DESCRIPTION AND ANALYSIS OF THE 

EMPLOYER MANDATE AND RELATED 

PROVISIONS OF H.R. 3600 

.. (''HEAL TIl SECURITY ACT") 

SCHEDULED FOR A HEARING 

BEFORE THE 

HOUSE COMMITTEE ON WAYS AND MEANS 

75-969 

ON FEBRUARY 3, 1994 

PREPARED BY THE STAFF 

OF THE 

JOINT COMMITTEE ON TAXATION 

FEBRUARY 2, 1994 

U.S. GOVERNMENT PRINTING OFFICE 

WASHINGTON: 1994 

For sale by the U.S. Government Printing Office 

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

ISBN 0-16-043555-2 

JCS-l-94 
JOINT COMMITTEE ON TAXATION 

l03n CONGRESS, 2n SESSION 

SENATE 

DANIEL PATRICK MOYNIHAN, New York 

Chainnan 

MAX BAUCUS, Montana . DAVID L. BOREN, Oklahoma 

BOB PACKWOOD, Oregon 

ROBERT DOLE, Kansas 

HOUSE 

DAN ROSTENKOWSKI, Illinois 

Vice Chainnan 

SAM GIBBONS, Florida 

J.J. PICKLE, Texas 

BILL ARCHER, Texas 

PHILIP M. CRANE, Illinois 

PETER V.Z. COBB, Deputy Chief of Staff 

MARY M. SCHMITT, Associate Chief of Staff (Law) 

BERNARD A. SCHMITT, Associate Chief of Staff (Revenue Analysis) 

(II) 

... 
CONTENTS 

Page 

INTRODUCTION •••••......•••••••.....•••••.••.....••••.•••••..••••••...••.••••..•••••••..••• 1 

I. OVERVIEW OF THE HEALTH SECURITY ACT ..•••••.....•••••.....•.• 2 

II. DESCRIPTION OF THE EMPLOYER MANDATE AND RELATED 

PROVISIONS OF THE HEALTH SECURITY ACT .•..•...........••• 18 

A. Premium Caps ......................................................... 18 

1. Regional Alliance Health Expenditures ...... .... 18 

a. Computation of targets and accepted 

bids (secs. 6001-6007) ......................... 18 

b. Plan and provider payment reductions 

to maintain expenditures within targets (secs. 6011-6012) ......................... 23 

2. Corporate Alliance Health Expenditures 

(secs. 6021-6022) ............................................ 25 

3. Treatment of Single-Payer States (sec. 6031) 27 

4. Transition Provisions-Monitoring Prices 

and Expenditures (sec. 6041) ........................ 29 

B. Premium-Related Financings ................................. 29 

1. Employer Premium Payments for Regional 

Alliance Employers (secs. 6121-6126) .......... 29 

a. In general ............................................... 29 

b. Base employment premiums ................. 29 

c. Premium payment required of each 

employer ................... ; ........................... 33 

d. Caps on employer premiums ................ 34 

e. Adjustments for large employers who 

participate in regional alliances ......... 36 

f. Additional employer payments for bad 

debt losses ............................................ 38 

g. "Employer" payments for self-employed 

individuals ............................................ 39 ~ 2. Corporate Alliance Employers Payments ....... 39 

a. Employer premium payments required 

(sec. 6131) ..................... ; ....................... 39 

b. Assessment on corporate alliance employers (sec. 7121) ................................ 41 

3. Employer Payments with Respect to Retiree 

Health Benefits ............................................... 42 

a. Employer retiree obligation (sec. 1608) 42 

(III) 
IV 

b. Temporary assessment on employers 

with retiree health benefit costs (sec. 

7121) .................................................... . 4. Regional Alliance Family Share of Premiums 

(secs. 6101-6107 and 6111-6115) ................ . a. In general .............................................. . b. Notification requirements .................... . c. Regional alliance family share ............. . d. Amount of premium .............................. . e. Premium discount based on income .... . f. Alliance credit ........................................ . g. Repayment of alliance credit by certain 

families ................................................ . h. Excess premium credit ......................... . i. Corporate alliance opt-in credit ............ . j. Family collection shortfall add-on ........ . 5. Corporate Alliance Family Share of Premiums (secs. 6101-6107) .............................. . a. In general .............................................. . b. Amount of premium .............................. . c. Premium discount based on income .... . d. Alliance credit ....................................... . 6. Recapture of Certain Health Care Subsidies 

Received by High-Income Individuals (sec. 

7131) ............................................................... . 

C. Payments to Regional Alliance Health Plans 

(secs. 6201-6202) ...................................................... . 

III. EXAMPLES OF PREMIUM CALCULATIONS •.•••••••..••......••.••..•••• 

A. Example 1: 'Regional Alliance ............................... . 

B. Example 2: Corporate Alliance ............................. . 

IV. ANALYSIS OF THE EFFECTS OF THE EMPLOYER MANDATE 

AND RELATED PROVISIONS OF THE HEALTH SECURITY 

Page 

44 

45 

45 

45 

46 

48 

49 

52 

53 

57 

58 

58 

59 

59 

59 

60 

61 

61 

64 

70 

70 

77 

ACT •...•••••••...••.••••..••.•....•••••••..•.•••••...•••.•••••...••••••...••.••.•.••••.. 80 

A. Overview .................................................................. 80 

B. Rationales for Mandated Health Insurance .... ... ... 80 

C. Economic Effects of a Health Insurance Mandate ............................................................................ . 1. In general ......................................................... . 2. Individual mandates ....................................... . a. In general .............................................. . 

b. E=d:ee~~ ... ~~~~.~ ... ~.~ .. ~ ... ~~~~~~~~ 3. Employer mandates ......................................... . a. In general ................ : ............................. . b. Full employer mandate ........................ . c. Partial employer mandates .................. . 

87 

87 

87 

87 

89 

90 

90 

91 

94 

.. 
v 

Page 

d. Other issues regarding employer mandates ..................................................... 96 

4. Mandates with subsidies .................................. 98 

a. In general ... ........ ....... ...... .................... ... 98 

b. Subsidies to low-income individuals 

and families .. ... ... ........ ............ ........ ....•. 98 

c. Firm level subsidies .... .... ........ ........ ....... 99 
INTRODUCTION 

This pamphlet,l prepared by the staff of the Joint Committee op. 

Taxation, provides a description and analysis of the employer mandate and related provisions of H.R. 3600 ("Health S~u:tity Act"). 

The Committee on Ways and Means has scheduled a public hearing 

on the employer mandate and related provisions in the Health Security Act, H.R. 3600, on February 3, 1994. 

The Committee on Ways and Means began its consideration of 

'? the employer and individual premium mandate provisions in the 

Health Security Act during its November 1993 hearings on the financing provisions of the Act. These hearings were held prior to 

the formal introduction of the Act as H.R. 3600 on November 20, 

1993. 

Part I of the pamphlet is an overview of the Health Security Act; 

Part II is a description of the employer mandate an4 :related provi- sions of the Health Security Act; Part III sets fortll e:l[~ples of 

premium calculations; and Part IV is an analysis of the economic 

effects of the employer mandate and related provisions of the 

Health Security Act. 

1 This Pamphlet may be cited as follows: .}ointCom:mittee on Taxation: Description and AndZy. sis of the Employer Mandate and Relat'edPro;i{srons otH.IC3(f(J(j("ltealth Security Act") (JCS1-94), February 2, 1994. 

(1) 
L OVERVIEW OF THE HEALTH SECURITY ACT 

Universal coverage and comprehensive benefit package 

Under the Health Security Act, all American citizens and residents would be guaranteed a comprehensive health benefit package. Individuals would generally be required to enroll in an applicable health plan providing the guaranteed benefit package 

through an appropriate health alliance. The comprehensive benefit 

package would be set forth in the statute initially, and would be 

subject to the cost sharing requirements of the bill, the exclusions 

in the bill, and the duties and authority of the National Health 

Board to be established by the bill. Individuals would be able to 

purchase supplemental health insurance to cover health services 

not included within the comprehensive benefit package. 

Each health plan would be required to offer one, and -only one, 

of three prescribed cost sharing schedules: lower cost sharing; higher cost sharing; or combination cost sharing (sees. 1131-1139). 

These cost sharing schedules would be defined generally as follows. 

Under a lower cost sharing plan, deductibles would be prohibited. The annual limit on individual out-of-pocket cost sharing 

would be $1,500, and the annual limit on family out-of-pocket cost 

sharing would be $3,000. Copayments 2 would be permitted as specified in the bill (e.g., $10 for outpatient services, $25 for hospital 

services, and $20 for certain dental services). No coinsurance 3 (except for an out-of-network item or service 4 ) would be permitted 

under a lower cost sharing plan. 

A higher cost sharing plan would have deductibles (for most 

items and services in the comprehensive benefit package) of $200 

for individuals and $400 for families. Coinsurance would be required under a higher cost sharing plan. The annual limits on outof-pocket cost sharing would be the same as under a lower cost 

sharing plan. 

A combination plan could have cost sharing that differs depending on whether the enrollee uses preferred providers or out-of-network providers. 

The dollar limits on deductibles and copayments would be indexed for inflation after 1994. 

2 Copayments are amounts, expressed as a dollar amount, that an individual may be required 

to pay with respect to an item or service, such as $10 per office visit. S Coinsurance is an amount, expressed as a percentage of an amount otherwise payable, that an individual may be required to pay with respect to an item or service, such as 20 percent 

of the total fee for a service. 4 Under the bill, a "provider network" would mean providers who have entered into an agreement with a health plan under which the providers are obligated to provide items and services 

in the comprehensive benefit package to individuals enrolled in the plan. An "out-of-network" 

good or service would mean items or services provided to an individual enrolled under a health 

plan by a provider who is not a member of a provider network of the plan (sec. 1402(f)). 

(2) 

.. 
3 

National Health Board 

The operation of the new health care system would be overseen 

by a National Health Board (the "Board"). The Board would consist 

of seven members appointed by the President by and with the advice and consent of the Senate. The chair of the Board would serve 

a term concurrent with that of the President, arid could serVe a 

maximum of three terms. The other members of the Board would 

serve staggered, 4-year terms. A member other than the chair 

could serve a maximum of two terms. 

Among other things, the Board would have the authority to establish requirements for State plans and monitor compliance with 

the bill's requirements, interpret and update the comprehensive 

benefit package, and recommend changes in the package to the 

President and the Congress. It would also establish a baseline 

budget for alliances and certify compliance with the budget. 

Health alliances 

In general 

Individuals would generally obtain health insurance through regional health alliances established and overseen by States or 

through corporate health alliances established by large employers 

or certain other entities. In general, if a family has only one worker 

and that worker is eligible to enroll in a corporate alliance plan, 

then the entire family would obtain insurance through the corporate alliance. Otherwise, the family would obtain insurance 

through the regional health alliance for the alliance area in which 

the family resides. 

Comment: It is unclear what would happen in the case of 

a family whose members reside in more than one regional 

alliance area. The bill provides that the Board is to develop rules to deal with Sjuch cases and similar situations, 

including treatment of children of divorced or separated 

parents and changes in family composition occurring during a year (sec. 1011(0). It is also not clear how residence 

is to be determined. For example, suppose an individual 

maintains a household in California, but is currently living 

in New York where ,she is worlting on an indefinite basis. 

It is not clear where the individual would be considered to 

reside. 

Special rules would apply in determining the appropriate alliance 

if more than one family member is employed. If an individual and 

his or her spouse are employed and eligible to participate in different corporate alliances or if one spouse is eligible to participate 

in a regional alliance and the other in a corporate alliance, they 

must choose the alliance in which the entire family will participate. 

Similarly, a single individual who is employed by a regional alliance employer (or employers) and a corporate alliance employer (or 

employers) may elect to enroll in a health plan offered by the regional alliance for the alliance area in,wll,ich tlw individu~ resides 

or a corporate alliance health plan (if applicable).' ' 

In lieu of establishing a system of regional alliances, States 

would be permitted to establish single-payer systems. 
4 

Regional alliances 

The bill would require States to establish regional alliances. by 

January 1, 1997. Regional alliances could,Q~organized as non-profit organizations, independent State agencies, or agencies of the 

State. Only one regional alliance could serve any geographic area, 

and no regional alliance could serve a geographic area crossing 

State boundaries. States. would be. required to certify health plans 

that can offer coverage through an alliance. 

Comment: Employers may be required to make premium 

payments to more than one regional alliance. This will be 

particularly true of large employers, but may also occur in 

the case of small employers in areas in which a metropolitan area crosses more than one State. For example, a 

small employer located in the District of Columbia may 

have employees who reside in the District of Columbia 

may have employees who reside in the District of Columbia, Maryland, Virginia, and possibly even West Virginia 

and Pennsylvania. Because each State will establish its 

own regional alliances and the premiuin payments will be 

based on the demographics of the individuals residing 

within the regional alliance area, it is likely that even a 

small employer will be making different premium payments on behalf of its employees to the extent that they 

reside in different regional alliance areas. 

Regional alliances would be governed by a Board of Directors 

with equal representation of employers whose employees purchase 

health coverage through the alliance (including self-employed individuals), and individual consumers. E~ch regional alliance would 

also be required to have a provider advisory board consisting of 

representatives of health care providers and professionals who provide covered services thrqugh health plans offered by the alliance. 

Regional alliances would negotiate with State-certified health 

plans and enter into contracts with he~th plans to provide health 

services to eligible individuals. Regional alliances would be required to offer at least one "fee-for-service" plan among the health 

plans offered to eligible individuals.5 

Regional alliances would receive funds .. from the following 

sources: employer and individual premiums (directly and through 

transfer payments from other alliances); State and Federal payments for recipients of Aid to Families with Dependent Children 

(AFDC) and supplemental security income (SSI); State maintenance of effort payments; payments from corporate alliances for 

dual earner families; and Federal payments for premium subsidies. 

Regional alliances would disburse fu~ds for the following reasons: 

payments to health plans; administrative costs; payments to other 

alliances for dual earner families and for certain other situations; 

and payments to the Federal Government for academic health centers. 

"In (Elneral, a "fee-for-service" plan would be defined as a health plan that provides coverage for allltems and services included in the comprehensive benefit ~ckage, subject to reasonable 

restrictions, and makes payments for such benefits to providers Wlthout regard to whether there 

is a contractual arrangement between the plan and the provider. 

.. 
5 

Corporate alliances 

In general, under the bill, most employers with more than 5,000 

full-time employees (large employers), certain multiemployer 

plans,6 rural electric cooperatives, rural telephone cooperatives,7 

and the U.S. Postal Service could elect to provide health care coverage through corporate alliances rather than purchasing coverage 

through regional alliances. The following employers would not be 

entitled to maintain a corporate alliance: an employer whose primary business is employee leasing; the Federal Government (other 

than the U.S. Postal Service); and a State government, a unit of 

local government, and an agency or instrumentality of government, 

including any special pu.rpose un.it of government. 

Full-time employees of a large employer that elected to form a 

corporate alliance WOUld. be eligible to enroll in a health plan offered by the alliance. ParlAime employees of a corporate alliance 

employer would not be eligible to enroll in a corporate alliance by 

reason of such employment, but woUld be eligible to enroll in a regional alliance. The following individuals also would not be eligible 

to enroll in a corporate alliance: recipients of Aid to Families with 

Dependent Children (AFDC); recipients of supplemental security 

income (SSI) benefits; certain military personnel and their families, 

veterans, and Indians who have coverage under another health 

plan; and seasonal or temporary workers (as defined by the National Health Board), other than workers who are tre~ted. as eligible to enroll in a corporate alliance health plan pursuant to a collective bargaining ~ement. In general, a full-time employee 

would be an employee who is employed for at least 120 hours in 

a month. An employee who is not so employed nevertheless would 

be a full-time employee if the employee is employed on a continuing 

basis that, taking into account the structure or nature of the employment in the industry, represents full-time employment pursuant to rules established by the National Health Board. 

In general, if an individual is the only worker in a family and 

is eligible to participate in a corporate alliance, then the individual 

and his or her family would be required to participate in a health 

plan of the corporate alliance, and could not obtain coverage through a regional alliance. Special rules would apply if both the 

individual and his or her spouse were employed by differente1l1-

ployers. Thus, if an employee eligible to participate in a corporate 

alliance is married to a working individual eligible to receive coverage under another corporate alliance or a regional alliance, then 

they may choose where the entire family is to be covered. 

An employer would have only one opportunity to elect to form a 

corporate alliance. If the employer did not elect to form a corporate 

alliance when first eligible to do so, it coUld never do so. Elections 

6A multiemployer plan could form a corporate alliance if (1) thellan offered health benefits as of September 1, 1993, and (2) as of both September 1, 1993, an January 1, 1996, the plan (a) has more than 5,000 active participants in the United States or (b) the plan is maintained 

by one or more affiliates of the same labor organization (or one or more affiliates of labor organi- zations representing employees in the same industry) covering more than 5,000 emJ?loyees. 7 Rural electric and telephone cooperatives may maintain a corporate alliance WIth respect to 

a group health plan maintained by such cooperative if (1) thellan offered health benefits as of September 1, 1993, and (2) as of both September 1, 1993, an January 1, 1996, the coopera- tive has more than 5,000 full-time employees in the United States entItled to benefits under 

the plan. .. 
6 

to form a corporate alliance would have to be fIled with the Department of Labor . . The bill contains specific provisions regarding the time by which 

elections to form a corporate alliance would. have. to. be made. In 

the case of an eligible sponsor that is a large employer on January 

1, 1997, the election would have to be made by January 1, 1996, 

or, if the State elects to participate under the Health Security Act 

before January 1, 1998, no later than the April 1 after the State 

forms regional alliances. In the case of an employer that is not an 

eligible large employer on January 1, 1997, and later becomes one, 

the election to form a corporate alliance would have to be made no 

later than March 1 of the year following the year in which the employer first becomes such a sponsor. In the case of multiemployer 

plans and rural cooperative plans, the election would have to be 

made no later than March 1, 1996. All elections to form a corporate 

alliance would be effective for coverage provided under health 

plans on and after January 1 of the year following the year in 

which the election is made. 

Comment: The rules regarding timing of elections for large 

emfloyers present a number of issues. For example, how 

wi! a large employer know on January 1, 1996, that it will 

still be a large employer on the following January I? Also, 

the election to form a corporate alliance may be required 

to be made before the State is participating and before regional alliances are formed. . 

The election to maintain a corporate alliance could be terminated 

voluntarily by the employer. In addition, the election would be terminated if the number of full-time employees falls below 4,800. The 

Department of Labor could terminate an election if it finds that 

corporate the alliance has failed to fulfill its requirements or that 

it has violated the prohibition against excess increases in premium 

expenditure. If an election terminates for any reason, the employer 

.could not again elect to form a corporate alliance. A termination of 

a corporate alliance would be effective as of the effective date of enrollments in regional alliance health plans made during the next 

open season. 

Employer mandate 

All employers would be required to pay a portion of the cost of 

the comprehensive benefit package for their employees. 

Premiums 

Regional alliances 

In general.-Each regional alliance would contract with the various health plans interested in providing health benefits to individuals residing in the alliance area. An individual who resides in the 

alliance area (and who is not eligible to participate in a corporate 

alliance) could choose coverage by any of the available plans. 

Participating plans would submit a per capita bid for providing 

the comprehensive benefits package to all eligible individuals residing within the alliance area. Using set formulas, this per capita bid 

would be converted into premiums for each type of family class: individual; couple-only (Le., a married couple without children); sin-

... 
7 

gle parent; or dual parent (i.e., a married couple with children). For 

this purpose, marital status would be determined in accordance 

with state law. 

Employer share of premiums.-An employer would be required to 

pay, for each employee, 80 percent of t:qe weighted-average premium for all plans in the alliance for the employee's class of enrollment. This weighted-average premium would be c:omputed for each 

family class on an alliance-wide basis according to a formula specified in the bill. Thus, employers would pay a fixed amount for each 

employee in a given family class, regardless of which plan actually is selected by the employee. The calculated averages would be 

based upon the number of wage earners in a given class (rather 

than the number of families covered in the class), to reflect that 

some families may have more than one wage earner. Under the 

bill, a single weighted-average premium would be calculated and 

would apply both to the single parent and dual parent classes of 

enrollment. 

In addition to the required employer premiums, employers could 

pay some or all of the family share of premiums on behalf of their 

employees, as long as all employees in the same class of enrollment 

received the same dollar amount. For part-time employees (those 

whose monthly employment is at least 40 hours, but less than 120 

hours), the required employer premium would be calculated on a 

pro rata basis, using 120 hours per month as a measure of full-time 

employment. Employer premiums would· be capped at 7.9 percent of an employer's total payroll. Small employers (those employing 75 or fewer 

employees) who pay average annual wages of $24,000 or less would 

be entitled to caps of 3.5 percent to 7.9 percent of total payroll, depending upon the average number of employees and their average annual wage. These caps would not apply to governmental employers before January 1, 2002. 

Special rule for large employers.-A large employer who is eligible to form a corporate alliance, but who chooses not to do so, or 

who forms a corporate alliance that is later terminated, would not 

be eligible for the percent of payroll caps for the first four years of 

regional alliance coverage. The benefit of the caps would be phased in ratably for such employers over the fifth through seventh years 

of regional alliance coverage, and would be fully available after 

seven years of regional alliance coverage. In addition, such employers would be required to make "excess risk" payments if the demographic risk of its employee pool exceeds the average demographic 

risk of all individuals eligible to participate in the regional alliance. 

(Demographic risk would be measured based on demographic characteristics such as age, gender, and socio-economic status.) The excess risk adjustment would be phased out ratably over the fifth 

through seventh years of regional alliance coverage. 

Bad debt.-Employers would be required to make additional premium payments to compensate for 80 percent of the antiCipated bad debt losses of the regional alliance. The regional alliance would 

estimate the total premiums unlikely to be collected, and diVide it 

by the number of people covered by the alliance to obtain a per capita shortfall amount. The per capita shortfall amount would be converted into a premium amount for each family class using the same 
8 

methodology as used to calculate base premiums. All employers 

would be required to make this payment regardless of any percent 

of payroll caps that would otherwise apply. 

Self-employed individuals.-A self-employed individual (i.e., an 

individual whose earnings are subject to self-employment taxes) 

would be treated as employing himself or herself for purposes of 

calculating the employer premium due. The individual's net selfemployment earnings would be deemed wages paid. The amount of 

employer premium due for a self-employed individual would be reduced by the amount of any employer premiums paid by other employers of the individual. The bill also would provide an anti-abuse 

rule applicable to any individual who is both an employee and a 

substantial owner of a closely-held business. . Family share of premiums.-The premium owed by a family living in an alliance area would depend upon the specific plan selected by the family. Each family having a family member employed on a full-time basis would be entitled to a "credit" of 80 percent of the weighted average premium. for all plans in the alliance 

for its family class. The credit would be reduced proportionately if 

family members were employed only on a part-time basis, or were 

unemployed.s The family premium due would be the difference between the total premium for the plan actually selected and this 

computed credit. The family premium could be less than 20 percent 

of the average premium if a low-cost plan is selected or more if a 

higher-priced plan is selected. 

Families also would be required to make additional premium 

payments to compensate for 20 percent of the anticipated bad debt 

losses of the regional alliance, under a calculation similar to that 

described above for employers. Certain low-income families would be entitled to a reduction in 

the family share of premiums owed. Such fainilies inchide Aid to 

Families with Dependent Children (AFDC) or Supplemental Security Income (SSI) recipients, those having family adjusted income 

below 150 percent of the poverty level, or those earning less than 

$40,000 and for whom the family obligation amount would otherwise exceed 3.9 percent of the family's adjusted income. Depending 

upon income, the reduction would be an amount up to 20 percent 

of the weighted-average premium for all plans in the alliance for 

its family class. 

Corporate alliances 

Each corporate alliance would determine its own weighted average premium for health plans offered by the alliance. Premiums 

charged by a corporate alliance for health care coverage under a 

plan could vary only by class of family enrollment and by premium 

area. Corporate alliances would be required to designate premium 

areas which reasonably reflect labor market areas or health care 

delivery areas and are consistent with rules to be established by 

the Department of Labor. The employer premium for corporate· alliance employers would be 80 percent of the weighted average premium. In addition, corporate alliance employers would be required 

8The statutory language calls this reduction a "repayment" of the alliance credit. As a practical matter, no repayment would be involved; the amount of the credit simply would be reduced 

and the family would be required to pay a greater premium. 

.. 
9 

to subsidize the premiums of full-time workers who have wages of 

less than $15,000 on an annualized basis. The $15,000 threshold 

would be indexed annually for inflation after 1994~ Individuals 

would be required to pay the difference between the employer 

share and the cost of the plan they select (subject to the low-wage 

subsidy). The 7.9-percent payroll cap on employer premiums would 

not apply to corporate alliance employers. 

Employer payments with respect to retiree health benefits 

The bill would impose two additional obligations on certain em-

"ployers (whether regional or corporate alliance employers) with re:-

spect to the health benefits .. of early retirees and their dependents. In general, the bill would'-provide that the employer share of the 

cost of providing the comprehensive benefit package to early retirees (other than high-income early retirees) is to be paid by the Federal Government. In some cases, employers may have had plans 

which obligated them to pay these retiree medical costs. 

To prevent a windfall tp such employers, the bill woU;ld impose 

a temporary assessment on ·employers whoseteti~e heal~ll~Q§ts 

would be reduced by reason of the Federal subsidy. In addition, 

under the bill~ employers who were paying for a portion of an early 

retiree's health costs on. October 1, 1993, would be required to pay 

20 percent of the average weighted premium for such early retiree's 

class of enrollment. The payment obligation would apply for each 

month beginning with January 1, 1998, but would be limited to individuals who were early retirees on October 1, 1993. 

Cap on health care expenditures 

The Administration expects that the Act would result .in increased competition in the health care market, and that such competition would reduce the growth in health care expenses. In addition, the Act would impose limits on the payments made by alliances. to health plans and providers. 

Regional alliances 

The amount that regional alliances would be allowed to pay 

health plans and providers would be subject to a budget. The Federal Government would be responsible for enforcing this budget, 

generally as described below. . No later than January I, 1995, the National Health Board would 

be required to establish a national per capita baseline premium 

target for the comprehensive benefit package based on 1993 per 

capita health expenditures, trended forward. This amount would be 

increased annually for inflation based on the "general health care 

inflation factor." For 1996, the inflation factor would be the percentage increase in the conSUlner price index (CPI), plus 1.5 percentage points; for 1997, the inflation factor would be the percentage increase in the CPI plus 1.0 percentage points; for 1998, the 

inflation factor would be the percentage increase in the cpr plus 

0.5 percentage points; for 1999 and 2000, the inflation factor would 

be the percentage incre~e in the.gJ:>~~"For later years, the Board 

would be required to submit to Congress recomttlen<iations of what 

the general health care inflation factor should be. 
10 

The Board would then set an initial per capita premium target 

for each regional alliance based on the national per capita target 

and the general health care inflation factor. In setting alliance targets, the inflation factor and the overall target would be adjusted 

for factors specific to each regional alliance, such as variations in 

health care expenditures and the rate of uninsurance and 

underinsurance. The Board would adjust the regional per capita 

targets annually by a regional inflation factor. 

Regional alliances would be required to conduct a bidding and 

negotiation process with health plans. If the alliance's weighted average accepted premium exceeds the target set by the Board, the 

alliance could renegotiate premiums. If the final bids submitted by 

health plans exceed the alliance's premium target, premium caps 

would be triggered. As a res'Q,lt, payments to noncomplying plans 

and providers and enrollee premium payments would be reduced. 

Corporate alliances 

The National Health Board would be required to develop a methodology for calculating an annual per capita equivalent for amounts 

paid for coverage for the comprehensive benefit package within a 

corporate alliance. If a corporate alliance exceeds the allowable increase in health care costs as determined by the Board for two 

years in a 3-year period, then the Secretary of Labor would terminate the corporate alliance. 

Modifications to the Internal Revenue Code 

The bill would make a number of changes to the Internal Revenue Code (the "Code"). Some of these changes are intended to be 

financing provisions. These provisions are contained in Title VII of 

the bill.9 

Financing provisions 

Increase in tobacco excise taxes (sees. 7111-7113J.-The bill would 

increase the tax rate on all tobacco products by approximately $12.50 per pound of tobacco content, and would extend the tax to 

tobacco to be used in "roll-your-own" cigarettes. The provisions 

would be effective for tobacco products removed from a bonded production premises after September 30, 1994. A floor stocks tax 

would be imposed on tobacco products held on the effective date. 

Assessment on corporate alliance employers (sec. 7121J.-The bill 

would impose an annual assessment equal to 1 percent of payroll ~ 

on large employers that elect to form corporate alliances. The assessment would be effective on January 1, 1996. 

Temporary assessment on employers with retiree health costs (sec. 

7121J.-In general, the bill would provide that the cost of providing ;. 

the comprehensive benefit package to retirees between the ages of 

55 and 65 is to be paid by the Federal Government. In some cases, 

employers may have had plans which obligated them to pay these . retiree medical costs. To prevent a windfall to such employers, the 

bill would impose a temporary assessment on all employers with 

retiree health costs for the period 1991 to 1993 (the ''base period"). 

9For a detailed descril?tion and analysis oftbese provisions, see Joint Committee on Taxation, 

Description and Analyms of Title VII of H.R. 3600, S. 1757, and S. 1775 ("Health Security 

Act")(JCS-2o-93), December 20, 1993. 
11 

The assessment for a year would be equal to 50 percent of the 

greater of (1) the "adjusted base period retiree health costs" of the 

employer for the year, or (2) the am<mn,J by which the employer's applicable retiree health costs for the year were reduced by reason 

of the enactment of the Health Security Act. The temporary assessment would apply to 1998, 1999, "and 2000. 

Recapture of certain health care subsidies rec~tv~dby high-income 

inc!ividuals (se~. 7131).-Under the bill, taxpayers with modified 

adjusted gross Income (AGI) above a threshold amount would be required to pay additional premiums for coverage under part B of 

Medicare. In addition, eligible retirees and qualified spouses and 

children with modified AGI above the threshold amount would be 

required to pay the employer share of their premium for health 

care under, the "c~mprehensive benefit package. The threshold 

amount would be $90,000 for unmarried tlDtpayers and $115,000 

for married taxpayers filing joint returns.' The amount of these payments would be phased in for taxpayers with modified AGI which 

exceeds the threshold amount by less than $15,000 ($30,000 in the 

case of married taxpayers filing a joint return). The provision relating to part B Medicare premiums would be effective for taXable 

years beginning after December 31, 1995. The provision relating to 

payment of premiums under the comprehensive benefits package would be effective January 1, 1998. 

Modification of self-employment tax treatment of certain S corporation shareholders and partners (sec. 7141).-The bill would (1) 

amend the definition of net earnings from self-employment subject 

to self-employment taxes to include the pro rata share of certain 

S corporation income of certain shareholders and (2) modify the 

definition of net earnings from self-employment as applied to limited partners in a partnership for self-employment tax and health 

insurance premiums purposes. These provisions would apply to taxable years of individuals beginning after December 31, 1995, and 

to taxable years of S corporations and partnerships ending with or 

within such taxable years of individuals. 

Extending Medicare coverage to all State and local government employees (sec. 7142).-Under present law, State and local government employees hired before April 1, 1986, are ,not cov~red llll:der 

Medicare unless a voluntary agreement providing for such coverage is in effect. The bill would extend MediCare coverage on a mandatory basis to all employees of State and local governments not otherwise covered under present law, without regard to their dates.of 

hire. These employees and their employers would become liable for 

the hospital insurance tax, and the employee would earn credit toward Medicare eligibility. This provision would apply to services 

performed by State and local government employees after Septem- ber 30, 1995. -

Tax treatment of employer-provided health care 

Exclusion for employer-provided accident or health care (sec. 

7201).-Under present law, all employer contributions for accident 

or health coverage are excludable from an employee's income. 

Under the bill, employer contributions to an accident or health plan 

would be excludable from gross income and wages for income and 

employment tax purposes only to the extent the contributions are 
12 

for (1) the comprehensive benefit package provided for under the 

bill, (2) cost sharing amounts under the comprehensive benefit 

package (including cost sharing policies) or (3) permitted coverage. 

Permitted coverage would mean (1) coverage providing wages or 

payments in lieu of wages for any period during which the employee is absent from work on account of sickness or injury, (2) coverage providing payment for permanentinjurfes'of an: employee, or 

his or her spouse or dependent, that are computed with reference 

to the nature of the injury without regard to the period the employee is absent from work, (3) retiree health coverage provided to 

former employees after age 65, (4) coverage under a qualified longterm care policy, (5) coverage provided under Federal law to veterans or any member of the Armed Forces of the. United States and 

their spouses and dependents, and (6) any other employer-provided 

coverage which the Secretary of the Treasury determines should be 

excludable. 

The limit on the exclusion for employer-provided accident or 

health cQverage would be effective on and ~l' January 1, 2004, 

except that it would apply to flexible spending accounts on and 

after January 1, 1997. For this purposes, a flexible spending account would be defined as a benefit program that provides employees with coverage under which specified, incurred expenses may be 

reimbursed and under which the maximum amount of reimbursement that is reasonably available to a participant for such coverage 

is less than 200 percent of the value of such coverage. 

Cafeteria plans (sec. 7202).-Under the bill, accident Qr health 

coverage could not be provided through a cafeteria plan unless the 

coverage constitutes wages or payments in lieu of wages for\any period during which the employee is absent from work on a~unt of 

sickness or injury. This provision would be effective on anQ. after 

January 1, 1997. \ 

Health insurance expenses of self-employed individuals. (sec. 

7203).-Under prior law, self-employed individuals could deduct 25 

percent of the health insurance costs for themselves and 'their 

spouses or dependents. This deduction expired December 31, 1993. 

The bill would make the deduction for health insurance expellses 

permanent. In addition, effective on the earlier of January 1, 1997, 

or the first day on which the taxpayer could purchase comprehensive health coverage under the bill, up to 100 percent of the co.st 

of the comprehensive health coverage could be deductible. The 2~­

percent deduction would continue until the 100-percent deduction. 

is available. . 

Limitation on prepayment of medical insurance premiums (sec:' 

7204).-Under present law, taxpayers who itemize deductions may 

deduct amounts paid during the taxable year (if not reimbursed by \ 

insurance or otherwise) for medical care of the taxpayer and the· 

taxpayer's spouse or dependents to the extent .that the total of such 

expenses exceeds 7.5 percent of the taxpayer's adjusted gross income. The Internal Revenue Service recently issued a revenue rul-

.. 

.. 
13 

ing 10 stating that previous rulings 11 permitting a current deduction for fees for medical services to be provided in the future (if at 

all) should not be interpreted to allow a current deduction of payments for medical care (including medical insurance) extending 

substantially beyond the close of the taxable year in situations 

where the future care is not purchased In connection with obtaining lifetime care of the type described in the earlier rulings. Under 

the bill, for purposes of this itemized deduction, amounts paid during a taxable year that are allocable to insurance coverage or medical care to be provided during periods more than 12 months after 

the month in which the payment is made would be treated as paid 

ratably over the period during which the coverage or care is to be 

provided. This limitation would not apply to any premium paid 

under a qualified long-term care policy. The provision would apply 

to amounts paid after December 31, 1996. 

Employment status provisions 

Definition o{employee (sees. 7301 and 7303).-':'Thebill would repeal section 530 of the Revenue Act of 1978, which provides safe 

harbor rules under which service recipients can treat individuals as 

not being employees for employment tax purposes. The bill would 

codify a modified version of section 530 which would protect taxpayers against retroactive recl.assification of workers as employees. 

The bill would also give the Secretary of the Treasury the' authority 

to define the term "employee" by prospective regulations. The modified rules would generally apply for income tax purposes, employment tax purposes, and the bill's health care provisions. The provision relating to section 530 wo.uld generally be effective for periods 

beginning after December 31, 1995. The provision authorizing regulations would be effective on the date of enactment. 

Increase in penalties for failure to file current iiiformation returns 

with respect to non-employees (sec. 7302).-The Internal Revenue 

Code contains a number of information reporting requirements. 

The bill would modify the penalties for failure to comply with these 

requirements in the case of two types of information returns: (1) information returns under Code section 6041(a) which relate to payments to any person for services performed by such person (other 

than as an employee); and (2) returns regarding remuneration for 

services under Code section 604IA(a). Both of these sections of the 

Code relate to information returns with respect to payments made 

to non-employees, such as independent contractors. In general, the 

bill would increase the penalty for failure to file correct information 

returns. on or before August 1 from $50 for each return to the 

greater of $50 or 5 percent of the amount required to be reported 

correctly but not so reported. The provision would apply to information returns the due date for which (without regard to extensions) 

is more than 30 days after the date of enactment. 

lOReV. Rul. 93-72, 1993-34 IRB 7 (Nov. I, 1993). The ruling applies to amounts paid on or after October 14, 1993, except amounts paid pursuant to the terms of a binding contract entered 

into before that date. 11 Rev. Rul. 75-302, 197s.-:2 C.B. 86; Rev.RuI.75-303, 197s.-:2··C.g.87;~:RuCit6=481, 

1976-2 C.B. 82. 
14 

Tax treatment of funding of retiree health benefits (sees. 7401 

and 7402) 

Under present law, an employer may deduct contributions, within limits, made to a welfare benefit fund to prefund post-retirement 

medical and life insurance benefits. ,These rules generally permit 

the cost of the benefits to be funded over the working life of the 

employee. In addition, retiree medical benefits may be prefunded 

(within limits) through a separate account maintained under a taxqualified pension plan (Code sec. 401(h)). 

Effective with respect to contributions paid or accrued after December 31, 1994, the bill would provide that the minimum period 

during which the cost of post-retirement medical and life insurance 

coverage could be funded under a welfare benefit fund would be at 

least 10 years. In addition, contributions would not be permitted to 

be made to retiree medical accounts under pension plans after December 31, 1994. 

Coordination with health care continuation rules (sec. 7501) 

The health care continuation rules require that qualified beneficiaries that received coverage under a group health plan be pro- vided the opportunity to purchase health insurance for a specified 

:pe.riod under the group health plan after the occurrence of a quali- tying event (e.g., termination of employment) that otherwise would 

have terminated such health insurance coverage. These rules are 

designed to prevent gaps in health care coverage. The bill would repeal the health care continuation rules, effective on the earlier of 

January 1, 1998, or the fIrst day of the calendar year following the 

calendar year in which each State has in effect health plans under 

which individuals are eligible to receive comprehensive health coverage under the hill. 

Tax treatment of organizations providing health care services 

and related organizations (sees. 7601-7603) 

The bill would establish certain new requirements applicable to 

nonprofit health care providers (hospitals and health maintenance 

organizations (HMOs)) seeking to qualify as tax-exempt charitable 

organizations under Code section 501(c)(3). In particular, the bill 

would amend the Code specifically to require that, in order for the 

provision of health care services to constitute a charitable activity 

for purposes of section 501(c)(3), the organization providing such 

services must periodically assesses the health care needs of its 

community and develop a plan to meet those needs. In addition, 

the bill would provide that an HMO seeking tax-exempt status 

under section 501(c)(3) must furnish health care services to its 

members at its own facilities through health care professionals who r.. 

do not provide substantial health care services other than on.behalf 

of such organization. These provisions would be effective January 

1,1995. 

The bill further would provide that organizations which serve as 

parent holding companies for hospitals or medical research organizations constitute public charities rather than private foundations. 

Finally, the bill would add the to-be-established regional alliances 

to the list of tax-exempt organizations set forth in section 501(c). 

These provisions would be effective on the date of enactment. 
15 

The bill would also subject HMOs that are eX~lllpt under either 

501(c)(3) or 501(cX4) to new rules defining "commercial-type" insurance for purposes of section 501(m). In general, health insurance 

provided by an HMO would be treated as commercial-type insurance if it relates to care which is not provided pursuant to a preexisting arrangement between the HMO and a health care provider 

(other than emergency care provided to a member of such o!'ganiza- tion at a location outside such member's area of residence), The bill 

would identify four types of health insurance provided by an HMO 

that would not be treated as commercial-type insurance and thus, 

would not jeopardize the organization's tax-exempt status. Such 

non-commercial-type health insurance coverages generally would 

address emergency situations and situations in which a health care 

provider has a pre-existing relationship with an HMO whereby the 

HMO exerts control over either the fee charged by the service pro- vider or the member's use of such provider's services. These provi- sions would be effective on the date of enactment. 

The bill also would redefine the scope of organizations treated as 

taxable property and casualty insurance companies. Effective for 

taxable years beginning after December 31, 1996, any organization 

that is not tax-exempt, and whose primary and predominant business activity during the taxable year falls in one of three categories, would be treated as a property and casualty insurance 

company. The three categories of activities would be: (1) issuing accident and health insurance contracts .. or reinsuring accident and 

health risks; (2) operating'as anHMO;or(3) en~ring into arrangements to provide or arrange for the provision of health care services in exchange for fixed payments or premiums that do not vary depending on the amount of health care services provided. 

Finally, the bill would repeal two of the special rules provided 

under Code section 833 to Blue Cross and Blue Shield organiza- tions and other eligible organizations, and would provide transition 

rules for organizations that become subject to section 833 after the 

effective date. These provisions generally would be effective for taxable years beginning after December 31, 1996. 

Tax treatment of long-term care services and insurance 

Long-term care services and insurance (sees. 7701 and 7702).-

The bill would provide that expenditures for qualified long-term 

care services provided to an incapacitated individual are treated as 

medical care for purposes of the itemized deduction for medical expenses. The bill would provide that, for purposes of the Internal 

Revenue Code: (1) a qualified long-term care insurance policy is 

treated as an accident or health insurance contract; (2) any plan 

of an employer that provides coverage under a qualified long-term 

care insurance policy is treated as an accident or health insurance 

contract (so that employer contributions for such a policy are excludable from income); (3) amounts (other than policy holder dividends or premium refun .. ds) received under such a contract or plan with respect to qualified long-term care services are treated as 

amounts received for personal injuries or sickness and as reimbursements forexp. enses actually incurred for purposes of the medical expense deduction (and thus, are excludable from gross income); (4) amounts paid for a qualified long-term care insurance 
16 

policy are treated as amounts paid for insurance for purposes of the 

medical expense deduction, and (5) a qualified long-term care insurance policy is treated as a guaranteed renewable contract subject to the rules of Code section 816(e). 

The provision relating to the deductibility of expenses for qualified long-term care services would apply to taxable years beginning 

after December 31, 1995. The other provisions of the bill relating 

to long-term care would apply to policies issued after December 31, 

1995. 

Accelerated death benefits under life insurance contracts (secs. 

7703 and 7704).-Effective for taxable years beginning after December 31, 1993, the bill would provide an exclusion from gross income for certain distributions (accelerated death benefits) received 

by an individual under a life insurance contract if the insured 

under the contract is terminally ill. For insurance company tax 

purposes, the bill would provide that a qualified accelerated death 

benefit rider to a life insurance contract is treated as life insurance 

and that such a rider is treated as a qualified additional benefit. 

The provision relating to the tax treatment of insurance companies 

would apply to contracts issued after December 31, 1993. 

Tax incentives for health services providers 

Nonrefundable credit for certain primary health services providers (sec. 7801).-Under the bill, a physician who provides primary 

health services in certain medically underserved areas would be eligible for a nonrefundable credit against Federal income taxes of 

$1,000 per month for up to 60 months. The provision would be effective for taxable years beginning after December 31, 1994. 

Expensing of medical equipment (sec. 7802).-Under present law, 

in lieu of taking depreciation, a taxpayer with a sufficiently small 

amount of annual investment may elect to deduct up to $17,500 of 

the cost of qualifying property placed in service for the taxable year 

under Code section 179. The bill would increase the amount allowed to be deducted under section 179 in a taxable 'year by the 

lesser of (1) the cost of section 179 property which is health care 

property placed in service during the year, or (2) $10,000. The provision would apply to property placed in service after December 31, 

1994. 

Miscellaneous provisions 

Tax credit for personal assistance services (sec. 7901).-Effective 

for taxable years beginning after December 31, 1995, the bill would 

provide a nonrefundable tax credit for up to 50 percent of an employed individual's personal assistance expenses up to $15,000. 

Denial of tax-exempt status for borrowings of health-related entities (sec. 7902).-Under present law, interest on bonds issued to finance activities of State and local governments generally is tax exempt. However, interest on private activity bonds is taxable unless 

the bonds are issued for a purpose specifically identified in the Internal Revenue Code. The bill would provide that regional and corporate health alliances created pursuant to the bill would be treated as private businesses that are generally not eligible for tax-exempt financing. Similarly, State guaranty funds established pursuant to section 1204 of the bill would be treated as private business 

.. 
17 

users and generally could not be funded with the proceeds of taxexempt bonds. This provision would be effective for obligations issued after the date of enactment. 

Disclosure of return information (sec. 7903).-The Internal Revenue Code prohibits disclosure of tax returns and return informati~n, except to t1}e e?tte.nt specifically.autho.rize.d .. b. y .... the C.od. ~ .. T. he bIll would perttllt dIsclosure of certam tax returnmformatIon to 

any Federal or State agency providing assistance under the'IIeaith 

Security Act for use in verifying eligibility for such assistance. The 

provision would be effective on t~e <late of e,nactment. " . Effective dates . 

The general effective date of thebinvvoul~Lbe"aIluiJjl,1998 . (sec. 1006). Th~ rjght to coverage under the guaranteed benefit 

package would be effective with respect to regional alliance· coverage when the State in which the indivi.c:lual resi(f.es becomes a 

participating State. In the case of persons eligible to receive coverage through a corporate alliance, the effective date . of coverage under the Act would be January 1, 1998. In the case"()f Ii. State"tliat 

participates before the general effective date, transition rules would 

apply with. respect to employees who are covered by a plan of an 

employer that intends to form a corporate alliance . .. The effective date of many of the provisions of the bill depend on 

when a State becomes a participating State. In general, in order to 

be a participating State, the State must gain approval of its health 

care system by the Board and comply with the State obligations set 

forth in the bill (e.g., establish regional alliances). The earliest a 

State could become a participating State would be January 1, 1996. 

States would be required to become participating States no later 

than January 1, 1998. In order to become a participating State for 

a year, a State would have to establish regional alliances no later 

than March 1 of the previous year. Thus, for example, if a State 

wanted to be a participating State on January 1,1997, it would 

have to establish regional alliances by March 1, 1996. (See secs. 

1200-1202 and 1511.) 

Some of the provisions of the bill have separate effective dates, 

such as the provisions of Title VII, described above. 
IT. DESCRIPTION OF THE EMPLOYER MANDATE AND 

RELATED PROVISIONS OF THE HEALTH SECURITY ACT 

A. Premium Caps 

1. Regional alliance health expenditures 

In general, the bill would limit the initial premiums, as well as 

subsequent yearly increases, charged by health plans that participate in regional alliances. The National Health Board (the "Board") 

would determine the limit through a process that begins with setting a national baseline premium target. Based on that national 

target, the Board would establish a separate target for each regional alliance that takes into account regional variations and demographics. If plans in a re-gional alliance, on a weighted average 

basis, charge premiums that exceed the alliance's per capita target, 

they would be subject to a premium reduction. The premium reduction would affect the amount of payments from employers and consumers to the alliance, from an alliance to a noncomplying plan, 

and from the noncomplying plan to its providers. 

a. Computation of targets and accepted bids (sees. 6001-

6007) 

Board determination of national per capita baseline premium target 

By January 1, 1995, the Board would be required to determine 

a national per capita baseline premium target. 12 In general, this 

target would equal the current (Le., 1993) cost of items included in 

the comprehensive benefit package divided by the number of people 

who would be eligible to participate in regional alliances (excluding 

SSI or AFDC recipients). 

For purposes of this calculation, payments made for items and 

services included in the comprehensive benefit package in 1993 

would not include the proportion of such payments attributable to 

Medicare beneficiaries, AFDC or SSI recipients, expenditures paid 

through workers' compensation or automobile or other liability insurance, and other expenditures that the Board determines would 

not be payable by regional alliance health plans. In addition, the 

cost of the comprehensive benefit package would be decreased by 

amounts which would be subject to cost sharing (Le., out-of-pocket 

costs paid by consumers) and any decrease in utilization of services 

estimated to occur as a result of higher cost sharing. 13 Thus, for 

l2Under Section 5232 of the bill, there could be no administrative or judicial review of any 

determination made by the Board with respect to Subtitle A of Title VI (regarding premium caps). 

l3Under the bill, a health plan could offer consumers one of three alternative cost sharing arrangements-lower cost sharing, higher cost sharing, and combination cost sharing. Under 

lower cost sharing, a plan enrollee woUld pay a nominaf copayment (i.e., $10 for outpatient serv- ices, $25 for hospital services and $20 for certain dental services, adjusted for inflation). Under 

(18) 

.. 
19 

example, the amount would not include the cost of supplemental 

insurance policies,costs of long-term care (which would not b~ included in the comprehensive benefit package), and out-of-pocket 

costs paid by consumers to cover deductibles and co-insurance for 

the comprehensive benefit package. The cost of the comprehensive benefit package would be increased to take into account increased utilization oror~xpenditures 

for items and services under tile package likely to be incurred by individuals who, as of 1993, were uninsured or underinsured .with 

respect to such benefits. In making this calculation, expenditures 

would be based on the estimated average cost for such services in 

1993, rather than on private payment rates; uncompensated care 

would be disregarded. In addition, the cost of the comprehensive benefit package would be increased by a percentage (not to exceed 

15 percent) that reflects the proportion of premiums required for 

health plan and regional alliance costs of administration and for 

State premium taxes (to the extent attributable in 1993 to health 

benefits included in the comprehensive benefits package). . The Board would update the amount for 1994 and 1995 to take 

into account private sector health care spending for items and services included in the comprehensive benefit package (as of 1996). 

The cumulative update could not exceed 15 percent. 

Determination of alliance per capita premium· targets 

Initial target.-By January 1, 1995, the Board also would be required to determine a per capita premium target for each regional alliance for 1996. The target would equal the national per capita baseline premium (determined as set forth above), adjusted by the 

adjustment factor for the regional alliance, and updated by the regional alliance inflation factor. 

Adjustment factor.-After consultation with States and regional 

alliances, the Board. would establish an adjustment factor for each 

regional alliance. This factor would take into account variations between the national average of factors used in computing the national per capita baseline premium target and such factors for a 

particular regional alliance, including variations in health care expenditures, rates of uninsurance and underinsurance, and variations in the proportion of expenditures for services provided by 

academic health centers. The Board would make this determination 

based on information regarding variations in premiums across 

States and across alliance areas within a State, variations in per capita health spending by States, variations. across States in per capita spending under the Medicare program "and in such spending 

among alliance areas within a· State, and area rating factors commonly used by actuaries. . . These adjustment factors would be applied by the Board for 1996 

in a neutral manner so as to ensure that the weighted average of 

all regional alliance per capita premium targets for 1996 equals the 

national per capita baseline premium target. 

a higher cost sharing arrangement, an enrollee would pay an .annual deductible ($200perindi- vidual and $400 per family, subject to adjustment for inflation) and a coinsurance.rate of 20 

percent (a higher coinsurance rate would appl~ to certain services) up to the maximum out«'-

pocket limit of $1,500 (individual) and $3,000 (family). A combination cost sharing arrangement would apply the lower cost sharing scheme to enrollees using preferred providers; the higher 

cost sharing scheme would apply when enrollees use out-of-network providers. 
20 

Inflation factor.-The Board would also compute and publish not 

later than March 1 of each year (beginning in 1995) an inflation 

factor for each regional alliance which would be based on a general 

health care inflation factor. For years 1996 through 2000, the general health care inflation factor would mean the percentage increase in the CPI plus (1) 1.5 percentage points for 1996, (2) 1.0 

percentage points for 1997, (3) .5 percentage points for 1998 and 

(4) 0 percentage points for 1999 and 2000. The Board would recommend to Congress an appropriate general health care inflation 

factor for years after 2000. If Congress fails to specify the general 

health care inflation factor for any year after 2000, the Board 

would be authorized to compute a default factor-which would generally approximate nominal growth in per capita gross domestic 

product (GDP)-in accordance with a predetermined formula set 

forth in the bill. 

The bill would allow a special adjustment to a regional alliance's 

inflation factor in the event of material changes in the demographic 

characteristics of the population served by the alliance that arise 

out of two specified occurrences. First, an adjustment would be allowed for changes occasioned by corporate alliances opting into a 

regional alliance. Second, an adjustment would be allowed in the 

event of disparity between changes in regional demographic characteristics (including age, gender, and socio-economic status) and the 

average change in such characteristics nationwide. 

In addition, a regional alliance's inflation factor would be reduced by a percentage (calculated as set forth in the bill) for two 

succeeding years if the actual weighted average accepted bid for 

the alliance exceeded the alliance's per capita premium target for 

any given year.14 As discussed below, an alliance's weighted average accepted bid is based on projected enrollment; if more individuals than anticipated enroll in high premium plans, then the actual weighted average accepted bid could exceed the regional alliance's per capita target. This would trigger the 2-year reduction in 

the regional alliance's inflation factor.15 

Further, the bill would provide for a special adjustment to all regional alliance inflation factors In the year 2001. At that time, regional alliance inflation factors would be increased by a factor determined by the Board to reflect the ratio of (1) the actuarial value 

of the increase in benefits provided in that year under the comprehensive benefit package to (2) the actual value of the benefits 

that would have been in such package in the year without regard 

to the increase. A special rule would apply for purposes of calculating the actuarial value of. the increase with respect to mental illness and substance abuse services. 

In establishing the regional alliance inflation factors for. each 

year, the Board would be required to consult with representatives 

of States and regional alliances. 

14Section 6001(a)(2)(C) of the bill incorrectly cross references section 6OO1(d) with respect to 

adjustments for previous excess expenditures; the correct cross reference should be to section 

6003(e). 

15The 2-year reduction would appear not to 'apply if the premium caps were triggered. In 

other words, if a regional alliance's weighted average accepted bid exceeds its per capita target, the premium caps will be triggered. The Board would compute a reduced weighted average ae- eepteci bid and certain plans would be subject to plan payment reductions. If, based on actual 

enrollment, the reduced weighted average accepted bid exceeds the per capita premium target, the 2-year reduction would appear not to apply. 

.. 
21 

Special rules.-For purposes of establishing the regional alliance 

per capita premium targets, if a State is not participating in the 

bill's health care program or has not established regional alliances, 

the entire State woVld be treated as composing a single regional alliance. 

In -addition, if a State changes the boundaries of its regional alliances (or adds new regional alliances after 1996), the Board would 

provide a method for computing the per capita premium target of 

each regional alliance affected by the change. The method would be 

required to reflect the factor~~ak.en into account in establishing the 

initial adjustment factors (applied in 1996), and the weighted average of the newly computed per capita premium targets for regional 

alliances affected by the change would equal the weighted average of the premium targets for the regional alliances as previously established. 

Targets revised annually 

Not later than March 1 of each year after 1995, the Board would 

determine a revised per capita premium target for each regional alliance for the succeeding year by updating the prior year's per cap- ita target by the regional alliance inflation factor for the year: . 

Alliance initial bidding and negotiation process . 

Under the bill, by July 1 of the first year of a State's participation in the bill's health care program and by August 1 of each year thereafter, regional alliances would be required to obtain premium bids from each plan seeking to participate as a regional alliance 

health plan in the following year. In obtaining such bids,a regional alliance could, but would not be required to, disclose its per capita premium target for the year involved. 

Each bid would have to be legally binding with respect to the 

plan involved and would be conditioned upon the plan's agreement 

to accept any payment reduction imposed under section 6011 of bill 

to enforce the premium targets (described below). 

Following submission of bids, a State could negotiate with health 

plans with respect to the premiums to be charged by such plans. 

The Board would be required to provide regional alliances with information and technical assistance to assist alliances in the bidding 

process. As a result of such negotiations, a plan may resubmit a 

bid, but any subsequent bids could not be higher than the prior bid. 

By September 1 of each year, each regional alliance would be required to submit to the Board a report containing information regarding the final accepted bids submitted by the different plans 

and any limitations on the capacity of the plans. In addition, for 

the first year of participation, the report must contain any information requested by the Board concerning an estimation of the likely 

enrollment in each plan. For succeeding years, the report must set 

forth the actual distribution of enrollment of alliance eligible individuals in regional alliance health plans.16 

Following receipt of the reports, the Board would determine an 

average accepted bid for each regional alliance (weighted by enroll16The Board would be required to establish special rules reg8ioding the treatment of enroll· ment in newly-offered or discontinued plans. 
22 

ment), taking into account the information on accepted bids and 

enrollment distribution. By October 1 of each year, the Board 

would notify a regional alliance if the premium caps were triggered 

because its weighted average accepted bid exceeded its per capita 

premium target. In this event, the Board would notify the alliance 

of the reduced weighted average accepted bid, and would notify the 

alliance and each noncomplying plan of any plan payment reduction (computed under section 6011 and described further below). 

State financial incentives 

Under the bill, participating States may elect to assume responsibility for containment of health care expenditures. This responsibility would include submitting annual reports to the Board on 

cost containment activities undertaken. In exercising this responsibility, a participating State could regulate rates charged by providers of health care items and services to private payers. However, 

such regulation must not result in differential treatment of corporate alliance health plans and other health plans. 

The bill would provide a financial incentive for States to elect to 

assume such cost containment responsibility. With respect to an 

electing State, if the statewide weighted average of the reduced 

weighted average accepted bids is less than the statewide weighted 

average of the regional alliance per capita premium targets for 

such alliances for such year, then a percentage of such savings 

would be made available to the State by reducing the State's Medicaid maintenance of effort payment for the following year. 

Recommendations to eliminate .. regional variations in alliance targets due to variation in practice patterns; Congressional consideration 

In an effort to reduce regional variations in premium targets 

over time, the bill would require the chair of the B.oard to establish 

an advisory commission on regional variations in health expenditures. The advisory commission would be composed of consumers, 

employers, providers, representatives of health plans, States, regional alliances, individuals with expertise in the financing of 

health care, individuals with expertise in the economics of health 

care, and representatives of diverse geographic areas. 

In general, the advisory commission would provide the Board, 

States, and regional alliances with information regarding regional 

differences in health care costs and practice patterns, In addition, 

the bill would identify two specific issues for the advisory commis~ 

sion to study. First, the advisory commission would examine methods of eliminating, by 2002, variations in regional alliance per capita premium targets due to variation in practice patterns (but not 

due to other factors, such as health care input prices or demographics). In addition, the advisory commission would examine 

methods of reducing, by 2002, variation among States in the level 

of payments for AFDC and SSI recipients and for Medicaidmaintenance of effort payments. The advisory commission would be required to submit to the Board a report specifying one or more 

methods for eliminating and reducing these variations. 

Not later than July 1, 1995, the Board would be required to submit to Congress detailed recommendations regarding the specific 

.. 
23 

method to be used to eliminate the variations in regional alliance 

per capita premium targets due to variation in practice patterns 

and to reduce the variation in State payments for cash. assistance 

recipients and for maintenance of effort, in a manner that is budget 

neutral with respect both to total government payments and payments by the Federal Government. In making reduction recommendations, the Board would take into account the fiscal capacity of the States. 

The detailed recommendations submitted by the Board would 

apply unless Congress enacts a joint resolution disapproving such 

recommendations within 60 days after such recommendations are 

submitted. The bill would contain specific requirements regarding the timing, form, and method of consideration applicable to such 

joint resolutions. 

b. Plan and provider payment reductions to maintain expenditures within targets (sees. 6011-6(12) . . ..... 

Plan payment reduction 

If a regional .alliance's weighted average accepted bid exceeds its 

per capita preII)ium target for the year, the alliance would be considered a "noncomplying alliance" and the premium caps would be 

triggered, resulting in premium reductions for certain plans in the 

alliance. If, on the other hand, a regional alliance's weighted average accepted bid does not exceed the applicable per capita premium 

target, no premium caps would be triggered. Thus, in a complying alliance, no plans would be subject to premium reductions, even 

those plans that charge premiums in excess of the per capita target.l7 Health plans offered through noncomplying· alliances would be 

subject to premium reductions if the final accepted bid for the year 

exceeds· the maximum cpmplying bid for the year. For the first year 

of participation, the maximum· complying bid for each plan offered 

by a regional alliance would be the regional alliance per capita premium target for the year. Accordingly, the premiums for all plans in a regional alliance that is a noncomplying alliance in its first 

year would be capped at the alliance's per capita premium target. Plans could charge lower premiums, but none could charge pre- miums in excess of the target. 

The premium caps would operate somewhat differently in subsequent years. After the first year, the maximum complying bid for 

any plan in a noncomplying alliance wouldbe the sum of (1) the 

accepted bid for the previous year, minus the amount of any plan 

payment reduction for the plan for that year (discussed below) and 

(2) the amount by which the regional alliance's per capita premium 

target for the year exceeds either the previous year's target or, if 

less, the previous year's weighted average accepted bid. 

For new plans, the maximum complying bid would be the regional alliance per capita premium target for the year, subject to 

the ability of the Board to establish special rules to prevent abusive 

17This could occur because. the per capita premium target would be compared to a weighted 

floorage of premiums charged by all plims In a regionaf alliance. Thus, certain plans could 

charges premiums in excess of the per capita target, so long as, on a weighted basis, the average premium for all plans did not exceed the target. 
24 

premium practices and encourage the availability of a wide range of plans. 

To ensure that pa)1lD.ents to regional alliance health plans by a 

regional alliance conform to the regional alliance's per capita target, each noncomplying plan for a year would be subject to a plan 

payment reduction. In general, a noncomplying plan's bid would be 

reduced by its proportionate share of the amount by which the 

weighted average bid for the regional alliance exceeds the regional 

alliance's per capita target. The bill would set forth a formula for 

determining the exact amount of the plan payment reduction applicable to each noncomplying plan. 

Thus, in establishing premiums for any year (including the first 

year), plans would have to consider the potential impact of the application of premium caps in the following year; such caps could act 

to exacerbate a pricing differential. 

Example: For example, assume that Plan A bids $1,000 in 

year 1, Plan B bids $1,500, and Plan C bids $2,000, and 

that anticipated enrollment is evenly distributed among 

the three plans. The weighted average accepted bid would 

be $1,500. Assume further that the regional alliance's per 

capita premium target is $1,500. In year one, the regional 

alliance would be a complying alliance and no premium 

caps would be triggered. 

In year two, assume that the regional alliance's premium target has increased by five percent, to $1,575. Plan 

A bids $1,500, Plan B bids $1,750, and Plan C bids $2,075; 

enrollment remains evenly distributed among the three 

plans. The weighted average accepted bid would be $1,775; 

because this exceeds the premium target, the premium 

caps would be triggered. Each plan's maximum allowed bid 

would be its prior year's bid plus the increase in the alliance's target. Thus, Plan Ns maximum allowed bid would 

be $1,075, Plan B's would be $1,575, and Plan C's would 

be $2,075. Plan A would have an excess bid (plan bid 

minus maximum allowed bid) of $425 and Plan B of $175; 

Plan C would not have an excess bid. The average of the 

excess bids would be $200 ($425+$175+0/3). The reduction 

percentage would be 100 percent (weighted average accepted bid minus alliance premium target divided by average 

of excess bids ($1,775-$1,575/$200)). Thus, Plan Ns payment reduction (excess bid multiplied by the reduction percentage) would be $425; Plan B's would be $175; and Plan 

C's would be O. Accordingly, the final payments to the 

plans after the application of the premium caps would be 

as follows: Plan A, $1,075; Plan B, $1,575; and Plan C, !fj 

$2,075. The weighted average of the final plan payments, $1,575, equals the alliance's per capita premium target. 

Thus, although Plan A's initial bid of $1,500 was below the 

premium target of $1,575, Plan A would be subject to a 

premium reduction because its bid increased more that did 

the alliance's per capita target. Although Plan C's bid exceeded the per capita premium target for the second year, 

it would not be subject to reduction because it did not increase by more than did the alliance's per capita target. 
25 

A n~ncomplying plan vyoul~. payeaJl opportunity voluntarily to 

reduce its accepted bid to avoid a mandatory plan payment reduc-

~~~al~fi:~~1t:;!loa~t~!T~f~~:h =. li;~~i~~~gan~g~~~&V~~ alliance and specifies the amount of the reqUisIte plan payment redqction.Ifa noncomplying plan voluntarily reduces its bid, the reduced bid would be reflected on the list of plan premiums presented to 'potential enrollees .. If the premhim caps were triggered 

in the subsequent year, the plan's premium increase would be 

based on its reduced bid. . . .' , If a noncomplying plan does not voluntarily reduce itsbid,it 

would receive a reduced payment from the regional alliance, as set 

forth above. In addition, the premium amount presented to poten- tial enrollees is the higher, unreduced, amount; thus, the plan may 

suffer a competitive disadvantage vis a vis other plans. Enrollees 

would pay unreduced premiums,and the excess~o~llLvvo~~b.e 

returned to all families in the alliance in the form of an "excess 

premium cre.dit." As .in the ,case of yoll1,~tary rea\icHciii;i{pt:emr~m caps were tnggered In the subsequent year, the plan's premIUm Increase would be base.4 on the reduced premium. Finally, as described below, payments to providers would be reduced by a specified percentage. 

Provider pa,ment reduction 

Each regional alliance heaIth plan would be required., as . part of 

its contract with any participating provider," to include a provision specifying that, if the plan is a noncomplying plan for a year, payments to the provider would be reduced by a specified percentage 

(the "applicable network reduction percentage"). Similarly, no contract could include a provision which the State determines varies 

the payments to a provider because of, or in relation to, a plan payment reduction or is otherwise intended to subvert the provider 

payment reduction requirement. 

The "applicable network reduction percentage" would be the plan 

payment reduction amount for the plan for the year divided by the 

final accepted bid for the plan for the year. The reduction percentage would be increased to take into account any estimated increase 

in volume reasonably anticipated as a conse-quen:ce""of applying a 

payment reduction. Similar rules would apply with respect to alliance health plan contracts with providers other than participating 

providers. Finally, amounts paid by individual consumers (Le., balance billing and cost sharing) would be based on the reduced provider payments by noncomplying plans, as determined under tJ::rls. section. 

2. Corporate alliance health expenditUres (sees. "'8021" and· 

6022) 

Calculation of premium equivalents (sec. (021) 

The bill would impose caps on ~orp6tate alliance expenditures 

similar to the caps applicable to regional alliances. For purposes of 

measuring the allowable increase in the health care costs of a corporate alliance, the bill would require. the National He.alth Board 

to develop by January 1, 1998, a methodology for calculatfng an an-
26 

nual per capita expenditure equivalent for amounts paid for coverage for the comprehensive benefit package within a corporate alliance. Corporate alliances would be permitted to petition the Secretary of Labor for an adjustment of the inflation adjustment that 

would otherwise apply to compensate for material changes in the 

demographic characteristics of the individuals receiving coverage 

through the alliance. Beginning in 2001, each corporate alliance 

would be required to report to the Secretary of Labor the average 

of the annual per capita expenditure equivalent for the previous 3-

year period. Such report would be made inthe form and manner 

specified by the Secretary of Labor. 

Termination of corporate alliance for excess increase in expenditures (sec. 6022) 

Under the bill, if a corporate alliance has two excess years in a 

3-year period, then, beginning with the second year following the 

second excess year in such period, the Secretary of Labor would 

terminate the corporate alliance and large employers that were corporate alliance employers with respect to such corporate alliance 

would become regional alliance employers.1s In the case of a corporate alliance sponsored by a multiemployer plan or a rural electric or rural telephone cooperative association, the employers of a 

terminated corporate alliance could become corporate alliance employers with respect to another such corporate alliance. No employer that was a corporate alliance employer with respect to a terminated corporate alliance could ever be eligible to sponsor a corporate alliance. This provision would first apply to the 3-year period beginning with 1998. 

The term "excess year" would mean a year after 2000 for which 

the rate of increase for the corporate alliance for the year exceeds 

the national corporate inflation factor for the year. The rate of increase for a corporate alliance for a year would be the percentage 

by which the average of the annual per capita expenditure equivalent for the corporate alliance for the 3-year period ending with 

such year exceeds the average of the annual per capita expenditure 

equivalent for the corporate alliance for the 3-year period ending 

with the previous year. The national corporate inflation factor for 

a year would be the average of the general health care inflation 

factors (as defined in sec. 6001(a)(3) of the bill) for each of the three 

years ending with such year. 

Comment: There appears to be an inconsistency in the bill 

regarding the definition of the term "excess year". Section 

6022(aX2) provides that the provisions regarding termination of a corporate alliance for excess years first applies 

to the 3-year period beginning with 1998. This would appear to mean that the first year an alliance could be terminated under the provision would be 2001. This would occur 

if 1998 and 1999 were excess years because 2001 would be 

the second year following the second excess year. 

IBAs described below in Part II.B., the payroll cap on premiums would be phased in for such 

employers and the premiums of such employers would alSo be subject to the excess risk adjustment. 

.. 
h, 

27 

However, section 6022(b)(1) defines an excess year to 

mean a year after 2000. Under this section, the first year 

a corporate alliance, ,could, be terminated would be 2004~ 

This would occur if 2001 and 2002 were exces§ yeal"s. " 

It is unclear what is intended, If 1998, 1999, and 2000 

are intended to count as excess years, then the definition 

of excess year may require :modification. 

3. Treatment of single-payer States (sec. 6031) 

In general 

Under the bill and subject to the approval of the National Health 

Board, each State would be permitted to establish a single-payer 

system in lieu of establishing a system of region~' alliances. States 

would be permitted to establish singlC7j>ayer systems on a Statewide basis or alliance-specific basis. 19 Under the bill, States which 

establish single-payer systems on a State-wide basis would be referred to as single-payer States. " 

Requirements for State-wide single-payer systems 

Under the bill, the National Health Board would be required to 

approve the application of a State to operate a State-wide singlepayer system if it finds that the, system would meet the general requirements for single-payer systems set forth in section 1222 of the 

bill and the State meets special rules for State-wide single-payer 

systems set forth in section 1223 of the bill. 

General requirements 

Under the bill, all single-payer systems would be established 

under State law and would be operated by the State or a designated agency of the State. State law w()uld provide for mechanisms to enforce the requirements of the system. All single-payer 

systems could require the map.~~tory enrollment of all individuals 

residing in the State (or in the case ofanal1i!'l:nc::e-specific singlepayer system, in the alliance area) and provide for the optional enrollment of Medicare-~ligible Individuals (subject to the approval of 

the Secretary of Health and HUman, Services) and corporate alliance-eligible individuals but could noCrequire the enrollment of 

veterans, active duty personnelor Indians. All s~ngle-payer systems 

would require States to make all payments to providers who fUt"-

nish items and services included in the comprehensive benefit 

package and assume all financial risk with respect to such payments unless the Statel:l,nd providers agree otherwise. All singlepayer systems would provide the items and ~rvice,s i~cluded in the 

comprehensive benefit package and imposecost~srumng' requirements no greater than tllQse imposed by regional alliance health 

plans. All single-payer systems would establishc,ost-containment 

procedures (satisfactory to the NationallI~altp, ,13~:gd), which would 

(1) compute and effectively monitor the amount of per"capita ex-

. 19Und~ thebill,', States, with lJlo',re ,than .one, alli!lDce,~ea could operate a single-pa, ,rer ,syste, m In one alliance area but not the other alliance areas. SlngJe.:.'P!lyer systems offere<i 1D a single alliance in a State would be required to meet the general reqUirements for single-payer systems 

set forth in section 1222 of the bill and the requirements for alliance-specific sing1e-payer systems set forth in section 1224 of the bill. 

75-969 0 - 94 - 2 
28 

penditures incurred for the provision of items and services included 

in the comprehensive benefit package each year, (2) ensure that 

such per capita expenditures would not exceed the per capita premium targets that would have applied if the State had established 

an alliance system, and (3) impose automatic, mandatory, nondiscretionary reductions in payments to health providers as necessary to contain such per capita expenditures within the singlepayer system's per capita premium target. Finally, all single-payer 

systems would meet the requirements applicable to health plans 

under the bill (secs. 1401-1414), except that systems would not be 

subject to restrictions on the marketing of plan materials (sec. 

1404(a» or the health plan solvency requirements (sec. 1408), nor 

could systems limit the enrollment of eligible individuals on the 

basis of plan capacity limits (sec. 1402(a)(2». ~, 

Special rules for single-payer States 

Under the bill, a single-payer State would operate the system 

throughout the State' through a single alliance. A single-payer 

State would meet the requirements applicable to all States under 

the bill (secs. 1201-1205), except that the State would not be subject to the requirements relating to (1) the establishment of regional alliances (sec. 1202); (2) health plans (sec. 1203), other than 

the requirement relating to the coordination of health coverage 

with workers' compensation and automobile liability insurance (sec. 

1203(f)); and (3) the financial solvency of health plans in the State 

(sec. 1204). Single-payer States could choose any method to finance 

a State-wide single-payer system, except that the State would be 

required to finance the system, at least partially through a payrollbased system under Which employers would pay at least the 

amount they would pay under an alliance-based system. In addition, the following requirements would apply to single-payer States 

in the same manner such requirements would apply to regional alliances under the bill: (1) enrollment rules and procedures (sec. 

1323); (2) the rules and administrative procedures relating to the 

reduction in cost-sharing payments for low-income families (sec. 

1371); (3) the quality management and improvement, health information systems, privacy of information and administrative simplification provisions in the bill (Subtitles A and B of Title V); and 

(4) non-discrimination rules and the requirement that alliances coordinate their enrollment and disenrollment activities with each" 

other (sec. 1328). 

Per capita premium targets for single-payer States , 

The provision would direct the National Health Board to compute 

a State-wide per capita premium target for each year for Statewide single-payer systems in the same manner that it would compute the per capita premium targets for regional alliances. The National Health Board would be required to determine a per capita 

premium target for 1996 for each State-wide single-payer system 

no later than January 1, 1995. The manner in which the bill would 

require the National Health Board to determine per capita premium targets for regional alliances is described in Part II.A 1 of 

this pamphlet. 
29 

4. Transition provisions-monitoring prices and expenditures (sec. 6041) 

The bill would. require the Secretary of Health and HUIIl~ Services (the Secretary) to establish a program to mOJlit,w·:qe~th.?a~e 

prices and expenditures in the Un!ted~tates. :Und~r the program, 

the Secretary would report to the PresIdent and Issue reports to 

the public on a periodic basis regarding (1) the rate of increase in 

expenditures in each sector of the health care system and (2) how 

such rates compare with the rate of increase in health care spending overall and the rate of increase· in the consumer price index. 

In addition, the provision would direct the Secretary to obtain information on prices and expenditures for health care services 

through surveys or other means and would give the Secretary the 

authority to compel health care providers and third party payers 

to disclose such information as is necessary to carry out the monitoring program. Finally, the provision woul4 provide that non-public information obtained by the Secretary with respect to individual 

patients would be C9nfidential. 

B. Premium-Related Financings 

1. Employer premium payments for regional alliance employers (secs. 6121-6126) 

a. In general 

Employers would be required to make monthly premium payments for each employee who is employed by the employer for at 

least 40 hours in a given month. The premium amount wo¥ldbe 

based on two factors: (1) the regional alliance area in which the 

employee resides; and, (2) the class of enrollment of the. etnployee 

(I.e., individual, couple-only, single parent, or dual parent). The 

amount of employer premium would be unifol'IIlforl:lJl persons residing in a given alliance area ~d iJl a particular class of enrollment. (For purposes of calculating . the employer premium, the 

health plan actually selected by an employee would not be considered.) If an employee were employed for at least 40 hours (but less 

than 120 hours) in a given month, the amount of employer pre- mium would be reduced proportionately. 

b. Base employment premiums (sec. 6122) 

In general 

Each year, each regional alliance would compute the base employment premiums applicable to. all residents of the alliance area 

for the year. Three base employment premium amounts W9uld be. 

calculated by each regional alliance: one applicable to individuals, 

one applicable to couples with no child,ren, and a third applicable 

to all families with children (whether single parent or dual parent families). . 

The first step in calculating base employment premiums would 

be to calculate the "credit-adjusted weighted average premium" for 

each class of enrollment: The credit-adjusted weighted average premium would be determined. by calculating the weighted average 

premium for. the class, then reducing it to reflect any "excess risk" 

payments made by large employers to the regional alliance. (These 
30 

"excess risk" payments are discussed in more detail in Part II. 

B.l.e., below.) 

The weighted average premium for a class of enrollment would 

be the average annual premium for the class of enrollment for all 

health plans offered by the regional alliance, weighted to reflect the 

anticipated relative enrollment of each plan. 

Example: Assume that a regional alliance were to offer two 

different health plans, and that the premiums for the individual class were $1,500 for Plan A, and $2,000 for Plan 

B. If the regional alliance anticipated that two-thirds of 

the individuals in the alliance would choose Plan A, and 

one-third would choose Plan B, the weighted average premium for the individual class would be (66.6% x 1,000) + 

(33.3% x $2,000) = $1,666. 

The weighted average premium would then be reduced to reflect 

any "excess risk" payments made to the regional alliance by large 

employers who provide coverage through the regional alliance 

(rather than through a corporate alliance). The resulting amount 

would be the "credit-adjusted weighted average premium". 

Part-time employment 

Under the bill, part-time employees would be viewed in terms of 

their "full-time equivalence". An employee employed by an employer for at least 120 hours in a month would be considered a fulltime employee. An employee employed by an employer for less than 

40 hours in a month would be disregarded. An employee who is 

employed by an employer for at least 40 hours, but less than 120 

hours, in a given month would be considered a part-time employee. 

For part-time employees, the bill sets forth a formula for calculating the "full-time equivalent" of the employee's employment, by 

comparing the number of hours the employee worked in a month 

to 120 hours. For example, an employee who worked 60 hours in 

a month would be a half-time employee, and any amounts in the 

bill which are described in terms of full-time employment would be 

reduced by one-half. 

Comment: The bill does not specify a method for computing 

hours of employment, but instead delegates this responsibility to the Board. In determining the method to be 

used, the Board would be required to take into account 

rules used under the Fair Labor Standards Act. (See sec. 

1901(b)(3) of the bill.) Thus, for example, it is not clear 

what rules would apply in the case of workers not compensated on an hourly basis. 

Individual class of enrollment 

For individuals, the base employment monthly premium would 

be equal to 1/12 of 80 percent of the credit-adjusted weighted average premium for the individual class of enrollment. 

Example: Assume that the credit-adjusted weighted average premium for all plans in a regional alliance for the individual class were $2,000. The annual base employment 

premium for a full-time employee in the individual class 
31 

would be 80 percent of $2,000, or $1,600. In other words, 

each employer of a full-tiIIle ePlployee in the. ~n<liyi<;lual 

class would pay an annual premium of $1,600. 

Couple-only class of enrollment 

For a "couple-only" family (i.e., a married couple with no children), the base employment premium would be calculated as fol~ 

lows. First, the credit-adjusted weighted average premium for the 

couple-only class of employment would be computed (as described 

above). This amount then wou1~be multiplied by the number of 

couple-only families receiving coverage 'through health plans offered by the regional alliance, in order to determine the total premiums for all couple-only families in the regional alliance.20 This 

total amount of couple-only premiums then would be divided by the 

number of employer premium payments being made for workers in 

the alliance with couple-only enrollment, in order to determine the 

amount of employment premium per wage earner. Every employer 

of a full-time employee in the couple-only class would pay a month- . ly premium equal to 1112 of 80 percent of this calculated premium 

per wage earner. 

Example: Assume that the credit-adjusted weighted average premium for all plans in a regional alliance for the 

couple-only class is $3,000. Assume further that there are 

1,000 couple-only families covered by health plans in the 

regional alliance, 500 of whom have one spouse employed 

on a full-time basis and one spouse who does not work at 

all, and 500 of whom have both spouses employed on a 

full-time basis. (In other words, there are 1,500 full-time 

equivalent workers in the couple-only class.) The calculation would be as follows: $3,000 x 1,000/1,500 = $2,000 

premium per wage earner. Every employer of a full-time 

worker in the couple-only class would pay 80 percent of 

this premium amount, or $1,600 per year. Thus, the employers of a couple-only family in which both spouses have 

full-time jobs would together pay $3,200 in premiums for 

that family. (Each spouse's employer would pay $1,600.) 

For a couple-only family in which one spouse is employed 

on a full-time basis, and the other spouse is not employed, 

employer payments for that family would be only $1,600.21 

Comment: As the above ,exarpple shows, under the structure of the bill, two-worker families would be partially subsidizing the premiums for single-worker· families. (For a 

more detailed discussion on the economics of these cross- subsidies, see Part IV.C~3~c.,'below.) ~";" .,<y;' ,',' ·~.~<"~dL> .c; 

20 In making this computation, certain families would not be considered: families who are re- cipients of Supplemental Security Income (881) or Aid to Families with Dependent Children 

(AFDC), families in which one spouse is a Medicare-eligible indiVidual, or families enrolled in 

health plans other than regional alliance health plans. 21As explained more fully in Part II.B.4.(describing the family share of premiums), the family 

share of premium due for any family having at least one full-time equivalent worker will be 

the same whether the family contains one full-time worker, two full~time workers, or sometliiiig 

in between. 
32 

Singieparent and dual parent classes of enrollment 

For single parent and dual parent families, one base employment 

premium would be calculated by the regional alliance to apply to 

both classes, using methodology similar to that described above for 

couple-only families. First, the credit-adjusted weighted average 

premium for the single parent class of employment would be computed (as described above). This amount then would be multiplied 

by the number of single parent families receiving coverage through 

health plans offered by the regional alliance, in order to determine 

the total premiums for all single parent families in the regional alliance. The same procedure would be used to calculate the premiums for all dual parent families in the regional alliance.22 The 

total amount of premiums for single parent families and the total 

amount of premiums for dual parent families would then be added 

together to get the total premiums for both classes. This sum then 

would be divided by the number of full-time equivalent workers 

with either single parent or dual parent enrollment, in order to determine the amount of employment premium per wage earner. 

Every employer of a full-time employee in the single parent or dual 

parent class of enrollment would pay a monthly premium equal to 

1112 of 80 percent of this calculated premium per wage earner. 

Example: Assume that the credit-adjusted weighted average premium for all plans in a regional alliance for the single parent class is $3,500, and for the dual parent class is 

$4,000. Assume further that there are 1,000 single parent 

families and 1,000 dual parent families covered by health 

plans in the regional alliance. Of the 1,000 dual parent 

families, assume that 500 have one spouse employed on a 

full-time basis and one spouse who does not work at all, 

and that the other 500 have both spouses employed on a 

full-time basis. Further assume that all of the single parents are employed on a full-time basis. In other words, 

there are 2,500 full-time workers in the single parent and 

dual parent classes. The calculation would be as follows: 

(($3,500 x 1,000) + ($4,000 x 1,000))12,500 = $3,000 premium per wage earner. Every employer of a full-time 

worker in the single parent class or the dual parent class 

would pay 80 percent of this premium amount, or $2,400 

per year. Thus, the employers of a dual parent family in 

which both spouses have full-time jobs would together pay 

$4,800 in premiums for that family. (Each spouse's employer would pay $2,400.) For a single parent family, or for 

a dual parent family in which one spouse is employed on 

a full-time basis, and the other spouse is not employed, 

employer payments for that family would be only $2,400.23 

22Again, in making these computations, families who are recipients of 88I or AFDC, families 

in which one spouse is a Medicare-eligible individual, or families enrolled in health plans other 

than regional alliance health plans, would not be considered. 23 Each family in a given class of enrollment enrolled in a given health plan, as long as the 

family contains at least one full-time equivalent worker, would pay the same family share of 

premium regardless of whether the family contains one full-time worker, two full-time workers, or something in between. 
33 

Comment: Again, this example shows that two-worker families would be partially subsidizing the premiums for single-worker families. 

Correction of estimation errors 

The base employment monthly p~emiumsto be).ls~4j:rlq,~':given calendar year would be calculate4by each regional al1ian~en~,later 

than December 1 gf the preceding year (or such other dat~~s the 

Board may specify). If the total of b~se employment·premiu,:ns actually received by an alliance during a year is not the .s~Jll~ ~,s tJJ.e, 

amount estimated by the alliance for the year, and the diff~rence 

is due to an incorrect estimate of the average number of premium 

payments per family, the alliance would be required to m~~e an 

adjustment i? the se~Qp.cl t;~£c~e.9J!,lg y~ar. In the s~c()D.:~~~£c~~4ing 

year, th~ alliance would adJus~ Its estImate of t~~ ~V'~r~e' num~er 

of premIUm payments per famIly so as to result m,~S9!!~Spondmg 

increase or decrease to the total receipts of the alliance in that second succeeding year. However,'if the incorrect e,§Hm~1(i~~~1~~Jp 

a surplus of funds to ,th~alli~nce, a "reasonabl~u'!mQy,~f:J!O be 

specified by t~e Secretary of Health andI:l~m~n~,~~XY!"C:~~) iriay De 

held in a contmgency fund ~~~~1?!i~JJ.~4, by the alliance ,and ~sed to 

fun~ a~y tfihutufire. sho(rtf~1§3.,r6~1s(ubl)(,tI3n))g trom such e~t!m~~~()n,,41~~re.l?- anCles m e uture sec. . 

c. Premium payment required of each employer (sec. 6121) 

Each employer would be required to make premium payments to 

the regional alliances .in. wNc"h}~ M~mployees reside on the first' of 

each month, based on ~JIlployrilent in.tb,e previous mpri~h:.rJ),~ 

amount due, wQlll<i. bed~te:rmiD.:~4,py taking the number .. of "ruIl~ time equivalent" employees employed by the empl';J:er in a given 

chlass of «:nrollmel!,tli,3D~'dr,£,§~gl'~~ li!!.,~ ~vebn rehgionall.libaln'<:b~ ,.~;r::~!j!t t e preVIOUS mont., an mll tip ymg It y t e app lca ease, e:qlployment premium for that class of enrollment for that alliance. for 

the' previous month. Similar"calculatlons'would'bemade"for each 

class of enrollmenfandfor'eadl"re"'onal'lillia:ncelo'which the employer's emploYees'resfde.'1$~:~mpfoyer would'payto"e~cn:regional alliance the sum of the payment amounts computed foreaCl1clai>s, 

of enrollment with respect to the employees residing in that alliance area. 

Comment: Note that these regional alliance payments 

would be paid by an employer for all employees residing 

in an alliance area, regardless of whether or not the employee is actually covered by a regionalalliance health 

plan. For example, suppose a family contains two working adult~the wj:f~.!~~~ligible for regional alli::tllc~, cQyera:ge through her employer, whereas th~l1\ls.l:>!'!,!!gj~Jll!gible for 

corporate alliance coverage through his employer. If the 

family chooses to enroll in a corporate allian~Ell1~li1"tll plan, the wife's employer still would be J:'e.quired to tll::t}{e payments to the regional alli~nce. ,iIl.':Y.~,i£1l,E!b,~.:r~si4es .. 'With 

respect to her employment: The reg.onaI alliance, in turn; 

would fOl"'Ward.Jb,()se. payments to the husband's. corporate alliance (sec. 1346(0). . 
34 

Comment: In computing the employer premiums due with 

respect to any particular employee, it would be irrelevant 

if the employee is also employed by other employers. Every employer employing a qualifying employee for at least 40 

hours per month would be required to make employerjremium payments based on the number of hours worke for 

that employer. Thus, it would be possible for the total employer payments made with respect to one individual to exceed the base employment premium due for one full-time 

worker. For example, if an individual works 120 hours in 

a month for one employer, and 60 hours in the month for 

another employer, the two employers together would pay 

one and one-half times the base employment premium for 

that employee. 

The bill provides default rules for calculating the employer premiums due for employees who are not enrolled in any alliance 

health plan. Such employees would be deemed to be enrolled in the 

dual parent class of enrollment for the alliance area in which the 

individual resides. If the employee's residence is not known, the 

employee would be deemed to reside in the alliance area where the 

employee principally is employed by the employer. 

The bill also provides that "divided families" would not be divided for purposes of calculating the amount of employer payment 

due. (See discussion of divided families in Part II.BA.d.) For example, assume that a couple has no children, and that the husband 

is an Indian (qualifying for coverage under the Indian Health Service program), but his wife is not of Indian descent. For purposes of 

applying the provisions of the Health Security Act, the family 

would generally be split into two separate families (an individual 

enrolled in a regi9nal alliance, and an individual enrolled in an Indian program). However, for purposes of calculating the employer 

payments due to a regional alliance with respect to the wife's employment, the family would be combined, and the calculations 

would be based on couple-only enrollment. The regional alliance 

would then make proportional payments to the health plans in 

which the family members were actually enrolled (in this example, 

to the wife's regional alliance health plan and to the Indian Health 

Service program). 

d. Caps on employer premiums (sec. 6123) 

For regional alliance employers, the required employer premium 

payments for a given year would be capped at a set percentage of 

the employer's wages paid for that lear. The percentage applicable 

to a given employer would be base on the average number of employees employed by that employer and their average annual wage. 

Federal, state, and local governmental employers would not be eligible for the caps until 2002. Also, as described in the following section, certain large employers that are eligible to form corporate alliances, but instead participate in regional alliances, may only be eligible for these caps on a phased-in basis. 

An employer who employs an average of more than 75 full-time 

equivalent employees would be subject to a 7.9 percent cap. In 

other words, the required amount of employer premiums under the 

Act would be limited to 7.9 percent of the employer's total payroll. 
35 

-Small employers (those who employ an average of 75 or fewer full:-

time equivalent employees) who paid an average annual wage of 

$24,000 or less (per full-time equivalent employee) would be subject 

to a cap of between 3:5and7.9percent of their total payroll. 

Comment: The bill does not specify the cap applicable. t() 

small employers whose employees earn an average annual 

wage of more than $24,000. Presumably, these employers 

would also be subject to a cap of 7.9 percent. 

The number of full-time equivalent employees and their average 

annual wage would be calculated on an annual basis, based on the 

average number of full-time equivalent employees employed in 

each month during the year. 

Comment: The bill is unclear as to whether the employer 

calculations of tlienumber of employees and their annual 

wages would be based on employment in the current year 

or the prior year. In other words, it is not clear whether 

the employer would determine its eligibility at the beginning of each year, based on the prior year's employment, 

or, wait until the end of the year to determine whether it 

had employed an average of 75 or fewer employees having 

average annual wages of $24,000 or less, and thus was entitled to a refund of some portion of the premiums paid. In 

the latter case, it is not clear whether the employer could 

make estimated payments d!1ri]1g the year, based on projected employment, then reconcile. at the end of the year 

if its projections were inaccurate. It is also unclear whether an employer who qualifies for the caps would reduce its 

payments pro rata throughout the year, or would pay up 

to the limiting amount, then make no further payments 

during the year. 

For purposes of calculating the number of employees and their 

average annual wage, the bill provides that certain self-employment earnings 24 would be deemed to be wages paid, and the individuals earning such amounts would be deelped to be employees of 

the relevant entity. This rule would apply to any individual who is 

a partner in a partnership, a two-percent shareho~der of an S cor~ 

poration, or an individual who carries on a trade or business as a 

sole proprietorship. 

An employer who claims that the caps apply would be required 

to so notify the appropriate regional alliance(s) at the time of making its payments. Such employers would also be required to make 

information available to the alliances to allow them to audit the average number of employees, their ::iverage annual wage, and the 

total wages paid by the employer to qualifying employees. 

If an employer that qualifies for th,e caps makes payments to 

more than ()l~e r~gional alliance, the payments to each regional alliance would be reduced proportionately. 

24 Self-employment earnings for thiS purpose would be the same as those subject to self~-

ployment taxes under section 1402 of the Internal Revenue Code, as morufied liy the bill. . 
86 

e. Adjustments for large employers who participate in regional alliances (sec. 6124) . 

In general 

If a large employer eligible to form a corporate alliance 25 instead 

participates in a regional alliance, two adjustments would be made 

for the first seven years of regional alliance coverage.26 First, the 

employer would only be eligible for the percent of payroll caps (described above) on a phased-in basis. Second, the employer would be 

required to make additional premium payments to the regional alliance if the demographic risk of its employees were greater than the 

demographic risk of the regional alliance participants as a whole. 

If an employer was not initially eligible to form a corporate alliance (for example, an employer who employed only 4,990 full-time 

employees when the Act is first effective), but later becomes eligible 

for corporate alliance coverage (in this example, by hiring more 

than ten additional employees), the employer would not be subject 

to these adjustments solely as a result of having grown in size. If, 

however, such an employer were to form a corporate alliance which 

was later terminated, these adjustments would apply as for any 

other employer that terminates a corporate alliance op.ce one has 

been formed. 

For employers that form a corporate alliance which is later terminated, these adjustments would be made beginning in the first 

year following termination. For employers who choose not to form 

a corporate alliance initially, these adjustments would be made beginning January 1, 1996, or the first year of the state program, whichever is later. 

Percentage of payroll cap 

Large employers that participate in regional alliances (rather 

than corporate alliances) would only be eligible for the percent-ofpayroll cap (limiting the amount of required employer premiums to 

7.9 percent of payroll) on a phased-in basis. For the first four years 

of regional alliance coverage, no cap would apply to such employers. In the fifth year of regional alliance coverage, such employers 

could reduce their premium payments by 25 percent of the amount 

by which the required premiums exceed 7.9 percent of payroll. In 

the sixth year, the premium payments would be reduced by 50 percent of the excess, and in the seventh year, the required payments 

would be reduced by 75 percent of the excess. In the eighth year 

of regional alliance participation (and in all succeeding years), 

these employers would receive the full benefit of the 7.9 percent 

cap. 

Example: Assume that a firm has constant employment of 

10,000 full-time equivalent employees at an average annual wage of $20,000. The firm's total payroll would thus 

be $200 million per year. If this employer is eligible to 

fonn a corporate alliance, but instead participates in a re25The bill generally provides that employers employing more than 5,000 full-time employees 

in the United States are eligible to form corporate alliances. 26 There are two reasons why a large employer could be participating in a regional alliance: 

(1) the employer could elect to do so; or (2) the corporate alliance formed by the employer could 

be involuntarily terminated. 

.ll 
;:: 

37 

gional alliance, the following would result. Assume. that 

the employer calculates its base employment premiums for 

regional alliance coverage to be $20 million per year. In 

this case, 7.9 percent of the firm's payroll would be $15.8 

million, thus the f!pIl'sJ>a§e employment premiums would 

exceed 7.9 percent of payroll by $4.2 million. . For the first four years of regional alliance coverage, the 

employer would be r~quired to pay the full $20 :rp.jllicm 

each year to the regional alliances in which its employees 

reside. In the fifth year, however, the employer would be 

entitled to a ·"discqunt" of 25 percent of the excess $4.2 

million (Le., $1.05 million). The employer would thus only 

be required to pay premiums of $18.95 million in year 5. 

In year 6, the required employer premium payments would 

be $17.9 million; in year 7, they would be $16.85 million; 

and in all subsequent years, they would be $15.8 million. 

For the years in which the discounts apply, the employer's 

payments to all regional alliances in which its employees 

reside would be reduced proportionally. 

Excess risk payments 

Large employers that participate in regional alliallces may be required to make excess risk payments to the regional alliances for 

the first seven years of regional alliancec()verage. Such payments 

would be required if the demographic risk of the employer's employees residing in a particular regional alliance area exceeds the 

average risk of all individuals eligible to participate in the regional 

alliance. The bill specifies that demographic risk would be meas-:-

ured based on de]llographic characteristics including, but not limited to, age, gender and socio~economic status.27 

The excess . .risk percentage for an employer for a particular regional alliance would be the percentage by which the demographic 

risk of the employer's employees living in the alliance area exceeds 

the demographic risk of all individuals living in the alliance area, 

in the year before the employer is first subject to making such payments. This percentage would be multiplied by the reduced weighted average accepted bid for the alliance for the year (which is a per 

capita amount) and the number of full-time employees employed by 

the employer who lived in the alliance area in the year before the 

employer was first subject to making these payments. Th~ r~sulting amount, for each of the first four years of regional .alliance coverage, would equal the amount ofexc;:~ssri§k payment due to the 

regional alliance from the employer. In the fifth year of regional alliance coverage, the employer would be required to pay 75 percent 

of this calculate9.alll()~l.!t; in the sixth year, 50 percent; and in the 

seventh year, 25 percent. No excess risk payments would be owed 

in subsequent years. N()te that excess risk is separately computed 

for each regional alliance .Ill w:hicll. the employer's employees reside. 

Thus, it would be possible for ·an· employer to be required to make 

27 The bill provides that demographic risk would be measured in a manner specified by the 

Board. Each employer would be required to submit to the regional alliances any information re- quired by the Board in order to determine deiiiograpJ:llc risk. . 
38 

excess risk payments to certain regional alliances where its employees reside, but not others. 

f. Additional employer payments for bad debt losses (sec. 6125) 

All employers would be required to make annual payments to the 

regional alliances in which their employees reside to compensate 

for the anticipated bad debt losses of the regional alliance. The percent-of-payroll caps (discussed above) would not apply to such payments. 

For each year, each regional alliance would be required to estimate the total amount of payments due the alliance which are not 

likely to be collected. Payments due from Federal, State, or local 

governments which are anticipated to be uncollectible would not be 

included in this estimate. The estimate for any particular year would be adjusted to reflect any incorrect estimates in prior years 

(calculated by comparing prior years' estimates of UIlcollectible 

amounts to actual collections, and taking into account any interest 

paid or received that is attributable to the prior over- or under-estimate). The total estimated amount of uncollectible payments owed 

the alliance would be divided by the average number of eligible individuals residing in the alliance during the year in order to determine a per capita shortfall amount.28 

The per capita shortfall amount would be converted into separate 

amounts for each class of enrollment using the same formulas as 

used to convert the average per capita bid amounts into base employment premiums (i.e., the per capita amount would be multiplied by the uniform per capita conversion factor and the premium 

class factor, adjusted to reflect the number of premium payments 

per family, then multiplied by 80 percent to get the employer 

share). The effect of this calculation would be that employers would 

be responsible for payment of 80 percent of the anticipated bad 

debt losses of the regional alliance.29 The shortfall amount paid by 

an employer with respect to any particular employee therefore 

would vary depending upon the employee's class of enrollment, in 

the same relative proportion as the base employer premiums vary 

for each class of enrollment. (e.g., an employer would be required 

to make a greater shortfall payment for an employee in the dual 

parent class than in the couple-only class). 

Comment: It should be noted that the amount of shortfall 

payments received by a regional alliance based on this formula may be less than the alliance's total estimate of 

uncollectible amounts. The reason for this is that the 

shortfall payments are allocated to all individuals and employers who are responsible for making premium payments 

to the regional alliance, and are not "grossed up" to reflect 

that some of these individuals and employers would fail to 

pay the basic premiums (and shortfall amounts) for which 

they are responsible. In other words, because some portion 

of the shortfall payments would allocated back to the indi28 For this purpose, individuals who have no family premium obligations under the Act would 

be disregarded (e.g., families including AFDC or 88I recipients). 29'l'he other 20 percent of the shortfall amount would be paid by families in the regional alli- ance (see Part I1.BA.j. for further discussion of the family share). 
39 

viduals (or employers) who fail to pay even the basic premiums owed, a portion of the shortfall payments would be 

uncollectible as well. . 

g. "Employer" payments for self-~mployed indivi4uals (sec. 

6126) 

Under the bill, a self-employed individual would be any person 

who has earnings subject to self-employment taxes under section 

1402(a) of the Internal Revenue Code (as modified by the bill). Selfemployed individuals would be required to make "employer" premium payments based upon their self-employment earnings. In calculating the "employer" premium due, a self-employed individual 

would be considered to be his or her own employer, and the total 

amount of self-employment earnings would be treated as wages 

paid. The required amount of employer premiums would be.capped 

as a percentage of "wages" paid, just as for any other small employer (see section 6123 of the bill, described above).3o If a self-employed individual has had any employer payments made with respect to his or her employment (or self-employment earnings), the 

amount of "employer" premiums due from the self-employed individual would be reduced by the total amount of such payments. 

The bill would also provide an anti-abuse rule applicable to any individual who is both an employee and a substantial owner of a 

closely-held business, to prevent individuals from avoiding payment 

of the full amount owed through fraudulent or secondary employment arrangements. 

2. Corporate alliance employer payments 

a. Employer premium payment required (sec. 6131) 

Each corporate alliance would determine its own weighted average premium. Premiums charged by a corporate alliaIlceJor health 

care coverage under a plan could vary only by class of family Emrollment and by premium area. Corporate alliances would be required to designate premium areas, which would be required to 

reasonably reflect labor market areas or health care delivery areas 

and be consistent with rules to be established by the Department of Labor. . Each corporate alliance employer that, during any month, employs a qualifying employee who is enrolled in a corporate alliance 

health plan offered by the alliance would be required to pay the 

corporate employer premium for that month. In the case of a qualifying employee that is not enrolled in a corporate alliance health 

plan offered by the alliance, the employer generally would make 

premium payments in the same manner as if the employer were a 

regional alliance employer. This provision would apply, for example, in the case of part-time employees (who always receive coverage under a regional alliance ratll~rthtilta corporate alliance) or 

a married employee who receives coverage through the allianc~ of hi~ or her spouse. 

30 As described in that section, in certain circumstances (e.g., if an individual is a partner in a partnership), an individual's self-employment earnings would also be used to calculate the 

caps applicable to the related entity. The calculation described here is a separate calculation 

from that made for the entity. 
40 

The amount of the corporate employer premium for a month for 

a class of family enrollment for a family residing in a premium 

area would be 80 percent of the weighted average monthly premium of the corporate alliance health plans offered by the corporate alliance for that class of enrollment for families residing in 

that area. 

In the case of self-insured plans, the premium for the plan would 

be the actuarial equivalent of such premium determined based on 

the methodology used by the National Health Board to determine 

the annual per capita expenditure equivalent (under sec. 6021 of 

the bill) applicable to corporate alliance health plans or a consist- ~ 

ent methodology. In addition, the premium for different classes of 

enrollment and different premium areas would be computed in a 

manner based on such factors that bear a reasonable relationship 

to costs for the provision of the comprehensive benefit package to 

the different classes in such areas. The Secretary of Labor would 

be directed to establish rules to carry out the provisions relating 

to self-insured plans. 

Corporate alliance employers would be required to pay an additional amount for certain low-wage employees and their families 

enrolled in a corporate alliance health plan by virtue of the employment of a low-wage employee. The additional amount the corporate 

alliance employer would be required to pay would be the amount 

by which (1) 95 percent of the premium for the least expensive corporate alliance health plan that is offered to the employee and that 

is a lower or combination cost sharing plan exceeds (2) the amount 

of the required corporate employer premium. In other words, a corporate alliance employer would be required to contribute at least 

95 percent of the premium for the least expensive lower or combination cost sharing plan offered by the corporate alliance health 

plan, if that amount exceeds the otherwise applicable required employer premium payment. 

Comment: The additional requirement for low-wage workers should create an incentive for a corporate alliance employer to offer a corporate alliance health plan for which 

95 percent of the premium is less than or equal to the otherwise applicable required employer premium. By so doing, 

the employer would minimize its contribution requirements under the bill. Thus, this provision may help ensure 

that low-wage employees have a relatively affordable 

health plan available to them. 

A low-wage employee would mean an employee who is employed 

on a full-time basis and who is receiving wages from the employer 

at an annual rate of less than $15,000 (adjusted annually for infla- ... tion after 1994). The determination of whether an employee is a 

low-wage employee would be made at the time of initial enrollment 

and at the time of each subsequent open enrollment period on the 

basis of the wages payable by the employer at that time. Wages 

would be defined the same as for social security tax purposes (sec. 

3121 of the Code). 
41 

b. Assessment on corporate alliance employers (sec. 7121 

of the hilI and new se~ 3461 of the Code) 

The bill would impose an assessm~J:lt QJ:l~orporate amanc.~,~p1-

ployers in addition to their premium obligations. Th~~§~~E!~s,m~J:l:~ 

is intended to ensure that corporate alliance, employers hear some 

of the cost of certain items that are expected to be reflected in the 

premiums for regional alliance health plans, such as graduate med:-

ical education, academic health centers,' and the costs of providing 

universal health care coverage. 

Corporate 'alli'ances 3Y 

In general under the bill, employers with more than 5,000 fulltime employees (large employers), certain multiemployer plans, 

rural electric cooperatives, rural telephone cooperatives, and the 

U.S. Postal Service could elect to provide health care coverage to 

their employees through corporate alliances rather" t1:i~, through regional alliances. The corporate alliance coufd pr()vIde rrisp:r~J:lC~ 

through self-insurance or through commercial, insurance. The corporate alliance would be responsible for providingtlie ~c()inprehensive benefit package. ' 

Assessment on corporate alliance employers 

Under the pill, every corporate alliance, ~lIlployer would be required to pay an asseSSm~J:lt ()f 1 percent of the employer's payroll 

for ~ach caleIl:~r year. Payroll wouJq~m~~R ~h~,,~'y'm Jlf: ,nL~ages (as defined for social security tax purposes, but :",ritKm!I.~t,:~gard to 

the wage cap); (2) in the cas~Qfa s()le proprietorship, tne net earnings from self employment of the proprietor attributab,l~. to the 

trade or busin~ss; (3) in the, ca~~ ()f a partnership, the'aggregate 

of the I).et e,WAings from,l?eJf employment of eacq. partnerwhtch is 

attributable to such partnership; and (4) in the case of an,S corporation, the aggregate of the net earnings from self employment 

(as defined under the bill) of each shareholder which is attributable 

to such corpol-atlonfor'the taXable yea£'ofsuch'corporatloii.'The as~ 

sessment would be imposed on total payroll, and thus wo:qld ~,!IIlposed with respect to all employees of the corporate alliance ¢1Ilployer even if they do not obtain health coverage through the" corporate alliance. The assessment is in essence a' 1 percent payroll 

tax. 

A corporate alliance em.ployer would inc1u.de any employer if any 

individual. is provided wIth. health. ~oyerage through any corporate alliance because the individual is employed by the employer. An 

employer would include any person for whoJP,. ,anjIid,iyjg.lltll per- forms services, of whatever nature, as an employee (as defined in 

Code sec. 34ql(c))~F()r purposes o!the}>!ll, any indiyiqllal \\ThO 

owns the entire mterest in an umncorporated trade or business 

would be, ~reated '8:str~Jii<i.iYtgllal's. ~YVIlemployer .. lri:'addiUon;'a 

partnershIp' would be treated as JhftfiltIlployer of each partner and 

an S corporation would be treated ast1:ie~mployer of ea<;hJ,h~~; 

holder of.tp.e <;orporatioIl .. All persons t~e~:IJe,g.~~~,~.§iIlgle employer" under section 1901 of the Health Secunty .ACt woUld be treated as 

a Single employer for'purposes'0onhel~percent a~sel?~!!1~itr"_c," "c ...• 

The I-percent assessm~nt would. not apply to an employer that 

is a corporate allianC!e employer solely by reason of employees who 

31 Corporate alliances are discussed in detail in Part II.A.2., above. 
42 

are provided with health coverage through a corporate alliance 

sponsored by a multiemployer plan. In the case of an employer that 

is a corporate alliance employer in part (but not solely) by reason 

of such employees, the assessment on the employer would be determined without taking into account the payroll of such employees. 

The I-percent assessment would be deductible by the employer. 

The assessment would be paid at the same time and in the same 

manner as employment taxes. For purposes of the provisions relating to the filing of tax returns and information reports and other 

rules relating to procedure and administration under subtitle F of 

the Internal Revenue Code, the I-percent assessment would be ~ 

treated as an employment tax. 

Effective date 

The provision would be generally effective on January 1, 1996. 

Every employer eligible to elect to be an eligible sponsor of a corporate alliance (other than an employer that is a corporate alliance 

employer solely by reason of employees who are provided with 

health coverage through a corporate alliance sponsored by a multiemployer plan) would be treated as a corporate alliance employer 

as of January 1, 1996, unless the employer irrevocably elects to 

waive its rights ever to be treated as such a sponsor. 

Comment: The effective date of the provision could be clarified if it were modified to provide that every employer eligible to elect to be an eligible sponsor as of some specified 

date would be treated as a corporate alliance employer as 

of January 1, 1996, unless it elects never to sponsor a corporate alliance. As written, it is unclear what happens if 

an employer is not eligible to form a corporate alliance on 

January 1, 1996 (e.g., does not have enough employees to 

be a large employer) but does become eligible at a later 

time. . 

3. Employer payments with respect to retiree health benefits 

The bill imposes two additional obligations on certain employers 

(whether regional or corporate alliance employers) with respect to 

retiree health benefits. 

a. Employer retiree obligation (sec. 1608) 

In general, under the bill, employers who, as of October 1, 1993, 

were paying for a portion of the retiree health costs of qualifying 

retired beneficiaries would be required to make payments to or on 

behalf of such beneficiaries. This provision would impose a maintenance-of-effort requirement; that is, if the employer were paying 

for a portion of an individual's retiree health benefits on October 

1, 1993, then it must continue to do so. 

In particular, the payment obligation applies for each month beginning with January 1998, with respect to any qualifying beneficiary for whom the employer, as of October 1, 1993, was paying 

at least 20 percent of the premium (or premium equivalent) for coverage of any item or service that is part of the comprehensive benefit package provided under the bill. The employer obligation would 

.. 
43 

cease to apply when the indiyi~ual i§.g() longer a qualifying retired 

beneficiary. The amQunt of the l'equlred payment wO\lld. be equal 

to 20 percent of the weighted average premium for theJn~ii!dual's 

class of enrollment in the regional alliance for the area In which the individual resides: . .... .. .. ......... .. ..., .... ~... . 

Under the"proVfsion:"a:"qualifying retired benefic::iary would include an eligible retiree or a qualified spouse or child 9f ~~ eligible 

retiree as those terms are defined in the bilL Under . the .bill, the 

determination of whether an. i.ndlvidu8.l1s 8ii' elfg1bTe 'retiree or a 

qualified spouse or.child:\vQuld he made' on-ii"mop.thly basis .. An individual would be. required to establish to the satisfaction of the regional alliance (for the alliance area. in which the- indiVfdualresides) his or her status as an eligible'reifree'ofijualified spouse or 

child. ~ individual wO\lld. b~_ C5>g~~g~red . an .eligible retir~e £9.1' . a 

month if, as of the first day of the month, such indiv:idual (1) is between the ages of 55 and 65, (2) is not employed on' a full-time 

basis,32 (3) is not currently eligible for MediCare c::ov~rage, and (4) 

would have satisfied the employment requirements for Medicare 

Part A eligibility at age 65. 

An individual W01l,!~.1?~.£.9I!~.i,g~l'~d,Ji qualified spouse for a month 

if the spouse is under age 65 and has been. mwti,e<i!2, t~~ eligible 

retiree for at least one year. An individual wouIa. be. considered a 

qualified child for a month if the, indiviQualls' 8'-cnna"of theellgible retiree. ". .. ' ..... ' '. , ..... , .. ". '. " ... " . .,. ""-"',' - ,_."-,,, '. , 

Under the bill, the surviving spouse of an eligible retiree would 

also be considered a qualified spouse for a month if he orshe'(l) ~as not ~m.¥rie~,· (2) was ma.¢,~d.tQ !g~ ellglole'" retlroo"at . the 

time of hIS or her death, (3) is underage 65, (4) is not employed 

on a full-tim.e .b~is,33 and (5) the deceased spouse would J!tiU,h~ye 

~;~~s~oh:~~~~ di~d:l~r~l~:::l~rig f~~!~:e'~iiui~ .~~·.~:~:iJ~t~~~~ qualified spouse for a month, his or her children also would be con- sideredqualified children for the month. " ,., •. , '''"'''~'v"_,,,·,·,, 

Comment: The sco~~ '~i ii;bility'f~~' an' employer to make' 

payments with respect to qualifying retirees, or qualified 

spouses or children of qualifying retirees, would be fairly limited. The provision would apply, beginning on January 

1, 1998, only to those individuals, ,who were at least age 55 

as of October 1, 1993 (and who met the.otherrequirements 

of a qualifying retiree as of that date ).Thus, qualifying retirees woulci be at least age 59 on January 1, 1998, and 

the continuing liability would not extend past September 

1,2003. 

Comment: There,Illay be a definitjoJ!!Mproblem with the 

provision as drafted. By definition, an individual C01l,141\9t. 

have been ,a qualifying retired beneficiary under tliepHtQ!t 

October 1, 1993, because in order .!Q 1?e~.qualifying beneficiary, an individual WQ\lldb(Ln~quired to e~taplisijJ() the 

satisfaction of the regional alliance (for the .allianc~a.r~~ i~L 

32Eligible retirees who work at least 120 hours in a month would be considered full-time em- ployees (sees. 6114(bX2) andl901(bX2)(A». .0. . .... •• ,0< w •• " ..... ', ~,'~. ";'''''~';''~",""" ... """,;,., 

33 Surviving spouses who work at least 120 hours in a month would be considered full-time 

employees (sees. 6114(c)(2)(C) and 1S01(b)(2XA). . . ". " ....J ........, 
44 

which the individual resides) his or her status as a qualifying retired beneficiary. Obviously, there were no regional 

alliances in existence on October 1, 1993. This could be 

solved by clarifying that the determination of whether 

someone is a qualifying retired beneficiary is made without 

regard to the requirement that the individual establish to 

the satisfaction of the regional alliance his or her status as 

a qualifying retired beneficiary. 

Any liability to continue payments would be in addition to any 

other requirement imposed on an employer by the bill or otherwise. 

Thus, for example, the bill would not alter any contractual obligations that an employer may have to make payments for health benefits on behalf of retired employees. 

In addition, the provision would not affect any rights under collective bargaining agreements. 

b. Temporary assessment on employers with retiree health 

benefit costs (sec. 7121) 

In general, the bill would provide that the employer share of the 

cost of providing the comprehensive benefit package to retirees between the ages of 55 and 65 is to be paid by the Federal Government. In some cases, employers may have had plans which obligated them to pay these retiree medical costs. To prevent a windfall to such employers, the bill would impose a temporary assessment on employers with base period retiree health costs. The assessment for a year would be equal to 50 percent of the greater of 

(1) the adjusted base period retiree health costs of the employer for 

the year, or (2) the amounts (determined in the manner to be prescribed by the Secretary) by which the employer's applicable retiree 

health costs for such calendar year were reduced by reason of the 

enactment of the Health Security Act. 

"Base period retiree health costs" would mean the average of the 

applicable retiree health costs of the employer for calendar years 

1991, 1992, and 1993. "Adjusted period retiree health costs" would 

mean the base period retiree health costs adjusted in the manner 

prescribed by the Secretary of the Treasury to reflect increases in 

the medical care component of the Consumer Price Index during 

the period after 1992 and before such calendar year. Rules similar 

to the rules of section 41(f)(3) (relating to adjustments to the research and development credit in the case of business transactions) 

would apply in determining adjusted base period retiree health 

costs in the case of acquisitions and dispositions after December 31, 

1993. In general, these rules would increase the adjusted base period retiree health costs by costs attributable to acquisitions of the 

employer, and would decrease by dispositions of the portion of a 

business by the employer. 

"Applicable retiree health costs" would mean, for any year, the 

aggregate cost (including administrative costs) of the health benefits or coverage provided during the year (whether directly by the 

employer or through a sec. 401(h) plan or a welfare benefit fund) 

to individuals who are entitled to receive such benefits or coverage 

by reason of being retired employees between ages 55 and 65 (or 

by reason of being a spouse or other beneficiary of such an employee), 
45 

The as~essment applies to governmental and tax-exempt employers as well as otherwise taxable employers. The assessment for each year would be paid on or before March 

15 of the following year, but the Secretary of the TreasUry would 

require quarterly estimated payments. Reporting requirements and 

interest and penalties for failure to make timely payment would 

apply in the same manner as in the ca~e of Feder~ employment 

taxes. 

The assessment would apply to calendar years 1998, 1999, and 

2000. 

4. Regional alliance family share of premiums (sees. 6106-

6107 and 6111-6115) 

a. In general 

Under the bill, each family enrolled in· a regional alliance health 

plan in a class of family enrollment (I.e., individual, couple only, 

single parent, or dual parent) would be required to pay the family share of premium payable with respect to such enrollment. This required premium could also be paid by an employer 34 or by any other person on behalf of the family. . ~ In general, for a family coiltaining at least one full-time worker, 

the family share of premiums would equal the premium for the 

health plan selected by the family, less a credit of 80 percent of the 

weighted average premium for the family's class of enrollment. 

Certain other credits would also be provided to low-income families, 

or those receiving AFDC or SSI payment. Families would also be 

required to pay a "shortfall" amount to compensate for 20 percent of the anticipated bad debt losses of the alliance. For employed individuals, the family share would generally be collected through payroll deduction. Each regional alliance would be responsible for 

calculating the family share of premium due for each family and 

so notifying each family. 

h. Notification requirements . 

Each regional alliance would be required to determine the family share of premium and the amount of any alliance credit required 

to be repaid for each year for families enrolled in regional alliance 

health plans (sec. 1343 of the bill). The information required for an 

alliance to determine the family share. of premium would be based 

on information obtained orinaintained by the alliance in the conduct of its business, including information required for income-related determinations, information on SSI and AFDC recipients, information submitted monthly or annually by employers, information submitted by self-employed individuals, applications for pre- mium reductions, information concerning medicare-eligible individuals, and whether or not the fam,ily is an SSI or AFDC family. 

At least 45 days before the deadline for payment of premiums for 

a year as specified by the Secretary of Health and Human Services 

34 If paid by the employer, the amount of the premium would be excludable from income under 

the bill (sec. 7201). The bill would also require that, if the employer pays for any portion of the 

family premium for any employee, the employer must make the same dollar payment for all em- ployees. The difference between this dollar amount and the family premium for the plan selected 

by the employee would be paid in cash to the emplOyee and would be includible in the employee's gross income (sec. 1607(bX2». 
46 

("the Secretary"), the regional alliance would be required to provide 

notices to each family enrolled in a health plan of amounts due to 

the regional alliance (sec. 1344). The notice would include detailed 

information relating to the amount owed, the basis for the computation, and the date the amount would be due and the manner 

in which the amount due would be payable. The notice would also 

include information relating to the discounts and reductions in premium liability available and a worksheet that could be used to calculate reductions in liability based on income. In the case of a family that would have been provided a premium discount (under sec. 

6104) for the previous year based on income, the notice would include an income reconciliation statement to be completed and returned to the regional alliance by the deadline for payment. Any family not provided with a premium discount, but that would have 

been eligible for such a discount, could submit an income reconciliation statement and, if eligible, would receive a rebate of the 

amount of excess family sl)are of premium paid for the previous 

year. 

In the case of a family that, during the year, changes the regional alliance through which the family obtains coverage under a 

regional alliance health plan, the regional alliance providing coverage as of the end of the year would be responsible for collecting 

the premiums owed for the year (to any regional alliance). Further, 

the regional alliance would be required to transfer to each of the 

other regional alliances providing coverage during the year the por- tion of premiums attributable to such other coverage.35 

Comment: It is unclear under the bill how payment transfers occur in the case of people switching between regional 

and corporate alliance plans during the year. It is also unclear what will happen to the transfers if there is a shortfall with respect to the amount of premium required to be 

transferred. 

Under the bill, no individual or family would be denied coverage 

under a health plan due to failure to pay amounts owed to a regional alliance. ------

c. Regional alliance family share 

In the case of a family enrolled in a regional alliance health plan, 

the family share of premium would equal the base amount minus 

any credits and discounts. 

The base amount would be the sum of the following amounts: 

(1) The regional alliance premium for the class of enrollment and 

the health plan in which the family is enrolled (Le., individual, single parent, couple, dual parent). This amount would be the total 

premium due with respect to a family enrolled in a particular class 

of enrollment without regard to the amount that is required to be 

paid by an employer._ . (2) 20 percent of the family collection shortfall add-on. The family 

collection shortfall add-on is designed to collect bad debts of the regional alliance, that is, to collect amounts owed to the regional alliance, but not otherwise received. 

35The methods for determining the manner in which the required premiums would be collected and transferred among regional alliances would be established by the Secretary. 

.. 
47 

Credits and discounts would equal the sum of the following 

amounts: 

(1) The alliance credit. This credit would equal 80 percent of the 

weighted average premium in the alliance for the class of enrollment and is designed to reduce the family share of premium by an 

amount assumed to be paid by an employer of a member of the 

family.36 Certain families, as described below, are liable to the regional alliance for repayment of the alliance credit. In other words, 

for such families, the amount of the alliance credit is reduced, but 

not below zero. 

(2) Any income-related discount to which the family would be entitled. 

(3) Any excess premium credit. This credit is designed to pass on 

to families the benefit of any plan payment reductions due to enforcementof the premium caps. 

(4) The amount of any corporate alliance opt-in credit. This credit 

is designed to compensate families for higher premiums in regional 

alliance health plans that may result from corporate alliance employers with employees with higher than average health risks opting into the regional alliance. 

(5) An additional credit for SSIand AFDC recipients and certain 

other families. 

In no event could the family share of premiums be less than zero .. The additional credit for SSI and AFDC recipients and certain 

other families is intended to ensure that these families can enroll 

in a low-cost health plan and owe Ilofaroily premiums. The credit 

would be determined as follows. In the case of an AFDC or SSI 

family 37 or in the case of a family for whom the income-related discount would equal 20 percent of the weighted average premium for 

regional alliance health plans offered by the regional alliance for 

that class of enrollment (increased as specified in bill sec. 

6104(b)(2)), the additional credit for SSI and AFDC recipients 

would equal 20 percent of the family collection shortfall add-on. 

Thus, such a family would not be liable for any portion of the family collection shortfall add-on. 

Comment: However, it appears that a family that is not 

entitled to the full premium discount (Le., a family that is 

not an AFDC or SSI family and that has adjusted income 

in excess of $1,000) (see the discussion in Part II.B.4.e., 

below, of the calculation of the premium discount based on 

income) would be required to pay the full amount of the 

family collection shortfall add-on. Thus, the bill does not 

appear to phase in the liability for the family collection 

shortfall add-on as it does the liability for the family share 

of premiums. 

36 Note, however, that this credit wo:uld not necessarily be the same amount as that paid by the employer. (See the discussion of the alliance credit below.) 37 An AFDC family would mean a family composed entirely of one or more AFDC recipients (sec. 1902(2)). Similarly, an SSI family would mean a family composed entirely of one or more SSI recipients (sec. 1902(32». See the discussion relating to divided families below, which· describes how a family containing an AFDC or SSI recipient and other individuals would be treat· 

ed under the hill. 
do· Amount of premium 

In general 

48 

In the case of a regional alliance health plan, the amount of the 

premium charged by a regional alliance for all families in a class 

of family enrollment under that health plan would equal the final 

accepted bid for the plan (which is a per capita amount) times the 

uniform per capita conversion factor for the alliance and the national premium class factor. The uniform per capita conversion factor, which is separately calculated by each regional alliance, would 

convert the final accepted bid to a premium for an individual only 

enrollment. The premium class factor, which is determined by the 

Board and is applied uniformly to all regional alliances, would convert the premium calculated for the individual only enrollment to 

the premiums for other classes of enrollment in the plan (such as 

dual parent). 

Divided families 

The bill would divide certain families for purposes of applying 

the provisions of the bill, if one or more members of the family 

qualifies for special treatment under the bill. The divided family 

rules generally apply if a member of the family qualifies for a 

health plan that is not part of a regional alliance or a corporate alliance. In general, the divided families rule would split up a legal family for purposes of applying the bill's provisions and would instead treat the family as two (or more) separate families--one family consisting of the individual eligible for special treatment, and a 

separate family consisting of the remaining members of the legal 

family. 

However, under certain circumstances, these divided families 

would be combiped back into one family for purposes of computing 

the family share of premiums due. In the case of an individual who 

is a qualifying employee (Le., who is employed by an employer for 

at least 40 hours in a month), if the individual has a spouse or 

child who is not treated as part of the individual's family, then the 

combined premium for both families would be computed. If such 

combined premium is less than the total of the premiums otherwise 

applicable, then the combined premium would be calculated as 

though the spouse or child is treated as part of the qualifying employee's family. The regional alliance would then divide the combined premium between the families proportionally (under rules established by the National Health Board) and credits and other 

amounts to which the families would be entitled would be pro-rated 

in a manner consistent with rules established by the Board. 

For purposes of the bill, a divided family means a family that includes one or more individuals who are part of a group under 

which all individuals in each such group within the family are 

treated collectively as a separate family, and all individuals not described in any such group are treated collectively as a separate 

family. The groups to which the separate family status would apply 

are (1) AFDC recipients, (2) disabled SSI recipients, (3) SSI recipients who are not disabled SSI recipients, (4) veterans who elect to 

enroll with a health plan of the Department of Veterans Affairs, 

unless the veteran elects family enrollment under the plan (instead 

of individual enrollment), (5) active duty military personnel (Le., an 

individual on active duty in the Uniformed Services of the United 
49 

States), but not with respect to any family coverage elected, ~6) ~ndians who elect a health program of the Indian Health ServIce instead of a health plan, but only if an election is made with respect 

to all eligible individuals who are family members of the family, or 

(7) prisoners (Le., an eligible individual during a period of imprisonment under Federal, State, or local authority after conviction as 

an adult). 

e. Premium discount bas~~c)11 il1~C)me 

In general 

A premium discount would be provided wftIiOrespecfto_~a~hJa:w.­ ily enrolled in a regional alliance health plan that is (1) an AFDC 

or SSIfamily, (2) has family adjusted income below 150 percent of 

the applicable poverty level and is "determined. to be eligible for reductions in ·cost sharing (secs. 1371-1375 of the bill), or (3) isa 

family for which the family obligatiorr7-amount for the year would 

otherwise exceed a specified percentage of family adjusted income. 

In the case of an AFDC or SSI family, the premium discount would 

be applied to the preniiumonly for those months in which the family is an AFDC or SSI family. 

The amount of the premium discount for a family enrolled in a 

regional alliance health plan under a class of family enrollment 

would be 20 percent of the weighted average premium for regional alliance health plans offered by the regional alliance for that class 

of enrollment reduced (but not below zero) by the sum of the family 

obligation amount (described below) and the amount of any employer payment toward the family share of premiums for covered 

members of the family (Le., an employer payment in excess of required payments). Thus, the premium discount to which certain 

families are entitled is reduced by any employer payments in excess of its minimum required payment. 

Comment: The bill appears to create a disincentive for any -. employer to pay more than the required minimum for its 

low-wage employees because then the premium discount is 

not available. Most economists believe that employees ultimately bear the full cost of amounts, such as payroll taxes, 

that employers pay on their behalf. If this is true, then 

there is a clear incentive for an employer not to pay more 

than the minimum required contribution because it appears under the bill to reduce the availability of the income-related premium discount. 

If a regional alliance determines that a family eligible for the 

premium discount is unable to enroll in an at-or-below-average-cost 

plan that serves the area in which the family resides, the premium discount would be increased by 20 percent of the amount by which 

the premium for the lowest-cost plan for which the family is eligible exceeds the weighted average premium for that class of enrollment. An at-or-below-average-cost plan means a regional alliance 

health plan the premium for which would not exceed, for the class 

of family enrollment involved, the weighted average premium for 

the regional alliance. 
50 

Family obligation amount 

If the family adjusted income of a family (described below) is less 

than $1,000 38 (the income threshold amount), or if the family is an 

AFDC or SSI family, the family obligation amount would be zero. 

Thus, such a family would be entitled to the full premium discount 

under the bill because the premium discount would not be reduced 

by any family obligation amount. The amount of the discount 

would still be reduced by any employer payments in excess of the 

minimum required employer payment. Families with adjusted income of $1,000 or more would have some family obligation amount, 

determined as described below. 

In the case of a family with adjusted income above the income 

threshold amount, the family obligation amount would be the sum 

of two amounts. The first amount would be the product of (1) the 

initial marginal rate and (2) the amount by which the portion of 

the family adjusted income not in excess of the poverty level exceeds the income threshold amount. The second amount would be 

the product of (1) the final marginal rate and (2) the amount by 

which the family adjusted income exceeds 100 percent (but is less 

than 150 percent) of the applicable poverty level. 

In the case of an individual class of enrollment, the initial marginal rate for a year would bE- the ratio of (1) 3 percent of the applicable poverty level for the individual class of enrollment to (2) the 

amount by which the poverty level exceeds the income threshold 

amount. The final marginal rate would be the ratio of (1) the 

amount by which the general family share for an individual class 

of enrollment exceeds 3 percent of the applicable poverty level (for 

an individual class of enrollment for the year) to (2) 50 percent of 

the poverty level. The general family share would mean, for a class 

of enrollment, the weighted average premium for the class minus 

the alliance credit (determined without regard to the calculation of 

the family obligation amount). 

Example: Assume that a single individual has adjusted income of $14,000 for 1994, the applicable poverty level is 

$10,000, the income threshold is $1,000, and the general 

family share is $400. The initial marginal rate is the ratio 

of $300 (3 percent of $10,000) to $9,000 (the amount by 

which the poverty exceeds the income threshold), or .0333. 

The final marginal rate is the ratio of $100 (the amount 

by which the general family share exceeds 3 percent of the 

poverty level, or $400 minus $300) to $5,000 (50 percent 

of the poverty level ($10,000», or .020. 

The family obligation amount is calculated as follows: 

(1) .0333 (the initial marginal rate) times $9,000 (the 

amount by which the portion of family income not in excess of the poverty level exceeds the income threshold 

amount), plus 

(2) .020 (the final marginal rate) times $4,000 (the 

amount by which the family adjusted income exceeds 100 

percent (but is less than 150 percent) of the poverty level). 

38 This amount would be indexed for changes in the CPI in years after 1994 and would be 

rounded to the nearest multiple of $10. 

," 
51 

Thus, the family obligation amount for. the indtvidual is 

$380 ($300 plus $80). 

For a year for a nonindividual class.(i.e., couple-only, single parent, or dual parent) of enrollment, the initial marginal rate would 

be the ratio of (1) 3 percent of the. applicable poverty level for a 

dual parent class of enrollment for.tlle year to (2) the amount by 

which the applicable poverty level exceeds the income.th~!!!h()ld 

amount. The flnalJnarginal rate would be the ratio of (1). the 

amount by which the general family share for a dual parent class 

of e.llrollment .ex<:~ed~.3 percent of the applicable poverty level (for 

such a class for the year) to (2) 50 percent of the applicable poverty 

level. 

In the case of a family with family adjusted income of less than 

150 percent of the applicable poverty level, in no case could the 

family obligation amount exceed 3.9 percent of the amount of such 

adjusted income. The 3.9 percent would be adjusted for any year 

after 1994 so that the percentage for the year bears the. !!!'ame ratio 

to the percentage so specified as the ratio .. ()f l plus the general health care inflation factor for the years bears to 1 plus the percentage specified in section 1136(b) (relating to indexing of dollar 

amounts rel~teq to co§t. sh~ng for the year). Any adjustment to 

the 3.9 percent shall be roun.ded to then~a,relitt.1.lll!ltiple of 1/10 of 

1 percentage point. 

In the case of a family with family adjusted income of at lea,st 

150 percent of the applicable poverty level but less than $40,000 

(adjusted after 1994 for changes in the CPI and rounded to the 

nearest multiple of $100), the family obligation amount for the year 

would equal 3.9 percent (adjusted as described above) of the adjusted income. For families with family adjusted income of at least 

$40,000, there would be no cap on the family obligation amount. 

Under the bill, family adjusted income would meaIl.. the .. sum of 

the adjusted incomes for all.ll1~mber$. of t.h.e Ja,mily (determined 

without regard to the divided. famJlie$ rules) (sec. 1372(d». Adjusted income would mean adjusted gross income (as defined in section 62(a) of the Internal Revenue Code of 1986 (the Code» determined without regard to' (1) the exclusion from gross' income with 

respect to the redemption during the year of qualified U.S. savings 

bonds used to pay qualified higher education expenses (sec. 135 of 

the Code), (2) the deduction for health insurance costs of self-employed individuals (sec. 162(i) of the Code),(3fitiEtexclu$lon from 

income for certain income of U.S. citi~~Ils ()r.~!3id~llt!3Jiying abroad 

(sec. 911 of the Code), (4) the exclusion from income from sources 

within Guam, American Samoa, or the Northern Mariana Islands 

(sec. 931 of the Code), and (5) the exclusion from income f()r income 

from sources within Puerto Rico (sec. 933 of the Code). This 

amount would be increased by the amount of tax-exempt interest 

received or accrued by the individual. At an individual's. option, 

family adjusted income could include the income of individuals who 

are claimed as dependents of the family for income tax purposes 

(but who are not considered members of th~ family for purposes of 

applying the Health Security Act generally). In such circumstances, 

these dependents would not be considered part of the family for 

purposes of determining the family's class of enrollment. 
52 

Ineligible individuals 

Certain individuals would not be entitled to a premium discount 

because the applicable health plan would not impose any premium 

obligation on such individuals. These individuals would include (1) 

electing veterans enrolled under a health plan of the Department 

of Veterans Affairs who, under the laws and rules in effect as of 

December 31, 1994, have a service-connected disability or are unable to defray the expenses of necessary care as determined under 

title 38 of the USC, (2) active duty military personnel, and (3) Indians who elect a health program of the Indian Health Service instead of a regional alliance health plan, but only if an election is 

made with respect to all eligible individuals who are family members of the family. 

f. Alliance credit 

An alliance credit would reduce the amount of the family share 

of premium that would otherwise be owed. The alliance credit is intended to reflect the employer's share of premiums presumed to be 

paid on behalf of an individual. 

In the case of a regional alliance, the alliance credit for a class 

of family enrollment would be 80 percent of the weighted average 

premium for health plans offered by the alliance for the class. 

Thus, if an individual elects coverage under a regional alliance 

health plan that has a premium equal to the weighted average premium for plans offered by the alliance for the same class of enrollment, the individual would not be obligated to pay, in any event, 

more than 20 percent of the weighted average premium. 

Examples: The alliance credit to which any family is entitled does not necessarily equal the amount of employer 

premium payments made on behalf of the family. A number of examples will illustrate this point. 

Assume that the weighted average premium for the couple-only class is $3,000 and that the average couple-only 

family has 1.5 full-time workers. The employer premium 

(or base employment monthly premium) to be paid for a 

full-time worker would be 80 percent of $3,000 divided by 

1.5, or $1,600. However, the credit for each family would 

be 80 percent of $3,000, or $2,400. The effect on different 

couples would vary depending upon the number of fulltime workers they represent. In each of the following examples, assume that the couple elects a health plan with 

a $3,000 premium (Le., an average health plan) and that 

there are no other credits or discounts available. 

Example 1: Both spouses are full-time employees. Their 

employers will each pay $1,600 of premiums for a total of 

$3,200. Assuming no other credits or discounts and no 

family collection shortfall add on, the couple will be required to pay $600 for their health plan (the $3,000 premium minus the $2,400 alliance credit). Thus, the couple 

and their employers pay a total of $3,800 ($3,200 plus $600) for coverage in a $3,000 health plan. 
53 

Example 2: Assume one spouse is a full-time employee and 

one spouse is unemployed. The working spouse's employer 

pays a $1,600 premium and the cpuple pays $600 (after 

the alliance credit). The couple and employer pay a total 

of $2,200 ($1,600 plus $600) for cove:rage in a $3,000 health plan. ' ' 

Example 3: Assume ,both spouses are half-time (i.e., 60 

hours a month) workers. Each employer would be required 

to pay an $800 premium (one-half of the full-time worker 

premium) and the co~ple is required to pay $600. Thus, 

the result is the same as example 2; a total premium of 

$2,200 ($800 plus-$800 plus $6(0) is collected for coverage 

in a $3,000 health plan. 

Example 4: Assume the, couple has one half-time wo:rk~r' 

and one nonwork~r .. Tlie employer pays $800 (one half the 

premium for a full-time ·W:Qr,k~r). The family is entitled to 

an alliance. credit of $2,400. However, the family's repayment liability (described in detail below) is 50 percent of 

the base monthly employment premium, or $800. Thus, 

the family's premium payment would be $1,400 ($3,000 

minus $2,400 plus $800) and the total premium paid with 

respect to the family would be $2,200 ($1,400 plus $800). 

Note that the alliance cQUect~, th~. salll~J,Q.~liLpremium in 

this example as in example 2 or 3, in wIiicn the couples have at least (in total) one full-time worker. 

Example 5: Assume that neither spouse of the couple is 

employed. The family is entitled to the alliance credit of 

$2,400 (80 percent of $3,000). However, the family's repayment liability equals the base mOl!thly employment pre- mium, or $1,600. Thus, the family's premium payment 

would be $2,200 ($3,000 minus $2,400 plus $1,600). 

Comment: In the aggregate, as long as the alliance can 

predict accurately the number of full-,tiJlle. ~!>r~ers per family, the total employer payments and the total family 

credits should be the same. As th,e ,8,l:>QV:~,,~~8,mples illustrate, if it is assumed, that employees u1timately bear the 

full burden of the required premium payments through reduced wages, then families with more, than one full-time 

worker will effectively be paying more for their hea.lth 'care' " 

than will families with less than one full-time worker. This 

result could create a disincentive to work in certainc~es., 

g. Repayment of alliance credit by certain families 

In general 

Under the bill, certain families that are provided an alliance 

credit (i.e., a credit that reduces the family share of premium by 

an amount assumed t<> be paid by an employer of a member of the 

family) for a class of enrollment would be liable to the regional alliance for repayment of an amount equal to the base employment monthly premium (applicable to such class) for the month (sec. 

6122). The base employment monthly premium would be the 

amount payable each month by an employer with respect to each 
54 

full-time employee enrolled in a class of family enrollment under 

a regional alliance health plan. 

Comment: The amount of the alliance credit would be 

based upon the weighted average premium for all health 

plans offered by a regional alliance for a class of coverage, 

whereas the calculation of any repayment liability would 

be based upon the base employment monthly premium 

paid by an employer with respect to a full-time employee. 

For individuals, these amounts will be the same. However, 

for families, these amounts will generally not be the same. 

The repayment of the alliance credit would have the effect of requiring payment of an additional premium with respect to a family 

enrolled in a regional alliance health plan in situations in which 

an employer did not make premium payments with respect to the 

family. Thus, for example, the liability of a family for a year would 

be reduced (but not below zero) by the amount of any employer 

payments made in the year based on the net earnings from self employment of a family member (sec. 6126). 

No liability for families employed full time; reduction in liability for part-time employment 

If any family member works at least 40 hours during the month 

(and his or her employer would be required to make payments with 

respect to such employment), the family's repayment obligation 

would be reduced or eliminated. Thus, the amount of any liability 

for repayment of the alliance credit would be reduced, in accordance with rules established by the Board, based on employer premiums payable with respect to the employment of a family member 

who is a qualifying employee or with respect to a family member. 

In no case could the reduction result in any payment due to a family (Le., the reduction could not reduce the liability for repayment 

of the alliance credit below zero). 

If a family member is a qualifying employee for a month, is not 

an eligible retiree or a qualifying spouse or child of an eligible retiree, and the employer is liable for payment with respect to the 

qualifying employee based on such employment, then the liability 

for repayment of the alliance credit would be reduced depending 

upon whether the employment is full time or part time. If the employment is on a full-time basis, the liability would be reduced by 

the full-time monthly credit. The full-time monthly credit, with respect to employment in a month, is 1112 of the repayment liability 

based on the class of enrollment for the year. If the employment 

is on a part-time basis, (Le., for at least 40 hours, but less than 120 

hours, in a month) the liability would be reduced by the employ- .. ment ratios (the ratio of the number of hours of employment for a 

month to 120) of the full-time monthly credit. In other words, in 

the case of part-time employment, the liability would be reduced 

proportionately by the percentage the hours of employment are to 

120 hours. In the case of a family that is not enrolled in a regional 

alliance health plan for all the months in a year, the full-time 

monthly credit would be deemed to be the repayment liability divided by the number of months in a year in which the family was 

enrolled in such a plan. 
55 

In the case of an individual who .is. a. qualifying employee of more 

than one employer in a month, the full-time monthly credit for the 

month would be the sum of the credi:ts earned with. ;respect to employment by each employer. In the case of a couple each spouse of 

which is a qualifying employee in a month, the credit for the month 

would be the sum of the credits earned with respect to employment 

by each spouse. In either case, the sums of the credits may exceed 

the full-time monthly credit amount. 

In the case of a family for which the class of family enrollment 

changes during a year (e.g., from single parent to dual parent), the 

Board would be required to establish rules for appropriate conversion and allocation of the credit amounts in a manner that reflects 

the relative values of the base employment monthly premiums 

among the different classes of family enrollment. 

Limitation on repayment obligation based on income 

In the case of a family that has wage-adjusted income below 250 

percent of the applicable poverty level, the repayment amount required (after taking into account any reduction in liability on account of full or part-time employment) with respect to a year would 

be limited. Wage-adjusted income would mean, for a family, the adjusted income of the family, reduced by the sum of (1) the amount 

of any wages included in such family's income that is received for 

employment with respect to which employment premiums would be 

required to be paid, (2) the amount of net earnings from self employment of the family, and (3) the amount of unemployment compensation included in gross income (sec. 85 of the Internal Revenue 

Code). For purposes of the reduction described in (1), above, the reduction would not exceed $5,000 for a year (indexed for inflation) 

mUltiplied by the nUplber of months (including portions of months) 

of employment with respect to which employer premiums would be 

payable. 

If the wage-adjusted income of a family is less than $1,000 39 (the 

income threshold) or if the family is an AFDC or SSI family, the 

amount of liability would be zero. If. the wage-adjusted income at 

least equals the income threshold, the amount of liability would be 

the sum of (1) the initial marginal rate multiplied by the amount 

by which the wage-adjusted income (not including any portion that 

exceeds the applicable poverty level for the class of family involved), exceeds the income threshold amount, plus (2) the final 

marginal rate multiplied by the amount by which the wage-adjusted income exceeds 100 percent of the applicable poverty level. 

The initial marginal rate for a year for a class of enrollment would 

be the ratio of 5.5 percent of the applicable poverty level for the 

class of enrollment for the year, to the amount by which such poverty level exceeds the income threshold amount. The finall!larginal 

rate for a year for a class of enrollment would be the ratio of the 

amount by which the repayment amount exceeds 5.5 percent of the 

applicable poverty level to 150 percent of the applicable poverty 

level. 

39This amount would be indexed for changes in the CPI after 1994 and rounded to the nearest 

multiple of $10. 
56 

Example: Assume that a family in the dual parent class of 

enrollment has family adjusted income of $14,000 for 1994, 

and the applicable poverty level is $10,000. Of the family's $14,000 income, assume that $11,000 was earned by one 

spouse from her part-time employment. (She works 60 

hours every month throughout the year.) The other $3,000 

was earned by her husband in employment that never totalled 40 or more hours per month (thus, his employer was 

not required to pay any employment premiums with respect to his employment). The weighted average premium 

for the dual parent class is $3,000. The base employment 

premium is $1,600. 

The family's total qualifying employment would be equal 

to .5 full-time equivalent worker (60 hours divided by 120 

hours). The repayment obligation (before considering any 

low-income limitation) would therefore be .5 times $1,600, 

or $800. 

The initial marginal rate is the ratio of $550 (5.5 percent 

of $10,000) to $9,000 (the amount by which the poverty 

level exceeds the income threshold, but not in excess of the 

poverty level), or .0611. The final marginal rate is the ratio 

of $1,050 (the base employment premium minus 5.5 percent of the poverty level, or $1,600 minus $550) to $15,000 

(150 percent of the poverty level), or .07. 

The family's repayment obligation would be calculated 

as follows. The family's ''wage-adjusted income" would be 

equal to the family'S adjusted income less any wages with 

respect to which an employer was required to pay employment premiums: $14,000 less $11,000, or $3,000. The repayment obligation would be limited to .0611 (the initial 

marginal rate) times $3,000, or $183. Note that the final 

marginal rate is not needed in this example because wageadjusted income does not exceed 100 percent of the poverty 

level. 

In the case of an AFDC or SSI family, the liability amount would 

be reduced to zero only for those months in which the family is an 

AFDC or SSI family. However, the family's income could be so low 

as to reduce the liability_to zero in those months in which the family is not otherwise an AFDC or SSI family. 

A family's wage-adjusted income and the amount of liability 

would be determined by the applicable regional alliance upon application by a family. Under the bill, there would be no repayment liability for electing Indians and certain veterans and military personnel because there would be no required premium payments for 

such individuals. 

Special treatment of certain retirees and qualified spouses 

and children 

An individual who is an eligible retiree or a qualified spouse or 

child of an eligible retiree for a month in a year (beginning in 1998) 

would be considered, for purposes of determining any repayment liability, to be a full-time employee for such month. Thus, there 

would be no repayment liability with respect to such individuals. 

An eligible retiree means, for a month, an individual who estab-
57 

~;::~;~~Y~fi'1~~~f~\~{a:£'~;IJ:r.~h~t ~!a~ai~du!t~ a:l~nli~ first clay 'O'f the montli, is atleast 55, but less than 65, years old, 

is not employed on a full-time 1>asis. (sec. 1901(b)(2)(A)), would be 

eligible for medicare benefits if t.he. incli,vid,ua,lWere§15 years of age 

based only on the employment of the individ\!,~l, and is not a !Iledicare-eligible individual. . .' ,. ' 

A qualified spouse or child of an eligible retiree would TIlean,an 

individual wh,o establishest9,. th~:L~,~tJ~fasti(,m QfJheregional alliance . for tl~e. all~an~e ,B.;re~, in, wp,JchtPe, J!l4iyjd~!'lLr~si~e~t~at, tlu~ individual (1) is under age 65 years of age and has been IIla,med 

for at least one year to an eligible retiree or is a child of an eligible 

retiree, (2) was married to an eligible retire~ (or8:tJea,st, PIle year 

at. the ,time of the eligible retiree'!) dea,th, is under age 65, is not 

employed 'on ii' fiiff-time basis, and is not remarried, provided the 

deceased spouse (the eligible },'etiree) would still be an eligible retiree in the mOJltb. if the,. spouse had not died, or (3) ii; a child pf 

an eligible retiree who 4ied. .... . .. ' .. An individual cou,ldnpt 1>e .. detenl').,ilJ.ed 1:9 .1;le an eligible retiree 

or qualified spouse or child ofan" eligible retiree unJess an application has been filed with the regional alliance .. The application 

would contain such information as may be required to establish 

status as an eligible retiree or qualified spouse or child and to verify information in the application. Any material misrepresentation 

in the application would be subject to a penalty. 

Special treatment of certain MedicfJ,re. b~neficiarie8 

In the case of an individual who would. be.a.IIledicare~eligible individual in a month but for t4eemployment in the month or in a 

previous month of the individual or t4e, individual's spouse or parent, the individual (or spouse or parent, as the case may be) so employed is considered to be a full-time employee described in such 

month. Thus, there would be no repayment liability with respect to 

such individuals. 

h. Excess premium credit 

If plan payment reduction!,! were imposed on. one Or more regional alliance health plans in a year under section 6011, the excess premium credit would reduce premiums for each family enrolled in a regional alliance health plan in the year.40 

'As discussed in more detaiUnPart II.A.l.b., a health plan that 

participates in a noncomplying alliance would be a noncomplying 

plan if its final accepted bid for the year exceeds the maximum 

complying bid for the year. In this case, the health plan .could voluntarily reduce its. bid, and enrollees would pay the reduced premium. If a plan does not reduce its bid, it would be subject to a 

mandatory plan payment reduction. In the case of a mandatory 

plan payment reduction, plan enrollees pay the higher, unreduced, 

premium (such plans are referred to as "excess premium plans"). 

However, the excess is returned to each family enrolled in any plan offe~g by the regional alliance in the form of an excess. premium 

40 Although the statute refers to Section 6021, thecori'ecl statUtOrY reference, appears to be 

section 6011 (relating to plan payment reduction), 
58 

credit. The credit would be available to families enrolled in any 

health plan offered by the regional alliance, and would not be limited to the families in excess premium plans. 

In general, the amount of the credit for a class of family enrollment for a year would be the weighted average premium for the 

alliance, class, and year, if the per capita excess premium amount 

for the alliance for the year were substituted for the reduced 

weighted average accepted bid for the regional alliance for the 

year. The per capita excess premium amount for a regional alliance 

for a year would be the amount by which the alliance's weighted 

average accepted bid for the year exceeds the alliance's per capita 

premium target for the year. 

The bill would provide for an adjustment to the amount of excess 

premium credits if more (or fewer) families than anticipated enrolled in excess premium plans. If the total payments made by a 

regional alliance to all regional alliance health plans in a year41 

would exceed (or would be less than) the total of such payments estimated by the alliance because of the distribution of enrolled families, the amount of the excess premium credit in the second succeeding year would be reduced (or increased, respectively) by the 

amount of such excess (or deficit). 

i. Corporate alliance opt-in credit 

A corporate alliance opt-in credit would be available if a regional 

alliance is owed an excess risk adjustment because a large employer participates in a regional alliance (sec. 6124 of the bill). For 

each class of enrollment for a regional alliance for a year, the 

amount of the credit would equal 20 percent of the weighted average premium for such alliance, class, and year, if the per capita 

corporate alliance opt-in amount for the alliance for the year were 

substituted for the reduced weighted average accepted bid for the 

regional alliance for the year. 

The per capita corporate alliance opt-in amount, for a regional alliance for a year, would be the total amount of the payment adjustments owed for the year by all employers (determined under bill 

sec. 6124), divided by the estimated average number of regional alliance eligible individuals in the regional alliance during the 

year.42 

j. Family collection shortfall add-on 

The family collection shortfall add-on, for a regional alliance for 

a class of enrollment for a year would be the weighted average premium for such alliance, class, and year, if the per capita collection 

shortfall amount for the alliance for the year were substituted for 

the reduced weighted average accepted bid for the regional alliance 

for the year. 

The per capita collection shortfall amount, for a regional alliance 

for a year, would equal the aggregate collection shortfall divided by 

the estimated average number of regional alliance eligible individ41 This would be calculated by taking into account the relative actuarial risk associated with 

the coverage under section 1351(b) of the bill. 

42For this purpose, individuals whose family share of premiums is zero, detennined without 

regard to the corporate alliance opt-in credit and the family collection shortfall add-on, would 

be disregarded. 
59 

uals in the regional alliance during the year 43• The aggregate collection shortfall would be esti1Ilatec:lby a regional alliance for each 

year (beginning with the first year) and would be the total a:r;n()llnt 

of payments that the alliance couldr<e!l§lOA,~bly identify as owed to 

the alliance (taking into account any premium reduction or discount and including amounts owed. as a result of the repayment of 

the alliance credit by certain families (sec. 6111 of the bill) and not 

taking into account any penalties) for the year and not likely to be 

collected (after making collection. efforts) during a period specified 

by the Secretary beginning on the first day of the year. Payments 

owed to a regional alliance by the Federal Governm.ent or any 

State or local governments wo:uldpot be taken.il!W .. ac<:ou~tin<.<:~lculating the aggregate collection shortfalL.. . . ........ . The amount estimated for a year would be adjusted to reflect 

over (or under) estimations in the. a1IlQ:up~.<:omputed for previous 

years (based on actual colle~i()lls) taking into account interest pay- able based upon borrowings (or savings) attributable to such overor under-estimations. . 

5. Corporate alliance family share of premiums (sees. 6101-

6107) 

a. In general 

Under the bill, each family enrolled in a corporate alliance health 

plan in a class of family enrollment (i.e., individual, couple only, 

single parent, or dual parent) would be required to pay the family 

share of premium payable with respect to such enrollment. This required premium could also be p8.ld by an employer 44 or by any 

other person on behalf of the family. 

In the case of a family enrolled in a corporate alliance health 

plan, the family share of premium would be the premium for the 

health plan selected by the family for the class of enrollment in 

which the family is enrolled, reduced (but not below zero) by the 

alliance credit and any income-related discount to. which the family 

would be entitled. 

In the case of a family enrolled in a corporate alliance health 

plan, the alliance credit w0\11d equal the minimum required employer premium. The minimum required employer premium payment for a class of family enrollment for a family residing in a premium area would be 80 percent of the weighted average premium 

of the corporate alliance health plans offered by the corporate alliance for that class of enrollment for. families re§ic:iing in the pre- mium area. . 

.'" h. Amount of premium 

In the case of a corporate alliance, the amount of the premium 

charged by the alliance would be determined ina,cco:r:dl:lIlce with 

43The average number of regional alliance eligible individuals would be reduced by the aver- age number of such individuals whose family share of premiums is zero, determined without 

regard to the family collection shortfall add on and the corporate alliance opt-in credit. 44 If paid by the employer, the amount of the premium would be excludable. from inc.ome under 

the bill (sec. 7201). The bill would also require that, if the employer pays for any portfonof the 

family premium. for any em. ployee, the. emp. lo.y ..e .. r .. m.u. st. m. ake ....the same dollar payment for all em- ployees. The difference between this dollar amount and the family premium for the plan selected 

by the employee would be paid in c8sh to the empfiiyee and would be includible in the employ- ee's gross income (sec. 1607 (bX2». . .. . 

75-969 0 - 94 - 3 
60 

the following rules (sec. 1384 of the bill). The premiums charged to 

families by a corporate alliance for enrollment in a corporate alliance health plan (not taking irito account the minimum employer premium payment required under sec. 6131) could vary only by 

class of family enrollment and by premium area. Thus, the bill generally would require that corporate alliances provide community 

rating of premiums within any premium area. 

Each corporate alliance would be required to designate premium 

areas to be used for the imposition of premiums and calculation of 

employer premium payments. The boundaries. of a premium area 

would reasonably reflect labor market areas and health care delivery areas and would be consistent with rules established by the 

Secretary of Labor so that there would not be substantial differences in average per capita health care expenditures within such 

areas. The corporate alliance could not establish boundaries for 

premium areas that discriminate on the basis of or otherwise take 

into account race, age, language, religion, national origin, socio-economic status, disability, or perceived health status. Further, a corporate alliance would be required to include the entire portion of 

a metropolitan statistical area located in a State in the same premium area. 

The Secretary of Labor could exempt multiemployer plans that 

establish a corporate alliance from such requirements as may be 

appropriate to reflect the unique historical relationship between 

employers and employees under such alliances. 

c. Premium discount based on income 

Each family enrolled with a corporate alliance health plan on account of the full-time employment of a low-wage employee would 

be entitled to a premium discount. The permitted premium discount would equal the amount (if any) by which 95 percent of the 

premium for the least expensive corporate alliance health plan that 

is offered to the employee (and that is a lower or combination cost 

sharing plan) exceeds the alliance credit for the class of family enrollment.45 

A low-wage employee would be an employee who is employed on 

a full-time basis and who is receiving wages for employment with 

the employer at an annual rate of less than $15,000.46 The determination of whether an employee is a low-wage employee would be 

made at the time of initial enrollment in the plan and at the time 

of each subsequent open enrollment period, on the basis of the 

wages payable by the employer at that time. The determination 

that an individual is a low-wage employee would apply as of the 

effective date of the initial enrollment in a plan or, in the case of 

an open enrollment period, as of the effective date of changes in en- .~ 

rollment during that period. 

Example: As an example of the calculation of the premium 

discount, assume that an individual earning $14,900 a 

year has single coverage under a corporate alliance health 

4li See the description of a lower or combination cost sharing plan in Part I.,. aboVe. 

46The $15,000 would be indexed for any year after 1994 by the percentage increase (or decrease) by which the average consumer price index (CPI) for the 12-month-period ending with 

August 31 of the preceding year exceeds the average for the 12-month period ending with August 31, 1993. 
61 

plan O'f the individual's emplO'yer. The individual is a IO'wwage emplO'yee because his orll.er .an!1ll,~.L:r~J~.()f pay dO'es 

nO't exceed. $15,000. The premium fO'r the plan in which the 

emplO'yee enrO'lls is $2,300. The premium fO'r the least expensive llealth. plan that. is a IO'wer ()rc()!lll:>i.IlatiO'n cO'st 

sharing plan is $1,800. The allia:nce creQit (Le., the minimum emplO'yer premium payment required with respect to 

individual cO'verage) is $1,600. 

T$he prem$ium . discO'unt for the iIl4iYid\l~!J§L$110 (.95 ( 1,800) - 1,600). . If this individual, earI!~$15,000 per year, the individual 

WO'uid nO't be entitled to a premium discO'unt because there 

is no phase O'ut O'f tlle premium discount under'thED:>ifL -. . 

Comment: The premiumdiscO'unt to' which any family is 

entitled WO'uid be determined sO'lely by the relatiO'nship between the minimum emplO'yer premium payment and the 

least expensive combinatiO'n or IO'wer CO'st sharing plan O'ffered to the emplO'yee and is nO't affected by the particular plan in which the family is enrO'lled. .. 

d. Alliance credit 

An alliance credit WO'ul<i re<i)lceJh~ a1l1Ot!}ltp(Jh.e f~ily share 

O'f premium. The alliance~red~! is iIltendeci.tO' refle(!t the employer's share of premiums presumed to be paid O'n behalf of an in<i~vi4u!i1. 

In the case O'f a cO'rporate alliance, the alliance credit fO'r a family 

enrO'lled in a cO'rporate alliance health plan fO'ra class O'f family enrollment WO'uid be the mini1l1um. emplO'yer premium payment required with respect to the family. The minimum emplO'yer premium 

payment fO'r a class O'f family enrO'llment for a faIllily residing in 

a premium area would beBO percent of the weighted average premium O'f the cO'rporate alliance health plans O'ffered by the corPO'rate alliance fO'r that class O'f enrO'llment for fa1l1i!ies residing in 

the premium area. FaIllUies:W:O'\lld. liayeIlO'repayment obligations in the case of a corporate alliance. . . 

6. Recapture of certain health care subsidies receiv~~by 

high-income individuals (sec. 7131) . . .. . 

In general 

Under the bill, taxpayers with mO'dified, adjusted gross income a~ove a threshold amoupt W.d.\lJ~):)~~~quired to pay additional premIUms for cO'verage under Pa:rt B O'f Medicare.,_ In a!i<ii.ti9n, under 

the bill, eligible retirees and qualified spouses and children wO'uld 

be eligible to' receive a Federal subsidy equal to' the emplO'yer share 

of the health care premium fO'r full-time emplO'yees under the cO'mprehensive benefit package. Eligible retirees and qualified SPO'uses 

and children with modified adjusted gross income above th,e. thre~hO'ld amO'unt would be required to pay the emplO'yer share O'f their 

premium for health care under the natiO'nally guaranteed comprehensive benefits package. 

FO'r the purpO'se O'f both O'f these additional payments, modified 

adjusted grO'SS income would be adjusted gross incO'me plus tax-exempt interest, certain fO'reign source inCQme, and incO'me fr()m higher educatiO'n U.S. savings bO'nds. The modified adjusted grO'SS in-
62 

come of married taxpayers filing joint returns would be the combined modified adjusted gross income of both spouses. 

For the purpose of both of these payments, the threshold amount 

would be $90,000 for unmarried taxpayers, $115,000 for married 

taxpayers filing joint returns, and $0 for married taxpayers filing 

separate returns. If a taxpayer's modified adjusted gross income for 

any taxable year exceeds the threshold amount by less than 

$15,000 ($30,000 for married taxpayers filing joint returns if each 

spouse were required to pay additional premiums), the amount of 

any additional payments imposed under this provision would be 

computed by multiplying the total amount due for the taxable year 

by a ratio, the numerator of which would be the amount of the taxpayer's modified adjusted gross income above the threshold amount 

and the denominator of which would be $15,000 ($30,000 for mar- ,.. ried taxpayers filing joint returns if each spouse is required to pay 

additional premiums). 

Any additional premiums imposed under this provision would be 

treated as income taxes for purposes of subtitle F of the Code (relating to income tax procedure and administration) but would not 

be treated as income taxes for alternative minimum tax purposes 

(Code sec. 55) or for the purpose of determining the amount of 

other tax credits under the Code. Finally, additional premiums imposed under this provision would be considered deductible to the 

same extent as other health insurance premiums and would be excludable from the recipient's gross income if paid by a former employer. 

Under the provision, penalties for failure to pay estimated income tax would not be imposed on a taxpayer for any period prior 

to April 16, 1997, to the extent that. the underpayment resulted 

from the failure to pay additional Medicare Part B premiums. In 

addition, penalties for failure to pay estimated income tax would 

not be imposed on a taxpayer for any period prior to April 16, 1999, 

to the extent that the underpayment resulted from the failure to 

pay additional premiums for health care coverage under this provision.47 . 

Additional Medicare Part B premiums 

Under the bill, taxpayers with modified adjusted gross income 

above the threshold amount would be required to pay additional 

Medicare Part B premiums for each month of enrollment in. Part 

B of Medicare. The additional monthly amount would be equal to 

the excess of 150 percent of the monthly actuarial rate for Medicare Part B enrollees age 65 or older over the monthly Medicare ~ 

Part B premium. 

Proceeds from the collection of additional Medicare Part B premiums would be credited at least quarterly to the Supplemental 

Medical Insurance Trust Fund. 

47 For a complete diScussion of the·'issues relating to section 7131 of the bill, see Joint Committee on Taxation, Description and Analysis of Title VII of HR. 3600, S. 1757, and S. 1775 

("Health Security Actn) (JCS-20-93), December 20, 1993, p. 34. 
:f 

63 

Additional health care premiums 

In general 

Under .thebill, eligible retirees and qualified spouses and children would be eligible to receive a Federal sllPsidy equal to the employer share of the health care premium for full-time employees 

under the comprehensive benefit package. For this purpose, the 

employer share of an individual's heal!,h: ~re premium generally 

would be 80 percent of the average premium charged by health 

plans in the individual's health alliance for the individual's class of 

enrollment.48 Eligible retirees and' qualified spouses' andcliifclren 

with modified adjusted gross income above the threshold amount 

would be required to pay the employer share of their premium for 

health care under t4e comprehensive benefits package. The determination of whether aIi~fii~ivjdllal is ap J:~ligible retiree or a qualified spouse or child would be roac;l~~m ,a IlJ.QIlthly basis. An individual would be required. to estal>l~sh his Or her ,status. :as. :a.Il eligible 

retiree or qualified spouse or chjld py filing an application with.the 

regional alliance in the area in:whic:h t4e iJ:lc:J,iY:iqu:alr~~ic:J,es.49 

Definition of eligible retiree 

An individual would be con,s:hlered~Ileligible retiree for a. month 

if, as of the first day of the month, such individual (1) is between 

the ages of 55 and 65, (2) is not employed on a full-time basis,50 

(3) is not currently eligible for Medicare coverage, and (4) would 

have satisfied the employment requirements for Medicare Part A 

eligibility at age 65.' 

Definition of qualified spouse or chila 

An individual would be considered a qualified spouse for a month 

if the' spouse is under age 65 and has been maITie~ to the eligible 

retiree for at least one year. An individual.would be cOllsidered a 

qualified child for a month if the individual is a child of the eligible 

retiree. 

Under the bill, the surviving spouse of an eligible retiree would 

also be considered a qualified spouse for a month if he or she (1) 

has not remarried, (2) was married to the eligible retiree at the 

time of his or her death, (3) is under age 65, (4) is not employed 

on a full-time basis,51 and (5) thedeceas.ed spouse would still.:have 

been considere.d an eligible retiree for the month. at i~~ue if Sl!<:.h. 

spouse had not died. If a Surviving spouse would be considered a 

qualified spouse for a month, his or her children also would be considered qualified children for the. month. 

48 Sections 6121 arid 6122. 

49Under the bill, if all'indiVidual make!! any ma.terial misrepresentations relating to his or her status as an eligible retiree or qualified spouse or child to a regional alliance, he or she 

would be required to pay a Penalty to the State in which the regional alliance is located equal 

to the greater of $2,000 or three times the excess payments made based on the misrepresenta- tion (sees. 6114(d) and 1374(iX2». . 

IIOEligible retirees who work at least 120 hours in a m.onth would be c:onsidered full-time em- ployees (sees. 6114(bX2) and 1901(bX2XA)). 51 Surviving spouses who work at least 120 hours in a month would be considered full-time 

employees (sees. 6114(cX2XC) and 1901(b)(2XAj). '. '.' :: '. 
64 

Effective date 

The provisions relating to additional Medicare Part B premiums 

would be effective for taxable years beginning after December 31, 

1995. The provisions relating to additional health care premiums would not become effective until January 1, 1998. 

C. Payments to Regional Alliance Health Plans (sees. 6201 

and 6202) 

[ngeneral 

Under the bill, each regional alliance would contract with various 

health plans interested in providing benefits to individuals residing 

in the alliance area. Participating plans would submit a per capita 

premium bid for providing the comprehensive benefit package to 

individuals residing within the alliance area. . . . . In addition, under the bill, recipients of Aid to Families with Dependent Children (AFDC)52 and supplemental security income 

(SS1) 53 benefits would remain eligible for medical coverage through 

their State's Medicaid program 54 but would also be required to enroll in a regional alliance health plan to receive the health care 

items and services included in the comprehensive benefit package.55 Payments to a health plan for the coverage of AFDC and SSI 

recipients would be unrelated to the plan's per capita premium 

bids. The Secretary of Health and Human Services (the Secretary) 

would separately determine AFDC and SSI per capita premiums 

for each regional alliance in a State. The same AFDC and SSI per 

capita premium would apply to each health plan in a regional alliance. The AFDC and SSI per capita premiums would generally 

equal a State's per capita Medicaid spending for AFDC and SSI recipients residing in the alliance area with respect to items and 

services included in the comprehensive benefit package. 56 

Because each he.~th plan's per capita premium could differ from 

the AFDC and SSI per capita premiums, and because the enrollment of AFDC and SSI recipients among plans would vary, the bill 

would require regional alliances to calculate ''blended plan per capita payment amounts" or ''blended premiums" for participating 

plans each year. To determine alarticipating plan's blended pre- mium, the regional alliance woul use a formula that would combine the plan's per capita premium and the AFDC and SSI per capita premiums but would treat each participating plan as if it enrolled the same percentage of non-AFDC/SSI and AFDC/SSI recipients as the alliance enrolled as a whole. The blended premium 

would apply to all individuals enrolled in the plan. 

52Under the bill. the term "AFDC recipient" would include an individual who is receiving aid or assistance under any plan of the State approved under title I. X. XIV. or XVI, or part A or part E of title IV of the Social Security Act for the month (sec. 1902(3». &sUnder the bill. the term "SSI recipient" would include (I) an individual with respect to 

whom supplemental security income benefits are being paid under Title XVI of the Social Security Act for the month. (2) an individual who is receiving a supplementary payment under sec- tion 1616 of such Act or under section 212 of Public Law 93-66 for the month, or (3) who is 

receiving monthly benefits under section 1619{a) of the Social Security Act (whether or not pursuant to section 1616{cX3) of such Act) for the month (sec. 1902(33». l54 Under present law. in general, AFDC and SSI recipients receive medical coverage through Medicaid. Each State administers its own Medicaid program and receives partial funding from 

the Federal government. 56 Section 4201{a). 

""Section 9012. 
65 

Comment: By calculating a blended premium for health 

plans in this manner, the advantages or disadvantages of 

providing coverage to AFDC and SSI recipients would be 

spread evenly among all health plans in a regional alliance. 

The regional alliance would use the .. blen~ed premiums to calculate the actual payments made to participating plans. The bill 

would require the regional alliance to reduce a plan's blended premium by an administrative allo~~n(:e percentage which could not 

exceed 2.5 percent. The bill wO\lld also require the regional alliance 

to reduce a plan's blended premium oy an additional 1.5 percent. 

Amounts attributable to the 1.5 percent would.be sent.to theF~d~. 

eral government for the, support of academic health centers and' 

graduate medical education. A plan's blended premium would alsQ 

be reduced, if necessary, to maintain health care expenditures 

within the regional alliance's per capita premium target set by the 

National Health Board.57 

FIn'ally, regionafallianc~s w()\l.1ds,djust each plan's redu(:ed 

blended premium to take into ac~ollnt. th~,rels,tiy';~a,!!t.\l~JiJl!!!~k 

associated with the individ\l!:l,J§,(:()v.~!:~A,J!pde!:Jhe plan in accord~ 

ance with a:dsk~adjustment methodology developed by the National Health Board.58 

Comment: Section 1341(a)(2)(E) of the bill would require 

regional alliances to provide health plans interested in 

submitting bids with infonnati9Il r~lating to the risk-ad-

~!~~~~o!~t~(~ubii~h~ai~~uI~i~:~~il!'ii~f~ t:b~ ~:ld by the regional alliance in computing blended plan premiums in accordance with section 6201 of the bill. Section 

1341(c) would requIre each 'regIonaralHance'"'to'compute' 

and publish the risk-adjustment factors and .. reinsurance 

payment amounts to be used by the regional alliance in 

computing blended premiums unders~ctiQIt .6.2Q1 oftp:~ 

bill. However, the calculation in section 6201fordetennining blended premiums does not include,risk.-adJu.stmimt 

factors and reinsurance payment amounts. Under sectiop 1351(c), risk-adjustment factors would apply to blended 

premiums after such amounts are calculated. Thus, it is 

not clear why sections 1341(a)(2)(E) and 1341(<:) refer to 

section 6201 rather thansection 1351(c). 

Payments to veterans. health plans of the Department of Veterans Affairs, Unifonned Services Health Plans of the Department of 

Defense, and health programs of the Indian Health Servi(:e would 

be calculated in accordance with special rules set forth in the bill.59 

Calculation of blended premium 

In general 

Each participating plan's blended premium for a year would 

equal the sum of (1) the plan bid component for the plan, (2) the 

57 Section 1351(bX2). 58 Sections 1351(c), 1541, and 1542, 59 Section 1351(e). 
66 

AFDC component for the alliance, and (3) the SSI component for 

the alliance, mUltiplied by any adjustment factor which would be 

applied for the year under section 6202(d) of the bill. 

The plan bid component 

The plan bid component for a participating plan would be the 

product of the final accepted bid for the plan and the plan bid proportion. 

The final accepted bid.-The final accepted bid for a plan would 

be the per capita premium bid for providing the comprehensive 

benefit package to individuals residing within the alliance area as 

agreed to by the regional alliance and the plan. The final accepted 

bid also would reflect voluntary reductions made by the plan to its 

per capita premium bid to avoid a mandatory plan payment reduction. 

The plan bid proportion.-The plan bid proportion for a year 

would be a percentage equal to one minus the sum of the AFOC 

proportion and the SSI proportion. The AFOC proportion for a year 

would be the ratio of the average of the number of AFOC recipients 

enrolled in the regional alliance's health plans for the year to the 

average of the total number of individuals enrolled in the regional 

alliance's health plans for the year. The SSI proportion for the year 

would be calculated in the same way. For example, assume that 

there are 1000 alliance-eligible individuals and that 100 of those 

individuals would be receiving AFOC payments and 100 of those 

individuals would be receiving SSI benefits. Under this example, 

the AFDC and SSI proportions would each equal 10 percent and 

the plan bid proportion would equal 80 percent. 

Comment: Section 6202(a)(l) of the bill states that the 

plan bid proportion should be determined "for a class of 

enrollment." Sections 6202(a)(2) and (3) of the bill state 

that the AFOC and SSI proportions should be determined 

"for a class of family enrollment." The bill ~oes not specifically define either phrase but generally the term class of 

enrollment in the bill means one of the four premium 

classes under the bill (i.e., individual, couple only, single 

parent, or dual parent). It is unclear why the bill refers to 

classes of enrollment to calculate the plan bid, AFOC and 

SSI proportions because the premiums to which the proportions are applied are per capita premiums and have not 

been converted into premiums for each type of family 

class. In addition, the blended premium is a per capita 

amount and payments to health plans are based on adjusted blended premiums. 

States would determine the AFDC and SSI proportions based on 

the best available data at least one month before the date health 

plans would be required to submit bids to regional alliances for the 

next calendar year. For the purpose of determining the number of 

AFOC and SSI recipients enrolled in a regional alliance, Medicareeligible AFOC and SSI recipients would be excluded. 

.. 
67 

The AFDC component 

The AFDC component for each regional alliance would be the 

product of the AFDC per capita premium for the regional alliance 

for the year (as determined under section 9012 of th~. bill) and the 

AFDC proportion described above. The Secretary would· determine 

the AFDC per capita premium for each regional alliance in a State. 

The AFDC per capita premium for a regional alliance would equal 

the product of (1) the per capita State Medicaid expenditures for 

the comprehensive benefit package for AFDC recipients for the 

State for the year and (2) the regional alliance adjustment factor 

for the year for the regional alliance. 

Per capita State M.edicaid expenditures.-The per capita State 

Medicaid expenditures for the comprehensive benefit package for 

". AFDC recipients for a year would be equal to the gross amount of 

payments under the State Medicaid plan with respect to health 

care items and. services included in the comprehensive benefit 

packa.ge for AFDC recipients· iii. fiscal year 199360 divided by the 

number of AFDC recipients enrolled in the State Medicaid plan in 

fiscal year 1993. The Secretary would rely on actual reports from 

the State to determine the number of A.FDC recipients in the State 

in fiscal year 1993.61 The amount of the per capita State Medicaid 

expenditures for fiscal year 1993 would be adjusted to take into account increases in Medicaid spending between the end of fiscal year 

1993 and the year before the first year a State implemented health 

care reform. The amount of a State's fiscal year 1993 Medicaid expenditures for AFDC recipients would be increased by the lesser of 

(1) 32.2 percent if 1996 is the State's first year of health care reform (the first year), 46.6 percent if 1997 is the State's first year, 

or 62.1 percent if 1998 is the State's. first year, or (2) the actual 

estimated rate of increase in per capita State Medicaid expenditures between fiscal year 1993 and the year before the State's first 

year as determined by the Secretary. The Secretary would be required to adjust its estimate so as to eliminate any change iii. Medicaid expenditures that are attributable to a reduction in the scope 

of services, an arbitrary reduction in payment rates, or a reduction 

in access to high quality services under the State Medicaid plan. 

For a State's first year and each year thereafter, the National 

Health Board would increase the State's per capita State Medicaid 

expenditures by a factor equal to 1 plus the general health care inflation factor for the year (as defined under section 6001(a)(3) of 

the bill). 

Regional alliance adjustment factors.-The bill would require the 

Secretary to calculate per capita Medicaid expenditures for AFDC 

recipients on a State-wide basis. If the State established more than 

one regional alliance, the bill would require the State to calculate 

a regional alliance adjustment.factor for each regional alliance. The 

Secretary would multiply the State's per capita Medicaid expenditures by the regional alliance adjustment factor to determine the 

alliance's AFDC per capita premium. 

60 For the purpose of determining a State's Medicaid expenses in 1993, expenses for which no Federal financial particip!l;tion was provided. would. ~ . exclud~.. In ~qd!J;iQP, disproportionate share payments under section 1923 of the Social SecUiity Act would also be excluded. 61 Section 9014(a). 
68 

The regional alliance adjustment factor would reflect variations 

in each regional alliance's per capita premium targets as well as 

variations in Medicaid spending across regional alliances where the 

weighted average of such factors would be one. For the purpose of 

computing adjustment factors, the weighted average would be determined based on the number of AFDC recipients enrolled in each 

regional alliance in a State. In determining the number of AFDC 

recipients enrolled in a State, States would be required to use the 

same data that would be used to determine the AFDC and SSI proportions (described above). 

The SSI component 

The SSI component for each regional alliance would be the product of the SSI per capita premium amount for the regional alliance 

for the year (as determined under section 9013 of the bill) and the 

SSI proportion described above. The Secretary would determine the 

SSI per capita premium for each regional alliance in a State for the 

year in the same manner as it would determine the AFDC per capita premium for the regional alliance, except that the percentages 

applied to account for increases in State-Medicaid spending for SSI 

recipients between fiscal year 1993 and a State's first year would 

be different. The percentages would be 29.4 percent if a State's first 

year is 1996,43.7 percent if a State's first year is 1997, and 58.8 

percent if a State's first year is 1998.· . 

Blended premium adjustment factor 

Under the bill, blended premiums would be calculated based on 

each State's projected estimate of the proportion of AFDC and SSI 

recipients that would enroll in the regional alliance in the following 

calendar year (referred to as the reference year). If a State's projected AFDC or SSI proportions for the reference year prove to be 

incorrect based on actual enrollment data, the bill would require 

the regional alliance to increase or decrease each participating 

plan's blended premium in the following year (referred to as the 

applicable year) to eliminate any underpayment or overpayment to 

participating plans in the reference year. The provision would also 

permit the Secretary to adjust incorrect blended premiums during 

the reference year with final adjustments in the applicable year as 

provided in regulations. 

The regional alliance would determine the amount of any adjustment as follows. The regional alliance would first determine the 

amount of any underpayment or overpayment to participating 

plans in the reference year by calculating the difference· between 

(1) the total amount paid to participating plans in the reference 

year using projected AFDC and SSI proportions to compute blended 

premiums and (2) the total amount that would have been paid to 

participating plans in the reference year using actual AFDC and 

SSI proportions to compute blended premiums. Next, the regional 

alliance would determine an adjustment percentage based on the 

ratio of the underpayment or overpayment to participating plans in 

the reference year to the amount of the total blended premiums 

which the regional alliance estimates it would pay to all participating plans in the applicable year. If participating plans were underpaid in the reference year due to incorrect projections, the blended 
69 

premiums for the applicable year would be increased by the adjustment percentage. On the other hand, if participating plans were 

overpaid in the reference year due to incorrect projections, the 

blended premiums would be reduced by the adjustment percentage. 

Example of a blended premium calculatiort: As,sume ,that 

the final accepted bid for Plan A is $2,000 and the plan bid 

proportion for Plan 1). is 60 percent for 1997. Thus, the 

plan bid component for Plan A would equal $2,000 times 

60 percent, or $1,200. 

Further assume that the AFDC per capita premium for 

the·· re!p'onal . alliance in· 'which.Plap. A participates is 

$1,800, the SSI per capita premium is $1,700, the AFDC 

proportion is 30 percent, and the SSI proportion is 10 percent for 1997. Thus, the AFDC component would equal $1,800 thnes 30 'percent or $540 and the SSI component 

would equal $1,700 times 10 percent or $170. Plan A's 

blended premium for 1997 would equal $1,200 plus $540 

plus $170 or $1,910 in 1997. . ." . Assume, however, that the State incorrectly projected the AFDC and SSI proportions used by the' regional alliance to calculate Plan A's blen.~ed premium for '1997 an<i 

that the correct AFDC and SSI proportions were 35 percent and 15. percent, respectively. Thus, the plan bid pro- portion should have been 50 percent. Plan A's blended pre- mium based on ,corrected proportions would equal $1,000 

($2,000 times 50 percent), plus $255 ($1,800 times 35 per- cent), plus $255 ($1,700 times 15 percent) or $1,885. 

The regional alliance would reduce Plan Ns 19~& hleIld:. 

ed premium to correct the overpayment to Plan A for 1997' 

as follows. The regional alliance would first determine the, 

difference between the amounts paid to all plans in 1997 

and the amount that should have bee,n paid in 1997 based 

on actual enrollment. Assuming that Plan A is the only plan in the alliance, the difference would be $25 ($1,910 

minus $1,855). The regional alliance would then determine, 

an adjustment percentage to be applied to Plan A's blend':' 

ed premium in 1998. The adjustment percentage would be 

the ratio of $25 to the total, estilI}ated plen<ied premiums for 1998. Plan A's blended premium for 1998 would be decreased by the adjustment percentage. ' 
TIl. EXAMPLES OF PREMIUM CALCULATIONS 

A. Example 1: Regional Alliances 

1. Assumptions 

For a given year, a regional alliance receives bids from two 

health plans. Plan A submits a per capita bid of $1,500. Plan B 

submits a bid of $1,600. 

The National Health Board has set the per capita premium target for the alliance for the year at $1,550. The Board has set the 

national premium class factor (applicable to all regional alliances) 

for the single parent class of enrollment at 2.05, and for the dual 

parent class of enrollment at 2.25. (The premium class factors for 

the individual class and the couple-only class are statutorily specified to be 1.0 and 2.0, respectively.) 

The regional alliance has calculated its uniform per capita conversion factor to be 1.25. The alliance estimates that 10,500 regional alliance eligible individuals reside in the alliance, and that 

these individuals are members of 4,000 separate families. The alliance estimates that 1,000 families will be in the individual class 

of enrollment, 1,000 will be in the couple-only class of enrollment, 

1,000 will be in the single parent class of enrollment, and 1,000 

will be in the dual parent class of enrollment. The alliance further 

estimates that each couple-only family, on average, will include 1.5 

full-time equivalent wage earners, and that each dual parent family will include, on average, 1.3 full-time equivalent wage earners. 

(In other words, there would be a total of 1,500 full-time equivalent 

wage earners in the couple-only class of enrollment, and a total of 

1,300 full-time equivalent wage earners in the dual parent class of 

enrollment.) 

The regional alliance also estimates that $500,000 of the total 

payments it expects to be owed for the year are not likely to be collected. Lastly, the alliance estimates that 75 percent of the participants in each class of enrollment will choose Plan A, and 25 percent will choose Plan B. 

2. Premium calculation for each plan 

Based on the per capita bids submitted to the regional alliance 

by each health plan, and using the premium class factors and uniform per capita conversion factors, the alliance would calculate a 

premium amount for each health plan in the alliance: 

(70) 

... 
;i 

71 

(A) (B) Weighted 

PlanA PlanB average 

(.75A+.25B) 

(a) Per capita bid ................... 1,500 1,600 1,525 

(b) Uniform per capita conversion factor ...................... 1.25 1.25 ........................ (c) Plan premium for an individual «a) x (b» .................. 1,875 2,000 1,906 

(d) Plan premium for couples 

«c) x 2.0) ............................. 3,750 4,000 3,813 

(e) Plan premium for single 

parent enrollment «c) x 

2.05) ..................................... 3,844 4,100 3,908 

(f) Plan premium for dual 

parent enrollment «c) x 

2.25) ..................................... 4,219 4,500 4,289 

Note that the weighted average bid for the alliance ($1.t525) is 

less than the per capita premium target for the alliance (;pl,550). 

As a result, the premium caps· will not be triggered, and Plan B 

will not be subject to any reductions, even though the per capita 

bid for Plan B exceeds the regional alliance target. 

3. Employer share/family share of premiums for each class of enrollment (generally) 

For each class of enrollment, the regional alliance would calculate the base employment premium (Le., the amount that would 

be due from each employer for. each full-time employee (or reduced 

proportionally for part-time employees», and the family share of 

premiums for each family. The following family share amounts 

would apply toanyfainily including a total of at least one full-time 

equivalent employee that qualifies for no other credits or discounts. 

Individuals: 

Base employment premium: 80% x $1,906 = $1,525 

Family share 

Plan A: $1,875-800/0($1,906)=$350 

Plan B: $2,000-800/0($1,906)=$475 

Couple-only: 

Base employment premium . (equal to 80% of the total premiums for couple-only families 

divided by the number of full-time equivalent employees in 

the couple-only class) 

80% x ($3,812 x 1,000)/1,500=$2,033 

Family share 

Plan A: $3,750-800/0($3,813)=$700 

Plan B: $4,000 - 800/0($3,813)=$950 

Single parent: 

Base employment premium (also applies to dual parent class): 
72 

(equal to 80% of: the total premiums for single parent families plus the total premiums for dual parent families, divided 

by the number of full-time equivalent employees in both 

classes) 

80% x [«$3,908 x 1,000)+($4,289 x 1,000))1(1,000+1,300)]=$2,851 

Family share 

Plan A: $3,844 - 800/£:($3,908)=$718 

Plan B: $4,100-800/£:($3,908)=$974 

Dual parent: 

Base employment premium (as calculated above)=$2,851 

Family share 

Plan A: $4,219 - 800/£:($4,289)=$788 

Plan B: $4,500 - 800/£:($4,289)=$1,069 

Shortfall add-ons 

Assumptions: 

Of the 10,500 regional alliance eligible individuals residing in the 

alliance area, 500 are members of families whose family share of 

premiums is zero (e.g., because they are AFDC or SSI recipients, 

or their adjusted income is less than $1,000). 

Per capita shortfall amount: 

The per capita collection shortfall amount would be: 

$500,000/(10,500 - 500)=$50 per person 

To determine the amount of shortfall payment to be paid by each 

employer and each family in the alliance, the same formulas are 

used as were used to calculate the premium amount for each plan, 

but the per capita shortfall amount is substituted for the per capita 

bid amount: 

Family share: 

(A) Family share 

(a) Per capita shortfall amount .............. . 

(b) Uniform per capita conversion factor 

(c) Individual class «a) x (b)) ................. . (d) Couple-only class «c) x 2.0) .............. . (e) Single parent class «c) x 2.05) ......... . 

CO Dual parent class «c) x 2.25) ............ . 

Total 20% X (A) 

50 

1.25 

63 

125 

128 

141 

Note: Due to rounding, some of the calculations may appear inconsistent. 

Employer share: 

Individuals: 80% x $63=$50 

Couple-only: 80% x ($125 x 1,000)/1,500=$67 

Single parentlDual parent: 80% x ({($128 x 1,000)+($141 x 

1,000))/(1,000+1,300)]=$94 

13 

25 

26 

28 
Specific employer calculat(01l, 

Assumptions: 

73 

ABC Co. employs 20 full-time workers and 50ha,lf-tiIll~ (Le., 60 

hours per month) workers, all of WhOIll are qualifying employees 

residing in the regional alliance described a1:)oye .. N1 oLthe.J!!,11-

time workers are in the couple-only class of enrollment, and all of 

the .half-tiIll.e. work,ers .a,r~ i!1J1!~.Jndiv"igual .. ~*~!?!S .Qc~I!:r:on:rl1~nt· This year, ABC Co. pays all of its workers. a total of $900,000 in 

wages. The amount)t would pay to the regional al1ian.c~. is calculated as follows. 

Base employment premiums: 

The base employment premiums of $1,525 per employee in the 

individual class and $2,033 per employee in the couple-only class 

(as calculated above) would b~ utiliz~d to calculat~ .th~ total.pase 

employment premiums for ABC CO. 

(a) Individual class (25 full-time equivalent employees) 

25 x $1,525 = $38,125 

(b) Couple-only class (20 full-time equivalent employees) 

20 x $2,033 = $40,660 

(c) Total base employment premiums «a) + (b)) 

$38,125 +$40,660 = $78,785 

Percent of payroll caps: 

ABC Co. would first calculate its average annual wage per fulltime equivalent employee (Le., total wages paid to qualifying employees divided by the number of full-time equivalent employees): 

$900,000/45 = $20,000 

The bill provides that an 'employer with between 25 and 50 fulltime equivalent eml,>loyees earning an average annual wage of between $18,001 and $21,000 would be subject to a payroll cap of 7.1 

l,>ercent. Applying th. e p. ayroll cap to ABC's total payroll of 

$900,000, we get 7.1 percent x $900,000 = $63,900. . Because the cap is less than the . total base employment premiums calculated above, ABC will only be required to pay to the 

regional alliance $63,900 in base employment premiums this year. 

Shortfall add-on: 

Individual employees: 25 x $50 = $1,250 

Couple-only employees: 20 x $67 = $1,340 

Total shortfall add-on: $1,250 + $1,340 = $2,590 

Because the percent of payroll caps do not apply to the shortfall 

add-on, ABC Co. will have to pay an additional $2,590 to the regional alliance (to compensate for a portion of the alliance's bad 

debts). Thus, ABC Co. will make payments to the regional alliance 

totalling $66,490 this year. 
74 

Specific family calculation (for a low-income family) 

Assumptions: 

The Green family consists of two adults and one child (i.e., they 

are in the "dual parent" class of enrollment). They have selected 

Plan A for their health care coverage (although they were eligible 

to enroll in either Plan A or Plan B). Mr. Green had regular employment of 60 hours every month during the year, and Mrs. Green 

had regular employment of 40 hours every month during the year. 

Their family adjusted income for the year was $12,000. Of this adjusted income, $9,000 was from Mr. and Mrs. Green's regular employment, and the other $3,000 was from odd jobs which never 

amounted to more than 40 hours of employment per month (i.e., 

employment with respect to which no employer premium payments 

were required). The applicable poverty level for this year is 

$10,000, and the income threshold amount is $1,000. Neither of the 

Greens' employers have made any voluntary premium payments in 

excess of the required employment premium amounts. The family 

share of premiums would be calculated as follows. 

Base amount of family premiums: 

The base amount of premiums for the Greens would be equal to 

the premium for the plan they select, plus the family share of the 

shortfall add-on: 

$4,219 + $28 = $4,247 

Credits and discounts: 

Alliance credit 

Every family is entitled to an alliance credit of 80 percent of the 

weighted average premium for their class of enrollment: 

80% x $4,289 = $3,431 

Income-related discount 

The Greens would also qualify for an income-related discount. 

First, the "family obligation amount" would be calculated, based 

upon the Green's $12,000 of adjusted income, the assumed income 

threshold amount of $1,000, the assumed poverty level of $10,000, 

the calculated weighted average premium for the dual parent class 

of $4,289, the calculated alliance credit of $3,431, and the 3-percent 

formula specified in the bill: 

[(3% x $10,000)1($10,000-$1,000)] x ($10,000 - $1,000) = $300 

plus, 

[«$4,289 - $3,431) - (3% x $10,000))1(50% x $10,000)] x ($12,000 - $10,000) = $223 

for a total of $300 + $223 = $523. However, the bill provides that 

the family obligation amount is limited to 3.9 percent of adjusted 

income. In this case, 3.9 percent of $12,000 is $468. Thus, the family obligation amount for the Green family is only $468. 
i 

75 

The amount of the income-related premium discount is equal to 

20 percent of the weighted average premium, less the family obligation amount: 

(20% x $4,289) - $468 = $390 

Excess premium credit 

Because the example assumes that no plan payment reductions 

were necessary (because the weighted average bid was less than 

the premium target for the alliance), there will be no excess premium credit. 

Corporate alliance opt-in credit 

For simplicity, assume that there are no large employers with 

employees residing in the regional alliance area who are eligible to 

form a corporate alliance, but instead participate in the regional alliance. Thus, there will be no corporate alliance opt-in credit. 

Total credits and discounts 

The Greens would be entitled to total credits and discounts of 

$3,431 + $390 = $3,821. 

Repayment obligation: 

Because Mr. and Mrs~ Green's total employment is less than one 

full-time equivalent worker, they must repay a portion of the alliance credit. 

First, the general repayment obligation amount would be calculated. It is equal to the base employment premium for the class 

of enrollment, here $2,851. . Because both of the Greens were employed on a part-time basis, 

their repayment obligation is partially reduced. Mr. Green's employment is the equivalent of .5 full-time employee (calculated as 

60 hoursl120 hours). Mrs. Green's employment is the equivalent of 

.33 full-time employee (calculated as 40 hoursl120 hours). Together, 

their employment is the equivalent of .83 full-time employee. Their 

repayment obligation would therefore be reduced by .83 x $2,851, 

or $2,366. The reduced repayment obligation thus would be equal 

to $2,851 less $2,366, or $485. 

The Greens' repayment obligation, however, would also be limited based on their income. First, the Greens' ''wage-adjusted income" would be determined. This amount equals the family's adjusted income less any wages with respect to which an employer 

was required to pay employment premiums: $12,000 leBS $9,000, or 

$3,000. 

Then, the amount of liability would be calculated, based upon the 

Greens' wage-adjusted income of $3,000, the assumed poverty level 

of $10,000, the assumed income threshold amount of $1,000, and 

the 5.5-percent formula specified in the bill: ... 

[(5.5% x $10,000)/($10,000 - $1,000)] x ($3,000 - $1,000) = $122 

Thus, the Green's repayment obligation would be limited to $122. 

75-969 0 - 94 - 4 
76 

Total family share: 

After considering all available credits and discounts, the' Green 

family's share of premiums would be the base amount, less the 

credits and discounts, plus the repayment obligation: 

$4,247 -$3,821 + $122 = $548 

Self-employed individuals 

Individual class of enrollment: 

Assumptions 

Self-employed individual John Doe, who is single and has no dependents, has net earnings from self-employment for a year of 

$60,000, and enrolls in Plan A. John has no employees. Under the ~ 

bill, he is treated as his own employer for purposes of calculating 

the premium owed. 

Premium payment required 

John Doe's total premium payment would be calculated as follows: 

Employer share: 80% x $1,906 = $1,525 

Employer share of shortfall add-on (see above): $50 

Family share: $1,875 - 80% ($1,906) = $350 

Family share of shortfall add-on (see above): $13 

Total required premium payment: $1,525 + $50 + $350 + $13 = 

$1,938 

Couple-only class of enrollment: 

Assumptions 

Self-employed individual Jane Jones is married and has no children (that is, she is in the couple-only class of enrollment). Jane's 

husband (Mr. Jones), works full-time for a regional alliance employer. Jane has net earnings .f:. rom s ..e. If. -e.m. ployment for a year of 

$60,000 and enrolls in Plan A. Slle has no employees. 

Premium payment required 

Jane Jones's total premium would be calculated as follows (see 

above for derivation of the numbers): 

Employer share: 80% x ($3,813 x 1,000)11,500 = $2,033 

Employer share of shortfall add-on (see above): $67 

Family share: $3,750 - 80% ($3,813) = $700 

Family share of shortfall add-on: $25 

Total required premium payment from Jane Jones: $2,033 + $67 

+ $700 + $25 = $2,825 

Note: Mr. Jones' employer would also be required to pay to the 

regional alliance the base employment premium for the couple-only 

class and the employer share of shortfall add-on, $2,033 + $67 = 

$2,100. The total payments made to th.e regional alliance with respect to the Jones family would thus total $4,925. 
B. Example 2: Corporate Alliance 

Assumptions 

A corporate alliance offers two. health plans in a given premium 

area, Plan A and Plan B. The alliance estimates that 75 percent I of participants in each class of enrollment will choose Plan A and 

that 25 percent will choose Plan B. 

Under the bill, the corporate alliance determines the premiums 

for each plan for each premium area for each class of enrollment. ~ The corporate alliance detennines that the premiums for a given 

premium area for each plan for each class of enrollment are as 

shown in the following table. The weighted average premium is 

also shown. 

Class of enrollment 

Individual .............................. . Couple .................................... . Single parent ......................... . Dual parent ........................... . 

(A) 

PlanA 

$1,875 

3,750 

3,844 

4,219 

(B) 

PlanB 

$2,000 

4,000 

4,100 

4,500 

Weighted 

average 

(.7GA + .2GB) 

$1,906 

3,813 

3,908 

4,289 

[Note: In order to make this example comparable to the preceding example for regional alliances, the premium numbers used in 

the examples are the same. However, the processes by which regional alliance premiums and corporate alliance premiums are arrived at are very different.] 

Employer share and family share of premiums for each class 

of enrollment 

For each class of enrollment, the corporate alliance employer is 

required to pay 80 percent of the weighted average premium for 

each class of enrollment for each full-time employee enrolled in the 

corporate alliance plan. [Note, for employees not enrolled in the 

corporate alliance plan, the employer pays premiums under the 

rules applicable to regional alliance plans. This could happen in a 

number of cases. For example; part-time employees receive coverage under the regional alliance plan, not under a corporate alliance plan. If full-time employee who has a spouse the couple could 

elect to be covered under the spouse's plan (whether through a corporate or regional alliance.)] For a family that is not entitled to any 

credit or discount other than the alliance credit, the family would 

pay the difference between the required corporate employer premium and the premium for the plan the family is enrolled in. 

Individuals: 

Corporate employer premium: 80% x $1,906 = $1,525 

(77) 
78 

Family share: 

Plan A: $1,875 - $1,525=$350 

Plan B: $2,000 - $1,525=$475 

Couple only: 

Corporate employer premium: 80% x $3,813 = $3,050 

Family share: 

Plan A: $3,750 - $3,050 = $700 

Plan B: $4,000 - $3,050 = $950 

Single parent: 

Corporate employer premium: 80% x $3,908 = $3,126 

Family share: 

Plan A: $3,844 - $3,126 = $718 

Plan B: $4,100 - $3,126 = $974 

Dual parent: 

Corporate employer premium: 80% x $4,289 = $3,431 

Family share: 

Plan A: $4,219 - $3,431 = $788 

Plan B: $4,500 - $3,431 = $1,069 

Note: The corporate alliance employer premium is higher for the 

couple, single parent, and dual parent classes of enrollment than 

the comparable premiums for regional alliance employers. This is 

because in the case of regional alliance employers, the employer 

premium is reduced to take into account the fact that there may 

be more than one worker per family and the regional alliance uses 

a blended rate for single- and dual-parent families. No such adjustments are made in the case of corporate alliance employers. 

Total employer premium 

The total employer premium (not taking into account any additional premiums for low-wage employees, described below) would 

be equal to the number of employees in each class of enrollment 

multiplied by the employer premium for that class of enrollment. 

In addition, as described below, the employer would have to pay 

the corporate assessment and would have to pay an additional 

amount for low-wage employees. 

Additional employer premium for low-wage employees 

Employees who have annualized wages of less than $15,000 are 

not required to pay the entire amount of the family share, but are 

entitled to a premium subsidy. The corporate alliance employer is 

required to pay the amount the employee would have paid but for 

the subsidy. In other words, corporate alliance employers are required to pay an additional amount for .t~eir low-wage employees. 

The amount of the low-wage subsidy is equal to the excess (if 

any) of (1) 95 percent of the premium for the least expensive plan 

that is a lower or combination cost sharing plan (as determined for 

the class of enrollment and premium area) over (2) the amount of 

the required employer premium (for the class of enrollment and 

premium area). 
79 

In this example, Plan A is a lower cost sharing plan. The additional amount the employer would have to pay for low-wage employees for each class of enrollment is as follows: 

Class of enrollment 

Individual .................................... . Couple only .................................. . Single parent ............................... . Dual parent ................................. . 

Corporate assessment 

(A) 

95% x 

PlanA 

$1,781 

3,563 

3,602 

4,008 

(B) 

Required 

employer 

premium 

$1,525 

3,050 

3,126 

3,431 

Low-wage 

subsidy 

(A-B) 

$256 

513 

526 

577 

In addition to required premiums, corporate alliance employers 

would have to pay a corporate assessment equal to 1 percent of 

payroll. 
IV. ANALYSIS OF THE ECONOMIC EFFECTS OF HEALTH 

INSURANCE MANDATES 

I A. Overview 

The bill would require that all indiViduals purchase health insurance and that employers pay for a portion of the cost of insurance 

for their employees. The bill raises a number of issues relating to 

why and how the purchase of health insurance is mandated. These 

issues can be considered both generally (e.g., the general impact of 

mandates on an individual's behavior and well being) and under 

the bill specifically (e.g., the effects that the particular provisions 

of the bill may have on (1) the decision to hire an employee and 

(2) the manner in which firms are organized). 

B. Rationales for Mandated Health Insurance 

The goals of universal coverage and uniform pricing 

. In general 

Universal coverage is an explicit, central goal of the bill. The bill 

also assumes that some level of uniform pricing is a desirable element. These two goals combine to necessitate a mandate on individuals to be insured. 

People differ in their health risks-some have healthy lifestyles 

and have no history of family illness, while others are more susceptible to either accident or disease, or both. Other things being 

equal, an insurance company would normally charge people with 

higher risks higher premiums, because they are expected to use 

more medical services, at higher cost, than average. Similarly, in 

a competitive insurance market, the insurer would charge lower 

premiums to lower risk individuals, because they are expected to 

have fewer, less costly, claims in a given year. 

Economists generally support pricing policies that charge individuals the full cost of the services they purchase. This is because an 

individual who pays less than the cost of the service will be induced to consume too much of the service from a social point of 

view. On the other hand, if the individual pays more than the cost 

of the service he or she will choose to consume too little of it. 

Differential pricing of health insurance across individuals of different risk may be either undesirable or impossible (see the discussion below). If insurance must be priced uniformly--either because 

such an approach is desired by society or because it is necessarythen without a mandate on individuals to be insured (be it through 

their employer or otherwise), universal coverage will not occur because persons who pay more than the cost of the service they receive will choose not to buy it. If people are not required to purchase insurance at the uniform price, then adverse selection may 

(80) 
81 

occur, with the possible result that only bad risks are left in the 

insurance pool (see discussion below). 

Adverse selection 

Suppose health insurance "is pricedunifoniily for a pool orilieH: 

viduals who have different health risks. At first, high-risk individuals in the pool would benefit from' such an arrangement, because 

their premium would be less than their expected costs (which are 

higher than average). Low-risk individuals would be disadvantaged 

because their premium would be higher than their expected costs 

(which are lower than average). In effect, the good risks would be 

subsidizing the bad risks in this situation and, if individuals are 

allowed to choose whether to be insured or not, the good risks 

might decide that it is better to forgo insurance at such a high 

price (relative to the v.alue they put on it). When the good risks 

leave the pool, however, the average cost of those left increases. 

Prices must increase for the insurer to break even and the lowerrisk individuals wlll face a' premIum·'greate'ilhan the value of tb.e 

insurance. These individuals willt1!.~~J~J~:Y~.~he pool. This process of attrition, known as adverse selectIOn, could continue until only 

the very ~ad ris~s are left !ri' the Insurance poo. 1.62 Or. cour~e, ~ot all good nsks wIll necessanly leave the pool. Those WIth hIgh lUcomes or less willingness to bear risk may be willing to pay a higher price for greater coverage. ,'. . . '. . .. If an explicit policy goal of health care reform isuri:iv~rsa1 coverage, then the effects of adverse selectigIlt:equire some' govern:~ 

ment intervention. One response would be for the government to 

mandate that all individuals buy insurance, so that good risks cannot drop out of the market. In practice this would require that all 

individuals purchase some minimum level of insurance,covering 

what is considered a suitable range of services and incot:porating 

suitable cost sharing (e.g., deductibles, coinsurance, and 

copayments).63 Such a system could permit individuals who desire 

more protection to purchase additional insurance, presumably at a 

cost that reflects actual value. 

While the goal of universal coverage is central to many health 

care reform proposals, adverse selection will mean that, under a 

mandate with uniform pricing, 'individuals who face less risk will 

subsidize those who are more likely to need medical care. 

Desirability of uniform pricfng' . 

The main argument against uniform pricing of mandated purchases of goods and services is that' individuals with expensive 

needs or tastes should not receive subsidies from those with more 

modest need,s or tastes, I~ the t;9ptext 0.( ;hEls,l,tp ~~ryic~s, this' argument would take the form that'individuals with low health needs 

should not be required to subsidize those wit.h greater needs. This 

62 Not requiring that all in<llvidualsbtiy Insurlincewoullt'be'iiki'trylngTo"'redlstrlbute -income 

through the taxsystem while8J.loWirig individuals to decide whether they wished .. to pay tax or not. The richwould prefer not to be in th~ sYstem. because theY' would subsidize the poor. Only a limited amou~t orredistri,b.ution v.:o.l1:r~riiS£ur. through charitable organizations. 63 The deternunants of ~sUltabltt In tliis context are a separate issue. If the government wish- es ~ control.healt1} care ~Sts. th~n the. n:ta~d!lted package may ~ quite ~mited. and the C()st sharing reqUirements relatIvely hIgh. On the other hand. a su/lic,ently WIde range of services 

should be included to satisfy basic medical needs. and the out-of-pocket expenses must be low 

enough to protect individuals in times of serioUs illness. ' 
82 

argument is frequently made most strongly where the health risks 

are the result of life-style choices, such as smoking, drinking, or 

eating habits. However, the argument may not be particularly compelling. Although redistribution of resources in our society is usually thought of in terms of money income-those who earn more 

are required to transfer resources to those who earn less-the same 

moral/ethical principles underlying the redistributive aspects of the 

Federal (and State) tax and spending programs could apply with 

equal force to health needs. To the extent that healthy individuals 

are considered to be better off than individuals with high health 

care needs, redistribution from the first group to the second is consistent with the general approach of other Federal (and State) programs. 

Furthermore, the amount of such redistribution is significantly 

reduced if the analysis is performed on a longer range basis. 

Health risk characteristics change over the course of an individual's life. Single men in their twenties have much lower health care 

needs than women of child-bearing age, who in tum have fewer 

needs than the elderly. 54 In any given year the health care needs 

of two different people may vary significantly, but over individuals' 

lifetimes, such needs are less variable. In this case, redistribution 

from low- to high-risk individuals in any given year may not represent a large redistribution between individuals over their lifetimes. This argument supports uniform pricing without regard to 

age as a means of effecting lifetime (as opposed to annual) health 

insurance.65 

However, there could be a number of problems with community 

rating across individuals of different ages. First, younger (generally 

healthier) people, who in any given year would subsidize older people, may face liquidity constraints, in which case an unreasonable 

burden might be placed on them. Second, the transitional effects of 

moving to a system with full community rating might be considered 

undesirable because the adoption of such a policy would have an 

equivalent effect to an increase in the national debt.66 Further, annual community rating could result in a redistribution from people 

who live short lives to longer lived individuals.67 

Apart from these possible problems, if society believes that the 

Federal Government has a role in redistributing not only from rich 

to poor in the normal sense, but also from healthy to sick, and if 

effective lifetime insurance is desired, then some degree of uniform 

64 Of course, other factors besides age influence an individual's risk characteristics. 65 A common concern in current insurance markets is that if an individual has a large medical 

expense in one year, premiums will increase in all subsequent years. Thus, insurance may cover expenses in a partiCUlar year, but may not protect fully against future costs. 

66To see this, note that in the first few years after a policy change to uniform pricing, mem- bers of the current older generation would be subsidized by the current young, without being 

responsible for subsidizing anyone else themselves. This pattern of transfers is exactly identical 

to that which would occur in setting up a new pay-as-you-go social security system (where taxes on the current young pay for benefits to the current (llderly). In both cases, the current elderly 

receive a transfer which is paid for by future generations. Similarly, when the national debt is 

increased, current generations can increase their consumption at the expense of future generations. For more discussion of these issues, see Laurence J. Kotlikoff, Generational Accounting: 

Knowing Who Pays, and When, for What We Spend, (1992) (New York: The Free Press). 

67For example, suppose one individual lives 80 years, and another lives 40 years. If individuals' medical expenses increase with their age, then the first individual will receive a net transfer from the second. 
83 

pricing is desirable. As discussed above, if such a policy is chosen, 

a mandate is necessary.68 

Factors that make uniform pricing necessary 

Even without government intervention in pricing decisions, it 

might be difficult for an insurance company to distinguish among 

individuals of different risk. Two individuals who are identical in 

all respects other than their risk of incurring medical expenses 

would then have to be charged the same premium, equal to the average cost of all policyholders of the particular company. Low-risk 

individuals would again subsidize high-risk ones, and tend to leave 

the market. In extreme cases, the market could fail completely, and 

insurance would not be available to many who were willing to pay 

more than its actuarial cost. This is inefficient, and a mandate 

would help reduce the inefficiency.69 

Currently there is more concern that insurance companies can 

distinguish between individuals of different risk than that they 

cannot do so. That is, policymakers may be more concerned with 

excessive "cream-skimming" behavior of insurance companies than 

with their inability to price differentially.7o This suggests that the 

desirability of uniform pricing is a stronger argument for a mandate than is the necessity of uniform pricing due to information 

constraints on firms. 

Other rationales for mandates on individuals 

In general 

There are a number of other arguments, independent of the goals 

of universal coverage and uniform pricing, for requiring individuals 

to purchase insurance. These stem from the idea that the markets 

for health care and health insurance are somewhat different from 

what are commonly thought of as "typical" markets (like those for 

bread or automobiles). First, individuals may not know what is in 

their best interests or if they do, this might not conform to what 

society sees as being in their best interests. Second, the government may not be able to commit to denying health care services to 

those needing them, in which case individuals will have an incentive to "free ride", that is, to obtain services that others pay for. 

Consumer information 

Generally, economists argue that in the absence of public policy 

goals to the contrary, governments should not interfere in decisions 

made by individuals about how to spend their money. For example, 

an individual who chooses to consume more bread and less potatoes 

68 A mandate may not be necessary if the uniform price is set low enough, and large enough 

government subsidies are provided to everyone. As an extreme example, if the price of the com- prehensive package were set at $1, then it is very likely that everyone would buy it, even without an explicit mandate to do so. . 69The welfare properties of compulsory insurance vis a vis unregulated insurance are difficult 

to predict in general. However, if universal coverage is an explicit policy goal, then information 

problems suggest the need for a mandate. See Charles Wilson ( 1977) "A Model of Insurance 

Markets With Incomplete Information," Journal of Economic Theory, and Michael Rothschild 

and Joseph Stiglitz (1976) "Equilibrium in Competitive Insurance Markets," Quarterly Journal 

of Economics. 

70Cream-skimming is also referred to as "cherry-picking", whereby insurance companies try 

to select the least risky individuals. 
84 

probably has a preference for bread, which economists believe 

should be respected. 

It is frequently argued that government interyeQ.tion is appropriate when individuals are not well informed about the benefits or 

costs (to themselves or others) of soine of their choices. For example, if some parents underestimate the benefits of schooling for 

their children, they may not send them to school for the appropriate length of time. It may thus be socially beneficial for the government to mandate school attendance. Similarly, if individuals 

consistently underestimate the chance or potential cost of a car, accident, the government might wish to require them to purchase 

auto insurance. Under this reasoning, if individuals do, .not understand or appreciate the health risks they face, the government 

might want to require them to purchase some lev~l of health insurance. Since individuals differ considera,ply with respect to health 

needs, the government would have,dJffic.tllty knowing exactly what 

level of insurance is! a,ppropriate for each. person. As ~ result, ~he 

government would be likely to impose relatively uniform insuran'ce 

requirements on ~ll In.cliyj,duals, regardless of their actual Ileeds, o~ 

how well informed, they actually are. " 

Some view this argument for government intervention as overly 

paternalistic (Le., that the government knows better than ~t least 

some individuals what is best for them). If a uniform mandate Is 

imposed, it is likely to impose an unnecessarily high level of insurance on some individuals. To the extent that only some individuals 

are uninformed about the appropriate level of insurance for themselves, the rest of the population may be forced to conform with an 

externally imposed level of insurance that they do not desire. 

Government commitment 

By buying health insurance, an individual protects himself or 

herself against the expense of current or future health care needs 

at the price of giving up some other extra consumption today. 

Other things being equal, the consumer will buy more insurance if 

he or she wants further to reduce this risk. 

Many societies provide health services to those who need them, 

even to those who do not pay for the services., Suppose, for example, that an individual has an accident and needs more health care 

services than her insurance (if any) covers. If the government were 

to act as it does in the example of bread and potatoes, it would 

have no reason to intervene; the individual was willing to accept 

the higher risk in return for a lower premium. But the government 

will usually not promise to allow accicient victims without insurance to die, or to withhold necessary care from other un~n,s~red ip.-

dividuals. By providing at least catastrophic insurance (free of 

charge), the government could induce some (possibly many) individuals not to purchase insurance themselves. The quantitative significance of the implicit insurance, in terms of the number of individuals that choose not to purchase their own coverage, clearly depends on the quality of the publicly provided care.71 In such a sys11 For example, long waiting lines in emergency rooms could be necessary to discourage too many people from relying on emergency care. This argument is sometimes used to rationalize 

high transactions costs in the consumption of other public services, such as unemployment benefits, food stamps, etc. For a more general discussion of these issues see "Stigma and Quality 
85 

tem some people will buy insurance, while others "free-ride", i.e., 

obtain the services without paying for them. Other members of society will pay for the health care of the free-riders, through increased taxes, higher insurance premiums, or other means. 72 To 

prevent the perceived unfairness of free-riding, the government 

may mandate that all individuals purchase at least a minimum 

level of insurance.73 

The government may attempt to counteract the free-rider problem by committing ahead of time to withholding medical services 

from the uninsured. If all individuals believed this promise, they 

would likely buy private insurance, without the need for an explicit 

mandate. However, not only would such a commitment be considered by some to be morally unpalatable, it would be virtually impossible to make such a commitment credibly~ This inability to 

commit means that an explicit mandate is required. 

Rationales for employer mandates 

The bill requires employers to pay a certain amount of the insurance costs of their employees. The arguments for such a financing 

mechanism are less well established in economic theory than are 

those for an individual mandate. Some of the more compelling arguments are premised on the assumption that health care reform 

must proceed leaving the existing health care delivery system in 

place, and recognize that large changes in organization may be 

costly. Five possible arguments in favor of an employer mandate 

are presented below. 

First, it may be easier for the government to enforce an employer 

mandate. This is really an argument about the desirability of withholding of premium payments at source, just as Federal income 

taxes are withheld.74 The issues of employer mandates and withholding, however, are distinct. In particular, an employer mandate 

(a requirement that employers pay some or all of the cost, of insurance for their employees, with the balance being withheld at 

source) should induce identical compliance rates to an individual 

mandate with withholding (Le., a requirement that an individual 

be insured and pay the full cost through wage withholding, with no 

employer share). However, these different policies may have different economic consequences, depending on the way wages are 

set. 75 

as Self-Selection Mechanisms" by Norman J. Ireland (paper presented at "WorldBrui.k conference on Public Expenditures and the Poor: Incidence and Targeting"). 

1'\ . :2 Charities and private physicians often also provide "free" catastrophic care. 73 The mandate could have the additional positive effect of helping to control health care costs. 

It is possible that individuals who rely on emergency treatment are more. costly to care for than 

others that seek more regular and timely treatment, because generally, hospital emergency 

treatment is more costly than other means of providing comparable treatment. Also, women with access to pre-natal care have lower total costs per healthy child on average than women who see a doctor only at their child's birth. Clearly, the net effect on health spending will depend on the generosity of the comprehensive package. If many high cost services are covered, 

and utilization rates increase, total health care costs may rise. 74 As reported in Table 990 of the 1988 Individual Taxpayer Compliance Measurement Pr0-

gram (Internal Revenue Service), income tax returns for wage and salary earners were 99.8 percent accurate, in dollar terms, while those for sole proprietors were only 75.2 percent accurate. 

7"See the discussion of hourly employees in the next section. 
86 

Second, many individuals currently obtain insurance through 

their employers.76 Some commentators view retaining the employer's role in insurance provision as a means of minimizing the disruption that liealth care reform might impose on the majority of individuals. While it is true that discontinuing employer coverage might be disruptive, such a discontinuation would only occur if employer schemes were expressly prohibited. As long as employers 

were permitted to continue their current practices of paying some 

or all of their employees' health premiums, purchasing choices 

would not be disrupted. In fact, to the extent that individuals who 

currently choose not to purchase insurance through their employers 

would be required to do so under the bill, the employer mandate 

could actually cause disruption instead of avoiding it. Therefore, 

some argue that there is little merit to the argument that all employers should be forced to provide insurance for their workers. 

Third, purchasing insurance through a group is both more effective and usually cheaper than purchasing an individual policy. It 

is more effective because the larger the pool of insured individuals, 

the more effectively risk is spread. It is often cheaper because of 

administrative, advertising, and underwriting costS.77 Some argue 

that firms offer natural groupings of individuals for this purpose, 

so employer coverage should be encouraged. However, small businesses are usually not large enough to achieve the efficiencies of 

group purchase and, if they were, they would be more likely to provide insurance currently. Moreover, under the Health Security Act, 

the employer mandate is not necessary to obtain the benefit of 

group rates. The regional and corporate health alliances are intended to serve this purpose.78 

Fourth, some analysts argue that employers have a responsibility 

to ensure that employees have sufficient health insurance. This argument is deficient in two respects. First, it is not clear why employers should be responsible for their employees' health insurance 

any more than they should be responsible for their employees' pur76 In March 1992,54.5 percent of workers aged 18 to 64 received insurance directly from their 

employers, while 71 percent received it either directly or indirectly (e.g., through their spouse). These figures are reported in Sources of Health Insurance and Characteristics of the Uninsured, 

Employment Benefits Research Institute, Special Report and Issue Brief, number 133, January 1993. . 77 Large group insurance purchase may be less costly than small group purchase if advertising and underwriting costs per enrollee vary. For example, the advertising activities of a large em- ployer group may consist primarily of internal staff memos, while for small emp-Ioyers, more intensive targeted advertising by insurance companies would be necessary. Also, If insurance com- panies are permitted (as under present law) to vary premiums on the basis of risk characteristics, then it is worth examining the medical history and lifestyles of small groups to make this 

adjustment. These examinations, known as underwriting, are costly. On the other hand, as long as all individuals in a particular large group face the same choice of policies, the implied risk 

pooling makes it less profitable for the insurance company to make detailed examinations of the 

Insured. 

The bargaining power of insurance companies may also differ when they are selling to small versus large employee groups. For example, by threatening to take its business elsewhere, a firm with 10,000 employees has more chance of obtaining insurance at a low markup. For small 

firms, on the other hand, the markup is likely to be higher. Higher markups give insurance com- panies less incentives to cut costs and provide insurance efficiently. See Peter A. Diamond, "National Health Reform - Commentn

, presented at the annual meetings of the Allied Social Science 

Association, Boston, January 1994, for more discussion oftheae issues. 78 A related reason that employer provision may be desirable is that purchase through a re- gional alliance could be closer to individual purchase than group purchase. As Diamond, ibid., 

has discussed, one of the efficiencies of employer purchase is that the choice of plans is nar- rowed down by the employer, who then presents a small number of plans to employees to choose 

from. This advantage however could be attained by mandating that employers (or health alliances) determine the choice of plans, or information about plans, and not that employers actually make payments for insurance on behalf of employees. 

... 
87 

chases of other consumption goods such as bread, automobiles, and 

ski equipment. Second, even if some justification could be articulated for increasing employees' total compensation indirectly through the provision of insurance, it would probably not be 

achieved through a mandate that employers simply pay for the insurance. As argued more fully in the following section, it is very likely that the employee would bear the cost of employer-provided insurance, so that their total compensation would not increase. 

A fifth ar~ment for the employer mandate may be based on the 

government s desire to provide a subsidy for thelurchase of health 

insurance. If the subsidy can only be provide by allowing employer-paid premiums to be excluded from an individual's taxable 

income, then the government would want to encourage purchase through the employer. However, it is unclear why an employer c'1". mandate is necessary in this case. An individual mandate accompanied by preferential tax treatment for employer provision would 

appear to give individuals sufficient incentive to purchase insurance through their employers. Moreover, subsidies for the purchase of health insurance can be provided in many ways other than 

through excluding the cost of employer-provided health care from 

taxable income. 

C. Economic Effects of a Health Insurance Mandate 

1. In general 

Conceptually, the health insurance mandate contained in the 

Health Security Act consists of three components: an individual 

mandate, an employer financing mandate, and subsidies. * Individual mandate: The individual mandate under the Health 

Security Act would require that all individuals be insured. All individual mandate has different effects on individuals depending on 

whether they are currently insured and on how mum they value 

the mandated coverage and how much it costs. This aspect of the 

mandate may have small effects on employment. * Employer financing: The employer mandate in the Health Security Act would require that employers pay a portion of the cost 

of the comprehensive benefit package. Such financing requirements 

can have additional effects on i,ndividuals' (particularly hourly employees') incentives to wor!t a!ltl.on employment levels. * Subsidies: The Health Security Act would subsidize a portion of the otherwise required health care premium of both individuals 

".. and employers. The way in which firms and individuals receive 

subsidies has implications for firm structure and employment decisions. 

For simplicity, the following analysis concentrates on single individuals, although distinct issues raised by family coverage are discussed where appropriate. 

2. Individual mandates 

a. In general 

The simplest mandate requires each individual to purchase insurance. This kind of mandate is contained in the bill. While the 

mandate is often referred to a.s an e:mployer mandate, that term 

has more to do with the financing of the premium costs rather than 
88 

with the responsibility of individuals to be insured. The bill requires unemployed and self-employed individuals to be insured, 

and employed individuals are required to pay any portion of the 

premium not required to be paid by their employer and not subsidized by the Federal Government. . Prior to the imposition of the mandate, some individuals would 

have no insurance, others would have minimal levels, while yet 

others would have coverage that is at least as generous as the comprehensive benefit package defined in the bill. In general, any particular individual pays a certain premium for insurance which has 

a particular value to the individual. For ~ individu.al currently 

buying insurance, it can usually be assumed that the value is larger than the premium (otherwise, the individual would not buy it).79 

Those not buying insurance can be thought of as paying a premium 

of zero and receiving no insurance (so the value of insurance received is zero). 

With the introduction of the mandate, all individuals would be 

required to purchase a certain amount of insurance. This would 

tend to change the value of the insurance which any given individual has. For example, those who were previously uninsured would 

probably obtain some value out of the mandawd coverage. On the 

other hand, those who were well insured previously are likely to 

want to keep the same or similar level of coverage, and thus may 

not see any change in the value of the coverage they have. 

In addition to the basic mandate, the bill includes a number of 

changes relating to the way health insurance is purchased and 

priced. For example, insurance would have to be purchased 

through either a regional or corporate alliance, and premiums 

would generally be community rated. These changes could affect 

the premiums that individuals must pay. In particular, the Administration expects that group purchase through the alliance system 

will lower costs, and that community rating will tend to average 

costs across individuals of different risk. so The bill would also impose ceilings on the increase in health care premiums. 

Thus, under the bill, not only could an individual see the value 

of his or her insurance change, but the individual could also face 

a different premium. The net change in a given individual's well 

being can be thought of as being made up of two parts-the change 

in the premium paid, plus the change in the value of insurance 

that the individual has.81 Two special cases CJ~n be examined. 

First, if an individual is not currently insured, then the value 

and cost of insurance that the individual has are both zero. The net 

impact of the bill on the individual's well being would be the difference between the value of the mandated coverage to the individual and the premium that must be paid. If, for example, the premium is larger than the value the individual places on the insur79This might not be a valid assumption if a group of individuals buys insurance collectively. 

If they all make the same contributions to the cost of the coverage, then those who would prefer lower coverage might be paying more than the value of the insurance to them. However, this 

may be preferred to leaving the group and purchasing insurance on an individual basis. 

SOThe mandate could affect premiums in other ways. First, if it requires higher levels of insurance, then induced utilization increases may cause premiums to rise. Also, since part of the 

premium payment is earmarked for medical research, it may be higher than otherwise. 81 If the net change is negative, then the individual is made worse off. 
89 

ance, then the effect is a decrease in well-being equal to the difference between the. tWO.82 

Next, suppose an individual currently purchases insurance that 

is at least as generous as the coverage that would be provided 

under the comprehensive benefit package. In this case, (unless the 

bill induces the individual to ch~mge his or her coverage for some 

reason), the v81ue the individual places on the insurance should 

not change. The net impact of the change will be just the change, if any, in the premium the individual must pay. The bill could also result in other changes in coverage that are 

not reflected in premiums, but that could affect the value of the 

coverage and an ind~vic:lual'§ well-:-being. For example, waiting times could increase,"1h1>:resetvices could be provided by health 

care providers who are nO,L<!9£19rs, and choicfi!. of providers could 

be more limited. The quantitative significance of such negative effects is difficult to . ascertain. Of course, these effects should be 

weighed against any positive effects on premiums and insurance 

coverage. 

b. Employment effects of an individual mandate 

The changes described above induced by the individuaJ mandate 

effectively increase or decrease a person's income. Such income 

changes may, in tum, trigger changes in an individual's employment behavior. Consider first those who suffer a loss: in the face 

of an unexpected reduction in real incoJ:p.e, they may respond by working a bit more, for example, by increasing the overtime they 

put in (if this is possible), getting a second part-time job (or having .' 

their spouse do so), or changing to less palatable but higher-paid 

work. On the other hand, those who enjoy a net benefit from the 

reform may resp6nd by working less hard. This type of response by 

individuals to chan8es in real income is described by economists as 

resulting from the' income effect".83 

The net impact of this change on employment is unlikely to be 

large. If it is expected that some individuals. will gain and some 

will lose (in terms of the net b(:lnefits described above), then the aggregate effect on labor §upply may be small. How~"\T~:r, for particu- lar individuals, the effect could be significant if the net benefit (or 

loss) is large enough. 

A potentially more important effect max stem from a. reducti<m. 

in the current problem known as "job~lock '. Briefly, many anaIysts 

note that insurance is. cUl1'~ntly intimately linked with (:lWployment. When an individual leaves a job, he or she often relinquishes the right to current insurance when Federally, or' State-required 

continuation insurance . cov~rage . ends and may face experiencerated (and hence potentially higher) premiums when purchasing a 

new policy or when applying for a new job. In addition, pre-existing conditions may not be covered by the new insurance: These prob82 This result has been used by some commentators to suggest that a mandate is like a payroll 

tax equal to the diffe~n,ce.~hyeell the. cost.and~ya!:u~ of the . insural!~e,.~See, e.g., LawreTl<:e~, 

Summers (1989) "SoI:JleSimple Economics ofManda~d Benefits,~ A1iiencan EC()llonii{: Review, 

79(2), pp 177·183. However, the employer part of the mandate disrupts this simple interpreta· 

tion somewhat, as discussed in the next section. .. .' .... .. saThe assumption that an increase in income will, other things 1ielng equal, ciiuse·'anlIiaIVia: 

ual to work less is the same as assuming that it will cause an individual's use of leisure~time 

to increase. This assumption, that leisure is what economists refer to as a "normal good", seems reasonable. 
90 

lems impose a high cost both in terms of being temporarily unemployed (when the cost of non-group insurance may be high) and in 

terms of reduced earnings in future jobs (which may provide insurance on an experience-rated basis upon entering the firm).84 This 

constraint on leaving a job for a better one can be termed the "lockin" effect. Community rating, disregarding of pre-existing conditions, and general insurance reform may reduce this labor market 

inefficiency, with positive effects on the allocation of labor in the 

economy. 

Similarly, in the absence of a mandate, an individual who does 

not want insurance may choose not to work for a particular firm 

that includes insurance in the benefits packages of all employees. 

Such an individual may decide either to work for a firm that pays 

less in total compensation but more in non-insurance compensation, or not to work at all. This can be thought of as a "lock-out" 

effect. By forcing the individual to be insured independent of the 

job he or she chooses, the individual mandate removes the consideration of health insurance from the employment choice.85 

3. Employer mandates 

a. In general 

Under the bill, employers would be required to contribute to the 

insurance costs of employees. This requirement can be thought of 

as an additional financing rule. All individuals would be required 

to be insured, while the premiums of those who are employed 

would be partially paid by their employer. 

Economists usually argue that independent of whether a particular payment on behalf of an employee is made by the employer or 

employee, the true economic impact of the requirement is the same. 

For example, although the employer arid employee each are required to pay 7.65 percent of the employee's wage in social security 

taxes, it is usually assumed that the employee bears the full burden of both portions.56 However, this conclusion is not necessarily 

valid in the case of the employer mandates contained in the bill. 

In particular, while the impact of the employer mandate on salaried workers is likely to be similar to that of the pure individual 

mandate, its effect on hourly wage earners will likely be different. 

This is because the cost of insurance is not necessarily proportional 

to an individual's income, but wage reductions for hourly workers 

are usually effected by proportional decreases in the hourly rate of 

pay. 

84These problems are somewhat addressed by the health care continuation rules (Code sec. 4980B). In general, these rules reqUire that qualified beneficiaries that are covered under an employer's group health plan be offered the opportunity to purchase coverage un, der the plan 

for a specified period following the occurrence of certain events that would otherwise result in 

loss of coverage (e.g., a termination of employment). For a further desCription of the health "care 

continuation rules, see Joint Committee on Taxation, Description and Analysis of Title VII of H.R. 3600, S. 1757, and S. 1775 ("Health Security Act") (JCS·20-93), December 20, 1993, p.79. 

85Emp,irical evidence on the extent of job-lock is varied. See, for example, Bridgette Madrian 

(1992), Employment-based Health Insurance and Job Mobility: Is there Evidence of Job-Lock?", 

mimeo, Massachusetts Institute of Technology, and Douglas Holtz-Eakin (1993), "Health Insur- ance Provision and Labor Market Efficiency in the United States and Germany", working paper 

No. 4388, National Bureau of Economic Research. 

86The employee pays the employee share of the tax directly, and wages are reduced by the amount of the employer's share. Thus, her net after-tax wage falls by the full portion of the tax. See Joint Committee on Taxation, Methodology and Issues in Measuring Changes in the 

Distribution of Tax Burdens (JCS-7-93), June 14, 1993. 
91 

Economists usually assum~ that, in the long run, wages and salaries adjust so that the full cost is somehow passed on to the employee (who also receives, tIle benefit 9fJ!lo~~ra,!loc~). It is possible, however, that the cost willnot be fully passed on to workers, but 

will be borne to some extent by the owners of the firm, or oth~r 

input suppliers. The issue is not whether employers can pass the 

costs of insurance on to their employees, but how they can achieve 

such a pass through. The extent to which the cost i~passed 

through is not of central importance in this part of the analysis of em.ployme~t effe~ts. except for minimum wage workers (see below), 

and the dISCUSSIon assumes that the worker bears the full burden.87 ' 

To examine these issues, a mandate where employers are required to pay the full costs of their employees" insurance will be 

considered first. A partial employer mandate of the type found in, 

the bill will be discussed sllbsequently. Salaried and hourly em-' 

ployees will be discussed separately. 

h. Full employer mandate 

Salaried employees 

Salaried employees can be thought of as earning a certain annual 

income that is essentially independent of the hours they work or 

the effort they exert. While it may be true that bonuses and rewards such as promotions can be earned through greater effort, 

there is usually a fixed base salary amount. For salaried employees, it may be relatively easy for the employer to adjust the base 

salary to offset the cost to the employer of complying with a full 

employer mandate without affecting the employees' incentives to 

work more.SS For example, if this cost is expected to be passed on 

to salaried employees, their base salary would be reduced by the 

full premium.S9 A salaried employee receives insurance which has 

some value to. the employee, so his or her economic income, as in 

the case of an individual mandate, is incr'l1ased or decreased by the 

difference between the premium and the value of the insu.rance.90 

Thus, assuming that salaried employees can have their annual 

income reduced by a fixed amount, the effects of a full employer mandate on salaried employees are likely to be similar to the effects of an individual mandate. In particular, one might expect a 

small i~crease in labor supply from those who suffer. ~ n,etJo§~ ill 

well-bemgas a result of the reforms and, correspondmgly, a small 

decrease for those with a net benefit. 

Also, a full employer mandate may create some incentive for salaried employees to switch between firms that can form corporate 

alliances and those that cannot. If the quality of the''insurance is 

87This assumption is often made (or employment and other taxes. See Joint Committee on Taxation, Methodology and Issues in Measuring Changes in the Distribution of Tax Bu7Xkns 

(JCS-7-93), June 14, 1993, for a more complete discussion. . 88That is, if only the base wage is reduced, and bonuses, promotions, and other rewards for 

extra effort are not changed, the employees will have the same incentive as before tQ attain 

these rewards. 

89This reduction iii base salary may be effected through smaller raises than would otherWiSe 

have occurred over time. 90 In fact, this outcome .does not depend on the assumption thaf the fun' coSt is paSsed 'on 'fu 

the individual. If only halI of it was passed on under the employer m~date, then with an individual mandate we would expect to see half of the cost imposed on the individual being shifted 

to the employer. The net effect is the same. 
92 

the same under corporate and regional alliances but the premiums 

differ, individuals will have an incentive to switch if they will receive the benefit of the cost saving.91 Since it is unlikely that employers will establish corporate alliances unless their insurance 

costs would be less than those of the regional alliance, this incentive will exist with respect to all corporate alliances to some degree.92 

Hourly employees 

Any reductions in the wages of hourly employees are usually implemented through a reduction in the hourly rate. In this case, the 

effect of the full employer mandate on hourly employees is as follows: each employee receives insurance of a certain annual value, 

which may vary across individuals. Assuming that the employer 

passes the cost of the premium on to the employee, the hourly 

wage would be reduced by some fraction that is sufficient to cover 

the cost of the insurance to the employer.93 

As an example, suppose an individual earns $10 per hour before 

the introduction of a full employer mandate and does not have insurance.94 The mandated insurance is worth $1,000 to her and 

costs the employer $2,000. Suppose that to pass the full cost on to 

the employee, the employee's hourly wage must be reduced to $9 

per hour. Then the effect is the same as if the employee were given 

a lump-sum payment of $1,000 and a 10-percent tax were levied on 

her earned income. 

The "income effect" for such an hourly employee is the same as 

discussed in the case of the salaried employee. If the value of insurance is less than the cost to. the employee, then the implied decrease in economic income will result in a small increase in labor 

supply. However, there· is an extra effect now on the hourly employee's decision to work: her hourly wage is 10 percent less than 

it was, so any extra work is rewarded less. This so-called "substitution effect" results in the hourly employee working less, because 

the return on extra effort has decreased.95 To the extent that she 

has control over the number olhonrsworked, one would expect her 

to reduce the time that she is willing to work. This reduction in 

hours may come in the form of less. overtime work or a switch to 

a job with more flexible hours. Thus, the substitution effect, by re91 This incentive also will be available to hourly employees. 92 See Joint Committee on Taxation, Description and Analysis of Title VII of H.R. 3600, S. 

1757, and S. 1775 ("Health Security Act") (JCS-20-93), December 20, 1993, for more discussion 

of the role and nature of corporate alliances. 93 Because of this structure, a full employer mandate has similar effects on hourly emplolees 

to what economists refer to as a "negative income tax". Under a negative income tax, an individual receives a fixed lump-sum grant, and then pays tax proportional to his earned income. Thus, 

all individuals receive at least the lump-sum grant. In the context of the employer mandate, 

the annual benefit that each individual receives (in the form of the change in the value of insurance) is similar to the lump-sum grant of the negative income tax (although normally, the lump- sum grant of the negative income tax does not vary among individuals). The proportionate re- duction in hourly wages to cover the cost of the premium corresponds to the proportional tax 

component of the negative income tax. 94 If the individual works 50 40-hour weeks in a year, she will work 2,000 hours and make 

$20,000. 95 It is called the substitution effect for the following reason. The hourly wage can be thought 

of as the price of an hour's leisure because an extra hour of leisure could be "purchased" by giving up an hour of work. The extra hour of leisure thus requires the individual to for~ an hour's worth of wages. A reduction in the wage then is like a reduction in the price of leIsure. 

When the price of a good falls relative to that of other goods, we usually see i.ndividuals substituting consumption ·of the first good for that of the others. In this case, the individual would consume more leisure or, equivalently, supply less labor. 
.:::?fI.. 

93 

ducing the incentive to work, acts in the opposite direction to the 

income effect. 

It should be noted that the disincenti.ve.E!J'tE!~s$of~.(Yll,E!mployer mandate operating through this "substitution effecttl are directly 

related to the full premium, that is, the full cost of providing the 

insurance, and not to the. difference behyeen this cost and the 

value placed on the insurance. Thus, in the numerical. example 

above, the percentage reduction in the hourly wage had to be large 

enough (10 percent) to pay for the full cost of the insurance 

($2,000). This is not an insignificant adjustment to take-home 

wages. Furthermore, the disincentive exists even when th~net effect of the purchase is to increase the employee's well-bemg (Le., 

even when the income effect of the mandate is positive). 

Distinguishing effects on employment levels and hours 

worked 

As set forth above, the effects of a full employer mandate on incentives to work would differ for salaried and hourly employees. 

Both types of employee would face a change in annual economic income equal to the change in the premium they pay less the change 

in the value of the.ir insuraI1ce .. cov,erage. The induced changes in 

labor supply from the income effect could be either in terms of 

changes in labor force participation rates or changes in hours 

worked and effort. For example, an individual who experiences a 

large net increase in well-being due to the reforms may decide not 

to work, or to work less, while an individual. who experiences a reduction in well-being might enter the labor force. or work Illore, in 

his or her current job. Because it is expected that the income effects will be small in the aggregate, they should not induce large 

changes in employment levels or output. 

On the other hand, for hourly employees the principal effect of 

the reduction in hourly wages should be on hours worked. One 

would expect to see these employees reduce the. number of h()urs 

they work, rather ~han decide .. not .. to w()r~,96 .Tlle~t:r~ngth of this 

substitution effect IS related to the full cost of the insurance, while 

the income effect is related to the. change in the individual'snElt 

economic income. As well as being larger for a given individual, the 

effect is negative for all affe~te~ individuals because 1;here are no 

individuals for whom the. proportional wage reduction induces 

extra labor supply. While not conclusive, this suggests that the 

substitution effect will be quantitatively more important than will 

the income effect, and that. while employment levels would not 

change, hours worked by 'hou'rly . employees, and hence output, 

would fall.97 

96 Of course, if hours are reduced to zero, thell particiPation in the labor force falls. 

97There is no firm empirical evi'dence on these issues. It is possible that, if the substitution 

effect is small (so that individuals .are~J.lotr~sponsive to changes in their hourly wage rates) but 

the income effect is large (so that they care significantly about total annual C()lIlpensation), then 

the income effect could outweigh the substitution effect. If this were the case, and if it were still expected that the. income effects for 4ifferent inlijviduaIs lvjll roUghly cancel out, then the 

aggregate employment effects of the m~!i~te, both in terms of numbers of individuals employed 

and hours worked, could be small. 
94 

c. Partial employer mandates 

Effects on individuals 

The bill would not impose a full employer mandate, but rather 

would require employers to pay only a portion of health care premiums. In the case of salaried employees, because it is assumed 

that the employer's cost will generally be passed through to the 

employee, the split between employer and employee payments is 

generally not important (except from the perspective of their relative tax treatments, discussed below). Thus, for salaried individuals, the effect of the partial employer mandate is just the same 

as that under a full employer mandate, as discussed above. 

In the case of hourly workers, if employer costs are passed on to 

employees, the wages of such workers must fall by a percentage 

sufficient to cover the employer's share of the premium. In the numerical example above, if the insurance cost $2,000, and the employer's share is $1,600, then the percentage reduction would have 

to be at least 8 percent 98 rather than at least 10 percent in the 

previous example, when the employer was required to pay the full 

amount.99 Thus, if the share of the premium that the employer 

pays is lower, the reduction in hourly wages will be smaller and 

the disincentive to work caused by the substitution effect will also 

be smaller. 

For individuals then, the partial employer mandate determines 

the manner in which the cost of a particular insurance policy is 

split between the employer and employee, but does not affect the 

total amount paid for insurance. For hourly employees, this split 

determines the amount that is paid as a lump-sum compared to the 

amount paid through a proportional reduction in wages, with consequent effects on labor supply decisions. 

Effects on familks 

For families, however, the partial employer mandate in the bill 

may also affect the total amount paid for a given policy, depending 

on family employment structure. This can create strong incentives 

for families to change their employment decisions, because some 

families may not be treated as having received the total amount 

that their employer would be required to pay on their behalf. 100 In 

particular, the amount paid by an employer is related to the employee's employment status (i.e., full-time versus part-time), but 

the credit received by such an employee may not change with employment status if the employee is a member of a family. 

For example, assume that the weighted average premium for an 

individual class of enrollment is $2,000 and that an individual 

elects to participate in a plan with a $2,000 premium. The em98This is calculated as follows. First assume that the number of hours worked by the individual stays fixed at 2,000 per year. The reduction in hourly wage, I!.w, in mone;y terms, must satisfy the equation (I!.w x 2,000) = 1,600 or I!.w = 1,600/2,000 = 80 cents. This 18 an 8-percent reduction in the $10 hourly rate. If this causes the individual to work less, then the $1,600 cost 

must be spread over fewer than 2,000 hours, and the proportionate wage reduction must be larg- er. 99 Because the employee must pay $400 annually himself, if he did not previously have insurance, the mandate is like a negative income tax with a lump-sum payment equal to the value 

of the insurance less $400, with a marginal tax rate of (at least) 8 percent. 100 In addition, the design of the employer obligation could create significant disincentives for 

individuals to marry, depending on the relative size offamily and single premiums. 

.41 
95 

ployer is required to. pay 80 percent of the weighted·· average premium (i.e., $1,600). The individual receives an alliance credit of 

$1,600 and is required to pay the balance of $400. 

However, for families, the employer share and the credit can differ.Suppose that the premium for the average cost plan for the 

couple-only class of enrollment is $3,000. If the average number of 

full-time workers per couple in this class is 1.5, then the premium 

for a full-time employee for this class is $3,000/1.5 = $2,000 . An 

employer is required to pay 80 percent of this value ($1,600) towards .th~ cost of ins,urli:Il,<:e (oJ:" a fu.n.~time employee and half of 

that ($800) for a half-time employee. .. Under the bill, however, the couple receives a credit of (Le., is 

deemed to have paid) 80 percent of the full cost of the average plan, equal to $2,400. For a couple in which one partner works fulltime and the other works half-time,lOl the total employer share of 

the premium is $1,600 + $800 = $2,400, which equals the credit received by the couple. The couple pays the balance of the premium for their selected plan, so that the employer plus employee contributions equal the actual cost of the plan. The total employer and employee contributions for couples with 

non-representative employment patterns may be greater or less 

than the full cost of their chosen health plan. For example, the employers of a couple with two full-time workers will jointly pay $3,200 ($1,600 each), while the couple will receive a credit for only $2,400, and will still be required to pay $600 if they have chosen 

a plan with a $3,00Q premium. Thus, the total contributions of employers and employees will be $800 more than the cost of the plan. 

On the other hand, a couple with just one full-time worker would 

receive a credit ($2,400) in excess of the employer contribution 

($1,600), and pay in total $800 less than the cost of the plan (i.e., 

a total of $2,200 = $1,600 + $600). This differential Between oneand two-worker couples imposes an impliCit tax of $1,600 on the 

decision of the second worker to ent~rthe labor force. Pr~s,umably, 

this could amount to a substantial annual burclen on a low wage, full-time worker (married to another fu1l7time worker). 

These e~ploYment incentives and disincentives f9r families stem 

from the fact that the employer share of the premium is related to 

an individual's employment status (i.e., full-time versus part-time), 

while the credit received by the family may not be affected by the 

employment status of different members of the family (e.g., a couple with a single full-time worker receives the same credit as one 

with two full-time workers, and one with ()n~ full=£hrie:a.ndone 

half-time worker). 

The design of the credit is probably meant to ensure tha.t·a :family does not receive too large a credit. For example, if the credit 

were $2,400 per full-time worker, a couple with two full-time workers would receive total credits ($4,800) far in excess of the cost of 

the plan. On the other hand, the employer share may be' designed 

to be fair to employers (since the share is proportional to the employee's employment status). That is, an employer should not have 

to pay 80 percent of the full premium cost (for the average cost 

plan) for an employee who only works part-time. Such a fai,rness 

101 That is, this couple has the exact characteristics of the average couple for this class. 
96 

objective is probably not well placed, however, once it is understood 

that the economic incidence of the mandate (Le., who bears the 

costs of the mandated coverage) is independent of the statutory incidence (Le., who is responsible for writing the checks to the alliances).102 Thus, if it is assumed that the employer contributions 

are passed on to the worker in the form of lower wages, then there 

is no need to "be fair" to employers, since they are not affected by the mandate. 

These labor market distortions could be removed by making the 

employer contribution equal to the credit received. However, the 

problem with such an approach is that the employer of one member ~ 

of a family would need to know the employment status of the other 

members, and the contributions being made by their employers (which in turn depend on the contribution made by the first employer), in order to calculate its contribution. This would be admin- ~ 

istratively difficult and costly. It is difficult to tell if the real economic costs resulting from distorted labor supply decisions would 

be less than the administrative costs (which are equally real) associated with matching family credits and employer contributions. Of 

course, this problem would not arise if the mandate were not based 

on employment. 

d. Other issues regarding employer mandates 

Determining the value of insurance to workers 

There are a number of reasons to expect the value of insurance 

to vary across individuals. First, individuals may have different 

medical needs. For example, suppose a comprehensive health insurance plan includes long-term care, which is predominantly used 

by the elderly. A young healthy individual would place a very low 

value on the probability that he or she will need such care in the 

current year, so such ,an individual would not value that part of the 

insurance. If only young and healthy people were included in the 

insurance pool, the cost of including long-term care in the package 

would be small, because there would be very low utilization rates. 

However, if the insurance package is available to other individuals 

who are more likely to need long-term care, then this aspect of the 

package will tend to make it more costly than it is worth to the 

young person. Similarly, if the package includes accident insurance 

and is offered to workers in dangerous occupations (working with 

heavy machinery, for example) as well as to those in less dangerous 

jobs (such as a clerical job), then the individuals in the less dangerous jobs are likely to value the accident insurance coverage at 

less than its cost, other things being equal. This reasoning suggests 

that whenever insurance is priced uniformly across individuals, 

some will value it above cost, while others will value it below 

cost. loa 

Another reason individuals may place different values on insurance is that they have different incomes. Low-income individuals 

are likely to value insurance less than those with high incomes for 

102This argument is true in the long run, that is, after wages and prices have had time to adjust, In the short run, when labor contracts, etc., are fixed, the economic incidence may be 

closely related to the statutory incidence. To the extent that the bill would only gradually phase 

in, there could be sufficient time for wages and prices to adjust in anticipation of the changes. 

103 See the discussion on adverse selection in Part IV.B" above. 

A. 
97 

at least two reasons: First, one of the benefits of employer-provided 

health insurance is that it is a tax-free form of compensation. The 

benefit of shifting compensation from taxable wages to non-taxable 

health insurance is proportional to an individual's marginal tax 

rate. Thus, if-a $1,500 policy is' purchased, an'individual with a 

marginal tax rate of 20 percent saves $300 (i.e., 20 percent of 

$1,500), while an individual with a marginal tax rate of 30 percent 

saves $450 (30 percent of $1,500). Therefore, low-income individuals may value employer-provided insurance less than high-income 

individuals due to its tax treatment.104 ~' 

The second reason that low-income individuals may place a-lower 

value on health insurance than do high-income individuals is that, 

even if there is a tax benefit associated with the, insurance, a 

$2,000 policy will necessarily make up a larger fraction 'or-a lowincome individual's expenditures on goods and services than it will 

of the expendit\lres ofahigh-income individual. For example, a 

very poor person with iIlC()meof only $4,000 wouldbe uIl:likely to 

want to spend halfof her income on}:tea!th inj;t!ran::ce. be~au!,e, .()t}:te.r 

goods, like food, clothing, and shelter, could constitute a higher priority. Such a person would probably value the insurance at much 

less than $2,000. An individual making $100,000 a year would be 

more likely to spend at least 2 percent of his or h~r in~()ll:leon insurance since other basic needs would be eafjily satisfied. 

A further reason that Individu,als may value insurance . <lifferently is that, under the bill~ families'with children pay the same 

premium, independent of the number of child!:e!l_~h~y have. Other 

things being equal, a large family would therefore tend to value a 

given insurance package more than.a small family. 

Minimum wage employees 

The previousdiscussio~ has 'assu:rri.~_Q." t!t.~t 'e.V1ploYers canatiJust 

cash wages. If cash wages cannot adjust dowQ:ward in response to 

the mandated employer premium payments, the total cost to the 

employer of employing an individual will ri~e~ If employers cannot 

absorb these additional costs, they will be forced to layoff employees whose cash wages cannot fall. 

An important class of such employees is minimum-wage employees. In effect, an employer mandate acts as an increase in the total 

minimum wage paid by the employer equal to the cost of insurance. 

The possibility that such an increase will lead to unemployment 

has long been recognized. However, debate over the empirical significance of the effect has been more contentious. 105 Estimates of 

induced unemployment vary widely":'-'in fact, one recent 'study of 

l04This aspect of theiax treatment ofhealth'Insurruice~Is ~ot cli~;ge;rundertil{;'biil~~ili respect to the mandated benefits. Many employerS that provide insurance do not pay the full 

cost (so that some portion of the premium is paid with after-tax dollars). This practice does not 

maximize the benefit of the favorable tax treatment. One explanation for the employer paying less than the full cost is the following: the employer and employee know that the favorable tax 

treatment of employer-paid premiums subsidizes insurance and tends to induce. the employee 

to purchase more extensive coverage than if the employee were paying the full cost. This over consumption creates what economists ,refer to as a ~deadweight loss" which results because the 

value to the, employee is less than the full cost of the insurance. This real economic cost is borne 

by the employer/employee pair. To reduce this cost, the subsidy is explicitly limited by obtaining it on less than the full premium. l05For a review of the issues, see "The Effect of the Minimum Wage on EmPlori!tent and Unemployment," by Charles Brown, Curtis Gilroy; and Andrew Kohen, Journal Of Economic literature, June, 1982, pp. 487-528. 
98 

the effects of minimum wages in New Jersey and Pennsylvania 

found the perverse effect of a small increase in employment.l06 

The reduction in employment discussed here, due to inflexible 

cash wages, is different from the disincentives to work discussed 

above with respect to the income and substitution effects, which result from increased economic incomes (including the value of insurance) or reduced wage rates. In these latter cases, individuals voluntarily would choose to work less at the available wage. On the 

other hand, the unemployment that may arise because of the minimum wage constraint is qualitatively different, because more people are willing to work at the prevailing minimum wage than can 

get jobs. 

4. Mandates with subsidies 

a. In general 

One problem with mandates is that some people simply cannot 

afford to comply with the law. For example, if the annual family 

premium were $4,000, a family of four at the poverty line ($13,950 

in 1992) would have to spend approximately 29 percent of its disposable income on health insurance. Other basic necessities of life 

would have to be forgone in such circumstances. 

Policymakers also have expressed concern that it may be more 

expensive for small firms to comply with the mandate than it is for 

large firms. This concern stems mainly from the observations that 

the current insurance costs of small firms are higher than the average and that many of the employed who are uninsured work in the 

small business sector.l07 Because economists would generally argue 

that the burden of the cost of complying with the mandate is borne 

by the employee, the concern for small businesses is best interpreted as a concern for the employees of such businesses. To the 

extent that the establishment of regional alliances reduces the 

costs of insurance to small business, this concern will decrease but 

not disappear. 

As a result of these concerns, the bill would provide subsidies (1) 

to low-income individuals and families, and (2) to firms based on 

firms' average wages and size. Both of these subsidies, but especially the second, could have distortionary effects on employment 

decisions. 

b. Subsidies to low-inco:ine individuals and families 

Under the bill, the subsidy to low-income individuals depends on 

their income relative to the poverty level and the direct cost they 

incur to purchase coverage under the comprehensive benefit package. If an unemployed individual with income only from unemployment compensation enrolls in a plan costing $2,000, then he or she 

l06See David Card and Alan Krueger, "Minimum Wages and Employment: A Case Study of 

the Fast Food Industry in New Jersey and Pennsylvania", National Bureau of Economic Research, working paper No. 4509, October 1993. 107 Employee Benefits Research Institute, op. cit., reports that of all uninsured employed individuals, 22.3 percent work in fl1'lIls with less than 10 employees, 12.7 percent work in firms with 

between 10 and 24 employees, and 12.7 percent are self-employed. 
99 

generally receives a subsidy related to the cosf.Assume for simplicity that the subsidy is 10 percent of the direct cost of the insurance, or $200.108 Now suppose that this individual becomes employed and earns a monthly wage that is equal to the amount of 

monthly unemployment benefits. If the employer pays 80 percent 

of the cost of the insurance, then the individual will only receive 

a subsidy of 10 percent of $400 (the balance of the premium that 

she must pay directly), or $40. Note that the subsidy has been reduced by $160, or 80 percent, equal to the employer share percentage of the premium. 

Even if the individual is treated as bearing the burden of the employer mandate such that her annual cash wage would have been 

$1,600 higher without the insurance, she loses the subsidy on the 

employer portion of the premium by returning to the workplace. If 

the subsidy is based on the cost borne directly by the employee, 

given the same income, the subsidy she receives is reduced. In par- ticular, if the subsidy is proportional to the direct cost, the subsidy 

is reduced by a percentage which is the same a:s the employer's 

percentage share of the premium. This could act as a substantial 

disincentive for individuals to re-enter the labor force after a period 

of unemployment. 

c. Firm level subsidies 

Under the bill, firm level subsidies are effected through a series 

of caps on the total costs different firms must incur in complying 

with the mandate. For example, no firm that purchases insurance 

through a regional alliance will be required to pay Inore than 7.9 

percent of its payroll in the form of health in~urance premiums (excluding the short-fall add-on). This is equivalent to capping the premium per employee at 7.9 percent of the average wage of all employees in the firm. For firms with fewer employees 109 or lower average annual. wages, the cap percentage is lower. The applicable 

percentage limits on the cost of insurance ar¢. sh()WA JJ;lr.r.~bIEl.I.. For 

example, in the case of a firm with 24' employees and an average 

wage of $10,000 per employee, the average cost of the mandated insurance policy per employee would be no greater than $350 (3.5 

percent of $10,000).' . 

Table I.-Limiting Percentages Under the FirDl-Based' 

Subsidies of the Health Security Act 

Average num· ber of full·time 

equivalent em· ployees 

Fewer than 25 

25 but fewer 

than 50 ...... 

Employer's average annual wages per full·time equiva. lent employee are: 

$0- $12,001- $15,001- $18,001- $21,001-

$12,000 $15,000 $18,000 $21,000 $24,000 ~'d' ~'-6"h"""""''''"?f''''' """*"":f,~,",N~"!"'·<' A;:"<,'''','~ it."" !.;'tr,?')~'±"'~%."""''''''' '. ' 

3.5 4.4 5.3 6.2 7.1 

4.4 5.3 6.2 7.1 7.9 

l08This is only an illustrative example, 

l09The bill def'mes the size of ~he firm based on the number of "full~time equivalent employ- ees". 
100 

Table I.-Limiting Percentages Under the Firm-Based 

Subsidies of the Health S~c~ity Act-Continued 

Averaf:nnum- Employer's average annual wages per full-time equiva- lent employee are: her of -time 

equivalent em- $0- $12,001- $15,001- $18,001- $21,001- ployees $12,000 $15,000 $18,000 $21,000 $24,000 

50 but not 

over 75 ....... 5.3 6.2 7.1 7.9 7.9 

SOURCE: Section 6123 of the hill. 

Because the subsidy is based on the characteristics of firms (size 

and average payroll) and not on those of individuals, economic effects in addition to those described above are likely. In the case of 

a mandate without any subsidies, the economic impact stems from 

the increase in the cost of employing any given individual (assuming the firm in question did not previously offer insurance), in relation to the value the individual places on the mandated coverage. 

When a subsidy based on the wages and size of a firm is iI).troduced, the impact of the mandate depends not only on the cost and 

valuation of coverage but also on characteristics that are not directly related to the individual: the number of other workers in the 

firm and their wages. The effective tax rate imposed on any particular worker by the mandate depends on all these variables. For 

convenience, the effects of the subsidies ar~ examined by looking 

first at the impact of a subsidy related to firm size and then at. a 

subsidy linked to average wages. 

Subsidies based on firm size 

To concentrate on the effects of firm size, assume that all employees of a particular firm earn the same wage.110 For all firms 

with a particular average wage, the cost per employee of complying 

with the mandate is limited to a certain percentage of the average 

payroll. For example, for firms with average wages of $17,000, 

those with fewer than 25 workers need pay no more than $901 (5.3 

percent of $17,000) per employee for insurance. Thus.!. if the actual 

cost of insurance is $1,500, there is a subsidy of t1l599 per employee.lll For firms with between 25 and 50 workers, the limit is 

$1,054 (6.2 percent of $17,000), with an implied subsidy of $446 per 

worker per year. 

Effects on employment decisions 

Firms will face very different subsidy rates per employee (and 

hence insurance costs) depending on their size. More importantly, 

the subsidy can change considerably when employment levels 

change by a small amount. For example, if a firm with average 

wages of $17,000 increases its number of employees from 24 to 25, 

110 That is, each employee earns the average wage of the firm in which she is employed. This 

simpliflcation is made for the purposes of illustration, and does not affect the general results. 111 This subsidy does not mean that the effective tax rate imposed by the mandate is negative. If an employee values the insurance less than $901, she faces a positive net effective tax rate. 

The subsidy does, however, reduce the size of the net effective tax rate imposed by the mandate 

by $599 per year. 
101 

it must not only pay an extra $1,054 in insurance costs for thell~w 

employee, it must also pay an extra $153 for the insurance costs 

of all existing employees - that is, an extra $3,672 (24 x $153). 

Thus, the cost o( employing the 25th worker is $21,726 ($17,000 + 

1,054 + 3,672); unless the worker ~§I w.Qz:thJi:t!~Il,§tJhl!? ,ID-Jlch to the 

firm, the workElr'.Vill not bEl .. hire4. The .25th employee may be WIlling to work for less than. the .v~ue. he orfi!he a,d<is, to JllEl ,firm .. 1IQwever, due to the form of the subsidy, the. financial cost ,to file elllployer of hiring the worker could bewuch higher than the value 

the worker adds, so that the worker would not beelllployed. . This may appear to be a problem only causing those firms that 

would like to have exactly 25 employees; to choose 24 instea,d. 

However, consider !i~rIIlJh!'l~.wishes to expand. its employment from 24 to .34. This mcrease m employment wlll cost the firm 

$18,054 ($17,000 + $1,054) per new employee directly, plus $3,672 

in additional insurance costs for the existing employees. The total 

cost of employing the extra ten employees is then $184,212, or 

$18,42L20 each.112 Un1ess.e,ach of file:Ql, ad4s 911 average at least 

this much. value to ~he fil1ri, they will not be employed. Even if 

each of the . ten employees increased the value to the fil'Il! by $18,000, and were willing to work for $17,000, they would not be 

employed. Thus, economically desirable growth of small firms could 

be impeded by the subsidy. . . . ... ' .. In fact, these examples do not concern only firms that are contemplating increases m employment. A firm currently employing 

34 workers would face exactly the same incentives, but in the opposite direction. That is, by eliminating 10 jobs, it co~ld. reduce its 

total payroll by $184,212. By choosing to fire the . least productive 

of its workers, this could be very profitable forthefifm. but not socially desirable, because the value. of their output is greater than, 

the true cost of their labor. 

In addition. t() .. these general economicineffi~i~Il£!~s,Jellltmg to 

employment decisions, the subsidy would have tne .un.t:ortunllte effect of working against itself in te:rms of healfil irisurance costs. 

The subsidy is based on firm' size because' there is evidence that 

small firms face higher costs of providing insurance than do large firms. As firms grow, one would the11 expect that their costs of insurance per employee would fall. However, one impact of the subsidy is to discourage this growth in firm size, thus keeping per employee insurance c().!?~~_high.113 The proponents hope that group 

purchase of health insurance through regional alliances will telllper the tendency of insurance costs to fall with increasing firm size, so 

this may not be important. On the other hand, if the regional alliances do succeed in reducing costs for small businesses, the necessity of the subsidy based on firm size would be called into question. 

Effects on firm organization and employment status 

The different subsidies avrulabie to firms' of' diffe~ent'sizes may 

affect firms' organizational decisions. For example, one way for the 

112 That is, the total cost is made up of $171000 in cash wages, plus $1,054 in direct insurance 

costs,. plus an additional $367.20 in additional insurance charges, per employee. l1SThese arguments are not meant to suggest that large firms are necessarily better (or 

worse) than small fll'lIls. However, if it were desired to encourage the formation of small firms, 

there would be no obvious reason to do so in the context of health care reform. 
102 

owners of a firm to increase production through an increase in 

labor, while not losing the benefits of the hilfoh subsidy for small 

firms, would be to create two firms. That is, mstead of increasing 

employment from 24 to 25 in the example above, the owners could 

form two firms of 12 and 13 individuals each. The per-employee 

subsidy would then remain at $599. This ability to reorganize firms 

offsets the effect of ~he subsidy to constrain employment growth. 

However, it will still entail economic inefficiencies to the extent 

that business organization decisions would be distorted. 114 As 

above, if per-employee insurance costs are higher for the two small 

firms combined than for the original firm, then by encouraging the 

formation of small firms this outcome works directly against the 

perceived problem the subsidy is designed to address. 

Instead of creating two firms in the example above, the original 

firm could re-employ some existing employees as independent contractors.U5 The individuals involved would perform exactly the 

same tasks but not be included in the firm's employment total. 

Similarly, janitorial needs and legal and accounting services could 

be "out-sourced" to companies that specialize in these activities, 

thus reducing the size of the original firm's employment and possibly increasing the per-employee subsidy. Again, such labor arrangements, if not observed without the subsidy, are likely to be 

inefficient. They may represent a sub-optimal mix of different 

kinds of employees (high- and low-skilled) within a firm, and they 

could increase aggregate health insurance costs. 

Subsidies based on average wages 

The bill would limit the amount that all firms, regardless of size, 

must spend per employee on health insurance. This limit is proportional to the average payroll of the firm. The subsidy (the cap on 

costs based on payroll) is intended to defray the costs of complying 

with the mandate for low-income individuals. If it is assumed that 

the costs of health insurance paid by an employer are passed through to employees, then the subsidy can be viewed as another 

means by which the bill provides relief to low-income individuals. 

Targeting of subsidy to low-income individuals 

Assume for simplicity that the bill requires an employer pay 100 

percent of the costs of health insurance for its employees (I.e., a full 

employer mandate). Under the bill, the limit on the employer's 

costs is equal to 7.9 percent of average walfoes (disregarding the 

short-fall add-on). This limit provides a subSIdy that decreases as 

average wages increase. For example, if the cost of insurance is 

$1,500 per employee, a firm with average wages of $10,000 will pay 

an average of $790 per employee due to the mandate. On the other 

hand, a firm with average wages of $100,000 will pay an average 

of $1,500 per employee because the cap is not binding. 

While the subsidy is directed to firms with low average wages, 

it is not specifically targeted to low-wage individuals. Some low-in114 It is not necessary here to discuss whether and when there are economies of scale in busi· ness size. It suffices to note that if fmns would be larger in the absence of the subsidy, the 

subsidy induces inefficient choices based on size, absent any other relevant market failure in 

firm organization decisions. 115 The bill contains provisions intended to prevent abuses in the reclassification of employees as independent contractors. See sections 7301·7303 of the bill. 
103 

come employees do not receive a subsidy, and some· high-income 

employees will be subject to a very large implicit true Consider a 

firm of 100 employees with average wages~()f $10,000 that is required to purchase health insUrance at a cost of $1,500 per employee. The firm must pay 7.9 percent of payroll in health insurance costs, or $79,000. It would prefer to pay $79;000 than to pay the full cost of insurance for all its workers, which is $150,000. 

However, the cost of employing a particular worker increases by 

7.9 percent of the worker's wage. The cost of employing an individual at a wage of $10,000 will increase by $790, while that of employing a $100,000-wage employee rises by $7,900. If it is assumed 

that all workers value insurance at cost, then the low-wage em;. 

ployee receives a net subsidy of $710 ($1,500 - $790), while the 

high-wage employee pays an implicit tax of $6,400 ($7,900 - $1,500). In general, low-wage workers at low average-wage firms 

receive a subsidy while high-wage workers at such firms bear a 

tax. 

In contrast, no employees of high-average-wage firms receive a 

subsidy. For example, a firm with a $100,000 average wage will 

pay $1,500 extra per employee for insurance, and the mandate will 

impose this extra cost on low- and high-wage employees alike. If 

both types of employees value the insurance at cost, the net subsidy to each is zero. 

This analysis shows that low-wage employees in low averagewage firms receive a subsidy, while low-wage employees in high-average-wage firms do not and that high-wage employees in low. average-wage firms suffer an implicit tax increase, while high-wage employees in high average-wage firms do not. 

While this discussion has centered on firms that currently do not 

provide insurance, firms that currently do provide insurance will 

face similar effects. For example, a firm with average wages of 

$10,000 that currently provides insurance at $1,500 will see its 

total labor costs fall by an average of $710 per employee. However, 

the firm's cost of employing a $100,000 employee will have. increased by $6,400. Therefore, the subsidy still has differential effects on different employees of such a firzp.. This means that any behavioral response of firms and workers 

to the implicit subsidies is not confined to those who do not currently offer insurance. On the contrary, all firms will have incentives to alter employment patterns due to the change in the relative prices of employing low- versus high-wage workers. These incentive effects are addressed in the following section. 

Incentive effects on hiring and employment 

The mandate imposes a high implicit tax on high-wage employees at fi!IDs with ~ow ~verage wages, but np ~uch tax Ql1 similar 

workers m firms With high average wages. Snmlarly, low-wage employees of firms with low average wages receive a subsidy, but lowwage employees at firms with high average wages do not. As long 

as there is some flexibility in the labor market, these conditions 

should not be expected to persist. 

For example, suppose that firms can easily reorganize. Then an 

existing low average-wage firm will have a large incentive to split 

into two firms: one employing its original empl~yees who earned 
104 

low wages, and the other employing those who earned high wages. 

It would then still receive the subsidy for the low-wage employees 

but would not incur the tax on the high-wage employees. Similarly, 

high average-wage firms that employ some low-wage employees 

will have an incentive to split. By forming a new firm that employs 

only the low-wage employees, it will receive a subsidy for them, but 

will not increase its costs with respect to its high-wage employees. 

This would result in better targeting of the subsidy, in that all 

low-wage workers would work in low average-wage firms, and 

hence get the subsidy, while no high-wage employees would receive 

a subsidy. However, the additional subsidy to low-wage workers in 

previously high average-wage firms would need to be financed by 

the government from general tax revenue (or other sources, such 

as increased health insurance premiums). In addition, the subsidy 

that low-wage workers in low average-wage firms previously received was financed in part by the implicit tax on their high-wage 

colleagues. Without this implicit tax, the cost of providing the subsidies increases. 

In practice, firms incur costs to reorganize into separate entities 

in this fashion. Since the subsidies accrue to employees of similar 

skill and productivity in different firms differently, there will be incentives for some employees to seek employment in other firms 

where they can receive larger subsidies (or face lower implicit 

taxes). Coincidentally, employers will be induced to hire individuals 

who impose lower labor costs on the employer and shift away from 

the higher-cost employees. 

For example, because high-wage employees in low average-wage 

firms face a high implicit tax, they will be induced to seek employment in high average-wage firms. This shift in labor supply will 

have the effect of bidding down the pre-tax wages of highly skilled 

employees in the high average-wage firms, and bidding them up in 

low-average-wage firms. If labor is mobile enough between the different firms, then in the long term, the net after-tax wages of highly skilled individuals will be equated in their different occupations. 

There will be fewer high-skilled employees in firms with low average wages, and more in firms with high average wages. 

Similarly, because the subsidy bestows a larger benefit on lowwage employees in low average-wage firms than it does on similar 

employees in high average-wage firms, it will induce a shift in the 

supply of lower-skilled workers to the low average-'irage firms. In 

the long term, the wages of lower-skilled individuals, net of the 

subsidy, should be equated in the different firms. 

These reallocations of labor between sectors of the economy could 

be quite costly, in the sense that firms are induced to use skilled 

and unskilled labor in less economical proportions than usual. 

These effects can be incorporated in models of the efficiency and 

equity costs of mandates with firIll level subsidies.116 Compared 
:{ 

105 

with individual-based subsidies, the poor generally do much less 

well than might otherwise be expected, and the program of firm 

subsidies under the bill is likely to be more expensive for the government (even taking into account the possibly higher administrative costs of individual subsidies), 

o