CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

STUD Y

&&&!&*

AN ANALYSIS OF THE

ADMINISTRATION'S HEALTH PROPOSAL

The Congress of the United States

Congressional Budget Office

For sale by the U.S. Government Printing Office

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

ISBN 0-16-043093-3
NOTES

Unless otherwise indicated, years referred to in Chapters 1 and 5 are calendar

years and years referred to elsewhere are fiscal years.

Numbers in the text and tables of this report may not add to totals because of

rounding.

Cover photo by Richard Price/Westlight.
Preface

T

he Congressional Budget Office (CBO) has prepared this analysis of the Administration's health proposal in response to several Congressional requests. The report

contains an overview of the Administration's proposal and an estimate of its effects on

national health expenditures and the federal budget. The report also examines the budgetary

treatment of the proposal, its impact on the economy, and other considerations affecting the

proposal's implementation.

More than 40 staff members in all of CBO's divisions contributed to the analysis contained

in this report. Paul Van de Water coordinated the analysis of the Administration's proposal and

the preparation of the report. Linda Bilheimer was responsible for Chapters 1 and 5, Paul Van

de Water for Chapters 2 and 3, and Douglas Elmendorf and Douglas Hamilton for Chapter 4.

In the Budget Analysis Division, under the supervision of C.G. Nuckols, Paul Van de Water,

Michael Miller, and Charles Seagrave, contributors were Paul Cullinan, Alan Fairbank, Scott

Harrison, Jean Hearne, Lori Housman, Lisa Layman, Jeffrey Lemieux, Amy Plapp, Patrick

Purcell, Kathleen Shepherd, and Connie Takata. In the Health and Human Resources Division,

under the supervision of Nancy Gordon and Linda Bilheimer, contributors were B.K. Atrostic,

Sandra Christensen, Carol Frost, Julia Jacobsen, Harriet Komisar, Susan Labovich, Carla Pedone,

Murray Ross, Karen Smith, Ralph Smith, Cori Uccello, and Bruce Vavrichek. In the Macroeconomic Analysis Division, under the supervision of Robert Dennis and Douglas Hamilton,

contributors were Douglas Elmendorf, Angelo Mascaro, Frank Russek, and Christopher Williams;

Derek Briggs, Blake Mackey, and Michael Simpson provided able research assistance.

Contributors in other divisions of CBO included Jan Acton, James Blum, Leonard Burman,

Thomas Cuny, Ellen Davidson, Gail Del Balzo, Mark Desautels, Stanley L. Greigg, Robert

Hartman, Richard Kasten, Rosemary Marcuss, Marvin Phaup, and Robin Seiler.

CBO would also like to acknowledge the significant help provided by the staff of other

federal agencies. The Bureau of the Census performed calculations according to CBO's specifications using data from County Business Patterns. The Health Care Financing Administration's

Office of the Actuary provided other critical data and professional assistance. Staff from the

Office of Management and Budget, the Domestic Policy Council, and the Department of Health

and Human Services interpreted the Administration's proposal and explained the Administration's

estimates.

Paul L. Houts supervised the editing and production of the report, assisted by Sherry Snyder.

Major portions were edited by Paul L. Houts, Sherry Snyder, and Leah Mazade. Jeanne Burke,

Sharon Corbin-Jallow, Dorothy Kornegay, Linda Lewis, and Ronald Moore assisted in the typing.

Christian Spoor provided editorial assistance. With the assistance of Martina Wojak-Piotrow*

Kathryn Quattrone prepared the study for final publication.

Robert D. Reischauer

Director

February 1994

Contents

SUMMARY xi

ONE OVERVIEW OF THE PROPOSAL 1

The Provision of Health Insurance 1

Establishing a Universal Entitlement 1

Health Alliances 2

Health Plans 4

Federal Program Initiatives and Expansions 6

Medicare's Coverage of Prescription Drugs 6

Home- and Community-Based Services

for Severely Disabled People 6

Expansions in Medicaid's Coverage

of Long-Term Care 7

"Wraparound" Benefits for

Low-Income Children 7

Funding for Graduate Medical Education

and Payments to Academic Health Centers 8

Expansion of the WIC Program 8

Public Health Service Initiatives 8

Financing Provisions 8

Premiums Paid to Alliances 9

Subsidies 11

Changes in the Internal Revenue Code 12

Reductions in the Medicare Program 13

Reductions in the Medicaid Program 15

Issues of Governance 15

The Role of the Federal Government 16

The Role of State Governments and Alliances 17

The Role of Employers and the Decision

to Form a Corporate Alliance 18

The Flow of Funds Through Regional Alliances

and Health Plans 19

Controlling Health Care Costs and Limiting the

Financial Exposure of the Federal Government 21

Market Forces and Cost Containment 21

Controls on the Level and Rate

of Growth of Premiums 24

Limits on Federal Payments to Alliances 24
AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

TWO

THREE

FOUR

FINANCIAL IMPACT OF THE PROPOSAL 25

How the Proposal Affects National Health Expenditures 26

How the Proposal Affects On-Budget

Programs and Social Security 27

Health Insurance Premiums 27

Corporate Alliances 30

Subsidies for Employers 31

Subsidies for Families 32

Total Federal Subsidies 32

Changes in Medicare 33

Changes in Medicaid 34

Long-Term Care Benefit 35

Changes in Other Federal Programs 35

Changes in Revenues 35

How CBO's Estimates Compare with

Those of the Administration 35

Subsidies for Employers 36

Other Differences 37

Sensitivity of the Estimates

to Premium Levels 38

Sources and Uses of Funds of the Health Alliances 39

BUDGETARY TREATMENT OF THE PROPOSAL 41

Guidelines for Budgetary

Classification 42

The President's Commission

on Budget Concepts 42

Budgetary Precedents 43

CBO's Assessment 44

Why Should the Health Alliances Be Included in the

Accounts of the Federal Government? 44

Budgetary Concepts and Precedents 45

Fiscal Accountability and Control 47

Public Perception 48

Why Should the Health Alliances Be Shown Separately? 49

Conclusion 50

ECONOMIC EFFECTS OF THE PROPOSAL 51

Key Aspects of the Proposal That

Would Affect the Economy 53

Universal Coverage 53

Community Rating 53

Controls on Health Insurance Premiums 53

Employers' Responsibilities 53

Subsidies to Employers 53

Subsidies to Early Retirees 53
CONTENTS Vll

The Effects on Health Spending by Business 53

Big Cost Reductions Overall for Business 53

Diverse Effects Among Individual Firms 54

Who Bears the Burden of Health

Spending by Business? 55

Why Workers Pay for Health Costs 56

How Savings Might Be Distributed 56

What Would Happen to the Labor

Force and Unemployment? 57

Increase Early Retirement 57

Impose an Implicit Levy on Work 58

Encourage Medicaid Beneficiaries

to Enter the Labor Force 59

Redirect Employment of Low-Wage Workers 60

What Would Happen to the Structure

of the Labor Market? 61

Hours of Work 61

Effect on "Job Lock" 62

Reallocation of Workers Among Firms 62

What Would Happen to the International Competitive

Position of the United States? 65

Overall Competitiveness: The Balance of Trade ... . 65

The Competitiveness of Different Firms 66

Conclusion 67

FIVE OTHER CONSIDERATIONS 69

Institutional Capabilities and Resources 70

Information Requirements 71

Requirements for Establishing

Payment Parameters 72

Requirements for Managing

the Quality of Care 73

Requirements for Administration

and Operations 73

The Effects and Sustainability of

Controls on the Rate of

Growth of Premiums 74

Conclusion 76

APPENDIX Summaries of Recent Health Care

Analyses by the Congressional

Budget Office 79
viii AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

TABLES

2-1.

2-2.

2-3.

2-4.

2-5.

3-1.

4-1.

BOXES

1-1.

1-2.

4-1.

4-2.

Projections of National Health

Expenditures Under the Administration's

Health Proposal, by Source of Funds 26

Estimated On-Budget and Social

Security Effects of the Administration's

Health Proposal 28

Estimates of Medicare Program Savings

Under the Administration's Health

Proposal 33

Differences Between CBO's and the

Administration's Estimates of the

Administration's Health Proposal 36

Sources and Uses of Funds of

the Health Alliances 38

Suggested Budgetary Display of the

Administration's Health Proposal,

Fiscal Year 2004 50

Effects of Community Rating and

Requiring Firms to Pay on the Health

Insurance Costs of Private Employers,

by Industry, 1992 55

Health Plans Offered Through

the Department of Defense,

the Department of Veterans Affairs,

and the Indian Health Service 3

Controlling the Level and

Growth of Premiums 22

Inefficiencies in the Current

Health Care System 52

Sorting of Workers in the Administration's

Proposal 63


Summary

T

he Health Security Act is a comprehensive

proposal to provide a universal entitlement

to health insurance for a broad range of

services and to slow the growth of spending for

health care. To achieve these goals, it would fundamentally restructure the current health care system,

changing requirements and incentives for employers,

consumers, insurers, and providers of care. Because

of the magnitude of these changes, the full impact

on the health care system is extremely difficult to

predict.

The Administration's proposal would redesign

the current system of financing for health care,

while building on its existing employer base. All

employers would be required to pay premiums on

behalf of their employees, and all individuals and

families-except Medicaid beneficiaries and others

with very low income—would be required to pay at

least part of their premiums. Subsidies would be

available to help employers and low-income families meet these obligations and would also be available for retired people ages 55 to 64.

To strengthen the demand side of the health

care marketplace, the proposal would establish regional purchasing alliances through which most

people who worked for firms with 5,000 or fewer

full-time employees would obtain health coverage,

as would most other people under age 65 who had

no connection to the labor force. Larger firms,

firms participating in multiemployer group plans,

rural electric cooperatives and telephone cooperative

associations, as well as the U.S. Postal Service,

would be entitled to establish their own corporate

alliances. Medicare beneficiaries would generally

remain outside the alliance system. States could

choose to opt out of the regional alliance system

entirely and establish a "single-payer" system of

health care financing, in which the state would pay

all providers directly.

Consumers would normally have access to a

choice of health plans of different types—including

at least one fee-for-service plan—that would be

offered through the alliance in the area in which

they lived. All plans would offer a standard package of benefits, which would be slightly more generous than the average plan currently offered by

employers. To ensure that consumers could make

informed choices about those plans, alliances would

provide much more information about the plans they

offered than is typically available today.

The primary objective of the proposal is to

ensure that health coverage would be available at a

reasonable price to everyone and that people could

not be denied coverage because of their health status. Accordingly, strict requirements would be

placed on the enrollment procedures that health

plans could employ, requiring plans (within the

limits imposed by their capacity and financial constraints) to accept all applicants, and prohibiting

plans from excluding people because of preexisting

medical conditions. A plan's premiums could not

vary for any reason other than the type of family

being insured, a requirement known as community

rating. (Premiums for plans offered by corporate

alliances could, in addition, vary among geographic

areas.)
xii AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

People entitled to Medicaid benefits because

they also receive cash welfare payments would

continue to obtain coverage from Medicaid but, like

almost everyone else, would be enrolled in health

plans offered through the regional alliances. Others

who currently receive Medicaid benefits would lose

that coverage, but most of them would be eligible

for subsidies for their premiums.

The proposal would also expand several federal

programs and institute new ones. Important among

these provisions are coverage of prescription drugs

for Medicare beneficiaries, the provision of "wraparound" health care benefits for low-income children, and a new program to provide home- and

community-based services for severely disabled

people.

Financing for these initiatives and the subsidies

that the federal government would pay to alliances

would come from a variety of sources. They would

include several new revenue measures, increases in

income and payroll tax receipts generated by the

change in the mix of employee compensation that

would occur under the proposal, reductions in the

Medicare and Medicaid programs, and assessments

on premiums. States would also make maintenanceof-effort payments to alliances, reflecting their reduced obligations for Medicaid under the proposal.

To lower the rate of growth of health care

spending, the proposal would establish a complex

mechanism for limiting the growth of premiums for

the standard benefit package—an approach that, if

carried out as intended, would almost certainly be

effective on that score. The proposal would also

attempt to limit the obligations of the federal government for subsidy payments, but that endeavor

would be less likely to succeed.

Uncertainty of the Estimates

Estimates of the interactive effects of so many complex changes to an industry that encompasses oneseventh of the economy are highly uncertain. Assumptions, used by the Congressional Budget Office

(CBO) and other analysts, about people's behavioral

responses to new incentives are frequently based on

research evidence from small changes in the existing marketplace. In the case of the Administration's

proposal, however, the entire marketplace and the

configurations of the actors within it would be

changing, and there is no precedent for estimating

the effects on health spending or the economy.

Estimating the effects of any proposal to

restructure the health care system is particularly

difficult because, inevitably, the transition from the

old to the new system would take several years.

Focusing on the effects of proposals in their early

years is, therefore, not very meaningful; it is the

long-term impacts, when new coverages would be

fully phased in and the system stabilized, that are

important. Unfortunately, the uncertainty surrounding cost estimates increases significantly in the outyears. Thus, although CBO believes that the most

important estimates presented in this paper are those

for 2004, they are also the most uncertain.

Financial Impact of

the Proposal

National health expenditures would rise in the initial

years of the Administration's proposal—an inevitable

consequence of expanding health insurance coverage

to the uninsured, increasing the generosity of the

benefits that many insured people currently receive,

and expanding home- and community-based services

for the disabled. Over time, however, the combined

effects of lowering the rate of growth of health

insurance premiums and the cuts in the Medicare

program would dominate. Thus, CBO projects that

national health expenditures would fall $30 billion

below the current CBO baseline by calendar year

2000, and would be $150 billion (7 percent) below

that baseline in 2004.

The effects on the federal budget deficit show a

similar pattern. The increase in the deficit is estimated to reach slightly more than $30 billion in

1998, the first year in which all states would be

participating in the system, and then begin to fall.

It would rise again in 2001 and 2002 because of

two additional factors in those years: increases in

the generosity of the standard benefit package that

would occur in 2001, and the subsidies, beginning
SUMMARY Kill

in 2002, of state and local governments in their role

as employers. By 2004, however, the estimated

effects on the deficit are negligible, and CBO believes that the proposal holds the promise of reducing the deficit in the long term.

CBO's estimates of the effects of the proposal

on the deficit differ only modestly from those of the

Administration. Because the Administration developed estimates for the 1995-2000 period, comparisons for the out-years, which are more important,

cannot be drawn. For the six-year period from

1995 through 2000, though, the Administration's

estimates indicate that the proposal would reduce

the deficit by about $60 billion. In contrast, CBO

estimates that the deficit would increase by more

than $70 billion over that period. The difference

between these estimates is small, however, compared with the uncertainty surrounding the budget

projections.

The primary difference between the two estimates stems from the amount of subsidies for employers, with CBO's estimate being considerably

higher than the Administration's—by $25 billion in

2000, for example, or about half of the difference in

the estimates of the effects on the deficit in that

year. The estimates of subsidies for employers

differ for three major reasons. CBO's estimates of

premiums for the standard benefit package are

higher than the Administration's, and estimates of

these subsidies are extremely sensitive to the estimates of premiums. CBO also assumes that lowwage workers would cluster in firms that received

subsidies, a factor not explicitly taken into account

in the Administration's estimates of subsidies.

Finally, CBO has used a different methodology than

the Administration, one that captures more of the

variation in average wages among firms.

Effects on the Economy

Although the Administration's proposal would make

fundamental changes in the current health care

system, the overall economic impact of those

changes might not be large. Because the proposal

would involve substantial redistributions within the

economy, however, the impact on business costs

and employment might be significant for individual

firms and people. Similarly, though the proposal

would have little predictable effect on national

saving and investment, or on the balance of trade,

some businesses could see their ability to compete

with foreign firms either improving or worsening.

The proposal would retain much of the current

central role of employers in the health insurance

system, requiring that a large part of health insurance premiums be paid in the first instance by employers. But businesses' costs for health care would

be significantly reduced overall, both because the

proposal would provide substantial subsidies to

firms and because it would limit the growth of

premiums. For example, the total premiums employers pay for active workers would drop by about

$20 billion in the year 2000.

Although overall costs would go down, for

some employers—particularly those that do not currently offer health insurance—costs would increase.

Changes in costs could also be pronounced among

firms that currently offer insurance. They would

rise for some businesses—especially those with

young and relatively healthy work forces-as a result

of the provisions for community rating. Conversely,

businesses that now face high health care costs-because they are small and have little clout in the

insurance market, have older or sicker work forces,

or hold substantial responsibilities for retireeswould see lower costs.

Those employers facing an increase in their

premiums would probably shift most of the added

cost to their workers by reducing cash wages, much

as occurs now in firms that offer health insurance.

Similarly, employees of firms that would pay less

would receive higher wages.

For several reasons, the proposal would also

affect people's decisions about whether they wanted

to seek work or to stay home. For instance, the

proposal would guarantee insurance for early retirees and directly subsidize the cost of that insurance. In other words, older people would no longer

have to work simply because they needed access to

affordable health insurance. A substantial number
xiv AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

would probably prefer the pursuits of early retirement to work, if their health costs were not a concern.

The proposal might also tempt some other

workers to leave the labor force. With universal

coverage, health insurance would be available even

to nonworkers—in some cases at no additional cost.

And the requirement that employers pay insurance

premiums for all workers, whether or not they had

coverage through a spouse, would encourage some

people to stay out of the labor force, especially

when there is already a full-time worker in the

household.

In contrast to these voluntary withdrawals from

the labor force, fewer minimum-wage workers

might be employed, since their employers' costs of

compensation would often be much higher. The

incentive to hire fewer minimum-wage workers

would be mitigated for small, low-wage firms, however, because the proposal would cap their payments

for premiums at levels ranging from 3.5 percent to

7.9 percent of their payroll. Moreover, the number

of people involved would be small, and the proposed expansion of home- and community-based

care would increase low-wage employment.

Other provisions of the proposal would encourage some people to enter the labor force or improve

the operation of the labor market. Some Medicaid

beneficiaries are currently deterred from seeking

work for fear of losing their health coverage. For

the same reason, some workers feel locked into their

current jobs when they might prefer a different one.

The proposal's universal coverage would encourage

Medicaid beneficiaries to enter the work force and

would end job lock.

Taking together all the provisions that might

increase or reduce participation in the labor force,

CBO estimates that eventually between one-quarter

of a percent and 1 percent of the labor force might

prefer to stay home if the proposal was enacted.

Correspondingly, gross domestic product (GDP)

would also be reduced, though by somewhat smaller

percentages. These changes are not large, falling

well within the uncertainty of projections of the

labor force and GDP over the next decade.

The proposal would have one further effect on

the labor market, as the subsidies for small, lowwage firms would encourage firms and workers to

reshuffle so that low-wage workers would be largely

together in small firms. The incentives for this

reshuffling, or "sorting," would be strong. But

sorting would also impose two types of economic

costs: the cost of disruption as firms reorganized

production, and the costs of inefficiency that would

occur because the way firms were organized would

not be driven solely by production considerations.

Businesses are often concerned that a change of

such magnitude as the Administration's health proposal would affect their ability to compete in international markets. There is little reason to expect

any change in the overall balance of trade because

the proposal would not have any predictable effect

on the main factors determining it—the level of

saving and investment in the United States. Some

firms would gain, however, and some would lose,

depending on what happened to their overall labor

costs.

Budgetary Treatment of

the Proposal

Ever since the outlines of the Administration's

proposal have become known, policymakers and the

media have expressed considerable interest in how it

would be treated in the federal budget. This issue

of budgetary treatment is not unique to proposals to

restructure the health care system. Every time the

Congress considers or enacts a bill that establishes a

new program, the Congressional Budget Office and

the Office of Management and Budget must consider whether and how it should be treated in the

federal budget. For most pieces of legislation, the

call is a relatively easy one. But for some bills,

such as major health care reform proposals, some

ambiguity and considerable complexity accompany

that assessment. In this case, CBO strongly believes that the President and the Congress should

address the budgetary treatment of the proposal

explicitly through legislation. CBO's role in the

decision is strictly advisory.
SUMMARY

Certain elements of the Administration's proposal are unambiguously federal activities that all

agree should be included in the budget—for example, the increase in the tax on tobacco, the subsidies for individuals and employers, the expansion of

certain discretionary programs, and the changes in

Medicare and Medicaid. But what about the premiums that individuals and employers pay to the

health alliances and the payments by alliances to

health plans? Are the alliances private or state

entities that belong outside the federal budget? Or

are they, for most practical purposes, creatures of

the federal government, whose income and outgo

should all be included in the federal government's

accounts?

In answering such questions, budget analysts

normally consult two sources for guidance. One is

the 1967 Report of the President's Commission on

Budget Concepts. The other is budgetary precedent.

Because of the unique features of the Administration's health proposal, however, neither source

provides a definitive answer.

Considering the Administration's proposal in its

entirety, CBO concludes that it would establish both

a federal entitlement to health benefits and a system

of mandatory payments to finance those benefits

that represents an exercise of sovereign power. In

administering the proposed program, regional alliances, corporate alliances, and state single-payer

plans (if any) would operate primarily as agents of

the federal government. Therefore, CBO believes

that the financial transactions of the health alliances

should be included in the federal government's

accounts and the premium payments should be

shown as governmental receipts rather than as offsets to spending. Nonetheless, because of the

uniqueness and the vast size of the program, the

budget document should distinguish the transactions

of the alliances from other federal operations and

show them separately, as is the practice for Social

Security.

Conclusion

The Health Security Act is unique among proposals

to restructure the health care system, both because

of its scope and its attention to detail. Some critics

of the proposal maintain that it is too complex. A

major reason for its complexity, however, is that the

proposal outlines in legislation the steps that would

actually have to be taken to accomplish its goals.

No other proposal has come close to attempting

this. Other health care proposals might appear

equally complex if they provided the same level of

detail as the Administration on the implementation

requirements.

Questions also arise about the capabilities of

new and existing institutions to perform their assigned tasks under the proposal, the ambitious

schedule for the development of the necessary infrastructure for the system, and the acceptability and

sustainability of the proposed cost control mechanisms. These are very legitimate concerns but,

again, they are not peculiar to the Health Security

Act. Any proposal attempting to restructure the

current health care system would face similar issues.

The ramifications of systemic changes to the

health care system are quite uncertain; even the

outcomes of incremental changes are difficult to

predict. As the Congress considers the Administration's proposal and alternatives, both comprehensive

and incremental, the inherent uncertainties of change

must be weighed against the detrimental consequences of the current system-increasing numbers

of people who lack the security of insurance coverage for health care and the rapidly rising costs of

that care.

Chapter One

Overview of the Proposal

T

he primary objective of the Administration's

proposal for health care reform, the Health

Security Act, is to ensure that everyone has

health insurance for a broad range of services. The

proposal would establish a universal entitlement to a

standard package of benefits to accomplish this

goal. Most participants would obtain their insurance through regional or corporate alliances for

purchasing health care, although care provided by

the Department of Defense, the Department of Veterans Affairs, and the Indian Health Service would

remain an option for some people and Medicare

would continue. The alliances would offer participants a choice of insurance plans, all of which

would cover the same services. Supplementary

insurance would be available for services not covered in the standard package and for certain costsharing amounts. The costs of the plans would be

financed by premiums paid by employers and

households, subsidies provided by the federal and

state governments, and payments from programs

such as Medicaid. The new system would be fully

operational nationwide by 1998, but states would

have the opportunity to participate as early as 1996.

Another major objective of the proposal is to

restrain the growth of health care expenditures. To

accomplish this goal, the proposal includes many

structural and institutional changes that would encourage competition in the health sector. In addition, it would impose limits on the growth of premiums for the standard package of benefits and modify somewhat the tax treatment of employmentbased health benefits.

As part of implementing and financing the new

system, the Administration's proposal would also

completely restructure the Medicaid program, significantly modify the Medicare program, and fundamentally change many components of both the

private and the public systems for financing and

delivering health care. But because of its scope and

complexity, a detailed description of all elements of

the proposal is not feasible in this report. This

chapter, therefore, is limited to a summary of the

features of the proposal that bear on the new program's likely costs, its appropriate budgetary treatment, and its possible impacts on the economy. It

discusses how the proposal would achieve universal

insurance coverage, modify existing programs and

initiate others, finance the new system, divide responsibilities among governments and the institutions that would be established, and control the

costs of health care.

The Provision of

Health Insurance

The core of the Administration's proposal deals

with defining the insurance coverage it would provide and with establishing the institutions that

would be needed to operate the new system.

Establishing a Universal Entitlement

The proposal would guarantee that citizens and

certain other people residing in the United States

would have health insurance coverage for a standard

package of benefits. Access to sendees in the standard package could not be denied an eligible individual even if the required premium payments were

not made, the provider of the insurance coverage

went bankrupt, or the institutions responsible for

administering the new system failed to fulfill their
2 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

obligations. That package would cover the following:

o Hospital services;

o Services of health professionals;

o Emergency and ambulatory medical and surgical

services;

o Clinical preventive services;

o Mental illness and substance abuse services;

o Family planning services and services for pregnant women;

o Hospice care;

o Home health care;

o Extended care;

o Ambulance services;

o Outpatient laboratory, radiology, and diagnostic

services;

o Outpatient prescription drugs and biological

products;

o Outpatient rehabilitation services;

o Durable medical equipment and prosthetic and

orthotic devices;

o Vision care;

o Dental care;

o Health education classes; and

o Certain treatments under clinical investigation in

approved research trials.

Coverage of some services would be phased in over

time. Dental benefits, for example, would be very

limited before 2001, and the coverage of mental

illness and substance abuse services would also

become more extensive in that year.

Although the proposed coverage of most services is comparable with that provided by relatively

generous employment-based policies today, there are

some differences. The coverage of preventive

health services, for example, would be more extensive from the beginning than in most current health

plans, as would the mental health and substance

abuse benefits when they were fully phased in. By

contrast, the prescription drug and hospital benefits

in plans with higher cost sharing and (before 2001)

the dental health benefits would be less generous

than those that many employers currently provide.

Health Alliances

The Administration's proposal would expand the

central role employers now play in purchasing

health insurance and restructure the market for that

insurance. All employers would have to pay part of

the premiums for their employees' insurance.

Moreover, the demand side of the health insurance

market would be reorganized in order to engender

greater market power for individuals and small

firms, enable people to have a choice of health

plans at a reasonable cost, and provide incentives

for health plans to compete on the bases of both

cost and quality.

To accomplish these goals, the proposal would

establish a nationwide system of regional purchasing

alliances. Most people who worked for firms with

5,000 or fewer full-time employees, as well as most

people who were not in the labor force (including

Medicaid beneficiaries), would be required to obtain

health insurance coverage through those alliances.

Medicare beneficiaries, however, would generally

continue their coverage through that program.

Firms with more than 5,000 full-time employees, firms participating in large multiemployer

group plans, rural electric cooperatives and telephone cooperative associations, and the U.S. Postal

Service would be entitled to establish separate corporate purchasing alliances. Full-time employees of

firms that did so would have to purchase their coverage through their firm's corporate alliance unless

they had a spouse who worked for an employer that

participated in a regional alliance. Such two-worker

families could choose to obtain their insurance

through either the corporate or the regional alliance.

Federal civilian employees would obtain their

coverage through regional alliances starting in 1998,

and the Office of Personnel Management (OPM)

would make available to them one or more supplementary plans. OPM would also develop one or

more plans that would supplement Medicare's benefits for retired federal workers and their dependents.
CHAPTER ONE OVERVIEW OF THE PROPOSAL 3

People who are now eligible for health coverage

through certain federal agencies would still be able

to receive their standard benefits through those

agencies. Active-duty members of the armed forces

would continue to receive their health benefits from

the Department of Defense (DoD). Their dependents and military retirees could also obtain coverage through the DoD system if its resources permitted. Indians could obtain coverage through the

Indian Health Service and veterans through the

Department of Veterans Affairs system. Box 1-1

describes these aspects of the proposal.

Regional Alliances. These entities would be established by the states as either nonprofit organizations

or state agencies. They would have nonoverlapping

jurisdictions that could be a portion of a state or an

entire state but could not cross state boundaries or

Box 1-1.

Health Plans Offered Through the Department of Defense,

the Department of Veterans Affairs,

and the Indian Health Service

In general, individuals who are currently eligible for

health services from government agencies could

receive their standard benefits through health plans

offered by those agencies. Unlike the current situation, however, people selecting a government plan

could not simultaneously participate in another plan

covering the standard benefit package.

The Secretary of Defense would establish one or

more Uniformed Services Health Plans that would

cover at least all the items and services in the standard benefit package. Active-duty personnel would

be required to enroll in those plans, for which they

would pay minimal amounts. Other people eligible

for military health care would have the choice of

enrolling in a military plan if one was available, a

plan offered by a regional or corporate alliance (for

those under age 65), or Medicare (for those age 65

and over). Premium payments and other cost-sharing requirements for people who elected to enroll in

military plans could not exceed the family share of

premiums and cost-sharing amounts in health plans

offered through regional alliances.

Military health plans would receive premium

payments from Medicare on behalf of people enrolled in the Supplementary Medical Insurance program who selected a military plan. Conversely, the

Department of Defense might make premium payments on behalf of people who were eligible for

military plans but elected to participate in other

plans.

In a similar manner, veterans could elect to

enroll in health plans established by the Department

of Veterans Affairs (VA). Those plans would be

required to offer all the items and services in the

standard benefit package, and they would also provide certain additional services specifically related to

service-connected conditions. These additional services would be available to all veterans now eligible

for them, regardless of whether they enrolled in a

VA plan.

Low-income veterans and veterans with serviceconnected disabilities who enrolled in VA plans

would not have to pay premiums or cost-sharing

amounts, but most other veterans would pay amounts

based on rules established by the regional alliance in

the area in which the VA plan operated. VA health

plans would be authorized, but not required, to enroll

family members of VA enrollees subject to their

paying the required premiums and cost-sharing

amounts. Veterans who chose to enroll in other

health plans would have no premiums paid on their

behalf by the VA. VA plans would be eligible for

reimbursement from Medicare, but only on behalf of

participants who were eligible for Medicare, who

also had no service-connected disabilities, and who

were not defined by the VA as having low income.

The Indian Health Service (IHS) would also

sponsor plans covering the standard benefit package

for eligible Indians, who would not have to pay

premiums or cost-sharing amounts. Family members

who were not otherwise eligible could enroll in IHS

plans but would be required to pay premiums and

cost-sharing amounts. The IHS would make no

payments for premiums or cost-sharing amounts for

Indians who chose to enroll in non-IHS plans.
4 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

subdivide a metropolitan area within a state. Each

regional alliance is supposed to ensure that its residents would have a choice of the health plans that

contracted with the alliance, at least one of which

would be a fee-for-service plan. The alliance would

also be responsible for ensuring that residents had

the necessary information with which to make informed choices and that they enrolled in a health

plan.

In general, alliances would be required to contract with all health plans that met the state's standards and wished to offer insurance coverage in

their area. Regional alliances could, however, refuse to contract with plans whose proposed premiums exceeded 120 percent of the target for the

alliance's per capita premium or that had violated

previous contracts with the alliance. The alliances

would also collect funds from employers, households, and governments and make payments to the

plans chosen by participants. Finally, they would

have to meet federal requirements to keep their

average premiums at or below specified targets.

Corporate Alliances. Corporate alliances would

also have to offer participants a choice of plans,

although that choice could be more restricted than

in regional alliances. Specifically, corporate alliances would have to offer at least one traditional

fee-for-service plan and at least two others of a

different type, such as health maintenance organizations (HMOs). Like regional alliances, their responsibilities would include collecting and disseminating

information about health plans and their outcomes,

as well as meeting federally determined targets for

cost containment.

Medicare and the Alliance System. The Medicare

program would generally continue to function outside the system of regional and corporate alliances.

Enrollment in plans offered through the alliances

would be mandatory, however, for people eligible

for Medicare if they or their spouse were employed

at least 40 hours a month. In addition, some people

could elect to stay in certain eligible plans when

they became entitled to receive Medicare benefits.

Finally, provided that they met certain requirements,

states would also have the option to integrate all

their Medicare beneficiaries into regional alliances.

Medicaid and the Alliance System. Medicaid

beneficiaries who receive cash welfare payments

would continue to be covered by Medicaid but

would receive services in the standard benefit package through health plans offered by the regional

alliances. These beneficiaries could choose any

health plan that charged an average or below-average premium, would be absolved of other payments

for premiums, and would have special limits on

their cost-sharing liabilities. (They could choose a

more expensive plan by paying the difference in

premiums themselves.) For this group, the federal

and state governments would also continue to make

payments for benefits that Medicaid now covers but

that would not be included in the standard benefit

package.

In general, Medicaid beneficiaries who do not

receive cash payments would no longer obtain coverage from Medicaid, except for long-term care and

cost sharing required by Medicare. Instead, they

would benefit both from the same subsidies available to other low-income people obtaining coverage

through the alliance and from payments made by

their employers if they were working. Almost all

children eligible for Medicaid under current law

would, however, continue to be covered for those

services provided by Medicaid that would not be in

the standard benefit package.

The Single-Payer Option for States. The Administration's proposal would allow states to opt out of

the regional alliance system and establish a "singlepayer" system of health care financing in which the

state would pay all health care providers directly.

States electing that option would assume responsibility for all people who would otherwise have been

in regional alliances. They could also choose to

enroll in their single-payer system all Medicare

beneficiaries and people who would otherwise have

been in corporate alliances.

Health Plans

The proposal envisions that people who obtained

their health insurance through alliances would select

from a variety of plans that contracted with their

alliance, including fee-for-service plans, HMOs, and
CHAPTER ONE OVERVIEW OF THE PROPOSAL 5

point-of-service plans. Some people, however,

might not be able to enroll in the plan of their

choice—for example, if it was operating at capacity.

Plans would have to comply with one of the three

cost-sharing schedules that are specified in detail in

the proposal—lower, higher, or combination cost

sharing-as well as other requirements.

Requirements for Cost Sharing. Higher-costsharing plans would impose both specified deductible amounts and coinsurance (calculated as percentages of the providers' fees) according to a national

schedule that is specified in the proposal. The use

of flat copayments would be prohibited in those

plans. Lower-cost-sharing plans would have no

deductible amounts and no coinsurance (except for

services obtained from providers outside the plan's

network of providers). Such plans would charge

flat copayment amounts for particular services according to a fixed national schedule also included in

the proposal. Cost sharing in combination plans

would basically follow the lower-cost-sharing model

for in-network services and the higher-cost-sharing

model for out-of-network services. In all three

types of plans, maximum annual out-of-pocket

payments would be the same: $1,500 for an individual and $3,000 for a family.

Requirements for Supplementary Coverage. The

proposal would place strict requirements on supplementary health insurance. Insurers could not offer

supplementary policies that would duplicate coverage offered in the standard benefit package. Any

policies to cover services not included in the standard package would have to be available to all

applicants, regardless of their state of residence,

subject to capacity and financial constraints.1

All plans available through regional alliances

would have to offer their enrollees supplementary

coverage for cost-sharing amounts.2 Lower- and

Membership organizations and employers offering such policies

could restrict them to their members and their own employees,

respectively.

The proposal appears to prohibit corporate alliances from offering

supplementary cost-sharing policies, but officials of the Administration have stated that they intended to place no constraints on

corporate alliances. In fact, the proposal permits firms that formed

corporate alliances to reimburse employees for those expenses.

combination-cost-sharing plans, however, would

offer supplementary coverage only for deductible

amounts and coinsurance required for services received from providers who did not have contracts

with the plan. Only enrollees in a plan could purchase the supplementary coverage associated with

that plan. Premiums for such coverage would have

to be the same for all enrollees in a plan, and they

would have to reflect the expected increase in use

of services that would result from the reduced cost

sharing. (Coverage of flat copayments, as opposed

to coinsurance, would not be permitted.)

Certification Requirements for Health Plans. In

order to contract with a regional alliance, health

plans would have to be certified by the state in

which the alliance was located. The criteria for

certification would encompass standards for quality,

financial stability, and capacity to deliver the standard benefit package, as well as requirements relating to community rating, enrollment, and coverage.

Those for community rating would prohibit plans

from varying premiums among residents of the

alliance area (except for variations attributable to

different types of families-individuals, couples,

single-parent families, and two-parent families).

The other requirements would prohibit medical

underwriting and limitations on coverage so that no

one would have coverage denied or restricted because of a preexisting condition. Those requirements would be stringent; a plan could not terminate or restrict coverage for any reason, even if

enrollees did not pay their premiums.3

Corporate alliances could either contract with

state-certified plans or offer self-insured plans that

met the requirements of Title I of the Employee

Retirement Income Security Act of 1974. Those

plans would have to meet requirements for community rating, enrollment, and coverage just as plans

offered by regional alliances would.

Requirements Relating to Essential Community

Providers. All health plans would initially be required to enter into agreements to pay essential

3. Plans could, however, obtain approval to limit enrollment if they

were operating at capacity or in order to maintain their financial

stability.
6 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

community providers who wished to have such

agreements. Essential community providers could

either participate in the plan or receive payments

from the plan without having a participating provider agreement. Certification as an essential community provider would be automatic for a wide range

of private nonprofit and public providers that receive funding under the Public Health Service or

Social Security Act.4 Certified providers would also

include Indian health programs and providers of

school health services that would receive funding

under the proposal, as well as other providers and

organizations certified by the Secretary of Health

and Human Services (HHS).

The requirement for health plans to contract

with essential community providers would end five

years after an alliance first offered a health plan.

No later than March 2001, however, the Secretary

of HHS would recommend to the Congress whether

to continue, modify, or terminate the requirement.

Requirements Relating to Workers' Compensation and Automobile Insurance. All health plans

that provided services to enrollees through participating providers would be required to provide or

arrange for workers' compensation services for their

enrollees. Workers' compensation carriers would

reimburse health plans for those services. Workers'

compensation services could, however, be provided

through alternative means if the carrier and the

injured worker agreed.

Similarly, enrollees would generally receive

from their health plans any medical benefits to

which they were entitled through their automobile

insurance. Health plans would be required to arrange for referral services, as necessary, to ensure

the appropriate treatment for injured individuals.

Automobile insurance carriers would reimburse

health plans for those services. As with workers'

compensation insurance, injured individuals and

carriers could agree to alternative arrangements.

4. Those providers would include community and migrant health

centers, providers of health services for the homeless and people

in public housing, family planning clinics, providers who treat

people with AIDS (acquired immune deficiency syndrome) and

are funded under the Ryan White Act, maternal and child health

providers, and federally qualified health centers and rural health

clinics.

Federal Program Initiatives

and Expansions

In addition to the new program to provide universal

health insurance coverage, the Administration's

proposal would create several federal programs and

would expand others. Changes in tax policy (discussed in a later section) would also benefit some

people, such as those with large expenses for longterm care.

Medicare's Coverage of

Prescription Drugs

Starting in January 1996, Medicare's Supplementary

Medical Insurance (SMI) benefit package would

cover prescription drugs for outpatients. This new

benefit would have a $250 deductible amount, 20

percent coinsurance, and an out-of-pocket limit of

$1,000. The deductible and out-of-pocket limit

would be adjusted each year to ensure that neither

the percentage of individuals satisfying the deductible nor the average percentage of enrollees receiving benefits would change.

Several new program requirements would attempt to restrain potential expenditures for prescription drugs. Medicare would limit reimbursement to

pharmacists, generally paying them the lesser of the

90th percentile of pharmacies' charges for a particular drug or their acquisition cost plus a dispensing

fee. In addition, drug manufacturers would have to

provide rebates to Medicare for all nongeneric drugs

sold to enrollees.

Home- and Community-Based Services

for Severely Disabled People

The Administration's proposal would establish a

new grant program for the states to provide homeand community-based services for people with severe disabilities. Although all people who met the

disability criteria would be eligible to receive services from this program, it would not be an entitlement for disabled individuals; the number actually

receiving services would depend on the amount of
CHAPTER ONE OVERVIEW OF THE PROPOSAL 7

funding appropriated. Federal contributions to the

program, which would be phased in over seven

years, would be capped, and states would be required to provide some funding.

The total federal budget for the program would

be $4.5 billion in fiscal year 1996, rising to $38.3

billion in 2003. Increases in subsequent years

would reflect changes in the consumer price index

(CPI) and the size of the disabled population. As in

Medicaid, a state's share of the funding would vary

according to its per capita income, but the share

would be much lower than in the Medicaid program, ranging from 5 percent to 22 percent of expenditures for services. If states transferred severely

disabled people from the Medicaid program to the

new program, thereby reducing federal expenditures

for home- and community-based services under

Medicaid, the federal budget caps for the new program would increase accordingly.

States would have to impose cost-sharing requirements on all program participants on a sliding

scale according to income. Participants with family

income below 150 percent of the poverty level

would pay nothing; those with family income at or

above 250 percent of the poverty level would pay

the maximum cost-sharing rate of 25 percent.

Expansions in Medicaid's Coverage

of Long-Term Care

Three features of Medicaid's coverage of long-term

care would change under the Administration's proposal, two of which would expand eligibility for

nursing home services. At their option, states could

raise the amount of assets that may be excluded

when determining the eligibility of single individuals for nursing home services (the asset disregard)

from the current limit of $2,000 to as high as

$12,000. In addition, all states would be required to

grant eligibility for nursing home services to people

who would meet the income and asset requirements

for eligibility if their nursing home expenses were

deducted from their income. (States currently have

the option to grant eligibility to this group of

people, but about one-third of the states do not do

so.)

A third provision would require all states to

allow nursing home residents who are Medicaid

beneficiaries to keep at least $50 a month for their

personal needs. Because almost half the states now

set this allowance at the minimum allowed ($30),

some beneficiaries would contribute less to the cost

of their care. The federal government would pay

for the resulting increase in Medicaid spending.

"Wraparound" Benefits for

Low-Income Children

Because the current Medicaid program provides a

wider range of services than those included in the

standard benefit package, so-called wraparound

benefits (apart from long-term care) would be provided to children now eligible for Medicaid. Although these benefits would be financed entirely by

the federal government, states' maintenance-of-effort

payments would, in effect, pay for roughly their

traditional share of costs for these additional services for children in families receiving cash welfare

benefits. Thus, the federal government would, in

effect, take over the financing of these additional

services only for children in families who did not

receive cash benefits.

Expenditures for these benefits would be

limited, however, based on the combined fiscal year

1993 federal and state spending for them. This

limit would be updated to account for changes in

the number of eligible children and adjusted by

Medicaid-specific inflation factors through 1998 and

by the "general health care inflation factor" combined with the rate of growth in the population

under age 65 thereafter.5

For the 1996-2000 period, the "general health care inflation factor"

would be the increase in the CPI plus specific amounts-1.5 percentage points in 1996, 1 percentage point in 1997, 0.5 percentage

point in 1998, and zero in 1999 and 2000. After 2000, if the

Congress did not act, the default factor would be the percentage

increase in the CPI combined with the percentage growth in real

gross domestic product per capita. (An actuarial adjustment would

also be made in 2001.)
8 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

Funding for Graduate Medical

Education and Payments to

Academic Health Centers

The Administration's proposal would restructure the

current system of federal subsidies for graduate

medical education and academic health centers (and

teaching hospitals) to account for the special costs

they incur. It would emphasize the training of primary care physicians; both the alliances and Medicare would help to pay for the training of physicians. The proposal would also authorize $200 million a year for graduate nursing education and $400

million a year for Public Health Service programs

for the training of minorities and of health professionals specializing in primary care.

A new National Council on Graduate Medical

Education would authorize the number of residency

positions, by specialty, in graduate medical education programs that received federal funding. At

least 55 percent of residents who completed eligible

residency programs would have to be in primary

care-that is, in family medicine, general internal

medicine, general pediatrics, or obstetrics and gynecology. That requirement would first hold for residents entering training in the 1998-1999 academic

year.

Funding for the direct costs of approved training

programs for physicians would be $3.2 billion in

calendar year 1996, rising to $5.8 billion in both

1999 and 2000. In subsequent years, the amount

would be the previous year's level increased by the

general health care inflation factor. Under the Administration's proposal, Medicare would contribute

$1.5 billion in fiscal year 1996, $1.6 billion in 1997

and 1998, and the 1998 level increased by the CPI

in subsequent years. Thus, Medicare's relative contribution would probably decline after 2000 since

total payments would almost certainly be rising faster than Medicare's contribution.

Medicare's relative contribution to payments to

academic health centers (and teaching hospitals) for

the indirect costs of graduate medical education

would also probably decline over time. Such payments would total $3.1 billion in calendar year

1996, rise to $3.8 billion in 2000, and then increase

in subsequent years by the general health care inflation factor. Of these amounts, Medicare would pay

$2.1 billion in fiscal year 1996, $2.0 billion in 1997

and 1998, and that amount inflated by the CPI in

subsequent years. The remaining funding for both

the direct and indirect costs of graduate medical

education would come as needed from a 1.5 percent

assessment on total premiums paid to regional and

multiemployer corporate alliances and from part of

the 1 percent tax on the total payrolls of all other

employers who established corporate alliances.

Expansion of the WIC Program

The proposal would establish a special Treasury

fund subject to discretionary appropriations that, in

addition to the regular appropriations for the Special

Supplemental Food Program for Women, Infants,

and Children (WIC), would help bring the program

up to full funding by the end of fiscal year 1996

and then maintain full funding levels. To that end,

the Secretary of the Treasury would credit annual

amounts to the fund totaling $1.85 billion over the

1996-2000 period. These annual amounts would be

available for spending, however, only if the regular

appropriation for the year provided new budgetary

authority for WIC at levels specified in the proposal.

Public Health Service Initiatives

Activities of the Public Health Service would expand significantly in a number of areas ranging

from biomedical and behavioral research to health

services for medically underserved populations. To

accomplish that expansion, funding for a Public

Health Service Initiative would be authorized.

Financing Provisions

Premiums paid by employers and households and

payments by the federal and state governments

would finance the insurance coverage obtained

through the alliances. Employers would pay premi-
CHAPTER ONE OVERVIEW OF THE PROPOSAL 9

urns for all employees who worked at least 40 hours

a month.6 Except for Medicaid beneficiaries who

receive cash assistance, nonelderly individuals and

families would, in general, be responsible for paying

the part of the premium that was not contributed by

employers. Families with no workers, or with selfemployed workers only, would be responsible for

the entire premium for the plans they selected.

Government subsidies would be available, however, for low-income people and for people between

the ages of 55 and 64 who had retired from the labor force. Employers, except for those that formed

corporate alliances, would be entitled to subsidies

that ensured that their payments for health insurance

premiums did not exceed certain fractions of their

payroll.

The costs of financing the subsidies, expanding

the Medicare program, and augmenting various

mandatory and discretionary federal health programs

would be covered by states' maintenance-of-effort

payments, higher SMI premiums, an increase in the

excise tax on tobacco, an assessment on the payroll

of firms that established corporate alliances, and

other assessments and tax changes, as well as by

various reductions in the Medicare and Medicaid

programs.

Premiums Paid to Alliances

The premiums charged by any health plan offered

through a regional alliance for the standard benefit

package could vary only by the type of family (individual, couple, one-parent family, and two-parent

family); they could not vary by age, sex, or health

status. Premiums for plans offered by a corporate

alliance, however, could also vary by geographic

area. Moreover, the relationship among premiums

for different types of families would be fixed and

uniform across all regional alliances. For example,

the premium for a couple would have to be twice

that for an individual in the same plan.7

The distribution of premium payments among

families and employers would be based on the

premise that employers should pay about 80 percent

of the premium for full-time workers, and families

the remaining 20 percent. The actual proportions

would vary, however, for several reasons.

Every family who enrolled in a plan offered by

a regional alliance would be assigned an "alliance

credit amount" that would equal 80 percent of the

weighted average premium in the alliance for that

type of family. The weighted average premium for

a specific family type would be calculated by averaging premiums for that family type for all the

plans in the alliance, weighting the premiums by the

number of families of that type in each plan. The

family's portion of the premium would be the difference between the premium for the plan selected

by the family and the alliance credit amount, subject

to various other adjustments, including subsidies.

In contrast, an employer's payment would not

equal the alliance credit amount because families

contain, on average, more than one worker for

whom some employer would be paying premiums.

An employer's payments would also not be determined by the premiums of the particular plans selected by its employees. Rather, for full-time workers in a specific family type, each employer's payments would take into account the number of workers of that family type in the alliance-for example,

the more two-parent families there were with two

full-time workers, the smaller the proportion of the

80 percent employer share any particular employer

would have to pay.8

More specifically, setting aside the possibility of

other adjustments (such as the subsidies for firms

that are described below), an employer's payments

would be calculated as follows:

6. Two exceptions are children under age 18 and full-time students

under age 24 who are dependent on their parents; they would be

covered by their parents' policies even if they were employed.

7. Each corporate alliance would have some discretion, but all plans

it offered within the same geographic area would have to have the

same relationship among premiums for different types of families.

8. In calculating these payments, families with members eligible for

Aid to Families with Dependent Children, Supplemental Security

Income, or Medicare would be excluded. In addition, an employer's payments would be scaled proportionately for part-time

workers, defined to be those who work between 10 and 30 hours

per week.
10 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

o For individuals, the amount paid by each employer would be 80 percent of the weighted

average premium for single individuals in the

alliance.

o For couples, the amount would be 80 percent of

the total premium payments for couples (that is,

the number of couples in the alliance multiplied

by the alliance's weighted average premium for

couples) divided by the number of couples plus

the number of "extra workers." Extra workers

are the full-time-equivalent workers in couples

with more than one working member. This

complicated formulation means that the amount

an employer would pay per worker would be

reduced as the number of workers in the alliance who were part of a couple rose relative to

the number of couples. The reductions in an

employer's payments from this adjustment,

which derives primarily from the presence of

two-worker couples, would be spread among

couples without a worker or with only one parttime or full-time worker.

o For both single- and two-parent families, an

employer's payments would equal 80 percent of

the combined total premium payments if or both

family types divided by the sum of the number

of single-parent families, the number of twoparent families, and the number of extra workers in two-parent families. The aggregation of

single- and two-parent families would ensure

that an employer paid the same amount for

employees in families with children, regardless

of the number of parents in the family.

Unlike employers in regional alliances, those

that formed corporate alliances would pay an

amount similar to the alliance credit amountnamely, 80 percent of the weighted average premium in the corporate alliance for employees in

each type of family. (Because the corporate alliance

would receive payments for spouses eligible to

enroll in other alliances, however, the cost per

worker would be reduced in much the same way as

for an employer in a regional alliance.) An exception would apply to full-time workers with average

annual earnings of less than $15,000 (indexed by

the CPI after 1994). For these workers, the employer would have to pay the greater of 80 percent

of the weighted average premium or 95 percent of

the premium of the lowest-cost plan offered by the

corporate alliance that had either lower or combination cost sharing.

Employers in either regional or corporate alliances could pay more than the required minimum

amounts on behalf of their employees, but their

additional payments for the standard benefit package

could not exceed the amount of the family share for

the highest-cost plan in the alliance. If an employer

chose to pay more, the amounts its employees owed

would be reduced correspondingly. Such voluntary

payments would have to be equal for all employees

in the same type of family, however, regardless of

the plans that were selected. Moreover, if the employer's payments totaled more than the premium of

the plan selected by the employee, the difference

would be returned to the employee (and included in

taxable income).

Individuals and families would be responsible

for the family share of the premium-that is, the

difference between the premium charged by the plan

they selected and the alliance credit amount—unless

their employers paid more than the required minimum. For most individuals and families, their

obligation would average about 20 percent of the

total premium costs, but it could be more or less

depending on whether they selected a plan with an

above- or below-average cost.

Individuals and families with no worker or only

a part-time worker would be responsible for some

or all of the employer portion, as well as the family

portion, of their premiums.9 The self-employed

would pay 7.9 percent of their self-employment

income or the employer portion, whichever was

lower, even if their family had another full-time

worker. (The required percentage would be lower if

they were eligible for the subsidies provided to lowwage firms that are discussed below.)

If some employers and families did not pay the

premiums they owed to regional alliances, other

9. A family would not be responsible for the employer share if one

of its members was employed full time for that month or if two

members worked part time and their combined hours of employment totaled at least 120 that month.
CHAPTER ONE OVERVIEW OF THE PROPOSAL 11

employers and families in those alliances would

bear the consequences. Each year, an alliance

would estimate the amount of premiums that it

would be unlikely to collect, adjusted for over- or

underestimates in the previous year. It would then

adjust the premiums for each type of family by the

same proportion in order to collect the desired total

from those expected to pay the amounts they owed.

Subsidies

The obligation to pay premiums that the Administration's proposal would place on employers and

families would be reduced by a variety of subsidies

designed to assist low-income families and employers. These subsidies would be available only

for families that obtained, and employers that paid

for, coverage through regional alliances. In other

words, employers that established corporate alliances would not be eligible for subsidies and would

have to keep the amounts paid by their low-income

employees below certain limits.

Subsidies for Families. Families receiving benefits

from Aid to Families with Dependent Children

(AFDC) or Supplemental Security Income (SSI) and

people whose income was below a very low threshold ($1,000 in 1994, inflated by the CPI thereafter)

would not have to pay the family portion of the

premium for plans with premiums at or below the

weighted average for that type of family. The family's maximum obligation would rise with income

so that at 150 percent of the poverty level a family

would pay the lesser of 20 percent of the weighted

average premium or 3.9 percent of income. Payments for the family portion would be limited to 3.9

percent of income for all families with income

below $40,000 (in 1994, inflated by the CPI thereafter). If no plan with a premium at or below the

weighted average was available (for example, because all such plans were at capacity), the family's

obligation would stay the same and the amount of

the government subsidy would increase.

Subsidies would also be available for individuals and families who were responsible for paying

part or all of the employer share of their premiums

and for the self-employed who worked part-time

and whose remaining obligation for the employer

share was not met by the work of other family

members. The subsidies would be set on a sliding

scale and would be phased out when nonwage income-which includes items such as rents, interest,

and dividends—reached 250 percent of the poverty

level.

Families in regional alliance plans who had

income below 150 percent of the poverty level

would also be eligible for reductions in cost sharing

if they lived in areas in which no lower- or combination-cost-sharing plan was available at a cost that

did not exceed the weighted average premium for

their type of family. Families meeting those criteria

would be obligated only for the cost-sharing

amounts they would have paid if they were enrolled

in lower-cost-sharing plans. Regional alliances

would pay the remainder to the plans. Special

subsidies for cost sharing would also apply to Medicaid beneficiaries, who would pay only 20 percent

of the copayment amounts required by lower- or

combination-cost-sharing plans. The plans themselves would generally finance the cost-sharing

subsidies for Medicaid beneficiaries.

Early retirees who would be eligible for Medicare's Hospital Insurance (HI) benefits when they

turned 65 would receive special subsidies for their

premiums. (Early retirees would be people between

the ages of 55 and 64 who were not employed full

time.) Spouses under age 65 who were not employed and other dependents of early retirees would

also be subsidized. Retirees in these families would

be entitled to government subsidies covering the

employer share, leaving them to pay only the difference between the premium for the plans they chose

and the alliance credit amount. The subsidies would

be reduced by employers' payments for retirees or

their spouses who worked part time. If the spouse

of a retiree worked full time, no government subsidy would be necessary.

Subsidies for Firms. The Administration's proposal would also place limits on the premiums paid

by employers in regional alliances. With the exception of the federal, state, and local governments,

which would not be entitled to caps on their premium payments for employees until 2002, an employer's premium payments to regional alliance
12 AN ANALYSIS OF THE ADMINISTRATIONS HEALTH PROPOSAL February 1994

plans would generally not exceed 7.9 percent of

payroll.10

Small, low-wage employers would have lower

caps, which would vary according to both the size

of the firm and its wage level. The lowest proportion of payroll (3.5 percent) would be paid by firms

with fewer than 25 full-time-equivalent employees

and average annual wages per full-time-equivalent

employee of not more than $12,000. The employers' obligation would increase to reach 7.9 percent for firms with 75 or more employees or average wages of more than $24,000. The proportion of

small employers that would be eligible for these

additional subsidies would fall over time because

the wage thresholds on which the subsidies are

based would not be indexed.

Changes in the Internal Revenue Code

Receipts from a variety of sources would finance

the Administration's proposal, although some new

tax incentives would reduce revenues. Detailed information on the amendments to the Internal Revenue Code contained in the Administration's proposal

is available in a recent publication from the Joint

Committee on Taxation.11 Therefore, only a summary of those provisions is provided here.

One provision would increase the excise tax on

cigarettes by 75 cents per pack and the taxes on

other tobacco products by approximately the same

amount per pound of tobacco content. In addition,

employers that no longer had to pay for their retirees' health coverage would have to pay a temporary assessment. Employers that established corporate alliances would be required to pay a 1 percent

payroll tax, in part to help pay for the federal grants

for graduate medical education, nursing education,

and academic health centers. Multiemployer corpo10. Employers eligible to establish corporate alliances that chose to

participate in a regional alliance would not be eligible for these

subsidies for the first four years. The subsidies would, however,

be phased in during the next four years.

11. Joint Committee on Taxation, Description and Analysis of Title

VII ofH.R. 3600, S. 1757, and S. 1775 ("Health Security Act"),

JCS-20-93 (December 20, 1993).

rate alliances and regional alliances would have to

pay a 1.5 percent assessment on premiums for the

same purposes.

Other provisions would broaden the definition

of the tax base for self-employed people. First,

more business income of shareholders in S corporations would be treated as "wages" for the purpose of

calculating the corporation's eligibility for subsidies

of its premiums. Specifically, individuals who

owned more than 2 percent of the stock in an S corporation and who participated materially in the business would have their distributive share of the

corporation's income from the service-related business treated as wages for this purpose. Likewise,

more business income of limited partners in partnerships would be treated as wages for the same purpose. The added income of S corporation shareholders and limited partners would also become

subject to employment taxes. These changes would

not only reduce subsidies for employers but would

also increase payroll tax receipts (as well as future

benefits from Social Security and unemployment

insurance).

The proposal would also require all state and

local employees to pay Medicare's HI payroll tax.

Currently, workers hired before April 1, 1986, in

states that do not have a voluntary participation

agreement with the federal government do not pay

this tax, although many are eligible for Medicare's

benefits through their spouse or nongovernmental

employment. The increase in Medicare's revenue

from this proposal would be partially offset by higher future spending because more people would participate in the program.

Two other provisions would reduce subsidies

received by high-income retirees. Medicare enrollees with modified adjusted gross income above a

specified threshold amount ($90,000 for single taxpayers and $115,000 for married taxpayers filing a

joint return) would, in effect, have to pay higher

premiums for Supplementary Medical Insurance.

The maximum SMI premium for high-income Medicare beneficiaries would cover about 75 percent of

the average benefits per enrollee, up from the current level of about 25 percent. In addition, highincome early retirees who would otherwise be eligible to receive subsidies for the employer share of
CHAPTER ONE OVERVIEW OF THE PROPOSAL 13

their health insurance premiums would be required

to pay that share themselves.

The Administration's proposal would leave the

tax treatment of employers' payments for health

benefits largely untouched until 2004. As under

current law, the proposal would allow the exclusion

from employees' incomes of employers' payments

for the standard benefit package and for cost-sharing

amounts under the standard package, including

premiums for cost-sharing supplements. But the

proposal would expand the exclusion for employers'

payments for qualified long-term care insurance.

Beginning in 2004, employer-paid premiums for

supplementary coverage of additional services

would no longer be excludable from employees'

income for income tax and payroll tax purposes. In

keeping with that provision, beginning in 1997,

coverage provided through flexible spending accounts would be tax-exempt only for benefits related to the standard package. Also beginning in

that year, employers generally could not include

health benefits in "cafeteria" plans.

If employers chose to pay more of their employees' premiums than the minimum required, they

would have to make equal voluntary payments for

all employees in the same type of family. Thus, the

employer's total payment could exceed the total

premium of the plan selected by an employee. In

such a case, the employee would be entitled to a

cash rebate that would be subject to both income

and payroll taxes.

The proposal also would expand the income tax

subsidy for health insurance purchased by the selfemployed; it would do so by making permanent and

later increasing a tax deduction for health insurance

premiums. The proposal would reinstate the 25

percent deduction that expired at the end of 1993

and increase it to 100 percent of premiums for the

standard benefit package beginning in 1997 (or

1996 if the state had begun participating in the new

system).

By contrast, the proposal would put tighter

limits on deductions for taxpayers who prepaid their

health insurance premiums. If taxpayers made those

premium payments or other payments for medical

care, the benefits from which would extend for

more than a year after the payment, that amount

would be treated as having been paid on a pro rata

basis over the period in which the benefits were

received. That provision would preclude taxpayers

from claiming a large tax deduction for a lump-sum

payment for future health benefits.

Three tax provisions related to long-term care

would lower revenue. One such provision would

provide tax relief for individuals with high expenses

for long-term care, and another would offer a tax

subsidy to encourage people to purchase private

insurance for long-term care. Taxpayers could

claim an itemized deduction for spending on qualified long-term care services provided to themselves,

their spouses, or dependents for which they had not

been reimbursed, if those expenses plus their other

qualified medical expenses exceeded 7.5 percent of

their adjusted gross income. Premiums for qualified

long-term care policies would also count as qualified medical expenses for purposes of itemized

deductions. And as mentioned above, the exclusion

of an employer's payment of premiums for qualified

long-term care policies from an employee's income

would be expanded; benefits received from such

policies would also be excluded from income.

Other tax provisions in the Administration's

proposal include changing the tax treatment of accelerated death benefits under life insurance contracts, providing tax incentives to encourage primary

care physicians to practice in areas designated as

having a shortage of health professionals, and giving tax credits for personal assistance services for

disabled workers.

Reductions in the Medicare Program

A major part of the funding for the proposal would

come from reductions in the Medicare program.

Some of them would affect the Hospital Insurance

program, some would affect the Supplementary

Medical Insurance program, and some would affect

both. (Increases in SMI premiums for high-income

enrollees were discussed above because they would

be collected through the income tax system.)
14 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

Spending for the HI program would be reduced

primarily because payment rates to providers would

be lower than under current law. Specific provisions of the proposal would:

o Reduce the updates to the per-case rates used by

Medicare's prospective payment system (PPS),

which pays for inpatient hospital services, for

fiscal years 1997 through 2000;

o Eliminate the adjustment to PPS payments for

the indirect costs of patient care that are related

to hospitals' medical education programs—although a portion of the amount that would have

been paid under this adjustment would be transferred to the fund for academic health centers;

o Reduce the base payment rates for capitalrelated costs of inpatient hospital services and

reduce the updates applied to those payment

rates for fiscal years 1996 through 2003;

o In states that were participating in the proposed

new health care system, revise and, on average,

reduce the PPS payment adjustment for hospitals that treat a disproportionately large share of

low-income patients; and

o Reduce the updates to some payment rates for

skilled nursing facilities in fiscal year 1996.

The largest reductions in spending for the SMI

program compared with current law would result

from lower payments for physicians. The specific

provisions would:

o Establish goals for cumulative expenditures for

physicians' services. Currently, the target rate

of growth for each year is based on the prior

year's actual rate of growth in outlays for physicians' services, without regard to the prior

year's target rate of growth. Under this proposal, the growth target for outlays for physicians' services would be built on a designated

base-year target (fiscal year 1994) and updated

annually for changes in enrollment and inflation

but not for actual growth in outlays above or

below the targets for prior years.

o Institute a new system for setting the target rate

of growth for payments to physicians. The new

system would both substitute the average rate of

growth in real gross domestic product (GDP)

per capita (plus 1.5 percentage points for primary care services only) for a measure of the

change in the volume and intensity of services

provided by physicians during the previous five

years, and eliminate the annual percentage reduction known as the performance standard

factor.

o Eliminate the floor on the reduction permitted in

the default update for physicians' payment rates.

Currently, there is no upper limit on increases in

physicians' fees under the default update formula, but fees cannot decrease by more than 5

percentage points.

o Reduce the conversion factor for the fee schedule for services (except for primary care) provided by physicians by 3 percent in 1995. The

conversion factor is a dollar amount that converts the fee schedule's relative value units into

payment amounts.

o Limit payments for physicians' services provided by medical staffs at high-cost hospitals,

effective January 1, 1998. This proposal would

establish limits on Medicare's payments for

physicians' services per inpatient hospital admission, similar to limits on payments for hospital services.

o Limit total payments for certain outpatient hospital services to Medicare's approved amounts,

effective July 1, 1994. Medicare enrollees'

coinsurance liabilities for hospitals' outpatient

services are now based on the hospitals' actual

charges rather than on Medicare's (typically

lower) approved amount for the services. Because Medicare usually pays 80 percent of the

approved amount, hospitals often receive more

than the total approved amount. This provision

would reduce Medicare's payments for hospitals' outpatient services by the amount of

patients' extra payments for coinsurance.
CHAPTER ONE OVERVIEW OF THE PROPOSAL 15

o Require Medicare beneficiaries to pay 20 percent coinsurance for all laboratory services,

effective January 1, 1995. Medicare currently

does not require copayments for clinical laboratory services, although most other SMI services

are subject to a 20 percent coinsurance requirement.

o Establish a competitive acquisition process for

magnetic resonance imaging tests, computerized

axial tomography scans, oxygen and oxygen

equipment, laboratory services, and other items

at the discretion of the Secretary of HHS, effective January 1, 1995. If competitive bidding did

not reduce average prices for those services by

at least 10 percent, the Secretary would reduce

Medicare's approved fees for those services to

accomplish the same goal.

The provisions that would affect both Hospital

Insurance and Supplementary Medical Insurance are

quite diverse. They would:

o Retain Medicare's role as a secondary payer for

disabled employees and employees with endstage renal disease (who would be insured

through their firms). Under current law, Medicare would become the primary payer for those

enrollees as of 1999.

o Establish new standards for Medicare's payments to HMOs and competitive medical plans

with risk-sharing contracts. Currently, Medicare

pays 95 percent of the average adjusted per

capita cost (AAPCC) for Medicare enrollees in

each county. The program would establish a

range around the HI and SMI components of

the AAPCC, varying from 80 percent of the

national average value up to 150 percent for

SMI services and 170 percent for HI services.

The intent would be to encourage more HMOs

to participate in Medicare while establishing

reasonable limits on reimbursement in counties

whose AAPCC is high.

o Reduce the limits on payments for routine costs

for home health services. In past years,

Medicare's payments for home health services

were limited to no more than 112 percent of

average home health costs nationwide. This

provision would reduce the limit to 100 percent

of median costs nationwide.

o Require beneficiaries to make a copayment of

10 percent of the average costs for home health

visits, excluding visits that occurred within 30

days of discharge from a hospital. Currently,

Medicare requires no copayment for home

health visits.

o Require the Secretary of HHS to contract with

"centers of excellence" for the provision of

cataract and coronary by-pass surgery and other

services to Medicare beneficiaries, thereby expanding current demonstration projects to all

urban areas. Medicare would contract with individual centers using a flat payment rate for all

services associated with the affected surgical

procedures. Patients would be encouraged to

use the centers through rebates equal to 10 percent of the government's savings from the centers.

Reductions in the Medicaid Program

The cost of the Medicaid program would be substantially less than under current law. The proposal

would terminate coverage for adult beneficiaries

who did not also receive cash welfare benefits and

would limit the rate of growth of the per capita

payments to regional alliances for beneficiaries who

did receive cash benefits, as discussed above. In

addition, the proposal would end Medicaid's payments to disproportionate share hospitals—those that

treat a relatively high proportion of low-income and

uninsured patients-when the state began participating in the new system.

Issues of Governance

The Administration's proposal would place new

responsibilities on the federal and state governments, create a variety of new institutions, and

specify a complex flow of resources among those

institutions.
16 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

The Role of the Federal Government

The federal government would play the major role

in designing and financing the proposed health care

system. Many of its functions would be the responsibility of a newly created National Health Board;

other important responsibilities would fall to the

Department of Health and Human Services and the

Department of Labor.

Functions of the National Health Board. The

National Health Board would have the mandate to:

o Interpret the standard benefit package;

o Oversee the cost containment provisions for

regional alliances and certify that those requirements were met;

o Develop and implement eligibility rules relating

to the coverage of certain individuals and families;

o Develop and implement standards for a national

health information system for measuring the

quality of health care;

o Establish and assume responsibility for a system

to manage and improve the quality of care;

o Develop the multiplicative factors for converting

premium amounts for individuals into premiums

for couples, single-parent families, and twoparent families;

o Develop methods for adjusting premium payments to health plans so that the premiums

reflected the health risks of their enrollees;

o Facilitate the development of a system of reinsurance so that plans could protect themselves

against the financial consequences of enrolling a

disproportionately large number of people with

expensive medical conditions;

o Develop capital standards for health plans that

contract with regional alliances;

o Develop standards for state guaranty funds,

which would be used to pay providers in the

event that a health plan offered by a regional

alliance failed;

o Establish criteria that states must meet to begin

participating in the system and monitor their

compliance; and

o Review documents submitted by the states describing their proposed health care systems and

approve or disapprove them.

Federal Initiatives to Ensure Compliance by

States. The federal government would not only

establish most of the criteria that states and alliances

would have to meet but would also have to ensure

that states met those standards. To that end, federal

planning grants would be available to assist states in

setting up their health care systems. The National

Health Board, moreover, would have considerable

authority to impose sanctions if necessary to enforce

the standards. If it determined that a state's noncompliance resulted from the actions of a particular

regional alliance, the board could order that alliance

to comply and take additional measures to assure

that it did so. The board could also require the

Secretary of Health and Human Services to reduce

federal payments to states for items such as academic health centers and health services research as

a sanction for noncompliance. If, however, the

board determined that a state was sufficiently far

out of compliance that people's access to health services would be seriously jeopardized, the Department of Health and Human Services would take

over the operation of that state's system. (The federal government would impose a 15 percent surcharge on total premiums in those circumstances.)

Oversight of Regional and Corporate Alliances.

The Department of Health and Human Services

would oversee the financial management of the

regional alliances. Accordingly, the department

would develop standards and conduct periodic audits relating to the alliances' enrollment of eligible

individuals, their management of subsidies for premiums and cost-sharing amounts, and their overall

financial management.

The Department of Labor would assume major

responsibility for oversight of corporate alliances

and employers in regional alliances. In particular, it
CHAPTER ONE OVERVIEW OF THE PROPOSAL 17

would ensure that employers in regional alliances

paid their share of premiums, withheld and paid

their employees' family share of premiums, and

submitted timely reports. The department would

also temporarily take over any insolvent self-insured

corporate alliances; for that purpose, it would establish an insolvency fund to which self-insured corporate alliances would be required to contribute when

funds were needed.

Federal Payments. The U.S. Treasury would make

payments for several purposes. In particular, the

government would be the main source of subsidies

for low-income families, employers, and retirees. It

would also finance a package of wraparound benefits for low-income children who were previously

eligible for Medicaid, as well as pay the federal

share of the restructured Medicaid program. In

addition, funding would be required for program

expansions such as Medicare's coverage of prescription drugs and initiatives such as home- and community-based services for severely disabled people.

The Role of State Governments

and Alliances

Although the structure and standards for the proposed health care system would come largely from

the federal government, the states and alliances

would have the major responsibility for the day-today operation of the system. States would also have

to help finance the new system.

Responsibilities of State Governments. Each participating state would be required to:

o Submit a document to the National Health

Board describing the health care system the

state proposed to establish;

o Establish one or more regional alliances, designating the geographic area that each alliance

would cover;

o Ensure that families in each regional alliance

had a choice of plans in which to enroll;

o Ensure that families were credited with any

subsidies for their premiums to which they were

entitled;

o Establish capital standards for health plans that

met the federal requirements;

o Establish standards for financial reporting, auditing, and reserves of health plans;

o Establish the standards for certifying the health

plans that regional alliances would offer, including criteria for quality, financial stability, and

capacity to deliver the standard benefit package,

and certify the plans to be offered;

o Establish a guaranty fund to pay claims and

other debts in the event that a plan failed and,

after a failure, collect an assessment of up to 2

percent on premiums to repay the obligations of

the plan;

o Ensure continuity of coverage for enrollees in

health plans that failed;

o Ensure that the amounts owed to regional alliances were collected and paid; and

o Assist regional alliances in establishing eligibility for subsidies of premiums and cost-sharing

amounts and assume financial responsibility for

errors that exceeded certain limits.

A designated state agency or official would be

responsible for coordinating these activities at the

state level.

States would also have substantial financial obligations. They would pay the regional alliances for

their share of premiums for individuals and families

who remained eligible for Medicaid, and they would

be responsible for their share of Medicaid's spending on services not included in the standard benefit

package for that group.

In addition, states would make maintenance-ofeffort payments related to the restructured Medicaid

program. Two components of these payments
18 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

would be on behalf of people who would lose their

Medicaid coverage under the proposal. (Those

people would no longer obtain coverage from the

Medicaid program, but most of them would receive

subsidies for their premiums for the standard benefit

package.) One component would reflect 1993 expenditures for services in the standard package, and

the other would reflect the part of states' payments

to disproportionate share hospitals attributable to

this group of people in that year. A third component would be based on fiscal year 1993 expenditures for children who remained eligible for Medicaid, excluding spending for services that would be

in the standard package and for long-term care. The

1993 amounts would be updated by Medicaid-specific factors until the first year of a state's participation, and by the general health care inflation factor

combined with the projected rate of growth in the

population under age 65 thereafter.

Responsibilities of Regional Alliances. The regional alliances, by contrast, would not finance the

health care system. Rather, they would serve as

conduits of funds from the federal and state governments, employers, and families to health plans.

They would be the frontline agencies that contracted

with health plans, enrolled individuals and families

in plans, and obtained and disseminated information

on the performance of those plans. Regional alliances would also calculate the amounts that families

and employers would have to pay, determine

whether families and employers were eligible for

subsidies, and collect payments from them. In

addition, regional alliances would have to implement the cost control provisions required by the

federal government. That would include establishing fee schedules for fee-for-service plans, unless

the state elected to have a single, statewide fee

schedule.

Regional alliances would also play an important

role in collecting and analyzing data. They would,

for example, have to estimate the number of workers in the different types of families; those numbers

would be used in determining how much employers

would have to pay. In addition, in order to determine the weighted average premium for each family

type, each alliance would have to provide information to the National Health Board about the market

shares of the different plans with which it had contracts.

All activities of the regional alliances would be

paid for by an assessment on premiums. Each alliance would determine that level annually, but it

could not exceed 2.5 percent of total premiums.

The Role of Employers and

the Decision to Form a

Corporate Alliance

Employers would have many of the same responsibilities whether they participated in a regional alliance or established a corporate alliance. In either

case, employers would have to pay a portion of the

premiums for their employees' policies. They

would also have to deduct their employees' share of

the premiums from their paychecks and transfer the

funds to the appropriate alliance. In addition, all

employers would have to provide specified information to their employees and to the regional alliances.

Most firms with 5,000 or fewer full-time employees would have to participate in regional alliances. (Some smaller firms might participate in

multiemployer corporate alliances or ones established by rural electric and telephone cooperatives.)

Larger firms, however, would have to decide

whether to join a regional alliance or set up a corporate alliance after weighing the relative advantages and disadvantages of the two options. Firms

would generally have to decide by January 1, 1996.

A decision to participate in a regional alliance

would be irrevocable; however, the decision to

establish a corporate alliance could be reversed at a

later date.

Advantages of Corporate Alliances. Large firms

might choose to form a corporate alliance for several reasons. Firms that had already established

effective programs for containing health care costs

might think that they could control health spending

better than the alliance system. Firms would also

continue to have direct input into the quality of care

their full-time employees received. In addition, they

would not be responsible for the assessments that

employers participating in regional alliances would
CHAPTER ONE OVERVIEW OF THE PROPOSAL 19

have to pay if there was a shortfall in premium payments. Finally, they would not have to pay the 1.5

percent assessment on premiums for graduate medical education and academic health centers that firms

in regional alliances would pay. (Firms in multiemployer alliances would have to pay the 1.5 percent assessment, however.)

Disadvantages of Corporate Alliances. Despite

the advantages of establishing a corporate alliance,

significant disadvantages would predominate for

many large firms. The most important one would

generally be that firms that formed corporate alliances would have to pay a tax of 1 percent on their

total payroll and that the tax would begin before the

regional alliances were set up. (Firms participating

in multiemployer alliances would not be subject to

that tax.) Moreover, the effective rate of the tax on

the payroll of full-time employees enrolled in plans

offered by the corporate alliance would be higher

than that, because the wages of part-time employees

would be in the tax base but the employees would

not be eligible to participate. (They would have to

enroll in plans offered by the regional alliance, and

the firms would have to make the appropriate payments to regional alliances on their behalf.)

Furthermore, a firm that established a corporate

alliance would not be eligible for the cap on its

premium payments that would be phased in if it

joined a regional alliance. Moreover, its lowincome employees who worked full time would not

be eligible for governmental subsidies of their premiums, and the corporate alliance itself would generally have to subsidize premiums for full-time

employees making less than $15,000 a year.12 A

firm that established a corporate alliance and chose

to self-insure might also have to make periodic

contributions (of up to 2 percent of annual premiums) to the insolvency fund established by the

Secretary of Labor for self-insured health plans

offered by corporate alliances.

Large firms that had self-insured in the past

would probably experience considerably more regu12. No subsidy would be required if the employer's contribution covered at least 95 percent of the premium of the most economical

plan that did not have higher cost sharing.

lation under the proposal. In addition to the federal

requirements for health plans offered by corporate

alliances that have already been discussed, the Secretary of Labor would specify financial reserve

requirements that those alliances would have to

meet. Their fee-for-service plans would have to use

the same fee schedules as plans in their corresponding regional alliances. The growth rates of their

premiums would be subject to essentially the same

limits as those of the regional alliances. Finally, in

addition to greater regulation, such firms might find

themselves with relatively little power in markets

dominated by large regional alliances.

Employers' Obligations for Retirees' Health

Benefits. Regardless of whether they participated in

corporate or regional alliances, all firms that were

paying more than a specified threshold for retirees'

health benefits on October 1, 1993, would continue

to have obligations to those retirees and most of

their dependents. When the subsidies for early retirees commenced in 1998, those employers would

be required to pay 20 percent of the weighted average premium for the appropriate type of family.

That obligation would continue only as long as

members of that cohort remained eligible for the

benefits of early retirees.

Because of the large financial windfall that

firms with extensive obligations to retirees would

gain under the proposal, all employers with health

care costs for retirees aged 55 through 64 in 1991,

1992, or 1993 would also be subject to a temporary

annual assessment. That assessment, which would

be paid each year from 1998 to 2000, would equal

one-half of either the average annual health care

costs for retirees in the 1991-1993 period (increased

by the medical care component of the CPI from

1992 on) or the estimated reduction in retirees'

health care costs for the year-whichever was

greater.

The Flow of Funds Through Regional

Alliances and Health Plans

Regional alliances would receive funds from multiple sources, which they would then allocate to

health plans and to other uses. The proposal specifies who would bear the financial responsibility in
20 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

particular circumstances if outflows from alliances

exceeded inflows.

Sources of Funds for Regional Alliances. Regional alliances would receive payments from the

following sources:

o Payments (reflecting appropriate reductions

because of subsidies) from employers;

o Payments (reflecting appropriate reductions

because of subsidies) from families for the

family share and, in some cases, for part or all

of the equivalent of the employer share;

o Risk-adjustment payments from firms that were

eligible to form corporate alliances but decided

to join regional alliances;13

o Payments from corporate alliances for part-time

employees and for employees in two-worker

families who chose to participate in plans offered by regional alliances;

o States' payments for AFDC and SSI beneficiaries, who would make up the continuing Medicaid population;

o States' maintenance-of-effort payments, including those made on behalf of low-income people

who would no longer be eligible for the restructured Medicaid program; and

o Federal payments for subsidies and for Medicare

beneficiaries who were enrolled in plans offered

by the regional alliances, as well as the federal

share of Medicaid payments for AFDC and SSI

beneficiaries.

Although Medicaid beneficiaries would be enrolling in plans offered by the alliances, Medicaid's

payments to alliances on their behalf would not be

related to the actual premiums of those plans.

Rather, the payments would generally be 95 percent

13. If people who would have been covered by plans offered by the

corporate alliance were at greater risk than others covered by the

regional alliance's plans, the firm would pay risk-adjusted premiums for the first four years. That adjustment would be phased out

during the next four years.

of what Medicaid would have paid in 1993 for the

services in the standard benefit package, updated by

Medicaid-specific inflation factors until the first

year of the state's participation, and by the general

health care inflation factor thereafter. (Those

amounts would be estimated separately for the

AFDC and SSI populations.)

Federal payments for subsidies would, in effect,

be residual payments based on the difference between an alliance's payment obligations and

amounts receivable from all other sources. As discussed below, however, the proposal specifies certain shortfalls between inflows and outflows that

would not be considered federal responsibilities and

would not be included in the calculation of those

residual amounts.

Uses of the Regional Alliances' Funds. The funds

of the regional alliances would be used primarily to

make payments to health plans and to pay the alliances' administrative costs. Regional alliances

would also pay the federal government 1.5 percent

of total premiums in order to help the government

finance academic health centers and graduate medical education. In addition, these alliances would

make payments to corporate alliances for twoworker families who elected to enroll in a plan

offered by the corporate alliance rather than in one

offered by the regional alliance.

Health plans would not, however, receive their

actual premium amounts. Instead, they would receive a per capita amount for each enrollee; that

amount would be based on a weighted average of

the final per capita premiums the plans had negotiated with the alliance and the amounts that Medicaid would pay for the AFDC and SSI populations.

The weights would reflect the relative size of those

populations in the alliance as a whole.

Regional alliances would also adjust the per

capita amounts to reflect the risk status of each

plan's enrollees. The risk adjustments would be designed to protect plans that enrolled people whose

expected use of services was higher than that in the

alliance as a whole. Risk adjustments could also be

made for plans that enrolled disproportionate numbers of AFDC or SSI beneficiaries. Plans would,

however, have to absorb part of the cost sharing
CHAPTER ONE OVERVIEW OF THE PROPOSAL 21

they would generally require of participants, because

Medicaid beneficiaries would pay only a small

portion of it.

Allocation of Risk for Administrative and Estimating Errors. The payment obligations of regional alliances could exceed their receipts for a variety

of reasons. Short-term problems with cash flow

could result from administrative problems, disparities in the timing of receipts and payments, and

estimating errors.

The federal government would not accept financial responsibility for cash flow problems arising

from administrative errors that exceeded certain

limits; such errors would occur primarily in determining eligibility for subsidies. Alliances could

borrow from HHS for shortfalls resulting from such

errors, but the states—not alliances—would have to

repay the loans through increases in their maintenance-of-effort payments.

Regional alliances could also borrow from HHS

for shortfalls arising from disparities in the timing

of payments and receipts or from errors in estimates

of the factors used to determine their inflows and

outflows. These factors would include the number

of extra workers in couples and two-parent families,

the proportion of AFDC and SSI beneficiaries in the

alliance, the distribution of families in different risk

categories, the amount of premiums that would not

be collected, and, under certain circumstances, the

distribution of enrollment in plans with different

levels of premiums. The loans would be repaid

through reductions in future federal payments to the

alliance.

In the first year of operation, however, no alliance could borrow more than 25 percent of its estimated total premiums from HHS. In subsequent

years, an alliance's total outstanding loan amount

could not exceed 25 percent of its premiums in the

previous year. The Secretary of the Treasury would

be authorized to advance funds to HHS to cover

loans to regional alliances, but the total balance of

advanced funds could not exceed $3.5 billion at any

time. Regional alliances would also be able to

borrow in the private credit markets, but they would

be prohibited from using tax-exempt financing.

Controlling Health Care

Costs and Limiting the

Financial Exposure of the

Federal Government

Besides ensuring universal coverage, the other major

goal of the Administration's proposal is to control

the rate of growth of health spending and, as a

corollary, to limit the financial exposure of the

federal government. The proposal employs a twopronged approach to controlling costs: reliance on

market forces and, as a backstop mechanism, federal

control of the level and rate of growth of premiums.

It also attempts to limit federal payments to alliances for subsidies.

Market Forces and Cost Containment

Competition among health plans in a regional alliance is one mechanism through which the proposal

intends to control costs. Under the proposal, however, health plans would compete on a different

basis than they do today. Those in a regional alliance would not be able to compete on the basis of

the benefits they offered, as do current plans, because they would all be required to offer the same

standard package of benefits, including standardized

cost sharing, to all their enrollees. Moreover, supplementary policies to cover additional services

would generally have to be available to any applicant, subject to capacity and financial constraints.

Plans would therefore compete on the basis of the

quality and convenience of their services and on the

level of their premiums.

Families purchasing health coverage through a

regional alliance would have incentives to select

less expensive plans because the payments that

employers would have to make would be independent of the plans their employees selected. In principle, families with workers who selected plans with

premiums above the weighted average in the alliance would have to pay more than 20 percent of the

premium, and those selecting plans with premiums

below the weighted average would pay less than 20
22 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

percent. (That might not always be the case because of other adjustments, such as subsidies for

low-income families, or because the employer paid

more than the minimum required.) Families for

whom no employer was paying premiums, including

nonretiree families with no workers, would also

have strong incentives to choose plans with lower

premiums. They would have to make a trade-off,

however, if the lowest-cost plans had higher cost

sharing.

Box 1-2.

Controlling the Level and Growth of Premiums

The controls on premiums would be implemented

differently in regional and corporate alliances. The

National Health Board would establish the initial

maximum per capita premium that would be permitted in each regional alliance; it would also set limits

on its growth. In contrast, corporate alliances would

experience controls only on the rate of growth of

their premiums.

Setting Initial Premiums

for Plans in Regional Alliances

The following steps describe the process for establishing and enforcing the initial level of premiums

for regional alliances in states that chose to enter the

system in 1996.1

The National Health Board would set a baseline

target for the national per capita premium based on

expenditures for the standard benefit package in

1993. These expenditures would, however, exclude

spending for groups such as beneficiaries of Aid to

Families with Dependent Children, Supplemental

Security Income, and Medicare.

The target would also reflect expected increases

in use of services by people who were uninsured or

had coverage that was less comprehensive than the

standard benefit package, declines in uncompensated

care, anticipated reductions in use resulting from

higher cost sharing, and cost-sharing amounts that

would be required for services covered by the standard package. It would also include an allowance of

up to 15 percent to cover the administrative costs of

1. A similar process would be followed for alliances that began

in 1997 or 1998.

health plans and alliances and existing state taxes on

premiums for health insurance. The board would

inflate the 1993 national baseline target to 1995 using an inflation factor based on the rate of increase

of health spending by the private sector but not more

than 15 percent over the two-year period.

By the beginning of 1995, the board would

adjust the 1995 national baseline target to establish a

target for each regional alliance that would be operating in 1996. The adjustments would account for

variations among alliances in health spending, insurance coverage, and spending by academic health

centers. To obtain the 1996 targets, the baseline

amount would be increased by each alliance's inflation factor. That factor would be the general health

care inflation factor adjusted to reflect changes between 1995 and 1996 in the health status and demographic characteristics of each alliance relative to

changes in the nation as a whole.

Health plans in a state that was planning to start

participating in 1996 would then submit their bids

for the per capita premium to each regional alliance

in which they wished to operate. Each plan's bid

would reflect its estimate of the average per capita

premium for the standard benefit package in a particular alliance. Plans submitting bids would do so

with the understanding that the board could, under

circumstances described below, subsequently lower

their bids, and they would have to accept any such

reduction.

Following a negotiation period during which

health plans might voluntarily lower their bids, each

regional alliance would submit its final bids for the

per capita premium from their health plans to the

National Health Board for review. The board would

use information from the alliance to estimate its

weighted average bid; each plan's bid would be

weighted by the expected enrollment in that plan.

The result for each alliance would then be compared
CHAPTER ONE OVERVIEW OF THE PROPOSAL 23

Comparison shopping by consumers would be

easier because the regional alliances would provide

information about factors such as the quality of care

provided by each plan, and consumers would no

longer be concerned about differences in benefit

packages that were hard to detect. Annual openenrollment periods would also facilitate moving out

of plans that consumers found unsatisfactory.

with the target for that alliance's per capita premium.

If the weighted average bid exceeded the target

for the alliance, the board would notify the alliance

that it was not in compliance. It would also notify

all plans whose bids were above the target that they

would face compulsory reductions in their per capita

premiums if they did not lower them voluntarily.

The reductions would be a percentage of the amount

that their bids exceeded the target and would be

designed to lower the weighted average bid to the

target. Plans with bids under the target would not

be affected.

Any plan that chose not to lower its bid voluntarily would have its per capita premium—that is, the

amount that would determine its funding from the

alliance—reduced by the board. As a consequence,

the plan would be required to lower its payments to

providers. Those cuts in payments would reflect the

proportional reduction in the plan's premium, adjusted for the anticipated increase in the volume of

services that would result from the lower payments.

Limiting the Growth

of Premiums

After its first year of participation, a regional alliance's target for the per capita premium would be

the target for the previous year updated by that alliance's inflation factor. This inflation factor could

differ in two ways from the definition used in the

initial year. First, it would reflect any changes in

the demographic characteristics of the regional alliance that occurred because a corporate alliance had

terminated and its members had enrolled in the regional alliance. A second adjustment would occur if

the actual per capita premium for the alliance exceeded its target in any year as a result of more

people enrolling in high-cost plans than expected. In

this case, the alliance's inflation factor would be

reduced for the next two years so that health spending in the alliance would be reduced during the twoyear period by enough to offset the higher expenditures made in the previous year.

After the initial year, changes would also be

made in the procedure for determining the amounts

by which bids for the per capita premium would be

reduced for a regional alliance that did not comply

with its target. To determine the extent to which a

plan's bid was too high, the board would compare

the current bid with the following amount: the

previous year's bid plus the premium target for the

current year, less either the premium target or the

weighted average bid, if that was lower, for the

previous year.2 Bids submitted by new plans would

be compared with the target for the alliance's per

capita premium. The remainder of the procedure

would be the same as in the initial year.

For corporate alliances, the cap on the rate of

growth of premiums would be based on a comparison of the rate of growth of the three-year moving

average of per capita spending with the rate of

growth of the three-year moving average of the general health care inflation factor. In 2001, corporate

alliances would have to start reporting their average

per capita expenditures for the previous three years

to the Secretary of Labor. If the rate of growth of

the spending measure exceeded the rate of growth of

the inflation measure in two years out of three, the

alliance would be terminated and its members would

enroll in plans offered by their regional alliances.

The board also would estimate targets for per

capita premiums for single-payer states. If per capita spending for the standard benefit package in those

states exceeded the targets, the states would be required to reduce payments to providers accordingly.

2. In the event that the plan's bid for the previous year had

been reduced involuntarily, the amount of that reduction

would also be subtracted.
24 AN ANALYSIS OF THE ADMINISTRATIONS HEALTH PROPOSAL February 1994

Furthermore, limiting the exclusion of employer-paid insurance premiums from employees'

income would heighten consumers' awareness of

costs once the new system was fully phased in.

Employer-paid premiums would be excluded until

2004, however, and then only employer-paid premiums for policies covering additional services would

be included in employees' taxable income. Moreover, the proposal would substantially expand the

income tax subsidy for premiums paid by the selfemployed, further limiting the effectiveness of market forces in containing costs.

Controls on the Level and Rate

of Growth of Premiums

To supplement the effects of market forces in containing health care costs, the proposal includes

provisions for federal control of premiums for the

standard benefit package. The principle underlying

the proposed controls is that the national per capita

premium for the standard benefit package should

increase each year by no more than the general

health care inflation factor. For the period from

1996 through 2000, the values of that factor would

be the increase in the CPI plus specified amounts—

1.5 percentage points in 1996, 1.0 percentage point

in 1997, 0.5 percentage point in 1998, and zero in

1999 and 2000. After 2000, if the Congress did not

specify new inflation factors, the default factor

would be the percentage increase in the CPI combined with the percentage growth in real GDP per

capita. (Adjustments would also be made in 2001

to account for at least a portion of the increase in

the actuarial value of the benefit package that would

occur in that year.)

How the controls would be implemented would

differ somewhat in regional and corporate alliances.

The National Health Board would establish both the

initial maximum per capita premium that would be

permitted in each regional alliance and the limits on

its growth. Corporate alliances, however, would

experience controls only on the rate of growth, not

the initial level, of their premiums. Box 1-2 (on

pages 22 and 23) describes the processes that would

be used to set the targets for regional and corporate

alliances, as well as the consequences of breaching

the targets.

Limits on Federal Payments

to Alliances

In a further attempt to limit the federal government's financial exposure, the proposal lists maximum total federal payments to alliances of the following amounts: $10.3 billion in fiscal year 1996,

$28.3 billion in 1997, $75.6 billion in 1998, $78.9

billion in 1999, and $81.0 billion in 2000. After

2000, the limit would be the previous year's limit

inflated by the increase in the CPI combined with

the average annual percentage change in the population for the previous three years and the average

annual increase in real GDP per capita for the previous three years.

The proposal also includes the procedures to be

followed if federal payments to alliances were expected to exceed the limits. In particular, the President would have to recommend to the Congress

policies to resolve the conflict. The proposal also

states that these recommendations would be considered in an expedited manner and would not be

subjected to the routine procedural hurdles that tend

to slow Congressional consideration of legislation.

Because the Congress has the constitutional right to

make and change its own rules, however, procedural

mechanisms cannot guarantee that an issue will be

considered. If the Congress took no action, the

courts might be asked to decide which portion of

the legislation took precedence-payments to the

alliances to ensure coverage of the specified benefits

or the limits on federal payments.
Chapter Two

Financial Impact of the Proposal

T

wo of the major objectives of the Administration's health proposal are to slow the

growth in overall national health expenditures and to reduce the relentless pressure that

spending for major health programs places on the

federal budget. Between 1965 and 1993, national

health expenditures grew from 6 percent to 14 percent of gross domestic product. The Congressional

Budget Office's (CBO's) projections suggest that

this figure will rise to 20 percent by 2004 if the

current system is not changed. Over the 1965-1993

period, federal spending for health increased from 3

percent to 17 percent of budget outlays. Medicare

and Medicaid are the only major federal programs

that are expected to grow faster than the economy,

and their growth will begin to drive the budget

deficit upward again in the second half of this

decade.

Initially, the expansion of health insurance coverage in the Administration's proposal would increase national health expenditures, but the limits on

the growth of health insurance premiums and the

proposed cuts in Medicare would reduce spending

for health in the longer run. By 2004, the proposal

would hold national health expenditures about $150

billion below the baseline level. CBO and the Joint

Committee on Taxation estimate that the Administration's health proposal would increase the federal

deficit by a modest amount as the proposal was

phased in. But in the longer run—after 2004~it

holds out the promise of reducing the deficit.

CBO has published estimates of the cost of two

single-payer plans (H.R. 1200 and S. 491) and four

bills from the previous Congress and will soon be

providing estimates for other pending proposals.1

Several of those, including the Administration's,

would make massive alterations in the current system for financing and delivering health care. Estimates of the effects of such sweeping changes on

overall health spending and its components will necessarily be much less precise than estimates of incremental modifications to existing federal programs. Nonetheless, estimates of the effects of different approaches to health reform provide useful

comparative information on the relative costs or

savings of alternative proposals.

CBO's estimates of the effect of the Administration's health proposal on national health expenditures and the federal budget use CBO's baseline

projections as their starting point. The Economic

and Budget Outlook: Fiscal Years 1995-1999 (January 1994) describes CBO's current economic assumptions and baseline budget projections. A CBO

memorandum, "Projections of National Health Expenditures: 1993 Update" (October 1993), sets out

CBO's baseline projections of national health expenditures. For comparability with the Administration's figures, CBO's estimates assume that the proposal is enacted during 1994 and takes effect on

schedule. CBO assumes, as does the Administration, that 15 percent of the relevant population

would participate in health alliances in 1996, 40

percent would participate in 1997, and 100 percent

would participate in 1998. Finally, the estimates

1. Congressional Budget Office, "Estimates of Health Care Proposals

from the 102nd Congress," CBO Paper (July 1993).
26 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

assume that the proposed methods for constraining

the rate of growth of premiums for the standard

benefit package would be completely effective.

How the Proposal Affects

National Health Expenditures

Once the Administration's proposal was fully implemented, it would significantly reduce the projected

growth of national health expenditures. Its provisions for covering the uninsured, providing better

coverage for many people who already have insurance, and establishing a new federal program of

home- and community-based care for the severely

disabled would increase the demand for health care

services. But the limits on the growth of health

insurance premiums and the reductions in the Medicare program would hold down health spending.

For the first few years after the proposal was in

place, the increases in spending would exceed the

decreases, and the proposal would raise national

health expenditures above the levels in the baseline.

From 2000 on, however, national health expendiTable2-1.

Projections of National Health Expenditures Under the Administration's Health Proposal,

by Source of Funds (By calendar year, in billions of dollars)

Source of Funds

Public

Federal

Health alliances

State and local

Total

Private

Public

Federal

Health alliances

State and local

Total

Private

Public

Federal

Health alliances

State and local

Total

1996 1997 1998 1999 2000 2001 2002 2003 2004

Private

Baseline

614 661 712 766 824 886 952 1,022 1,095

379

0

169

1,163

-59

5

74

13

555

384

74

162

418

0

184

460

0

200

505

0

216

1,263 1,372 1,488

Changes from Baseline

-157 -387 -422

-6

208

-23

-49

542

-66

-68

563

-72

22 40 1

Administration's Proposal

505 325 344

412 411 437

208 542 563

161 134 145

555

0

234

610

0

253

670

0

273

735

0

295

807

0

318

1,613 1,748 1,894 2,052 2,220

-460 -510

-78

585

-78

-30

363

478

585

157

-84

635

-90

-48

376

526

635

163

-554

-93

668

-97

-75

398

577

668

177

-601

-108

703

-105

-110

422

-650

-127

740

-114

-150

446

627 681

703 740

190 204

1,176 1,285 1,411 1,489 1,583 1,700 1,820 1,942 2,070

SOURCE: Congressional Budget Office.
CHAPTER TWO FINANCIAL IMPACT OF THE PROPOSAL 27

tures would fall below the baseline by increasing

amounts. By 2004, CBO projects that total spending for health would be $150 billion—or 7 percent—

below where it would be if current policies and

trends continued (see Table 2-1). National health

expenditures in 2004 would represent 19 percent of

GDP-more than a percentage point below the baseline.

The Administration's proposal would also significantly change the composition of national health

expenditures. A substantial amount of spending that

is now being financed by private payments and existing government programs would be channeled

through new public entities~the health alliances. In

2004, the alliances would collect almost $750 billion in premiums from employers and households,

subsidies from the U.S. Treasury, and other revenues and would disburse the same amount in payments to health plans and in other expenses. Under

the proposal, private health insurance and out-ofpocket payments would pay for $650 billion less in

health spending than in the baseline. And other

federal, state, and local government programs would

fund almost $250 billion less.

The projections of national health expenditures

by source of funds are not intended to portray the

effects of the proposal on the budgets of families,

employers, or governments. The national health

accounts allocate national health expenditures according to who directly pays for the health insurance or services—not according to who ultimately

bears the burden. Thus, the Medicare program is

counted as a federal activity, although the program

is financed by payroll taxes, general revenues, and

premiums paid by households and employers. Similarly, spending by the health alliances is shown as a

separate category, even though it is financed by premiums from households and employers and payments by federal and state governments.

How the Proposal Affects

On-Budget Programs and

Social Security

The Administration's health proposal would affect

on-budget federal spending in several ways. It

would provide federal subsidies for low-income

families and certain employers, alter Medicare and

Medicaid, establish new benefit programs for longterm care and supplemental services for children,

restructure the system of subsidies for graduate

medical education and academic health centers, and

make changes in numerous other federal programs.

In addition, it would raise Social Security outlays

by providing subsidies for early retirees and encouraging more people to start collecting benefits before

the age of 65.

Higher levels of receipts by the federal government would offset most of the additional spending.

The Administration's proposal would increase excise taxes on tobacco products, levy a payroll tax on

employers that established corporate alliances, extend the Medicare Hospital Insurance tax and coverage to all employees of state and local governments,

exclude health insurance from cafeteria plans, establish a temporary annual assessment on employers

that now provide health benefits for early retirees,

and make permanent the tax deduction for health

insurance premiums of the self-employed. By limiting the rate of growth of health insurance premiums, the proposal would also reduce spending by

employers for health insurance, raise earnings or

other taxable income by a corresponding amount,

and increase collections of income and payroll

taxes.

On average, the Administration's health proposal would increase the projected deficit by less

than $15 billion a year between 1995 and 2004 (see

Table 2-2). In the last few years of that period,

however, the proposal's effect on the deficit gradually dissipates. After 2004, the proposal could

potentially reduce the deficit.

Health Insurance Premiums

Determining the average premium to be paid to

health insurance plans is one of the most critical

elements in estimating the cost of federal subsidies.

The higher the estimated premium, the higher will

be the estimate of subsidy payments by the federal

government.
28 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

CBO's estimation of the average premium follows the methodology specified in Section 6002 of

the Administration's proposal. The estimate proceeds in three steps: calculate the initial amount of

health spending in the baseline that would be paid

for by premiums collected by the alliances; increase

that base amount in proportion to the expected increase in the use of health services by individuals

who are currently uninsured or who have coverage

that is less comprehensive than the standard benefit

package; and divide the result by the number of

people covered by alliance premiums. The calculation of the average premium excludes spending on

behalf of Medicaid cash recipients, for whom the

Table 2-2.

Estimated On-Budget and Social Security Effects of the Administration's Health Proposal

(By fiscal year, in billions of dollars)

1996 1997 1998 1999 2000 2001 2002 2003 2004

Outlays

Subsidy Payments

Subsidies for employers

Subsidies for families

State maintenanceof-effort payments

Subtotal

Medicare

Drug benefit

Program savings

Offset for employed

beneficiaries

Other changes

Subtotal

Medicaid

Discontinued coverage

Premium limits and DSH cuts

Other changes

Subtotal

Long-Term Care Benefit

Supplemental Services

for Children

Medical Education

Public Health Service

Department of Defense

Department of Veterans Affairs

Federal Employees

Health Benefits

WIC Program

Other Administrative and

Start-Up Costs

Social Security

Assessment for Medical

Education

Total, Outlays

5

6

-2

9

6

-7

-1

J_

a

-2

-1

1

-2

5

a

1

2

-1

a

a

a

1

a

jj_

15

17

20

-6

30

15

-12

-2

1

2

-7

-5

2

-10

8

1

3

3

-2

a

a

1

2

a

_£

36

44

54

-16

82

16

-19

-6

1

-8

-19

-14

4

-28

12

2

4

3

-2

-4

-3

1

1

1

j£

54

55

67

-20

102

17

-28

-8

2

-16

-27

-20

1

-46

16

2

6

2

-3

-5

-3

1

1

2

-li

50

58

70

-20

108

19

-37

-8

2

-24

-31

-24

1

-54

20

2

6

2

-3

-5

-4

1

1

2

^8

43

67

77

-21

123

21

-45

-8

2

-30

-34

-28

1

-62

28

2

6

2

-3

-5

-5

1

1

2

^9

51

81

83

-22

142

23

-54

-9

2

-38

-38

-33

1

-71

37

3

7

2

-3

-5

-6

1

1

2

£

61

92

89

-23

158

25

-65

-9

_2

-47

-43

-39

1

-81

40

3

7

2

-3

-5

-7

1

1

2

-10

60

102

95

-24

173

28

-77

-10

2

-57

-48

-45

1

-92

40

3

7

2

-4

-5

-8

1

1

2

-10

53
CHAPTER TWO FINANCIAL IMPACT OF THE PROPOSAL 29

alliances would be separately reimbursed, and

spending for people who would not be participating

in health alliances, such as Medicare beneficiaries

who were not employed and members of the armed

forces on active duty.

CBO's estimate of the base amount of spending

includes all baseline private health insurance premiums, subsidies from state and local governments

for public hospitals and clinics, half of state and

local subsidies for mental institutions, all Medicaid

Table 2-2.

Continued

Total, Revenues

1996 1997 1998 1999 2000 2001 2002 2003 2004

Revenues

Income and Payroll Taxes

on Additional Income

Increase in the Excise Tax

on Tobacco

Assessment on Corporate

Alliance Employers

Extension of Medicare HI Tax

Exclusion of Health Insurance

from Cafeteria Plans

Assessment on Employers

for Retiree Subsidies

Deduction of Health Insurance

for the Self-Employed

Other Changes

a

11

1

2

0

0

-1

_a

1

11

2

2

1

0

-1

_2

4

11

2

2

2

3

-2

J_

8

11

2

2

3

5

-2

J_

12

10

1

1

4

5

-2

_L

16

10

1

1

5

2

•3

_2

22

10

1

1

6

0

-3

2,

28

10

1

1

7

0

-3

_3

34

10

1

1

7

0

-3

_3

14 17 22 29 33 35 40 46 53

Total Effect

Deficit

20 32 21 10 16 22 14

SOURCES: Congressional Budget Office; Joint Committee on Taxation.

NOTES: DSH = disproportionate share hospitals; WIC = Special Supplemental Food Program for Women, Infants, and Children; HI = hospital

insurance.

The Administration's proposal would reduce the deficit by $10 billion in 1995.

The figures in the table include changes in authorizations of appropriations and in Social Security that would not be counted for payas-you-go scoring under the Budget Enforcement Act of 1990.

a. Less than $500 million.
30 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

spending for noncash beneficiaries, and federal

Medicaid payments for disproportionate share hospitals. For uninsured people, CBO uses an estimate

of induced demand employing the assumptions described in its memorandum "Behavioral Assumptions for Estimating the Effects of Health Care Proposals" (November 1993). The estimate also assumes that the Administration's standard benefit

package would initially be 5 percent more expensive

than the average benefit of privately insured people

in the baseline.

The estimated total premiums and employer

shares per full-time-equivalent worker in 1994 for

the four types of policies specified in the Administration's proposal are as follows:

Single Person

Married Couple

One-Parent Family

Two-Parent Family

Total

Premium

$2,100

$4,200

$4,095

$5,565

Employer

Share

$1,680

$2,315

$3,033

$3,033

These estimated base premiums are assumed to increase annually according to the formula specified

in the proposal, including an additional increase of

5 percent in 2001 to cover the expansion of dental

and mental health benefits scheduled in that year.2

Employers would collectively be liable for up to

80 percent of aggregate premiums (before any subsidies) under the Administration's proposal. Their

actual liability would be less, however, because

families without qualified workers would themselves

be liable for the employer share. In addition, the

percentage of premiums paid by employers collectively would not be the same as the percentage paid

by a particular employer. Individual employers

would actually pay 80 percent of the average total

premium only for single workers without children.

Because the calculation of the employer share for

each worker takes into account the number of extra

workers (working spouses) in couples and families,

2. CBO follows the Administration's practice of using premiums for

1994 to illustrate the effects of the proposal. See Domestic Policy

Council, Health Security: The President's Report to the American

People (October 1993), pp. 111-136.

the employers of married people and single parents

(whose employer share is calculated in combination

with that of two-parent families) would generally

pay less than 80 percent of each worker's total premium. For married couples, the employer share

would be 80 percent of the total premiums for all

couples divided by the number of couples plus extra

workers. For one-parent and two-parent families,

the employer share would equal 80 percent of the

combined total premiums for all families divided by

the combined number of families plus the number

of qualified extra workers in two-parent families.

For example, employers would pay $2,315 for

each member of a married couple who worked full

time. If only one spouse worked full time, that person's employer would pay about 55 percent of the

total premium ($4,200) for the couple. If both

spouses worked full time, each spouse's employer

would pay $2,315 to the alliance, and both employers together would pay 110 percent of the total

premium.

On average, families would pay 20 percent of

the premium, less any subsidies from the federal

government, but specific families would pay more

or less depending on their choice of plan. In addition, families with no workers would generally be

liable for the employer share of the premium for

their type of family. CBO's estimate assumes that

the payments of employers and families are based

on the average premium for each type.

Corporate Alliances

Firms that formed corporate alliances and their fulltime, low-income employees would not be eligible

for federal subsidies. Therefore, the estimated number of firms with more than 5,000 employees that

would elect to form a corporate health alliance is

another important factor in estimating the budgetary

effects of the Administration's proposal.

The decision to establish a corporate alliance

would depend largely on how much a firm thought

it could save by staying outside the system of regional alliances. A firm would tend to find it advantageous to establish a corporate alliance if its

average employee had a much lower level of health
CHAPTER TWO FINANCIAL IMPACT OF THE PROPOSAL 31

spending than the average participant in a regional

alliance. But a firm that established a corporate

alliance would also bear several additional costs: a

1 percent tax on its payroll (including the earnings

of part-time workers, who must enroll in the regional alliance in any event), subsidies for premiums of full-time workers earning less than

$15,000 per year, and the loss of the 7.9 percent-ofpayroll limit on premium costs, which would otherwise be phased in over eight years if the firm joined

the regional alliance. In addition, because the payroll tax would start in 1996-whereas most regional

alliances are not expected to be in place until 1998—

many firms that elected to form a corporate alliance

would have to pay the tax for two years before

receiving any benefit from their decision.

Based on data from the Bureau of the Census's

Current Population Survey of March 1993, CBO

estimates that the average firm would have to expect savings in premiums of about $800 per employee in 1996 to make it advantageous to establish

a corporate alliance rather than enroll in a regional

alliance. The firms meeting this condition employ

an estimated 23 percent of the eligible employees in

large firms. That percentage would decline in later

years as corporate managers had a greater opportunity to observe regional alliances in operation and

became more willing to make what would be an

irrevocable decision to join a regional alliance.

CBO estimates that after 2001, corporate alliances

would cover 11 percent of the eligible employees in

large firms. CBO also estimates that about threequarters of the employees now covered by multiemployfcr plans, rural electric and telephone cooperatives, and the U.S. Postal Service, none of which

would be subject to the 1 percent payroll tax, would

ultimately be in corporate alliances.

Subsidies for Employers

Employers that participated in regional alliances

would generally be eligible for federal subsidies that

would limit their required premiums to 7.9 percent

of their payroll. Small firms with low average

annual wages would benefit from limits as low as

3.5 percent of their payroll. The wage brackets for

determining eligibility for these larger subsidies

would not be indexed for growth in prices or wages.

CBO based its estimate of the amount of subsidy payments to employers on County Business

Patterns data for 1990 collected by the Census

Bureau. These data cover employment and payroll

for 5.1 million firms. CBO has adjusted the data to

match total payroll in the national income and product accounts for 1990 and to reflect growth in employment and wages after that year.

An employer's required premiums would depend on the number of its workers who were enrolled in regional alliances and on their family type.

Employers would not have to pay premiums for

employees who were dependent children under 18

or dependent full-time students under 24, or for

employees who worked less than 10 hours a week;

employers would pay only part of the employer

share for employees working between 10 and 30

hours a week. They would pay the most for

workers in one- and two-parent families and the

least for single workers. The estimate assumes that

the relevant characteristics of each firm's work force

match the average for its size and industry, as calculated from the March 1993 Current Population

Survey.

These data allow CBO to estimate each firm's

liability for premiums as a percentage of its qualified payroll. They also provide estimates of fulltime-equivalent employment and average wages per

full-time-equivalent employee, which determine the

maximum percentage of its payroll that the firm

must pay. The estimated federal subsidy is the

excess of the firm's percentage liability for premiums over its limit, multiplied by its qualifying

payroll.

The final estimate incorporates three adjustments to the figures derived from the County Business Patterns data. It adds subsidies for employers

not included in the data-employers of agricultural,

railroad, and domestic workers; employers in Puerto

Rico; and (after 2001) state and local governments.

It removes estimated subsidies for firms choosing to

operate a corporate health alliance. And it takes

into account incentives for low-wage workers to

minimize their premium liability by clustering in

firms. As described in Chapter 4, CBO estimates

that such clustering, or sorting-including what

already appears to be taking place without the in-
32 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

centives in the Administration's proposal—would

increase the amount of subsidies to employers by 9

percent in 2000 and 14 percent in 2004.

In total, federal subsidies for employers are

projected to rise from $5 billion in 1996 to $58

billion in 2000 and $102 billion in 2004. Employers with up to 24 full-time-equivalent employees—which includes over 90 percent of employers but only one-fifth of workers—would receive

44 percent of total federal subsidy payments to

employers. This percentage would decline over

time, however, as rising wages pushed some small

employers out of the higher subsidy brackets. Premium payments would be capped for about threequarters of all employers, representing over one-half

of qualified employment.

The rapid increase in subsidies for employers

between 1996 and 2000 primarily reflects the growing number of workers enrolled in regional alliances

during this period. Subsidies continue to grow

thereafter because employment levels rise, health

insurance premiums increase more rapidly than

wages, and state and local governments and additional employers electing not to form corporate

alliances become eligible for subsidies.

Subsidies for Families

Under the Administration's proposal, families (including single people) who participated in regional

alliances would be eligible for a variety of federal

subsidies. Families with low total income could

receive subsidies for the family portion of the premium. Families with low nonwage income could

also receive subsidies for the employer share of the

premium, for which the family would be liable if it

did not have a full-time wage and salary worker or

the equivalent. In 1998 and thereafter, retirees ages

55 to 64 could have the full amount of the employer

share of their family's premium subsidized if they

would be eligible for Medicare at age 65. Further

subsidies would help low-income families pay costsharing amounts.

CBO based its estimate of premium subsidies

for families on the March 1993 Current Population

Survey (CPS). Using the data from the CPS and

the rules specified in the proposal, CBO grouped

individuals into health insurance units, excluded

ineligible units (for example, Medicare beneficiaries

who were not employed and people in corporate

alliances), identified units that would be subject to

special provisions (for example, recipients of Aid to

Families with Dependent Children or Supplemental

Security Income, early retirees, workers eligible for

Medicare, and the self-employed), computed the

relevant measures of income and labor force status,

and determined the premium liability and subsidy

amount for each health insurance unit. The estimate

was then adjusted to take account of people missed

by the CPS (the so-called undercount) and people

not included in the CPS universe, such as institutionalized persons and residents of Puerto Rico.

Subsidies for families would total an estimated

$54 billion in 1998, $70 billion in 2000, and $95

billion in 2004. The number of families receiving a

subsidy for the family share of the premium would

rise from 40 million in 1998 to more than 50 million in 2004. Families receiving a subsidy for the

employer share of the premium (such as those with

early retirees, self-employed people, or part-time

workers) would approach 30 million in 2004. By

2004, half of all families would receive some

subsidy.

Total Federal Subsidies

Employers and families would pay regional alliances the premiums they owed, less the amount of

any subsidy; the federal government would, in effect, pay regional alliances for the subsidies, reduced by the states' maintenance-of-effort payments

to the alliances. Those maintenance-of-effort payments would be based on 1993 spending by the

states for standard benefits for Medicaid beneficiaries who did not receive cash welfare payments,

payments to disproportionate share hospitals attributable to such beneficiaries, and supplemental

(wraparound) benefits for children receiving AFDC

or SSI. This amount would be updated by the

projected rate of growth of Medicaid spending

through the first year of a state's participation in the

new program and thereafter by the general health

care inflation factor combined with growth of the

population.
CHAPTER TWO FINANCIAL IMPACT OF THE PROPOSAL 33

CBO estimates that federal payments to regional

alliances for subsidies would total $82 billion in

1998, $108 billion in 2000, and $173 billion in

2004. Those figures exceed the capped federal alliance payments specified in the Administration's

proposal; CBO believes, however, that the caps on

payments to the alliances would not be legally binding. Section 9102 of the proposal attempts to limit

federal liability for the subsidy costs of the program, but the limitation does not diminish the federal government's responsibilities under the proposal. The proposal would oblige the government

both to make subsidy payments on behalf of employers and families and to ensure health coverage

for all eligible people. The proposal contains no

provisions for limiting those entitlements in the face

of a funding gap, other than providing for expedited

Congressional consideration of the matter.

Changes in Medicare

The Administration's proposal would cover outpatient prescription drugs under Medicare starting in

Table 2-3.

Estimates of Medicare Program Savings Under the Administration's Health Proposal

(By fiscal year, in billions of dollars)

1996

Reduce Update for Inpatient

Hospital Services

Reduce Adjustment for

Indirect Medical Education

Reduce Payments for

Inpatient Capital

Reduce Adjustment for

Disproportionate Share Hospitals

Base Reimbursement Rates for

Physicians on Real GDP per Capita

Establish Cumulative Expenditure Goals

for Physicians' Services

Eliminate Formula-Driven

Overpayments for Outpatient Services

Impose Coinsurance for

Laboratory Services

Raise SMI Premiums (Net savings)

Limit Payments for Physicians

at High-Cost Hospitals

Change Secondary Payer Provisions

Impose Copayment for

Home Health Care

Other Reductions

Total

0

-2

-1

a

0

0

-1

-1

1

0

0

-1

J.

-7

1997

-1

-3

-1

-1

a

-2

-1

-1

1

0

0

-1

£

-12

1998

-2

-3

-1

-4

-1

-3

-2

-1

2

-1

a

-2

£

-19

1999

-4

-4

-2

-4

-2

-4

-2

-2

2

-1

-1

-2

:£

-28

2000

-6

-4

-2

-4

-2

-6

-3

-2

a

-1

-2

-2

^3

-37

2001

-7

-5

-2

-5

-3

-8

-4

-2

-1

-1

-2

-2

;3

-45

2002

-8

-5

-2

-5

-4

-10

-5

-2

-3

-1

-2

-2

4

-54

2003

-9

-6

-3

-5

-5

-13

-7

-3

-6

-1

-3

-2

^

-65

2004

-10

-7

-3

-6

-7

-16

-9

-3

-7

-1

-3

-3

:!

-77

SOURCE: Congressional Budget Office.

NOTE: GDP = gross domestic product; SMI = Supplementary Medical Insurance.

a. Less than $500 million.
34 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

1996. CBO based its estimate of the cost of the

prescription drug benefit on the methodology detailed in its study Updated Estimates of Medicare's

Catastrophic Drug Insurance Program (October

1989). The distribution of spending for prescription

drugs by Medicare beneficiaries under current policies was estimated using the 1987 National Medical

Expenditure Survey, adjusted for underreporting and

for subsequent increases in drug prices and use.

Total spending for prescription drugs by Medicare

beneficiaries under the proposal was increased to

reflect additional demand for drugs stemming from

the extended insurance coverage and reduced to take

into account the limits that the proposal would impose on drug prices. Medicare would pay for the

portion of this spending that exceeded the specified

deductible and coinsurance amounts. Of the increase in Medicare spending, 25 percent would be

covered by an increase in premiums paid by beneficiaries, and the remaining 75 percent would be covered by general revenues. All things considered, the

net cost to Medicare of the prescription drug benefit

would reach $19 billion in 2000 and $28 billion in

2004.

As noted in Chapter 1, reductions in Medicare

spending would provide a major part of the funding

for the Administration's proposal. The proposed

savings would grow from $19 billion in 1998 to

$37 billion in 2000 and $77 billion in 2004 (see

Table 2-3 on page 33). Most of the cuts would be

made in reimbursements to hospitals, physicians,

and other providers of health care services. Beneficiaries would also be required to pay higher premiums for Supplementary Medical Insurance and part

of the cost of laboratory services and home health

care. CBO estimated the savings from these provisions by applying the proposed changes in the reimbursement formulas and cost-sharing requirements

to its baseline projections for the types of spending

that would be affected.

Under the Administration's proposal, people

eligible for Medicare who were employed or who

were married to a worker would receive their primary coverage through an alliance rather than

through Medicare. Medicare would continue to

provide secondary coverage for benefits that it covered but that were not in the standard benefit package, including coverage of certain copayments and

deductibles. Medicare would also be responsible for

paying a portion of the alliance premium for Medicare-eligible individuals who worked part time or

retired in the middle of a year. Based on data from

the Current Population Survey, CBO estimates that

in 1998 this provision would reduce the number of

people receiving primary coverage through Medicare by 2.5 million, of whom about 0.7 million

would be the disabled spouses of workers. CBO

assumes that most of this group would remain enrolled in Medicare's Supplementary Medical Insurance program to receive the secondary coverage that

it would provide. On balance, these changes would

save Medicare an estimated $6 billion in 1998, $8

billion in 2000, and $10 billion in 2004.

Other elements of the Administration's proposal

would increase Medicare spending by about $2

billion a year. Most of that increase would represent payments to the Department of Defense for

care provided to Medicare-eligible individuals who

enrolled in a health plan operated by the Defense

Department.

Changes in Medicaid

Under the Administration's proposal, some people

who currently receive certain health benefits from

Medicaid would receive them from the alliances or

from other programs instead. Medicaid would no

longer cover standard benefits for beneficiaries who

did not receive cash welfare payments, supplemental

services for poor children with special needs, or

Pharmaceuticals covered by the new Medicare drug

benefit. CBO's estimates of the savings from this

discontinued Medicaid coverage reflect the baseline

projections of spending for these items. The estimated savings would grow from $31 billion in 2000

to $48 billion in 2004.

Medicaid would continue to cover recipients of

cash welfare payments, who would receive services

through the regional alliances, but federal payments

would be cut. Initially, the federal government

would pay only 95 percent of what it would have

paid under current law. Thereafter, premiums for

Medicaid beneficiaries would grow at the same rate

as other premiums in the regional alliances. In

addition, Medicaid would no longer make payments
CHAPTER TWO FINANCIAL IMPACT OF THE PROPOSAL 35

for disproportionate share hospitals (DSH). Limiting the growth of premiums and cutting DSH payments would save Medicaid $24 billion in 2000 and

$45 billion in 2004.

The Administration's proposal would liberalize

eligibility for long-term care benefits, speed up

payments for services, reduce administrative expenses, and make other small changes to the Medicaid program. Those changes would, on balance, increase Medicaid spending slightly.

Long-Term Care Benefit

The Administration's proposal would establish a

new entitlement program to help states finance

home- and community-based care for the severely

disabled. The proposal would limit spending for

this new program to specified amounts, plus the

amount of federal savings for home- and community-based services under Medicaid. CBO assumes

that the states would spend about one-quarter of

their savings on optional Medicaid services. Net of

the savings to Medicaid, this program would cost

the federal government an estimated $20 billion in

2000 and $40 billion in 2004.

Changes in Other Federal Programs

The Administration's proposal would also affect

several other federal programs. It would establish a

new program for poor children to provide supplementary benefits not included in the standard benefit

package, restructure the system of subsidies for

graduate medical education and academic health

centers, expand the activities of the Public Health

Service, and fully fund the Special Supplemental

Food Program for Women, Infants, and Children.

The Departments of Defense and Veterans Affairs

would receive payments from regional alliances for

health services provided to some members of their

health plans. The Federal Employees Health Benefits program would save money from the limits on

premiums, which would slow the growth of its

spending, and from being relieved of part of its

responsibility for subsidizing the health benefits of

retirees.

The availability of universal health insurance

and the subsidization of health insurance for retirees

ages 55 to 64 would encourage some older workers

to retire earlier. CBO estimates that these changes

would add 215,000 more retired workers ages 62 to

64 to Social Security's benefit rolls in 2000 and

would raise Social Security outlays by $2 billion.

Over the long term, Social Security would incur no

additional costs, because benefits are actuarially

reduced for early retirement.

Changes in Revenues

The Joint Committee on Taxation has estimated the

impact of the provisions of the proposal that would

affect on-budget federal revenues and Social Security payroll taxes. By 2004, more than half of the

new revenues would stem from increases in income

and payroll taxes on the additional taxable income

generated by the proposal. The limits on premiums

and other elements of the Administration's proposal

would sharply reduce the growth of employer

spending for health insurance. By 2004, employers

would save about $90 billion for active workers and

more than $15 billion for early retirees. The estimate assumes that the lion's share of those savings

would be returned to workers in the form of higher

cash wages and that most of the rest of the savings

would be reflected in higher corporate profits.

(These assumptions, which reflect long-established

conventions of revenue estimation, are examined in

Chapter 4.) Federal revenues would rise because

the additional wages and profits would be subject to

income and payroll taxation. The additional revenues would total $34 billion in 2004. Other provisions that would significantly increase on-budget

and Social Security revenues include an increase in

the excise tax on tobacco ($10 billion in 2004) and

the exclusion of health insurance from cafeteria

plans ($7 billion).

How CBO's Estimates

Compare with Those of

the Administration

In its budget for fiscal year 1995, the Administration estimates that its health proposal would reduce

the deficit by $38 billion in 2000 and by a cumula-
36 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

Table 2-4.

Differences Between CBO's and the Administration's Estimates of the Administration's Health Proposal

(By fiscal year, in billions of dollars)

1995 1996 1997 1998 1999 2000

Administration's Estimate of Proposal's

Effect on the Deficit -11

Differences

Subsidies for employers 0

Subsidies for families 0

State maintenanceof-effort payments 0

Medicare drug benefit 0

Long-term care benefit 0

Social Security 0

Assessment on corporate

alliance employers 0

Exclusion of health insurance

from cafeteria plans 0

Other differences 1

Total Differences 1

CBO's Estimate of Proposal's

Effect on the Deficit -10

-3

2

-1

a

-1

a

a

0

1

1

6

-1

a

1

1

a

13

20

17

-1

2

1

1

1

4

6

27

32

-18

22

-1

3

1

1

2

39

21

-38

25

a

3

2

1

2

5

J>

48

10

SOURCES: Congressional Budget Office; Office of Management and Budget,

a. Less than $500 million.

tive total of $59 billion over the 1995-2000 period.

(The Administration has not provided estimates for

later years.) In contrast, CBO estimates that the

proposal would increase the deficit by $10 billion in

2000 and by a total of $74 billion over the six-year

period. The two estimates are virtually the same in

1995 but differ by growing amounts after that year.

CBO's estimate exceeds the Administration's by

about $50 billion in 2000 (see Table 2-4).

Subsidies for Employers

Differences in the estimated cost of federal subsidies for employers account for about half the total

difference between the two sets of estimates. In

2000, CBO estimates that such subsidies would cost

$58 billion-$25 billion more than the Administration's figure of $33 billion. Three major factors

explain the higher CBO estimate: a higher estimate

of the average health insurance premium, the assumed clustering of low-wage workers to take advantage of federal subsidies, and a methodology that

better accounts for the dispersion of average wage

rates among employers.

CBO's estimate of the average health insurance

premium under the Administration's proposal is

about 15 percent higher than the Administration's

estimate. CBO's average premium, however, is

virtually identical to that used by Lewin-VHI, Inc.,

in its recent financial analysis of the Administration's proposal and about 13 percent lower than the

actuarial estimate by Hewitt Associates.3 CBO's

3. Lewin-VHI, Inc., The Financial Impact of the Health Security Act

(Fairfax, Va.: Lewin-VHI, December 1993), p. 25; testimony of

Dale H. Yamamoto and Frank B. McArdle, Hewitt Associates,

before the House Committee on Energy and Commerce, Subcommittee on Health and the Environment, November 22, 1993, p. 9.
CHAPTER TWO FINANCIAL IMPACT OF THE PROPOSAL 37

estimate of premiums is higher than the Administration's because it assumes that the alliance health

plans would be responsible for a larger proportion

of national health expenditures. For example, compared with the Administration's estimate, CBO assumes that more services for the uninsured, which

are now funded by state and local subsidies to public hospitals, would be paid for through alliance

plans. CBO also assumes, based on consultations

with actuaries, that the standard benefit package

would be about 5 percent more expensive than the

current average benefit package for insured people.

CBO's higher estimate of premiums explains about

$15 billion of the difference between the estimates

in 2000.

As noted above and explained in Chapter 4,

CBO concludes that providing subsidies to employers based on the employer's average wage

would create an incentive for low-wage workers to

cluster in certain firms. The Administration, in

contrast, makes no explicit assumption about the

sorting of workers into firms. This difference in

assumptions explains another $4 billion of the difference between the estimates in 2000.

The remaining $6 billion difference between the

estimates of subsidies for employers stems from

differences in estimating methodologies. CBO

based its estimate on County Business Patterns data

for specific firms. In contrast, the Administration

based its estimate on data for people in the Current

Population Survey and imputed an average wage per

firm to each worker in the CPS sample based on the

worker's industry, state of residence, and establishment size. CBO believes that the Administration's

method of imputation understates the variation in

average wages among firms and therefore substantially underestimates the number of workers in firms

that would be eligible for subsidies.

Other Differences

Other differences between CBO's and the Administration's estimates are much smaller. The two estimates of the cost of subsidies for families are quite

similar; in 2000, the Administration's allowance for

behavioral changes almost exactly offsets CBO's

higher premiums.

CBO's estimates of maintenance-of-effort payments by the states are slightly lower than those of

the Administration, with the difference reaching $3

billion by 2000. Maintenance-of-effort payments

would be based on spending by states in 1993 on

behalf of Medicaid recipients who were not beneficiaries of AFDC or SSI or eligible for Medicare.

CBO's estimate of the proportion of Medicaid

spending that falls in this category is derived from

data reported by the states to the Health Care Financing Administration; it is smaller than the figure

assumed by the Administration.

CBO and the Administration differ slightly in

their estimates of the costs of the proposed Medicare drug benefit and the long-term care benefit.

CBO's estimate of the cost of the drug benefit is

$2 billion higher than the Administration's in 2000.

CBO assumes a higher level of spending for drugs

in the baseline, but the Administration assumes a

larger increase in demand from the new benefit.

CBO's estimate of the long-term care benefit exceeds the Administration's estimate because of

CBO's assumption that the states will spend about

one-quarter of their savings on optional Medicaid

services. Another difference in the two sets of

estimates is that the Administration's estimate includes no additional Social Security benefits for

early retirees.

The Joint Committee on Taxation (JCT) has

estimated that the income from the 1 percent assessment on the payroll of corporate alliance employers

would yield only $1 billion in revenues in 2000—$4

billion less than the Administration's estimate of $5

billion. In preparing its estimate, the Administration

assumed that most eligible large firms would choose

to establish corporate alliances. In contrast, CBO

and JCT have projected that firms employing only

about 15 percent of eligible employees would be in

corporate alliances in 2000. JCT has also estimated

that excluding health benefits from cafeteria plans

would gain $5 billion less in revenues in 2000 than

the Administration has calculated. The difference

arises from JCT's assumption that a smaller fraction

of the health benefits that could no longer be provided through cafeteria plans would end up as

wages.
38 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

Sensitivity of the Estimates

to Premium Levels

The impact of the Administration's proposal on the

deficit is highly sensitive to the assumed level of

health insurance premiums in the alliances. The

higher the average premium, the greater will be the

federal subsidy payments, the smaller the increase in

taxable incomes, and the bigger the increase in the

deficit. CBO has illustrated this sensitivity by estimating the financial impact of the Administration's

proposal under two additional sets of premiums: that

of the Administration, which is roughly 15 percent

below CBO's, and a set that is 10 percent higher

than CBO's.

Using the Administration's premiums, CBO

estimates that the Administration's proposal would

reduce the deficit in 1999 and later years. The

reduction would amount to $17 billion in 2000 and

$40 billion in 2004. The reduction in the deficit in

2000 would still be about $20 billion less than the

Table 2-5.

Sources and Uses of Funds of the Health Alliances

(By fiscal year, in billions of dollars)

1996 1997 1998 1999 2000 2001 2002 2003 2004

Sources of Funds

Nonfederal

Employer payments

Household payments

State share of Medicaid

State maintenance-ofeffort payments

Subtotal, Nonfederal

Federal

Subsidies

Federal share of Medicaid

Other federal payments

Subtotal, Federal

Total, All Sources

30

10

2

2

43

9

3

a

12

56

93

30

136

30

8

a

39

174

239

76

17

348

82

22

6

110

458

290

92

20

.20

421

102

27

8

137

558

300

94

21

20

436

108

28

8

144

580

318

99

22

21

461

123

30

9

162

623

327

104

24

22

477

142

32

9

183

660

338

107

25

23

493

158

33

10

201

695

352

110

27

24

513

173

36

10

219

732

Uses of Funds

Payments to Health Plans

Assessment for Medical Education

Alliance Administration

Total, All Uses

54

1

1

56

168

2

4

174

441

6

11

458

537

8

13

558

558

8

14

580

599

9

15

623

635

9

16

660

668

10

17

695

705

10

17

732

SOURCE: Congressional Budget Office,

a. Less than $500 million.
CHAPTER TWO FINANCIAL IMPACT OF THE PROPOSAL 39

Administration's own estimate, but removing the

difference in assumed premiums would eliminate

more than half of the total difference between

CBO's and the Administration's estimates. If premiums were 10 percent higher than CBO has assumed, the proposal would add substantially to the

deficit each year~$52 billion in 1998, $36 billion in

2000, and $38 billion in 2004.

Sources and Uses of Funds

of the Health Alliances

Although the Administration's proposal would have

only a modest effect on the federal deficit, the flows

of funds into and out of the regional and corporate

health alliances would be substantial (see Table

2-5). Payments to health insurance plans would

constitute by far the largest of the alliances' outlays.

Alliances would receive payments of premiums

from employers and households and maintenanceof-effort payments and payments on behalf of Medicaid beneficiaries from the states. The U.S. Treasury would also make payments to the alliances for

subsidies for employers and households, the federal

share of Medicaid, and premiums for federal civilian

employees and certain people eligible for Medicare.

Alliances would make payments to other alliances

in cases in which a household could choose its

source of coverage, but these interalliance payments

would have no net effect.

Chapter Three

Budgetary Treatment

of the Proposal

T

he Budget of the United States Government

serves many purposes. Not only is the budget a financial accounting of the receipts

and expenditures of the federal government; it also

sets forth a plan for allocating resources-between

the public and private sectors and within the public

sector—to meet national objectives.

Ever since the outlines of the Administration's

health proposal became known, policymakers and

the media have expressed considerable interest in

how it would be treated in the federal budget.

Some observers contend that the program would not

receive an appropriate degree of scrutiny if the

budget did not include all of its financial transactions. If the financial activities mandated by the

new program were not part of the budget, they

argue, fiscal discipline might suffer: activities that

are now in the budget might be transferred to nonbudget entities that were not subject to the oversight

and restraints characteristically imposed on budget

accounts. Others fear that labeling all of the program's financial flows as budgetary might preclude

a reasoned consideration of the proposal's merits by

raising concerns about the size of the public sector.

The choice of budgetary treatment could also affect

which Congressional committees are given primary

jurisdiction over the proposal.

The issue of budgetary treatment is not peculiar

to the health reform initiative. Every time the Congress considers or enacts a bill that establishes a

new program, the Congressional Budget Office and

the Office of Management and Budget must consider whether and how it should be shown in the

federal budget. For most pieces of legislation, this

is a relatively easy call. But for some bills, such as

major health reform proposals, that assessment is

marked by some ambiguity and considerable complexity.

This chapter discusses the appropriate budgetary

treatment of the Administration's health proposal,

particularly the treatment of the payments to and

from the regional and corporate alliances. It first

examines the two main sources of guidance on budgetary classification—the Report of the President's

Commission on Budget Concepts and the current

budgetary treatment of programs analogous to the

President's plan. It finds that these sources can

inform the decision on how to treat the Administration's proposal but by themselves cannot resolve the

issue.

The second and third sections of this chapter explain CBO's view: the financial transactions of the

health alliances should be included in the accounts

of the federal government, but they should be distinguished from other federal operations and shown

separately, as is the practice for the Social Security

program. CBO bases this view primarily on its

judgment that the Administration's proposal would

establish a federal entitlement to health benefits and

that the mandatory premiums used to finance the

new entitlement would constitute an exercise of

sovereign power. CBO's view on these matters is

only advisory; ultimately, the Congress and the

President should explicitly address the issue through

legislation to ensure the appropriate public control

of and accountability for the transactions of the

alliances.
42 AN ANALYSIS OF THE ADMINISTRATIONS HEALTH PROPOSAL February 1994

Guidelines for Budgetary

Classification

Certain elements of the Administration's proposal

are unambiguously federal activities that all agree

should be included in the budget-for example, the

increase in the tax on tobacco, the subsidies for

individuals and employers, the expansion of certain

discretionary programs, and the changes in Medicare

and Medicaid. But what about the premiums that

individuals and employers pay to the health alliances and the payments by the alliances to the various health plans? Are the alliances private or state

entities that belong outside the federal budget? Or

are they, for most practical purposes, creatures of

the federal government, whose income and outgo

should all be included in the federal government's

accounts?

In answering such questions, budget analysts

normally consult two sources for guidance. One is

the 1967 Report of the President's Commission on

Budget Concepts. The other is budgetary precedents. Because of the unique features of the Administration's health proposal, neither source provides an unambiguous answer.

The President's Commission

on Budget Concepts

In March 1967, President Lyndon B. Johnson appointed a 15-member commission to advise him on

budgetary concepts and presentation. The commission issued its report in October of that year, and

the budget that the President submitted in January

1968 reflected most of its recommendations—notably, the institution of a unified federal budget. The

commission's proposal to record federal credit transactions in the budget on a subsidy-cost basis was

not adopted until 1990, with the passage of the

Federal Credit Reform Act. A few recommendations-for example, the use of accrual accounting

instead of cash accounting—have never been fully

implemented.

Although the Report of the President's Commission on Budget Concepts has no legal status, it

remains to this day the only authoritative statement

on federal budgetary accounting. The commission's

most important recommendation was for a comprehensive budget with few exclusions. "To work

well," the commission stated, "the governmental

budget process should encompass the full scope of

the programs and transactions that are within the

Federal sector and not subject to the economic

disciplines of the marketplace." The commission

recommended that "the budget should, as a general

rule, be comprehensive of the full range of Federal

activities. Borderline agencies and transactions

should be included in the budget unless there are

exceptionally persuasive reasons for exclusion."1

The commission recognized that its recommendation posed "practical questions as to precisely

what outlays and receipts should be in the budget of

the federal government. The answer to this question

is not always as obvious as it may seem: the boundaries of the federal establishment are sometimes difficult to draw." The commission proposed a series

of questions to help make this determination: "Who

owns the agency? Who supplies its capital? Who

selects its managers? Do the Congress and the

President have control over the agency's program

and budget, or are the agency's policies the responsibility of the Congress or the President only in

some broad ultimate sense? The answer to no one

of these questions is conclusive, and at the margin,

where boundary questions arise, decisions have been

made on the basis of a net weighing of as many

relevant considerations as possible."2

The report cited some exceptions, though, to its

recommendation of a comprehensive budget. For

example, even though the Federal Reserve System is

clearly a federal operation, the commission recommended that its receipts and expenditures be excluded from the budget, in part to protect the independence of the nation's monetary authorities. The

commission recommended that the local receipts

and expenditures of the District of Columbia be excluded as well, even though the District is a federal

1. Report of the President's Commission on Budget Concepts (October 1987), pp. 24-25.

2. Ibid.
CHAPTER THREE BUDGETARY TREATMENT OF THE PROPOSAL 43

enclave. The commission further recommended that

government-sponsored enterprises be omitted from

the budget when such enterprises were "completely

privately owned." Because the Administration's

proposal shares some of the characteristics of these

exceptions but lacks others, no one can be sure how

the commission would have treated the health alliances, had they been on the horizon in 1967.

The commission also considered the issue of

when to offset receipts against expenditures in presenting the government's fiscal totals. For fiscal

year 1993, the Department of the Treasury reported

federal outlays of $1,408 billion, federal governmental receipts of $1,153 billion, and a deficit of

$255 billion. The figure for governmental receipts

includes most of the funds that the government

collects (for example, income and payroll taxes).

But the budget treats some of the government's

income, such as proceeds from the sale of stamps

by the Postal Service, as an offset to its outlays.

"For purposes of summary budget totals," the

commission recommended, "receipts from activities

which are essentially governmental in character, involving regulation or compulsion, should be regarded as receipts. But receipts associated with

activities which are operated as business-type enterprises, or which are market-oriented in character,

should be included as offsets to the expenditures to

which they relate." Among the various items that

should be treated as budget receipts the commission

listed both employment taxes and social insurance

premiums.3

Budgetary Precedents

Another way to inform judgment is by examining

relevant precedents. Yet this approach is also incomplete, because the Administration's health proposal differs significantly from existing programs

and because existing accounting practices are inconsistent.

In one major instance—the unemployment insurance (UI) program—the federal budget includes in

3. Ibid., p. 65.

its entirety a joint activity of the federal and state

governments. The Social Security Act of 1935 created the UI program and established a federal tax

liability. Under the program, states are free to set

tax rates, benefit levels, and eligibility requirements

within certain limits. States that establish a federally approved UI system and impose their own payroll tax receive a partial credit against the federal UI

tax. The federal tax pays for federal and state administration of unemployment insurance, 97 percent

of the cost of employment services, and 50 percent

of the cost of extended benefits during periods of

high unemployment in a state. The state and federal

taxes alike are deposited in trust funds held by the

U.S. Treasury, and the federal budget records all of

the funds' revenues and spending.

In other instances, the federal budget includes

only part of the cost of a joint federal/state program.

For example, if a state establishes a program of

Medicaid or Aid to Families with Dependent Children that meets the terms of the Social Security Act,

the federal government pays a prescribed share of

the costs, and the budget includes only that federal

payment. Unlike the case of unemployment insurance, however, the federal government imposes no

tax or other penalty if a state fails to establish a

Medicaid or AFDC program.

The Coal Industry Retiree Health Benefit Program is part of the federal budget, although its

funds do not pass through the Treasury. Established

by the Energy Policy Act of 1992, this program

guarantees lifetime health benefits for certain miners

and their dependents and requires coal companies to

pay health insurance premiums to two privately

managed trust funds on behalf of those miners,

including some who never worked for the companies in question. Even though the benefit plans are

nominally private and the federal government plays

no role in selecting their trustees, the plans' receipts

and spending are included in the federal budget

because federal law both requires payment and determines the use of the money.

The budgetary treatment of the promotional

boards for agricultural commodities is at odds with

that of the Coal Industry Retiree Health Benefit

Program. Federal law has established 17 of these

boards since 1955. The boards collect assessments
44 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

from domestic producers (and sometimes importers

and marketers) and use those funds to promote consumption of a particular commodity, such as dairy

products or cut flowers. The Secretary of Agriculture appoints most of the boards, and federal law

establishes and enforces payment of the assessments. Yet despite this substantial federal role, the

budget does not include the transactions of the

boards.

Still other comparisons are possible between the

Administration's proposal and various federal regulatory activities. For example, the federal government requires employers to meet conditions governing the wages and hours of workers (under the Fair

Labor Standards Act of 1938), occupational safety

and health (under the Occupational Safety and

Health Act of 1970), and the treatment of persons

with disabilities (under the Americans with Disabilities Act of 1990). All of these laws impose substantial costs on employers and may affect the

amount and type of compensation that employees

receive, but the budget includes none of their costs.

Looking at these budgetary precedents does not

resolve the issue of how to treat the Administration's health proposal. The proposal bears a resemblance to all of the programs cited, but it also shows

significant differences. Which is the most appropriate comparison? Is the proposal most like the unemployment insurance program, AFDC or Medicaid,

the Coal Industry Retiree Health Benefit Program,

the promotional boards for agricultural commodities,

the mandates of the Americans with Disabilities

Act, or some other program? The answer is, again,

a matter of judgment. But even if the answer were

clear, a practice followed for a program costing

$200 million might not be appropriate for one costing $500 billion.

CBO's Assessment

Determining the appropriate budgetary treatment of

a program like health reform involves answering not

one but a series of questions. Is the program fundamentally governmental in nature, or does the legislation seek to facilitate, regulate, or guide an activity or transaction that remains essentially private?

If the activity is primarily governmental, is it a

federal activity, a state activity, a shared federal/

state activity, or some new hybrid? If the answers

to these two questions indicate that the program

belongs in the accounts of the federal government, a

third question arises: How should the program be

displayed in, and controlled through, the budget?

Considering the Administration's proposal in its

entirety, the Congressional Budget Office concludes

that it establishes both a federal entitlement to

health benefits and a system of mandatory payments

to finance those benefits. In administering the proposed program, regional alliances, corporate alliances, and state single-payer plans (if any) would

operate primarily as agents of the federal government. Therefore, CBO believes that the financial

transactions of the health alliances should be included in the federal government's accounts and

that the premium payments should be shown as

governmental receipts rather than as offsets to

spending. Nonetheless, because of the uniqueness

and vast size of the program, the budget document

should distinguish the transactions of the alliances

from other federal operations and show them separately, as is the practice for Social Security. CBO's

view, as noted earlier, is solely advisory. The President and the Congress should ultimately resolve the

debate over the proposal's budgetary treatment

through legislation.

Why Should the Health

Alliances Be Included in

the Accounts of the

Federal Government?

Two factors shape CBO's view that the proposed

health alliances should be included in the federal

government's accounts—a review of budgetary concepts and precedents and the need to ensure fiscal

accountability and control. In addition, the public's

perception of the nature of the new program deserves some consideration.
CHAPTER THREE BUDGETARY TREATMENT OF THE PROPOSAL 45

Budgetary Concepts and Precedents

More than a government regulation, the Administration's proposal specifies outcomes, dictates the

means by which the outcomes must be achieved,

prescribes the financing mechanism that must be

used, and enforces the prescribed transactions. The

first section of Title I creates a universal entitlement

to a set of benefits that are defined in considerable

detail. The benefits would not be restricted to those

who already receive similar benefits, nor would

nonpayment of premiums be grounds for a health

plan or health alliance to deny benefits. Thus, the

program does more than redefine the terms or conditions of preexisting private transactions, which is

how one might characterize the minimum wage, for

example.

The Administration's proposal establishes an explicit financing mechanism for the standard benefit

package. It requires employers (except those large

firms that choose to form corporate alliances), employees, and nonworkers to pay premiums to the

regional alliances. A federal entity—the National

Health Board—and a set of subsidies specified in

federal law would largely determine the levels of

those payments. The premiums would be mandatory, although many participants would undoubtedly

pay them gladly in return for the program's health

benefits, just as many would voluntarily contribute

to Social Security in return for that program's retirement, survivors, and disability benefits. The proposal would also require states to make specified

payments (for example, Medicaid maintenance-ofeffort payments) to their regional alliances.

The National Health Board and the Departments

of Health and Human Services and Labor would

play important roles in the creation and day-to-day

operation of the new health system. The board

would approve the states' health care systems, impose sanctions on those systems that failed to meet

federal requirements, develop a methodology for

risk adjustment and reinsurance, set capital standards for health plans in the regional alliances,

develop standards for states' guaranty funds, and

oversee and monitor the system. The Secretary of

Health and Human Services would develop standards for the financial management of the health

alliances, audit the regional alliances, and certify

essential community providers with whom plans

would have to affiliate. The Secretary of Labor

would be responsible for the proper functioning of

the corporate alliances and could impose civil monetary penalties for noncompliance.

Although the federal government would play a

very large role, the proposal would assign substantial responsibilities—and leave some discretion—to

the states, the regional alliances, corporations, and

individuals. States would establish and define the

geographic boundaries of the regional alliances, ensure that the amounts owed to the alliances were

collected and paid, assist alliances in verifying eligibility for subsidies, certify health plans and assure

their fiscal solvency, ensure that all residents had

access to an adequate choice of health plans, establish a reinsurance program for health plans, and provide a guaranty fund. If they chose, states could

assign the responsibilities of the alliances to a state

agency. They could also establish a single-payer

plan, which would affect the amount of choice

offered to the state's residents, the governance of

the system, and (within specified limits) the system's financing.

The regional alliances would be charged with

making agreements with qualified health plans and

offering those plans to the residents of their areas.

The alliances would ensure that people enrolled in

health plans, collect premiums, determine eligibility

for subsidies, evaluate the performance of health

plans, ensure that the plans stayed within budget,

adjust payments to plans for different levels of risk,

establish fee schedules for services, and coordinate

activities with those of other alliances. In addition,

health plans in the regional alliances would offer

participants the option of purchasing supplementary

insurance to cover certain cost-sharing requirements

of the standard benefit package and could offer

supplementary insurance for items not included in

the standard package. As proposed, the alliances'

income from premiums and their payments to the

health plans would not pass through the Treasury's

accounts.

Large corporations would be able to establish

corporate alliances that would perform the basic

functions of regional alliances. Large corporations

would also have some discretion in shaping the
46 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

options that their corporate alliances offered to

employees. The Administration's proposal would

impose no limits on the amount a corporation could

initially pay for the insurance it provided to its

workers, but it does specify the minimum fraction

of the costs that the firm would have to pay and the

rate by which premiums could grow. The premiums and payments would not flow though the regional alliances, and the subsidies to individuals

would be largely the responsibility of the corporation, which would be required to pay at least 95

percent of the costs of insuring its low-wage

workers. The proposal would require corporate

alliances to offer at least three health plans (including one fee-for-service plan and two others, such as

health maintenance organizations), employ community rating, use the same medical fee schedules as

the regional alliances, and satisfy much the same requirements for information as the regional alliances.

Individuals in both regional and corporate

alliances would have a choice of health plans, and

their premiums would vary according to the plan

they chose and their income. People would also

have the option of purchasing supplementary health

insurance.

Are these discretionary aspects of the proposal

sufficient to classify the new program as a regulatory activity or a shared federal/state program? The

answer to this question is a matter of judgment. No

sharp line separates regulatory activities that are

outside the budget from governmental activities that

are within it. In this case, when the federal government specifies not only an outcome but also how

the outcome is to be achieved, limits the ways in

which the activity can be financed, makes a substantial financial contribution, and calls for the creation

of new institutions to carry out the activity, CBO

concludes that the boundaries of regulation have

been crossed.

In particular, this appears to be the case with

respect to the regional alliances. Federal statute

would establish and define these new institutions.

The terms and financing of the insurance they offered would be specified by federal law, and their

activities would be regulated and monitored by the

Departments of Labor and Health and Human Services. This situation differs from cases in which the

federal government requires existing institutionsstates or businesses—to take on added responsibilities and leaves open the choice of how they would

finance them.

The corporate alliances, which have many of the

characteristics of private entities, would for all practical purposes be standing in for a governmental or

quasi-governmental agency—the regional alliance. If

a large corporation chose not to establish its own

alliance, it would have to participate in the regional

alliances. If a corporate alliance did not comply

with federal regulations or became financially insolvent, it could be terminated by the Secretary of

Labor. If a state chose to establish a single-payer

system, it could deny the large corporations operating within its borders the option of establishing a

corporate alliance.

The important role and flexibility afforded to

states and regional alliances do not appear to be

sufficient to classify the proposal as a shared federal/state program like AFDC or Medicaid. Indeed,

the level of federal involvement would far exceed

that of existing entitlement grant programs. Regional alliances would be able to borrow from the

federal government and would receive start-up

grants from Washington. In addition, they would be

granted powers that could only flow from federal

authority. For example, they would have the power

to extract premium payments from businesses in

other states that employed their residents, even

when those businesses engaged in no activity in the

alliance's state. Federal law would establish a complex set of financial flows among alliances. Those

flows would cover people who moved either temporarily or permanently, full-time students who attended schools located in other alliance areas, and

multiworker families in which one or more workers

could be covered by a corporate alliance.

As described in Chapter 1, federal agencies

would play an important role in ensuring that states

and alliances fulfilled the requirements specified in

the proposal. If a state did not establish a system of

alliances according to the law, or if the National

Health Board terminated its approval of a state's

system, the Secretary of Health and Human Services

would establish and operate a system of alliances

and would impose a surcharge of 15 percent on
CHAPTER THREE BUDGETARY TREATMENT OF THE PROPOSAL 47

premiums to cover additional administrative and

other expenses. This backstop is even stronger than

the one in the unemployment insurance program,

which establishes a federal payroll tax liability that

can be largely offset by state unemployment payroll

taxes.

The universality of the entitlement distinguishes

the Administration's health proposal from programs

such as AFDC and Medicaid. In those two programs, states have the option of not participating.

(Until 1982, Arizona did not participate in Medicaid.) The Administration's proposal would require

everyone to participate; it would also require states

to make specific payments to their regional alliances

for noncash beneficiaries of Medicaid and for additional benefits for certain children receiving AFDC

or Supplemental Security Income.

The significant financial role that payments

from the U.S. Treasury would play in the new program reinforces the impression that it would be

predominantly a federal, not a state, activity. By

2004, about 30 percent of the payments to the

health alliances would be federal subsidies to lowincome families and employers, payments for Medicaid beneficiaries, and the like. And the financial

role of the Treasury in the regional alliances could

grow even bigger if many Medicare recipients and

military dependents currently receiving federal

health services chose to participate in the alliances

instead. In contrast, the states would have a much

smaller financial role.

Even the voluntary aspects of the new program

do not by themselves resolve the issue of budgetary

treatment. The fact that individuals could choose

the plan they wanted, and thus the premium they

would pay, is balanced by the constraints that federal law and regulation would place on the benefits

and the charges. The benefits and cost sharing

would be set by legislation, and ultimately the National Health Board would limit the average premium in each area. The voluntary nature of supplementary cost-sharing insurance-people can decide

whether or not to purchase it—must be weighed

against the fact that federal law would define its

scope, coverage, and availability. Moreover, the

proposal would require that the premiums for costsharing supplements take account of the increased

use of standard benefits by those people who had

purchased the supplementary coverage. Furthermore, it is worth noting that the federal budget

includes many voluntary transactions, not the least

of which is physician insurance under Medicare.

On balance, the new program seems to represent

an activity of the federal government that relies on

the exercise of sovereign power. The universality

of the entitlement, the mandatory nature of the

premiums, and the major financial participation of

the U.S. Treasury outweigh other considerations.

Although the states and the alliances would have

important roles and responsibilities, they would be

acting largely as agents of the federal government.

Fiscal Accountability and Control

The second reason for including the health alliances

in the federal government's accounts is the need for

accountability and control. Since the alliances

would be agents of the federal government, their

financial flows should be subject to a level of oversight and control similar to that accorded programs

that are included in the federal budget.

It is particularly important that the activities of

the health alliances be subject to some fiscal restraints and limits as long as tight controls govern

other federal activities. Discretionary appropriations

are currently limited by caps on budget authority

and outlays. Receipts and direct spending programs

are constrained by pay-as-you-go rules. Social

Security, which is classified as off-budget, is subject

to its own set of rules, which are designed to prevent the depletion of the program's reserves.

The Administration's health proposal would

establish many financial flows between the Treasury

and the health alliances. Payments would flow from

the Treasury to the alliances for subsidies to individuals and employers, for recipients of cash welfare benefits, and for Medicare beneficiaries who

chose to stay in an alliance plan. The Treasury

would receive payments from the alliances for graduate medical education and for participants who

chose to get their health care through plans established by the Department of Defense, Department of

Veterans Affairs, or Indian Health Service. If the
48 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

activities of the health alliances were not subject to

fiscal control, the restraints on federal spending and

receipts could easily be circumvented by altering

these financial flows or creating new ones.

For example, the Congress could lower the

mandatory payments that the federal and state governments would make to the alliances to pay for the

health benefits of Medicaid cash beneficiaries from

95 percent of their previous payments to, say, 75

percent. If the alliances were exempted from the

budgetary discipline imposed on most other federal

activities, cutting those payments would appear to

reduce federal spending and would add room on the

pay-as-you-go scorecard, even if individuals and

employers were required to pay higher health insurance premiums to cover the receipts lost to the

alliances.

Similarly, the Congress could require health

plans to cover needs and activities that are currently

provided through discretionary appropriations, such

as nutritional assistance for infants and pregnant

women. This move would free up resources under

the discretionary spending limits of the budget and

make the health alliances bear added burdens if they

were not subject to appropriate budgetary controls.

Increasing the limits on the percentage of their

payrolls that employers contributed to the regional

alliances would appear to have very different effects

on the federal government's finances depending on

how the budget treated the alliances. If the alliances were included in the government's accounts,

higher employer payments would be recorded as an

increase in governmental receipts. If the alliances

were excluded, any rise in employers' payments

would be shown as a spending cut, because it would

reduce federal subsidies to the alliances.

Preventing budgetary gamesmanship requires

that corporate alliances and state single-payer

plans—not just regional alliances—be included in the

federal government's accounts. Otherwise, legislation could create the semblance of budgetary savings by expanding the corporate alliances or by

creating additional incentives for states to operate

single-payer systems. Including the corporate alliances and the state plans would also avoid meaningless changes in the fiscal totals that could arise if

several large firms terminated their corporate alliances or if the Secretary of Health and Human

Services was forced to take over a state's system of

alliances.

The Congress has several options available for

controlling the financial activities of the health

alliances. It could subject the alliances to the same

fiscal controls that govern the rest of the federal

government's activities, or set up a separate set of

controls for them, or both. Without a full accounting and some sort of control, however, the income

and outgo of the health alliances would escape the

scrutiny that is essential when the federal government takes resources from individuals and businesses and uses them to meet a national objective.

Public Perception

Some policymakers and citizens may wonder

whether including the health alliances in the federal

government's accounts defies common sense and

the public's perception of the nature of the new program. Why should the government's accounts show

transactions that, for most workers, are like those

that already occur in the private sector? The answer

is that the budgetary status of a federal activity is

not determined by whether the private sector provides the same service. Very few federal programs

would be included in the budget if the criterion for

inclusion were that there be no comparable private

spending. Many federal programs that appear in the

budget are largely an extension of prior practices in

the private sector. For example, loans to businesses

and individuals, medical research, and public safety

programs are a few of the large number of federal

programs that have displaced private spending to

some degree.

Many of those people who now have employment-based health insurance might be surprised at

first to be told that they had just become participants in a major new federal program, since under

the new system they might be able to keep the same

health plans that they now have and might enjoy

much the same benefits. Currently, employers (or

unions) make payments to insurance carriers that

reflect both the employers' contributions and the

employees' premiums (if any), which are deducted
CHAPTER THREE BUDGETARY TREATMENT OF THE PROPOSAL 49

from the workers' paychecks. In the new system,

employers would make the same sorts of payments,

but they would make them to an alliance, which

would then transfer funds to the health plans that

the workers had chosen.

What would differ is that federal law rather than

the employer would determine the benefits and

premiums. Moreover, the transaction would no

longer be voluntary. The employer could not drop

or change the terms of the health insurance benefit.

Similarly, employees could not opt out of their

employment-based plan, as some do now because

they do not want to pay their share of the premium

or because they are covered under a spouse's policy.

Those people who were receiving employmentbased health insurance for the first time would

initially be more accepting of the notion that they

had become participants in a government program.

Their employers, who would suddenly find themselves required to make payments for their employees' health insurance, would undoubtedly feel the

same way. Many nonworking and self-employed

individuals with adequate incomes who currently

choose to remain uninsured would probably conclude that they were part of a government program

as well.

Why Should the Health

Alliances Be Shown

Separately?

Although CBO's analysis has concluded that the

health alliances would be more like federal agencies

than like state or private entities, it has also found

that the Administration's proposal would be unique

in its form, size, scope, and complexity. In addition, the funds earmarked for the health alliances are

not intended to be used for any other federal program. These features of the proposal argue for

showing its transactions separately in the federal

government's accounts rather than mixing them with

other federal activities.

The institutions and responsibilities that the

Administration's proposal would create would be

unlike those of any existing federal program. The

flows of premiums and spending into and out of the

alliances would dwarf the income and outgo of

Social Security, which is currently the largest federal program (see Table 2-5). The complexity of

the structure would be unprecedented, with regional

alliances, corporate alliances, and possibly state

single-payer plans interacting with each other and

with numerous private health plans, Medicare, Medicaid, the Veterans Affairs and Indian health systems, the Defense Department's health plans for

military dependents, and the federal subsidy system.

A separate budgetary accounting would make clear

the size of the program and its effect on federal

receipts and outlays.

Like Social Security, which is treated as offbudget but included in the federal government's

consolidated accounts, the Administration's health

proposal would be financed from earmarked revenues, except for the subsidies and other explicit payments from the U.S. Treasury and the states. Segregating the finances of the alliances from other

federal programs would reflect the earmarked nature

of the premiums and highlight the additional subsidies required.

Several practical considerations constitute further grounds for segregating the finances of the

health alliances. Unlike the funds of almost all

other federal programs, those of the alliances would

not flow through the U.S. Treasury. At least initially, then, their financial data—particularly the

reports from the corporate alliances—are likely to be

of poorer quality than those of programs currently

in the budget. The Coal Industry Retiree Health

Benefit Program illustrates this point: despite its

being in the budget, its funds do not pass through

the Treasury, and problems with data collection

have thus far prevented its inclusion in the Monthly

Treasury Statement of Receipts and Outlays of the

United States Government.

Table 3-1 illustrates the budgetary display that

CBO suggests for the Administration's proposal.

Federal outlays for premium and cost-sharing subsidies, Medicare, and Medicaid, and federal receipts

from income and excise taxes (see Table 2-2) would

be shown on-budget. Changes in Social Security

benefits and payroll taxes would be shown off-
50 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

budget. The net outlays and nonfederal receipts of

the health alliances (see Table 2-5) would be shown

in a new off-budget category, the way Social Security is shown today, and included in the federal government's consolidated totals. Because the health

alliances are expected to balance their income and

outgo, including them in the totals would have no

Table 3-1.

Suggested Budgetary Display of the

Administration's Health Proposal,

Fiscal Year 2004 (In billions of dollars)

Outlays Receipts

Surplus or

Deficit (-)

On-Budget

Off-Budget

Social Security

Postal Service

Consolidated

Total

CBO Baseline

2,007 1,503

2,419 2,054

Effect of the Proposal

On-Budget 52 44

Off-Budget

Social Security 2 9

Postal Service 0 0

Health alliances8 513 513

Consolidated

Total 566 566

Baseline with the Proposal

On-Budget 2,058 1,548

Off-Budget

Social Security 414

Postal Service 0

Health alliances3 513

Consolidated

Total 2,985 2,620

-503

138

0

-365

-7

8

0

0

-510

146

0

0

-365

SOURCE: Congressional Budget Office.

a. Receipts of the health alliances would comprise premiums

from employers and households and payments by state

governments. Federal transactions with the health alliances

would be treated as intragovernmental outlays.

b. Less than $500 million.

significant effect on the deficit. But the alliances'

payments to health plans would swell federal outlays, and mandatory payments of health insurance

premiums by firms and individuals would add to

federal receipts.

Maintaining a separate accounting for the health

alliances would not stand in the way of obtaining a

complete picture of the impact of the federal sector

on the economy. The consolidated totals would

reveal "the full scope of the programs and transactions that are within the federal sector and not subject to the economic disciplines of the marketplace,"

as the President's Commission on Budget Concepts

recommended, and would allow policymakers and

the public to evaluate the Administration's proposal

in a comprehensive fashion. But keeping the health

alliances separate would make clearer the many

complex interactions among the proposal's components and would recognize and accommodate the

proposal's unique aspects, which prevent it from

fitting neatly into any existing budgetary pigeonhole.

Conclusion

Two aspects of the Administration's health proposal

have made its budgetary treatment particularly

contentious. First, the proposal is innovative and

complex, and existing budgetary concepts and precedents are less helpful than usual. Second, the

proposal does not spell out the requirements for financial reporting by the federal government or the

fiscal rules controlling the system of regional and

corporate health alliances.

For these reasons, the Congress will want to

consider carefully the budgetary presentation and

control of the health alliances in its deliberations on

the Administration's proposal. If the Congress decided to include the income and outgo of the alliances in the federal government's accounts, it could

facilitate their recording and control by requiring

them to flow through the Treasury. In any event,

the Congress should require the federal government

to provide regular financial reports on the health

alliances and should bring the alliances under some

form of fiscal discipline to ensure that existing

budgetary rules are not circumvented.
Chapter Four

Economic Effects of the Proposal

A

ny fundamental reform of the health care

system could have profound effects on the

structure of the U.S. economy, and the

Administration's proposal is no exception.

Supporters of the Administration's approach

argue that it would improve the efficiency of labor

markets by reducing insurance-related job lock and

the work disincentives Medicaid beneficiaries face.

They claim that it would also improve the allocation

of resources in the economy by increasing the efficiency of the health sector and strengthen the competitive position of U.S. producers, particularly

those with large health burdens for retired workers.

Critics of the proposal have argued that it would

raise business costs, devastate small enterprises, put

some low-wage workers out of their jobs, encourage

many workers to leave the labor force, and adversely affect the competitive position of U.S. industry.

This chapter examines the probable impact of

the Administration's proposal on important aspects

of the economy—business costs, employment, labor

markets, and international competitiveness. The

complexity of the proposal and of the current U.S.

health insurance system makes analyzing these

topics especially difficult, and few conclusions can

be reached with great precision.

Several conclusions can, however, be drawn

with relative confidence. First, the proposal would

increase the cash wages of U.S. workers (see Chapter 2). Second, the proposal would without doubt

involve a substantial redistribution of costs within

the economy, and thus would have important consequences for individual workers and firms. Third,

some low-wage workers would lose their jobs because their employers would have to pay for insurance, but this group is likely to be quite small;

some others may gain jobs in community-based care

for the disabled. Finally, more workers would

voluntarily leave employment in response to new

incentives created by the proposal, and some

workers would enter employment for this reason.

Although the complexity of the proposal makes

quantitative inferences imprecise, the Congressional

Budget Office estimates that the plan might reduce

the number of people in the labor force by onequarter of a percent to 1 percent, though it would

alter the unemployment rate little. Perhaps more

important than its effect on the overall labor supply,

the proposal is likely to affect the current pattern of

where people work.

The Administration's proposal would affect

labor markets both by eliminating or reducing existing distortions in these markets and by introducing

new ones. Among the distortions that would be

reduced are the tendency of the current system to

lock people into certain jobs or into welfare because

they fear the loss of insurance. It would also end

the advantages big firms have in purchasing health

insurance. These are important gains. But the

proposal would also introduce some distortions of

its own: it would encourage early retirement; it

would in some cases reduce the attraction of having

more than one adult in each family work; it would

increase the cost of hiring most minimum-wage

workers; and it would encourage the grouping of

workers in firms on income lines that may not be

efficient.

On balance, the new distortions in the labor

markets could outweigh the ones eliminated; should

that happen, the productive potential of the econ-
52 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

omy would go down, and fewer people would be

engaged in market activities that produce income.

But the potential loss of market income would overstate any loss to the economy. People who leave

work would be doing so from choice and would be

able to do things they could not do while working.

Although the value of this leisure is certainly not

zero, it is not counted in gross domestic product.

A full accounting of the proposal's effect on the

economy would have to include its possible impact

on the efficiency of the health care system. Few

analysts doubt that the current health care system

wastes resources (see Box 4-1). The proposal hopes

to reduce many of these inefficiencies. The Administration aims to cut administrative costs, foster the

growth of health maintenance organizations and

other types of plans that might be able to reduce

costs below those of fee-for-service providers, and

make it easier for consumers to pick more costeffective health plans. For the most part, this report

does not address these questions of the efficiency of

the health sector.

Finally, any proposal to reform the current

health care system would introduce its own distortions while eliminating others. Evaluation of the

Administration's proposal should, therefore, be

based on how its costs and benefits compare with

those of the alternatives—including current policy.

Box 4-1.

Inefficiencies in the Current Health Care System

For many economists and policymakers, the large

proportion of national income going to the health

sector—some 14 percent of gross domestic product in

1993~is cause for considerable concern. Behind this

concern is a belief that health care markets as currently structured are not efficient and are prone to

excessive and unnecessary spending.1 A successful

restructuring of the health care system would correct

some of these inefficiencies.

Several factors now hinder the efficient operation of the health sector. First, consumers lack key

information about the quality and price of medical

services. Treatment costs are difficult to obtain in

advance, and comparison shopping can be costly and

impractical for sick people. Patients delegate a

considerable amount of decisionmaking to their

doctors, who are trained to provide the best possible

care rather than the most cost-effective care.

Second, the widespread prevalence of health

insurance (and other third-party payers) insulates

consumers from the full cost of medical care when

they are sick. Moreover, health insurance is tax

deductible when employers offer it as a fringe benefit, which reduces the incentive for workers to select

less expensive policies. Because employers pick up

Congressional Budget Office, Economic Implications of

Rising Health Care Costs (October 1992).

most of the bill, most employees have little idea how

much their insurance truly costs.

Because of these shortcomings, health care markets are not truly competitive. Providers generally

do not compete as aggressively over price as in

other sectors of the economy. Instead, their competition focuses on the nonprice aspects of medical

care. For example, hospitals try to attract patients

by offering the best and latest medical technologies

or the most comfortable surroundings—not the lowest

price. At the same time, consumers lack sufficient

bargaining clout to offset the tendency of the system

to spend too much. The payment system is relatively fragmented, and providers are able to shift

costs from large organized payers (like government)

to private payers with little countervailing power.

Perhaps most important, technological change is

very rapid in the health care sector, but market constraints that might ensure that new technologies are

used in cost-efficient ways may not operate effectively. As long as health insurance pays for new

technologies, the private sector is encouraged to

develop any innovation, regardless of cost, that is

likely to improve the quality of care. Other countries strictly control the supply of new technology to

the health sector. But there is no effective mechanism in the current U.S. system—neither a market

nor a government regulatory plan—to ensure that the

costs of new technologies will be kept in line with

their benefits.
CHAPTER FOUR ECONOMIC EFFECTS OF THE PROPOSAL 53

Key Aspects of the Proposal

That Would Affect the

Economy

The Administration's proposal contains literally

hundreds of provisions that would make fundamental changes in the delivery and financing of the

nation's health care. Nevertheless, the most important economic effects can be traced to just a few

features.

Universal Coverage

The Administration's proposal would entitle all citizens and certain other people residing in the United

States to a standard package of health insurance

benefits. Unlike the current system, benefits would

no longer depend on whether or where a person

worked.

Community Rating

Insurance premiums could not vary with age or

health status. The new system would therefore incorporate the cost and spread the burden for people

who present the greatest health risks.

Controls on Health

Insurance Premiums

The Administration's proposal would limit the

growth of health spending by fostering competition

and capping premium costs.

Subsidies to Employers

A firm in a regional alliance would not have to pay

more than 7.9 percent of its wage and salary payroll

for its share of health insurance; instead, the government would pay for premiums for the standard insurance package above that amount. Lower limits

would apply to firms with 75 or fewer employees

and low average wages.

Subsidies to Early Retirees

The government would subsidize the average premium for early retirees. This would reduce the

incentive to continue to work, thus changing the

size of the work force.

The Effects on Health

Spending by Business

The Administration's proposal would maintain the

central role of employers in financing health care in

the United States, but would significantly alter the

distribution of costs among businesses and workers.

After 1996, the proposal would most likely reduce

the total spending of business on health care. Of

course, businesses would be asked to pay directly

for insurance for those workers who are currently

uninsured, and the Administration's proposed insurance package is more generous than many firms

currently offer. Employers who formed corporate

alliances would pay an additional 1 percent payroll

tax. But although these factors would tend to increase businesses' costs, they would be more than

offset after 1996 by the limits on premium growth

and the subsidies from the government.

Employers' Responsibilities

Employers would be required to pay a significant

share of the health insurance premiums for virtually

all of their employees. Health benefits would no

longer be a flexible component of employee compensation but rather would become an inflexible

levy on employing workers.

Big Cost Reductions

Overall for Business

When all these factors are taken into account, the

total cost that all businesses together would pay for

health insurance for active workers would be about

$20 billion less in the year 2000 if the proposal

were implemented than if the current system were
54 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

to continue unchanged.1 The estimated reduction in

the cost for active workers from the proposal would

be even larger in subsequent years, reaching slightly

above $90 billion in 2004.

Businesses would also benefit from a large

reduction in costs for workers taking early retirement. This reduction would amount to more than

$15 billion in the year 2004, and more thereafter.

Diverse Effects Among

Individual Firms

Even though the plan would quite dramatically reduce the overall cost of health insurance for business, it would have widely differing effects on individual firms and industries, in some cases causing

costs to rise and in others reducing them. Three

factors account for most of the diversity.

Requiring All Employers to Pay. The requirement

on all employers to contribute would raise spending

by firms that do not currently offer insurance—or

that offer a less generous insurance package-to

their workers. These firms are disproportionately

small-in 1989, over 94 percent of firms with 25 or

more employees offered health insurance, but only

39 percent of firms with fewer than 25 employees

did so.2

Community Rating. Currently, the cost of health

insurance varies tremendously among firms, depending on the size of the firm and the age and health

status of its workers. Under the Administration's

proposal, insurance premiums would be community

rated, which would greatly reduce this variation in

health spending. For example, community rating

would increase the costs of firms that employ

younger and healthier workers and those in low-risk

jobs, and decrease the costs of firms employing

2.

The Administration also predicts that the plan would reduce business spending, compared with current policy, by similar amounts.

By contrast, another analysis, by the consulting firm Lewin-VHI,

estimated that the proposal would increase business spending by

about $16 billion in 2000. See Lewin-VHI, The Financial Impact

of the Health Security Act (Fairfax, Va.: Lewin-VHI, December

1993).

Congressional Budget Office, Rising Health Care Costs: Causes,

Implications, and Strategies (April 1991).

older and sicker workers and those in risky jobs.

Further, community rating would benefit smaller

firms that typically pay much higher premiums than

larger firms. This leveling of costs could benefit all

small businesses—not just those that provide insurance today. With access to more affordable insurance, small businesses would be better able to attract workers who now demand health insurance as

a condition of employment.

Estimating the effect of these two factors-community rating and requiring all firms to pay—on

various industries is beyond the scope of this study,

but estimates prepared by Henry Aaron and Barry

Bosworth at the Brookings Institution provide a

rough guide (see Table 4-1).3 These calculations do

not capture some key aspects of the Administration's proposal. For example, they do not include

the effects of subsidies to firms, nor do they allow

for variations in the premiums among regional alliances that would occur under the proposal. Most

important, they do not include the cost savings that

controls on premiums would bring about.

Nevertheless, Aaron and Bosworth's estimates

suggest that community rating and requiring firms

to pay would cause an enormous redistribution of

resources among workers in different industries. The

redistribution would be even greater among subsectors of industries and individual firms not shown in

the table. For example, Aaron and Bosworth's detailed estimates suggest that these two factors would

decrease the annual cost of health insurance by

almost $6,000 per worker in the coal mining industry—but increase it by $1,300 in the retail sector.

These redistributions are not unique to the Administration's proposal. Most proposals to reform

the nation's health care system involve some community rating, and some also require all employers

to pay. Those proposals would also redistribute

large amounts of resources among firms and

workers.

Subsidies to Firms. The subsidies to employers in

the Administration's proposal would also affect how

The premiums under community rating in Table 4-1 are not identical among industries because each industry pays a different

amount for retirees.
CHAPTER FOUR ECONOMIC EFFECTS OF THE PROPOSAL 55

Table 4-1.

Effects of Community Rating and Requiring Firms to Pay

on the Health Insurance Costs of Private Employers, by Industry, 1992

Employer Contributions for Health Insurance

Industry

Current Costs

Dollars Percentage

per Worker* of Wages

Costs with

Community

Rating and

All Firms

Pavina Difference

(Dollars Dollars

per worker)*'

 b per Worker* b

Percentage

of Wages

Agriculture, Forestries, and Fishing 394

Mining 4,776

Construction 1,572

Manufacturing 3,466

Durable goods 3,801

Nondurable goods 3,017

Transportation 2,221

Communications 6,572

Electric, Gas, and Sanitary Services 4,871

Wholesale Trade 2,426

Retail Trade 788

Finance, Insurance, and Real Estate 2,123

Services 1,480

Private Households 0

All Industries 2,017

2.5

11.4

5.4

10.7

11.2

10.0

7.1

15.6

11.3

7.1

4.5

5.9

5.5

0

7.2

2,041

3,048

2,373

2,416

2,452

2,367

2,412

3,070

2,804

2,177

2,090

2,190

2,177

2,041

2,253

1,647

-1,728

800

-1,050

-1,349

-649

191

-3,502

-2,067

-249

1,303

67

697

2,041

236

10.3

-4.1

2.7

-3.2

-4.0

-2.2

0.6

-8.3

-4.8

-0.7

7.5

0.2

2.6

16.5

0.8

SOURCE: Congressional Budget Office based on Henry Aaron and Barry Bosworth, "Economic Issues in the Reform of Health Care

Financing," Brookings Papers on Economic Activity (forthcoming).

a. Based on full-time-equivalent workers.

b. Includes a 13 percent increase in average costs to cover uninsured workers and assumes uniform costs for nonretirees (community

rating). Does not reflect the effects of the cost controls in the Administration's proposal. Retiree health costs account for the variation

among industries.

insurance costs are distributed among companies.

Other things being equal, firms with low wages

would be more likely to be subsidized. Many small

firms would also face lower caps (and receive larger

subsidies per person) than large firms. Finally,

firms located in regions of the country with high

medical costs might receive higher subsidies because their premiums would be higher. Yet some

regions with high medical costs also pay higher

wages, so it is difficult to infer the regional impact

of the Administration's proposal without more information about how the boundaries of the alliances

would be drawn.

Who Bears the Burden of

Health Spending by Business?

Although businesses initially pay a large portion of

the bill for health insurance, people ultimately bear

these costs. Workers may pay them in the form of

lower wages, consumers in the form of higher

prices, and shareholders through lower returns on

their investments. But for the most part, the

nation's workers shoulder the cost of employers'

premiums for health insurance. Thus, the signifi-
56 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

cant savings that the Administration's proposal

would produce compared with current policy would

be largely passed on to workers in the form of

higher wages.

Why Workers Pay for Health Costs

The primary reason that workers as a group bear the

cost of employers' health premiums—and would realize the savings under the Administration's proposal-is that the supply of labor is relatively insensitive to changes in take-home wages. Recent empirical studies suggest that the total hours supplied

by U.S. workers would decline only 0.1 percent to

0.2 percent for each 1 percent reduction in their

take-home wage.4 Because most workers continue

to work even if their take-home pay declines, businesses have little trouble shifting most of the cost of

health insurance to workers' real wages. Similarly,

workers gain the lion's share of any reductions in

employers' health costs.

Two recent studies of mandated benefits mirror

this view.5 In one study, firms shifted 85 percent of

the cost of mandated "workers' compensation" accident insurance to workers in the form of lower real

wages; another study found that virtually all of the

cost of federal and state mandates for childbirth

coverage was passed into lower real wages.6

Of course, because labor supply is not completely insensitive to changes in wage rates, share4. Congressional Budget Office, "Taxes and Labor Supply," CBO

Memorandum (forthcoming); Mark Killings worth, Labor Supply

(Cambridge, England: Cambridge University Press, 1983); and

James Heckman, "What Has Been Learned About Labor Supply in

the Past Twenty Years?" American Economic Review, vol. 83,

no. 2 (May 1993), pp. 116-121.

5. Jonathan Gruber and Alan B. Krueger, "The Incidence of Mandated Employer-Provided Insurance: Lessons from Workers* Compensation Insurance," Tax Policy and the Economy (1991); and

Jonathan Gruber, "The Incidence of Mandated Maternity Benefits,"

American Economic Review (forthcoming).

6. Lawrence H. Summers, "Some Simple Economics of Mandated

Benefits," American Economic Review, vol. 79, no. 2 (May 1989),

pp. 177-183. The Administration's proposal would probably have

a smaller effect on real wages—and a larger effect on employment-than implied by these studies. Unlike a pure employer

mandate, the Administration's proposal would entitle everyone to

insurance whether they worked or not and would finance the proposal through a compulsory payment.

holders would bear some of the changes in health

insurance costs in the short run. But they would

probably bear virtually none of these costs in the

long run. The United States operates in a world

economy and, if businesses attempted to shift such

costs to capital, shareholders would move their investments to other countries that offered them

higher returns.

Shareholders, however, would benefit from

reductions in the cost of retirees' health insurance.

The Administration's proposal would reduce costs

for companies that currently have large retiree

health obligations. The government would take

over a significant portion of companies' responsibility for health insurance for early retirees and drugs

for older retirees. The companies' workers and

their unions would probably fight for a portion of

that windfall, and the gain would therefore be split

among shareholders, workers, and retirees.

How Savings Might Be Distributed

Although the wages of workers (as a group) would

increase to reflect reductions in the cost of health

insurance for current employees under the Administration's proposal, the benefits would not be spread

evenly among individual workers for at least two

reasons.7 First, by evening out the costs of insurance, community rating would raise the costs of

employing some individuals relative to current

policy, but reduce them for others. Second, individual firms could respond differently to these changes

in costs. Some might change the nominal wages of

their workers; others might adjust their prices.

For the economy as a whole, lower prices for

some products would largely be offset by higher

prices for others.8 But because individuals purchase

7. Henry Aaron and Barry Bosworth, "Economic Issues in the Reform of Health Care Financing," Brookings Papers on Economic

Activity (forthcoming).

8. Because the Administration's proposal would cause the labor force

and output of the economy to fall slightly, the overall price level

could rise somewhat in the long run compared with current policy.

The effect on output and prices would be somewhat larger in the

short run because firms that would face cost increases might not

be able to reduce the nominal wages of their workers. Over time,

these firm would be able to bring nominal wages back in line by

simply not compensating their workers for general inflation.

Finally, this discussion excludes any possible actions by the Federal Reserve.
CHAPTER FOUR ECONOMIC EFFECTS OF THE PROPOSAL 57

different bundles of goods and services, individual

workers and consumers could experience significantly different effects.

In some respects, the Administration's proposal

would reduce the likelihood that firms with cost

increases would raise prices. Community rating

virtually assures that competing firms would face

very different changes in their insurance costs. Unless most competitors in an industry faced similar

changes in their costs, it would be difficult for any

single firm to raise its prices much without losing

market share.

What Would Happen to

the Labor Force and

Unemployment?

The Administration's health proposal would sharply

change the terms of the employment bargain for

many workers, reducing some distortions implicit in

the current system and imposing others. Overall,

the proposal would probably impose greater employment-related distortions than it removed. The

supply of labor would probably fall slightly, somewhat reducing the productive capacity of the economy, but unemployment would be little changed.

In summary, the proposal would:

o Encourage workers nearing retirement age to

retire early, by subsidizing their health insurance

in early retirement;

o Reduce the value of working for people who

receive insurance through their spouses and

currently work at firms without insurance;

o Reduce the current incentive for recipients of

Aid to Families with Dependent Children to

remain on the welfare rolls and out of work in

order to maintain their Medicaid benefits; and

o Raise the cost of hiring some adult workers who

earn close to the minimum wage, thus slightly

reducing their employment.

These direct effects of the plan—which would

result on balance in a reduction in labor supplywould in turn produce a partially offsetting change.

Competition among employers for the reduced labor

supply would slightly raise real wage rates. But the

effect of a rise in wages would not completely

offset the direct effects of the proposal.

Increase Early Retirement

Three features of the Administration's proposal

would create significant incentives for workers

between 55 and 64 years old to take early retirement. First, because the proposal would guarantee

universal coverage and premiums would not vary

with health or employment status, early retirees

need not fear becoming uninsured. Thus, older

people would no longer have to work simply because they need access to affordable health insurance. Most analysts would regard this as a clear

improvement over the current situation, even though

it would reduce the supply of labor.

Second, the proposal goes further and would

subsidize health insurance for retired people between the ages of 55 and 64. However, people in

this age group who worked full-time (or whose

spouses worked full time) would not receive this

benefit. The subsidies would sharply reduce costs

for those firms that currently offer health insurance

to early retirees, and might induce them to sweeten

the other components of their retirement package.9

Aside from any consideration of fairness, this provision would clearly reduce the incentive to work.

Finally, community rating among age groups

means that early retirees would face premiums that,

even before considering subsidies, would be no

higher than those paid by younger people. Because

older people currently pay much higher premiums

than young people, community rating would significantly reduce the savings that workers would need

to accumulate for retirement, and some might find

they could retire earlier.

9. Roughly half of the savings for these firms in 1998 through 2000

would be recaptured by the government. The proposal includes

no provisions to recapture savings from firms after 2000.
58 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

The Administration estimates that the health

proposal could increase the number of retired

workers ages 55 to 64 by 350,000 to 600,000.

CBO's analysis also suggests effects in about this

range, although probably closer to the upper end or

slightly above. These estimates are roughly consistent with the results of a recent study by Brigitte

Madrian of Harvard University.10

Impose an Implicit Levy on Work

The Administration's proposal would bring about a

major change in the nature of health care costs: for

many workers, the cost would operate like a new

levy on work. However, most people's decisions

about whether to work or not are not particularly

sensitive to changes in their take-home wages or

salaries. Consequently, the effect of the proposal on

the total labor force would be relatively small and

limited largely to second workers in households in

which one person already works.

The proposal would create an implicit levy on

work because it would make health coverage universal without charging many nonworkers for the

full cost of their insurance. In other words, coverage under the proposal would not depend on

whether one worked and paid the premium or

stayed at home and, often, paid much less. The premium would simply reduce take-home pay without,

from the point of view of the individual worker,

buying anything.

By contrast, under the current system, employers provide health insurance to many of their

10. Brigitte Madrian, "Labor Market Effects of Employment-Based

Health Insurance" (Ph.D dissertation, Massachusetts Institute of

Technology, Cambridge, 1993), Chapter 2. Other studies suggest

much larger responses. See Jonathan Gruber and Brigitte Madrian,

"Health Insurance Availability and the Retirement Decision,"

Working Paper 4469 (National Bureau of Economic Research,

Cambridge, Mass., September 1993); and Michael Kurd and

Kathleen McGany, "The Relationship Between Job Characteristics

and Retirement," Working Paper 4558 (National Bureau of Economic Research, Cambridge, Mass., December 1993). Although

one study found that retirees' health insurance had little effect on

retirement, those results cannot be applied to the Administration's

proposal; see Alan Gustman and Thomas Steinmeier, "EmployerProvided Health Insurance and Retirement Behavior," Working

Paper 4307 (National Bureau of Economic Research, Cambridge,

Mass., March 1993).

workers as part of an implicit or explicit bargain,

which ensures that the cost of health insurance does

not stray too far from what most workers feel it is

worth.11 Thus, health insurance is a component of

compensation that substitutes for cash wages and,

therefore, has little effect on an individual's decisions about whether and how much to work.

That bargain is not perfect for several reasons.

Most important, some married people who work in

firms that offer health insurance are or could be

covered under a spouse's policy.12 For these people, the availability of health insurance at work is

worth little. But many of these workers are not

compensated in other ways for the insurance they

do not use.13 This situation distorts decisions about

whether and where to work; it also partly explains

why some married women work in firms that do not

offer insurance.14

The Administration's proposal would extend this

distorting effect on decisions about work to everyone. However, the proposal would also reduce premiums for currently insured workers because all

workers would have to pay for insurance and because administrative costs are apt to be less~particularly for small firms. On balance, the proposal

would probably impose a somewhat larger distortion

on decisions about work than exists under the current system.

11. Employer-paid health insurance premiums are not included in a

worker's taxable income for either income tax or payroll tax calculations. Thus, health insurance benefits that have a lower value

than a given amount of cash wages before taxes may have a

higher value after taxes are accounted for. The statement in the

text refers to workers' after-tax valuation of insurance benefits.

12. Another reason that the employment bargain is not perfect is that

some health care is available to people without insurance.

Workers who pay for insurance effectively subsidize these "free

riders."

13. At the few firms that offer "cafeteria" plans, workers can substitute wages or other benefits for unneeded health insurance. Similar adjustments may also occur at other firms, but it is hard to

know whether this phenomenon is widespread. If such adjustments are widespread, then fewer people would be in the category

described in the text.

14. Patricia M. Danzon, "Mandated Employment-Based Health Insurance: Incidence and Efficiency Effects," Working Paper 60 (Center

for the Study of the Economy and the State, University of Chicago

Chicago, m., April 1990).
CHAPTER FOUR ECONOMIC EFFECTS OF THE PROPOSAL 59

Would everyone recognize that the proposal imposed a distortion? Perhaps not. Some workers

may not recognize the implicit trade-off in the current system between employer-paid health insurance

benefits and cash wages.15 For these workers, the

Administration's proposal would not appear to represent such a fundamental change in the employment bargain.

Although the proposal would reduce the incentive to work for many workers, the vast majority

would nevertheless remain in the labor market because they need wage and salary income to support

themselves or their families. But some people—

especially those whose spouse is employed—have

more flexibility in their decision to work. These socalled "secondary" workers are more responsive to

changes in work incentives because they can rely on

their spouse's income. The Administration's proposal would thus reduce the participation of secondary workers in the labor force.

Encourage Medicaid Beneficiaries

to Enter the Labor Force

The Administration's proposal would reduce the

current incentive for AFDC beneficiaries to remain

on welfare. Under current rules, when a welfare

beneficiary goes to work and earns income above

certain thresholds, the beneficiary may lose both

eligibility for cash assistance and Medicaid coverage.16

 Because such workers may not find employment at a firm that offers insurance, they may lose

access to affordable health benefits if they work.

The Administration's proposal, by contrast,

would make coverage universal. Thus, welfare

beneficiaries would not risk losing coverage if they

worked. Note, however, that these workers would

not receive free insurance when they went to work.

Like all other workers, they would ultimately pay

for the employers' share of insurance through lower

cash wages. Thus, the net incentive for welfare recipients to work would be less than it may at first

appear.

Still, the proposal would subsidize health insurance at many firms, and workers at such firms

would have to pay, at most, 7.9 percent of their

wages for insurance (and less if the firm is small

and has a predominantly low-wage work force).

Premiums at unsubsidized firms could, however,

absorb a substantial fraction of these workers'

wages; few welfare recipients would probably seek

jobs in the unsubsidized sector.

These workers could also receive some subsidies for the family share. If the worker continued

to receive AFDC assistance, he or she would pay

nothing. Workers who were no longer enrolled in

AFDC would also receive subsidies, although they

would be required to pay a portion of the family

share.17 These subsidies would phase out gradually

as the worker's family income rose, reaching zero

when income was 150 percent of the poverty level.

The phaseout of the subsidy would impose an implicit levy on additional hours of work.

Empirical studies show that Medicaid has reduced participation in the labor force.18

 But estimating the effects of the Administration's proposal

is difficult because the available studies cannot

easily be adapted to it. Nevertheless, the literature

suggests that the proposal would noticeably increase

participation of AFDC recipients in the labor force.

15. Aaron and Bosworth, "Economic Issues in the Reform of Health

Care Financing.11

16. Different thresholds apply for AFDC eligibility and Medicaid

eligibility. Medicaid coverage may be maintained for a transition

period of up to 12 months after starting work.

17. When a family no longer received AFDC, the family would also

lose the subsidy for copayments and supplementary services for

the parent. Supplementary services for children would be continued as at present.

18. Aaron Yelowitz, "The Medicaid Notch, Labor Supply, and Welfare Participation: Evidence from Eligibility Expansions" (Massachusetts Institute of Technology, Cambridge, September 1993);

Sandra Decker, "The Effect of Medicaid on Participation in the

AFDC Program: Evidence from the Initial Introduction of Medicaid,"(New York University, New York, N.Y., 1993); Robert

Moffitt and Barbara Wolfe, "The Effect of the Medicaid Program

on Welfare Participation and Labor Supply," The Review of Economics and Statistics, vol. 74, no. 4 (November 1992), pp. 615-

626; Anne E. Winkler, "The Incentive Effects of Medicaid on

Women*s Labor Supply," The Journal of Human Resources, vol.

26, no. 2 (Spring 1991), pp. 308-337; Rebecca M. Blank, "The

Effect of Medical Need and Medicaid on AFDC Participation,"

The Journal of Human Resources, vol. 24, no. 1 (Winter 1989),

pp. 54-87.
60 AN ANALYSIS OF THE ADMINISTRATIONS HEALTH PROPOSAL February 1994

Redirect Employment of

Low-Wage Workers

The Administration's health proposal would affect

employment of low-wage workers in a variety of

ways. It would raise labor costs at uninsured firms

and would reduce the employment of some of their

low-wage, adult workers. But it would also reduce

labor costs at insured firms, which could tempt

some of them to employ more workers. At the

same time, the proposal would increase employment

of workers who provide services for the disabled

and could induce a shift toward teen and student

employment. On balance, the Administration's proposal would probably have only a small effect on

low-wage employment.

Workers at Firms Without Insurance. The

Administration's proposal would reduce the employment of adult workers who are currently uninsured

and whose wages are close to the federally regulated minimum wage. The requirement that firms

pay for insurance would raise the cost of employing

these workers, but because of the minimum wage

rules, employers would not be able to pass the increased cost fully back to the workers by reducing

their cash wages. Thus, firms that could not absorb

these costs in profits or could not raise their prices

might resort to layoffs.

The amount of the cost increase for minimumwage workers would vary significantly from firm to

firm.19 Firms subject to the premium caps, and thus

subsidized, would experience increases amounting to

between 15 cents and 34 cents per hour-probably

not enough to have a serious impact on employment. The increases at unsubsidized firms would be

substantially larger, amounting to about $1 per hour

(or close to 25 percent) for full-time workers choosing individual policies in 1998 and almost $2 per

hour (nearly 45 percent) for workers choosing family policies.20

Some firms would respond to this cost increase

by raising their prices; others might pass the increase on to other workers or shareholders. Some

firms would reduce employment, but the effect

would probably be relatively small. Past empirical

studies suggest that changes in the minimum wage

affect employment only modestly.21 Moreover, the

numbers of workers earning the minimum wage will

decline over time as market wages rise with general

inflation.

Workers at Insured Firms. Not all low-wage

workers would face increases in health costs. Although most firms that employ minimum-wage

workers do not offer insurance to those workers,

some firms do, and these firms would most likely

see their costs go down. A firm that is subject to

the payroll cap would have to pay no more than

$700 to cover the insurance cost of a full-time

minimum-wage worker—considerably less if the firm

is small and employs mostly low-wage workers-and

this amount would be well below the cost of most

current health plans. Because small, unsubsidized

firms would benefit from community rating and

from a reduction in administrative costs, many of

them would also see their costs go down. In firms

where costs could fall, employment of low-wage

workers could rise, though again not by much.

Teenagers and Students. The Administration's

proposal does not require employers to pay for

employees who are dependents and who are either

under age 18 or full-time students under age 24.

Thus, the proposal would reduce the cost of hiring

these workers relative to adult minimum-wage

workers. This provision could induce a shift toward

employment of teens and students and away from

adult nonstudent workers, although it is difficult to

estimate the magnitude of this effect.

19. For information on insurance coverage of low-wage workers, see

Congressional Budget Office, "In Pursuit of Higher Wages and

Employment-Based Health Insurance," CBO Memorandum (February 1993).

20. Using CBO's premium estimates for 1998 and assuming a 37-hour

week for 52 weeks.

21. Allison Wellington, "Effects of the Minimum Wage on the

Employment Status of Youths: An Update," The Journal of Human Resources, vol. 26, no. 1 (Winter 1991), pp. 27-46; "New

Minimum Wage Research: A Symposium," Industrial and Labor

Relations Review, vol. 46, no. 1 (October 1992), pp. 3-88; David

Card, Lawrence Katz, and Alan Krueger, "An Evaluation of Recent Evidence on the Employment Effects of Minimum and

Subminimum Wages," Working Paper 4528 (National Bureau of

Economic Research, Cambridge, Mass., November 1993); Janet

Currie and Bruce Fallick, "A Note on the New Minimum Wage

Research," Working Paper 4348 (National Bureau of Economic

Research, Cambridge, Mass., April 1993).
CHAPTER FOUR ECONOMIC EFFECTS OF THE PROPOSAL 61

Personal Care Workers. The Administration's

proposal would also directly increase employment in

one low-wage area—personal care and other in-home

workers. Although most aspects of it aim to reduce

spending on health care, the proposal would substantially increase funds for home- and communitybased care, which would expand the employment of

both higher-paid and lower-paid workers in this

sector.

The proposal also could bring into the labor

force statistics—and into the gross domestic product

accounts—an unknown number of family members

who currently provide uncompensated care for the

disabled. Current rules do not permit these people

to be paid with government money, and thus they

are not counted in the labor force or in GDP. The

proposal would allow these people to be paid and

thus bring them into both sets of statistics. The

recognition of the work effort of these family members would be important to the disabled and their

families. From the national point of view, however,

this would be largely a statistical change and would

not alter the true amount of economic activity.

What Would Happen to

the Structure of the

Labor Market?

The Administration's health proposal would create

incentives for reorganizing the structure of production. To start, these incentives would alter the number of hours that people work, and particularly the

decisions of firms to hire full-time or part-time

workers. The proposal would also allow workers to

switch jobs without losing insurance, but it might

induce some reallocation of workers among firms in

an effort to receive greater government subsidies.

Hours of Work

The Administration's proposal would affect not only

the number of workers in the economy but also the

number of hours that they work. Specifically, the

proposal would encourage a reduction in hours for

full-time workers in subsidized firms but an increase

in hours for full-time workers at some unsubsidized

firms. The proposal would also encourage a reduction in the hours of most part-time workers.

Subsidized Firms. Under the proposal, subsidized

firms would pay an implicit levy on the wages

earned by their employees from each additional

hour of work. At many subsidized firms, this levy

would equal 7.9 percent; at small firms with low

average wages, it could be as low as 3.5 percent.

The levy would apply to full-time and part-time

workers in the same way, and would be passed back

to workers in the form of lower wages. This provision would create an incentive for both full-time

and part-time workers at subsidized firms to reduce

their hours of work.

Unsubsidized Firms. At unsubsidized firms, the

proposal would impose no added cost on the wages

earned from additional hours of work by people

already working more than 30 hours per week.

Thus, at unsubsidized firms that offer insurance

today, the proposal would have no appreciable

effect on hours worked by full-time employees. At

unsubsidized firms that do not offer insurance today, however, there would be a new fixed cost of

hiring additional full-time workers, which would

cause firms to use more overtime by their existing

workers.

Part-time employees at unsubsidized firms

would face an implicit levy on hours because the

proposal prorates premiums for these workers. For

an additional hour of work by employees working

between 10 and 30 hours per week, unsubsidized

firms would generally have to pay one-thirtieth of

the basic employer premium. This amount could be

large relative to the wages of some low-wage

workers.22

Workers with Very Short Hours. The proposal

might cause some firms to increase their use of employees who work fewer than 40 hours per month

22. The proposal would impose particularly large costs on part-time

workers with jobs in more than one unsubsidized firm. For example, the combined employer premiums for a worker who has

two 20-hour-a-week jobs are 33 percent more than the employer

premium for a 40-hour worker with just one job. This situation

does not exist for workers in subsidized firms because they pay a

fixed percentage of their salary regardless of their hours of work.
62 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

because neither subsidized nor unsubsidized firms

would be required to pay premiums for these workers. The number of such workers would probably

be small, however, and they would primarily be

workers with low training and transportation costs.

Effect on

 ffJob Lock"

Some of the proposal's provisions would reduce

problems created by the current employment-based

system of health insurance. Under the current system, people may be reluctant to leave the safety of a

large corporation to work in a small company or

start a small business because they fear losing their

health insurance. Because the proposal would establish universal coverage and prohibit restrictions

based on preexisting health conditions, this fear

would be lifted. Workers could choose jobs that

gave them the most satisfaction and at which they

had the highest productivity, thus improving economic efficiency.

The quantitative importance of job lock is unclear, however. Public opinion surveys suggest that

10 percent to 30 percent of people feel locked into

their current jobs because of their fear of losing

health insurance.23 But statistical studies of the extent to which this fear actually reduces job mobility

have reached mixed conclusions.24 Overall, the

weight of evidence suggests that job lock probably

hinders the operation of the labor market to some

degree, but the magnitude of the effect cannot be

reliably estimated. %

Reallocation of Workers

Among Firms

The current system of employment-based health insurance influences the allocation of workers among

firms. People who receive insurance coverage

through their spouses-or low-wage workers who

place a low value on health insurance relative to

their other needs—have an incentive to work at firms

that do not offer health insurance but pay higher

wages instead. At the same time, higher-wage

workers who do not have alternative access to insurance typically work at firms that provide insurance

coverage.

The Administration's proposal would eliminate

the allocation of labor based on workers' demand

for insurance. But the proposal would substitute an

incentive for reallocating labor (so-called "sorting")

based on wages: to take advantage of the subsidies

to firms available under the proposal, low-wage

workers would migrate to firms with low average

wages, and high-wage workers would eventually

move to firms with high average wages. As with

many other issues discussed in this chapter, the precise effects of the proposal would vary among

workers and firms (see Box 4-2).

This sorting would occur because the subsidies

are based on the characteristics of firms; subsidies

based purely on individual or family characteristics

would not have this effect, nor would a payroll tax

levied at uniform rates on all firms. Therefore,

these incentives for sorting are somewhat particular

to the financing mechanism in the Administration's

proposal. Of course, alternative schemes for financing universal coverage could also introduce new

distortions, though the precise effects would depend

on the details of any alternative.25

The Incentive for Sorting. A simple example illustrates how workers could benefit by moving between firms that were subsidized and firms that

were unsubsidized. If an unsubsidized firm hired an

additional single, childless worker at an annual salary of $10,000, its payments to the regional alliance

23. Erik Eckholm, "Health Benefits Found to Deter Switches in Jobs,"

The New York Times, September 26, 1991, p. 1; Christopher

Conte, "Labor Letter," The Wall Street Journal, June 15, 1993,

p. Al.

24. Douglas Holtz-Eakin, "Job-Lock: An Impediment to Labor

Mobility?" Jerome Levy Economics Institute of Bard College Public Policy Brief, vol. 10 (1993); Brigitte Madrian, "EmploymentBased Health Insurance and Job Mobility: Is There Evidence of

Job-Lock?" Working Paper 4476 (National Bureau of Economic

Research, Cambridge, Mass., September 1993); Jonathan Gruber

and Brigitte Madrian, "Limited Insurance Portability and Job Mobility: The Effects of Public Policy on Job-Lock," Working Paper

4479 (National Bureau of Economic Research, Cambridge, Mass.,

September 1993).

25. Louise Sheiner, "Mandates with Subsidies: Efficiency and Distributional Consequences" (Federal Reserve Board, January 1994).
CHAPTER FOUR ECONOMIC EFFECTS OF THE PROPOSAL 63

would rise by $2,031 (CBO's estimate of the employer share of the premium in 1998). By contrast,

a subsidized firm would have to pay only $790 to

the alliance if it hired the worker, since subsidized

firms would pay only 7.9 percent of payroll for insurance. If the worker had the same value to both

firms, the subsidized firm could pay a substantially

higher annual salary—as much as $1,241 more-than

the unsubsidized firm. This is a rather large difference; it would increase the worker's salary by more

than 12 percent.

The incentive would work in the opposite direction for higher-wage workers, though it might take a

long time to affect where people work. A single,

childless worker earning an annual salary of

$40,000 would have to give up $3,160 of his or her

salary for insurance in the subsidized firm (7.9 percent of $40,000), and thus could save up to $1,129

each year by moving to an unsubsidized firm, where

the premium would not be based on salary.

The size of the sorting incentive would vary

among both workers and firms. In the example

above, the incentive would obviously be amplified

for workers with annual salaries above $40,000 or

below $10,000. In addition, small firms with very

low average wages would have capped rates as low

as 3.5 percent, which would further boost the incentive for low-wage workers to work at these firms.

Last, the size of the incentive would depend on the

family status of the worker-workers with children

would face higher premiums at unsubsidized firms

than workers without children. At subsidized firms,

the employer share of the premiums would simply

be 7.9 percent of the worker's wages or salary

whether the worker was a single adult, or part of a

couple or a family with children.

Forms of Sorting. Sorting could take several

forms, some involving actions of workers, some

involving actions of firms, and some involving actions of both parties. For example, new workers in

the labor force could choose jobs with certain firms

rather than others. Or existing workers could quit

and move to different firms.

Firms could "outsource"—that is, lay off employees and contract with other companies for the

Box 4-2.

Sorting of Workers

in the Administration's Proposal

The incentive for sorting under the Administration's proposal would vary among workers, but

most workers can be classified into one of three

groups for this purpose.

First, the Administration's proposal would

provide a substantial new incentive for sorting

among workers who place a significant value on

insurance and whose wages are flexible in the

long run. Because these workers' wages adjust

to reflect the cost of their employment-based

health insurance, these workers face no incentive

under the current system to leave their jobs. But

under the proposed system, those who have low

wages would seek jobs at subsidized firms, while

those with high wages would seek out unsubsidized firms. This group is rather large-it includes all heads of households except those with

very low incomes.

The second group of workers are those who

place a high value on insurance but whose wages

are not flexible even in the long run. Because

the productivity of these workers may not be

high enough to cover the minimum wage plus the

cost of health insurance, they tend to find work

at firms that do not offer insurance. If the current system is maintained, more of these workers

would be forced into uninsured firms as the cost

of health insurance rose. By contrast, the subsidies in the Administration's proposal would reduce this incentive for sorting. This group is not

large and consists primarily of minimum-wage

and near-minimum-wage workers.

The last group consists of workers who place

a low value on insurance. The current system

encourages these workers to work at firms without insurance, and again this incentive increases

as health insurance costs rise. The Administration's proposal would eliminate this incentive for

sorting because every firm would have to offer

insurance. But the proposal would substitute an

incentive for high-wage workers in this group to

move to firms with high average wages and lowwage workers to move to firms with low average

wages. This group is fairly sizable because it

includes most secondary workers and some younger and poorer primary workers as well.
64 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

same services. For example, a firm with high average wages, which would be unsubsidized under the

proposal, could give up its company's cleaning help

and hire an outside cleaning service instead. Alternatively, firms could divide themselves into subsidiaries with low and high average wages. For example, a manufacturing plant could spin off its

research and development lab.

Although the proposal contains legal restrictions

on some of this sorting, they would not be totally

successful.26 The proposal would increase the Internal Revenue Service's authority over the classification of employees and independent contractors, but

reclassification of these workers is just one of several ways in which firms could respond to the proposal. Moreover, any simple regulation is unlikely

to prevent the creation of new firms that could use

the subsidies to their competitive advantage against

existing, regulated firms.

Sorting Would Raise the Cost of Federal Subsidies to Firms. When sorting occurs, workers

would be reallocated among firms in a way that reduced the private cost of their health insurance. But

this reduction in private cost would be exactly offset

by an increase in government spending.

Of course, it is difficult to determine exactly

how much sorting would occur under the Administration's proposal. Some restructuring along salary

lines may be occurring anyway.27 There are no

empirical estimates indicating the sensitivity of the

allocation of workers to incentives of this type. But

26. Eugene Steuerle, "The Proposed Segregation of the Labor Market

by Economic Class," Tax Notes, vol. 61, no. 5 (November 1,

1993), pp. 621-622.

27. Because some sorting would occur without any policy change, the

subsidies to firms would grow over time even if the Administration's proposal induces no additional sorting. In other words,

what matters for the cost of subsidies is the total amount of income-based sorting, not just the amount created by the proposal.

See Katharine G. Abraham, "Restructuring the Employment Relationship: The Growth of Market-Mediated Work Arrangements,"

in Katharine G. Abraham and Robert B. McKersie, eds., New

Developments in the Labor Market (Cambridge, Mass.: MTT Press,

1990); Katharine G. Abraham and Susan K. Taylor, "Finns' Use

of Outside Contractors: Theory and Evidence," Working Paper

4468 (National Bureau of Economic Research, Cambridge, Mass.,

September 1993); and Steve J. Davis and John Haltiwanger,

"Wage Dispersion Between and Within U.S. Manufacturing Plants,

1963-1986," Working Paper 3722 (National Bureau of Economic

Research, Cambridge, Mass., March 1991).

the incentive for sorting under the proposal would

be fairly large for many people. CBO estimates that

in 1998 almost 8 million low-wage workers could

receive salary increases of 10 percent or more by

moving from unsubsidized to subsidized firms. And

the average increase in salary for workers earning

less than $20,000 who migrated from unsubsidized

to subsidized firms would be over 15 percent.

CBO assumes that 20 percent of the workers

would eventually respond to a potential 10 percent

increase in their after-tax salaries; workers facing

larger or smaller incentives would have proportionally larger or smaller responses. This sorting would

not occur immediately, however. CBO assumes that

it would take 10 years after full implementation of

the proposal for sorting to reach its full extent and

estimates that sorting could increase the cost of

subsidies to firms by some $12 billion (or 14 percent) in 2004, an amount incorporated in the cost

estimate in Chapter 2.

Sorting Would Alter the Effects of the Proposal

on Employment. As discussed in an earlier section, the requirement that firms pay for health insurance would reduce the employment of low-wage

workers. The sorting of these workers among firms

would mute this effect, however. Low-wage

workers who are currently uninsured would be

induced to leave unsubsidized firms where they

would face large implicit increases in the minimum

wage and move to subsidized firms where the implicit minimum wage increase would be relatively

modest. This migration would limit the number of

displaced workers.

At the same time, sorting could produce some

temporary loss of employment, if workers lost their

jobs and were forced to look for new ones. Ironically, the harder the government tried to prevent

sorting in the form of simple legal reorganizations,

the more it would encourage firms to sort workers

by laying them off. Of course, employers would be

trying to contract with other companies to provide

the same services, so overall demand in the economy for these workers' skills might be unaffected.

But this possibility does not mean that the same

workers would find jobs immediately, and those that

could not would experience some short-run unemployment.
CHAPTER FOUR ECONOMIC EFFECTS OF THE PROPOSAL 65

Sorting Could Reduce the Efficiency of the Labor Market. A competitive market economy allocates workers to jobs where their productivity is

highest. The current health insurance system distorts that allocation in at least two ways. First, it

provides an incentive for workers who place a low

value on health insurance received through their

jobs to work for firms that do not offer insurance.

Second, it raises the cost of labor at firms for which

health insurance is more expensive. These distortions lower the efficiency of the labor market and

the economy.

The Administration's proposal would eliminate

these distortions, but would create a distortion of a

different type, in which workers at different wage

levels would have an incentive to work for different

firms. By contrast, the current system creates no

incentive to separate high- and low-skill workers

into different firms. And most firms currently include both low-wage and high-wage employees,

suggesting that heterogeneous wage (and skill)

structures at firms may be more efficient than the

homogeneous structures encouraged by the proposal.

This efficiency may depend partly on the nature of

production processes, which often involve people of

different types and levels of skill. It may also depend on the difficulty of conducting transactions

through explicit contracts with independent firms

rather than informal arrangements within a single

firm.

If grouping workers among firms by income or

skill level is very inefficient, then the allocation of

workers encouraged by the proposal might be less

efficient than the current allocation. Also, the process of sorting—of reallocating workers—would

entail administrative and organizational costs that

would reduce efficiency. But if the efficiency cost

of sorting were high, then the speed and ultimate

amount of sorting would be relatively low.

What Would Happen to the

International Competitive

Position of the United States?

When the government makes policy changes as far

reaching as the Administration now proposes, one

of the biggest concerns of many businesses is how

the changes might affect their international competitiveness. CBO's analysis concludes that because

the proposal would affect different firms in different

ways, some firms would become more competitive

and some firms less so. But no solid conclusions

can be drawn about whether the overall trade balance would increase or decrease.

Overall Competitiveness:

The Balance of Trade

The notion of the "international competitiveness" of

the whole economy is hard to define, but what most

people mean by it, in practical terms, is a concern

that the United States may lose exports or absorb

more imports. Working by analogy with an individual firm, it is commonly believed that anything

that increases costs would make the balance of trade

worse, and anything that decreases costs would

improve it. Almost all economists disagree with

this view, however, because it neglects some important connections that exist in an entire economy but

do not apply to an individual firm.

At a fundamental level, the trade balance of any

country is constrained because a country, unlike a

firm, can sell abroad only that part of its production

that it does not consume or invest itself. Hence, the

net amount of sales abroad—the balance of trade--

depends most directly, not on costs of production,

but on saving and investment.28 The trade balance

improves only if national saving rises, investment

falls, or both.

The Administration's health proposal would

have indeterminate effects on both national saving

and investment. Thus, it is difficult to predict how

the proposal would affect the balance of trade.

National Saving. According to CBO's estimates in

Chapter 2, the Administration's proposal would

marginally raise the federal budget deficit for most

of the next decade, though ultimately it would decrease it. A decrease in the federal deficit corresponds to an increase in national saving.

28. Congressional Budget Office, Policies for Reducing the CurrentAccount Deficit (August 1989).
66 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

The proposal could also affect private saving

through several channels. First, universal health

insurance would reduce some of the need of individuals to save for precautionary reasons. Precautionary saving arises when individuals are uncertain

about, for example, their future income prospects,

their life span, or the amount of money they may

need to spend on medical services. In the case of

medical needs, the amount of precautionary saving

would depend on the probability of incurring outlays, the amount of outlays likely to be incurred,

and the cost of insurance. It would also depend on

income, wealth, and attitudes toward uncertainty.

Because the proposal would eliminate the risk of

losing insurance and facing large, unexpected medical expenses, it would probably reduce precautionary saving.29

 Of course, the reduction in risk would

itself improve people's well-being. Second, some

people between the ages of 55 and 64 might save

less if the proposal encouraged them to retire earlier. This group, if they continued working, would

normally have relatively high saving rates.

At the same time, two factors would work to

increase private saving. First, some workers might

want to save more during their working years if the

proposal encouraged them to retire early. Second,

the plan might reduce some people's incentive to

spend down their assets if they expected to need

Medicaid when they were older. The proposal

would allow states to raise the maximum level of

assets that single people on Medicaid could keep,

thus slightly increasing the incentive to save. Overall, the proposal might reduce national saving somewhat.

Investment. It is even more difficult to predict the

effect of the proposal on investment. Because reallocating the burden of health care costs would affect industries very differently, some would increase

investment and some decrease it. On net, because it

is hard to shift plant and equipment from one firm

or industry to another as one contracts and the other

expands, such shifts could increase national spending on investment while adjustments occurred. But

the effect would be very small: industries are

always growing and declining, and the additional

shifts as a result of reallocation of health care costs

would be difficult to discern. Other factors—especially changes in the health care industry itself—

could also affect investment, but it is impossible to

predict whether they would cause investment to go

up or down. On balance, the effect of the Administration's proposal on investment is uncertain.

The Competitiveness

of Different Firms

Under the Administration's proposal, the health care

costs of firms that compete directly with foreign

firms (the "tradable goods sector") would probably

decline. Those firms are much more likely than

firms outside that sector to offer health benefits

now, and they offer relatively generous benefits.30

Nevertheless, this reduction in costs would not have

much effect on the trade balance.

Although prices might fall, the dollar would rise

enough to prevent the change in prices from significantly altering the trade balance. Much of the reduction in health spending would be passed on to

workers in the form of higher cash wages. Some

firms might pass a portion of their health cost savings through to their prices, depending on the market conditions they face. Thus, the prices of tradable goods could fall on average. But these price

declines would probably lead to a strengthening of

the value of the dollar relative to foreign currencies.

A higher dollar would offset the lower costs in industries dealing with tradable goods, keeping the

average price of U.S. goods to foreigners about the

same.31 One result would be to share the lower cost

of producing tradable goods with the whole U.S.

economy by reducing the cost of imported goods.

29. R. Glenn Hubbard, Jonathan Skinner, and Stephen Zeldes, "The

Importance of Precautionary Motives in Explaining Individual and

Aggregate Savings," Working Paper 4516 (National Bureau of

Economic Research, Cambridge, Mass., November 1993); Martha

Starr-McCluer, "Health Insurance and Precautionary Saving" (paper presented at the 1994 annual meeting of the American Economic Association, Boston, Mass., January 1994).

30. See Lewin-VHI, "The Impact of the Health Security Act on Firms

Competing in International Markets" (paper presented to the

Competitiveness Policy Council, Washington, D.C., December 10,

1993).

31. Henry Aaron and Barry Bosworth, "Health Care Financing and

International Competitiveness" (paper presented to the Competitiveness Policy Council, Washington, D.C., December 10, 1993).
CHAPTER FOUR ECONOMIC EFFECTS OF THE PROPOSAL 67

As discussed earlier, the Administration's proposal would redistribute insurance costs among different firms and industries, which could alter the

prices of their goods and services. These price

changes, in turn, could affect the international competitiveness of some companies, although firms

whose costs decline by the average for the tradablegoods sector would see no change. For these firms,

the reduction of their health costs would be exactly

offset by the appreciation of the dollar.

But the international competitiveness of companies with larger-than-average cost reductions would

improve. Although the dollar would appreciate, the

insurance costs at these companies would fall even

more. Firms that have smaller than average reductions~or cost increases-would become less competitive, however.

Conclusion

CBO estimates that the Administration's proposal

could cause the number of people working to decline by about one-quarter of a percent to 1 percent,

though most of these people would retire or turn to

other activities outside the labor market. Unemployment would increase only slightly among minimum-wage workers. A decline in the labor force of

that magnitude would reduce the potential market

output of the economy by somewhat less, perhaps

from 0.2 percent to 0.7 percent. In addition, the

proposal would probably cause low-wage workers to

move from firms where they would qualify for little

or no subsidy to firms where they would attract

greater subsidies. Such churning could impose

noticeable, though unquantifiable, costs on the

economy.

The proposal might also bring into the measured

labor force, and measured GDP, some people who

are now giving care to their disabled relatives. This

would largely be a statistical change and would not

significantly alter levels of economic activity.

These predictable changes in the labor force,

though important, are in any case small relative to

the normal growth and variation in the economy.

CBO projects, for example, that the labor force will

increase by some 13 percent in the next 10 years,

and the predictable effects of the Administration's

proposal are well within the range of uncertainty of

that estimate. Further, the lower market output of

the economy somewhat overstates the economic

losses the proposal would cause. Those who left

the labor force would engage in other activitieslooking after children or enjoying leisure—that have

value but are not captured in GDP.

Chapter Five

Other Considerations

T

he Administration has developed a comprehensive proposal that, if implemented as

envisioned by its architects, could alleviate

the problems it seeks to address: lack of insurance

coverage, lack of access to health care, and rapidly

rising health care costs. The proposal's scope is

broad, and its attention to detail is extraordinary. It

provides a blueprint for restructuring the entire

health care system, complete in almost every particular of the design. In this respect it is unique.

As described in Chapter 1, the underlying principles of the proposal would be to establish a universal entitlement to a standard package of health

benefits with a financing structure that would build

on the existing employment-based system. The

proposed system, however, would require all employers to make specified contributions to premiums

on behalf of their employees, thereby ending the

situation in which some employers in effect pay for

the coverage of employees in other firms. All individuals and families, except Medicaid beneficiaries

and others with very low income, would also be

required to pay at least part of their premiums.

Subsidies would be available to help employers and

low-income families meet their premium obligations. The Medicaid program as it exists today

would end, and Medicaid beneficiaries would enroll

in "mainstream" health plans, which would receive

the same premium payment for Medicaid beneficiaries as for any other enrollees.

People who had experienced difficulties obtaining health insurance coverage at a reasonable price,

and those who feared losing coverage if they lost or

changed their jobs, would find that those problems

no longer existed. Families with no employed

members and employees of small firms would not

have to pay higher premiums than others in their

community for the same coverage. Employed people would not lose their coverage when they left the

labor force. High-risk people in particular would

benefit since health status would no longer be a

factor in determining the availability of insurance

coverage or its price. Most people would have a

choice of health plans available to them, which

many do not today, and would be provided with

information to help them to make informed choices.

To constrain the growth of health care costs, the

proposal would establish mechanisms for limiting

the rate of growth of premiums for the standard

benefit package, and for setting the initial level of

premiums in regional alliances. If they were implemented as intended, those mechanisms would be

completely effective. The proposal would also

attempt to limit federal obligations for subsidies.

As discussed in Chapter 2, those limits might not be

as effective.

In assessing the likelihood that the Administration's proposal would be able to achieve its goals

and establish a stable system for financing health

care, two important issues arise: whether it would

be possible to implement the proposal fully in the

time frame envisioned, and whether there might be

unintended consequences that could affect the

system's viability.

Policymakers and analysts can only speculate

about such questions because of the magnitude of

the institutional changes being proposed. The complexity and interrelated nature of the proposal's

many components make it difficult to grasp all their

possible interactions or to determine the extent of

institutional change and development that would be

necessary. Moreover, under the proposal an entirely

new environment would evolve; the behavior and
70 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

expectations of consumers and providers would

change in ways that one cannot fully anticipate

today. Thus, the potential for unforeseen consequences—both favorable and unfavorable—would be

significant.

The Congressional Budget Office's cost estimate, discussed in Chapter 2, assumes that the Administration's restructuring of the health care system

would be implemented according to the schedule

laid out in the proposal. That assumption may be

questionable, however, especially as it relates to the

capacity of the agencies that would carry out the

program and to the data requirements of the system.

The cost estimate also assumes that the proposed methods for constraining the rate of growth

of premiums for the standard health package would

be completely effective. Such binding limits could,

however, have unintended consequences for the

health care system that would affect its overall

acceptability and, hence, the sustainability of the

limits.

This chapter explores these issues in more

depth. The discussion is germane, however, not

only to the Administration's proposal but also to

any proposal that would involve a major restructuring of the health care system.

Institutional Capabilities

and Resources

The organizational structure of the proposed system

raises a basic question about its implementation:

Would all the agencies involved have the capabilities, experience, and resources needed to undertake

their assigned tasks in the time frame envisioned?

Many of the critical tasks of setting up the system

would be performed by the newly created National

Health Board and by the regional alliances, which

would be new and untried entities. State and federal agencies would also have major new roles.

The National Health Board would have considerable power and broad responsibilities for the functioning of the entire system, and a large, skilled

professional staff would be essential. It would have

many difficult tasks to perform—such as establishing

a national program for managing the quality of care,

developing a national information system for health

care, establishing the initial target for the per capita

premium for each regional alliance, determining the

inflation factor for each regional alliance, estimating

the market shares for each health plan in each regional alliance, developing risk-adjustment factors,

and recommending modifications to the benefit

package.

Moreover, those tasks frequently would have to

be performed on extremely tight schedules dictated

both by the effective start-up dates and the continuing needs of the proposed system. For example, the

board would be required to establish a national

program for quality management within one year of

enactment and the information system within two

years of enactment. On an ongoing basis, the board

might have no more than a month in which to determine whether each regional alliance was in compliance with its target for the following year's premiums. After 1996, the board would also have to

determine the annual inflation factor and the target

for the per capita premium for each regional alliance by March 1 of the preceding year.

The regional alliances—as the frontline agencies

responsible for orchestrating the flow of funds

through the health care system-would have an even

broader, and possibly more demanding, set of responsibilities. They would combine the functions of

purchasing agents, contract negotiators, welfare

agencies, financial intermediaries, collectors of

premiums, developers and managers of information

systems, and coordinators of the flow of information

and money between themselves and other alliances.

They would also have to implement the controls on

premiums under the direction of the National Health

Board. Any one of these functions could be a

major undertaking for an existing agency with some

experience, let alone for a new agency that would

have to perform them all. Some regional alliances

might succeed very well; others might be overwhelmed by these tasks, especially in their early

years of operation.

States would also vary in their capability to

assume their new responsibilities. Among other
CHAPTER FIVE OTHER CONSIDERATIONS 71

things, they would be asked to develop standards

for and certify health plans, establish guaranty

funds, and ensure continued coverage for enrollees

who had been in health plans that failed. Consequently, the responsibilities of state insurance regulators would probably expand considerably. But the

states vary widely in the legal authority of their

insurance departments and in the resources that they

now devote to the regulation of health insurance.

Whether all states would be prepared to undertake

all these activities on schedule is therefore uncertain.1

 The three-year phase-in period, however,

would give states the opportunity to increase the

capacity of their insurance departments before 1998,

if they needed to do so.

States would also play important roles in helping the regional alliances to perform their functions.

In particular, they would be required to ensure that

alliances received the premiums they were owed

and help them to determine eligibility for subsidies

for premiums and cost-sharing amounts. Since

states would be financially liable for error rates

above certain limits when determining eligibility for

subsidies, they would have strong incentives to assist alliances with that task. Again, however, it is

not clear that they would have the needed resources.

The proposal would allow states access to information on tax returns from the Internal Revenue Service to assist them in determining eligibility, but

many of the people likely to be eligible for subsidies would not be tax filers.

Interstate cooperation would be essential in

order for states to meet their responsibilities effectively. Cooperation would be especially important

for handling the complications that could arise in

metropolitan areas that crossed state boundaries.

The proposal recognizes this issue and includes

provisions that would permit states to coordinate the

activities of two or more regional alliances—including alliances in different states—in such areas as

operating rules, enforcement procedures, fee schedules, and contracting with health plans. Setting up

1. See General Accounting Office, Health Insurance: How Health

Care Reform May Affect State Regulation, Testimony of Leslie G.

Aronovitz before the Subcommittee on Health, House Committee

on Ways and Means, November 5, 1993, GAO/T-HRD-94-55.

these types of arrangements could be difficult but

would be important for the effective functioning of

some health care markets.

Similar questions of capacity and resources arise

with respect to the Department of Health and Human Services (HHS) and the Department of Labor

(DOL)-the two federal agencies that would have

major responsibilities under the proposed system.

Given the reduction in federal employment that is

under way, would HHS have the necessary

resources to oversee the financial management of

regional alliances and to take over the operation of

states' systems if they were seriously out of compliance? Would DOL have the capabilities to oversee

corporate alliances and to ensure that employers

fulfilled their responsibilities in paying premiums

and withholding employees' shares? Presumably,

the funding necessary to carry out those functions

and develop those capacities would be provided

through the normal appropriation process. But in a

world of limits on discretionary spending, increased

resources for those purposes would mean reductions

elsewhere.

Information Requirements

The Administration's proposal would depend critically on timely information, much of which has

never been collected. Its data requirements fall into

three broad categories: those related to the establishment of the parameters of the system that would

determine the payments to health plans, those related to managing the quality of care, and those essential for the day-to-day administration and operation of the alliances and health plans. Notwithstanding the ongoing and rapid development of

information technology in the health care industry,

it is uncertain whether the data essential for decisionmaking would be available in a timely fashion.

If they were not or if important information was of

poor quality, the functioning of the system could be

compromised.

The proposal recognizes the magnitude of these

requirements. The National Health Board would be

charged with developing and implementing a

national health care information system, which
72 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

would function through an electronic data network

based in regional centers. The information system

would provide data to meet multiple requirements in

such areas as quality assurance, information for

consumers and providers, cost containment, and

planning and policy development. Establishing

even the framework for such an information system

within the two-year time period envisioned by the

proposal would be a challenge.

Requirements for Establishing

Payment Parameters

The National Health Board would need extensive

state and local data to develop the adjustment and

inflation factors that it would use to determine the

target for the per capita premium of each regional

alliance. The data required to establish an effective

mechanism for adjusting premiums for risk would

also be considerable.

The adjustment factors that would be used to

establish the initial target for the per capita premium

for each regional alliance are supposed to account

for the variations in the health spending and insurance coverage of alliances as well as variations in

the proportion of spending by academic health centers. Although data on per capita health expenditures would probably be available for states,

whether that information would be available for

regional alliances is uncertain. Moreover, reliable

information on some of the proposed adjustment

factors—such as the proportion of people whose

insurance coverage was less generous than the standard benefit package—might not be available even

for states.

Initially, calculating the inflation factors would

require data on the relative changes in the demographic characteristics (age, sex, socioeconomic

status, and health status) of the population of each

regional alliance compared with those of the population as a whole. The sample sizes of existing national surveys (such as the Current Population Survey) are too small to produce reliable data of these

types for all the regional alliances. Either the

sample sizes of existing national surveys would

have to be increased, or new regional and local

surveys would have to be undertaken. Once the

alliances were functioning, however, they would

probably collect at least some of the demographic

data as part of the enrollment process.

Under the proposed health care system, alliances

would have to adjust the per capita payments to

health plans to reflect the risk status of their enrollees. If that was not done or was not done well,

plans that enrolled higher proportions of sicker or

riskier individuals would be at a serious disadvantage competing in the new marketplace, and incentives would be strong for plans to engage in subtle

forms of risk selection.

The proposal gives the National Health Board

the responsibility for developing a methodology that

alliances would use to adjust their per capita payments to health plans for risk. The feasibility of

developing an effective risk-adjustment mechanism,

however, is highly uncertain and depends on the

answers to three questions.2

o Would it be possible to develop measures that

could distinguish the high use of medical services that resulted because some enrollees were

poor risks from the higher use that resulted

because health plans were poorly managed?

o How precise would such measures have to be in

order to keep risk-selection activities by health

plans at minimal levels?

o If effective risk-adjustment measures could be

developed, would the information needed to

implement them be available to alliances and

health plans?

The Administration's proposal recognizes the difficulties that could be encountered. For example, the

board would be required to establish by April 1995

a method for adjusting payments to health plans

prospectively to reflect the risk status of their enrollees, but the proposal contains an alternative

should that task prove to be impossible. Specifi2. See, for example, Joseph P. Newhouse, "Patients at Risk: Health

Reform and Risk Adjustment," Health Affairs, vol. 13, no. 1

(forthcoming); and Testimony of Harold S. Luft, Acting Director,

Institute for Health Policy Studies, University of California at San

Francisco, before the Subcommittee on Health, House Committee

on Ways and Means, November 9, 1993.
CHAPTER FIVE OTHER CONSIDERATIONS 73

cally, the board could develop a mandatory reinsurance system for health plans that would remain in

effect until a prospective risk-adjustment system

was in place.

Requirements for Managing

the Quality of Care

The National Health Board would be required to

develop a program for managing the quality of care

under the direction of a newly created National

Quality Management Council. The council would

develop national measures of performance relating

to the provision of and access to health care services, the criteria for which the proposal specifies in

considerable detail. The council would also conduct

surveys on access to health care, use of health services, health outcomes, and patients' satisfaction. It

would be responsible for providing an annual report

to the Congress on the performance of each alliance

and health plan and on trends in the quality of

health care.

A fundamental precept of the Administration's

proposal—one that is shared broadly by health policy

experts—is that information on the performance of

health plans and providers should be publicly available and in a standardized form that helps consumers to make informed choices. Accordingly,

regional and corporate alliances would be required

to provide annual reports on each health plan's

performance using the standardized measures, including information about individual providers on

some of the measures. Those reports would also

include results of surveys of consumers on access,

outcomes, and satisfaction.

The specifications in the proposal clearly indicate that tracking quality and performance would be

a major undertaking for providers, health plans, alliances, and the board, and would greatly expand current reporting requirements. In addition, an inherent

tension would exist between the consumers' need

for information on which to base their choices and

the demands that would be placed on plans and providers to report the required data.

Requirements for Administration

and Operations

In order to carry out their basic functions, health

alliances would need extensive management information systems and access to national information

networks. They would also need the capabilities to

conduct surveys and data analyses, or be able to

contract for these services. One has only to review

the functions that alliances would have to perform

to realize that they would require collecting, maintaining, and updating large amounts of information

on individuals, employers, and health plans. Examples include:

o Tracking enrollment and disenrollment in different health plans according to the risk characteristics of enrollees and whether they were receiving Aid to Families with Dependent Children or

Supplemental Security Income;

o Determining the eligibility of employers and

families for premium subsidies;

o Determining eligibility for reductions in costsharing amounts;

o Tracking the amounts of cost-sharing payments

for low-income people enrolled in high-costsharing plans;

o Monitoring the premium amounts owed by

families, taking into account their hours of

qualified employment and any changes in their

type of family that occurred during the year;

o Monitoring the premium amounts owed by

employers; and

o Tracking individuals who were eligible to enroll

in the regional alliance-such as students or

members of two-worker families—but who enrolled in another alliance, and making appropriate payments to those other alliances on their

behalf.

The complexity of tracking the flow of people

and dollars across alliances' boundaries highlights
74 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

the need for some type of national information

system. Determining how much families would

owe for their health insurance if they moved between alliances during the year would be particularly difficult. According to the proposal, the regional alliance in which a family was enrolled in

December (termed the "final" alliance) would be

responsible for collecting any amounts owed by the

family, regardless of whether the family had lived in

the alliance area for the entire year. All the other

alliances in which the family had lived would be required to provide the final alliance with the information necessary to determine the family's total

liability. Once the final alliance had collected the

amount owed, it would have to distribute it equitably to all the alliances involved. Without an automated tracking system, that would be a monumental

undertaking.

In addition to collecting and monitoring financial information on individuals and families, regional alliances would have to estimate the demographic characteristics of their eligible populations,

including the number of families of each type, the

number of extra workers in couples and two-parent

families, the proportion of people enrolled in AFDC

and SSI, and the number of people in different risk

categories. They would also be responsible for

estimating the distribution of enrollment across

health plans, as well as the total amount of premiums that employers and families should pay and the

expected shortfall in premium payments. Those

estimates would be of critical importance to the

alliance because they would affect the amounts

owed by employers and families, the payments

made to health plans, and the amount paid by the

federal government for subsidies.

The Effects and Sustainability

of Controls on the Rate of

Growth of Premiums

Under the proposal, the rate of growth of premiums

for the standard benefit package would be severely

constrained for the 1996-2000 period, after which

the rate of increase would be determined by the

Congress or, if it failed to act, by a default procedure tied to real per capita economic growth and

inflation in consumer prices.

Limiting the rate of growth of premiums would

undoubtedly slow the growth of health spending.

Thus, even though the proposal would provide

universal health insurance coverage and include

several new federal program initiatives, CBO estimates that national health expenditures would increase by 94 percent between 1995 and 2004, compared with a projected increase of 108 percent under

the CBO baseline. That represents a reduction of

$150 billion in 2004. The projected slower growth

of spending would occur because of the restraints

on premiums, reductions in the Medicare program,

and other features of the proposal.

In preparing its cost analysis, the Congressional

Budget Office has assumed that the controls on

premiums in the Administration's proposal would be

implemented as intended and that the mechanisms

used to enforce those limits would effectively restrain spending on the services included in the standard benefit package. But what would be the consequences of that restraint, and could it be sustained?

Some experts believe that the targets for premiums could be largely met by increasing the efficiency of the health care system. According to this

view, the system has plenty of "fat"—in the form of

excess administrative costs and unnecessary use of

services-that would be squeezed out by constraining the growth of premiums. Reductions in administrative costs might be achieved by such measures as

standardizing claim forms and developing electronic

information systems. The unnecessary use of services might be reduced by increasing enrollment in

managed care plans and promoting clinically effective methods of treatment.

By contrast, others maintain that even if efficiency improved greatly, achieving the premium

targets exclusively by those means would be extremely difficult and that tight constraints could

have undesirable effects on the health care system

and might prove to be politically untenable. Possible consequences might include reductions in payments to providers and less access to appropriate

services for some consumers. The latter might take
CHAPTER FIVE OTHER CONSIDERATIONS 75

the form of longer waiting times for nonemergency

services—including visits to physicians, diagnostic

tests, and elective surgeries—and reduced access to

new high-cost medical technologies if health plans

became more selective about the technologies they

adopted. As a corollary, research and development

in medical technology might slow, and its focus

might shift.

At a general level, both views have merits and

limitations. Opportunities undoubtedly exist for

lowering administrative costs and reducing inappropriate use of services in the health care system, but

trimming unnecessary spending might be difficult

without increasing spending elsewhere. For example, although the proposal would streamline

many aspects of the administration of health services, it also contains provisions that would entail

new administrative costs, such as additional reporting requirements for health plans. Increasing enrollment in tightly managed health care plans—such as

group- or staff-model health maintenance organizations—might indeed reduce health spending initially

but might have little effect on the rate of growth of

spending in the longer run. In addition, some of the

methods for reducing the unnecessary use of services—such as promoting effective treatments

through the use of guidelines for clinical practicecould also result in increasing the appropriate use of

services. Although the effects of the use of guidelines on health spending are uncertain, shifting

health care resources from less appropriate to more

appropriate uses would almost certainly improve the

overall quality of health care.

Whether adverse consequences would result

under a constrained system is also uncertain. Lower

payments to providers and longer waiting times for

some services would not necessarily have negative

effects on health outcomes, although providers and

some consumers would probably be less satisfied.

Furthermore, shifting the focus of research on medical technology could yield positive benefits if manufacturers concentrated more on developing lowercost substitutes for existing technologies and took

the likely effects on costs into account when planning new research initiatives.

Ultimately, however, the effects of constraining

the rate of growth of premiums would probably play

out more at the alliance than the national level. The

new system could encompass perhaps 100 to 200

different regional alliances or markets, each facing a

target for its per capita premium. The restrictions

on premiums might be more constraining in some

markets than in others, because the existing degree

of competition in those markets and the extent to

which health plans and providers have already

achieved greater efficiencies vary widely. The

limits, therefore, might be much harder to meet in

some areas than in others. Furthermore, the effects

of the constraints on spending in any particular

market would depend on the interrelated behavioral

responses of health plans, employers, providers, and

consumers in that market to the new incentives in

the health care system.

In short, the full effects of limiting the rate of

growth of premiums would be highly uncertain. In

part, that uncertainty would arise because the restraint on premium growth would occur in a restructured health care system, operating under new incentives and with insurers and health plans facing

new forms of restrictions as well as new opportunities. Uncertainty would also stem from the heterogeneity of the regional alliance markets and the

probable variation in the ways their health care

systems would adapt to restraints on spending.

The fact that limits on the rate of growth of

premiums might begin to bite at different times and

in different ways in each of the various alliances

raises the issue of the political sustainability of

those limits: Would the public and policymakers

view them as an acceptable way to restrain health

care spending? The situation would be particularly

difficult because of the wide variation that currently

exists in health spending across the country—at least

some of which reflects differences in patterns of

medical practice and competitive pressures in the

marketplace.

On the one hand, to the extent that historical

spending is used as the basis for determining the

initial level of premiums in regional alliances, limits

on the rate of growth of premiums will build in the

inequalities in current spending. Some analysts

argue that such an approach would be unfair to

regions in which the health care system has already

become "leaner" and more efficient, since those
76 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

regions would have a harder time meeting the

growth targets (because they have less "fat" to trim).

On the other hand, ignoring historical spending

levels and instead establishing initial premium or

spending levels according to some objective criteria

reflecting need and differences in input prices could

cause major disruptions within the health care system in some regions that currently have high rates

of use.

The Administration's proposal has recognized

both aspects of the problem. The National Health

Board would attempt to adjust the regional alliances' targets for premiums to reflect current differences in health spending and insurance coverage.

Although this approach would build on historical

spending patterns, it would be modified by including the adjustment for insurance coverage. In other

words, current spending patterns would be adjusted

to account for low spending in an area that may

reflect the population's lack of insurance coverage.

The per capita amounts for Medicaid, as well as

states' maintenance-of-effort payments for current

Medicaid beneficiaries who would no longer be

eligible for the program, would also be based on

historical spending. In the case of Medicaid, historical differences in per capita spending among regions may reflect differences in covered benefits

and in reimbursement rates for providers, as well as

variations in access to and use of services.

Under the proposal, the board would be required, by July 1995, to make recommendations to

the Congress on:

o Eliminating, by 2002, the variation in regional

alliances' targets for per capita premiums that

resulted from variations in practice patterns; and

o Reducing, by 2002, the variation in the payments that states would make for beneficiaries

receiving cash assistance and for maintenance of

effort that resulted from differences in practice

patterns, historical differences in the rates of

reimbursement to providers, and the amount,

duration, and scope of benefits covered by Medicaid.

The Congress would be required to conduct an

expedited review of the board's recommendations,

which would go into effect unless a joint resolution

of disapproval was passed within 60 days. The

board's recommendations would be of extreme

interest to policymakers because they might have

the effect of raising the allowed premium levels in

some areas and lowering them in others. The board

might also recommend that some states pay more

than in the past for Medicaid beneficiaries and

maintenance of effort and that others pay less.

CBO's analysis has assumed that the limits on

the rate of growth of premiums would be sustained

even though they are likely to create immense pressure and considerable tension. Such strains, however, would not be peculiar to the Administration's

approach. Other methods of restraining the rapid

growth of health care spending would be likely to

generate similar stresses.

Conclusion

Fundamental reform of the nation's health care

system will inevitably involve many uncertainties.

New institutions will be required, and new responsibilities will be imposed on existing institutions.

Their abilities to perform will be in doubt. The

behavior of providers and consumers will change as

incentives are altered. The magnitude and even the

direction of these changes are difficult to foresee.

The ramifications and consequences of even

incremental approaches to reform are not easy to

predict. The complexity of the existing system and

the intense interest all Americans have in health

care issues make it difficult to anticipate the outcome of even modest changes in existing programs.

For example, most policymakers badly misjudged

the political response to the Medicare Catastrophic

Care Act, and analysts seriously underestimated the

fiscal consequences of recent changes in the Medicaid program.
CHAPTER FIVE OTHER CONSIDERATIONS 77

As the Congress considers the Administration's consequences that flow from the current systemproposal and other alternatives for systemic and increasing numbers of people who lack the security

incremental reform, the inherent uncertainties of of insurance coverage for health care and the

change must be weighed against the detrimental rapidly rising costs of that care.

Appendix

Summaries of Recent Health Care

Analyses by the Congressional Budget Office

T

he Congressional Budget Office (CBO)

publications listed below are available to

Congressional staff and the general public.

To obtain copies, call CBO's Publications Office at

(202) 226-2809.

Evaluating the Costs of Expanding the CHAMPUS

Reform Initiative into Washington and Oregon

(CBO Paper, November 1993, 46 pp.)

In 1988, the Department of Defense (DoD) began

the CHAMPUS Reform Initiative (CRI) as a test of

managed care in the military. In August 1993, DoD

proposed extending a revised version of CRI to

Washington and Oregon, certifying to the Congress

that CRI would be the most efficient method of

providing health care to the two states. As required

by law, this paper reviews DoD's analysis. CBO's

findings suggest that the revised CRI benefit is

likely to cost more than DoD has estimated.

Behavioral Assumptions for Estimating the Effects

of Health Care Proposals (CBO Memorandum,

November 1993, 37 pp.)

To estimate the effects of proposals to change the

health care system, CBO must make assumptions

about the behavioral responses that might occur as a

result of new policies. This memorandum draws on

the best available research to develop a set of guidelines on which to base CBO's estimates. These

guidelines will be revised as new evidence appears.

Projections of National Health Expenditures: 1993

Update (CBO Memorandum, October 1993, 22 pp.)

This memorandum provides projections of national

health expenditures through 2003. It updates the

tables and figures in CBO's study Projections of

National Health Expenditures (October 1992) based

on the methods described in that study and consistent with CBO's September 1993 economic assumptions and baseline budget projections.

Controlling the Rate of Growth of Private Health

Insurance Premiums (CBO Memorandum, September 1993, 27 pp.)

This memorandum analyzes two illustrative policy

options that are intended to highlight some of the

key issues surrounding the regulation of health

insurance premiums. The first option is a "standalone" measure to limit the rate of increase in private health insurance premiums. The second option

incorporates additional policy measures that could

mitigate some of the potential adverse effects of a

stand-alone policy. (The two options are not based

on any specific legislative proposal.)

Estimates of Health Care Proposals from the 102nd

Congress (CBO Paper, July 1993, 57 pp.)

The 103rd Congress will be considering a wide

range of proposals to expand access to health care

and control costs while maintaining quality, and
80 AN ANALYSIS OF THE ADMINISTRATION'S HEALTH PROPOSAL February 1994

CBO will have to estimate the effects of these proposals on the federal budget. This paper illustrates

CBO's approach to preparing such estimates by

examining four health reform bills introduced during

the 102nd Congress; H,R. 1300, sponsored by Congressman Russo, establishing a single-payer system;

H.R. 5502, sponsored by Congressmen Stark and

Gephardt, expanding Medicaid and Medicare and

setting overall limits on national health expenditures; H.R. 5919, introduced by the House Republican leadership, embodying much of President

Bush's health reform program; and H.R. 5936,

introduced by Congressman Cooper and other members of the Conservative Democratic Forum, establishing regional purchasing cooperatives for health

insurance and a federal program to subsidize the

purchase of private insurance by low-income people.

Trends in Health Spending: An Update (CBO

Study, June 1993, 91 pp.)

Since the early 1960s, national health expenditures

have risen rapidly despite many attempts to control

their growth. This study examines trends in the

market for health services since 1960 to provide

background information and a context for assessing

proposals to change the U.S. health care system.

The report focuses on increases in the costs of hospital services, physician services, and drugs and

other medical nondurable items. It also compares

trends in health spending by the nation with trends

in Medicare spending.

Managed Competition and Its Potential to Reduce

Health Spending (CBO Study, May 1993, 58 pp.)

This study looks at whether managed competition

could constrain spending on health care by motivating consumers, insurers, and providers to be more

cost-conscious. The report identifies eight features

that are critical for achieving the full savings that

managed competition could potentially deliver,

including health insurance purchasing cooperatives,

caps on contributions by employers, and standardized benefits.

Responses to Uncompensated Care and PublicProgram Controls on Spending: Do Hospitals "Cost

Shift"? (CBO Paper, May 1993, 45 pp.)

During the 1980s, the revenues that hospitals received for treating Medicare and Medicaid patients

declined, on average, relative to what it cost hospitals to treat those patients. CBO looks at the extent

to which hospitals were able to cover their costs of

uncompensated care and their unreimbursed costs of

treating Medicare and Medicaid patients during the

1980s with subsidies from state and local governments; sources other than patient care, such as revenues from hospitals' parking facilities and donations; and revenues from private patients.

Single-Payer and All-Payer Health Insurance Systems Using Medicare's Payment Rates (CBO Memorandum, April 1993, 60 pp.)

The United States is a leader in medical research

and has the ability to deliver health care of the

highest quality, but critics find fault with two aspects of the system: a substantial number of people

lack health insurance coverage, and health care costs

are high compared with countries where coverage is

universal. CBO examines two approaches by which

both universal health insurance coverage and greater

control over health care costs might be achieved.

The first approach is a single-payer system in which

all covered health care services are insured and paid

for by a single insurer, and the second is an allpayer system in which services are covered and paid

for by multiple insurers but all payers adopt the

same payment methods and rates.

Projections of National Health Expenditures (CBO

Study, October 1992, 70 pp.)

The rapid growth of spending on health care will

not decrease in the 1990s unless the present health

care financing and delivery system is changed. This

CBO study reviews the growth in national health

spending since 1965, describes CBO's methodology

for projecting national health expenditures, and ana-
APPENDIX SUMMARIES OF CBO'S RECENT HEALTH CARE ANALYSES 81

lyzes trends in spending by type of spending and

source of funds.

Economic Implications of Rising Health Care Costs

(CBO Study, October 1992, 70 pp.)

This study, a companion to the one above, analyzes

how rising health care costs significantly affect the

economy by squeezing household and government

budgets, distorting the labor market, and diverting

resources from other priorities. Because the current

health delivery system lacks a mechanism to match

benefits with costs, spending on health may not

reflect the preferences of either consumers or society. Instead, many factors—detailed in this studyseem to encourage excessive health spending. CBO

finds that workers have borne most of the costs of

employer-provided insurance in the form of lower

real wages and reduced nonmedical benefits. Over

the 1973-1989 period, these health costs have gobbled up more than half of the real gains in workers'

compensation.

The Potential Impact of Certain Forms of Managed

Care on Health Care Expenditures (CBO Memorandum, August 1992, 31 pp.)

This memorandum looks at what might happen to

national health expenditures and to spending under

Medicare, Medicaid, and private health insurance if

all acute care services now funded through insurance arrangements were provided through delivery

systems incorporating two specific forms of managed care. One is staff-model and group-model

health maintenance organizations. The other is

"effective" forms of utilization review, which CBO

interprets to mean utilization review that incorporates precertification and concurrent review of inpatient care.

The Potential of Direct Expenditure Limits to Control Health Care Spending (CBO Memorandum,

July 1992, 17 pp.)

This memorandum describes various approaches to

using expenditure limits to control health spending

and identifies some of the operational issues that

would be involved.

The Effects of Managed Care on Use and Costs of

Health Services (CBO Memorandum, June 1992, 32

PP-)

This memorandum assesses the evidence about the

effect of managed care organizations and interventions on the use and costs of health services-both

for the affected populations and for the entire health

care system—focusing on managed care for acute

care services.

Selected Options for Expanding Health Insurance

Coverage (CBO Study, July 1991, 100 pp.)

About one in seven Americans lacks health insurance. This study explores three options to expand

health insurance coverage for the uninsured: mandating job-based coverage, expanding the Medicaid

program, and combining the two. Each of these

options could substantially reduce the ranks of the

uninsured and keep most existing insurance arrangements intact, the study finds, but spending on health

care could rise considerably.

Rising Health Care Costs: Causes, Implications,

and Strategies (CBO Study, April 1991, 110 pp.)

This study describes the economic factors that contribute to the growth in health spending and examines what is known about the effectiveness of different strategies for achieving greater control over

costs. The five strategies examined by the study are

cost sharing by consumers; managed care that limits

the freedom of health care providers and consumers;

price controls; efforts to increase competition among

insurers and providers; and regulation of the market

for health services, including controls on capital and

uniform payment systems that encompass all payers.

Updated Estimates of Medicare's Catastrophic Drug

Insurance Program (CBO Study, October 1989, 73

PP-)

This study estimates the cost to Medicare of covering outpatient prescription drugs as required by the

Medicare Catastrophic Coverage Act of 1988. The

methodology described in this report remains applicable to estimates of proposals to provide a prescription drug benefit under Medicare.




ISBN 0-16-043093-3