they

thus have a tendency to ignore their very opposites--

that is, similarities across groups and differences

within them (42).

This report continues to use the terms Single

Payer, Play-or-Pay, Individual Vouchers or Tax

Credits, and Managed Competition to refer to

broad “approaches’ to health care reform since

3 Since Aaron arrived at his strategy for categorizing approaches to reforrq some have proposed combining managed competition and

budget limits (70,71). However, and in contrast to Aaron’s conclusion some believe that certain components of their approaches must not be

tampered with if the approach is to be successful (15).
8 I An Inconsistent Picture

this is the terminology typically used in the

analyses examined.4

In contrast to the term “approaches,” this

report used the terms “proposal” or “plan” to

refer to specific variants of the broad approaches,

and the term ‘‘analysis” to refer to an estimate of

the impact of either an approach or a proposal.

Most, but not all, analyses reviewed for this report

resulted in estimates put in numerical, rather than

narrative, terms. Most of the numbers are in

dollars.

Figure 2 presents the specific proposals within

the major approaches to universal coverage and

cost containment. 5

For example, the Heritage Foundation and

Bush Administration proposals are usually considered variants of the Individual Vouchers or

Tax Credits approach to achieving universal

coverage. Various potential economic impacts of

the Bush Administration’s proposal were analyzed by several agencies andorganizations.67

It is important to note that: 1) not every

proposal with a particular name includes every

feature of a prototypical approach, and 2) not

every analysis addresses identically every feature

of similar proposals.8 Even where similar features

were included, specific assumptions about the

4 One exception is Individual Vouchers or Tax Credits. This title is used hereto distinguish this group of reform approaches from Managed

Competition approaches. Both have been grouped together at times under the heading ‘‘market-based/consumer choice” approaches, a term

which can obscure their differences.

5 OTA considers an approach ‘major’ if it attempts to achieve universal coverage. Nonmajor approaches, them are reform proposals that

address specific aspects of access to insurance coverage, such as efforts to increase affordability or availability for selected populations, markets,

or individuals (e.g., by the rescinding of preexisting conditions provisions in insumnce contracts).

s These include: the OffIce of Management and Budget in the U.S. Executive Ofi3ce of the President (94); the Health Care Financing

Administration in the U.S. Department of Health and Human Services (93); Lewin-VHI for the Bipartisan Panel on Presidential Candidates’

Health Plans, a panel convened by the organimtion Families USA in 1992 (3); and Silow-Carroll of the Economic and Social Re search Institute

(65).

7 As shown in figure 2, the Heritage Foundation proposal would attempt to achieve universaZ coverage by subsidizing individuals’ (or heads

of households’) purchase of health insuranc e through tax credits or vouchers made available directly to the individual purchaser. Cost

confuinment is to be achieved through competitio~ according to the Heritage Foundation plq in the following way: individual purchasers

of health insurance will be more cost-conscious with respect to both their purchases of insurance coverage and the uses to which their insurance

and other health care dollars are put (e.g., the purchase of health services) than they are currently. Under this theory, as insurers compete to

sell health insurance at the lowest premiums, and individuals more aggressively negotiate with providers over the price and quality (i.e., the

value) of health services, the rate of growth in national health expenditures will decelerate. Thus, the Heritage Foun&tion plan appears in the

cell (cell 3) of figure 2 that combines “competition” and “individual vouchers or tax credits. ’ It is important to note that the Heritage

Foundation proposal-and all other proposals-includes other important features besides “competition” and “individual vouchers or tax

credits. ’ For the sake of relative simplicity, these features are not shown in figure 2, but they maybe of importance to any analysis comparing

the Heritage Foundation plan and other specific proposrds or approaches. These features may include, but are not necessarily limited to, the

fact that Heritage’s plan would: 1) require individuals to purchase health insurance coverage or face a fiie; 2) provide subsidies at only certain

family income levels; 3) have Congress develop and mandate many of the features of the benefit package; 4) have Congress rescind the current

tax deduction/exclusion for employer-sponsored health insurance coverage (6,35), The level of the individual tax credi~ the basic benefit

package, and the rescission of the employers’ tax deduction/employees’ tax exclusion are all related in the Heritage plan (6,35).

s In addition to specific variations within and across approaches and proposals, almost all major approaches to health care refol-m-except

the Single Payer approach-include in some fashion the following reforms to the health insurance marketplace: 1) guaranteed issue of policies,

regardless of preexisting conditions, current health status, or other factors that could potentially affect utilization and costs; 2) limitations or

prohibitions on benefit plan exclusions for preexisting health conditions; and 3) an end to experience rating. However, many proposals would

establish some form of risk-adjusted community rating, in which individual subscribers would all pay equal or relatively similar premiums (i.e.,

adjusted for family size or geographic area), but the amounts of the premium paid to insurers would reflect the risk status of their specific pool

of subscribers. Other insurance marketplace reforms that are frequently suggested but that vary by approach or proposal include: requiring

insurers to offer a specific benefit package; efforts to promote the use of managed care arrangements (e.g., by preempting State laws that inhibit

their growth); efforts to encourage the formation of health insurance purchasing networks (e.g., by extending Employee Retirement Seeurity

Act @RISA] preemptions that permit larger self-insured employers to avoid State-mandated health insurance benefits to small employers

purchasing coverage through health insurance purchasing networks) (94). Common reforms that would reduce the administrative burdens of

the current system include electronic claims processing and billing. None of these reforms are shown in figure 2.
Chapter l-Summary and Overview of Competing Approaches to Health Care Reform I 9

FIGURE 2: Major approaches and specific proposals in analyses reviewed by OTA:

strategies to achieve universal coverage and cost containment

Strategies to achieve universal coverage

I

Single Payerb

Play-or-Pay Individual Vouchers Open market’

I or Tax Credits

?

I I

.—c Heritage

(u Pepper

E Competitiond Commission Foundation (6,35);

o

0 (75)f Bush Administration

5 (94)

o -- -—--—–- ‘---- ‘- 

‘

--- 

‘

----

—.

I

c1

: m●

Jackson Hole -k ‘“m-- ‘------ ‘- :

Enthoven and

a) Managed Group (29); Starr and ‘ Kronick, 1989

E

v Competition Zelman (71); (16,17); H.R. 5936

a

o Clinton campaign (9) (CDF) (10)

= — — ma) m● Canadian-style ‘- “--”-- ‘- ‘

- b-- -----—-—- m’--–” -------- -

‘g Expenditure plansh; AAFP (36,37); ~

~ limits PNHP (24); NLCHCR (49);

5

or targets cm (77) S. 1227

----- ‘--

on findings of OTA’S review and analysis for this report.

features may have varied considerably, further

affecting any estimates provided. Variations in

plan features and in certain assumptions may be

a function of the primary goals or the ideology of

the proponents of the approach as well as, in some

instances, the analyst’s desire to provide numerous examples of potential effects for more purely

analytical purposes.

The following descriptions attempt to provide

the basic elements of the major approaches to

health care reform as well as their major goals.

That section is followed by a discussion of

caveats that should be kept in mind as specific

attempts at analysis are reviewed.

Policymakers should also note that, as approaches to health care reform continue to evolve,
10 I An Inconsistent Picture

they will likely be faced with new variants of

existing approaches and new analyses of those

modtilcations (20).

Single Payer Approaches

The Single Payer approach explored in most

analyses proposes a system of tax-financed universal coverage with government as the sole

purchaser of health services.g Most of the analyses reviewed for this report examined a “Canadian model’ fashioned after the system operating

in Canada.10 Its key features are:

a federally-specilied health benefits package;

universal coverage;

tax-financed system;

government as sole purchaser of services; and

expenditure limits. In Canada, expenditure

limits include global budgeting for hospitals

and negotiated physician fee schedules and, in

some provinces, controls on expenditures for

physician services (e.g., expenditure targets

and caps as well as limits on physician income).

An approach in which government is the sole

purchaser of services may or may not include

expenditure limits.

Under the Single Payer approach, government

would ensure that all Americans have financial

access to broad health care services. Proponents

of a Single Payer system believe that its implementation in the United States would:

■ achieve universal coverage, because general

revenues, rather than individual premiums,

would be used to finance the system (a priority

goal of this approach); and

achieve a more equitable distribution of the

burden of financing health care costs, to the

extent that the system would be financed

through general revenues (a priority goal); and

stabilize or reduce the rate of growth in national

health expenditures through the imposition of

expenditure limits (a secondary goal of this

approach); and

drastically reduce administrative costs through

substantially streamlined administrative procedures (a secondary goal).

Play-or-Pay Approaches

Play-or-Pay, sometimes known as the “publicprivate combination’ approach (88), would build

upon the current system of employment-based

coverage, requiring a combination of employmentbased and tax-financed universal coverage with

multiple purchasers of services. Its key features

typically include:

a federally -specfiled health benefit package

that must be offered, at a minimum, by private

insurers and any public backup plan;

universal coverage (usually mandatory acceptance of insurance coverage); ll

financing by a combination of employer contributions, individual premiums and cost-sharing,

and Federal and State monies including cument

Medicaid funds and general revenues;

employers that, on behalf of their employees,

make premium payments for private insurance

(“play”) or contribute a specitled amount (e.g.,

7 percent of total payroll) (“pay”) to a public

fund; and

9 Examples of legislation to establish a Single Payer system introduced in the 103d Congress include: S. 491 (American Health Security

Act of 1993)/H.R. 1200 (American Health Security Act of 1993); in the 102d Congress: S. 2320 (Universal Health Care Act of 1992YH.R.

1300 (Universal Health Care Act of 1991); S. 1446 (Health USA Act of 1991); H.R. 5514 (Health Choice Act of 1992).

10 c)m ac~owledges that different Single Payer approaches operate in other countries but since the system o~mtillg ifl Canada is tie system

most frequently discussed in terms of implementation in the United States, it is the system used by many analysts to infer what would happen

in the United States under a Single Payer system.

11 Ewpl= of such le~slation ~~duced ~ tie l~d congr~s ~clude: S. 1177 (pep~r Commission H~ti care Access ~d Reform Act

of 1991)/H.R. 2535 (Pepper Commission Health Care Access and Reform Act of 1991); S. 1227 (HealthAmerica: Affordable Health Care for

AU Americans Act)/H.R. 3205 (Health Lnsurance Coverage and Cost Containment Act of 1991).
Chapter l--Summary and Overview of Competing Approaches to Health Care Reform I 11

■ a public fund that provides coverage to all

uninsured workers and to unemployed persons

and their dependents, whether presently uninsured or otherwise insured.

In addition, expenditure limits are included in

some proposals.12

Proponents of the Play-or-Pay approach believe that it would:

achieve universal coverage, by insuring all

Americans through employment-based or publicsponsored coverage, and by making coverage

more affordable through health insurance marketplace reforms (the priority goals of this

approach); and

minimize the redistribution, and the potential

disruption associated with it, of the burden of

financing health care by building upon the

current employment-based method of sponsoring health insurance (the secondary goal of this

approach). 13

Approaches Employing Individual

Vouchers or Tax Credits

The approaches that OTA calls Individual

Vouchers or Tax Credits propose tax policy

modifications and limited health insurance marketplace reforms to expand access to coverage

while retaining multiple purchasers of services.14

Their key features typically include:

a specified (e.g., by Congress or the States)

benefit package available for the amount of the

maximum tax subsidy;15

universal or expanded access to coverage;

deduction, credit or voucher available to individuals to assist them primarily with the

purchase of health insurance and secondarily

with the direct purchase of health services;16

financing by a combination of individual premiums and cost-sharing, Federal and State

monies currently funding care to low-income

and uninsured persons, general revenues, and

employer contributions, at least initially, in

some proposals;

individuals purchase health insurance coverage

directly or through their employers; and

public programs (e.g., Medicaid, Medicare)

continued with some modification possible to

expand coverage to additional low-income

people under Medicaid.

Proponents of the Individual Vouchers or Tax

Credits approaches believe that these changes

would:

increase the affordability, accessibility, portability, and stability of health insurance, in

particular for individuals17 and small groups,

thereby reducing the number of uninsured

individuals (a priority goal of this approach);

encourage individuals to assume a greater role

than they presently do, and to be more costIZ E~pleS of such legis~tion introduced in the 102d Congress include: S. 1227 (HealthAmerica: Affordable Health CareforAll Amerims

Act)/H.R. 3205 (Health Insurance Coverage and Cost Containment Act of 1991).

13 III 1990, 64percentof in.sur~ persons underage 65 in the United States purchased insurance through anemployer-sponsored group (eitier

directly or as dependents) (89).

14 Examples examin~ in this report are the Heritage Foundation (6,35) and Bush Administration (94) proposals. ID the IOzd Congress, H.R.

5919 (Comprehensive Health Reform Act of 1992), incorporated some of the Bush Administration’s proposed reforms. See also, Pauly,

DanzoG Feldsteti et al., 1991 (52), 1992 (53).

IS me Heri~ge Foundation plan would require Congress to delineate a “basic” benefit package (6). The Bush Administration plan would

have delegated responsibility for specifying the benefit package to the States (94).

16 me Hefi~geFow&tionp~m rqfies ~dividualst. pwc~seheal~i~~cecoverage~esshey Weady have coverage unde r

Medicaid, Medicare or another government program (6,35).

17 cwen~y, some ~ople Pwchme h~~ insm~ce coveragedirectly from an insurer for ~emselves and ~ek f~liCS, in pdCUh,IhOSe

ineligible for employment-based coverage, Medicare, Medicaid, Civilian Health and Medical Program of the Uniformed Services

(CHAMPUS), Veterans Affairs, or military coverage (89). This is typically referred to as the “individual market’ for health insurance to

distinguish it from the “small group” and “Iarge group” markets.
12 I An Inconsistent Picture

conscious, with respect to their purchase of

health care coverage and services (a secondary

goal of this approach); and

limit the Federal Government’s regulatory role

(a secondary goal).

Managed Competition Approaches

Managed Competition generally combines tax

policy modifications with health insurance marketplace reforms designed to promote health care

delivery system restructuring. 18 It is, according to

its originator, Alain Enthoven,

. . . a purchasing strategy to obtain maximum

value for money for employers and consumers. . .

Managed competition occurs at the level of

integrated financing and delivery plans, not at the

individual provider level. Its goal is to divide

providers in each community into competing

economic units and to use market forces to

motivate them to develop efficient delivery systems (15).

Key common features typically include:

a standardized benefit package (15,70), defined

by a National Health Board or similar entity

which must be offered by private insurers and

any public backup plan;

expanded access to coverage through sponsors

(e.g., health insurance purchasing groups) authorized to structure and modify the market for

competing health plans (15);19

further development of integrated financing

and delivery organizations (e.g., Health Maintenance Organizations [HMOs]) financially at

risk for the total health care of enrollees and

accountable to the public;

limitation of the deduction from employer

income and, in some proposals, the exclusion

from employee income, of employer contributions for group health insurance premiums to

the price of the least expensive, but minimally

acceptable, standardized benefit plan in the

area; and

expenditure limits, in some proposals.

As noted above, the Managed Competition

approach typically provides for health insurance

purchasing groups which, by pooling large numbers of individuals together, are intended to foster

competition among providers for enrollees and

pool the risk of providing coverage. These group

purchasing arrangements are particularly advantageous for individuals and small groups that are

currently unable to achieve the economies of

scale enjoyed by larger groups.

The primary purpose of this approach is to use

a combination of market competition and targeted

regulation of the health care insurance industry to

promote change in the health care system. Some

proponents of Managed Competition believe that

it would:

■ achieve universal access by making coverage

more affordable through specific insurance and

health care delivery reforms;20

■ minimize the redistribution, and the disruption

associated with it, of financing health care by

retaining current arrangements, yet modify

incentives related to the purchase of coverage

IS Am ~~oven originatd the concept and the Jackson Hole Group initiated development of the framework for -ged COm@tion

(16,17,29). Examples of such legislation introduced in the 102d Congress include: S. 3299 (Managed Competition Act of 1992)/H.R. 5936

(Managed Competition Act of 1992) (Conservative Democratic Forum); S. 3300 (21st Century Hea.lti Cam Act). Resident Ctiton h

previously expressed support for this approach in principle (9).

19 Most propo~ ~o~d ~rmitl~geemployersto~n~uetop~~Coverageon ~eirowbi.e., employers With lt),tx)OOr IIIOrCCOVUCd

lives would deal directly with the insurem and/or providers. Some proposals would permit employers with 1,000 or more covered lives to deal

directly with the insurers ador providers (27).

m En~oven fit=, “bly PUH@J -ket pR=ure on providers to cut costs, market reforms promoting cornpetitioI+if not accompanied

by universal coveragt+could exacerbate access problems. (This would be true of any serious cost containment program.) It would be more

hurnane, economical, and rational simply to adopt a policy providing coverage to virtuaIly everybody through an integrated financing and

delivery organization that provides primary and preventive care as part of a comprehensive benefit package. A necessary condition for univemal

coverage is that everybody who can contribute to fmcing the system must do so” (15).
Chapter l-Summary and Overview of Competing Approaches to Health Care Reform I 13

through tax modifications to encourage costconscious behavior on the part of individuals;21

and

promote competition among providers on the

basis of price and quality.

CAVEATS CONCERNING THE ANALYSES

EXAMINED BY OTA

In reviewing analyses of approaches to health

care reform, several problems arise that must be

understood so that the import of the analyses for

purposes of the health care reform debate is clear.

These problems relate to:

defining the various approaches to reform; and

the content and capabilities of the analytic

models used to examine the approaches to

reform.

First, apparent from the descriptions of the

major reform approaches is the fact that certain

components of reform may appear in various

approaches. Thus while the terms Single Payer,

Play-or-Pay, Individual Vouchers or Tax Credits,

and Managed Competition may be used in

common parlance, they lack freed definitions.

Therefore, the use of these terms is likely to

confuse rather than enhance the debate unless the

particular components under discussion are outlined and the specific combination is carefully

scrutinized with respect to its unique impact.

In order to analyze health care reform approaches, analysts must decide upon a relatively

specific proposal to analyze and obtain the

relevant data.22 While not a complete barrier to

analysis, the age of and problems with available

data have posed problems for analysts (30,45,62).

Some of the key assumptions affecting the

estimates of the impact of the various reform

approaches concern:

■

■

■

the extent to which coverage is expanded in the

population;

the distribution of the direct burden and the

means of financing health care;

the extent to which an approach or spectific

proposal incorporates specific cost-containment mechanisms and/or expenditure limits,

and the assumed effectiveness of such mechanisms and/or limits;

the content of the benefit package;

the actuarial cost of coverage;

employer/employee cost-sharing with respect

to private insurance or enrollee cost-sharing

with respect to public-sponsored coverage;

savings or increases in spending due to modifications of the tax subsidy for health insurance

premiums;

savings or increases in spending due to modifications in administrative procedures;

implementation of managed care; and

cost-savings assumed from managed care.23

Unfortunately, available studies may not be

helpful when it comes to evaluating these and

other key issues. The report of an analysis may be

incomplete or difficult to interpret, or the analytic

model itself is proprietary. As a consequence,

crucial assumptions are not available to readers.

Particularly troublesome are those analyses

that do not explicitly say that new revenues will

be needed to finance the proposals; however, the

proposals are frequently described as “budget

neutral’ in summaries of the analyses. New

revenues, of course, would require either new

taxes or increased premiums.

21 Some analysts maintain that Managed Competition is compatible with various financing mechanisms (e.g., alternatively, from a

tax-fiiced approach “to an employer/employee mandate plus an individual mandate and subsidh for the nonemployed. . . . tom individual

mandate’ (15).

22 ~ -ycases revlew~ ~ ~s rqo~ a.naiysts were asked to analyze a SPXitlC PIWOSal (35,S6.37,75).

23 Note tit most ~yse5 of tie costs of p~~~~reform propo&do not deal ~~ transition COStS, tit is, C,OStS Rkttd tO ilnpltllllentig

the system, such as developing an appropriate information system, which may be signiilcant.
14 I An Inconsistent picture

An example of a very widely used proprietary

analytic model is the Lewin-VHI Health Benefits

Simulation Model (HBSM).24 It has been used to

analyze the impact of a wide range of proposals

based on numerous approaches (3,34,35,36,37,63,

75), yet analysts who wish to check the numbers

generated by the Lewin-VHl HBSM are likely to

be stymied because some of the assumptions and

data are not available to them.

OTHER POLICY CONSIDERATIONS

Despite the need for complicated analytic

models for analyzing the potential impacts on the

U.S. economy of large and simultaneous changes

in financial incentives and organizational structures, leading users of these analytic models

emphasize that such models cannot answer the

fundamental questions about health care reform

(13,39,50). These fundamental issues include:

■

■

9

■

—

access to health care-Access for whom and to

what? To health care coverage and/or services,

and to what type of coverage or level of

services?

financing of health care-How much disruption of the current health care system, in terms

of the distribution of the direct financing

burden, is deemed acceptable and to what

extent is equity sought? What is the appropriate

role of government, employers and individuals

in financing health care?

to what extent and how should the Nation

attempt to control national health expenditures,

in both absolute terms and with respect to their

rate of growth?

the appropriate roles of competition and regulation.

The estimates provided in this report cannot

independently resolve the fundamental political

and social issues that are central to health care

reform. However, despite this, and the caveats

discussed above, a comparative review of analyses of the reform approaches may be useful in

informing the policy debate to the extent that their

results can be understood to:

demonstrate the potential for a specific reform

action to have an economic impact; and

provide insight into who or what will be

affected by, and the possible order of magnitude of the economic impact of, a specific

reform action.

However, it is critical that such estimates be used

cautiously. Policymakers need to know what an

estimate refers to in some detail as well as the

validity of the data used in the estimate, before

relying upon it as a basis for decisionmaking.

SUMMARY OF THE ESTIMATES

Tables 1 through 5 provide a brief summary of

the estimates of the economic impacts of major

approaches to health care reform, in five different

areas for which there was sufficient information

to put in table format. It is important to note that:

1) the tables report numbers that are available

publicly; 2) almost every estimate in the tables

contains a footnote that provides some of the key

reasons why the estimate differs from the others

shown in the table; 3) additional information on

the seven areas of the economy addressed in this

report, and more detailed discussions of the

estimates and why they vary so much, can be

found in chapters 2 through 8, and appendix B, of

this report; and 4) types of estimates that were not

amenable to table format (e.g., impacts on other

u me ~~-VHI H~~Be~fi~ Sixntition Model (HBSM) was fmt developed in 1984 to analyze the Md.i_ CWLStrOptiC propod.

Its purpose is to estimate the cost of access proposals, the impact of access proposals, distributional impacts, and to identify unintended

consequences. It is a month-by-month simulation model including a household data fde horn the 1987 National Medical Expenditures Survey

updated to the simulation year, And there is a statistical match with the Small Business Adrmms “ “ tration’s survey of large and small f- (62).

While the model itself is properly proprietary, to the extent that the detailed assumptions used by the analysts are not available to policyrnalms,

analyses using the HBSM may not provide policymakers with adequate information upon which to base public policy decisions.
Chapter l-Summary and Overview of Competing Approaches to Health Care Reform I 15

areas of the economy; impacts on employment;

and per-capita and per-household effects) are also

discussed in the appropriate chapters and in

appendix B. The tables are as follows:

Table 1 summarizes the range of quantitative

estimates of the economic impacts of competing approaches to health care reform on national health care spending and savings;

Table 2 summarizes the range of quantitative

estimates of the economic impacts of competing approaches to health care reform on Federal, State, and local budgets;

■

■

■

Table 3 summarizes the range of quantitative

estimates of the economic impacts of competing approaches to health care reform on employers;

Table 4 summarizes the range of quantitative

estimates of the economic impacts of competing approaches to health care reform on households;

Table 5 summarizes the range of quantitative

estimates of the economic impacts of competing approaches to health care reform on administrative costs.
16 I An Inconsistent Picture

TABLE 1: Quantitative estimates of the impact of competing approaches to health care reform on national health care spending and

savings (national health expenditures)a

Change

in expenditures Estimate

(in $billions) year(s) Sourced

Change

in expenditures Estimate

(in $billions) year(s) Source

Sing/e year esfimate~: Single year estimates:

+ !3 1.0 199 2 NLCHCR”

Estimates 0/future impactd:

-$1.300.0 to -$5.500.0 1991-2000 Mever, et al.l,k

+ $ 6.0 1994 Silow-Carroll & Meye@r

+ $ 1.0 1994 Silow-Carroll & Meye@!s

-$ 5.0 1994 Silow-Carroll & Meyer@

Estimates 0/future impacts:
.

Chapter l--Summary and Overview of Competing Approaches to Health Care Reform I 17

TABLE 1: Quantitative estimates of the impact of competing approaches to health care reform on national health care spending and

savings (national health expenditures)~onthwd

Change Change

In expenditures Estimate m expenditures Estimate

(m Sbllllons) year(s) Source (m $bllllons) year(s) Sourcecc

Sing/e year estimates Sing/e year estimates”

-$10.8 1991 Heritage Foundationv

-$ 7.5 1993

-$ 2.0 1994

-$ 6.0 1994

Estimates of future impacts.

-$394.0 1992-1997

-$954.0 1992-2000

-$ 72.6 1993-1997

-$156.9 1993-2000

-$158.0 to -$1,000.0 1994-2(XI3

Bipartisan Pan@

Silow-CarrollXY

Silow-Carrollxz

+ $47.9

-$ 8.0

- $21.8

1903

1993

1994

Shds, et aL@

brtg & Rodger@

Bipartisan Panelfl

Estimates of future impacts:

Bush Administration

Bush Administration=

Bipartisan Pan@

Bipartisan PaneP

-$232.0

-$745.7

1994-1997 Bipartisan PaneF

1994-2000 Bipartisan Paneltl
18 I An Inconsistent Picture

TABLE 2: Quantitative estimates of the impact of competing approaches to health care reform on federal, state and local budgetsa

Change

in expenditures Estimate

(in $billions) year Sourced

Single year estimates:

Total + $143.6 1989 CBOf

Federal + $154.7

State -$ 11.1

Total

Federal

State

Total

Federal

State

Total

Federal

State

+ S?44.0 to + $252.0 1991

na

na

+ .$225.0 1991

na

na

+ $ 29.0 1991

na

rta

HIAAg

Meyer, et al.h

Meyer, et al.’

Change

in expenditures Estimate

(in $blllions) year Source

Single year estimates:

Total

Federal

State

Total

Federal

State

Total

Federal

State

Total

Federal

State

+ $33.6 1989 Zedlewski, et al.jk

na

na

+ $23.1 1989 Zedlewskl, et al.11

na

na

+ $16.6

+ $24.0

-$ 7.4

+ $17.1

+ $13.1

+ $ 4.0

1990 Pepper Cornm.m

1991 CBOn

Tota l

Federal ~W.7

State na

Total + $41.7

Federal + $34.1

State + $ 7.6

1992

1993

NLCFKW

AAFPP
Chapter l-Summary and Overview of Competing Approaches to Health Care Reform I 19

TABLE 2: Quantitative estimates of the impact of competing approaches to health care reform on federal, state and local

budgets~conhl?ued

Change Change

In expenditures Estimate In expenditures Eshmate

(m Sbllllons) year Source (In $bllllons) year Source

Sing/e year estmates Sing/e year estwnates

Total na

Federal + $87.9

State + s 7.6

1991 Heritageq

Total na

Federal + $ 47.7

State na

Total na

Federal + S 41.0

State na

Total na

Federal + $106.5

State na

1993

1993

1994

Sheils, et al.’

Long & Rodgerss

CDF

= not available
20 I An Inconsistent Picture

TABLE 3: Quantitative est imates of the impact of competing approaches to health care reform on employers

Change

in expenditures Estimate

(in $blllions)c year(s) Sourced

Single year est/mate&:

-$76.0 to -$136.0 1991 Meyer, et al.f

Estimates of future irnpact~:

-S2,200.0 to -$3,000.0 1991-2000 Meyer, et al.f

Change

In expenditures Estimate

(In SbiHions) year Source

Single year estimates:

+ $29.8, + $44.4 1989 Zedlewski, et al.h

+ $14.7 1990 Pepper Commissioni

+ $23.7 1993 AAFP~

Estimates 0/future impacts:

not available
Chapter l-Summary and Overview of Competing Approaches to Health Care Reform I 21

TABLE 3: Quantitative estimates of the impact of competing approaches to health care reform on employersa—contirwed

Change

In expenditures Estimate

(In Sblllmns) year(s) Source

Sing/e year estimates

+ S7,8 1991 Heritage Foundatlonk

- S2.O 1994 Sllow-Carroll’m

—

Eshrnates of future Impacts:

-$35.0 to -$84.0 1994-2003 Silow-Carrolll.m,n

-$ 4.0 to -$10.0 1994-2003 Silow-Carrolll’O@

Change

In expenditures Estimate

(m Sbllllons) year Source

Sing/e year estfrnates:

+ $a.o 1993 Long & Rodgersq

Estmates of future wrfpack:

not available

Comm{sslon on Comprehensive Health Care
22 I An Inconsistent Picture

TABLE 4: Quantitative estimates of the impact of competing approaches to health care reform on households

Change

in expenditures Estimate

(in $billions) year(s) Sourced

Change

in expenditures Estimate

(m $billions) year Source

Single year estimates:

#‘t $20.0 1994 Siiow-Cwotl, et al.f

-$10.0 1994 Silow-CarrM, et al.g

Single year estimates:

-$19.3 1990

+ $ 2.3 1993

Pepper Commission]

AAFPk

Estimates of future irnpact~:

-$3,000.0 to -$3,600.0 1994-2003 Silow-Carroll, et al.f’

-$3,700.0 to -$4,400.0 1994-2003 Silow-Carroll, et al.%’

Estimates of future impacts:

not available
Chapter l-Summary and Overview of Competing Approaches to Health Care Reform I 23

TABLE 4: Quantitative estimates of the impact of competing approaches to health care reform on households~corrtinued

Change

m expenditures Estimate

(In Sbllllons) year(s)

.%gle year estimates:

-$18.8 1991

- !$ 7.0 1994

Source

Heritage Foundationt

Silow-Carroll~n

Change

In expenditures Estimate

(In $b!lllons) year Source

—

Sing/e year estmates:

- S6.0 1993 Long & RodgersP

Estvnafes of future wnpack

- S440.O to - S700.O 1994-2003 Silow-Carrollm ““

Estimates of future Impacts:

not available
24 I An Inconsistent Picture

TABLE 5: Quantitative estimates of the impact of competing approaches to health care reform on administrate ive costsa

Change

in expend lturesc Estimate

(in $billions) year

Sing/e year esthnate#:

-$ 69.0 to -$83.2 1987

-$ 18.2 to -$58.3 1989

- !$ 46.8 1991

-$ 67.0 1991

-$ 67.0 1991

-$ 90.0 1991

-$113.0 1991

Change

in expenditures Estimate

Sourced

(in $billions) year(s) Source

Single year estimates:

Woolhandler & Himmelstein’

cm

Lewin-VHlh

GAOI

PNHPI

Meyer, et al.kl

Meyer, et al.km

Estimates of future impact~:

not available

-$2.8 1993 AAFPo

Estimates of future impacts:

-$40.1 1993-2000 AAFP”
Chapter l-Summary and Overview of Competing Approaches to Health Care Reform 1 25

TABLE 5: Quantitative estimates of the impact of competing approaches to health care reform on administrative costsa—continued

Change Change

In expenditures Estimate In expenditures Estimate

(In Sbilllons) year(s) Source (In Sbllllons) year Source

Single year estimates: Sing/e year estimates:

+ S2. 1 1991 Heritage FoundatlonP

-$0.87 1993 Bush Administration -$11.2

-$4. 3 1993 Bipartisan Panel’

1993 Sheils, et al.s

—

Est/mates of future Impacts: Eshmates 0/ future unpacts:

- S60.5 1993-2000 Blpartlsan Panelr

not available

- S74.4 1993-2000 Bush Admmlstratlonq

the 11s! of references at the end of th(s re~ort
PART II.

Potential

Economic

Impacts of

Selected Reform

Approaches
Introduction

to Part II

As noted in chapter 1, available analyses were reviewed

for their insight into the anticipated impact of the

selected reform approaches on:

national health care spending and savings (see ch. 2);

Federal, State and local budgets (see ch. 3);

employers (see ch. 4);

employment (see ch. 5);

households (see ch. 6);

other costs in the economy (see ch. 7); and

administrative costs (see ch. 8).

Each of the following chapters provides an introduction to the

impact of current health care spending on the area of the economy

being examined in that chapter. Then, the chapter provides, for

each of the four major approaches to health care reform addressed

in this report, a summary of the range of available estimates of

the impact of the approach on the area of the economy. Selected

key assumptions made in the estimates are also noted.

The chapters in this section are not equal in scope or depth for

several reasons. First, some health care reform approaches (e.g.,

Canadian-style system, employment-based expansions) have

been discussed in depth over a period of time and have been the

subject of many more studies than others (e.g., Managed

Competition). Second, the potential impact of health care reform

on some areas of the economy (e.g., national health care spending

and savings) has been examined in greater depth than others.

Third, the analyses reviewed varied markedly with respect to the

level of detail provided regarding the assumptions they made.

Appendix B provides considerable additional detail on assumptions underlying specific analyses.

29
Impacts on

National

Health Care

Spending and

Savings 2

INTRODUCTION

A

s the Nation heads toward national health care expenditures’ projected to be almost $1.7 trillion by the year

2000 (4,79), considerable attention has been directed to

the portion of the Nation’s gross domestic product

(GDP) devoted to health care spending, and its impact on other

sectors of the economy. Recently, the U.S. Department of

Commerce reported that health care spending increased by 11.5

percent from 1991 to 1992, bringing it to 14 percent of the

Nation’s GDP (92). At a projected average annual rate of growth

of around 10 percent, the Health Care Financing Administration

and the Congressional Budget Office (CBO) estimated that

national health care spending will reach 18 percent of GDP by the

year 2000 (4,79).2 Although individuals debate what the correct

level of spending on health care should be, many Americans want

to lower the rate of growth in health care spending. Thus, the

ability of a reform approach to control the rate of growth in

national health care expenditures is one of the key issues in the

debate over health care reform.

* National health expenditures are defined as: 1) health services and supplies (expenses

related to personal health care, public and private program administration and the net cost

of private health insurance [administrative costs], and government public health

activities) and 2) research and construction of medical facilities (89). National health care

spending is the total amount spent by employers, governments and households in the

United States on health care (89). National health care spending is usually calculated as

either a set dollar amount or as a percentage of the Nation’s total economic output (gross

national product [GNP] or gross domestic product [GDP]). GDP ‘‘covers the goods and

services produced by labor and property located in the United States . . . GNP covers the

goods and services produced by labor and property supplied by U.S. residents” (90).

2 CBO recently revised its projection of the average rate of growth in national health

expenditures downward to 8.8 percent a year from 1992 to the year 2000. Nevertheless,

it projected that health spending, as a percent of the gross domestic product, will be almost

19 percent, an increase of 1 percent over its m.rlier projections, in the year 2000 (32).

31
32 I An Inconsistent Picture

IMPACTS OF SINGLE PAYER

APPROACHES

One goal of most proposed Single Payer

systems is to limit or reduce the rate of growth in

national health spending.

Key to cost control under a Single Payer system

would be the type, extent, and enforceability of

any cost-containment measures, including expenditure limits, incorporated. Estimates of the

change in national health care expenditures under

a Single Payer system vary considerably, as

shown in table 1 in chapter 1. In a single year

(1991), the change ranges from estimated savings

of $241.0 billion (43) to increased spending of

$21.2 billion (34). Estimates of future savings

range, for the period from 1991 through the year

2000, from $1.3 to $5.5 trillion, in current dollars

(43) (table 1).

The major assumption affecting the various

estimates of the impact of a Single Payer system

on health care spending and savings is the extent

to which the approach incorporates specific

cost-containment mechanisms and/or expenditure limits and, most importantly, the presumed

effectiveness of such mechanisms and/or limits.

With respect to the estimates shown in table 1,

for example, analysts with estimates at the

extremes assumed either: 1) health care spending

in the United States at the rate of 8.7 percent of

GDP (the often-cited Canadian rate of health care

spending) achievable immediately and continuously (savings of $241.0 billion and $5.5 trillion)

(43), or 2) no change in the rate of spending in the

first year of the system’s implementation (increased spending of $21.2 billion) (34). As shown

in the notes to table 1, estimates that are more in

the middle range assumed various combinations

of cost-containing and cost-increasing features.

For example, the U.S. General Accounting Office

(GAO) assumed that some cost-containment (e.g.,

in administrative costs) and all cost-inducing

(e.g., universal coverage) factors were effective in

the first year of implementation (82); the Congressional Budget Office assumed no overall

limit on expenditures (e.g., a global budget), but

assumed that costs would be lower because all

providers would be paid according to a Medicare

fee schedule (77).3

Analysts acknowledge that, left unresolved by

any available estimates of the economic impact

on the United States of a Single Payer system is:

. . . the extent to which the savings from controlling total expenditures represent true efficiencies,

as opposed to sacrifices in the quality of health

care or in availability of particular services (43).

This concern is true, of course, of other

approaches that aim to control costs without

addressing issues of access and quality.

IMPACTS OF PLAY-OR-PAY APPROACHES

Under the Play-or-Pay approach, employmentbased insurance as well as public coverage are

expanded; therefore, health care spending is most

frequently estimated to increase initially relative

to current health care spending, due to increased

utilization by the previously uninsured population.

As shown in table 1 in chapter 1, estimates of

the change in health care expenditures under

Play-or-Pay approaches range from decreased

spending of $36.0 billion in a single year, the

second year of plan implementation (the year

1993) (49), to increased spending of $33.6 billion

(where the plan included expanded Medicare

coverage through expanded Medigap coverage,

which together with Medicare would meet the

American Academy of Family Physicians’ [AAFP]

minimum benefit package; $32.5 billion without

expanded Medicare coverage) in a single year (the

year 1993) (36,37).

Most analyses estimate that the cumulative

impact of a Play-or-Pay approach will result in

savings, but the estimated savings vary vastly,

from $111.3 billion in current dollars from 1993

3 This CBO study was revised in April 1993 (81),
Chapter 2-impacts on National Health Care Spending and Savings I 33

through the year 2000 (36,37), to $2.7 trillion

from 1994 through 2003 (66).

The difference in estimates appears to arise

primarily from the degree to which the analysis

assumed the Nation controls the rate of health

care spending growth during the period examined. In the preceding estimates for example, the

analysts assumed: an annual health care expenditures target, reducing the rate of growth in health

care spending to the rate of growth in GNP, at a

targeted rate of decrease of 2 percent each year

(savings of $36.0 billion) (49); that there was an

initial 5 percent decrease in health care costs

phased in over 5 years and future health care

spending growth would be limited to the growth

rate of the economy after the fifth year of

implementation ($2.7 trillion) (66); or that 1)

increased utilization and improved provider reimbursement would be offset only somewhat by

cost-cont ainment savings (increased spending of

$33.6 billion) (36,37), and 2) the effectiveness of

expenditure limits initiated in 1994 would eventually reduce per-capita health spending from a

projected rate of 8.6 percent to 7.6 percent and 6.6

percent (cumulative savings of$11 1.3 to $333.5

billion, respectively) (36,37). Thus, Play-or-Pay

approaches that estimate savings in national

health care spending appear to achieve these

savings principally through the addition of various cost-containment mechanisms, with the greatest savings projected under plans that incorporate

expenditure limits (55) (table 1).

IMPACTS OF APPROACHES EMPLOYING

INDIVIDUAL VOUCHERS OR TAX CREDITS

Individual vouchers or tax credits approaches

expect to achieve control over national health

spending indirectly through more ‘‘costconscious” behavior on the part of individuals

regarding their health care coverage and services

purchasing decisions.

All available estimates of the impact of the

Individual Vouchers or Tax Credits approaches

on health care spending project that such approaches would result in savings, both initially

and cumulatively, although the projected savings

are generally lower than those under other approaches. As shown in table 1 in chapter 1, these

estimates range from savings of $2.0 billion in

1994 for the Bush Administration plan (65), to

savings of $10.8 billion in 1991 for the Heritage

Foundation plan (35). Other estimates place the

level of savings between these extremes (3,94).

Cumulative estimates were not available for

the Heritage Foundation plan. For the Bush

Administration plan estimates of cumulative savings ranged from $72.6 billion from 1993 through

1997 (3) to $1.0 trillion from 1994 through the

year 2003 (65) (table 1).

In arriving at these estimates of the impact of

Individual Vouchers or Tax Credits proposals on

health and care spending and savings, analysts

made varying assumptions. With respect to the

Bush Administration plan, for example: “much

of the savings . . . are one-time in nature, and that

after these efficiencies are achieved, the cost

curve returns to its present course’ (savings of

$158.0 billion) (65); that some success was

achieved in insurance market and related reforms

(savings of $72.6 billion) (3); or that in the first 5

years, “the plan’s cost containment features are

relatively successful in both reducing current

expenditures . . . and slowing down the rate of

spending growth” (savings of $6.0 billion and

$1.0 trillion) (65). With respect to the Heritage

Foundation plan, an analysis done on behalf of the

Foundation assumed that increased utilization by

newly insured persons and increased insurer

administrative costs would be offset by reduced

utilization by presently insured persons as a result

of a more limited benefit package for most people,

but made no assumptions about immediate changes

in the rate of growth in health care spending (35).

One major difference between the Heritage Foundation’s and the Bush Administration’s approach

to individual tax credits or vouchers as the way to

increase the number of Americans with coverage

is that the Heritage Foundation plan would

require individuals to purchase coverage while
34 I An Inconsistent Picture

the Bush Administration would have kept such

purchases voluntary (6,94). As a consequence

fewer people would have been insured, and health

care utilization might have been less, under the

Bush Administration proposal.

IMPACTS OF MANAGED COMPETITION

APPROACHES

Proposals founded on “pure” Managed Competition (17) generally expect to moderate the rate

of growth in national health spending indirectly

through increased competition among providers

on the basis of price and quality with tax

incentives to promote cost-conscious purchasing

decisions (17). However, some versions of Managed Competition incorporate expenditure limits

(e.g., global budget, cavitation payments) that, if

effectively implemented, would permit direct

control of health care spending (70).

To date there have been few detailed estimates

of the impact of Managed Competition on health

care spending and savings. Enthoven recently

wrote that “[i]t is altogether possible that a very

efficient competitive system could get us back to

9 or 10 percent” of GDP (15), but he did not

provide the specific assumptions upon which he

based this estimate. In testimony regarding H.R.

5936, 4 a Managed Competition bill introduced

but not enacted in the 102d Congress, the Director

of the Congressional Budget Office, Robert

Reischauer, estimated that after several years the

system implemented would “leave national

health expenditures at approximately the same

level they would reach otherwise’ (56), although

Reischauer predicted that at the outset national

health care spending would increase. The estimated increase assumed that the National Health

Board, established under the bill, would require

the health plans to deliver a “comprehensive set

of benefits” that would be available to more

people than are currently covered by health

insurance. Reischauer further testified that the

rate of growth in national health expenditures

would slow down due to increased enrollment in

health maintenance organizations which he maintained could provide health care more efficiently

than other organizational forms. Thus, he concluded that after a number of years, savings

flowing from the reduced rate of growth in

national health expenditures could offset the

increased costs of expanded access to presently

uninsured persons. Limited examples of aspects

of managed competition exist (e.g., California

Public Employees’ Retirement System) and are

discussed in appendix B.

Estimates of the impact of Managed Competition approaches on national health care spending range from increased spending of $47.9

billion in 1993 (63) to decreased spending of

$21.8 billion in 1994 (3) (table 1 in chapter 1).

Cumulative estimates of the impact of Managed

Competition were provided for one plan (President Clinton’s campaign proposals) and projected

increased savings over time (savings of $232.0

billion from 1994- 1997,$745.7 billion in savings

through the year 2000) (3).

Variations in assumptions with respect to the

impact of Managed Competition that affect the

range in estimates of health care spending include: 1) that savings achievable through managed care should be based upon the experience of

all types of HMOs, not just group-model HMOs,

but that the Nation would not impose overall

expenditure limits (increased spending of $47.9

billion) (63); and 2) the implementation of a

national health budget which restricts the growth

in national health spending to the rate of growth

in family income (assumed to be approximately

the same as the rate of growth in GNP) ($21.8

billion, $232.0 billion, and $745.7 billion in

savings) (3).

d A bill to contain costs and improve access to health care through accountable health plans and managed competition and forotherpurposes

(“Managed Competition Act of 1992”).
Chapter 2-impacts on National Health Care Spending and Savings I 35

SUMMARY dependent upon the cost-containment mechanisms

Available analyses suggest that at least some than upon the overall approach adopted. Thus, in

proposals under all approaches to health care selecting the appropriate approach to reform, the

reform would achieve universal coverage while impact on health care spending and savings may

saving money (i.e., reduce national health expen- become less of a distinguishing characteristic

ditures) in the long term. Yet it appears that the than differences in impacts on other areas of the

projected magnitudes of savings are far more economy.
Impacts on

Federal,

State and

Local Budgets 3

INTRODUCTION

F

ederal, State and local governments contribute directly

to the financing of health care through payment for

public health insurancel programs (e.g., Medicare,

Medicaid, CHAMPUS2

) and public health programs

(47). They also make an indirect contribution through tax policy,

e.g., the exclusion of employer contributions to workers’ health

care benefits from employee taxable income (Internal Revenue

Code of 1986, §§105 and 106); the personal deduction for a

specified portion of health insurance premiums paid by selfemployed individuals (Internal Revenue Code of 1986, §162

(1)); 3 the Schedule A deduction from personal income of a portion

of medical expenses over a specified proportion of adjusted gross

income (Internal Revenue Code of 1986, §213); and the

supplemental health insurance credit component of the earned

income tax credit (Internal Revenue Code of 1986, §32). The

Joint Committee on Taxation, U.S. Congress, projects that the

tax expenditures associated with the tax exclusion, Schedule A

1 The term “health insurance” is used broadly to include various types of health plans

that are designed to reimburse or indemnify individuals or families for the costs of medical

care, or (as in HMOS) to arrange for the delivery of that care, including traditional private

indemnity fee-for-service coverage, prepaid health plans such as health maintenance

organiza tions, self-funded employment-based health plans, Medicaid, and Medicare.

2 CHAMP US is the Civilian Health and Medical Program of the Uniformed Services.

s This tax code provision expired June 30, 1992. Legislation has been introduced in the

103d Congress to extend the deduction and to increase it to 100 percent of premiums paid

(e.g., H.R. 162, H.R. 815, S. 381, and S. 571, all bills to amend the Internal Revenue Code

of 1986).

A c ‘Tax expendities, ’ as defined by the Congressional Budget and Impoundment Act

of 1974, are ‘‘reductions in individual and corporate income tax liabilities that result from

special tax provisions or regulations that provide tax benefits to particular taxpayers.

These special tax provisions carI take the form of exclusions, credits, deductions,

preferential tax rates, or deferrals of tax liability” (86).

37
38 I An Inconsistent Picture

deduction, and supplemental health insurance

credit will be $36.7 billion, $3.5 billion, and $.1

billion, in 1994, respectively (86).

The Congressional Budget Office projected

that the government share of national health

expenditures for 1992 would be 45.5 percent of

total national health expenditures (79). Among

levels of government, CBO projected the Federal

Government’s share to be 31.3 percent, and the

State and local governments’ share to be 14.2

percent. CBO estimates did not include the value

of the aforementioned tax subsidies. Steuerle has

estimated that in fiscal year 1992, Federal, State

and local governments would pay more than

one-half ($390.0 billion) of total health care

expenditures in the United States (72). Unlike the

CBO estimates, Steuerle’s estimate included

$63.0 billion in Federal tax subsidies, which, as

indicated above, operate like other expenditures

to the extent that they represent revenues forgone

by government (72).

According to the Employee Benefit Research

Institute, the government share of national health

care expenditures has been fairly constant since

the implementation of Medicare and Medicaid,

but the share of government budgets devoted to

health care has increased as budgets have been

tightened but government health care funding

responsibilities have not declined (14). Therefore,

in addition to the impact of any health care reform

approaches on aggregate (national) health expenditures as defined in chapter 2 of this report, at

issue in the health care reform debate are:

the extent to which alternative reforms might

increase or decrease governments’ share of

health care spending; and

the potential for redistributing the burden of

financing among Federal, State and local government.

IMPACTS OF SINGLE PAYER

APPROACHES

Proposals that would make the government the

sole purchaser of health care services essentially

redistribute the responsibility for purchasing

health care services from a diverse group of

purchasers to government. The proportion of this

responsibility funded through Federal, State and

local government revenues can vary, as can the

means by which governments collect the revenues, that is, the types of taxes levied, to finance

this burden. Regardless of how governments

obtain the necessary funds, governments would

bear tremendous responsibility for direct funding

of, and control over purchasing, health care

services in such a system.

Estimates of the impact of a Single Payer

system on government budgets cover a wide

range, from relatively modest increased government spending in the first year ($29.0 billion

in 1991) with the promise of unspecified savings

after the third year (43), to large initial outlays by

government ($252.0 billion in 1991) (25) (table 2

in chapter 1; also see appendix B).

While no one maintains that Federal, State and

local governments would save money initially

under a Single Payer system, its long-term impact

on government budgets is not clear, and quantitative estimates of the cumulative impact of a

Single Payer system on government budgets were

not provided in the studies reviewed. Assumptions about the degree to which a Single Payer

system will control the rate of growth in health

care spending greatly influence the long-term

budgetary impact of the approach. For example,

one group of analysts assumed that total health

care spending would not exceed 8.7 percent of

GDP (43). Another analysis assumed that national health care spending would continue to

grow at about 10 percent each year under a Single

Payer system (25). These assumptions help greatly

to explain why one group of analysts expects

government to save money on health care after 3

years (43).

Tax increases would be necessary to raise the

revenues for governments to fulfill their obligations; however, it is likely that other sectors of the

economy would realize gains (e.g., a decrease in

or elimination of premiums paid to private
Chapter 3--Impacts on Federal, State and Local Budgets I 39

insurers) although these may be offset, at least in

part, by such increased taxes. Proponents assume

that the Single Payer system funded by taxes

would result, nevertheless, in a more equitable

distribution of health care spending.

IMPACTS OF PLAY-OR-PAY APPROACHES

The effect on government budgets of employmentbased approaches that incorporate a public backup

plan appears to depend primarily upon:

■ the number of people enrolled in the public

plan; and

■ whether Federal and State Medicaid funds, and

revenues from employment settings earmarked

for the public plan (e.g., payroll taxes), are

sufficient to cover the cost of insuring the

public plan’s enrollees and to fund any government subsidies under the plan.

Both the number of people enrolled in the

public plan and the level of revenues required to

fund the plan appear to be functions of numerous

factors: employers’ behavior (e.g., whether they

choose to sponsor private insurance or contribute

to the public fund to cover their employees); types

of employers and employees covered by the

employer mandate; the cost of health insurance;

the payroll tax rate; employer/employee premium

cost-sharing; public plan enrollee premium costsharing, if any; and the nature and extent of public

subsidies (e.g., to small employers, to lowincome persons).

While the employment-based approach places

the bulk of the direct burden of financing health

care coverage on employer-sponsored groups, it

could increase direct and indirect outlays for

health care at all levels of government (76). First,

to the extent that the approach increases access to

employment-based coverage without modifying

the tax treatment of health benefits, tax revenues

under current policy would be reduced by increasing the number of persons with respect to whom

the employer deduction/employee exclusion would

apply (76). Should the tax exclusion be limited,

however, governments may expect some increased revenues flowing from increased personal

and corporate income taxes. Second, Play-or-Pay

approaches would shift any uninsured and individually insured persons not eligible for employmentbased health coverage to the public plan, although

some of these persons are expected to contribute

directly to the cost of their coverage. To the extent

that projected total funding of the public plan is

adequate to cover both the cost of insuring its

enrollees and the cost of required subsidies (e.g.,

to small employers, to low-income persons), the

impact on government budgets would be lessened

but costs to business and individuals would likely

increase.

None of the analyses projected initial savings

to governments overall from a Play-or-Pay approach, but one analysis estimated savings to

State and local governments in the amount of $7.4

billion in 1990 at the same time it projected

increased spending by the Federal government

(75) (table 2 in chapter 1). Estimates of initial

increased spending by governments resulting

from an employment-based approach range from

$16.6 billion (in the year 1990) (75) to $41.7

billion in 1993 (37). Several other estimates fall

between these two extremes (49,76,100). Cumulative estimates were not available.

The above estimates at the extremes of the

range of impacts of the Play-or-Pay approach on

government budgets assumed that States support

the public plan in the same proportion as their

current level of contribution to Medicaid (37,75).

And neither assumed that the cost-containment

measures included in each plan would be effective in the first year of plan implementation.

While the payroll tax rate selected will affect the

magnitude of government spending (100), it

appears that a plan’s cost-containment measures

will have a greater impact on the growth in

government spending (55).
40 I An Inconsistent Picture

IMPACTS OF APPROACHES EMPLOYING

INDIVIDUAL VOUCHERS OR TAX CREDITS

For the most part, proposals that involve the

use of individual vouchers or tax credits to expand

coverage are specifically intended not to result in

significant additional spending on the part of

government. Analyses of the impact of such

proposals suggest that a major assumption with

respect to plans providing tax deductions, credits

or vouchers is that a minimum benefit plan will be

available for the dollar amount of the credit or

voucher for those eligible for the maximum

amount of assistance, and that the deduction will

be adequate to make coverage affordable for the

eligible population.

Lewin-VHI’s analysis of the Heritage Foundation’s individual voucher/tax credit proposal,

executed on behalf of the Foundation, indicated

that $87.9 billion in Federal funds and $7.6 billion

in State funds would be necessary to implement

the plan in 1991 (35) (table 2 in chapter 1).

Specific estimates of the Bush Administration

plan on government budgets were not available.

The Heritage Foundation’s plan asserted, however, that the plan would be revenue neutral, that

is, it would be fully funded at the Federal and

State levels, and have no effect on the Federal

deficit. To accomplish this, the analysis assumed

that tax code modifications, in particular, would

raise most of the funds necessary for the plan’s

implementation. Thus, the $87.9 billion in Federal funds necessary to implement the plan in

1991 would be raised through the elimination of

the tax exclusion for employment-based premiums and of the deduction for health expenditures

in excess of 7.5 percent of adjusted gross income,

and from savings to State and local governments

passed onto the Federal Government to fund the

tax credits. State and local governments would be

similarly affected by the proposal, as a result of

transferring their savings of $18.8 billion to the

Federal Government for the tax credit plan, as

indicated above. State and local government total

savings would be derived from several sources:

the elimination of the State income tax exclusion;

decreased expenditures on public hospitals offset

to some extent by increased State and local

workers benefits; and decreased revenues resulting from changes in premium taxes and State

corporate income taxes.

IMPACTS OF MANAGED COMPETITION

APPROACHES

Although Managed Competition is an approach that some say is consistent with several

methods of financing (70,71), most Managed

Competition approaches seek to minimize the

role of governments in providing health care

coverage, at least relative to tax-financed Single

Payer approaches. Most approaches calling themselves Managed Competition would retain and/or

build upon the current employment-based system, require individuals to contribute to the cost

of their coverage to the extent possible, and

mod@ the tax treatment of employer-sponsored

coverage, thereby decreasing Federal tax expenditures associated with health insurance premiums. Thus, estimates of the impact on government budgets of Managed Competition approaches

may depend upon assumptions about such interrelated factors as: the extent of public subsidies for

coverage; the premium for the lowest-cost plan

and any change in the tax policy regarding

employer-sponsored benefits; the content of the

standardized benefit package; whether there is an

employer mandate; and recoupment of funds

presently used to fired indigent care.

Estimates of the impact of Managed Competition approaches on government budgets range

from $31.0 billion in total net new Federal

revenues in 1993 (40) to $106.5 billion in Federal

expenditures in 1994 (10) (table 2 in chapter 1).

The estimate of $106.5 billion in Federal expenditures was, however, expected to be completely

offset by revenues from Federal Medicaid funds;

a cap, operationally, on the tax deductibility to

employers of health insurance benefits; and the

repeal of the taxable maximum income for
Chapter 3--Impacts on Federal, State and Local Budgets I 41

Medicare benefits. This would result in Federal

budget neutrality, if all estimates of new spending

and increased revenue were correct (10).

The variance in these estimates may ensue at

least in part from major design differences

between the proposals analyzed. That is, the

Conservative Democratic Forum’s (CDF) proposal did not include an employer or employee

mandate nor did it modify the employee tax

exclusion for employer-sponsored premiums

(lo).

The Managed Competition plans analyzed by

Sheils and his colleagues (63), and Long and

Rodgers (40), differed substantially from the

CDF’S proposal. Sheils and his colleagues based

their estimates loosely on Paul Starr’s version of

Managed Competition, which assumes an employer mandate with a public backup and, thus,

universal coverage (71). Long and Rodgers used

many of the same numbers as Sheils and his

colleagues, but varied some assumptions in order

to answer three broad questions, including one

about the impact of the approach on government

budgets (40).

Long and Rodgers point out that Sheils and his

colleagues did not indicate how much of the net

new costs to the Federal Government would arise

from savings from Managed Competition. As

noted in table 2 in chapter 1, Long and Rodgers’

three estimates of net new government costs were

based on three illustrative scenarios: 1) no savings from Managed Competition; 2) 8 percent

savings from either managed care or administrativecosts savings; or 3) 16 percent savings from

adding together projected managed care savings

and projected administrative costs-savings.

In their article, Sheils and his colleagues had

assumed 2 percent savings resulting from increased use of managed care arrangements.5 They

also pointed out that their estimates may have

understated potential savings because they were

not able to fully explore the possible dynamics of

Managed Competition (e.g., potential savings

that concentrated buying power would have on

the unit cost of services provided; incentives to

contain costs even for HMOS by increasing

consumers’ price sensitivity and eliminating risk

selection as a means of maximizing insurers

profits) (63). On the other hand, no one--

including CDF—seems to have built into their

estimates of the impact of Managed Competition

the full costs of administering all the new

quasi-governmental bodies and disseminating all

the information that appear to be an important part

of Managed Competition (57). Some of these will

undoubtedly be new costs to governments. Long

and Rodgers’ estimates thus illustrate how sensitive projections can be to variations in critical

assumptions.

SUMMARY

None of the analyses reviewed for this report

estimated savings to governments from the implementation of any one of the approaches to health

care reform addressed. Efforts to expand access to

uninsured persons will necessarily entail some

new government spending since some form of

subsidy will be necessary for many of these

people and, in some proposals, for their employers. The Single Payer approach, as a tax-financed

system, relies more on government to make direct

payments for coverage and services as compared

5 In an article in the same journal, Staines, an analyst with the Congressional Budget Office, suggests that national health spending might

be almost 10 percent lower if all acute health care services were delivered through staff-or group-model HMOS (68). He further estimates that

universal use of utilization review, managed care arrangements might result in spending that is only 1 pereent lower than current national health

expenditures (68). Sties did not estimate how much of these savings would accrue to the Federal Government under alternative health care

reform plans. However, Staines’ estimates suggest that Sheik and his colleagues’ estimates differed from Long and Rodgers’ estimate of

changes in national health expenditures, and the subsequent distribution to the Federal Government of combining Managed Competition and

Play-or-Pay, because of their differing ideas about the nature of managed care under Managed Competition. The extent to which staff- or

group-model HMOS will be able to deliver health care---and achieve savings-should Managed Competition become the approach pursued

for health care reform is a critical issue in the debate.
42 I An Inconsistent Picture

with the other approaches. Therefore, it is the ets, in absolute terms, will be affected by the rate

approach most likely to increase government of growth in national health expenditures. Thus,

spending for health care. Yet the redistributive the extent to which cost-containment is incorpoeffects of this, or any other approach, on other rated in an approach will be important to the

areas of the economy (e.g., impacts on house- impact of health care reform on such government

holds) should be reviewed carefully, in order to budgets, regardless of the approach adopted.

evaluate any offsetting effects. Government budg-
Impacts

on

Employers 4

INTRODUCTION

H

ealth insurance in the United States is provided in large

part through groups sponsored by employers. Employmentbased insurance covered the majority (64 percent) of

insured persons under age 65 in the United States in

1990 (89). Thus, employment-based coverage is the source of a

considerable portion of national health care expenditures in the

United States (34 percent in 1991) (19). Yet most of the

uninsured people in the United States are employed, either full-or

part-time (89).

Many of the uninsured workers are employed in small

businesses (usually defined in reform proposals as no more than

100 employees, but sometimes defined as 25 or fewer). Due

primarily to higher administrative charges and the increased

underwriting risk to insurers, insurance coverage expenditures

for small groups tend to be even higher than those for large

groups.

l To the extent that these factors increase small employers’ costs beyond what they deem as affordable, they may not

offer to sponsor insurance at all.

The problem for groups sponsored by large employers (usually

defined as having more than 100 employees but sometimes as

having more than 1,000) is somewhat different, insofar as they

1 Def~tions of “large” versus “small” employers vary considerably in proposed

legislation and illustrative reform proposals. Since employer size is au issue with respect

to the application of certain provisions of some reform proposals, the specillc definition

used in a proposaI is generalIy quite important (e.g., an employer mandate which includes

all employers will have a diHerent impact on employers, overall and by size, than one

which excludes or subsidizes employers based on size).

43
44 I An Inconsistent picture

are better able to control their total health plan

costs. 2 Nevertheless, large employers have expressed concern with the issue of increasing

health care costs (e.g., in terms of their groups’

share of the financing burden and the impact of

financing on their business or budget) (See also

chapter 7).

While analyses of the impact of the various

reform approaches on employers, both large and

small, make many assumptions to project potential effects, the key ones pertain to:

- the extent to which the particular approach or

proposal requires employers to finance health

care coverage, either directly (e.g., to contribute to employees’ health insurance premiums)

or indirectly (e.g., to finance coverage through

taxes);

, employer behavior, when employers are presented with choices between direct (e.g., to

purchase private insurance for employees) and

indirect (e.g., to pay into a public plan through

which employees secure coverage) coverage;

and

● the employers to whom any mandate applies.

It is important to note here that the idea that

health care costs have an impact on a business’s

(or other employer’s) bottom line is antithetical to

economic theories of total compensation costs

(69). According to economic theory, “employerpurchased” health insurance is actually part of

the employee’s total compensation package. That

is, the employee trades off wages in exchange for

the noncash benefit of health insurance. Thus, any

costs or savings ‘‘to the employer’ for health

insurance (e.g., the employer’s “share” of the

health insurance premium) is in reality a cost or

savings to the employee. 3 Employers (i.e., management), employees (e.g., organized labor) and

policy analysts rarely speak of health insurance

costs in these terms, however. This report also

uses the language of impacts on employers

although it is important to note that the actual

impacts may be broader.

IMPACTS OF SINGLE PAYER

APPROACHES

Approaches that render government the sole

payer for services would remove employers from

direct involvement in the funding of health care.

Businesses could, however, continue to fund

health care coverage indirectly through broadbased Federal and State taxes. The impact of these

taxes on employers would depend upon the

specific tax system devised to implement the plan

(55). For example, while employers’ corporate

income or payroll taxes may increase, if such

increases are less than their current health care

coverage payments, they will experience a net

gain.

As summarized in table 3 in chapter 1, only one

group of analysts has projected what the impact of

a Single Payer system on employers might be.

This one analysis estimated that a Canadian-style

system would result in pretax savings4 to employers in 1991 ranging from $76.0 to $136.0 billion

(43). Estimates of cumulative pretax savings to

this group ranged from $2.2 to $3.0 trillion in

current dollars from 1991 through the year 2000

(43) (table 3). Behind the range in these estimates

2 Large employers’ herdth beneilt plans tend to be larger in size, in terms of numbers of enrollees and, therefore, able to take advantage of

many economies of scale to control administrative costs and to spread the risk. Furthermore, many large employers are self-funded

(self-insured), which also allows them to self-administer their benefit plans or to contract for the administrative services portion of their plan

with a private insurer or other entity. Whether self-administered or contracting for administrative semices only, a self-funded insurer can have

greater and/or more direct control over its health benefit plans’ expenses.

3 

tiPIOY~S without health insumnce, under this theory, are or should be receiving alternative compensation. Thus, it is redly the employees

of small employers who are incurring the costs of higher health insurance premiums resulting from being part of a small group or being affected

by the nonaffordability of insurance to the small group. The issue of total compensation is discussed fhrther in ch, 5.

A ~e~ savings we dtim~ as savings before employers’ liability for increased income taxes, due on hCWiS~ hCOrIM ESUl@ from a

decrease in deductible health care expenditures, has been met (43).
Chapter 4--Impacts on Employers I 45

were the authors’ assumptions about the degree to

which the system would control the rate of growth

in health care spending; that is, health care

spending was capped at its current share of GDP

after including the cost of covering uninsured

persons (lower savings estimates), or health care

spending was assumed to not exceed 8.7 percent

of GDP (higher savings estimates). Thus, the

greater the savings to the Nation overall, the

greater would be the likely savings to employers

in terms of taxes required to finance the system.

IMPACTS OF PLAY-OR-PAY APPROACHES

A major issue in the context of a proposal to

mandate that an employer offer and contribute

toward employees’ health insurance is: Would

such a mandate apply to all employers and

employees and, if so, would it do so uniformly?

If not, what are the criteria for not applying the

mandate or for varying its application? Underlying the relevant policy decision is the fact that if

a scheme does not require all employers to

participate, the intent to achieve universal coverage primarily through an employment-based

health insurance coverage system is subverted. A

parallel dilemma is that if the system does not

require all employers to participate what, if any,

backup system is appropriate?

The impact of Play-or-Pay proposals on specific employers could vary considerably by the

number of workers employed. Currently, larger

firms are more likely to offer health insurance

(38) and, therefore, are more likely to experience

net savings due to shifts in the covered population

and potential reductions in cost-shifting from

uncompensated care and Medicaid (75). Smaller

fins, which are less likely to offer health

insurance, are more likely to experience a net

increase in costs under this type of system. The

impact of such an approach on both large and

small employers will vary according to:

■ the size of the employer to which the mandate

applies;

■ the length and design of any phase-in period;

■

9

■

the payroll tax levied on employers (including

provisions for its adjustment);

the content of the benefit package; and

any requirements regarding payment for dependent coverage (75).

Also relevant to employers’ costs is any impact of

the approach on the rate of growth in health care

costs (see chapter 2 in this report).

All quantitative estimates of the impact of the

Play-or-Pay approach projected increased spending by employers (37,75,100), ranging from $14.7

billion in 1990 (75) to $44.4 billion in 1989 (100)

(table 3 in chapter 1). The estimates at the

extremes assumed, respectively, a 7- and 9-

percent payroll tax rate but there were also other

differences in assumptions (See appendix B).

IMPACTS OF APPROACHES EMPLOYING

INDIVIDUAL VOUCHERS OR TAX CREDITS

The impact on employers of reforms that focus

on providing individuals with tax incentives

depends, at least in part, upon whether an

approach:

continues to rely on employment-based insurance;

preserves or modifies the current tax benefit for

employment-based health insurance coverage;

requires that individuals purchase insurance;

and

achieves a decrease in both health insurance

premiums and health care spending.

As S ummarized in table 3 in chapter 1, estimates of the impact of Individual Vouchers or

Tax Credits approaches ranged from savings to

employers of $2.0 billion in 1994 under the Bush

plan (65) to increased spending of $7.8 billion in

1991 under the Heritage Foundation plan (35).

Silow-Carroll’s analysis of the Bush Administration plan projected cumulative savings to

employers for the period from 1994 through 2003

(65). Depending upon the model used regarding
46 I An Inconsistent Picture

the distribution of savings to employees,5 as well

as on other factors such as the rate of growth in

health care spending, the estimates of the cumulative impact of the Bush Administration plan

ranged, in 1994 aftertax dollars, from savings of

$4.0 billion to savings of $84.0 billion for 1994

through 2003 (65).

The Heritage Foundation plan assumed that

employers would no longer make premium contributions on behalf of their employees but would

convert the value of the employer share of any

premium to wages, in at least the transition year.

The estimated increase in employers’ spending

under the Heritage Foundation plan was attributed to increased OASDI (Old Age, Survivors and

Disability Insurance) and HI (Hospital Insurance

Trust Fund) payroll taxes less employers’ reduced

corporate income taxes (35). Since estimates were

provided for the frost year of the plan only, it is not

possible to tell what the long-term impact of the

Heritage Foundation plan on employers would

potentially be.

The estimates of the impact on employers of

the Bush Administration plan depended in large

part upon the author’s assumptions about the

plan’s impact on the rate of growth in health care

spending. Thus, the study’s ‘‘Pessimistic Scenario, which assumed that ‘much of the savings

in the Bush plan are one-time in nature, and that

after these efficiencies are achieved, the cost

curve returns to its present course, ’ estimated no

initial but some cumulative savings (65). The

“Optimistic Scenario” assumed that in the first 5

years, “the plan’s cost containment features are

relatively successful in both reducing current

expenditures. . and slowing down the rate of

spending growth’ (65); therefore, the analysis

projected some initial as well as greater cumulative savings under this scenario. The study noted,

however, that [a]s a result of the incentive nature

of the reforms, assumptions about the success of

access expansion and cost containment under the

Bush plan are more speculative than corresponding assumptions used in alternative proposals”

(65), leaving questions about the long-term impact on employers (as well as on other areas of the

economy) of the Bush Administration proposal.

IMPACTS OF MANAGED COMPETITION

APPROACHES

In-depth studies of the impact of Managed

Competition on employers were not available for

this report. However, some Managed Competition approaches would use a Play-or-Pay approach to help achieve universal coverage. To the

extent that this feature operates as suggested in

studies of Play-or-Pay approaches to reform,

employer health care spending would likely

increase. However, there may be other changes in

the system, for example, more extensive use of

managed care, which may reduce such increased

costs.

In a recent analysis of a Managed Competition

approach, Long and Rodgers estimated that

business private insurance costs would increase

by $8.0 billion in 1993 (40) (table 3 in chapter 1).

This estimate, based on a draft of the analysis by

Sheils and his colleagues of a Managed Competition proposal (41), was for a plan incorporating an

employer mandate with a 7 percent cap on

employers’ costs, and assumed savings from

Managed Competition of 8 percent based upon

the experience of group-model health maintenance organizations or administrative savings.

While Sheils and colleagues’ analysis of a like

plan did not estimate the impact on employers of

Managed Competition, it assumed a 2 percent

savings from Managed Competition based upon

the experience of all types of health maintenance

organizations (63), which would likely lead to a

greater increase in business’s private insurance

costs.

S Employers are assumed to distribute 80 or 50 percent of savings to labor, respectively (65).
SUMMARY

In summary, the impact on employers of the

competing approaches to health care reform rests

on the extent to which the system selected

requires employers to contribute toward health

care coverage and the means by which employers

contribute (e.g., taxes versus purchase of insurance coverage on behalf of employees). Not

surprisingly, approaches that require employers

to offer and support coverage for their employees

Chapter 4-impacts on Employers I 47

have been estimated to cost employers more than

would government-financed or individuallyfinanced approaches (table 3 in chapter 1).

However, vastly different analytic models’ assumptions have been applied across approaches

(table 3) and it remains unclear who would

eventually pay any costs or save money. Furthermore, control of the rate of growth in health care

spending will also affect employers’ share of

health care spending.
Impacts

on

Employment 5

INTRODUCTION

E

stimates of the impact of any of the approaches to health

care reform on employment are more speculative than

quantitative. l Specific industries such as the health

insurance industry may be particularly affected by

changes in the health care financing structure. 2

3 similarly,

expansions of access to services and/or restrictions in health care

spending may affect employment in the health care sector.

Implicit in the fact that health care is 14 percent of the Nation’s

economy is that large numbers of people work in the health care

sector. According to one analysis, ‘‘ [m]ore than 8 million U.S.

workers have jobs in the health services industry, which indicates

the great economic importance of the industry. . . Its employment

growth rate has been little affected by changes in the growth of

the overall economy, with the result that the industry has become

a primary source of new jobs during economic downturns’ (28).

More broadly, concern has been expressed about the impact any

requirements for employers to sponsor health care coverage

might have on their ability to maintain or increase current hiring

levels. At the same time, public or private subsidies to

individuals may make it more feasible for individuals, who

Is umma.ries of studies of the employment effects of the selected approaches to health

care reform appear in appendix B. No table is provided given the nature of the available

data.

2 The Health Insurance Association of America estimates that in 1990 there were

1,725,380 employees, agents and semice personnel operating in the health insurance

indusuy, of whom approxirnately 460,000 (245,000 employees and 215,(XKI agents)

operated solely in health insurance (26).

J By way of example, when Medicare implemented the Prospective Payment System

in the mid- 1980s, health services employment growth slowed while health insurance

employment increased (28).

49
50 I An Inconsistent Picture

currently remain out of the workforce in order to

maintain coverage, to take a job.

IMPACTS OF SINGLE PAYER

APPROACHES

A system in which government is the sole

purchaser of services may have varying effects on

employment. It could eliminate or otherwise

modify the various functions served by private

insurers in the current system, that is, underwriting health care benefits or processing claims for

payment for health care services. This could lead

to disemployment of insurance company and

related workers who fulfill certain functions (e.g.,

claims processors, underwriters, insurance agents),

although if private insurers continued to fulfill a

claims processing function, shifts in employment

could be relatively small (77). Workers engaged

in direct health care services delivery or working

in related employment sectors could also be

affected according to one analysis (67). Some

expect that such disemployment effects would be

temporary and that persons displaced could be

absorbed into other areas of the economy that

would grow because of discretionary income

made available by decreased spending on health

care (67). Another analysis suggests that more

health care personnel would be needed under a

system of universal coverage with government as

sole payer for services due to increased utilization

of health care services4 (77) (appendix B).

IMPACTS OF PLAY-OR-PAY APPROACHES

There is substantial debate about the impact on

employment of an employer mandate to provide

and/or contribute toward employee health insurance. If it is accepted that employers provide a

total compensation package to employees (see

chapter 4 in this report), then the argument goes

that in cases where total employee compensation

increases due to a new or increased fringe benefit

requirement such as health insurance, employers

will adjust by reducing wages or employment, or

by increasing prices to consumers (99), who are,

generally, the employees of other firms or organizations. In order to estimate the impact on

employment of the aforementioned type of employer mandate, studies have tended to focus on

the lessons provided by the minimum wage

experience (45,46,99).

The studies examining the minimum wage

literature advise caution with respect to their

results regarding the employment effects of a

mandate for employers to provide health insurance benefits, given the age of the literature and

problems with the data. However, they do indicate that the disemployment effects of an employer mandate will likely be small and will tend

to cluster around those workers at or near the

minimum wage where the employer cannot offset

the benefit through decreased wages (46).

A valuable result of the relevant studies is the

identification of important factors related to the

impact of an employer mandate, that is, firm size,

industry type, employees’ type of employment

(full- versus part-time), average employee age,

and employees’ tenure with employer, as well as

the amount of the increase in labor costs. Estimates can vary markedly depending on the

assumptions made about these factors; for example, estimates of the impact of a Play-or-Play

approach on employment range from 23,000 (60)

to 710,000 jobs lost (87) (appendix B).

While increased labor costs may cause employers to decrease the numbers of workers used,

increase hours worked by some workers and fail

to make new hires, or contract work out (46,98),

if some employers experience a net gain as a

result of the implementation of a broader employment-based insurance system, increased employee

compensation or employment may result. Increased health care utilization under universal

coverage could even lead to an increased need for

health care workers (100), assuming universal

d ~s CoWessio~ Budget Offlce study was revised h April 1993 (81).
Chapter 5--Impacts on Employment I 51

coverage takes place without concomitant cost

constraints (appendix B).

IMPACTS OF APPROACHES EMPLOYING

INDIVIDUAL VOUCHERS OR TAX CREDITS

A reform proposal that provides for individual

vouchers or tax credits may modify the tax benefit

to employers for providing health insurance

coverage, by eliminating or capping the employer

tax deduction for health insurance benefits. Yet

disemployment or other adverse employment

effects ensuing from such a proposal are unlikely

since it requires no significant additional expenditures on the part of employers. In fact, to the

extent that this leads employers to reduce payments or cease paying for employee health

insurance coverage, they should experience an

increase in income which, after taxes, they mayor

may not use to increase employment or pass on to

current employees (and/or consumers). Note that

a proposal may require that employers pass any

such savings on to employees, at least for a

limited period (e.g., for a single or transition year

as in the Heritage Foundation proposal) (6).

Then-President Bush hypothesized that a tax

credit for health insurance for low-income workers may strip away one barrier to seeking employment (94). Furthermore, if reforms decrease

premiums, employers may have other additional

income that they may distribute in the form of

increased employee compensation or reduced

prices. No quantitative estimates of the employment effects of reforms based on individual

vouchers or tax credits were available for this

report.

IMPACTS OF MANAGED COMPETITION

APPROACHES

While quantitative estimates of the potential

impact on employment of the Managed Competition approach to health care reform were also not

available for this report, some Managed Competition approaches include several key features that

would likely affect employment. First, most

approaches would limit the tax deductibility of

employer contributions to employee health insurance benefits. If this modification were to induce

employers to limit their payments toward health

insurance coverage, it should result in increased

income to employers which, after taxes, could be

used by employers to increase employment or

wages. Second, some Managed Competition approaches would mandate employers to contribute

toward employee health benefits. If implemented,

employment effects similar to those discussed

regarding the Play-or-Pay approach, above, could

occur. As in the Play-or-Pay approach, the total

compensation package provided to many workers

would be modified by a mandate, and employers

would likely attempt to alter wages and/or employment in response. Third, some Managed

Competition approaches would include a global

health care budget. If such budgeting is successful

in controlling the rate of growth in health care

costs, employment could improve to the extent

that employers have additional income from

decreased premiums to distribute and funds

would be released to other areas of the economy

stimulating growth. Fourth, most Managed Competition approaches would provide subsidies to

low-income individuals for coverage that might

remove current public program barriers to seeking

employment.

SUMMARY

It is fairly certain that changes in the health care

system will have an impact upon employment,

but the nature of those impacts (e.g., lost jobs

versus reduced wages versus displacement of

workers to other sectors of the economy) is very

uncertain. Most of the published analyses regarding the impact of competing approaches to health

care reform on employment are more intuitive or

speculative than quantitative. Where quantitative

estimates exist, for example, regarding an employer mandate to offer and contribute toward

employee health benefits, the minimum wage

experience used as a basis for the estimates is not
52 I An Inconsistent Picture

necessarily parallel so that even the quantitative tive impacts in terms of financing, and the type of

estimates remain rather speculative. However, the restructuring of the health care system involved,

impacts of the approaches to health care reform should provide some indications, albeit indirect

on national health care spending, their redistribu- ones, of their likely impacts on employment.
—.

INTRODUCTION

I

n the debate over health care

discussion about the distribution

ing among various payers, that

Impacts

on

Households 6

reform, there is much

of the burden of financis, among government,

business, and individuals. If, however, “ultimately. . . the

individual bears the primary responsibility of paying for health

care through health insurance premiums, out-of-pocket costs,

philanthropic contributions to health organizations, income

taxes, earnings reduced by increases in employers’ health

insurance costs, and higher cost of products’ (33), as well as for

the tax subsidy for employment-based health insurance premiums, then a key area of scrutiny is the impact of reform

approaches on householdl income. Furthermore, the impact on

households by income level and type of household (i.e., the

so-called distibutiona1 effects among households at different

income levels, different family compositions, and different

health status) should be examined for any differential impacts

ensuing from the various reform approaches.

1 Analysts reporting their estimates of the impact of health care reform on households

tend to use the words “household” and “family” interchangeably and OTA did not

attempt to redo analyses based on any standard deftition such as that devised by the U.S.

Department of Commerce, Economics and Statistics Admuus “ “ tration, Bureau of the

Census; that is: “[h]ousehohfs consist of all persons who occupy a housing un.k ., A

household includes the related family members and all the unrelated persons, if any, such

as lodgers, foster childre~ wards, or employees who share the housing unit’ whereas

families, which are a subset of households, ‘‘are groups of two persons or more (one of

whom is the householder) related by bti marriage, or adoption and residing togethe~

M such persons . . . are consiclem! as members of one family” (emphasis added) (91).

In 1991, there were 95,669,000 households but 67,173,000 families in the United States

(91). Thus, quantitative estimates of the impacts of health care reform on ‘‘households’

and ‘families’ are not comparable. And when the same analysis uses both terms without

deftig either one, the basis for any estimates is all the more unclear.

53
54 I An Inconsistent Picture

In evaluating and comparing analyses of the

impact of health care reform on households, it is

important for policymakers to keep in mind the

scope and types of effects that the analysts

considered. As suggested above, these consequences can be limited to the so-called direct

effects of households’ share of national health

expenditures, as calculated by the United States

Department of Health and Human Services,

Health Care Financing Administration, Office of

National Statistics (33); this is the method used by

the Congressional Budget Office in its analyses.2

More narrowly, analysts may restrict their estimates to impacts on households’ private health

insurance costs only (40). Less frequently, analysts may discuss the indirect costs of the tax

burden on families to support the Federal Government’s open-ended tax subsidy of employmentbased health insurance premiums (72). Even more

rarely, analysts may include potential gains in

compensation (e.g., wages to working members

of households) that may result from employers’

reduced liability for employees’ health insurance

premiums (67). As noted throughout this report,

all of these impacts may potentially offset each

other, either partially or fully, at least for some

people (e.g., gains in wages may be offset by

increased taxes under a Single Payer or other

plan; gains in wages maybe offset by additional

out-of-pocket costs if a plan incorporates high

patient cost-sharing), and analyses may not identify and discuss the implications of such potential

offsets. As in other comparisons in this report, this

chapter presents the quantitative results of analyses, providing explanations in the text, the tables,

and in appendix B. The primary message for

policymakers is the need to exercise caution when

comparing numbers.

Direct and Indirect Spending in NHE Terms

While direct spending on health remained

fairly stable from 1984 through 1991 as a

percentage of nonaged household income (22),

combined direct and indirect spending on health

care in national health expenditures terms represent an increasing portion of the family budget

(19). According to an analysis by Lewin-VHI

conducted for Families USA, families’ average

annual health payments,3 as a percentage of

average family income, increased from 9 percent

in 1980 to 11.7 percent in 1991 for an average of

$4,296 in 1991. Moreover, Families USA projects

an increase in average health payments by families to $9,397 in 2000, representing an increase of

439 percent since 1980 (19). The report stated

that, “[t]hese estimates understate the burden of

health care costs on families since there is no

attempt to determine how much of business

health expenditures are simply passed back to

individuals through lower wages, higher prices or

reduced payments to shareholders” (19).

According to the CBO, medical care cost

increases have widened the distance between the

growth in wages received by workers and that of

total employee compensation paid by employers

(54). CBO found that in almost every year in the

1980s, total fringe benefit costs, of which rising

health insurance costs were a ‘‘major factor, ’

rose faster than wages and salaries (54). To the

extent that this disparity decreases the real cash

wages of employees, households may be adversely affected by increasing health care costs

that consume income that they could put to other

uses.

Indirect Spending Through Federal Taxes

In his examination of tax policy related to

health care reform, Steuerle proposed that the

z C ‘Dk@ ~n~ on health” as defined by the Congressional Budget office, “includes the amount directly paid for health insurance

premiums by a household, as weU as other out-of-pocket expenses for health services’ (22).

s Health payments were defined by Families USA as ‘the delivery of all health semices and supplies and the purchase of medical products,

including prescription drugs and vision products in retail outlets. It also includes government public health expenditures, the administrative

costs of public progmms, and the net cost of private insurance. ’ It excludes non-patient revenue, research and construction (19).
Chapter 6--Impacts on Households I 55

current tax subsidy for employment-based health

insurance benefits essentially constitutes an openended health program provided by government

(72). Because this open-ended subsidy results in

a tax impact on households, Steuerle maintained

that individuals are ignorant of both the cost of the

health care they receive and are deterred from

knowing the cost of the health insurance that they

purchase through their employer. He estimated

that the average health care expenditure (which

includes the value of the tax subsidy provided by

government) per household in 1992 was $8,000,

of which only about one-third was paid directly

by individuals and of which a large portion was

hidden (72).

Hence, the various reform approaches, to the

extent that their design redistributes the financing

burden placed on families (e.g., through mandating the purchase of insurance, eliminating or

limiting the tax exclusion for employment-based

health benefits, or mandating employer contributions to employee health benefits where they were

not provided previously) will have an impact, be

it obvious or hidden, favorable or adverse, on

household income.

IMPACTS OF SINGLE PAYER

APPROACHES

The economic impact on households of approaches in which the government is the sole

purchaser of services will turn most on the

financing mechanism adopted (e.g., general tax

revenues, payroll tax, value added tax [VAT] 4

).

Also significant will be the extent to which the

system eliminates or limits cost-sharing at the

point-of-service by individuals (82). Under a

tax-financed universal coverage plan, employees

(and thus, households) as a group may benefit to

the extent that employers are left with additional

funds after taxes which may be distributed, at

least in part, to them. To a lesser extent, households may experience some gain due to reduced

time expended handling health care administrative tasks (e.g., claims forms) (83).

Silow-Carroll’s analysis of a Canadian-style

system projected initial impacts on consumers (in

the year 1994) ranging from net savings t o

consumers of $10.0 billion to a net loss of almost

$20.0 billion (67). Cumulative estimates from

1994 through 2003 ranged, in current dollars,

from savings of $3.0 to $4.4 trillion (67) (table 4

in chapter 1; also see appendix B). These estimates took into account changes in both consumers’ direct spending and in their tax liability. The

estimated impact on consumers depended primarily upon the degree to which the system gained

control of the rate of health care cost growth. Also

important was the extent to which employer

gains, due to the elimination of their health

insurance costs, were distributed to labors Thus,

under the study’s “Pessimistic Scenario,”6 

an

initial loss and lower cumulative savings were

estimated whereas under the study’s ‘‘Optimistic

Scenario,’ some initial savings and greater

cumulative savings were projected (67).

44 $~Ue ~&j ~’ ~~ VAT IS d~~i~ as ‘‘ [a] @ ~~ch ac~u]ates on goods M hey move from raw materi~s mugh the production

process. Each processor pays a tax according to the amount by which he has increased the value of items that were raw materials to him” (44).

5 With respect to the cumulative estimates, the study assumed that after taxes, 50 and 80 percent, respectively, of employer gains were

distributed to labor (67).

6 Silow-Carroll’s ‘‘Pessimistic Scenario’ assumed that ‘after expanding coverage to the uninsured, we achieve onty a 2 percent reduction

in spending compared with business as usual in year one. Further reductions are experienced in the second and third years, ’ and the future health

care spending growth rate is slightly faster than the rate of growth in GDP (67).

7 Silow-Carroll’s “Optimistic Scenario’ assumed ‘‘an immediate 10 percent reduction in spending, offset in part by an expansion in

coverage, netting an 8 percent decline in total spending for 1994. The following two years would experience additional reductions of 5 percent

each representing a phasing-in of savings horn conversion to a single-payer syste~ consolidation of duplicated services. . . . and other

efficiencies. This scenario also assumes that after the frost three years, the growth in health care spending would be reduced . . . to the same

rate as the economy, or about 7 percent per year’ (67).
56 I An Inconsistent Picture

IMPACTS OF PLAY-OR-PAY APPROACHES

In general, critics of the Play-or-Pay approach

claim that the required employer contribution is

essentially a tax levied on those least able to

afford it (i.e., low-income workers and their

families) (5). They further maintain that it results

in negative redistribution effects, posing a significant financial burden for working-poor and nearpoor people who do not now have employersponsored health insurance and who ‘‘most economists” believe “would effectively pay the full

cost of their health insurance under ‘play-orpay’ “ unless employers absorb these increased

costs (48).8

Some analyses of Play-or-Pay approaches to

health care reform have increased premium costsharing for employees and/or their dependents,

which would increase households’ health insurance costs even if total health care costs are held

constant (100). This raises the question of the

ability of low-income families to afford their

requisite premium share. Safeguards such as

requiring all working adults to be insured through

their own employers (thereby limiting the number

of employees with adult dependents for whom,

presumably, the sponsoring employer would pay

a smaller share than would an individual’s own

employer), and government subsidies for lowincome families, may help alleviate some of the

increased burden on low-income households

resulting from employer mandates to sponsor

coverage (98).

Estimates of the impact of an employmentbased approach on households range from savings of $19.3 billion in 1990 (75) to increased

spending in 1993 of $2.3 billion (37) (table 4 in

chapter 1).

While not dispositive of the difference between

these estimates, factors such as assumed increased taxes in one estimate (increased spending

of $2.3 billion) versus no revenue-raising assumptions in the other (savings of $19.3 billion),

differences in the assumed baseline year and

health care costs of employers, and the payroll tax

rate-7 percent where savings are estimated (75)

and 10 percent where increased spending is

estimated (37)-appear to contribute significantly to the difference in estimates.

To the extent available, detailed discussion of

the impact of an employment-based approach on

households, by income level, appears in appendix

B.

IMPACTS OF APPROACHES EMPLOYING

INDIVIDUAL VOUCHERS OR TAX CREDITS

If Individual Vouchers or Tax Credits approaches to reform function as intended, insurance coverage should be more available and

affordable, thereby decreasing the cost of health

care to households in the aggregate and increasing

many households’ funds available for other purposes. If, however, the resulting tax credit,

deduction or voucher is insufficient to purchase

adequate coverage, households will be no better

off and some may be worse off than under the

current system (65).

Lewin-VHI’s analysis of the Heritage Foundation plan on behalf of the Foundation estimated

that households would save $18.8 billion in 1991

(35). Silow-Carroll’s analysis of the Bush Administration proposal estimated savings in 1994 of $7

billion (65). Silow-Carroll also estimated cumulative net savings for the Bush plan, in current

dollars, of $400.0 to $700.0 billion from 1994

through the year 2003 (65) (table 4 in chapter 1).

The Lewin-VHI analysis of the Heritage plan

assumed that increased household health care

spending (limited to households’ direct spending

for health insurance) would be offset by increased

wages (given the proposal’s provision that employers that discontinue coverage must convert

the value their contribution to such coverage to

employee income during the first year, and

assuming that all employers discontinue cover8 See also chapter 5 and appendix B regarding the potential employment effects of mandatory employment-baaed insurance.
Chapter 6--Impacts on Households I 57

age). Silow-Carroll’s analysis of the Bush plan

focused on the net impact of the proposal on

consumers’ from the tax credits or deductions,

and changes in “after-tax wages, out-of-pocket

spending for health care, prices of goods and

services, and dividends and stock values’ (65), It

assumed varying degrees of success with respect

to the proposal’s ability to achieve ongoing

reductions in the rate of health care spending

given its voluntary, incentive-based approach.

IMPACTS OF MANAGED COMPETITION

APPROACHES

As with Individual Vouchers or Tax Credits

approaches, if Managed Competition approaches

to health care reform function as intended (that is,

improve access to and the affordability of health

insurance) households’ average health care costs

should decrease. In some Managed Competition

proposals, specific cost-containment mechanisms

appear to heighten the potential for decreased

national health care expenditures in the aggregate

and, thus, for decreased households’ health care

costs. There are few analyses to date, however, of

the specific impacts of Managed Competition

approaches on households’ health care costs. One

recent analysis of a Managed Competition proposal by Long and Rodgers focused on its impact

on households’ private health insurance costs (as

opposed to total household health care costs) (40).

The authors estimated a reduction in households’

private health insurance costs in 1993, the first

year of plan implementation, of $6.0 billion.

According to the authors, the analysis was based

on an earlier draft of an analysis of a Managed

Competition proposal by Sheils and his colleagues (41). Long and Rodgers’ estimate assumed the implementation of universal coverage

and Managed Competition, and further assumed

savings from Managed Competition of 8 percent,

based upon the experience of group-model health

maintenance organizations or, in the alternative,

upon the reduction in the administrative costs for

employer plans (40).

It is important to note that the impact of a

Managed Competition approach or proposal on

households’ total health care costs is an important

factor in determiningg the reasonableness of the

approach or proposal. To the extent that such

costs are not even identified, the full impact of a

proposal on households is hidden. Furthermore,

assumptions about the extent to which components of Managed Competition (e.g., managed

care, health insurance purchasing groups) will be

adopted and effective in reducing health care

costs are significant elements in estimating the

economic impact of a proposal on households (as

well as on other areas of the economy).

PER-CAPITA AND PER-FAMILY ESTIMATES

The estimates shown in table 4 (in chapter 1)

and discussed above are limited to estimates of

aggregate costs in billions of dollars. Other

available estimates of the impact of the various

reform approaches on households were calculated

on a per-capita or per-family basis and are

provided in appendix B. They range broadly and

include:

■ savings of $102 per capita under a Single Payer

plan with price controls (77);

n savings of $1,382 for the average family under

a Managed Competition plan with budget

targets and price controls (3);

■ increased spending, at least initially (i.e., before cost containment efforts could take effect)

of up to $672 by families with incomes greater

than $30,000 per year under a Play-or-Pay plan

that would also increase provider reimbursement rates under Medicaid (37).

DISTRIBUTIONAL EFFECTS

Depending on the particulars of an approach or

proposal, incomes of families of different income

levels, compositions, and ages could be affected

differently. One example is suggested in the

illustration above (see “Per-Capita and PerFamily Estimates’ ‘): in addition to estimating that

families with incomes greater than $30,000 would
58 I An Inconsistent Picture

have to spend more under their plan, at least

initially, Lewin-VHI, for the American Academy

of Family Physicians, estimated that families with

incomes under $30,000 would, on the average,

save from between $2 to $385 initially (37). In

general, analyses that provided estimates by

family income assumed greater health expenditures by families at higher income levels and

lower health expenditures by families at lower

income levels as a result of their plans (see

appendix B). An exception is the Heritage Foundation plan, under which very low-income families would spend more than they do currently (35).

However, the income ‘cuts’ were defined differently by different analysts, and so they make

distributional effects even less comparable than

the aggregate effects shown in table 4 and

discussed earlier in this chapter.

SUMMARY

Any estimated effects on households should be

taken with a large grain of salt. In addition to basic

differences in estimates derived from differences

in estimated national health expenditures under

plans, analyses differ in the types of effects on

households that they identify as pertinent. In

addition to direct health care spending, these can

include household income taxes, total employee

compensation, and tax expenditures related to

health care costs.

As suggested in figure 1 presented earlier in

this report (see chapter 1), policymakers and the

public should realize that, ultimately, American

households-in the aggregate-will face all the

costs of whatever national health care costs are

incurred. 9

g Under this logic, and assuming that the estimates in table 1 in chapter 1 me considered vali~ the estimates in table 4 in chapter 1 should

be parallel to those shown in table 1, at least as household effects pertain to national health expenditures. ‘Ilw is, whatever health me savings

are achieved or additional health care spending incurred should be attributed to the households of the United States.
Impacts on

Other Costs

in the

Economy 7

T

o the extent that health care spending continues to

consume an increasing portion of family and corporate

income and government budgets, other areas of the

economy are likely to suffer as they are squeezed out by

health care (84). Some areas said to be suffering already are

education, infrastructure, and corporate competitiveness. There

is some controversy over whether there is a negative impact on

international corporate icompetitiveness.l

According to Steuerle, “[b]udget data make obvious the

possibility that expenditures on health may be helping to deter

government action on almost every other domestic front. This

reinforces the notion that health policy choices are seldom

matters merely of health policy, but of budget, social, and tax

policy, as well” (72).

Furthermore, according to the Congressional Budget Office,

“ [r]educing the size of the federal deficit by controlling Federal

health spending could have a significant effect on the living

standards of future generations by raising national saving, which

would increase the nation’s investment in new capital equipment

and structures and reduce its indebtedness to foreigners” (78).

CBO estimated that by the year 2002, real capital investment

would be 22 percent higher, real capital stock would be 5.6

higher, and the output of the economy (i.e., GDP) would be 2.2

percent higher, than the CBO baseline if Federal spending on

health care (Medicare and Medicaid) were held to its 1991 share

and there were no offsetting increases.

1 Some argue that in order to compare U.S. businesses with those of other countries,

total labor costs, which are lower in the United States than in its major industrialized

competitors (e.g., Germany, Japan), but are higher than in many developing countries

(e.g., Mexico, Korea), are the relevant denominator, not health care costs to employers

alone, which are higher in the United States than in its major competitors (84).

59
60 I An Inconsistent Picture

Concerns have also been raised about the innovation were not available.2 Therefore, no

impact of health care reform on technological detailed discussion of this issue is presented here.

innovation in health care. While there is research Specific quantitative estimates of the effects of

on the interactive relationship between health the selected reform approaches on other costs in

care costs and technological innovation (95), the economy, in general, were also not available

analyses addressing the impact of the approaches for this report.

to reform discussed in this report on technological

2 Another OTA assessment entitled International Differences in Health Care Technology and Costs is underway. The goal of the assessment

is to: 1) identify how differences in organizatiom dissemination and use of medical technologies among industrialized countries contribute to

differences in costs; and 2) how differences in the structure of health f~cing, paymenc and regulation among industrialized countries

contribute to the different patterns of technology use among countries. In the process, the accuracy and comparability of the available data will

be assessed. Project Director: Hellen Gelband, Senior Associate.
Impacts

on

Administrative

costs 8

INTRODUCTION

F

or very small employers (one to four employees), health

benefit administrative costs have been estimated to be as

high as 40 percent of claims paid, compared with

substantially lower percentages for larger firms (34).

This percentage decreases as firm size increases (e.g., 25 percent

for firms with 20 to 49 employees, 16 percent for firms with 100

to 499 employees, and 5.5 percent for firms with 10,000 or more

employees) (34). The issue of administrative costs is important

to the health care reform debate primarily because they are often

perceived as waste (58,74,96). Yet discussion of the administrative efficiency of the health care system is hampered by the lack

of a common definition of administrative costs, both in terms of

what constitutes administrative costs and whose administrative

costs are relevant to the discussion.

In their study of the administrative efficiency of the U.S. health

care system, Woolhandler and Himmelstein examined four

components of administrative costs—insurance overhead, hospital administration, nursing home administration, and physicians’

billing and overhead expenses (96)-whereas Danzon maintained that:

. . . a simple comparison of reported administrative costs can be

grossly misleading. The true overhead of a health insurance system

also includes all the hidden costs associated with insurance financing

and operations as well as all insurance-induced distortions in the

production and consumption of medical care (1 1).

Thorpe defines administrative costs as transaction-related

costs, that is, benefits management, selling and marketing costs,

and regulatory/compliance costs (74). These components can be

examined across the health care delivery system since they are

To Your

ii

w

E

a

y

Explanation !>

I

61
62 I An Inconsistent Picture

incurred by health insurers, hospitals, nursing

homes, physicians, firms and individuals. His

definition is intended to facilitate the debate

regarding administrative costs by permitting evaluation of them in terms of their “[s]ocial or

economic cost: the value of resources used to

produce administrative services as measured by

their next-highest-valued alternative use” (e.g.,

to finance health coverage for uninsured persons)

(74).

Review of the analyses of administrative costs

demonstrates the importance of Thorpe’s or a

similar typology in furthering the debate over

administrative costs. Differences in systems produce different incentives and different administrative costs. For example, Canada’s global budgeting for hospitals provides fewer incentives to

invest in health care information systems that

collect patient cost data. This may reduce costs

but it may also reduce the system’s costmanagement potential (82).

Underlying the debate, according to LewinVHI in its examination of the Canadian health

care system, is a “[t]ension between product

diversity and administrative cost” (34). LewinVHI maintained that the fundamental question

behind the adminis trative costs debate is “[w]hether

the costs of administering our multi-payer system

are worth the benefits we derive from diversity in

insurance products” (34).

Because studies to date have not used a

common definition of administrative costs,l making comparisons of their findings with respect to

the impact of a reform plan on these costs is

extremely difficult. In order to arrive at estimates

of administrative costs-savings that would accrue

to the United States were one or another health

care reform proposal implemented, studies have

made some broad assumptions regarding what

constitutes administrative costs, and about the

ability to replicate (e.g., reduce U.S. administrative costs to the Canadian level) or implement a

particular system in the United States. On the

more technical level, for lack of better information, analyses of likely changes in administrative

costs have used limited data or extrapolated from

the experience of one geographic region (California) to another (United States) (24,34,96). Other

assumptions include estimates regarding the maximum percent of claims expected to be submitted

electronically, and the dollar savings associated

with electronic claims submission.

The primary purpose of reforms that directly

address the current health care services paperwork burden, such as electronic billing, claims

submission, and processing, is to reduce administrative costs. Other insurance marketplace reforms directly affect the provision of insurance

(e.g., guaranteed issue and renewal of coverage;

requirement that policies be community rather

than experience-rated; prohibition or limitation

on preexisting condition clauses; prohibition on

use of health status as basis for denying coverage). To the extent that these reforms simplify

insurance administration, they are also likely to

reduce administrative costs. Most approaches to

health care reform include some or all of these

reforms; therefore, most approaches would likely

facilitate some reduction in administrative costs.

The Workgroup on Electronic Data Interchange (WEDI) reported to the Secretary of the

Department of Health and Human Services in

July 1992 that electronic data interchange (comprised of electronic enrollment and certification;

electronic eligibility and verification of coverage;

electronic claim submission and processing; electronic claim inquiry; and electronic payment and

remittance) could produce administrative costssavings from $4.0 to $10.0 billion, assuming

implementation commencing in 1994 with several years to phase-in provisions (97).

1 For example, many analyses of specitlc proposals—Lewin-VHI for Families USA regarding the Bush administration and Clinton

campaign proposals (3); Uwin-VHI for the Heritage Foundation regarding the Heritage Consum er Choice Health Plan (35)-look only at

insurance administrative costs, whereas Woolhandler and Himmelstein looked at provider and insurer costs.
Chapter 8--Impacts on Administrative Costs I 63

IMPACTS OF SINGLE PAYER

APPROACHES

Canada’s systems of health care financing and

payment streamline health care administration by

‘‘centralizing the source of payment for all

covered health care services within each province

under a single government program with uniform

coverage and reimbursement rules’ (34). The

substantial reduction in the number of payers and

transactions (e.g., claims) processed in the Canadian system are thought to reduce costs tremendously. The question has been posed whether the

United States could implement a system with the

same level of administrative costs as experienced

in Canada, and even if the Nation could do so,

whether it would want to (34).

Estimates of the impact of a Single Payer

system on administrative costs range from savings of $18.2 billion in 1989 (77)2 to savings of

$113.0 billion in 1991 (43) (table 5 in chapter 1;

see also appendix B). The lower estimate of

savings assumed universal coverage at Medicare

rates, patient cost-sharing and retention of a

residual Medicaid program (77). Thus, it assumed

decreases in insurance and provider administrative overhead given a simplified system involving

a single payer. Yet since this estimate was not for

a Canadian-style system, it assumed that some

costs that would not exist in the Canadian system

would remain (e.g., those associated with Medicare’s hospital payment methods and copayment

collection). The higher savings estimate assumed

that nearly one-half of the estimated savings in

national health expenditures in 1991 ($241.0

billion, assuming health care spending of no more

than 8.7 percent of GDP) would flow from

adopting a Canadian-style system that would

yield administrative costs-savings related to private insurance overhead, hospital administration,

and physicians’ billing and overhead expenses.

IMPACTS OF PLAY-OR-PAY APPROACHES

While some studies have discussed the administrative cost impact of an employment-based

approach, few studies have focused on such

savings as a major outcome of the implementation

of such an approach. Requiring broader implementation of employment-based insurance would

not in itself alter the number of transactions

taking place in the system since it would generally maintain the current number of payers

involved and increase the numbers of people

filing claims under the system. However, were the

scope of benefits narrowed or the market reforms

and billing practices discussed above implemented, such changes could generate cost savings, although not of the magnitude estimated

under the Canadian-style system, according to the

Congressional Budget Office (77).

Lewin-VHI’s analysis of the impact of the

America n Academy of Family Physicians’ employment-based proposal on administrative costs projected savings of $2.8 billion in 1993 (36,37). The

same analysis estimated cumulative administrative costs-savings in current dollars of $40.1

billion from 1993 through the year 2000 (37)

(table 5 in chapter 1). Lewin-VHI’s analysis

attributed the savings to the sum of: increased

administrative costs associated with insuring

previously uninsured persons; savings from insurance market reform (e.g., guaranteed issue and

guaranteed renewal of coverage, prohibition on

use of health status as basis for denying coverage); and electronic claim submission utilizing a

uniform billing system. Thus, none of the savings

are inherent in the Play-or-Pay approach that

AAFP favored.

IMPACTS OF APPROACHES EMPLOYING

INDIVIDUAL VOUCHERS OR TAX CREDITS

As in Play-or-Pay approaches (see above),

administrative savings are not inevitable under

approaches employing individual vouchers or tax

Z This Congressional Budget OffIce study was revised in April 1993 (81).
64 I An Inconsistent Picture

credits; some would even expect administrative

costs to increase as a result of having individuals

instead of groups choose among plans. Consequently, Individual Vouchers or Tax Credits

approaches frequently incorporate reforms related to the insurance market and the paperwork

burden in order to directly or indirectly affect

administrative costs generated by the health care

system.

Estimates of changes in administrative costs

resulting from the implementation of Individual

Vouchers or Tax Credits proposals range from

increased spending of $2.1 billion in 1991 (6,35),

to savings of $4.3 billion in 1993 (3). Estimates of

future impacts of the Bush Administration proposals ranged, in current dollars, from $60.5

billion in savings from 1993 through the year

2000 for electronic claims and insurance market

reforms (3) to $74.4 billion in savings, also from

1993 through the year 2000, for automating

health care information (93) (table 5 in chapter 1).

The variation in the estimates appears to reflect

different assumptions regarding the impact of

electronic claims processing and, where examined, other broader insurance marketplace reforms on the level of administrative overhead

rather than the impact of the approach per se. For

example, possible increases in administrative

costs due to monitoring individual compliance

with requirements to buy coverage as contained in

the Heritage Foundation plan do not appear to

have been considered in the estimates (35).

IMPACTS OF MANAGED COMPETITION

APPROACHES

Managed Competition approaches are expected

to achieve administrative costs-savings through

insurance market reforms and health care delivery

system restructuring. However, any such savings

could be offset by substantially increased costs

associated with the generation and provision of

quality-of-care information to consumers. Making this information available is said to be an

essential feature of Managed Competition, in that

it would permit potential purchasers of health

insurance to compare plans on quality as well as

price (29). All available analyses of administrative costs impacts of Managed Competition

approaches are flawed in that they do not include

the costs of providing such information. According to Lewin-VHI, there are no studies analyzing

the administrative costs-savings that might result

from “the unique features of managed competition” but it would likely reduce insurer and

provider adminis trative costs “by extending largegroup economies of scale to employee groups of

all sizes and by reducing the number of insurers

that providers must work with’ (63). Thus, Sheils

and his colleagues, using Lewin-VHI’s analytic

model and an approach to Managed Competition

based largely on Starr’s proposal, estimated that

Managed Competition could save $11.2 billion in

insurer administrative costs in 1993 (63) (table 5

in chapter 1). The analysis assumed that insurer

administrative costs would be 3.6 percent of

covered claims; this percentage was based on

current administrative cost data for insured

groups having 10,000 or more members. The

analysis noted that State insurance premium

taxes, if continued to be permitted, and the

‘‘expanded use of utilization review and case

management under managed competition’ could

increase administrative costs. However, the latter

would likely be offset by decreased utilization of

health care services (63). Even gains to providers

due to standardized coverage would likely be

offset by the costs of complying with utilization

management programs (63). In an article intended

to be a comment on the analysis by Sheils and his

colleagues about the various impacts of Managed

Competition, Long and Rodgers used an assumed

administrative costs-savings of 8 percent in their

most optimistic analysis of potential savings to

the Federal Government (40); this estimate of

administrative costs-savings was not Long and

Rodgers’ own, but was based on assumptions

made in a draft of the report by Sheds and his

colleagues (41). However, Long and Rodgers did
Chapter II-Impacts on Administrative Costs I 65

not estimate a dollar figure for administrative

savings alone (40).

SUMMARY

Most analyses assume that administrative costssavings will be realized in any of the approaches

to reform under consideration. Policymakers

should be aware, however, that not all of the

projected administrative costs-savings are due to

inherent features of the approach to health care

reform. For example, neither Play-or-Pay nor

Individual Tax Credits or Vouchers approaches to

universal coverage would automatically lessen or

increase the administrative burden of the current

system. Rather, the analyses typically rely on

features of proposals explicitly addressed to

administrative costs (e.g., electronic billing) in

order to derive savings. Further, at least in part

because of differences in the definitions of

administrative costs, no analysis appears to have

fully thought through the administrative burdens

associated with various approaches and proposals. The magnitude of any savings or increase will

most likely depend upon the degree to which the

system moves to electronic systems, reduces the

number of payers involved and transactions

processed, and does not involve offsetting increases in utilization, utilization review, case

management services and activities geared to

quality improvement.
P ART III.

Additional

Policy

Considerations

and

Conclusions
Additional

Policy

Considerations

T

his report presents a summary of available analyses of

the potential economic impacts of four broadly-defined

approaches to health care reform. OTA has attempted to

gather and summarize studies that are likely to be the

most credible given their institutional origins. However, the

purpose of this document is neither to come to conclusions about

the accuracy of either the size or the tendency of any of the

estimates nor to synthesize the estimates and come to a

conclusion about potential economic impacts of choosing any

one approach over another. Moreover, even if these estimates

might be used to suggest the direction or magnitude of potential

economic impacts, quantitative analyses of the approaches in and

of themselves cannot fully answer the question, ‘‘Which route to

health care reform? The answer is likely to depend on more than

financial issues.

Most of the approaches to health care reform analyzed here

assume, at least implicitly, the possibility of having a national

health policy.l Arguably, this is a relatively new concept in the

approach to providing health care in the United States, and it

could promote a somewhat different way of appraising competing approaches to health care reform.

To date, much of the health care reform debate has been fueled

largely by concerns about: 1) the rising health care costs; and 2)

lack of access. Each sector has seemed to want relief from its own

burden of costs or lack of access or both. Little attention has been

paid to how the facets of the U.S. economy are interrelated and

9

1 TWO important notes: 1) A national health policy is not the same as natiOd h~ti

insurance or a national health system. 2) Even approaches that propose the use of

individual vouchers or tax credits in a market-oriented system would probably have to

make changes at the national level that would result in having a national health policy, and

necessitate some monitoring at the national level of the effects of any changes.

69
70 I An Inconsistent Picture

dependent on one another, and perhaps even less

to the social and political implications of change.

The little that has been done related to the

economy as an integrated whole, however, suggests that any change in health care spending and

savings is likely to have repercussions in many of

its sectors, both private and public. These areas—

employers, employment, households, government

at all levels—are in turn: 1) related to each other

and 2) likely to influence the Nation’s ability to

spend money on health care and other services.2

In turn, economic change-and changes in health

care delivery systems--can affect the social and

political landscape, potentially disrupting longheld American traditions (15).

In finding the appropriate route to successful

health care reform, policymakers may find it

useful to ask themselves a number of key

questions. The basic issues relate to overriding

values and social purposes, primarily:

1.

2.

the health- and health-care-related goals of

health care reform; and

the other important social, political and

economic values that they are trying to

further through health care reform.

Listed below are key questions within each of

these areas pertinent to comparing approaches.

THE HEALTH- AND HEALTH-CARERELATED GOALS OF HEALTH

CARE REFORM

m Key questions pertinent to the health- and

-health-care-related purposes of health care

reform include:

—Is a fundamental purpose of health care

reform to expand or achieve universal access

to insurance coverage or expand or achieve

universal access to health care services?

And by access do we mean financial and/or

physical access to health care services (e.g.,

for rural and/or inner-city Americans), and to

what level of services?

—Is a fundamental purpose of health care

reform to improve health status? If so,

whose, and to what level?

—Is a fundamental purpose of health care

reform to improve quality of health care? If

so, how? And how will the Nation know

when improvement has occurred?

-Should the provision of health care coverage

and services be used to promote changes in

lifestyles?

—Do we want insurance (that is, some protection from large and unexpected health care

costs) or prepaid, comprehensive health care?

OTHER SOCIAL, POLITICAL, AND

ECONOMIC VALUES

Key questions pertinent to the social, political, and economic purposes of health care

reform include:

—Is a fundamental purpose of health care

reform to establish a right to health care?

Should this right be moral or legal?

—Is a fundamental purpose of health care

reform to reduce or contain health care

spending (national health expenditures)? If

so, to what purpose?

—Is a fundamental purpose of health care

reform to redistribute the burden of payment

for health care coverage and/or services? If

so, to what extent? Should there be equity in

payment for all Americans? If so, how is it to

be measured?

—What is the appropriate role (including their

respective shares of the burden for health

care spending) of government versus the

private sector in financing health care?

. What is the appropriate role (including

their respective shares of the burden for

2 Conversely, no cbange-that is, a continuation of trends that increase expenditures and decrease coveragfiwill also have widespread

economic implications, both positive and negative (78).
health care spending) among levels of

government (Federal, State and local)?

● What is the appropriate role of employers?

Should employers continue to be the primary sponsors of health insurance-and,

thus, gateways to health care-for AmeriCans?

● What is the appropriate role of the individual in paying for health care? Should sick

people (or other high users of health care)

be responsible for a greater share of overall

health care costs?

Chapter 9–Additional Policy Considerations I 71

—What are the roles of competition and

regulation in the health care system?

. Should the purchase of insurance coverage

be mandatory for either individuals or

employers? What political, social and economic ramifications would that have?

These questions seem at least as important as

quantitative analyses in helping to estimate the

potential effects of specific legislative proposals.
Conclusions

and a

Provisional

Checklist for

Policymakers 10

CONCLUSIONS

o

TA’s review suggests that estimates of the projected

costs to various sectors of the economy and public vary

for a variety of reasons. These reasons include but may

not be limited to: basic assumptions about coverage,

approaches to payment, and cost controls underlying the

approaches; the year(s) subject to analysis; and proprietary

features of the mathematical models used to analyze what might

happen. There are likely to be various additional provisions,

which in and of themselves could have a considerable economic

impact, hidden within an approach named for its approach to

health care cost containment or universal coverage. *

Policymakers should exercise caution when they are presented

with any one analysis. In fact, they would likely benefit from

having a guide available that includes some of the factors and

assumptions that might explain how the various components of

the reform approach being examined affect its impact on the

various areas of the economy. Following s ummaries of the

estimated impacts of major approaches to reform on national

health expenditures and on effects in other areas of the economy,

1 For example, while the term Managed Competition properly implies regulated

competition among the collectors and distributors of health care coverage funds (15),

approaches labeled Managed Competition may also include specitlc assumptions about:

●

●

●

particular sources and flows of financing (e.g., employer mandates versus individual

vouchers versus continuation of the Nation’s voluntary system of health insurance;

limits on the tax exclusion available for employer-sponsored health insurance

premiums);

the extent of coverage (core benefits); and

expenditure targets or limits.

In the current environment where labels come and go in terms of political popularity,

these specifics are not readily apparent from the label, Managed Competition.

73
74 I An Inconsistent Picture

this chapter provides a provisional “checklist”

that policymakers could use as they contemplate

the relative virtues of competing approaches to

health care reform.

Which Approaches Will Reduce National

Health Expenditures?

OTA’S review finds that, regardless of the

approach to health care reform, the ways in

which analysts are able to project savings (in

national health expenditures, at least-not with

respect to distributive effects) appear to be limited

to the extent to which the analysis (or plan):

establishes a‘ ‘cap’ on expenditures at a certain

level [i.e., Meyer (43); GAO (83)/both Single

Payer; NLCHCR (49) and Silow-Carroll’s “Optimistic Scenario’ (66) regarding Play-orPay]; or

assumes price controls at, for example, Medicare payment rates [i.e., CBO/Single Payer

(77)]; or

does not assume universal coverage [i.e., all

analyses of the Bush Administration proposal

(3,65,94); or

assumes universal coverage but substantially

cuts back on the scope of coverage [i.e.,

Heritage (6,35)]; or

assumes high levels of savings from either

managed care or administrative savings or both

[i.e., Long and Rodgers, re: Managed Competition without a global budget (40)].

OTA finds that the reasons proposals, or

analyses of them, need these assumptions to

achieve savings are that:

■ any approach that increases availability of

coverage to people who are currently uninsured

will not reduce national health expenditures

because it is likely to increase the use of health

care services. In this respect, ‘‘any approach”

includes the insurance market reforms that are

designed to increase availability of coverage

(e.g., guaranteed issue). Broader approaches to

reform (Single Payer; Play-or-Pay; Managed

Competition; Individual Vouchers or Tax Credits) either: a) would not inherently reduce

national health expenditures without the imposition of a global budget (e.g., Canadianstyle Single Payer); orb) have not been tried, so

we do not know what their effects on health

care spending might be (e.g., highly procompetitive private market approaches, including

pure or Enthoven-type Managed Competition).

administrative reforms alone are not likely to

save enough money to expand coverage, especially over time, to those people who are

currently uninsured.

Why Do Estimates Vary So Much?

The following illustrates the importance of

identifying key assumptions if comparisons within

and across approaches are desired. As noted

above, most—but not all-analyses estimate that

any of the approaches reviewed here will probably result in reductions in national health expenditures (table 1 in chapter 1). But the estimates of

the impact on national health expenditures of just

“Canadian-style’ approaches varied in one recent year (the year 1991) from an estimated

increase of $21.0 billion (34) to savings of $241.0

billion (43). In reviewing these estimates, it

would be important for policymakers to be aware

that the reason for much of the variation between

these two extremes appears to be the assumption

made by Meyer and his colleagues that national

expenditure limits would reduce health care

spending to 8.7 percent of U.S. GDP in the first

year of the system’s implementation, that is, in

1991 (43). This assumption was in large part

responsible for the estimate of $241.0 billion in

savings. The other analysis, by Lewin-VHI,

assumed no change in national health spending in

the first year of plan implementation, again, 1991

(34). Thus, two analyses of a similar Single Payer

approach to health care reform arrived at two

widely divergent estimates of the impact of the

system in the United States in large part because

their assumptions were essentially at the extremes
Chapter 10-Conclusions and a Provisional Checklist for Policymakers I 75

from one another. Even after this difference in

assumptions is accounted for, however, a difference in the tens of billions between estimates may

remain (61).

To the extent that they can even be compared

with estimates of the impact of other approaches

on national health expenditures, assessments of

the impact of a Canadian-style Single Payer

approach overlap considerably with approximations of the costs or savings from other approaches to reform (table 1 in chapter 1).

Further, the above illustrates the wide variation

in estimates for just one initial year of a plan’s

implementation. Many analyses provide estimates for the first year of a plan that may not be

indicative of the long-term effects, beneficial or

adverse, of an approach. Despite the wide-ranging

long-term impacts that any approach to health

care reform is likely to have, there are few

estimates of the cumulative impacts of competing

approaches to health care reform on various areas

of the economy.

Many analyses do not look at the impact of an

approach on the various areas of the economy in

relation to one another. This void tends to obscure

the totality of change that might be expected from

the implementation of a particular approach.

Not surprisingly, for example, the available

estimates suggest that a Play-or-Pay approach to

universal coverage will result in lower government spending than will a tax-financed approach

to universal coverage (table 2 in chapter 1).

Conversely, the employment-based approach seems

more likely than the fully tax-financed (Single

Payer), the Individual Voucher or Tax Credits, or

various Managed Competition approaches to

result in greater expenditures, relative to other

sectors of the economy, by employers, unless, for

example, the Managed Competition approach is

implemented with an employer mandate (table 3

in chapter 1). When numbers are put forth

independently, these relationships are generally

obscured.

A PROVISIONAL CHECKLIST TO GUIDE

POLICYMAKERS

Policymakers reviewing analyses of approaches

to health care reform with an eye to identifying

the key factors and assumptions behind the

analyses would facilitate their own development

of public policy by:

1.

2.

3.

isolating specific components of reform

proposals;

identifying the potential impact of these

components; and

examining whether these impacts are acceptable or unacceptable.

OTA has identified key questions that can help

policymakers understand why the results of

analyses of competing approaches differ. These

key questions, along with examples of how

variations in the assumptions can materially

affect estimates, are listed in Box 1O-A.
76 I An Inconsistent Picture

●

●

●

●
Chapter 10-Conclusions and a Provisional Checklist for Policymakers I 77

●

●

●

●

defined In the proposal? -

of
78 I An Inconsistent Picture

●

●

●
Chapter 10-Conclusions and a Provisional Checklist for Policymakers I 79

●

●

●

●
80 I An Inconsistent Picture

●

●
Appendix A:

Overview of OTA

Assessment:

Technology, Insurance,

and the Health

Care System

Background

c

ongress has been concerned for many years

with serious and growing problems of health

care costs, access, and quality. In response to

requests from the Senate Committee on Labor

and Human Resources (Edward Kennedy, Chairman),

the House Committee on Energy and Commerce (John

Dingell, chairman), the House Committee on Ways

and Means Subcommittee on Health (Bill Gradison,

then Ranking Minority Member), Senator Charles E.

Grassley (Committees on Budget, Finance, Special

Committee on Aging), and Senator Ted Stevens,l

OTA’S assessment, Technology, Insurance, and the

Health Care System, addresses these congressional

concerns by focusing on the following issues:

1.

2.

30

What does the available literature say about the

impact of lacking health insurance on access to

care and patient health outcomes?

Can a minimum benefit package be fashioned

from the perspective of effectiveness and costeffectiveness?

What cost implications do the leading types of

health care reform proposals have in seven areas:

national health care spending and savings; Federal, State, and local budgets; employers (large

and small); employment; households (low, middle, and

economy;

upper income); other costs in the

and administrative costs?

Schedule and Plan

The assessment was approved by the Technology

Assessment Board in April 1991, and began in July

1991. In June 1992, the request letter for this Report

was received from Senator Stevens.

An advisory panel for the overall assessment was

formed in November 1991; the advisory panel met in

January and December 1992; the final meeting of the

advisory panel is scheduled for May 1993.

In addition to the release of this Report, OTA has

released, or plans to release, the following documents

related to the assessment:

1. Does Health Insurance Make a Difference?—

Background Paper (OTA-BP-H-99).

This interim report, requested by the Senate

Committee on Labor and Human Resources,

summarizes the state of the literature on the

relationships among insurance coverage, access,

and patient health outcomes; provides a conceptual framework for evaluating access to health

care and the health effects of such access; and

provides an overview of insured and uninsured

populations in the United States as of 1990. The

1 Senators GTa.ssley and Kennedy and Representative Dingell are also members of the ‘liAmology Assessment Board (’TAB), the

congressional body that governs OTA. Senator Stevens was a member of ‘MB.

81
82 I An Inconsistent Picture

background paper is available for congressional

puposes from OTA (49241), and to the public

from the U.S. Superintendent of Documents

(phone number 202/275-3030; address: Washington, DC 20402; GPO stock number 052-003-

01301-1,$5.00 per copy).

2. Health Insurance: The Hawaiian Experience--

Background Paper (will not be printed).

This background paper is available from OTA

for congressional use by calling OTA at 49241,

and to the public by calling OTA at 202/228-

6140.

3. Care for Depression: Issues Raised in Using

Effectiveness and Cost-Effectiveness Information to Design a Mental Health Benefit—

Background Paper.

This case study will be available from GPO in

winter 1993.

4. Primary Care for Uninsured People: Efficacy

and Access--Background Paper.

This background paper will be available from

OTA in summer 1993.

5. Nonfinancial Barriers to Access--Background

Paper.

This background paper will be available in late

1993; plans for distribution are not yet final.

6. Benefit Design in Health Care Reform.

This, the main report of OTA’S assessment,

will be available from GPO in fall 1993.

7. Insurance Status and Health Care Utilization:

Analysis of Four Data Bases and Cost Implications of Universal Coverage--Background Paper.

This background paper is scheduled to be

available in fall 1993; plans for distribution are

not yet final.
contents:

Appendix B

Introduction, 85

Specific Analyses of Impacts on National Health Care Spending and Savings, 85

Single Payer Approaches, 85

Play-or-Pay Approaches, 87

Approaches Employing Individual Vouchers or Tax Credits, 89

Managed Competition Approaches, 90

Specific Analyses of Impacts on Federal, State and Local Budgets, 93

Single Payer Approaches, 93

Play-or-Pay Approaches, 94

Approaches Employing Individual Vouchers or Tax Credits, 96

Managed Competition Approaches, 96

Specific Analyses of Impacts on Employers, 97

Single Payer Approaches, 97

Play-or-Pay Approaches, 98

Approaches Employing Individual Vouchers or Tax Credits, 100

Managed Competition Approaches, 101

Specific Analyses of Impacts on Employment, 101

Single Payer Approaches, 101

Play-or-Pay Approaches, 101

Approaches Employing Individual Vouchers or Tax Credits, 103

Specific Analyses of Impacts on Households, 104

Single Payer Approaches, 104

Play-or-Pay Approaches, 104

Approaches Employing Individual Vouchers or Tax Credits, 105

Managed Competition Approaches, 107

Specific Analyses of Impacts on Administrative Costs, 107

Single Payer Approaches, 107

Play-or-Pay Approaches, 109

Approaches Employing Individual Vouchers or Tax Credits, 109

Managed Competition Approaches, 110

83
Summaries of Specific

Analyses of the

Economic Impacts of

Competing Approaches to

Health Care Reform

Introduction

his appendix provides detailed summaries of

T

the analyses reviewed for this report for the

following areas of the economy: national

health care spending and savings; Federal,

State, and local budgets; employers; employment;

households; and administrative costs. The appendix is

organized by these areas of the economy and within

each area of the economy is divided by approach to

health care reform. Within each approach to health care

reform, analyses are indicated in the headings by who

published the analysis and then by who conducted the

analysis, if the latter differs from the former. The

specific proposal reviewed is then indicated in parentheses, unless the analysis was of the generic approach

to reform under which the entry appears.l

Specific Analyses of Impacts on National

Health Care Spending and Savings

Single Payer Approaches

Lewin-VHI 2--Lewin--VHI, in a staff working paper,

examined national health spending under a Canadianstyle system (34). The authors identified two features

of the Canadian system that could potentially reduce

U.S. national health expenditures-simplification of

the administration of health benefits, and regulation of

the growth in health spending through aggregate

expenditure limits for physicians and hospitals-and

one feature that would increase expenditures, that is,

primarily, expanded coverage.

Lewin-VHI maintained that a Canadian-style system in the United States would not necessarily achieve

the level of health care spending achieved in Canada,

least not immediately, since:

It is unlikely that the United States would make

major changes in provider payment levels;

The resource allocation systems in place in Canada

would take time to develop in the United States;

U.S. health spending includes amortization costs of

existing capital;

Data systems for expenditure

developed; and

Due process rights in the

budgeting need to be

United States have

implications for medical malpractice reform and

provider rate appeals, both of which affect health

care spending (34).

Based upon their analysis, Lewin-VHI estimated a

net increase in national health spending of $21.2

1 Examples of how appendix entries are organized include: r-ewin-VHI-H VHl conducted an independent analysis of a generic

approach (34); Physicians for a National Health Plan/Grurnbach and Colleagues (PNHP)--Grumbach and his colleagues, on behalf of the

Physicians for a National Health Progrw analyzed the PNHP plan (24).

2 Lewin-VHI was formerly known as Lewin-ICF.

85
86 I An Inconsistent picture

billion in 1991, the first year of the plan. This was the

sum of $46.8 billion in administrative costs-savings

plus $68.0 billion in increased utilization ensuing from

expanded access to uninsured individuals and the

elimination of cost-sharing as well as the elimination

of some utilization management programs. However,

it does not include increased spending of $10.2 billion

associated with long-term care services.

The analysis noted that a large portion of the

increase in health spending in the first year could be

averted by imposing patient cost-sharing, but such

modification of the Canadian approach might significantly reduce the potential for administrative costssavings flowing from the Single Payer system.

While Lewin-VHI projected an increase in spending

in the plan’s first year, it indicated that in future years

substantial savings could be realized as the growth in

health spending was controlled through health expenditure limits. They maintained that it is impossible to

reliably predict savings ensuing from expenditure

limits. “Health expenditure budgeting in the U.S. is

sure to be a highly political process which may not

always yield results consistent with the goals of cost

containment” (34). However, by way of illustration,

they showed that if the United States were to reduce its

projected rate of growth in health spending by 1

percentage point per year, national health expenditures

would be reduced by about $137.0 billion over the next

decade. What impact such reductions would have on

the quality of care and on health care technology is

generally unknown (34).

Meyer and Colleagues-Meyer and his colleagues

examined the long-term impact of the implementation

of a national health plan with government as the sole

payer for services on business and the economy (43).

They projected U.S. health care savings over a 10-year

period, from 1991 through the year 2000, under several

scenarios that varied the assumptions about the level of

health care spending under a Canadian-style system.3

Based upon these scenarios, the authors estimated a

change in national health care spending in 1991

ranging from savings of $241.0 billion, under the

“Full Savings Scenario,” to increased spending of

$20.0 billion, under the “Deceleration Scenario”

Cumulative savings under these scenarios for 1991

through the year 2000 ranged from $1.3 (“Deceleration Scenario”) to $5.5 trillion (“Full Savings Scenario”) in current dollars ($1.0 to $4.3 trillion in 1991

dollars). Since neither of these scenarios account for a

phase-in period, the savings achieved under them are

likely to be upper limit projections. However, given

the magnitude of the estimated long-term savings, the

authors maintain that the analysis demonstrates [t]hat

a conversion to a national health plan would release

resources from the health care sector to the rest of the

economy” (43).

U.S. General Accounting Off ice-in a 1991 report

examining the Canadian health care system, the U.S.

General Accounting Office (GAO) estimated that the

implementation of a Canadian-style system in the

United States would produce a net savings of $3,0

billion in 1991, about 0.4 percent of projected 1991

national health expenditures (82). This estimate: was

based upon the system in place in Ontario; assumed

effective in the first year some cost-containment and

all cost-inducing factors; and did not take into account

transition costs. GAO projected that long-term health

care savings from implementation of a Canadian-style

system would be possible given that the cost constraining features of the system could help control growth in

national health care expenditures (82).

Physicians for a National Health Program/

Grumbach and Colleagues (PNHP)--The Physicians

for a National Health Program (PNHP) support a

publicly administered, tax-financed national health

plan with a single public payer (24). The PNHP plan

would: provide coverage to all Americans for “all

medically necessary services including prescription

drugs;” prohibit private insurance that duplicates the

plan’s coverage; eliminate patients’ copayments and

deductibles; and provide for annually negotiated

global budgets for hospitals, and a negotiated fee

schedule for fee-for-service physicians’ services.

According to its proponents, the proposal “could

initially pay for expanded care out of administrative

3 * $F~ sav~~ SC~~~’ ~s~ed h~~ Cae Spnding a[ no more~8.7 ~~ent of I-J.S. GDP, tie portion of (kM&i’s GDP devoted

to health care. “Deceleration Scemrio” assumed health care spending capped at its current share of U.S. output (GDP) ajler including the cost

of covering uninsured individuals (43).
Appendix B-Summaries of Specific Analyses I 87

savings without adding new costs to the overall health

care budget and would establish effective mechanisms

for long-term cost control” (24) (See also “Specific

Analyses of Impacts on Administrative Costs,” this

appendix). According to Health Care Financing Administration (HCFA) estimates cited by Grumbach and

his colleagues, $602.0 billion would be spent in 1991

for personal health care plus insurance overhead and

profits under current policies. The authors estimated

that ‘‘the net cost of personal health care and insurance

overhead for universal coverage under the NHP,

including expanded services for the previously uninsured, would be at most $547 billion if the system

operated with the administrative efficiency of the

Canadian system” (emphasis added). However, in

calculating a national health care budget for the first

year of plan implementation, the authors assumed a

more conservative level of administrative costssavings and that significant savings from the adoption

of cost-containment mechanisms, such as global

budgets for institutional providers and fee schedules

for physicians’ services, would accrue over time.

Based upon these assumptions, the authors estimated

that national health expenditures would be $18.0

billion less ($584.0 billion) than under current policies

($602.0 billion) in 1991. Nevertheless, the authors

proposed a national health care budget in 1991 of

$602.0 billion (equal to HCFA’S 1991 estimate under

current policies), earmarking the difference in spending under their plan versus under current policies for

new health initiatives and transition costs. The analysis

indicated that in order to achieve this national health

care budget in the initial year of the plan, given the

increase in costs due to increased utilization of health

care services by the previously uninsured population,

the plan would “rely on the ability of a single payer to

allocate and enforce prospective budgets for physician

and hospital services’ (24).

Congressional Budget Office-In a Congressional Budget Office (CBO) study,4 CBO projected the

change in national health expenditures for a Canadianstyle system in which provider payments were made

on the basis of Medicare rates (77). However, it varied

the approach from the Canadian system to the extent

that some patient cost-sharing and a residual Medicaid

program were retained. It projected that under such a

system, the net change in 1989 in national health

expenditures would range from savings of $58.1

billion (9.6 percent) to increased spending of $7.4

billion (1.2 percent), under relatively optimistic and

relatively pessimistic assumptions, respectively. Note

that the above GAO report, which compared various

estimates of the change in national health spending

under a Canadian-style system, converted these 1989

figures to 1991 dollars; that is, savings of $69.0 billion

to increased spending of $9.0 billion (83). In its study,

CBO noted that” [t]he magnitude of savings achieved

by limiting price increases would depend on allowed

increases and the extent to which increases in volume

would offset some of the potential savings from price

controls” (77).

Play-or-Pay Approaches

Congressional Budget Of Office-CBO reviewed

illustrative options for expanding health insurance

including a variation of a Play-or-Pay approach (76).

It found that in 1991, the three options--employer

mandate, Medicaid expansion and combined employer

mandate/Medicaid expansion-would not ‘‘increase

national health expenditures by more than 3 percent,

but all of them would have redistributional consequences that would substantially exceed the modest

net effect on overall health spending” (76).

U.S. Bipartisan Commission on Comprehensive

Health Care/Lewin-VHl (Pepper Commission)--The

U.S. Bipartisan Commission on Comprehensive

Health Care (Pepper Commission) reviewed three

alternatives-Medicaid expansion, national health insurance (through a refundable tax credit to purchase

coverage available to all Americans or government as

sole payer), and ‘‘job-based and public coverage, ’

before recommending the latter in its final report in

September 1990 (75).

The Commission rejected the Medicaid expansion

alternative because it determined that an estimated 14

million people would remain without access to affordable coverage and that currently inadequate coverage

available to others would not improve. To the extent

that such a plan would not achieve universal access, the

cost shift to private payers for uncompensated care

A This Congressional Budget Oftice study was revised in April 1993 (81).
88 I An Inconsistent Picture

would continue. Furthermore, the Federal Government

would be responsible for the entire cost of insuring

low-income workers. The Commission also rejected

the two means of achieving what it termed “national

health insurance” because it determined that they were

controversial and disruptive, especially for those

covered by the current employment-based system, and

that they would totally shift the financing burden from

employers to the taxpayers.

Thus, the Commission recommended the adoption

of a proposal combining job-based and public coverage. The recommended reforms, designed to achieve

universal access, would be phased in over a 5-year

period. The projections for the plan assumed that

employers would seek to minimize costs in choosing

between the private and public options, and that they

would be able to elect separately between private

insurance and coverage under the public plan for their

full- and part-time workers.

The Commission, using Lewin-VHI’s estimates,

estimated that the system’s implementation would

increase national health spending less than 2 percent.

Thus it projected, based upon full implementation in

1990, an increase of $12.0 billion in 1990 in national

health expenditures. In practice, the plan would be

phased in. Therefore, the $12.0 billion does not reflect

adjustments for inflation or for savings resulting from

various cost-containment measures. Not all sectors of

the economy would experience increased costs as a

result of the plan implementation (75) (See ‘Specific

Analyses of Impacts on Employers,’ this appendix).

American Academy of Family Physicians/LewinVHI (AAFP)--The American Academy of Family

Physicians’ Rx for Health provides for an employer

mandate with a government backup insurance plan

coupled with global budgeting for health care spending

as well as miscellaneous other reforms (2). An analysis

of the plan conducted by Lewin-VHI for AAFP

estimated an initial increase in health care spending of

$33.6 billion (with expanded Medicare coverage

through the private purchase of expanded Medigap

insurance; $32.5 billion without) in 1993 due to

increased utilization, and increased provider reimbursement for care provided to persons currently

covered by Medicaid, offset, only in part, by costcontainment savings (36,37). It further projected that

savings resulting from the implementation of the

plan’s cost-containment measures (e.g., patient costsharing, expenditure limits for hospitals and physicians, medical liability reform, global budget) would

offset additional outlays in the future. Thus, it estimated a net reduction in health spending from $111.3

to $333.5 billion (with expanded Medicare coverage

through the private purchase of expanded Medigap

insurance; $123.7 to $345.9 billion without) from

1993 through the year 2000, in current dollars. These

projected savings depend, in particular, upon the

effectiveness of the plan’s expenditure limits, assumed

to take effect in 1994, and assume that such measures

reduce per-capita health spending from a projected rate

of 8.6 percent to 7.6 percent and 6.6 percent, respectively, beginning in 1994 (36).

Lewin-VHI concluded that its higher estimate of

savings under the AAFP proposal, which would

require a reduction in health spending of approximately 3.5 percent over 8 years (reflecting a 25 percent

reduction in the rate of growth in health spending),

“seems modest, ” given that State all-payer hospital

rate setting programs have been shown to reduce the

rate of growth in health spending by 30 percent (36).

National Leadership Coalition for Health Care

Reform (N LCHCR)---The National Leadership Coalition for Health Care Reform, also projected substantial

savings in health care spending over current policy for

its proposal, which is similar to the AAFP proposal.

After an initial increase in outlays of $1.0 billion in

1992, the plan projected savings of $36.0 billion in

1993 increasing to over $600.0 billion annually in the

year 2000 (49).

Silow-Carroll and Meyer (HealthAmerica: Affordable Health Care for All Americans Act; Clinton

Campaign)--Silow-Carroll and Meyer examined S.

1227 (HealthAmerica: Affordable Health Care for All

Americans Act), introduced (but not passed) in the

102d Congress, and then-candidate (now President)
Appendix B-Summaries of Specific Analyses I 89

Clinton’s campaign proposal,5 both of which incorporated an employer mandate to contribute toward

employee health insurance benefits as welI as global

health care spending budgets and fee schedules (66).

While the authors noted that in all three scenarios

modeled, 6 some of the cost savings were offset by the

increased cost of providing health care coverage to

uninsured persons, cumulative savings in health care

spending accrue under all three from 1994 through

2003 for both plans. They further noted that it would

be misleading to judge the impact of the proposals

based upon first-year expenditures.

Thus, under an “optimistic Scenario, ” net savings

in national health spending over business as usual

during the first year of the plan (1994) would be $5.0

billion with cumulative savings of about $2.7 trillion

in current dollars ($1.7 trillion in 1994 dollars) from

1994 through 2003,

Under the “Intermediate Scenario, ” the authors

found that the expansion of coverage to uninsured

individuals would offset initial savings under the plan,

resulting in a net increase in national health spending

of $1.0 billion in 1994. However, savings would

exceed new costs beginning in 1995 with cumulative

savings from 1994 through 2003 of about $1.2 trillion

in current dollars ($712.0 billion in 1994 dollars).

The “Pessimistic Scenario” would take the longest

to yield savings since under its assumptions, health

care spending would exceed expected spending under

business as usual for about 5 years, at which point net

savings would be realized. Cumulative savings would

be about $457.0 billion in current dollars ($260.0

billion in 1994 dollars) from 1994 through 2003.

The authors maintain that small changes in health

care spending growth can have a significant impact,

emphasizing “the extreme importance of the exact

spending targets set by the federal board and the

effectiveness of the mechanisms put in place to achieve

those targets” (66).

Approaches Employing Individual Vouchers or

Tax Credits

Bush Administration/U.S. Executive Off ice of the

President (Bush Administration)—Fcmmr President

Bush’s reform proposal included tax credits, deductions, or vouchers as well as insurance market reforms

intended to expand the availability of private insurance

(94). The Bush Administration estimated that 95

million Americans would be affected by the Administration’s various reform measures. And it estimated

that based on 34.1 million persons currently uninsured,

the plan would newly cover 29.2 million of them. Of

the 4.9 million Americans remaining uninsured, the

Administration held that many of them would be

eligible for a credit or deduction.

Bush Administration projections of the impact of its

various reforms on national health expenditures estimated that they could reduce national health expenditures by 6 to 14 percent, yielding cumulative systemwide savings from 1992 through 1997 of $394.0

billion and through the year 2000 of $954.0 billion, in

current dollars. The Bush Administration also expected the reforms to reduce the rate of growth of real

per-capita medical expenses thus reducing the share of

the GDP devoted to health care in the long-term.

Looking forward to 2030, the U.S. Office of Management and Budget projected that 19 percent of GDP

would be devoted to health care spending if the Bush

Administration reforms were implemented, rather than

27 percent, the middle range projected estimate under

the current system (94).

Bipartisan Panel on Presidential Candidates’

Health Plans/Lewin-VHl (Bush Administration)--

Lewin-VHI, for the Bipartisan Panel on Presidential

Candidates’ Health Plans convened by Families USA,

analyzed then-President Bush’s reform proposal (3). It

estimated that health care spending would decrease by

5 While Silow-Carroll and Meyer examined then-candidate Bill Clinton’s proposal, since none of the core components of Managed

Competition were included in either S. 1227 or then-candidate Clinton’s proposal, the study has been categorized as one examining Play-or-Pay

approaches to refom.

6 ~ ~op~stic SW~o*~ ~S~ed fie pl~ WO~d re5~t fi ~vers~ coverage, ~ ini~ 5 pffcent re&CtiOn in h~~ care COStS phased k

over 5 years, and future health care spending growth Limittxi to the growth rate of the economy after the fifth year of implementation.

‘‘Intermediate Scenario’ assumed initial efficiencies would result in a 2.5 percent reduction in spending phased in over 5 years and, over 10

years, the annual growth rate in health care would slowly decline in stages, eventually achieving a reduction of 3 percentage points, from 11.26

to 8.26 percent annual growth. Health care would continue to grow faster than the rest of the economy but by a much smaller margin than

currently, ‘‘Pessimistic Scenario’ assumed no initial efficiencies, spending would increase as access expands, and annual health care spending

growth would decline slowly from approximately 11.3 percent (in 1994) to about 9.1 percent (in 2003) (66).
90 I An Inconsistent Picture

$7.5 billion in 1993, and would continue to decrease

annually with the cumulative net decrease in spending

estimated to be $72.6 billion through 1997 and $156.9

billion through the year 2000, in current dollars. These

estimates assumed the successful implementation of

the proposed cost-containment measures including

insurance market reform, electronic claims processing,

medical liability reforms, expanded use of coordinated

care, preemption of State mandated minimum benefits,

promotion of competition, and increased funding for

prevention programs.

Silow-Carroll (Bush Administration)---SilowCarroll examined the long-term impact (1994 through

the year 2003) of then-President Bush’s tax credit

proposal on the economy under two scenarios that

varied the assumptions about the magnitude of savings

achievable under the proposa17 (65).

The analysis found that either scenario would entail

some increase in overall health care spending due to

the expansion in coverage, but that any such increase

would be mostly offset by cost-containment savings in

the initial years of the plan. Under the “Pessimistic

Scenario,” health care spending would decrease by

$2.0 billion in 1994 relative to the current system;

under the ‘Optimistic Scenario, ” by $6.0 billion. The

analysis estimated cumulative savings of $158.0

billion to nearly $1.0 trillion, in current dollars ($107.0

to $600.0 billion, in inflation-adjusted, 1994 dollars),

under the “Pessimistic” and ‘optimistic” scenarios,

respectively, from 1994 through 2003. The study did

not project whether savings would continue under the

“Optimistic Scenario.” However, it noted with respect to the “Pessimistic Scenario” that if health care

spending were to continue on the same course, savings

in national health care spending resulting from former

President Bush’s tax credit reforms would taper off

after the first decade (65).

Congressional Budget Office (Bush Administration)--The Congressional Budget Office, in testimony

before the Senate Committee on Finance, estimated

that a proposal combining tax subsidies with market

reforms would increase national health care spending

2 percent initially (55). With respect to former

President Bush’s proposal, CBO Director Robert

Reischauer testified that the combined effect of the

proposal’s cost-control measures could produce a

modest one-time reduction in national health spending

but that it was not likely to significantly slow the rate

of growth in such spending (85). He attributed the

limited impact of the reforms on the rate of growth in

health spending to their voluntary nature and the

relatively small financial incentives involved.

Heritage Foundation/Lewin-VHl (Heritage Foundation)--Lewin-VHI analyzed the Heritage Foundation’s health care reform proposal on behalf of the

Foundation (35). The proposal replaces the tax deduction/

exclusion for employment-based health benefits with

individual refundable tax credits/vouchers, includes

health insurance market reforms, and requires individuals to purchase insurance. Employers, in particular

those who now offer coverage, would continue, as a

general rule, to arrange payroll deductions for benefits

payments. The analysis assumed that the newly

insured individuals would increase their utilization of

services to the level reported by insured persons with

similar characteristics while the utilization of some

workers would decline as they ‘‘downgrade’ their

coverage (35). Taking into account the utilization

responses of both newly and currently insured persons

as well as changes in administrative costs, Lewin-VHI

estimated that implementation of the Heritage Foundation proposal would reduce national health spending

by $10.8 billion in 1991 (35).

Managed Competition Approaches

Enthoven--Enthoven has estimated with respect to

Managed Competition, generally, i.e., without specifying some of the details which tend to vary in the

proposals (e.g., employer mandate, tax policy modifications, and expenditure limits), that” [i]t is altogether

possible that a very efficient competitive system could

get us back to 9 or 10 percent” of GDP (15).

7 ‘Jp=titic s-()” assumed that “much of the savings in the Bush plan are oneAime in nature, and that after these efficiencies are

achiev@ the cost cmve returns to its present course. ” “Optimistic Sc e!nario’ ‘ assumed that in the fii 5 yearn of the program, “the plan’s cost

Comainment features are relatively suaxssfid in both reducing current expenditures. . . and slowing down the rate of spending growth” (65).
Appendix B-Summaries of Specific Analyses I 91

Bipartisan Panel on Presidential Candidates’

Health Plans/Lewin-VHl (Clinton Campaign)--LewinVHI, in its analysis for the Bipartisan Panel on

Presidential Candidates’ Health Plans convened by

Families USA, mentioned above, examined thencandidate (now President) Clinton’s health care reform

proposal. As outlined during the presidential campaign, it incorporated an employer mandate to provide

benefits directly or pay toward public-sponsored, but

privately operated, plans that would provide “the

specified core benefits package,’ and annual national

health care budget targets (3). Lewin-VHI’s estimates

assumed that the national health budget would restrict

growth in national health spending to the rate of

growth in family income (assumed to be approximately the same as the rate of growth in the GNP).

Making additional assumptions about the phase-in of

the various aspects of the proposal, with the first year

of the plan being 1994, Lewin-VHI projected that

health care spending would be reduced in 1994 by

$21.8 billion. Cumulative savings (in current dollars)

under then-candidate Clinton’s campaign proposal

would be $232.0 billion from 1994 through 1997, and

$745.7 billion from 1994 through the year 2000,

relative to current policy (3).

Sheils and Colleagues--Sheils and his colleagues

recently prepared estimates of the impact on national

health spending of a Managed Competition approach

(63). The approach was a variation of Paul Starr’s

approach to Managed Competition (71). It included an

employer mandate requiring employers with more

than five employees to contribute at least 75 percent of

the premium of the lowest-cost plan in the area for all

full-time workers (defined as working 17.5 hours or

more per week), and to pay an 8 percent payroll tax for

part-time employees. Any employer contribution over

75 percent of the lowest-cost plan premium would be

taxable to the employee as income. Subsidies would be

available to some employers, low-income employees

and people without employment-based insurance or

Medicare.

In order to calculate the average lowest-cost plan

premium, the authors adjusted “the average premium

estimated with HBSM,” the Health Benefits Simulation Model developed by Lewin-VHI, “to reflect the

savings that one can expect to achieve in a wellmanaged HMO’ (63). Thus, the authors assumed an 8

percent reduction in the lowest-cost plan premium,

based upon the experience of group-model HMOS.

Furthermore, according to the authors, key assumptions affecting their estimates regarding national health

spending concerned ‘‘managed care savings, ” estimated to be 2 percent based upon the experience of all

types of HMOs, “uncompensated care costs, behavioral responses to cost sharing, reimbursement improvements, and administrative savings.” The analysis also acknowledged that “further sensitivity analysis is needed” to determine the impact of these various

assumptions on the results (63).

Based upon the various assumptions described

above, Sheils and his colleagues provided two estimates of the impact on national health spending in

1993 of the variation of Managed Competition they

examined:

increased spending of about $47.9 billion, assuming

low patient cost-sharing (no patient deductible and

a $10 copayment per visit); and

increased spending of about $42.3 billion, assuming

high patient cost-sharing $250 deductible per individual ($500 per family) with 20 percent coinsurance required up to a maximum of $2,000 per

individual ($3,000 per family).8

The authors attributed the $5.6 billion difference to

expected lower services utilization under the higher

cost-sharing scenario (63).

Long and Rodgers-Long and Rodgers reviewed

the preceding Lewin-VHI analysis and responded with

estimates of the impact of the Enthoven/Kronick

Managed Competition proposal (which the authors

maintained was similar to the plan analyzed by Sheils

and his colleagues) on national health spending (40).

The authors’ estimates assumed the implementation of

universal health insurance which they estimated would

increase national health spending by $29.0 billion (the

s HMOS do not usually bave deductibles or cost-sharing as a percentage of the fee at the point-of-service, thus this scenario is a signifbnt

departure fmm current HMO practice (23).
92 I An Inconsistent Picture

cost of expanded access to coverage) in 1993. 9

Assuming savings of 8 percent based upon the

experience of group-model HMOs (or, in the alternative, based upon reductions in administrative costs in

employer plans), the authors estimated savings from

Managed Competition of $37.0 billion in 1993. Since

these savings would be offset by the $29.0 billion

increase in spending, the authors estimated that

national health spending would decrease by $8.0

billion in 1993 under universal insurance with Managed Competition.

Long and Rodgers attribute the difference between

their estimate (savings of $8.0 billion) and those of

Sheils and his colleagues (increased spending of $42.3

and $47.9 billion, assuming high and low patient

cost-sharing, respectively) to differences in the underlying assumptions. For example, Long and Rodgers

indicated that Sheils and his colleagues included:

. . . $27.4 billion in net reimbursement increases

by Medicaid as an addition to national health

spending; we choose not to count these additional

outlays as added real spending, since they do not

correspond to any additional health care services

provided and simply reverse cost shifting under

the current system (40).

And the estimates differ further in terms of their

assumed savings based upon the experience of HMOS

(Sheik and colleagues: 2 percent; Long and Rodgers:

8 percent, using an estimate from an earlier version of

the paper by Sheils and his colleagues), leading to far

different estimates of the impact of Managed Competition on health care spending (40,41,63).

Data from the California Public Employees’

Retirement System-The California Public Employees’ Retirement System (CalPERS) functions as a

group purchaser of health care benefits for 887,000

covered lives including employees and retirees of the

State of California, 787 other public employers in

California, and the California State University system,

and their dependents (7). Seventy-six percent of the

employers employ fewer than 100 people. CalPERS

offers 25 health plans including 19 HMOS, 2 selffunded preferred provider organizations (PPOS), and 4

“association” plans. Beginning with the 1993 policy

year, CalPERS has insisted on a standard benefit

design among all HMOS with which it contracts, in

order to make comparisons among the HMOS’ premium offerings.

CalPERS has been put forth by some proponents of

Managed Competition as an example of a successful

health insurance purchasing group, reducing health

care costs for its members by providing all employer

participants with the advantages of the large purchaser

of health care benefits.

As the purchasing agent on behalf of its covered

population, CalPERS secured a 1.4 percent overall

increase in 1993/94 premium rates (HMOs: 0.4 percent

decrease; PPOS: 7.9 percent increase; Associations: 5

percent). According to CalPERS, combined with a 6.1

percent overall premium increase for 1992/93, the

2-year combined increase of 7.5 percent was onefourth the national average of 30 percent (7).

CalPERS recent low increase in HMO premiums

was achieved in part via increases in patient costsharing at the time of service (i.e., copayments).

CalPERS’ efforts to reduce premiums may have been

aided by the California State budget crisis and other

factors (59).

A recent issue paper published by the Service

Employees International Union (SEIU) examined the

CalPERS experience in terms of its impact on health

care costs, and concluded that ‘‘[competition alone

did not constrain costs; tough negotiations over

premium increases--one form of rate control--did”

(59). SEIU noted that while CalPERS premium rate

increases were in the single digits for 1992/93 and

1993/94, its overall average rate increases in 1990/91

and 1991/92 were 16.9 percent and 11.3 percent,

respectively, and that “[throughout the 1980s,

CalPERS experienced higher premium increases than

employers nationally. Thus, SEIU attributes

CalPERS lower rates of increase in premiums for the

past two contract negotiations to several recent initiatives taken by CalPERS which SEIU deemed health

cost control measures: change in premium contribution formulas (1991/92); request for a zero percent

increase in premiums (1992/93); detailed cost and

performance information required from plans (1993/

g A background paper concerning the potential impact of expanding coverage to people who are currently uninsured is being prepared by

the Rand Corporation for OTA and the Congressional Research Sexvice. Its release is planned for fall 1993.
Appendix B-Summaries of Specific Analyses I 93

94); and standardized benefits for all HMO options

(1993/94).

Therefore, while CalPERS may be succeeding in

reducing premium rate increases, it is important to

determine what is driving such decreases.

Specific Analyses of Impacts on Federal,

State and Local Budgets

Single Payer Approaches

Meyer and Colleagues-Meyer and his colleagues

examined the long-term impact of the implementation

of a system of universal coverage with government as

the sole payer for services on business and the

economy (43). Under the study’s ‘‘Full Savings

Scenario,’ 10 they found that additional public revenues of $29.0 billion would be required in 1991, the

first year of implementation. The study notes that this

estimate rests upon achieving the Canadian level of

health care spending as a proportion of GDP. This may

account for the disparity between this analysis’ estimate of additional public revenue requirements and

those of various other studies (43). The analysis further

indicated that the revenue shortfall would be temporary, and that by the third year of implementation, the

government would recognize a gain, even though it

would have assumed a larger burden, proportionately,

with respect to health care financing.

Under the study’s ‘‘Deceleration Scenario,”ll 

government spending would increase by $225.0 billion in

1991, due to smaller systemwide savings under this

scenario coupled with the shift from private to public

sector financing.

Health Insurance Association of America-The

Health Insurance Association of America (HIAA)

studied the implications of the Canadian public health

insurance system for the United States (25). It estimated that the implementation of this system in the

United States would require $183.0 to $189.0 billion

(1988 dollars) ($244.0 billion to $252.0 billion in 1991

dollars) in additional public funds assuming an annual

increase in health care spending of about 10 percent.

This increase in the public financing burden would be

offset by a reduction in private financing of health care.

HIAA postulated that implementing a Canadianstyle system funded solely by the Federal Government

would require a 46 percent increase in Federal income

tax receipts, a 59 percent increase in payroll tax

receipts, or a 62 percent reduction in defense spending

(25). If, in the alternative, the system were funded

solely at the State level, it would necessitate a 71

percent increase in State tax revenues. These estimates

were based upon HIAA’s 1988 midpoint estimate of

$186.0 billion in additional public expenditures to

finance the implementation of a Canadian-style system.

According to HIAA, the States would assume the

vast majority of the financing burden were the

distribution allocated as it is in Canada. Using 1987/88

data, HIAA estimated that under their respective

systems, the U.S. and Canadian governments currently

fund about the same proportion of total health spending (United States: 29.2 percent; Canada: 29.6 percent). While HIAA did not think that the U.S. system

would necessarily reflect Canada’s distribution of the

burden, it indicated that a government-financed system

might be unstable for the States were the Federal

Government to experience, as it is now, budgetary

difficulties, compelling it to restrict its contribution to

health care expenditures (25).

Congressional Budget Office-As a recent Congressional Budget Office Staff Memorandum noted,

the Canadian Government limits its contribution to

national health spending by making per capita payments to the provinces, determined in accordance with

a formula based on growth in the GNP, not on actual

health care expenditures in each province. The result is

that the provinces have become increasingly more

responsible for the cost of health care services for their

populations (80).

In testimony, CBO estimated that the implementation of a Single Payer public plan in the United States

would increase direct Federal Government outlays by

75 percent initially. Federal outlays would be offset by

10 ( ‘Full swings scenario’ assumed implementation of a Canadian-style system with health care spending at no more than 8.7 percent of

U.S. GDP, the proportion of Canada’s GDP devoted to health care (43).

11 I ~DWele~tiO~ sce~o” ~S~Wed ~tioml h~~ we Spending is capp~ at i~ c~ent she of U.S. GDP after including the cost of

covering uninsured individuals (43).
94 I An Inconsistent Picture

a 95 percent decrease in tax expenditures, including

those related to income and payroll taxes, as a result of

the elimination of the health insurance tax exclusion.

Thus, CBO estimated total Federal health expenditures

would increase by 34 percent initially. This estimate

assumed that the Federal Government would pay all

costs of the public plan, but acknowledged that such

costs could be shared between Federal, State, and local

governments (55).

In a study of universal health insurance coverage

using Medicare’s payment rates, and assuming the

continuation of a residual Medicaid program for which

States would continue to finance their portion, CBO

found that even if national health expenditures decreased, government spending under a Single Payer

approach would increase (77). Based upon a midrange

group of assumptions, CBO projected that government

health spending would increase by 56.7 percent or

$143.6 billion (1989). Among levels of government,

this increase would be allocated as follows: Federal

spending would increase by $154.7 billion and State

spending would be reduced by $11.1 billion. Implementation of the plan (again using midrange assumptions) would require an increase in taxes of approximately $560 per capita. However, other offsetting

gains (e.g., to the private sector whose costs would

decrease by $662 per capita) would be likely, leaving

individuals, on average, with additional discretionary

dollars (77).

Play-or-Pay Approaches

Milliman & Robertson--The actuarial firm of

Milliman & Robertson examined the effects on

government budgets of a simple employer mandate;

that is, they did not take into account individual

premium cost-sharing with respect to either the employer or government plans, but assumed a 7 percent

payroll tax rate, and did not make assumptions

regarding insurance market reform (12). Under this

scenario, the firm found that the government plan is

likely to be ‘‘consistently underfunded” at the 7

percent payroll tax rate. The firm attributed this

instability to the fact that the government plan funding

source, payroll taxes, would not be very sensitive to the

cost of delivering care to plan enrollees.

Congressional Budget Office--In testimony, CBO

estimated that the implementation of an employmentbased approach combined with insurance market

reforms would increase direct Federal Government

outlays by 17 percent initially (55). This estimate

assumed no change in overall or full-time employment; that all people eligible for free insurance under

the public plan, but only some people from other

eligible groups, would enroll in the public plan; and

that increased taxes from employers and employees

would offset more than 70 percent of the cost of

insuring employees enrolled in the public plan. Given

continued favorable tax treatment of employmentbased insurance, tax expenditures would increase by 9

percent initially, due to an increase in the number of

persons covered by employment-based insurance.

Thus, total Federal Government health expenditures

would increase by 15 percent initially. CBO assumed

that the Federal Government would pay all costs of the

public plan, but acknowledged that such costs could be

shared among Federal, State, and local governments,

thereby lessening the impact on the Federal budget.

CBO, in a report reviewing selected options for

expanding health insurance coverage, looked at the

impact of an employer mandate combined with

Medicaid expansion, and estimated that it would

increase the Federal budget deficit by $13.1 billion

(1991) (76). This figure is the sum of changes in

Federal outlays for Medicare (savings of $3.6 billion)

and Medicaid (increased spending of $10.2 billion),

plus the loss of Federal revenues associated with

individual income taxes (a loss of $3.0 billion) and

Social Security and Medicare payroll taxes (a loss of

$3.5 billion). Likewise the illustrative option would

increase State and local government spending as well

as reduce their tax revenues. CBO estimated that State

and local government outlays would increase by

approximately $3.0 billion and that income tax revenues would decrease by approximately $1.0 billion

(1991). CBO also projected that in the longer term,

other State and local tax revenues would decrease due

to a shift in spending from taxed to untaxed (e.g.,

medical goods and services) purposes. CBO noted that

many States and local governments operate under

balanced budget requirements, thus the increased

outlays detailed above would require the implementation of either revenue raising or spending reduction

measures (76).
Appendix B-Summaries of Specific Analyses I 95

U.S. Bipartisan Commission on Comprehensive

Health Care/Lewin-VHl (Pepper Commission)--

Lewin-VHI’s analysis of the plan of the U.S. Bipartisan Commission on Comprehensive Health Care

(Pepper Commission) estimated that State and local

governments would save about $7.4 billion in current

(1990) payments for financing care for uninsured

persons (75). Further, the plan would hold State

contributions to finance the Federal system replacing

Medicaid to their current Medicaid contribution level

adjusted for inflation. Thus, the plan would alleviate

the increasing drain that Medicaid poses to State

budgets. The analysis estimated that new Federal

expenditures required to cover nonworkers, to subsidize insurance costs for individuals and employers,

and to pay providers in accordance with Medicare

payment rules, would be approximately $24.0 billion

(1990). These expenditures would require additional

Federal revenues.

Zedlewski and Colleagues--Zedlewski and her

colleagues, in a study conducted under the auspices of

the U.S. Department of Labor, examined the firstround effects of a Play-or-Pay plan (100). This study

did not examine the impact of the approach on the

change in total government health care spending.

However, by looking at the single component of health

insurance costs, defined as health insurance premiums,

it tended to show the sensitivity of the resulting system

to system design (e.g., which employers and employees the mandate applies to, payroll tax percentage,

employer/employee share of premium) and to changes

in employer behavior, and the consequences for the

distribution of the burden of health care financing.

The authors used 1989 data with the Urban Institute’s Transfer Income Model (TRIM2) to arrive at

their estimates. The authors found that the proportion

of the nonelderly population enrolled in the publicsponsored plan has important implications for the

health insurance costs of government, as well as those

of other payers. In general, the lower the payroll tax

rate, the greater the number of nonelderly enrolled in

the public-sponsored plan, if employers select the less

expensive alternative which the public plan is assumed

to be, and the greater the cost to government. This is

based upon the assumption that the funds coming into

the government plan to insure employed enrollees will

be less than the actuarial cost of insuring them

(otherwise the employer would probably have purchased private insurance), thereby requiring government to fund the difference. However, the study found

that government costs would not increase linearly with

the proportion of workers enrolled in the public plan

because the government would only be paying a

portion of each individual’s costs.12 And,

. . . at certain tax rates some employers would pay

taxes higher than the government’s cost of

insuring their workers (thereby partially subsidizing costs for the low-income population), because

the premium for the public-sponsored plan would

be less expensive than the premium available to

small employers (100).13

Assuming the purchase of insurance at current

prices (1989) and that employers would pay 80 percent

of the premium, the study estimated that at a 7 percent

payroll tax rate, $64.4 billion or 23.9 percent in

additional government funds (over and above those

funds collected pursuant to the payroll tax) would be

necessary to cover insurance costs, whereas at a 9

percent payroll tax rate, $53.2 billion or 19.5 percent

more would be necessary. Note that only part of these

funds ($33.6 billion and $23.1 billion, under each

payroll tax rate, respectively) are new government

funds (i.e., funds not currently spent by government to

fund the Medicaid program). Also, these estimates are

based on what maybe “upper bound’ estimates of the

numbers of persons who would be enrolled in the

public plan according to Zedlewski and her colleagues

(loo).

12 The study assumed some level of cost-sharing of the premiums for the public-sponsored plan by plan enrollees except to the extent that

such enrollees would be eligible for a subsidy (e.g., income below the poverty level) (100).

13 me s~dy iDdJ@td tit Und= ~ assumptions with respect to employer behavior, premiums or tax rates, the public-sponsored bsumnce

plan under this reform approach would include 40 to 50 million people since a large proportion of the plan’s enrollees are noneldexly

nonworkers, self-employed workers, part-time workers (i.e., work fewer hours per week than required by the mandate to be covered by an

employer), and work for very small employers with very low payrolls. Given the anticipated large size of the public-sponsored plaxL it is likely

that the government would be able to provide coverage for the plan’s enrollees at a price less than that which some employers would have paid

if purchasing coverage directly in the private inmmnce market (loo).
96 I An Inconsistent Picture

American Academy of Family Physicians/LewinVHI (AAFP)-Lewin-VHI, analyzing the American

Academy of Family Physicians’ reform proposal,

estimated that in 1993, the first full year of anticipated

implementation, the system would require $34.1

billion in new Federal Government revenues, largely

resulting from the government’s share of subsidizing

coverage under the public plan (37). However, the plan

would be budget neutral; that is, the plan would be

fully funded at the Federal level through increased

taxes levied on businesses and households and,

therefore, it would not have an impact upon the Federal

deficit. The plan would require that States continue to

pay into the public-sponsored plan in the same

proportion as they currently support Medicaid, which

would increase State outlays due to an increased

number of people eligible for public-sponsored coverage. Thus, despite savings to other State programs

serving the medically indigent, this increase in expenditures as well as other more minor ones, would result

in a $7.6 billion increase in State and local government

health care spending in 1993.

National Leadership Coalition for Health Care

Reform (NLCHCR)-Estimates of new government

spending provided by the National Leadership Coalition for Health Care Reform for its plan, which is

similar to the AAFP plan, were close to Lewin-VHI’s

projections for the AAFP plan-$34.7 billion in 1991

dollars (49). The Coalition also projected that the plan

would be budget neutral at the Federal level due to

increases in taxes to fund the plan. State and local

budget impact estimates were not provided.

Approaches Employing Individual Vouchers or

Tax Credits

Silow-Carroll (Bush Administration)--SilowCarroll analyzed the long-term impact of thenPresident Bush’s tax credit proposal on the economy

(65). The study specifically addressed the issue of

equity in financing among various payers with respect

to the proposal. It submitted that certain efficiencies

would be achieved under the Bush plan, thus saving

the Federal Government money in its current public

health programs vis-à-vis “business as usual. ” But it

further stated that because the cost-containment provisions (e.g., managed care, administrative efficiencies,

malpractice reform, provider price and quality information) in the Bush plan are of a voluntary nature, such

efficiencies would not be adequate to control costs,

particularly in the near term. Thus, the study theorized

that the Federal Government would seek “efficiencies” in its existing public programs, which might

have an effect in terms of reduced payments to the

States for the Medicaid program. This might lead to an

adverse impact on Medicaid beneficiaries (e.g., reduced access and/or quality of care) if the States could

not adjust accordingly (e.g., manage care more effectively or increase taxes),

Heritage Foundation/Lewin-VHl (Heritage Foundation)-The Heritage Foundation maintained that its

reform proposal is structured to be revenue neutral at

the Federal, State and local levels; that is, the cost of

the tax credits to the Federal Government plus any

Civil Service Plan changes and corporate income tax

loss to the Federal Government ($87.9 billion) would

equal current Federal tax subsidies related to health

care expenditures, plus a direct contribution by State

and local governments (35). Lewin-VHI’s analysis of

the Foundation’s plan indicated that the States and

local governments would be expected to contribute

their net savings ($18.8 billion) from changes in taxes

due to them, their provision of care to uninsured

persons in public hospitals, and in coverage of State

and local government employees, to the Federal

Government. Requiring the States to contribute such

savings to the Federal Government would maintain

budget neutrality at the State level (35).

Managed Competition Approaches

Conservative Democratic Forum (H.R. 5936)-

With respect to the impact of Managed Competition,

the Conservative Democratic Forum submitted that its

proposal, “The Managed Competition Act of 1992,”

H.R. 5936 (102d Congress), would be budget neutral;

that is, its financing provisions—a cap, in essence, on

the tax deductibility of health insurance premiums by

employers, repeal of the Medicare taxable maximum

(assumed to be $130,200 per worker), and Federal

Medicaid funds-would totally cover any additional

Federal expenditures ($106.5 billion in 1994) generated by the proposal (10).
Appendix B-Summaries of Specific Analyses I 97

Jackson Hole Group--The Jackson Hole Group, in

setting forth the 21st Century American Health Care

System, an approach similar to the Conservative

Democratic Forum’s except that it incorporates an

employer mandate, did not specifically address any

impact on Federal, State or local budgets (29).

However, the group has said that the plan does not

require a large new government spending program.

Rather it expects that monies saved due to the cap on

the tax exclusion of health benefits would fund

coverage for uninsured and unemployed persons (18).

Sheils and Colleagues--Sheils and his colleagues

recently prepared estimates of the impact on public

expenditures of a Managed Competition approach

(63). The approach included an employer mandate

requiring employers with more than five employees to

contribute at least 75 percent of the premium of the

lowest-cost plan in the area for all full-time workers

(defined as working 17.5 hours or more per week), and

to pay an 8 percent payroll tax for part-time employees.

Any employer contribution over 75 percent of the

lowest-cost plan premium would be taxable to the

employee as income. Subsidies would be available to

employers, low-income employees and people without

employment-based insurance or Medicare.

Public costs under the plan would depend in large

part upon the types and extent of the subsidies

provided. Assuming the implementation of an employer cost cap of 7 percent of payroll, an individual

cap of 2 percent of income on employee premiums, an

individual cap of 9 percent of income on nonemploy -

ment insurance spending, and subsidies of $2.2 billion

to persons below 200 percent of poverty for patient

cost-sharing expenses under a low cost-sharing plan

(no patient deductible and $10 copayment per visit),

the authors estimated that $120.3 billion in public

funds would be required to fund the proposal in 1993.

Based upon further calculations related to the use of

current Medicaid funds as well as revenue increases

and decreases due to the plan’s provisions, Sheils and

colleagues’ estimated that $47.7 billion in total net new

Federal revenues would be required, and suggested

other means that could be used to further reduce this

amount (e.g., recover State and local funds for indigent

care programs rendered unnecessary by the universal

health insurance plan; reduce the minimum benefit

package by increasing individual cost-sharing; raise

premium subsidy caps) (63).

Long and Rodgers-Long and Rodgers reviewed

the preceding Lewin-VHI analysis and responded with

estimates of the impact of the Enthoven/Kronick

Managed Competition approach (similar to the plan

analyzed by Sheils and his colleagues according to

Long and Rodgers) on public expenditures (40). The

authors’ estimates assumed that the implementation of

universaI health insurance wouId require public subsidies of $92.0 billion. However, these subsidies would

be offset by $52.0 billion in savings in current public

spending for Medicaid, Medicare, and the Department

of Veterans Affairs. Assuming an 8 percent savings

due to the implementation of Managed Competition,

based upon the experience of group-model HMOS or,

in the alternative, based upon reductions in administrative costs in employer plans, as cited by Sheils and his

colleagues, the authors estimated that Federal health

spending would increase by $41.0 billion under

Managed Competition ($1 1.0 billion less than universal coverage without Managed Competition). The

authors then further assumed that Managed Competition would:

. . . have a 16 percent effect. (This is roughly

equal to the sum of the HMO effect and the

administrative savings.) With this level of savings—

perhaps for a fully implemented plan under the

Lewin-VHI assumptions-federal spending would

increase by $31 billion, or $21 billion less than

under the proposal with no managed competition

[but with universal coverage] (40).

Specific Analyses of Impacts on Employers

Single Payer Approaches

Meyer and Colleagues--Meyer and his colleagues,

in their analysis of the impact of the implementation of

a Canadian-style system in the United States on

employers, estimated substantial savings to the business sector (employers) over a lo-year period (1991

through the year 2000) (43). The magnitude of the

estimated savings depended upon the degree to which

costs savings were projected to be achieved in the

United States under a Canadian-style system, and upon

the taxes collected by the government to finance health

care coverage. Making assumptions about the success
98 I An Inconsistent Picture

of cost control measures under the plan, the authors

estimated that employers would save, in 1991, $136.0

billion, pretax,14 under the study’s “Full Savings

Scenario’ ’15 or $76.0 billion, pretax, under the study’s

‘‘Deceleration Scenario. “16 Estimated cumulative pretax savings to employers ranged from $2.2 to $3.0

trillion in current dollars ($1.7 to $2.3 trillion in 1991

dollars). The distribution of these savings would vary

by industry depending upon the comprehensiveness of

the industry’s current health care benefits. Industries

currently paying greater health care costs (e.g., the

basic steel industry) would save more than those with

lower health care costs (e.g., high-tech electronics,

retail trade).

Play-or-Pay Approaches

Zedlewski--Zedlewski, in a study conducted under

the auspices of the U.S. Department of Labor, used the

Urban Institute’s analytic model to examine the effects

on employers and employees of expanding the employment-based health insurance system (98). Based upon

simulations that varied numerous aspects of an employment-based plan, Zedlewski found that the results were

sensitive “to requirements about including part-time

workers, exemptions for small employers, family

insurance choices, and different employer/employee

premium-sharing arrangements” with respect to both

employee and dependent coverage (98). She further

found that expansions of the employment-based system that would include most part-time employees

would affect firms of all size and industry categories.

Thus, Zedlewski noted that expansion of the employmentbased health insurance system would make expenditures on this fringe benefit more equitable across firms,

by size and industry.

Zedlewski and Colleagues-Another study under

the auspices of the U.S. Department of Labor, conducted by Zedlewski and her colleagues, further

examined the impact on insurance coverage and costs

of employer mandates requiring an employer contribution (100). The authors found that the payroll tax rate

selected was key to employers’ insurance costs. Any

increase in the payroll tax acts as an increase in

employers’ maximum liability for insurance coverage

costs. Thus, savings to employers would occur when

the payroll tax option is less expensive than premiums

for private coverage. Further savings would accrue to

some employers if they were required to provide

coverage for fewer of their employees’ dependents.

In 1989 dollars, using “baseline assumptions,”17

the authors found that at a 7 percent payroll tax rate,

employers’ health insurance costs would increase by

$29.8 billion or 23.1 percent, and by $44.4 billion or

34.4 percent at a 9 percent payroll tax rate, for all

employers. Neither estimate is adjusted for uncompensated hospital care savings (100).

Again, the rate of change would vary considerably

depending upon employer size, and the payroll tax rate

assumptions would significantly affect the estimated

effects. At the 7 percent payroll tax rate, the change in

employers’ health insurance costs would range from an

increase of 13.4 percent for employers with greater

than 500 employees to 69.7 percent for employers with

between 1 and 24 employees. At the 9 percent payroll

tax rate, the change would be even more dramatic,

ranging from an increase of 19.6 percent for firms with

more than 500 employees to 100.1 percent for firms

with between 1 and 24 employees.

According to the study by Zedlewski and her

colleagues, small employers, defined here as those

with fewer than 25 employees, would experience the

largest relative increase in insurance costs under both

options because health insurance would be a new

expense for many of these employers. While the health

insurance costs of employers with more than 500

employees would increase on average, such increases,

due for the most part to covering previously excluded

employees and upgrading current plans, would be

14 pI-WU UNJingS -e defined as savings before employ=’ hibfity for increased income taxes, due on increased income resulting IiOm a

deerease in deductible health care expenditures, has been met (43).

15 “F~ Savings Scemu-io“ assumed implementation of a Canadian-style system with health care spending at no more than 8.7 pement of

U.S. GDP (43).

161 CD~l~OnS_ “

o assumed implementation of aCanadmn“ -style system with health cxtrespemlingcapped at its Current share of Us.

GDP after including the cost of covering the unhsumd (43).

17 “B=~Mmptiom’ ‘ : Assumed coverage isavailableat euxrentpremium prices andemployer/employeepremium cost-sharingis 8020

for employee and dependent COVt21’tl& (100).
Appendix B-Summaries of Specific Analyses 99

substantially smaller. The impact in terms of actual

dollars would not consistently decrease as size of

employer increases. According to the authors, it would

be highest for the smallest employers at either the 7 or

9 percent payroll tax rates (an increase of $10.8 and

$15.6 billion, respectively) and, in fact, second highest

for the largest employers (an increase of $10.5 and

$15.3 billion, respectively) and lowest for employers

with 25 to 99 and 100 to 500 employers (an increase

of $5.3 and $3.2 billion, at the 7 percent rate, and an

increase of $7.7 and $5.7 billion, at the 9 percent rate,

respectively) (100).

Thus, the authors maintained that the simulations

demonstrated the sensitivity of employment-based

reform approaches to changes in the payroll tax rate. At

the 9 percent rate, it is more likely that it will be less

expensive for employers overall to obtain private

insurance than to pay into the public plan. As a result,

the higher tax rate tends to impose more direct costs on

employers. The lower tax rate leads to a larger public

plan and higher government costs. The authors emphasized that the ultimate impact of employment-based

insurance proposals would hinge upon employer

behavior (100). That is, employers may respond to

incentives other than the payroll tax rate, such as

employees’ interests in having their employers sponsor group health insurance.

U.S. Bipartisan Commission on Comprehensive

Health Care/Lewin-VHl (Pepper Commission.--The

U.S. Bipartisan Commission on Comprehensive

Health Care (Pepper Commission) recommended the

implementation of an employment-based approach

incorporating a payroll tax to fund a public-sponsored

plan (75). Lewin-VHI’s estimates for the Commission

assumed the imposition of a 7 percent payroll tax and

mandatory acceptance of insurance by employees

under either the employer’s or the public plan.

Accordingly, they found that employers who currently

offer health insurance to workers and dependents

would save an estimated 10.2 percent or $12.8 billion

(1990 dollars) in employment-based health insurance

costs per year. These savings were attributed to the fact

that while some employers would have to improve

coverage and insure some people not previously

covered, overall, employers would no longer be

making payments for the premium costs of employees’

dependents who work for other firms and the costs

shifted to them to fund uncompensated care, including

the cost shift from Medicaid. On the other hand, newly

insuring employers would have new costs of $27.5

billion (which is equal to an average of less than 4

percent of payroll after taxes) (75). As with similar

employment-based approaches, the public plan option

would limit an employer’s risk with respect to

employee health insurance benefit costs to the payroll

tax due on the employer’s eligible employees.

While the Pepper Commission recommended the

implementation of an employer mandate, it likewise

recommended different treatment for large (defined as

firms with 100 or more employees) versus small

(defined as firms with fewer than 100 employees)

employers. The Commission found that larger firms

were more likely to provide health insurance now, and

therefore, they were more likely to benefit from the

Commission’s recommendations. Lewin-VHI estimated net savings to large employers of $5.6 billion

(1990 dollars) or 5.8 percent of their health care

spending. Since smaller firms were less likely to

provide health insurance currently, their costs would

increase pursuant to a mandate. Thus, the Commission

recommended incentives (as opposed to a mandate),

initially, for smaller firms to provide insurance. It

further recommended that a mandate should be imposed if the incentives did not work after a specified

period. Lewin-VHI estimated that if small employers

were to offer health insurance in response to the

incentives provided under the plan, their costs would

increase $18.8 billion (1990 dollars), after taxes, or by

1.8 percent of payroll (75).

The Commission noted that the plan would also

affect current health benefit plans that did not meet the

minimum-benefit and premium-sharing standards of

the Commission’s plan. Including these plans in the

estimates of increased costs for small firms would

bring their additional costs to about $20.6 billion (1990

dollars), after taxes, or 2.1 percent of payroll. Note that

the Commission recommended that tax subsidies be

available to some small employers.

American Academy of Family Physicians/LewinVHI (AAFP--Lewin-VHI prepared estimates of the

impact on employers of the employment-based approach proposed by the American Academy of Family

Physicians (36,37). The estimates were based upon a

plan fully phased-in in 1993 using a payroll tax rate of
100 I An Inconsistent Picture

10 percent. The AAFP plan would allow only businesses with fewer than 25 employees, rather than all

employers, to opt for the public plan. Lewin-VHI

estimated that 1993 aftertax employer costs under the

AAFP plan would be $2.83 billion for all firms that

currently insure, and $20.9 billion for all firms that do

not currently insure. The majority of the total increased

cost, or $10.5 billion, would be on firms with fewer

than 10 workers who do not currently insure. Firms

that do not now insure would, for every firm size

category, incur increased and substantially higher

costs than firms that currently insure. For firms that

currently insure, in a couple of size categories (25 to 99

and 500 or more employees), the costs would decrease.

Approaches Employing Individual Vouchers or

Tax Credits

Silow-Carroll (Bush Administration)--SilowCarroll, analyzing the impact on employers of the Bush

Administration plan, found that for the period from

1994 through 2003, employers would realize a net

savings in health care spending compared to ‘business

as usual’ (65). The author found that the plan would

ease access to insurance at more affordable prices for

employers, especially for small groups, but that it was

not clear how many employers not currently offering

insurance would do so absent a mandate.

Silow-Carroll estimated that in an “Optimistic

Scenario,’ 18 total health care costs for all employers

would decrease $2.0 billion in 1994 with cumulative

pretax savings of about $300.0 billion ($200.0 billion

in 1994 dollars) through 2003. Cumulative net savings

(after taxes and after the distribution of a portion of

employers’ savings to labor) would range from $35.0

to $84.0 billion (1994 dollars) through 2003 under the

“optimistic Scenario,” depending upon the distribution to labor.

In a‘ ‘Pessimistic Scenario,’ 19 the cost of expansion

of employment-based coverage would fully offset any

gains from cost containment in 1994 and savings

achieved thereafter would be minimal. Thus, the

author estimated, under this scenario, cumulative

pretax savings to employers through 2003 of about

$33.0 billion ($22.0 billion in 1994 dollars), However,

net savings to employers in this scenario would be no

more than $1.0 billion (1994 dollars) per year. Thus,

cumulative net savings to employers under the “Pessimistic Scenario’ would be fairly insignificant; that is,

they would range from $4.0 to $10.0 billion (1994

dollars) through 2003, again depending upon the

distribution to labor.

Heritage Foundation/Lewin-VHl (Heritage Foundation)—The Heritage Foundation plan makes individuals, assisted by tax subsidies, responsible for the

purchase of health insurance, rather than employers

(6). The plan requires employers, in the first (transition) year of the plan, if they cancel their group plan or

an employee switches to another plan, to include the

cash value of the employer’s contribution to the plan

in the employee’s income. It further requires employers to pay the increased FICA (Federal Insurance

Contributions Act) tax liability of the employee

accruing from the increase in cash wages. Except for

these initial adjustments affecting employers, the

Heritage plan eliminates the current tax deduction

available to employers for employee health benefits.

Thus, direct payment for health insurance coverage no

longer rests on employers in a significant and direct

way. If employers choose to continue to fund employee health insurance, such benefits would no longer

be deductible by employers and their value would be

deemed taxable income to employees.

Accordingly, Lewin-VHI, on behalf of the Heritage

Foundation, assumed that private employer expenditures for health care, estimated at $124.3 billion in

1991, would, for the most part, be converted to wages

(35). Employers would be responsible for increased

OASDI (Old Age, Survivors and Disability Insurance)

and HI (Hospital Insurance Trust Fund) payroll taxes

of $10.9 billion that Lewin-VHI assumed would be

absorbed by employers as reduced profits. As a result,

employer corporate income taxes would decrease by

$3.1 billion, producing a net cost to employers in 1991

of $7.8 billion (or $104.80 per worker).

16 ~~qtimistic sce~o’ WSumed that in the fist 5 years, ‘‘the plan’s cost containment features are relatively successful in both reducing

current expenditures . . . and slowing down the rate of spending growth” (65).

19 ~~pe5S~5tic sw~o~ ~~ed tit “much of the Savings in the BUSh plan are Orle-tie in nature, an(i that after these &flCknCkSare

achieved, the cost curve returns to its present come” (65).
Managed Competition Approaches

Long and Rodger+In a recent analysis of a

Managed Competition approach, based upon an earlier

draft of an analysis by Sheils and his colleagues, Long

and Rodgers estimated that business private insurance

costs would increase by $8.0 billion in 1993 (40,41,63).

This estimate was for a plan incorporating an employer

mandate with a 7 percent cap on employers’ costs, and

assumed savings from Managed Competition of 8

percent based upon the experience of group-model

health maintenance organizations or, in the alternative,

from administrative costs-savings associated with

employer plans.

.

Appendix B-Summaries of Specific Analyses I 101

Sheils and Colleagues--The analysis by Sheils

and his colleagues did not estimate the impact on

employers of Managed Competition (63). However, it

assumed a 2 percent savings from Managed Competition based upon the experience of all types of health

maintenance organizations. This assumption would

likely lead to a greater increase in business’s private

insurance costs.

Specific Analyses of Impacts on

Employment

Single Payer Approaches

Congressional Budget Office-In its study of a

Single Payer system with provider payments at Medicare rates, the Congressional Budget Office maintained that such a system would narrow the insurer

market, which would most likely result in significant

shifts in investment dollars and employment to other

areas of the economy (77). The study noted, however,

that if private insurers continued to fulfill the claims

processing function for the system, shifts in employment would be relatively small.

SiIow-Carroll and Colleagues--Silow-Carroll and

her colleagues projected that for a Canadian-style

health coverage system, fully implemented in 1991,

any costs savings accruing to the nonhealth sectors of

the economy would “[c]ome largely at the expense

of” people employed in health-related fields (67). “As

prices of health care goods and services become more

tightly controlled and much private insurance administration becomes obsolete (with uniform billing and

claims, the elimination of medical screening, etc.),

profits and some personal incomes (e.g., for physicians) within the health care sector will decline” (67).

According to the authors, dislocation, unemployment,

and stunted wage growth would occur among people

employed in health insurance, medical product manufacturing, and direct health care services. However, the

authors suggested that these consequences would be

temporary, due to the relatively high skill levels of the

people involved, and the resulting growth in other

areas of the economy from an influx of additional

discretionary income made available by decreased

spending on health care.

Play-or-Pay Approaches

Morrisey—Morrisey maintained that newly insured

workers would pay for an employer mandate to

provide and contribute toward health insurance in the

form of reductions in other forms of compensation,

most importantly, in wages (46). Morrisey suggested

that mandated insurance operates differently from the

minimum wage; that is, it acts as a lump sum tax on

each worker, and that it creates an incentive for

employers to reduce the number of workers subjected

to the mandate. Reduction in the number of workers to

whom the mandate applies might be accomplished

through a reduction in the number of hours worked by

each employee, thereby creating more part-time employees who would presumably be exempt from the

mandate; by increasing the use of consultants; and by

contracting out certain tasks. According to Morrisey,

the disemployment effects of a mandate would most

likely have an impact at or around the minimum wage

because the employer could not offset the benefit

through decreased wages (46). Morrisey did not

provide specific quantitative estimates of the disemployment effects of a Play-or-Pay approach.

Monheit and Short—Monheit and Short looked at

the impact on employment of an employer mandate

that did not include a public backup plan (45). They

suggested that the mandate would have little or no

effect on employment if there were no barriers to

adjusting employee wages accordingly so that total

compensation remained the same. This would not be

the case though given the existence of the minimum

wage legislation, Therefore, if employers were required to provide health insurance benefits, some

decline in employment of eligible employees would be
102 I An Inconsistent picture

likely. However, concluding from the labor economics

literature that labor demand is not very sensitive to

changes in employment costs, the authors estimated

that under a mandate “2.4 percent of low-wage

workers (197,000 people) might lose their jobs and

that, even under the most pessimistic assumptions (no

wage reduction for higher-paid workers and long-run

adjustment of capital-labor ratios), the jobs of at most

2.5 percent of affected employees (or 847,000 people)

would be affected’ (64). Note that the plan examined

by Monheit and Short did not include a public backup

plan, the existence of which might alter the effects

predicted by the authors.

Zedlewski---In a study conducted under the auspices of the U.S. Department of Labor, Zedlewski

looked at the distributional issues related to an

employer mandate without a public backup plan (98).

She found that certain characteristics of employees

with employment-based coverage differ from those of

employees without such coverage; that is, the latter

tend to work for small firms in the retail and service

industries, and are generally young, part-time employees who have worked for their employer for less than

1 year. Zedlewski postulated that if employers were

required by a mandate to pay the same share toward the

health care benefits of all workers, regardless of the

number of hours worked by an employee, adverse

employment effects might be expected (e.g., employers would use more hours per worker and reduce the

size of their workforce). The extent of such employment effects would depend upon the amount of the

increase in labor costs.

Zedlewski and Colleagues-Another study conducted under the auspices of the U.S. Department of

Labor by Zedlewski and her colleagues noted that

some employers would save money under a Play-orPay approach (100). These savings would enable

employers to increase compensation and profitability.

The authors suggested that universal access to health

care provided through the employment-based, public

backup plan approach would have other positive

economic impacts (e.g., an increase in the demand for

health care services which would result in an increase

in the need for health care workers). On the other hand,

the authors noted that small employers might have

difficulty absorbing the new costs imposed on them by

a mandate. This is because their average payrolls are

relatively low, and they are less able to adjust wages

and other compensation to pay the new benefit costs

since more of their workers are at or near the minimum

wage (100).

Klerman-Klerman, in a study also conducted

under the auspices of the U.S. Department of Labor,

estimated the employment effects of mandated health

benefits based upon the experience of the minimum

wage legislation (30). Klerman noted that, in general,

it is thought that employers would shift compensation

from cash wages to health benefits if they were

mandated to provide health benefits they do not

currently provide. However, this adjustment would not

be possible for employees who are at or around the

minimum wage because this would violate the minimum wage requirements. Therefore, Klerman concluded that it is likely that workers whose productivity

is below the value of the combined mandatory

compensation would be laid off.

Klerman went on to look at the anticipated extent of

such disemployment and concluded that the group of

workers who would be directly affected by mandated

health benefits would be small. He estimated that the

requirement would affect between 2 and 3 percent of

teenage employment and would be even less among

older workers. However, Klerman noted that the

enactment of mandatory employment-based insurance

at this time would follow a previously authorized,

sizable increase (30 percent) in the minimum wage.

Klerman cautioned that for a number of reasons related

to both the analytic model and the data used, there is

considerable uncertainty in calculating the employment effects for the group of workers whose current

compensation would fall below the new combined

(minimum wage plus mandatory employment-based

health insurance) statutory levels, that is, one-third of

uninsured persons and one-third of workers insured

currently by a source other than their own employer.

Moreover, Klerman maintained that the employment

effects of the Play-or-Pay approach would be very

sensitive to the implementation details of the specific

plan.

U.S. Bipartisan Commission on Comprehensive

Health Care (Pepper commission)--The U.S. Bipartisan Commission on Comprehensive Health Care
———-

Appendix B--Summaries of Specific Analyses I 103

(Pepper Commission) reported that reductions in

employment due to expanding employment-based

insurance depend upon the number of minimum and

near-minimum wage employees affected, as well as the

increase in cost of providing insurance (75). The

Commission cited surveys of the minimum wage

literature which indicate that each 10 percent increase

in the minimum wage reduces employment by 0.5 to

3 percent. And that the research indicated that the

effects on adults were in the lower range. Based upon

these surveys, the Commission estimated that 25,000

to 50,000 low-income workers could be displaced by

its recommended coverage requirements. The Commission submitted, citing Bureau of Labor Statistics

data that 39,000 jobs were created in June 1990, that

this effect was small enough that it could be offset by

job creation that would come about through the normal

workings of the economy.

Sheils (HealthAmerica: Affordable Health Care

for All Americans Act--On behalf of Lewin-VHI,

Sheils testified that S. 1227 (HealthAmerica: Affordable Health Care for All Americans Act), a Play-or-Pay

bill introduced but not enacted during the 102d

Congress, would result in 23,000 to 63,000 jobs lost,

based upon Lewin-VHI’s review of empirical studies

of previous increases in the minimum wage (60).

Heritage Foundation/Butler (HealthAmerica:

Affordable Health Care for All Americans Act)-

Butler of the Heritage Foundation contended with

respect to S. 1227 (HealthAmerica: Affordable Health

Care for All Americans Act) that the Play-or-Pay

approach would,

. . . regardless of the nature of the required basic

plan, or the size of the tax imposed as an

alternative to providing insurance, . . . set in

motion an unintended cycle of adverse selection

and employment discrimination. . . Mandating

extra employer-provided benefits, like increasing

by law any other cost of hiring employees,

depresses cash wages and/or reduces employment. Furthermore, the cost of those actions is

borne not by employers but by the workers

themselves, and the hardest hit are the lowest

wage workers--the same ones who are most

likely to lack health insurance. . . Before enacting

such a system, I suggest that Congress stop to

consider the possibility that low-income families

might consider a job to be more valuable than a

. . . health plan (5).

Joint Economic Committee/GOP Staff—According to a health care briefing paper, prepared for

Representative Richard K. Armey by the Joint Economic Committee/GOP (i.e., Republican) Staff of the

U.S. Congress, over 710,000 workers would lose their

jobs in the first year of implementation of a Play-orPay approach (87). This estimate assumed a 7 percent

payroll tax and applied supply and demand elasticities

regarding low-wage labor. The paper asserted that 43

percent of these job losses (308,265 jobs) would occur

in small businesses that employ fewer than 20 workers,

Congressional Budget Office--In a study of an

illustrative employer mandate coupled with Medicaid

expansion, CBO found that the mandate would raise

labor costs that could result in layoffs or reduced hours

for affected firms and workers (76). This would affect

small employers, in particular, which employ more

than one-half of all uninsured workers. CBO suggested

that exemptions for small firms would protect them but

would also reduce the effectiveness of the employmentbased approach for expanding coverage. While subsidies to small firms would reduce this problem, they

would increase the Federal deficit.

Approaches Employing Individual Vouchers or

Tax Credits

Bush Administration/U.S. Executive Office of the

President (Bush Administration--The Bush Administration reform proposal maintained that the

subsidy of health insurance for low-income workers

through the tax credit would encourage reentry into the

work force, particularly among Medicaid recipients

who may lose coverage if they resume employment

under current policy (94). The Bush Administration

further maintained that broader health insurance

should lead to productivity gains resulting from

improved health status of uninsured unemployed

persons and the working poor.
104 I An Inconsistent Picture

Specific Analyses of Impacts on

Households20

Single Payer Approaches

Silow-Carroll and Colleagues--Silow-Carroll and

her colleagues estimated that in a Canadian-style

system, consumers would experience a net loss in the

first year of the plan under a‘ ‘Pessimistic Scenario’ ’21

but would ultimately experience again over ‘business

as usual’ under both the ‘‘Optimistic”u and ‘ ‘Pessimistic” scenarios (67). Specifically, assuming a reduction in out-of-pocket health care expenses as indicated

by the Canadian experience, and an increase in payroll

and income taxes, the initial impact (1994) on households ranged from net savings of $10.0 billion, under

the study’s “Optimistic Scenario,” to a net loss of

almost $20.0 billion, under the study’s “Pessimistic

Scenario. ” Depending upon the model followed with

respect to distribution of gains to employees by

employers (50 or 80 percent, respectively), cumulative

estimates from 1994 through 2003 ranged, in current

dollars, from savings of $3.0 to $3.6 trillion ($1.9 to

$2.3 trillion in inflation-adjusted, 1994 dollars) under

the ‘Pessimistic Scenario,’ to savings of $3.7 to $4.4

trillion ($2,5 to $2.9 trillion in inflation-adjusted, 1994

dollars) under the “Optimistic Scenario” (67). Individuals would be effected differently depending upon

their specific circumstances (e.g., the most favorable

financial impact would accrue to an individual who

currently purchases family coverage independently,

not through an employer).

Congressional Budget Off ice-In its report examining a system with government as sole payer using

Medicare’s payment rate, the Congressional Budget

Office estimated that in the aggregate, the population

would have more funds to spend-$102 per capita in

1989-for purposes other than health care (77).

However, CBO cautioned that the actual effects on

individuals would vary considerably (e.g., if taxes are

used to finance universal coverage then higher-income

people would be more likely to pay additional taxes

under this system).

Play-or-Pay Approaches

Zedlewski and Colleagues--Zedlewski and her

colleagues, reviewing potential effects of a Play-orPay approach, simulated plans using two different

premium rates, current (1989) and lower, and two

different payroll tax rates, 7 and 9 percent (99). They

found no significant difference among the four alternatives in individuals’ insurance costs (net of government subsidies to low-income persons), which ranged

from 16.6 to 17.2 percent of total insurance costs. Note

that these costs are not all new costs nor are they

individuals’ total health care costs. According to these

simulations, individuals’ insurance costs would be

relatively unchanged under this approach regardless of

the option selected compared with current policy.

However, the authors pointed out that:

Individuals will pay indirectly for all of the

insurance costs shown. Employers will shift costs

either to workers (in the form of lower compensa20 ~y~k tend t. me tie wo~s c ‘household” ~d C ‘ftiy’> interchang~bly even though they differ in their composition ad, ~emfom,

the total numbers of households and families in the United States differ. As defined by the U.S. Department of Commerce, Economics and

statistics A&rum“ “stratioq Bureau of the Census, “[h]ou.reholds consist of all persons who occupy a housing unit. . . A household includes the

related family members and all the unrelated persons, if any, such as lodgers, foster childreq wards, or employees who share the housing unit’

whereas @m”/ies, which are a subset of households, ‘‘are groups of two persons or more (one of whom is the householder) related by bh@

marriage, or adoption and residing togethe~ all such persons . . . are considered as members of one family” (emphasis added) (91). In 1991,

there were 95,669,000 households but 67,173,000 families in the United States (91). Thus, quantitative estimates of the impacts of health care

reform on “households’ and ‘‘families” are not comparable. And when the same analysis uses both terms without defii either one, the

basis for any estimates is all the more unclear.

21 ‘fPeSSirniStic Scenario ” assumed that ‘‘after expanding coverage to the ~, we achieve only a 2 percent reduction in spending

compared with business as usual in year one. Further reductions are experienced in the second and third years, ” and the rate of growth in future

health care spending is slightly faster than the rate of growth in GDP (67).

22 ~ ‘(jp~stic sce~o” assumed 4 cm immediate 10 ~rc~t r~uction iII spn&ng, Offwt in part by an expansion in COVelZige, lle~ Ul

8 percent decline in total spending for 1994. The following two years would experience additional reductions of 5 percent eack representing

a phasing-in of savings from conversion to a single-payer system, consolidation of duplicated services.. ., and other efficiencies. This scenario

also assumes that after the fmt three years, the growth in health care spending wouId be reduced. , , to the same rate as the economy, or about

7 percent per year” (67).
Appendix B-Summaries of Specific Analyses I 105

tion) or to consumers (in the form of higher

prices) (99).

Given that individuals ultimately pay for the health

care they receive, a key issue for households is the way

in which the burden of payment placed upon businesses and/or government is financed because it will

affect the specific impact on individual households.

According to the authors:

. . . systems with higher payroll tax rates would

rely more on a proportional tax scheme to finance

health care, while lower payroll tax rates and

higher government costs would be financed

through the more progressive federal and state

income tax system (99).

U.S. Bipartisan Commission on Comprehensive

Health Care/Lewin-VHl (Pepper Commission)--LewinVHI, for the U.S. Bipartisan Commission on Comprehensive Health Care (Pepper Commission), estimated

that the Commission’s employment-based reform

plan, if fully implemented in 1990, would save

individuals and families $19.3 billion (1990 dollars)

(75). This figure equals the sum of reductions in

employer and nongroup plan premiums and household

out-of-pocket costs flowing from insurance reforms,

improved reimbursement for public plan enrollees

relative to Medicaid, and expanded employersponsored and public coverage, plus the increase in

premium payments by nonworkers for their coverage

under the public plan.

American Academy of Family Physicians/LewinVHI (AAFP)--Lewin-VHI examined the American

Academy of Family Physicians’ employment-based

plan which incorporated global spending budgets.

However, the analysis assumed the continuation of

current reimbursement rates per unit of service in

1993, the first year of the plan, except with respect to

services now provided under Medicaid for which the

rates would be increased to Medicare reimbursement

levels. Lewin-VHI estimated an increase in aggregate

household spending for health care in 1993 of $2.3

billion (37). This figure reflects increases and decreases in various types of premium payments, new tax

payments, and decreased direct payments for health

care. The net impact in 1993 of the AAFP plan on

families with differing income levels would be a

decrease in average family health spending for families

with incomes less than $30,000 (savings of $2.00 to

$385.00), and an increase for families with incomes

above that amount (spending of $130.00 to $672.00).

Physician income would increase ($14.3 billion) in

1993 due to increased payment rates for services now

rendered under Medicaid (36,37).

Approaches Employing Individual Vouchers or

Tax Credits

Bush Administration/U.S. Executive Office of the

President (Bush Administration)--kcording to the

Bush Administration projections, then-President Bush’s

reform proposal would affect households by making

coverage more affordable for uninsured persons.

Through the plan’s initiatives-tax credits, deductions

or vouchers, and market and other reforms-the Bush

Administration estimated that it would, after five

years, insure 29.2 people previously uninsured. Of

these, 15,3 million would have household incomes

below 100 percent of poverty (defined by the plan

designers as “[t]he income level at which individuals,

couples, and families must begin paying income

taxes” (94), and 5.6 million would be between 100 and

150 percent of poverty. Overall, the Bush Administration projected that 95 million individuals would

benefit from the health insurance tax credit and

deduction once it was fully phased-in. Then-President

Bush’s proposal provided examples of its potential

impact on families including that it would make a basic

health insurance plan accessible to families below the

poverty level, that it would remove the incentive for

parents receiving Aid to Families with Dependent

Children (AFDC) to not return to work, and that for

higher income families without employment-based

coverage, affordable coverage would be more readily

available through a tax deduction and access to group

purchasing arrangements that offer broader risk pooling (94). No quantitative estimates of the impact on

households in the aggregate or by income level were

provided.23

23 The Bush Administration proposal provided some illustrative examples of the benefits specific families would be eligible for (94).
106 I An Inconsistent Picture

Silow-Carroll (Bush Administration)--According

to Silow-Carroll, the actual impact of the Bush

Administration plan on consumers’ health care spending would depend, in part, upon whether the tax credit

would enable individuals or families to purchase

adequate coverage.24

Silow-Carroll’s analysis of the Bush Administration

proposal found that consumers would save initially

under the study’s “Optimistic Scenario,”25 but not

under its “Pessimistic Scenario,” as compared with

“business as usual” (65). That is, in 1994, consumers

would realize savings of $7.0 billion. And they would

realize savings in health care spending over the 10-year

period from 1994 through 2003 under both scenarios

with net cumulative savings ranging from $440.0 to

$700.0 billion in current dollars (about $300.0 to

$500.0 billion in 1994 dollars). While achieving some

savings over time, the author maintained that certain

subgroups, specifically Medicaid enrollees and possible Medicare enrollees, could suffer in terms of access

and quality of care. This would be the likely result

because, in order for the government not to raise taxes

as promised in the proposal, it would attempt to reduce

government spending through “efficiencies” in existing public programs (65).

Bipartisan Panel on Presidential Candidates’

Health Plans/Lewin-VHl (Bush Administration)--In

their analysis of then-President Bush’s proposal for the

Bipartisan Panel on Presidential Candidates’ Health

Plans convened by Families USA, Lewin-VHI projected that without any reform Legislation, American

families’ average health spending would be $10,601

(1992 dollars) by the year 2000, whereas such spending would be reduced to $10,398 in the year 2000

under the Bush Administration proposal (3).

Heritage Foundation/Lewin-VHl (Heritage Foundation)--The Heritage Foundation plan would require

that individuals purchase insurance unless they are

covered by Medicare or Medicaid, and would provide

limited tax credits to heads of households (taxpayers)

to assist in this purchase. Under the plan, individuals

who have employment-based insurance currently would

be “held harmless” initially; that is, in the first year of

the plan, if an employee switches plans or an employer

cancels its plan, the employer would add the cash value

of the employer’s share of the premium to the

employee’s income. According to Lewin-VHI’s analysis of the plan, in 1991, assuming that all employers

discontinue their health benefit plans, households’

total health spending would increase by $129.9 billion.

Such spending would be offset by increased wages of

$148.7 billion resulting in net savings to households of

$18.8 billion in 1991 (35).

Lewin-VHI also looked at the average net impact of

the alternative tax credit options provided in the plan

on families by family income. Under all alternative tax

credit options, 1991 aftertax health spending would

decrease for most families, but it would increase in

some instances for very low- or high-income brackets

(i.e., family income less than $15,000 or greater than

$75,000).26 The average net impact on all households

under any alternative tax credit for which estimates

were provided was $168.00 in aftertax savings in 1991.

In the same year, the maximum estimated savings to

families of $534.00 would accrue to households with

from $30,000 to $39,000 in family income; the

maximum estimated aftertax increased spending of

$574.00 would be by households with family income

of $100,000 or more.

u Silow-C,mlI SUMM with respect to the Bush ~“ “ tration proposal that ‘([t]here is some doub~ however, that the amount of the tax

credits and deductions specified in the proposal would be suftlcient to purchase adequate coverage. With average group policies expecting to

cost $2,445 for individuals and $5,327 for families in 1993 @IAA, 1992), the proposed tax credits of $1,250 and $3,750, respectively, may

not be enough to purchase even a basic package” (65).

M SiIow.CmU tie estimates for savings under the BIAI~“ “ tration proposal with respect to two scenarios. The “Optimistic

Scenario” assumed that in the fmt 5 years of the program, ‘‘the plan’s cost containment features are relatively successful in both reducing

current expenditures. . . and slowing down the rate of spending growth. ” The “Pessimistic Scenario” assumed “much of the savings in the

Bush plan are one-time in nature, and that after these efficiencies are achieve~ the cost curve returns to its present course” (65).

26 b lggl, 16.9 ~mnt of ftilies (or 11,352,237 families) had family incomes below $15,000 and 13.1 percent Of f-es(8,799,663

families) had family incomes above $75,000 (91).
Appendix B-Summaries of Specific Analyses I 107

Managed Competition Approaches

Bipartisan Panel on Presidential Candidates’

Health Plans/Lewin-VHl (Clinton Campaign)--Thencandidate (now President) Clinton’s reform proposals,

as set forth during the 1992 presidential campaign,

were analyzed by Lewin-VHI on behalf of the Bipartisan Panel on Presidential Candidates’ Health Plans

convened by Families USA (3). While they did not

have a detailed plan to work with, Lewin-VHl assumed

annual budget targets under which the rate of growth

in health care costs would not exceed the rate of growth

in average family income, and delivery of health care

services by managed care networks, Based upon these

assumptions, Lewin-VHI estimated that the reforms

would reduce average health care spending per family,

which is projected to be $10,601 (1992 dollars) in the

year 2000 without any reform, to $9,219 (1992 dollars)

(3).

Long and Rodgers--k their analysis of a Managed

Competition approach assuming universal health insurance, with coverage sponsored through three systems, that is, employers or unions, public insurance

(Medicare or Medicaid), and health insurance purchasing cooperatives, Long and Rodgers estimated that

households’ private health insurance costs would

decrease by $6.0 billion in 1993 as compared with

current law (40). This estimate assumed savings from

Managed Competition of 8 percent based upon the

experience of group-model HMOS or, in the alternative, upon the reduction in administrative costs for

employer plans. Estimates of changes in total household health care spending were not made.

Specific Analyses of Impacts on

Administrative Costs

Single Payer Approaches

Wool handler and Himmelstein—Woolhandler and

Himmelstein compared the U.S. and Canadian health

care systems in terms of their administrative efficiency

by studying four components of administrative costs

(insurance overhead, hospital administration, nursing

home administration, and physicians’ biIling and

overhead expenses) in the United States and Canada

for 1987 (96). Based upon their calculations of the

per-capita costs of health care administration in the

United States and Canada (using two methods to arrive

at physicians’ billing and overhead costs), Woolhandler and Himmelstein found that for 1987, the United

States would have saved $69.0 to $83,2 billion or 13.8

to 16.6 percent of total spending on health care if U.S.

health care administration had been as efficient as

Canada’s. They identified the United States’ “fragmented’ or multipayer, micromanaged system as the

primary culprit for this differential, as well as for the

increase in the costs of the ‘‘health care bureaucracy’

in the United States from 1983 to 1987, claiming that

it is inherently less efficient than the Single Payer

system in Canada. Other factors cited as contributing

to increased administrative costs are a lack of comprehensiveness in coverage and the extensive involvement of private insurers. Note that Woolhandler and

Himmelstein did not look at the issue of added costs

due to increased utilization, a likely and possibly

significant outgrowth, in terms of its impact on

systemwide savings, of the adoption of a system

designed to cover all Americans at no direct cost to

them.

Physicians for a National Health Program/

Grumbach and Colleagues (PNHP)--The Physicians

for a National Health Program (PNHP) support a

publicly administered, tax-financed national health

plan providing universal coverage with a single public

payer (24) (See also ‘‘Specific Analyses of Impacts on

National Health Care Spending and Savings,” this

appendix).

According to an analysis of the PNHP proposal by

Grumbach and his colleagues, large administrative

costs-savings would be possible during the proposal’s

implementation considering the administrative efficiencies possible under a Single Payer system. For

example, “[providers would be relieved of much of

the expense of screening for eligibility, preparing

detailed bills for multiple payers, responding to

cumbersome utilization review procedures, and marketing their services. ’ In order to estimate administrative costs-savings under the plan, the analysis calculated hospital and physician administrative costs as a

percentage of revenues or expenditures, respectively,

in the United States and Canada in 1987. The analysis

assumed hospital administrative savings of 11.2 percent for the United States based upon the difference in

the percentage of revenues devoted to hospital administrative functions in California-20.2 percent-and
108 I An Inconsistent Picture

the percentage devoted to the same in Canadian

hospitals-9.0 percent—in 1987. The analysis assumed physician administrative savings of 6.25 percent, based upon the difference between billing costs

for physician time and practice expenditures of 8.25

percent of total physician expenditures in the United

States, and Canadian physician costs for the same, or

2.0 percent of total physician expenditures. Thus, the

analysis estimated potential provider administrative

costs-savings of $40.0 billion under the plan versus

under current policies. In addition, the analysis estimated that the administrative costs of the public

insurance plan would be $8.0 billion or $27.0 billion

less than under current policies. Combined, a total of

$67.0 billion in administrative costs-savings could

accrue under the PNHP “if the system operated with

the administrative efficiency of the Canadian system’

(emphasis added) (24).

However, when calculating the national health care

budget for 1991, the first year of the plan, the authors

did not assume an outright reduction in health care

costs of $55.0 billion; that is, $67.0 billion in

administrative costs-savings offset by $12.0 billion,

assumed to be the cost of increased utilization by

previously uninsured persons. Instead, the analysis

assumed that reductions in administrative costs would

be achieved by: 1) realizing the full amount of the

change in insurance administration and overhead due

to moving from multiple payers to a single public

payer, 2) establishing hospital operating budgets at the

1991 Health Care Financing Administration’s projected baseline level; and 3) reducing physician fees by

6.25 percent but setting the target for physician

expenditures at 6.0 percent above the baseline for such

expenditures (24). Presumably these levels of provider

expenditures would prompt providers to make administrative changes in order to shift funds to clinical

services to accommodate the increased utilization by

previously uninsured persons within their budgeted or

targeted expenditures.

U.S. General Accounting Office--A 1992 report

of the U.S. General Accounting Office estimated costs

and savings for the United States under a Canadianstyle system, using Ontario’s health insurance system

as the basis for comparison (83). Focusing upon three

major areas-insurance, physicians and hospitals--

with respect to administrative costs, GAO estimated

savings of $67.0 billion (1991 dollars) due to a

substantial reduction in administrative and billing

costs (83), It estimated that further savings (no dollar

figure provided) would accrue to U.S. businesses and

households, whose administrative duties would also be

reduced. Furthermore, GAO noted but did not include

in its calculations the value of hospital nurses’ time

devoted to administrative tasks.

GAO provided estimates of offsetting additional

costs resulting from increased utilization, finding that

the new costs of a Canadian-style system would be

approximately equal to administrative savings. GAO

maintained that new costs arise from increased utilization, that is, “induced demand” anticipated in a

“free” care system. It calculated the costs of insuring

the currently uninsured and eliminating cost-sharing

provisions across the board. GAO indicated that its

estimates of increased utilization due to the elimination of cost-sharing are the ‘largest and most uncertain

components of our national cost assessment” (83).

GAO further noted that if the United States were to

implement a Canadian-style system, it might want to

retain certain features of its current system, that is, with

respect to administrative costs, collection of detailed

statistical and financial data from hospitals. Canada’s

information systems are less developed than those in

the United States since, under the global budgeting

approach, hospitals have fewer incentives to collect

detailed patient-per-diem or per-case-cost information.

Detailed information systems can enhance cost management but this was not factored into GAO’s estimate

(83).

Congressional Budget Off ice-The Congressional

Budget Office looked at administrative costs, defined

as overhead expenses of providers and insurers including public payers, in the context of achieving universal

coverage using Medicare’s payment rates in a Single

Payer system (77). Based upon its calculations, CBO

prepared illustrative estimates of changes in these

costs. The study found that in a Single Payer system,

insurers’ administrative costs for those currently

insured would decrease after the system was fully

implemented. Various costs (e.g., eligibility determinations, marketing, risk assessment, claims payment,

coordination of benefits, profit margin) would be

significantly reduced or eliminated. The study assumed that insurers’ overhead costs would decrease
Appendix B-Summaries of Specific Analyses I 109

from 6.7 to 2.3 percent of personal health expenditures

in a Single Payer system. Similarly, providers’ overhead expenses would decrease as a result of reduced

collection costs. Some or all of these savings would

likely be captured by government through reduced

provider payment rates. The study did not calculate the

transition costs, which it acknowledges could be

substantial, which would follow from a change in the

current payment system. According to the CBO

illustrative estimates, a Single Payer system would

produce a net reduction in overhead costs of $18.2 to

$58.3 billion in 1989.

Meyer and Colleagues--Meyer and his colleagues,

reviewing the implementation of a Canadian-style

system in the United States, estimated that a fully

phased-in system, with health care spending at no more

than 8.7 percent of U.S. GDP, would yield $241.0

billion in savings the first year (1991) of which nearly

one-half ($1 13.0 billion) would be derived from

reduced administrative costs, especially private insurance overhead, hospital administration, and physicians’ billing and overhead expenses (43). The authors

also estimated administrative costs-savings for a

scenario in which they assumed the implementation of

a Canadian-style system which “focuses its initial

reform efforts on reducing administrative costs only.

Under this scenario, administrative costs would be

reduced by about $90.0 billion (1991) (43).

Lewin-VHI--According to Lewin-VHI, ‘prior studies have estimated the potential administrative savings

under the Canadian model based upon the cost of

administration in Canada. We find this approach

unsatisfactory for three reasons’ relating to the

composition of administrative costs reported for Canada, U.S.-specific health care system factors (e.g.,

wage levels, investment in health care technologies),

and the impact on claims adjudication of due process

rights guaranteed by the U.S. Constitution (34).

Lewin-VHI estimated the administrative costssavings of implementation of the Canadian system in

the United States based upon “a detailed evaluation of

how individual cost centers (e.g., billing, admitting,

dietary, etc.) will be affected under the single-payer

model” (34). Using this method, Lewin-VHI estimated administrative costs-savings of $46.8 billion for

a proposal fully implemented in 1991.

Play-or-Pay Approaches

American Academy of Family Physicians/LewinVHI (AAFP)--Lewin-VHI analyzed the American

Academy of Family Physicians’ reform plan in terms

of its impact on administrative costs (36). It found that

the proposal would reduce health care administrative

costs by eliminating certain insurer underwriting

practices (e.g., medical underwriting, preexisting condition limitations, large premium variations across

insurers) and by promoting use of electronic claims

processing systems. The study estimated savings, if the

plan was implemented in 1993, of $4.7 billion. These

savings would be partially offset by administrative

costs related to insuring the 35 million currently

uninsured persons, estimated to be $1.9 billion (36).

Estimates of net cumulative administrative savings for

the period from 1993 through the year 2000 were $40.1

billion. Note that the net administrative savings

projected to follow from implementation of the AAFP

proposal result, primarily, from insurance marketplace

reforms included in the proposal rather than from

electronic claims processing requirements.

Zedlewski and Colleagues--In a Study of an

employer mandate to contribute toward private or

public insurance for employees, conducted pursuant to

a U.S. Department of Labor contract, Zedlewski and

her colleagues noted that the government might incur

administrative costs to administer eligibility requirements for government subsidies. These potential

administrative costs were not reflected in the study’s

spending/cost figures regarding the implementation of

a Play-or-Pay approach (100).

Approaches Employing Individual Vouchers or

Tax Credits

Bush Administration/Health Care Financing

Administrate ion (Bush Administration)--Former President Bush’s reform proposal included insurance

market reforms as well as tax credits, deductions or

vouchers, intended to expand the availability of private

insurance (94). The Bush Administration estimated

that its proposal would cut administrative costs by as

much as 25 percent under its five major reform

initiatives, four of which streamlined paperwork. The

fifth dealt with insurance market reforms intended to

reduce overhead costs by prohibiting insurers from
110 I An Inconsistent Picture

refusing coverage based on health status and by

discouraging frequent changes of insurers by employers. Also included in this latter group of reforms was

the creation of Health Insurance Networks for small

businesses, which were intended to help reduce insurer

administrative and marketing costs by promoting

group purchasing of health insurance benefits.

Specific costs-savings estimates for the Medical and

Health Insurance Information Reform Act of 1992,

which embodied then-President Bush’s major administrative reforms related to automating health care

information but which was not enacted, were prepared

by the Health Care Financing Administration (HCFA)

(93). The estimates include an offset for fixed investment costs necessary to implement the reforms.

Assuming that administrative costs would grow at the

same rate as total health care expenditures, HCFA

estimated savings from changes in administrative costs

alone of $870.0 million ($0.87 billion) in 1993 with

cumulative savings through the year 2000 of $74.4

billion.

Bipartisan Panel on Presidential Candidates’

Health Plans/Lewin-VHl (Bush Administration)-

lEwin-VHI, for the Bipartisan Panel on Presidential

Candidates’ Health Plans convened by Families USA,

examined then-President Bush’s reform proposal (3).

Lewin-VHI estimated administrative costs-savings of

$300.0 million ($0.3 billion) in 1993 from electronic

claims processing reforms under former President

Bush’s plan, with savings of $3.0 billion per year by

the year 2000. Lewin-VHI also estimated administrative costs-savings due to the implementation of the

plan’s insurance market reforms; they estimated that

these reforms would yield savings of $4.0 billion in

1993, increasing to $7.5 billion in the year 2000. In

general, Lewin-VHI estimated that the reforms included in then-President Bush’s plan would reduce

insurer administrative expense, currently said to be as

much as 40 percent of insurance claims for very small

firms (1 to 4 employees), to 18.9 percent. Reductions

of increasingly smaller magnitude would accrue to all

other firms up to 499 employees. While no similar

savings would accrue to larger firms, neither would

they incur any increased expense (3).

Heritage Foundation/Lewin-VHl (Heritage Foundation)--The Heritage Foundation’s reform proposal

includes tax credits, health insurance market reforms,

and requires individuals to purchase insurance with

employers, in particular those who now sponsor

coverage, arranging payroll deductions for benefits

payments. Estimates of the administrative costssavings under the Heritage plan were prepared by

Lewin-VHI (35). They assumed that administrative

costs would be the same as under current policy for

employees whose employers now arrange payroll

deductions for health benefits payments. For others

purchasing individual insurance, they assumed that

administrative costs would be 21.9 percent of claims

(down from as much as 40 percent, based upon

estimates for groups with 1 to 4 members). Thus,

Lewin-VHI estimated increased insurer administrative

costs of $2.1 billion in 1991 under this reform proposal

(6,35).

Managed Competition Approaches

Conservative Democratic Forum (H.R. 5936)-

The Conservative Democratic Forum’s bill, H.R. 5936

(the “Managed Competition Act of 1992”), proposed

in the 102d Congress, was a Managed Competition

approach with neither a global budget nor an employee

mandate but with, effectively, a limit on the employer

deduction for employee health insurance benefits. The

bill’s sponsors maintained that administrative costssavings could be realized by reducing the paperwork

currently necessary to satisfy the requirements of the

estimated 1,500 health insurance companies in the

United States (e.g., standard claims forms, electronic

submission of data) (10). Specific estimates of this

type of administrative savings under the bill were not

available.

Sheils and Colleagues--Sheils and his colleagues

analyzed a Managed Competition approach with no

global budget but with an employer mandate, and a

limit on the exclusion from employees’ income of

employer contributions to employees’ health benefits

to the cost of the lowest-cost plan in the area (63). The

analysis found that under Managed Competition,

insurer, hospital, and physician administrative costs

would be reduced ‘‘by extending large-group economies of scale to employee groups of all sizes and by

reducing the number of insurers that providers must
Appendix B-Summaries of Specific Analyses! 111

work with” (63). The analysis assumed insurer $11.2 billion” in 1993, under both their high- and

administrative costs under Managed Competition would low-cost-sharing scenarios. The authors noted that

equal about 3.6 percent of covered claims, based upon certain factors not factored into their analysis (e.g.,

administrative cost data for insured groups of 10,000 State insurance premium taxes, utilization review and

or more members. Thus, the analysis estimated ‘‘po- case management programs) could increase insurers’

tential net savings in insurer administrative costs of administrative costs (63).
Appendix C:

Acknowledgments

OTA wishes to thank the individuals and organizations listed below for their assistance with this Report.

These individuals and organizations do not necessarily approve, disapprove, or endorse this Report. OTA assumes

full responsibility for the Report and the accuracy of its content.

Helen Bowman

Jackson Hole Group

Washington, DC

Charles Buck III

Jackson Hole Group

Teton Village, WY

Peggy Connerton

Service Employees International

Union

Washington, DC

Edward H. Crane

CATO Institute

Washington, DC

Patricia Danzon

University of Pennsylvania

Philadelphia, PA

David Dranove

Kellogg Graduate School

of Management

Evanston, IL

Lorraine Driscoll

American Association of

Retired Persons

Washington, DC

Paul Dryfoos

Paul Dryfoos Consulting Services

Newton Comer, MA

Timothy Eckels

Catholic Health Association of

the United States

Washington, DC

Tom J. Elkin

California Public Employees’

Retirement System

Sacramento, CA

Mary Jane England

Washington Business Group

on Health

Washington, DC

H.E. Frech III

University of California,

Santa Barbara

Santa Barbara, CA

Thomas E. Getzen

Temple University

Philadelphia, PA

Eli Ginzberg

Columbia University

New York, NY

Michael Gutowski

U.S. General Accounting Office

Washington, DC

Robert B. Helms

American Enterprise Institute

Washington, DC

John Hoff

Swidler & Berlin

Washington, DC

Robert Hungate

Physician-Patient Partnership

for Health

Wellesley, MA

Julia Jacobsen

U.S. Congress

Congressional Budget Office

Washington, DC

David Kass

U.S. Department of Commerce

Washington, DC

112
Appendix C--Acknowledgments I 113

Jacob Alex Klerman

RAND Corp.

Santa Monica, CA

Janet Kline

U.S. Congress

Congressional Research Service

Washington, DC

Kathryn Langwell

U.S. Congress

Congressional Budget Office

Washington, DC

Arleen Leibowitz

RAND Corp.

Santa Monica, CA

Daniel N. Mendelson

Lewin-VHI

Fairfax, VA

Jack Meyer

Economic and Social Research

Institute

Reston, VA

Marianne Miller

Health Insurance Association of

America

Washington, DC

Robert Moffit

The Heritage Foundation

Washington, DC

Michael Morrisey

University of Alabama

at Birmingham

Birmin gham, AL

Gerald J. Mossinghoff

Pharmaceutical Manufacturers

Association

Washington, DC

Mark Pauly

University of Pennsylvania

Philadelphia, PA

Jack Rodgers

Price Waterhouse

Washington, DC

Ruth Ruttenberg

Ruth Ruttenberg Associates, Inc.

Bethesda, MD

John F. Sheils

Lewin-VHI

Fairfax, VA

Pamela Farley Short

U.S. Department of Health and

Human Services

Rockville, MD

Sharon Silow-Carroll

Economic and Social Research

Institute

Reston, VA

Verdon Staines

U.S. Congress

Congressional Budget Office

Washington, DC

Eugene Steuerle

Urban Institute

Washington, DC

Carl Volpe

National Governors’ Association

Washington, DC

Patricia Willis

U.S. Department of Labor

Washington, DC

Sheila Zedlewski

Urban Institute

Washington, DC

Denise Mitchell

Abernathy & Mitchell

Washington, DC
Appendix D:

Acronyms

and Glossary

of Terms

Acronyms

—American Academy of Family

Physicians

AFL-CIO —American Federation of LaborCongress of Industrial Employees

CalPERS -California Public Employees’

Retirement System (State of California)

CBO -Congressional Budget Office (U.S.

Congress)

CDF -Conservative Democratic Forum (U.S.

Congress)

CHAMPUS -Civilian Health and Medical Program

DHHS

ERISA

FICA

GAO

GDP

GNP

HBSM

HCFA

HI

HMO

NLCHCR

of the Uniformed Services

—U.S. Department of Health and Human

Services

—Employee Retirement Income Security

Act of 1974

—Federal Insurance Contributions Act

-General Accounting 0ffice (U.S.

Congress)

-Gross domestic product

-Gross national product

—Health Benefits Simulation Model

(Lewin-VHI)

—Health Care Financing Administration

—Hospital Insurance Trust Fund

(Medicare Part A)

—Health Insurance Association of

America

—Health maintenance organization

—National health expenditures

—National Leadership Coalition for

Health Care Reform

OASDI -Old Age, Survivors, and Disability

Insurance

OTA -Office of Technology Assessment (U.S.

Congress)

PPO —Preferred provider organization

VAT —Value added tax

Terms

Access to health care: Potential and actual entry of a

population into the health care delivery system.

Elements of access include availability, affordability, and approachability.

Accountable health plans: Organized systems of

health care delivery and financing.

Actuarial cost of coverage: The expected dollar value

of a health plan’s benefits. The method for determining this value may be based entirely on a plan’s

provisions, or may adjust for the geographic

location and demographic characteristics of enrollees, the actual health care utilization level by plan

participants, or the type of plan under which the

benefits are provided (e.g., fee-for-service plan vs.

health maintenance organization).

Administrative costs: Expenses related to the management or supervision of the provision of health

care coverage and services. Analyses of reform

approaches, proposals or plans frequently do not

share a common definition of what components

constitute administrative costs but most commonly

refer to insurer, including government programs

and private plans, and provider, including hospital

and physician, administrative costs.

114
—

Appendix D–Acronyms and Glossary of Terms I 115

Administrative costs-savings: Reductions in expenditures related to changes in the administrative costs

associated with the provision of health care coverage and services.

Aid to Families With Dependent Children (AFDC):

A federally-supported, State-administered program

established by the Social Security Act of 1935 that

provides financial support for children under the

age of 18 (and their caretakers) who have been

deprived of parental support or care because of the

parent’s death, continued absence from the home,

unemployment, or physical or mental illness.

All-payer system: All insurers use the same payment

schedule.

Analysis: A separation of a whole entity into its

complex parts, and an examination of its elements

and their relations.

Approach: An organized group of broad ideas designed to achieve specific goals with respect to

reform of the health care financing and/or delivery

systems.

Beneficiary: A person entitled to receive covered

health care services and reimbursement for such

covered services rendered under a health insurance

plan.

Benefit package: In this report, benefit package refers

primarily to the services and providers that are

covered by a health insurance plan, and to the

financia1 and other terms of such coverage (e.g.,

patient cost-sharing, limitations on amounts and

numbers of visits or days). See also, scope of

benefits or coverage and depth of benefits or

coverage.

Benefits: The covered health care services and the

amount payable by a health insurance plan to a

beneficiary under the terms of the plan.

California Public Employees’ Retirement System

(CalPERS) Health Benefits Program: A health

insurance program available to California’s public

employees and their dependents whose current

strategy focuses on the maintenance of a large risk

pool, the promotion of managed care strategies and

a standard benefit package required to be offered by

participating HMOs.

Canadian-style system: A health care financing

system based upon the system in place in Canada

which provides tax-financed universal coverage

with the government as sole purchaser of services.

Typically, in Canada, patients choose their own

physicians and incur no deductibles or copayments.

Physicians are paid according to a negotiated fee

schedule and hospitals operate under global budgets, both of which are established by the provinces.

Cap: In this report, refers to a limit on the dollar

amount an employer can deduct from its corporate

income taxes or that an employee can exclude from

his or her taxable income for an employer’s

contributions to an employee’s health benefits’

premiums.

Cavitation payment: A method of payment for health

services in which an individual or institutional

provider is paid a fixed amount for each person

served in a set period of time, usually a year,

without regard to the actual number or nature of

services provided to each person. This is the

characteristic payment method in health maintenance organizations. Compare fee-for-service.

Civilian Health and Medical Program of the Uniformed Services (CHAMPUS): A Department of

Defense program supporting private sector health

care for dependents of active and retired members

of the uniformed services.

Coinsurance: A fixed percentage of covered expenses

paid by a health plan and an enrollee for covered

expenses after any deductible has been met; for

example, 80/20 coinsurance means 80 percent is

paid by the plan and 20 percent is paid by the person

covered by the plan. Compare copayment.

Community rating: A method of determining health

plan premiums by basing the premiums on the

average costs of health services for all subscribers

within a specific geographic area. Under community rating, the premium does not vary for different

groups or subgroups of subscribers based upon their

specific claims experience. Compare experience

rating.

Competition: If not qualified by some phrase (such as

nonprice competition), competition as used by

economists means price-competition (competition

based on price). Enthoven has suggested that

‘‘value-for-money competition’ would be a more

apt phrase of what is typically meant when economists refer to price competition. In standard economics, pure competition is characterized by

many sellers (and buyers) of a standardized product,
116 I An Inconsistent picture

free entrance to the market, and no collusion or

price fixing.

Consumers: In this report, individuals who fund,

either through out-of-pocket expenses or indirect

payments (e.g., taxes), health care coverage and/or

services and/or use them.

Copayment: A fixed dollar amount that a health plan

enrollee is required to pay for a covered service

(e.g., $10 per office visit, $3 per prescription drug).

Cost containment: The control or reduction of

inefficiencies in the consumption, allocation, or

production of health services that contribute to

higher than necessary costs.

Costs: Expenses incurred in the provision of services

or goods. Many different kinds of costs are defined

and used (e.g., allowable, direct, indirect, and

operating costs). It is important not to confuse costs

with charges which are the price of a service or the

amounts billed for services rendered, which may or

may not be the same as or based on costs.

Cost-sharing: The provisions of a health benefits plan

that require the enrollee to pay a portion of the cost

of services covered by the plan, typically exclusive

of premium cost-sharing (sharing of the cost of a

health care plan premium between the sponsor and

the enrollee). Usual forms of cost-sharing include

deductibles, coinsurance, and copayments. These

payments are made at the time a service is received

or shortly thereafter, and are only made by those

insureds who seek treatment.

Cost-shifting: The condition which occurs when

health care providers are not reimbursed or are not

fully reimbursed for providing health care so

charges to those who do pay are increased.

Coverage: Promise by a third party to pay for all or a

portion of expenses incurred for specified health

care services.

Covered services: Services eligible for reimbursement by a health plan. See benefit package.

Current dollars: The value of dollars spent or

received at the time of the transaction, without

adjusting for inflation or deflation since the transaction date. Compare inflation-adjusted dollars.

Current Population Survey: A cross-sectional survey which can provide a series of snapshots of the

socioeconomic conditions that exist at different

fixed points in time. The survey is conducted by the

U.S. Department of Commerce, Economics and

Statistics Administration, Bureau of the Census.

Deductible: A specified amount of money (e.g., $200,

$500, $1,000) that must be paid during a given time

period (usually a year) by the enrollee and/or his or

her dependents for covered services before any

payments are made by a health plan.

Depth of benefits or coverage: Refers to the level of

patient cost-sharing required under a health insurance plan (i.e., the deductibles, copayments, coinsurance, out-of-pocket maximums, maximum liability of the insurance plan).

Direct spending on health: Includes the amount

directly paid for health insurance premiums by a

household, as well as other out-of-pocket expenses

for health services.

Employer mandate: Refers to a requirement that

employers offer health insurance to employees and,

in some cases, contribute toward the cost of

employees’ health benefits’ premiums,

Employers’ share of health insurance premiums:

The employers’ share of health insurance premiums

is the share of the premium charged by the insurer

that the employer, rather than the covered employee, is on record as contributing. The term

employers share can be a misnomer, however,

because, according to most economists, the employers’ share of the premium is part of the total

employee compensation package, and thus paid,

ultimately, by the individual insured. The employment setting is the most frequent form of group

sponsorship of health insurance purchases.

Employment-based health insurance plan: A group

health plan that is sponsored by an employer for its

employees and their dependents,

Enrollee: An individual who qualifies for benefits

under a health benefits plan and has taken any

required action to register or otherwise signify his

or her participation in the plan.

ERISA: Employee Retirement Income Security Act of

1974. Exempts companies that self-insure, or fund

their own insurance plans, from State regulations.

Most large companies began to self-insure in the

1980s. Now, 70 percent of firms with 5,000 or more

workers do it. Only Hawaii has an ERISA waiver,

allowing it to regulate such plans.

Expenditure: In the context of health care, monies

spent on the acquisition of health care coverage
Appendix D–Acronyms and Glossary of Terms I 117

and/or services. See national health expenditures.

Expenditure limits: With respect to health care,

expenditure limits include various mechanisms

which limit the maximum amounts that may be

spent to acquire health care coverage and services

(e.g., negotiated fee schedules, hospital global

operating budgets, national health budget).

Expenditure targets: With respect to health care,

established goals as to how much money may be

spent on health care coverage and services.

Experience rating: A method of adjusting group

health plan premiums based wholly or in part on the

historical utilization data of the specific group.

Compare community rating.

Family: As defined by the U.S. Department of

Commerce, Economics and Statistics Administration, Bureau of the Census, a family is a group of

two persons or more (one of whom is the householder) related by birth, marriage, or adoption and

residing together, all such persons (including related subfamily members) are considered as members of one family. Beginning with the 1980

Current Population Survey (CPS), unrelated subfamilies (referred to in the past as secondary

families) were no longer included in the count of

families, nor are the members of unrelated subfamilies included in the count of family members. The

term is often used interchangeably with household.

Federal poverty level: The official U.S. Government

definition of poverty based on cash income levels

for families of different sizes. Responsibility for

changing poverty concepts and definitions rests

with the Office of Management and Budget in the

Executive Office of the President of the United

States. The poverty thresholds for the continental

United States in 1992 were $8,810 for one person,

$9,190 for two persons, $11,570 for three persons,

and $13,950 for four persons. Alaska and Hawaii

have higher thresholds.

Fee-for-service: A method of billing for health

services under which a physician or other practitioner charges separately for each patient encounter

or service rendered. Under a fee-for-service payment system, expenditures increase if the fees

themselves increase, if more units of services are

provided or if more expensive services are substituted for less expensive ones. This system contrasts

with salary, per capita or other prepayment systems,

where the payment to the practitioner is not changed

with the number of services actually rendered.

Compare cavitation payment.

Fee-for-service plan: As used by the Office of

Personnel Management and others, a traditional or

conventional health insurance plan that permits

employees to select providers of services and pays

the providers according to the fees charged for such

services. The term is used to distinguish such plans

from HMOS, under which the enrollee generally

must obtain services from the HMO providers

whose payments from the HMO are not necessarily

directly related to the type or quantity of services

actually provided.

Financing (of health care): Refers to where the

money to pay health care providers for the delivery

of health care services comes from (e.g., government/

taxpayers). Compare payment.

Fiscal year: Any accounting period of 12 successive

calendar months, or 52 weeks, or 365 days, used by

an organization for financial reporting. Beginning

with October 1, 1977, the Federal fiscal year

extends from October 1 through September 30.

Fringe benefits: Noncash benefits provided to a

worker by an employer.

Global budget: Generally, an overall budget limit on

health care services, regardless of where the funds

originate. Global budgets can take the form of a

State or national maximum limit on total health care

expenditures, but usually imply national limits. In

some contexts, global budgeting has come to mean

setting a limit on spending by sector (e.g., specific

allocations for physicians, hospitals).

Gross domestic product (GDP): Covers the goods

and services produced by labor and property located

in the United States.

Gross national product (GNP): Covers the goods

and products produced by labor and property

supplied by U.S. residents regardless of whether

produced in the U.S. or in foreign countries.

Group health insurance: Health insurance purchased

through a group that exists for some purpose other

than buying insurance, such as a workplace, labor

union, or professional association. Currently, the

majority of Americans under age 65 are covered by

employment-based group health insurance.

Group-model HMO: An HMO that uses a single large

multispecialty group practice as the sole (or major)
118 I An Inconsistent Picture

source of care for an HMO’s enrollees. The group

may or may not have existed prior to the formation

of the corporately distinct HMO, and has an

exclusive contract with the HMO. Some groups

also see fee-for-service or preferred provider organization patients; others are not allowed to do so.

Health Benefits Simulation Model (HBSM): An

analytic model developed by the private consulting

firm Lewin-VHI in 1984. The purpose of the HBSM

is to estimate the cost of access proposals, the

impact of access proposals, distributional impacts,

and to identify unintended consequences. It is a

month-by-month simulation model including a

household data file from the 1987 National Medical

Expenditures Survey updated to the simulation

year. There is a statistical match with the Small

Business Administration’s survey of large and

small firms.

Health Care Financing Administration (HCFA):

An agency within the U.S. Department of Health

and Human Services (DHHS) that oversees the

Medicaid and Medicare programs, and is responsible for making payments to the States for the

Medicaid program, and to providers under Medicare for care rendered to program beneficiaries.

HCFA is also responsible for assuring that health

care services provided to Medicare and Medicaid

beneficiaries meet professionally recognized and

Federal standards of care and are delivered effectively and efficiently.

Health care provider: An individual or institution

that provides medical services (e.g., a physician,

hospital, laboratory, etc). This term should not be

confused with an insurance company which “provides” insurance.

Health insurance: In this report, the term “health

insurance” is used broadly to include various types

of health plans that are designed to reimburse or

indemnify individuals or families for the costs of

medical care, or (as in HMOs) to arrange for the

delivery of that care, including traditional private

indemnity fee-for-service coverage, prepaid health

plans such as HMOS, self-funded employmentbased health plans, Medicaid, and Medicare. Private health insurance: With respect to health

insurance, refers to a plan run or sponsored by an

entity other than government. Public health insurance: With respect to health insurance, refers to a

government-run or -sponsored plan.

Health insurance network (HIN): An arrangement

that would aggregate the purchasing power of small

businesses by allowing them to make group purchases of insurance. As proposed by the Bush

Administration, these would have been voluntary

arrangements.

Health insurance purchasing cooperative or group:

An arrangement to make group purchases of health

insurance that would be established under a Managed Competition approach to health care reform. It

would aggregate the purchasing power of large

populations and provide economies of scale to

small businesses and individuals.

Health maintenance organizations (HMOS): An

organization that, in return for prospective per

capita (capitation) payments, acts as both insurer

and provider of comprehensive but specified health

care services to a voluntarily enrolled population.

Prepaid group practices and individual practice

associations are types of HMOS.

Hospital Insurance Trust Fund (HI): The Federal

hospital insurance trust fund is a trust fund of the

Treasury of the United States in which the monies

collected from taxes on the annual earnings of

employees, employers, and self-employed persons

covered by Social Security are deposited. Disbursements from the fund are made to help pay for benefit

payments and administrative expenses incurred by

the hospital insurance program (Medicare Part A).

See Medicare.

Household: As defined by the Bureau of the Census

within the U.S. Department of Commerce, all the

persons who occupy a housing unit (i.e., a house, an

apartment or other group of rooms, or a single room

occupied or intended for occupancy as separate

living quarters).

Individual insurance: Policies purchased without the

benefit of group sponsorship that provide protection to the policyholder and/or his or her family.

Sometimes called personal insurance as distinct

from group insurance.

Individual Vouchers or Tax Credits approach:

Approach to health care reform that focuses on tax

incentives to encourage the purchase of coverage

and expand access to it. Usually combined with

some insurance market reforms.
Appendix D-Acronyms and Glossary of Terms I 119

Inflation-adjusted dollars: Dollars expressed in terms

of their purchasing power in a base year. They are

adjusted for changes in buying power due to

inflation (or deflation) between the base year and

the year of measurement.

Insurance: Protection by written contract against the

financial hazards (in whole or in part) of the

happening of specified fortuitous events.

Insurer: An insurance company, HMO, government

program, or “self-funded” group (e.g., employer)

responsible for providing protection against financial loss.

Internal Revenue Code of 1986: The most recent

codification of the U.S. statutes pertaining to

taxation including any amendments thereto since

1986,

Jackson Hole Group: Described by the group itself as

an ad hoc and changing group of health executives,

leaders, and experts who have been meeting (over

the past several years) to discuss and address the

deficiencies of the health system.

Managed care: A general term applied to a range of

initiatives from organized health care delivery

systems (e.g., HMOS) to features of health care

plans (e.g., preadmission certification programs,

utilization review programs) that attempt to control

or coordinate enrollees’ use of (and thus to control

the cost of) services.

Managed Competition approach: An approach to

health care reform that would combine health

insurance market reform with health care delivery

system restructuring. The theory of Managed Competition is that the quality and economy of health

care delivery will improve if independent groups

compete with one another for consumers in a

government-regulated market.

Market: In economics, an area within which buyers

and sellers are in such close communication that

prices of the same goods tend to equality throughout the area. Some markets are virtually worldwide,

others are national, and some are local or regional.

Many economists have noted that markets for

health care differ from markets for most other

goods. For example, the market in health care is

subject to considerable problems regarding the lack

of knowledge (and, sometimes, lack of rationality)

among consumers, and the influences of health care

providers as agents of patients.

Medicaid: A joint Federal-State program of Federal

matching grants to the States to provide health

insurance for categories of the poor and medically

indigent. States determine eligibility, payments,

and benefits consistent with Federal standards.

Medicare: A Federally administered health insurance

program covering the cost of services for people

who are 65 years of age or older, receiving Social

Security Disability Insurance payments for at least

2 years, or have end-stage renal disease. Medicare

consists of two separate but coordinated programs--

hospital insurance (Part A) and supplementary

medical insurance (Part B). Health insurance protection is available to insured persons without

regard to income.

Medigap: A private health insurance policy (also

called a Medicare supplemental policy) designed to

pay for services not covered by the Medicare

program. Medigap policies generally cover some or

all of Medicare’s cost-sharing requirements and

may also cover other costs or services not covered

by Medicare (such as dental services).

Minimum benefit package: A health insurance benefit package consisting of specified benefits which

must be offered.

National health budget: Establishes a dollar amount

to be spent on health care nationally, usually geared

to a limitation on the percent increase in the rate of

growth of national health expenditures.

National health care: A system in which government

both finances and delivers health care (e.g., the

system in place in the United Kingdom). This term

is sometimes used as a synonym for the Canadianstyle system, even though the Canadian Government does not deliver care.

National health expenditures: An estimate of national spending on health care made up of two broad

categories: 1) health services and supplies, which,

in turn, consist of personal health care expenditures

(the direct provision of health care), program

administration and the net cost of private health

insurance, and government public health activities;

and 2) research and construction of medical facilities.

Negotiated fee schedule: Fees set through an organized bargaining process, Usually used to help

determine a global budget. Also called negotiated

payment schedule.
120 I An Inconsistent Picture

Out-of-pocket expenses or spending: Payments made

by a plan enrollee, beneficiary or insured for

medical services that are not reimbursed by the

health plan. These may include payments for

deductibles and coinsurance for covered services,

for services not covered by the plan, for provider

charges in excess of the plan’s limits, and for

enrollee premium payments.

Payer: The person (e.g., patient) or organization (e.g.,

self-funded employer, insurance company, government) that makes full or partial payments for health

care services rendered to and/or for health commodities received by a patient.

Payment (for health care): The amounts and methods

used to pay for health care that is supplied. Compare

financing.

Payroll tax: A tax which is a direct function of the size

of an employer’s payroll.

Per-capita: On an individual basis.

Plan: In this report, used to refer to a specific variant

of an approach to health care reform. Distinct from

a health benefit or health insurance plan. Also called

a proposal.

Play-or-Pay approach: Approach to health care

reform that would provide employment-based

health benefits coverage combined with public

programs to cover the uninsured. Employers can

either “play” (provide coverage for their employees in the private market) or “pay” (pay into the

public health insurance program), most often

through a payroll tax which sets a maximum limit

on employers’ liability for coverage, as a percent of

payroll.

Preexisting condition: A physical and/or mental

condition of an insured which first manifested itself

prior to the issuance of the insured ’s policy or which

existed prior to issuance and for which treatment

was received.

Preferred provider organization (PPO): A term that

refers to a variety of different insurance arrangements under which plan enrollees who choose to

obtain medical care from a specified group of

participating providers receive certain advantages,

such as reduced cost-sharing charges. Providers

usually furnish services at lower than usual fees in

return for prompt payment by the health insurance

plan and a certain assured volume of patients.

Premium: The price or amount which must be paid

periodically (e.g., monthly, biweekly) to purchase

insurance coverage or to keep an insurance policy

in force. Virtually all health insurance programs

require the payment of a premium by the enrollee,

insured or beneficiary and/or by someone else (such

as the employer) on the individual’s behalf. Premiums paid to health maintenance organizations or

similar organizations are often called cavitation

payments.

Premium cost-sharing: The sharing of the cost of the

health plan premium between the employer or other

group sponsor and the enrollee.

Price-competition: See competition.

Proposal: In this report, used to refer to a specific

variant of an approach to health care reform. Also

called a plan.

Prospective payment system: A payment system

under which health care providers are paid for their

services according to a predetermined fixed amount.

Although prospective payment rates may be related

to the costs providers incur in providing services,

the amount a provider is paid for a service under a

prospective payment system is unrelated to the

provider’s actual cost of providing that specific

service. Medicare and CHAMPUS use prospective

payment systems to pay for inpatient hospital

services,

Provider: See health care provider.

Quality of (medical) care: Evaluation of the performance of health care providers according to the

degree to which the process of care increases the

probability of outcomes desired by the patients and

reduces the probability of undesired outcomes,

given the state of medical knowledge. Which

elements of patient outcomes predominate depends

on the patient condition.

Revenue: As used in an accounting sense, the increase

in assets (or decrease in liabilities) that results from

operation. Revenues result from: 1) services performed by the Federal Government and 2) goods

and other property delivered to purchasers.

Scope of benefits or coverage: Refers to the range of

services, providers, and settings covered by a health

benefit plan.

Self-insurance: Payment of employees’ health care

expenses through the use of a special fund established by an employer rather than by arranging for
Appendix D-Acronyms and Glossary of Terms I 121

an insurer to provide such coverage. The employer

directly assumes the functions, responsibilities, and

liabilities of an insurer, although an employer may

arrange for another entity (e.g. insurer) to handle the

administrative tasks associated with running the

plan.

Single Payer approach: Approach to health care

reform that would provide tax-financed universal

coverage with government as the sole purchaser of

services. A single entity, usually government-run,

reimburses all medical claims. Consumers typically

pay a uniform tax rather than premiums. Money

goes to a single health care trust fund, used only for

health care expenditures.

Small group market reform: In the context of U.S.

health care financing reform, these are measures

aimed at alleviating problem areas in the private

insurance marketplace. Typically, they include:

guaranteed issuance of policies, regardless of health

status; limitations or prohibitions on benefit plan

limitations or exclusions for preexisting health

conditions; and an end to experience-rating (although some form of risk-adjusted community

rating is often proposed).

Sponsors: The employers (or sometimes unions) who

offer group health benefit plans.

Staff-model HMO: An HMO in which physicians

practice solely as employees of the HMO and are

paid a salary.

State-mandated benefits: Certain minimum benefits

that health insurers (but not self-insured groups

which are exempt under ERISA) are required by

State law to offer in their insurance policies.

Tax credit: An amount that offsets or reduces tax

liability. It is subtracted directly from the tax

liability that would otherwise accrue, and thus, it is

not contingent upon the marginal tax rate. When the

allowable tax credit amount exceeds the tax liability, and the difference is paid to the taxpayer, the

credit is considered refundable. Otherwise, the

difference can be: 1) allowed as a carryforward

against future tax liability, 2) allowed as a carryback

against past taxes paid, or 3) lost as a tax benefit.

See also tax deduction and tax expenditure.

Tax deduction: An amount that is subtracted from the

tax base before tax liability is calculated.

Tax expenditure: Defined as reductions in individual

and corporate income tax liabilities that result from

special tax provisions or regulations that provide

tax benefits to particular taxpayers. Further defined

as a revenue loss attributable to a provision of the

Federal tax laws that: 1) allows a special exclusion,

exemption, or deduction from gross income or 2)

provides a special credit, preferential tax rate, or

deferral of tax liability. Examples of tax expenditures include the personal income tax exclusion for

health insurance premiums paid by employers on

behalf of employees, and the personal tax deduction

for unreimbursed medical expenses.

Third-party administrator (TPA): A private firm

that administers a group health plan on behalf of the

insurer or policyholder. TPAs are responsible for at

least some (if not all) administrative functions, but

a TPA bears no financial risk associated with the

insurance function.

Third-party payer: An organization (private or

public) that pays for or insures the health care

expenses of its beneficiaries. Third parties include

Blue Cross/Blue Shield, commercial health insurers, Medicare, and Medicaid. The individual receiving the health care services is the first party, and the

individual or institution providing the service is the

second party.

Third-party payment: Payment by a private insurer

or government program to a health care provider for

care given to a patient.

Total compensation package: The total amount of

compensation received by a worker for services

rendered including wages or salary and fringe

benefits.

Underinsured: People with public or private insurance policies that do not coverall necessary medical

services, resulting in out-of-pocket expenses that

exceed their ability to pay.

Uninsured: People who lack private or public health

insurance coverage.

Universal coverage: An all encompassing plan which

would provide all 37 million uninsured Americans

with health insurance.

Utilization: Use; commonly examined in terms of

patterns or rates of use of a single service or type of

service (e.g., hospital care, physician visits, prescription drugs). Measurement of utilization of all

medical services in any given period is sometimes

done in terms of dollar expenditures. Use is also

expressed in rates per unit of population at risk for
122 I An Inconsistent Picture

a given period (e.g., number of admissions to a

hospital per 1,000 persons over age 65 per year or

number of visits to a physician per person).

Utilization management: A set of techniques used on

the behalf of purchasers of health benefits to

manage health care costs by influencing patient care

decisionmaking through case-by-case assessments

of the appropriateness of care prior to, or sometimes

following, its provision. See utilization review.

Utilization review: The review of services delivered

by a health care provider or supplier to determine

whether those services were medically necessary.

Value added tax: A tax which accumulates on goods

as they move from raw materials through the

production process. Each processor pays a tax

according to the amount by which he has increased

the value of items that were raw materials to him.

Voucher: A form or check indicating a credit against

future purchases or expenditures.
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48. National Federation of Independent Business

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51. Pauly, M. V., Bendheirn Professor; Chairman,

Health Care Systems Department; Professor of

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Economics, Wharton School, University of Pemsylvania, Philadelphia, PA, letter to the Office of

Twhnology Assessment, U.S. Congress, Washington, DC, Feb. 19, 1993.

52. Pauly, M, V., Damon, P., Feldstein, P. J., et al.,

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57. Rodgers, J., Dirwtor of Health Policy Analysis,

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61. Sheils, J. F., Vice President, IEwin-VHI, Fairfax,

VA, personal communication, Mar. 2, 1993.

62. Sheils, J. F., and Dobson, A., “Estimating the

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63. Sheils, J. F., hwin, L. S., and Haught, R. A.,

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64. Short, P.F., Deputy Director, Division of Medical Expenditure Studies, Agency for Health Care

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Mar. 4, 1993.

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99. Zedlewski, S. R., Acs, G. P., and Winterbottom,

C. W., ‘‘Play-or-Pay Employer Mandates: Potential Effects,” Health Aflairs 11(2):62-83, 1992.

100. Zedlewski, S.R., Acs, G. P., Wheaton, L. L., etal.,

“Study 15: Exploring the Effects of Play or Pay

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1992).
Index

AAFP. See American Academy of Family Physicians

Aaron, Henry, 7

Access to coverage. See Universal coverage

. .

Administrative costs

components and definition, 61-62

employer impacts, 101

estimate summary, 24-25

Federal, State, and local budget impacts, 41, 97

household impacts, 57, 107

Individual Vouchers or Tax Credits approach impacts,

63-64, 109-110

Managed Competition approach impacts, 64-65, 110-111

National health care spending and savings impacts, 86-87,

92

Play-or-Pay approach impacts, 63, 109

provisional checklist, 78

reform impacts, 65

Single Payer approach impacts, 63, 107-109

Aid to Families with Dependent Children, 106

American Academy of Family Physicians

administrative costs impacts, 24, 63, 109

employer impacts, 20, 99-100

Federal, State, and local budget impacts, 18,96

household impacts, 22, 23,58, 105

National health care spending and savings impacts, 16,32,

88

Analysis summaries

administrative costs impacts, 107-111

employer impacts, 97-101

employment impacts, 101-103

Federal, State, and local budget impacts, 93-97

household impacts, 104-107

National health care spending and savings impacts, 85-93

Automating health care information, 64

Background information on proposals, 80

Background papers, 81-82

Benefit Design in Health Care Reform, 82

Bipartisan Commission on Comprehensive Health Care, 16,

18,20,22,23,89,95,99, 102-103

Bipartisan Panel on Presidential Candidates’ Health Plans,

17,25,89-91, 106-107, 110

Brookings Institution, 7

Budgets. See Federal, State, and local budgets

Bureau of Labor Statistics, 103

Bush adminis tration plan

administrative costs impacts, 25, 64, 109-110

employer impacts, 21,45-46, 100

employment impacts, 51, 103

Federal, State, and local budget impacts, 40, 96

household impacts, 23, 56-57, 105-106

National health care spending and savings impacts, 17,

33-34,74,89-90

Butler/Heritage Foundation, 103

California, administrative costs impacts, 62, 107-108

California Public Employees’ Retirement System, 34,92-93

Canadian-style system

administrative costs impacts, 62-63, 107-109

employer impacts, 44-45, 97-98

employment impacts, 101

Federal, State, and local budget impacts, 18, 93-94

household impacts, 55

National health care spending and savings impacts, 16,

74-75,85-87

reform approaches, 10

Care for Depression: Issues Raised in Using Electiveness

and Cost-Effectiveness Information to Design a Mental Health Benefit, 82

Checklist for policymakers, 75-80

Clinton campaign proposals, 34,88-89,91, 107

Competing approaches summary and overview

additional policy considerations, 14

caveats on analyses, 13-14

estimate summary, 14-25

findings Summary, 3-6

reform approaches, 7-13

report method and organization, 6-7

Congressional Budget Office

administrative costs impacts, 24, 108-109

employment impacts, 101
130 I An Inconsistent picture

Federal, State, and local budget impacts, 18,31-32,93-94

household impacts, 54, 104

National health care spending and savings impacts, 16,

31-32,34,74,87,90

selected economic areas impact, 59-60

Conservative Democratic Forum, 19,41,96-97, 110

Consumer impacts. See Households

Corporate income taxes, 46, 100

Cost containment. See Cost controls

Cost controls

administrative costs impacts, 62,64, 109-110

approaches and proposals, 4, 9

employer impacts, 43-47, 98

Federal, State, and local budget impacts, 38-41,96

household impacts, 57

National health care spending and savings impacts, 31-35,

57,74-75,77-78,88-90, 92-93

reform goals, 7

Cost-sharing, 55-56,91,97, 108

Damon analysis, 61

Deficit reduction, 59

Department of Commerce, 31

Department of Labor, 95,98, 102, 109

Department of Veterans Affairs, 97

Does Health Insurance Make a Difference?, 81-82

Economic impacts of reform. See also Analysis summaries

administrative costs, 61-65

competing approaches summary and overview, 3-25

conclusions, 73-75

employers, 43-47

employment, 49-52

Federal, State, and local budgets, 37-42

funds flow in U.S. economy, 5

households, 53-58

National health care spending and savings, 31-35

provisional checklist, 75-80

selected economic areas, 59-60

Economic values. See Social, political, and economic values

Efficiency of health care system, 61-62

Electronic billing, 63-65, 109

Electronic data interchange, 62, 110

Employee Benefit Research Institute, 38

Employee total compensation package, 44,50

Employer mandates, See Play-or-Pay approach

Employer tax deduction, 51

Employers

estimate summary, 20-21

Individual Vouchers or Tax Credits approach impacts,

45-46, 100

insurance coverage spending, 43-44,47

Managed Competition approach impacts, 46, 101

Play-or-Pay approach impacts, 45,98-100

provisional checklist, 78-79

Single Payer approach impacts, 4445,97-98

Employment

Individual Vouchers or Tax Credits approach impacts, 51,

103

Managed Competition approach impacts, 51

Play-or-Pay approach impacts, 50-51, 101-103

provisional checklist, 78-79

reform impacts, 49-50, 51-52

Single Payer approach impacts, 50, 101

Employment-based approaches. See Play-or-Pay approach

Employment incentives, 51

Enthoven analysis, 12, 17,34,74,90

Enthoven/Kronick proposal, 91-92,97

Estimate summaries

. . administrative costs impacts, 24-25

employer impacts, 20-21

Federal, State, and local budget impacts, 18-19

household impacts, 22-23

National health care spending and savings impacts, 16-17

overview, 14-15

Executive Office of the President. See Bush administration

plan

Expenditures. See Federal, State, and local budgets; National

health care spending and savings; Physician spending

Families USA, 54. See also Bipartisan Panel on Presidential

Candidates’ Health Plans

Family budgets. See Households

Federal, State, and local budgets

administrative costs impacts, 64-65

cost containment, 41-42

estimate summary, 18-19

health care financing distribution, 37-38

Individual Vouchers or Tax Credits approach impacts, 40,

96

Managed Competition approach impacts, 40-41,96-97

Play-or-Pay approach impacts, 39, 94-96

provisional checklist, 78-79

Single Payer approach impacts, 38-39,93-94

Federal deficit, 59, 103

Federal Insurance Contributions Act, 100

GAO. See General Accounting Office

GDP. See Gross domestic product

General Accounting Office, 16,24,32,74,86, 108

Goals of health care reform, 7,70

Gross domestic product

. . administrative costs impacts, 109

National health care spending portion, 31-32,74, 89,90

Group-model health maintenance organizations

employer impacts. 46.101
Index I 131

household impacts, 57, 107

National health care spending and savings impacts, 34,

91-92

Grumbach and colleagues analysis. See Physicians for a

National Health Program/Grumbach and colleagues

HealthAmerica: Affordable Health Care for All Americans

Act, 88-89, 103

Health Care Financing Admini stration, 25, 31, 108, 109-110

Health care financing distribution, 37-38

Health care sector impacts, 49-50, 101

Health Insurance: The Hawaiian Experience, 82

Health Insurance Association of America, 18, 93

Health insurance funding flows, 5

Health insurance industry

administrative costs impacts, 62,64, 110

employment impacts, 49-50

National health care spending and savings impacts, 89-90

Health insurance purchasing groups, 12,57,92-93

Health maintenance organizations. See also Group-model

health maintenance organizations

employer impacts, 46, 101

Federal, State, and local budget impacts, 97

National health care spending and savings impacts, 34,

91-93

Heritage Foundation plan

administrative costs impacts, 25, 64, 110

employer impacts, 21, 45-46, 100

employment impacts, 51, 103

Federal, State, and local budget impacts, 19,40,96

household impacts, 23, 56-58, 106

National health care spending and savings impacts, 17,

33-34, 74, 90

HIAA. See Health Insurance Association of America

Hospital Insurance Trust Fund, 46, 100

Households

direct and indirect spending in NHE terms, 54

distributional effects, 57-58

estimate summary, 22-23

indirect spending through Federal taxes, 54-55

Individual Vouchers or Tax Credits approach impacts,

56-57, 105-106

Managed Competition approach impacts, 57, 107

per-capita and per-family estimates, 57

Play-or-Pay approach impacts, 56, 104-105

provisional checklist, 78-79

reform impacts, 53-54, 58

Single Payer approach impacts, 55-56, 104

Individual health care financing. See Heritage Foundation

Plan; Households

Individual Vouchers or Tax Credits approach

administrative costs impacts, 25, 63-64, 109-110

approaches and proposal, 9

employer impacts, 21, 45-46, 100

employment impacts, 51, 103

Federal, State, and local budget impacts, 19,40,96

household impacts, 23,56-57, 105-106

National health care spending and savings impacts, 17,

33-34,74-75,89-90

reform approaches, 11-12

Insurance industry, See Health insurance industry

Insurance premium taxes, 64

Insurance prices, 64,92-93,95

Insurance Status and Health Care Utilization: Analysis of

Four Data Bases and Cost Implications of universal

Coverage, 82

Insurer administrative costs, 64

Investment, 59, 101

Jackson Hole Group, 97

Joint Committee on Taxation, 37

Joint Economic Committee/GOP staff, 103

Klerman analysis, 102

Large businesses, 43-45, 61, 98-100

Lewin-VHI/American Academy of Family Physicians

administrative costs impacts, 25, 63, 109

employer impacts, 20, 99-100

Federal, State, and local budget impacts, 18,96

household impacts, 23, 58, 105

National health care spending and savings impacts, 16,88

Lewin-VHI analysis, 64,97

Lewin-VHI/U.S. Bipartisan Commission on Comprehensive

Health Care, 16, 18, 20, 23, 87-88,95,99

Lewin-VHI/Bipartisan Panel on Presidential Candidates’

Health Plans, 17, 25, 89-91, 106-107, 110

Lewin-VHI/Canadian-style system, 16,24,62,74-75,85-87,

109

Lewin-VHI/Families USA, 54

Lewin-VHI/HealthAmerica: Affordable Health Care for All

Americans Act, 103

Lewin-VHI Health Benefits Simulation Model, 14

Lewin-VHI/Heritage Foundation

administrative costs impacts, 25, 110

employer impacts, 21, 100

Federal, State, and local budget impacts, 19,40,96

household impacts, 23,56-58, 106

National health care spending and savings impacts, 17,90

I.meal budgets. See Federal, State, and local budgets

Long and Rodgers analysis

administrative costs impacts, 64-65

employer impacts, 21, 46, 101

Federal, State, and local budget impacts, 19,41,97
132 I An Inconsistent Picture

household impacts, 23,57, 107

National health care spending and savings impacts, 17,74,

91-92

Low-income individuals

employment impacts, 51

Federal, State, and local budget impacts, 95,97

household impacts, 56,58, 106-107

National health care spending and savings impacts, 91

Low-wage labor, 103

Managed Competition Act of 1992,34,96-97, 110

Managed Competition approach

administrative costs impacts, 25, 64-65, 110-111

approaches and proposals, 9

employer impacts, 21,46, 101

employment impacts, 51

Federal, State, and local budget impacts, 19,4041,96-97

household impacts, 23,57, 107

National health care spending and savings impacts, 17,34,

74-75,90-93

reform approaches, 12-13

Single Payer approach comparison, 40

Market-based/consumer choice approach. See Individual

Vouchers or Tax Credits approach; Managed Competition approach

Market competition. See Managed Competition approach

Marmor and Boyum, 7

Medicaid

administrative costs impacts, 63

employer impacts, 45, 99

employment impacts, 103

Federal, State, and local budget impacts, 38-41,94-97

household impacts, 105-107

National health care spending and savings impacts, 87-88

reform approaches, 11

Medical and Health Insurance Information Reform Act of

1992,25, 110

Medicare

administrative costs impacts, 63, 108

employment impacts, 101

Federal, State, and local budget impacts, 38,4041,94-97

household impacts, 105-107

National health care spending and savings impacts, 32,

87-88

reform approaches, 11

Medigap, 32,88

Meyer and colleagues analysis

administrative costs impacts, 24, 109

employer impacts, 20, 97-98

Federal, State, and local budget impacts, 18,93

National health care spending and savings impacts, 16,74,

86

. . Milliman & Robertson analysis, 94

Minimum wage, 101-103

Monheit and Short analysis, 101-102

Morrisey analysis, 101

National Health Board, 12, 34

National health care spending and savings. See also Cost

controls

administrative costs impacts, 107-108

estimate summary, 16-17

findings Summary, 3-5

household impacts, 54

Individual Vouchers or Tax Credits approach impacts,

33-34,89-90

Managed Competition approach impacts, 34,90-93

Play-or-Pay approach impacts, 32-33,87-89

provisional checklist, 77-78

selected economic areas impacts, 59-60

Single Payer approach impacts, 32,74-75,85-87

National health policy, 69-70

National Leadership Coalition for Health Care Reform, 16,

18,74,88,96

NHE. See National health care spending and savings

NLCHCR. See National Leadership Coalition for Health

Care Reform

Nonfinancial Barriers to Access, 82

Office of Management and Budget, 89

Office of National Statistics, 54

Old Age, Survivors and Disability Insurance, 46, 100

Operational assumptions of proposals, 80

Out-of-pocket costs. See Households

Paperwork burden, 62,64,78, 109-110

Part-time employees, 97-98, 101-102

Payroll taxes. See also Medicaid; Medicare

employer impacts, 98-100

employment impacts, 103

Federal, State, and local budget impacts, 39,94-95,97

household impacts, 56, 104-105

National health care spending and savings impacts, 91

Pepper Commission. See Bipartisan Commission on Comprehensive Health Care

Per-capita estimates, 57,89

Per-family estimates, 57,89

Physician spending, 108-109

Physicians for a National Health Program/Grumbach and

colleagues, 16, 24, 86-87, 107-108

Play-or-Pay approach

administrative costs impacts, 24, 63, 109

approaches and proposals, 9

employer impacts, 20,45, 98-100

employment impacts, 50-51, 101-103
Index I 133

Federal, State, and local budget impacts, 18, 39,94-96

household impacts, 22, 56, 104-105

National health care spending and savings impacts, 16,

32-33,74-75,87-89

reform approaches, 10-11

PNHP. See Physicians for a National Health Program/

Grumbach and colleagues

Policy considerations and conclusions

analysis summaries, 85-111

caveats on analyses, 13-14

conclusions, 73-75

policy considerations, 4-7, 14,69-71

provisional checklist, 75-80

Political values. See Social, political, and economic values

Price of insurance, 64,92-93,95

Primary Care for Uninsured People: Efficacy and Access, 82

Provisional checklist for policymakers, 75-80

Public-private combination approach. See Play-or-Pay approach

Quality-of-care information, 64

Questions for reviewing analyses, 6-7,75-80

Reischauer, Robert, 34, 90

Rx for Health, 88

Salaries and wages. See Wages

Savings and investment, 59, 101

Selected economic areas, 59-60

Service Employees International Union, 92-93

Sheils analysis, 103

Sheils and colleagues analysis

administrative costs impacts, 25, (64-65, 110-111

employer impacts, 46, 101

Federal, State, and local budget impacts, 19,41,97

household impacts, 57

National health care spending and savings impacts, 17,

91-92

Silow-Carroll analysis

employer impacts, 21,45-46, 100

Federal, State, and local budget impacts, 96

household impacts, 23,55,56-57, 106

National health care spending and savings impacts, 17,74,

90

Silow-Carroll and colleagues analysis, 22, 101, 104

Silow-Carroll and Meyer analysis, 16,88-89

Single Payer approach

administrative costs impacts, 24,63, 107-109

approaches and proposals, 9

employer impacts, 20, 44-45, 97-98

employment impacts, 50, 101

Federal, State, and local budget impacts, 18,38-39,93-94

household impacts, 22,55-56, 104

Managed Competition approach compared with, 40

National health care spending and savings impacts, 16,32,

74-75,85-87

reform approaches, 10

Small businesses

administrative costs impacts, 61, 110

employer impacts, 98-100

employment impacts, 102-103

insurance coverage spending, 43-45

Social, political, and economic values, 70-71

Social and political implications of change, 14,69-70

Spending. See Cost controls; Federal, State, and local

budgets; National health care spending and savings;

Physician spending

Starr, Paul, 41,64,91

State budgets. See Federal, State, and local budgets

State insurance premium taxes, 64

Steuerle analysis, 38,54-55,59

Stevens, Ted, 6, 81

Tax policy. See also Corporate income taxes; Employer tax

deduction; Individual Vouchers or Tax Credits approach; Payroll taxes

employer impacts, 44-45

Federal, State, and local budget impacts, 37-38,93-97

household impacts, 54-57

provisional checklist, 78-79

Technology, Insurance, and the Health Care System, 6,81-82

Terminology used in report, 7-10, 13

Thorpe analysis, 61-62

Total compensation package, 44, 50

21st Century American Health Care System, 97

Uninsured individuals

administrative costs impacts, 108-109

employment impacts, 103

Federal, State, and local budget impacts, 95-96

household impacts, 105

National health care spending and savings impacts, 74,89

universal coverage, 75

Universal coverage. See also Canadian-style system; Single

Payer approach

administrative costs impacts, 63,65

approaches and proposals, 9

employer impacts, 45-46

employment impacts, 50, 102

findings Summary, 3-5

household impacts, 55

National health care spending and savings impacts, 35,75

provisional checklist, 76,79

reform approaches, 10-13

reform goals, 7
134 I An Inconsistent Picture

Urban Institute, 98 Zedlewski analysis, 98, 102

U.S. Bipartisan Commission on Comprehensive Health Zedlewski and colleagues analysis

Cam. See Bipartisan Commission on Comprehensive administrative costs impacts, 109

Health Care employer impacts, 20,98

employment impacts, 102

Wages Federal, State, and local budget impacts, 18,95

employer impacts, 46, 100 household impacts, 104-105

employment impacts, 50, 101-103

household impacts, 54,56-57

Woolhandler and Himmelstein analysis, 24,61, 107

Workgroup on Electronic Data Interchange, 62

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